THIRD QUARTER 2018 CONFERENCE CALL
Thank you, Jimmy, and good morning to those of you who have chosen to listen live. It's great to have you here, along with those who have decided to listen to the taped version at their leisure.
Again, your companies had another nice quarter, this time it's Q3. We expect more progress with the Solesence products in Q4 as well, and we expect to post another record year for 2018.
Jaime Escobar, our Chief Financial Officer, is joining me again today.
During this call, I'll be giving an update on our progress in new business development, within Solesence, along with updates on our Advanced Materials business, and, of course, third quarter results. We've seen unprecedented market demand for our minerals-based UV absorbers within our Advanced Materials business. As I said last time, the markets continue to improve for the products we sell, and we intend to take advantage of the strong position we're in.
Our third quarter 2018 revenue was $4.0 million, a 44% improvement over the same quarter in 2018. We also showed a $136 thousand net loss for Q3 which, although much improved year-over-year, fell below our expectations. One impact of the unexpected order flow we've seen through our largest active ingredient customer, was the recognition of approximately 50% of the 2018 annual volume pricing discount in Q3. Were this amount to have been spread ratably over the four quarters in 2018, the Q3 bottom line would have been at least $100K stronger.
Our nine-month revenue numbers were just over $11 million, a 12% increase over the same period in 2017. As we discussed, the anomalous Q1 we believe we had this year, with its $924K loss, has had an outsized impact on our nine-month profit numbers.
I'll return to share more about all of this, and our forward strategic view, in a few minutes.
Now I'd like to introduce our CFO, Jaime Escobar, who will give us a quick overview of the rest of our financial results. Jaime?
Jaime Escobar, CFO
Thanks Jess, and Good morning. Before I begin, please remember that all financial information is stated in approximate terms.
Our third quarter revenue was $4.0 million in 2018, compared to $2.8 million in 2017.
We had a decrease in our losses quarter-over-quarter. For this past quarter, we netted a $136K loss, or $0.0 cents per share this quarter, compared to $642K of next loss, or $0.02 per share, for the same period last year.
This loss was a function of many factors which include lower margin revenue mix for the quarter, cost increases to raw materials used in production, along with a reduction to our top line to account for certain contractual obligations. Jess described some of this in his opening comments.
We ended the third quarter with a $1.0 million cash position and $500,000 drawn on our working capital line of credit.
Jess?
Jess Jankowski, President & CEO
Thanks Jaime.
For any investors new to our calls, or those that are just getting re-engaged in the Nanophase and Solesence story, I want to better explain the terms I have been using to define our commercial areas. You'll be hearing more and more about our "Advanced Materials" business, and our Solesence business. They are significantly different from one another. The Advanced Materials business is composed of our personal care ingredients business, and the materials businesses related to coatings, a diverse grouping of customers buying higher value specialties, and, the polishing business where we have partnered with Eminess.
The products we sell in to these varied customers and markets are essentially enabling ingredients and, in the case of the Personal Care markets, our largest Advanced Materials growth driver, they are considered "Active Ingredients".
We expect our Advanced Materials business to become more focused on skin-and sun-care ingredients over time. This is certainly where we're investing our business-and product-development energy in Advanced Materials. In the Personal Care, Skin Care, and Cosmetics markets, demand for more and better minerals-based products has become the biggest driver for growth within our Advanced Materials portfolio.
The growing market focus on minerals-based products also comes at a great time for our Solesence business. Through Solesence, we're developing and manufacturing fully formulated prestige beauty products for Bands, using what we refer to as our Active Stress Defense technology. All of our formulations are created using minerals-based active ingredients as their backbone, which is where the demand is. Consumers and Dermatologists generally prefer minerals, which are known to offer excellent health benefits, but adoption has been slowed by the limitations of other technologies in the market. That's where Solesence comes in!
Some of the key clinical benefits we have proven are:
Comprehensive environmental protection, including protection against pollution;
Full spectrum UV protection; and
Stopping the release of free radicals, which contribute to signs of premature aging, such as wrinkle formation & skin discoloration.
These claims for Solesence products help the Brands to provide evidence of being able to prevent the signs of premature aging, which continues to be one of the biggest drivers of consumer demand.
We often refer to our Solesence clients as "Brands." That's because they'll be marketing these products, with their names on them, using their distribution channels, enabled by our Solesence technology, our formulating expertise, marketing support, and regulatory and production backbone. They are selling the products we create to consumers through a series of specialty channels. While Solesence is not selling products directly to consumers, we are helping brands to produce better products, marketed as "prestige products", to capitalize on building demand. In Q3, we continued to fill demand relating to our three successful Solesence product launches through our client, Colorescience. We are now working toward another launch, with a new Solesence client in Q4.
As exciting as Solesence has become, the larger story of Q3 is our Personal Care business in total. While Solesence is certainly a contributor, and one that we expect to play an outsized role in our future growth, our minerals-based active ingredients volume is growing significantly, as a result of the broad market demands for mineral-based skin care.
Revenue from our largest customer tells a compelling story:
It was up significantly year-over-year. When comparing third quarters, dollar volume was up more than 70% from 2017 to 2018. The big change was both a reflection of 2018 growth, and a dampening of Q317 revenue by a planned shutdown.
However, for the nine-month periods, dollar volume was up more than 20%.
Our nine-month 2018 numbers have exceeded 2017 full year sales to them by more than 5%, and we expect good volume in Q4.
These dollar volumes also reflect lower per-unit pricing in 2018, when compared to 2017. This means product volumes, in terms of total tonnage sold, will exceed those of 2017 by an even greater margin than reflected in the increased dollar volumes. We will effectively see more total margin dollars from this business than in past years, but at a lower margin percentage.
In terms of Operating Expenses, we are still investing in new products, and working toward building new and sustainable volume for 2019 and 2020. Our main focus over the past eighteen months or so has been to get our new finished products to market, then to capitalize on some of the momentum we are seeing.
We have also spent much of this year pushing hard to meet the rapidly expanded demand from our largest customer for our minerals-based actives. Going forward, we are expecting to see improvement in production efficiencies as we get more Solésence product launches under our belt and look to have more level-loaded demand within our Advanced Materials business.
Your Company is becoming more and more focused on skin care and cosmetics applications.
Consumer demand, regulatory forces, and the success of our Solésence technology, are things that are creating momentum, momentum that we expect to be sustained for the foreseeable future.
As we mentioned in the press release, we’re looking forward to breaking another revenue record in 2018, with more growth to come in 2019.
We’ll have more information to share, both on the products, and sales volumes, over the next few quarterly calls, but remember, we are in the market, and growing, right now!
Although the majority of our investors listen to the webcast, or review the transcript, after the live call, I’d like to invite those participating today in real time to ask any questions you may have or share your comments. Jimmy, would you please begin the Q&A session?
Q&A SESSION
Thank you, Jimmy. And thanks to all of you taking the time to listen, to engage, and to support Nanophase and Solésence.
Our fourth quarter looks good, and we are expecting to be able to discuss another Solésence launch next time. We’re working hard on securing more Solésence product launches for the coming spring, so you know I’m looking forward to the opportunity to discuss the business with all of you again soon. I like where we’re at.
Remember, enjoy the sun, we need the sun, but be sure to protect yourself from its effects on your skin. Rain or shine, you’ll get skin damage without proper care, and I know just the stuff you should use!
Have a great day everybody!