2016 FIRST QUARTER CONFERENCE CALL
Jess Jankowski, President & CEO
Thank you, Luke. Good morning folks and thanks for listening. We're glad you're able to join us to discuss our first quarter 2016 financial results and business updates. Frank Cesario, our CFO, has jointed me again today.
During this call, we'll be talking about some new products, an update on our existing business, and, of course, and 2016 1st quarter results.
We entered 2016 with a little bit of momentum and a continued focus on growing revenue. While Q1 was below my expectations in terms of revenue, Q2 promises to be stronger. The Q1 "slip" was driven by order timing, not a permanent reduction in demand.
In 2015, we had growth, outside of our largest customer, of about $1.1M. Our largest customer had a down year in 2015, and we expect more 2016 volume from them, as well as some additional new revenue growth from the rest of the business.
We also generated cash based on our longtime "Adj. EBITDA" metric during two of the four quarters of 2015, demonstrating success from our continued focus on improvement in operating results. I expect this improvement to continue in 2016.
We've also seen new opportunity growth for our inorganics in the Personal Care markets, I'll discuss that later in the call. Lastly, you may have noticed that we filed an 8-K, regarding a new supply agreement, for the first of our new personal care products based on our "C3" coating technology. We don't pretend that this one supply agreement will drive significant 2016 revenue, but it will be accretive, and more importantly, reflects the shape of anticipated future agreements in terms of our gainsharing approach. We'll talk a bit more about that too. As a mater of fact, I'll discuss all of this in more depth after Frank provides a short overview of our financial results. With that, I'll welcome Frank to begin his discussion.
Frank Cesario, CFO
Thanks Jess. Good morning, this is Frank Cesario. Before I begin today's overview of our financial results for the first quarter of 2016, please remember that all financial results are stated in approximate terms.
Revenue for the first quarter of 2016 was $2.2 million, vs. $2.3 million in 2015. The net loss for the quarter was $0.6 million, or $0.02 per share, for the first quarter of each year.
We ended the first quarter of 2016 with a $1.5 million cash position and nothing drwan on our working capital cred line.
Jess Jankowski, President & CEO
Two thousand sixteen will be a good year for Nanophase. WE're making good progress in several areas, and we have market tailwinds in Personal Care to potentially accelerate our growth further. I expect 2016 to show better performance, topline and bottom line, than 2015 did.
In Personal Care, which has been composed largely of our active ingredients for inorganic sunscreens, we continue to sell a significant amount of zinc oxide into the marketplace, and have recently expanded our product line to include titanium dioxide, but in the form of two formulated dispersions, which allow us to move up the value chain. Dispersions refer to products in a liquid format. Historically, the bulk of our business, and certainly all of our Personal Care business, has involved sales or products in a dry powder format. These dispersions are the subject of our recently filed supply agreement. They were enabled by our new patented "C3" technology. The dispersions were launched in Europe at the inCosmetics show two weeks ago. Before I go too far, the answer is yes, we anticipate more supply agreements for other products as we move forward.
Our goal with these C3-enabled dispersions, beginning with titanium dioxide, was to create a dispersion that is chemically robust, stays well-dispersed (leading to a high degree of transparency) and limits the amount of free radicals generated,... as the skin is exposed, both to the sun's rays and to other compounds included in the final sun- or skin-care product. It also has to have a really nice "skin feel", which comes about through building a good dispersion, keeping the minerals (titanium dioxide in this case) from agglomerating, or sticking together. This non-agglomeration leads to a much more pleasant tactile experience, as well as helping to achieve the all-important degree of transparency desired by the consumer.
The initial feedback we received has been positive, but the proof will be when the materials get included in commercial products. WE expect the various downstream customers for these products to spend 12 - 24 months doing required testing and scale-up. This means we should see sampling volumes (possibly in the low-six-figure range) late in 2016. If the scale-up process is successful, they will be test-marketed (by the end -products), then produced at commercial scale. We expect more significant volumes to begin later in 2017, and related growth to continue through 2018.
As I mentioned earlier, the new contract that we filed is structured in a new way to allow both Nanophase and its partner to maximize sales. It requires that both parties be co-participants in the selling process. It's structured on a strategy that we have developed based upon "gainsharing". While our typical contract involves a much higher degree of opacity between Nanophase and its customers, this contract allows us to approach the market, agree to what the market dictates, and remain as transparent as possible with our customer. We are only implementing this strategy in cases when Nanophase is further down the value chain, and thus further away form the end buyer, or in areas where our strategic focus dictates that we're not doing much sales- and applications-development support. we developed this approach because the typical contract int he advanced materials, chemical, or cosmetics industries does not allow for pricing flexibility based upon market conditions.
Historically, this means Nanophase prices our products at a flat per kilogram rate, maybe with volume discounts. Under this system, we price these products so that we can achieve strong margins on every sale, based upon our indirect understanding of our customer's end-customer. Our customer will then pay us "our Price", go to market with the product, and frequently ignore any business that falls below an arbitrary margin threshold. This is the way our entire business has been structured up until mid-2015. A common theme, within our sales process through an intermediary, has always been pushback on pricing. Under this typical agreement structure, it can be difficult to determine whether the pushback is our customer looking for more margin themselves, or whether sales volumes truly depend on more aggressive pricing. Yes, we've had some superior products, but in cases where we use another company's sales channels, there often isn't enough profit to make it worth their while to pursue volume.
Through gainsharing, our goal is to empower whomever is selling the product, to get and maintain all of the business they can, and for Nanophase to receive a portion of the dollar margin on each sale. This allows pricing to reflect market conditions. Effectively, Nanophase now expects to be directly profit-sharing with some of its customers. I also expect this strategy to allow us to pick up a greater total dollar volume of margin, maximizing total profit dollars.
Another nice feature of this approach is that, in cases where our customers have multiple product lines in addition to ours, Nanophase products will become something that the customer's sales team will want to sell. There is more profit and more flexibility to be had for everybody under this model, and we expect their efforts to reflect that reality. The gainsharing approach offers us the "best of both worlds" in certain types of applications. First, we allow our selling partner to manage the interface, which allows us to focus on other business development activities. Second, we optimize market pricing which allows both parties to maximize our margins.
Again, we are only seeking to implement this strategy in cases when Nanophase is further down the value chain, and thus further away from the end buyer, or in cases where our strategic focus dictates that we not dedicate much sales and applications development support to certain market areas. It's a true Win-Win.
Regarding our markets more broadly, in addition to the European launch of these new products at inCosmetics in Paris, we also spent a good deal of time talking with our colleagues and attending seminars on market trends in sun care, the specific part of the Personal Care market we play in most. For the foreseeable future, things look great for inorganics, or minerals-based sunscreens.
Generally, consumers are taking a more holistic view of their skin care, tying together health, wellness, diet and lifestyles as they choose products. Things that are perceived as "All-Natural" or "Naturally-Derived", as well as products with fewer and fewer ingredients are gaining traction, and that's our sweet spot.
Several different key industry sources communicated that they see inorganics, or minerals-based sun care products, becoming the dominant part of the market's growth over the coming years. All of this gives Nanophase a nice tailwind as we continue to raise awareness of our products and the advances they can bring to these markets.
In terms of our Energy business, we've now developed and sold several solutions in the Solar Control area. This refers to applications which improve energy conservation (think of the window films used on vehicles and buildings). It may be easier for you to think of this business as using our technology to keep heat from the outside outside, and keeping things cooler inside. We've sold small commercial quantities of new material in this area that may be a market disruptor. We should know more about our potential for success here by the end of Q3.
We expect to continue to grow revenue during 2016, and at a greater rate than in 2015. I'm confident that we'll set some new financial performance milestones, with revenue growth and cash generation being our top priorities. The second quarter will be stronger than the first, and we still have several new opportunities in the pipeline that I expect to materialize this year.
Although most of our investors either 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.
Luke, would you please begin the Q&A session?
Thank you, Luke.
We'll look forward to talking to all of you again in a few months. Nanophase is making good progress and I expect 2016 results to reflect that going forward. Thank you for joining in on today's call.