SECOND QUARTER 2014 CONFERENCE CALL
Jess Jankowski, President & CEO
Thank you, Kate.
Good morning everybody. Thanks for joining us today for our second quarter 2014 financial conference call. Frank Cesario, our CFO, is with me again today.
We had strong financial results this quarter, and we continue to see success in our ongoing business development efforts. At a high level, as we discussed briefly in the press release, our Q2 2014 revenue came in above that of the same quarter in 2013, and again, we were ahead of the average quarterly rate of last year. Additionally, our Q2 bottom line approached GAAP breakeven, and we even generated a bit of positive cash. While we haven’t yet achieved regular positive quarterly cash flows, and don’t expect to do so this year, we’re well on our way. As I’ve said, this is a direct result of focusing only on the top opportunities, as well as running our business as efficiently as possible. Even though this was a “good” quarter, I don’t like to get caught up in incremental quarterly changes. They can be a distraction from what we’re working to accomplish, in developing sustainable business, over the typically drawn-out times-to-market companies experience in advanced materials applications.
We’re all focused on increasing our revenue, and our margins, in a material way over the near term. We believe we’ve identified a number of markets that make our growth expectations sensible, and, as I keep saying, the goal we’re ALL after is to significantly increase the equity value of Nanophase.
After Frank provides a short overview of our financial results, I’ll talk about our key business development goals for the near- and mid-terms. These are focused on these main areas:
-Personal Care Technologies;
-Surface Finishing Technologies; and
-Energy Technologies; including
-Energy Storage & Solar Control
Frank Cesario, CFO
Good morning, this is Frank Cesario. Before I begin today’s overview of our financial results for the second quarter 2014, please remember that all financial results are stated in approximate terms.
Revenue for the second quarter was $2.9 million, versus revenue of $2.7 million for the comparable 2013 quarter. Gross margins were 36% for the quarter versus 32% for the comparable period of 2013. The net loss for the quarter was $0.1 million, or $0.00 per share (less than half a penny per share), compared to a net loss of $0.5 million, or $0.02 per share, during the comparable 2013 period.
The six months ended June 30, 2014 saw revenue of $5.5 million, versus $5.7 million for 2013. Gross margins were 32% in 2014 versus 31% in 2013. Net loss for the 2014 six month period was $0.5 million, or $0.02 per share, versus $0.9 million and $0.03 per share in 2013.
Many will recall that we had virtually no receivables at the end of 2013. We have rebuilt our working capital position to normal levels, and ended the second quarter 2014 with a $2.4 million cash position. Other than working capital, cash consumed by the business was less than $0.2 million during the first six months of 2014, and it was positive during the second quarter, as Jess mentioned. Of the net cash outflow during the first six months of the year, all but $20,000 related to our modest annual capital spending, and prior to significant new revenues, the pursuit of which Jess will describe further. Our company remains debt free.
Jess Jankowski, President & CEO
I’m happy with our financial performance for Q2, and I expect it to continue to improve over time. Since the financial results speak for themselves, I’d like to visit our main business development areas. These remain our primary focus as we strive to build Nanophase to achieve the highest sustainable value possible for our shareholders and stakeholders. Again, they are:
-Personal Care Technologies;
-Surface Finishing Technologies; &
-Energy Technologies; including
-Energy Storage; & -Solar Control
We expect these to make a meaningful difference in the near- and medium-terms.
Relative to Personal Care Technologies, which is composed largely of our active ingredients for inorganic sunscreens, we’re continuing to see good market feedback for our zinc oxide.
We attended the New York Society of Cosmetic Chemists Supplier’s Day exposition in Q2, where BASF prominently displayed and promoted the Z-COTE line of products, which as many of you know, have been designed and manufactured by Nanophase. Walking the show, speaking with multiple personal care companies, as well as in meeting with BASF, we see positive signs of continued growth for our products.
Our goal is to continue to develop new products in this space, and to see revenues continue to grow, at least incrementally, if not better. We expect this market to continue to be a strong one for Nanophase.
Switching to what we call Surface Finishing Technologies, which I consider to represent both near- and mid-term commercialization opportunities, we continue to expand our presence in the optics polishing markets. We’re doing this by engaging in various focused, and industrywide marketing activities, identifying and working with consulting experts and, most importantly, by keeping our feet on the ground at existing and potential slurry customers. Recall that a slurry, in this context, is a proprietary mixture of chemistry and particles (both things being critical to success) that is used in various types of optics polishing machines to produce lenses and glass for many high-end applications.
At the risk of being repetitious, advances in photonic devices and related lenses, mirrors, prisms and other optics, are currently driven more and more by the demand for finer and finer surface finishes, which are achieved via precision polishing. What perhaps has been an area that I haven’t highlighted enough in the past, is that these manufacturers are also highly focused on achieving increases in throughput. Our slurries can provide these increases through enhanced removal rates, and, more importantly, reduced process time required, to achieve the desired surface finish.
Optics polishing is a capital intensive business, and we believe that we can offer multiple benefits in our value proposition in this market. To this end, we’re continuing to expand our capability in direct application support for Optics. We’re further enhancing the polishing laboratory we built in Q1. In order to better serve our customers and potential customers, we have expanded the metrology equipment, and have plans to add a second type of polisher. These additions will allow us to address a greater part of the market more directly, and more effectively. Some of the ways this lab will help us to expand our business development efforts, are by allowing us to generate a more complete data package to open the door to prospective customers. We’ve also bolstered our analytical capabilities, which will help us in hitting each customer’s ideal running conditions more quickly, once trials begin and we’re called on to bring our troubleshooting experience in to the mix. According to the limited feedback we’ve received to date, we’re developing a reputation as a good commercialization resource in this market.
We’re doing all of this to enhance the sales process, and to make it easier for our potential customers to make the decision to run trials with our slurries. This is a bigger decision for them than it may first seem, because most optics polishers prefer to do their new materials testing on the plant floor, sacrificing productivity today for promised gains tomorrow. This means it’s harder to get them to break in to daily production to run our slurries initially. Fortunately, it also means that the results of these trials will be more meaningful, than those done at lab scale, and the further post-trial scale-up on the customer side is less involved.
All in all, we expect these additions to our selling toolbox to help us to bring the business development cycle to a close sooner. To further capitalize on this, we also exhibited at the Optatec show in Frankfurt Germany, in Q2, and we believe we’ve made new contacts there that may translate in to 2015 revenue, in addition to the existing development work we’ve been doing here in the U.S.
Currently, we have purchase commitments extending through year-end that well exceed 2013’s full year polishing volume. Our polishing revenue in total for 2013 was just a few hundred thousand dollars. We expect to roughly double that volume in 2014, then expand upon it further in 2015.
We’re addressing obvious market needs in our approach to this space, and we continue to receive positive feedback. Our immediate goal here is to build Surface Finishing Technologies to a point, where it exceeds $1million in business to Nanophase in 2015.
Relative to our two new Energy Technologies, which I consider to be in the mid-term commercialization group, we continue to make solid progress. We refer to these two areas as Energy Storage (referring to batteries) and, now, Solar Control, which refers to several applications involved with improving energy conservation. Our market reach has expanded to a point where we are now willing to be at least a little more specific in describing these areas.
For the battery work, since the last call, we’ve had meetings with three companies that produce more than half of the World’s alkaline batteries. While due to confidentiality restrictions we cannot specify the details, we have active projects with the leading companies in this area.
While we’re further along in the battery application than in Solar Control, based on test results and market feedback in both areas, we see opportunity for very large, profitable volume across our energy portfolio. Ultimate commercial success remains to be seen here, particularly given our limited past exposure to these markets, but we’re making progress, and both markets are demanding improvements that we believe we can deliver. While it’s difficult today, to determine the revenue that will come from the first year of a product’s future commercialization, we’re pursuing these energy applications because we believe they can both contribute seven figure revenue in the mid-term. In both of our Energy businesses, we’re making good headway toward commercialization. At the end of the third quarter, we’ll be prepared to share more details around the timing for revenue in these businesses.
To summarize, right now, our focus is very sharp in these areas. We see all of them;
-Surface Finishing Technologies,
-And the two Energy applications,
as the markets where we can win in the near- and mid-term, and we’re going after them aggressively.
I like where we are right now. With that, I’ll finish up. Although most of our investors listen to the webcast, or review the transcript after the live call, we’d like to invite those participating in today’s call to ask any questions you may have, or to share your comments.
Kate, would you please begin the Q&A session?
Thank you, Kate.
We appreciate the continued support of our longer-term investors, and we appreciate the enthusiasm and support of our new shareholders. We’re working hard and we’re seeing it pay off as we go. All of us continue to work toward our ultimate goals, of becoming an exciting company with significant growth and profitability. Thanks again for joining us today.