THIRD QUARTER 2019 CONFERENCE CALL
Jess Jankowski, President & CEO
Thank you, Daniel. Good afternoon to all of those listening live, and welcome to those who choose to listen later online. I’m glad you could join us for our third quarter 2019 conference call. Today’s discussion will cover current results, our recent financing, the current state of the business, and our plans for 2020. Unless identified otherwise, all numbers will be stated in approximate terms.
Today’s call is about both the future and the past. We are optimistic about the future of our Solésence finished products business, and about the growing demand for minerals-based sunscreens generally. There has been no slowing down of any of the trends we’ve seen. We’re also optimistic that the changes we are making will help to mitigate some of the losses we’ve generated due to a series of factors, many of which were difficult to control. First, some numbers:
Solésence continues to be our growth driver in to the year, offset by decreases in revenue from our largest Personal Care Ingredients customer and, to a less critical extent, our industrial coatings business. Our Q32019 revenue was down almost $1M when compared to 2018, with nine-month year-over-year sales being down about $900K. Revenue from our largest customer was down more than $600K for the quarter, and $1.6M for the nine-month period. In 2018, their expanded revenue was driven by some “spot-buys,” and some inventory building that hasn’t been repeated in 2019. 2019 revenue was also impacted by the loss of a significant downstream customer. This created a burst of orders from our largest customer last year, requiring a capacity expansion on our part, both in labor and equipment. These volumes were not repeated this year, and related revenue will continue to be disappointing through year-end. We’ll talk more about this in a minute. The good news here is that our Solésence revenue through Q3 of ’19 is up by $600K year-over-year. It was at almost $1.7M through Q3, headed toward about $2.5M, for the full year, effectively doubling between 2018 and 2019.
Yet again, the best part of the story is in our revenue mix. And, we expect nothing less than this same growth, or more, through 2020. A good indication of this, is that through September, we’ve had 14 new product launches, along with reorders for the first 8 products we launched in 2018. In addition to our expectations for more launches throughout 2020, we specifically expect more product launches through the coming first quarter. We are currently expecting to ship products for a new launch in January, which, unfortunately, was postponed from December due to timing issues related to customer-supplied materials. It’s a nice order that will represent significant volume in Q1.
Currently, we have purchase orders in house for Q1 that exceed $1M, with more orders expected by year-end. As I’ve mentioned, I am happy with our progress toward more Solésence growth, but not with the margins we’ve been able to generate thus far.
Next, I’d like to address the financing we disclosed in yesterday’s press release. Our largest investor continues to be a strong supporter of both Nanophase and Solésence. He came in during the 11th hour, with $2M in convertible debt at a 2% coupon rate. We needed this financing, to help us recover from the cumulative effect, of the changes to our revenue volume from our largest customer, including last-minute changes to Q4 orders, that would’ve been impossible to withstand otherwise.
Taking a look back to how we got here, in late 2016, when we began planning for our major push in to the Solésence business, bringing fully formulated skin health products to market, all of our strategic planning was predicated on consistent volume from our largest Personal Care Ingredients customer going forward. At the time, it was the right decision. This consistent and cash-generating business was intended to support the expanded investments we were making to bring our new fully-formulated Solésence products to market. We achieved excellent growth with our Solésence products, but not at the margins we expected. These were losses that we normally could’ve absorbed.
Unfortunately, the rapid increases of volume we saw from our largest customer in 2018, then the even more rapid decreases we saw in 2019, resulted in us losing a good deal of money in both years, and in areas where we’ve typically done well. We took a cash hit in responding to the rapid 2018 growth that was expected to continue in to 2019, but didn’t. As a result, we were not able to react quickly enough to mitigate losses in 2019 created by the rapid reductions in volume expectations that were not communicated to us until Q1 of this year.
All of these factors drove an acute cash need that we needed to address immediately. This week’s financing, and the related disclosures in the 10-Q we filed yesterday, were the reason for the lateness of earnings, and the lack of a more typical notice period to all of you regarding the timing of this call. For that, I certainly apologize.
We are approaching the balance of 2019, and the beginning of 2020, as an opportunity for us to begin making significant adjustments to our organization in order to allow us to operate more flexibly. The goal of these changes is to increase profitability, and to streamline our companies, to allow us to more efficiently handle a much higher volume of Solésence sales, as well as to better manage the cyclicality in our Personal Care Ingredients business. We’ll have much more installed filling capacity by year-end, as well as a more profitable suite of products, and a slightly different focus. To that end, while we consciously spent 2017, 2018 and much of 2019 focused on growing the Solésence business as quickly as possible, we planned to maintain the momentum we created to build Solésence volume as our 1st priority, then to let the margins catch up.
Going forward, we’re focused only on profitable growth, at whichever volumes allow that although we do expect those volumes to be meaningful. As I mentioned earlier, Solésence sales will roughly double from 2018 to 2019, coming in at around $2.5M. We fully expect Solésence volume for 2020 to more than double, again. We are now focused on building our margins on both new and existing business, with additional growth being important, but secondary to achieving the self-sufficiency that profitability will bring. Companywide, we’re reorganizing workflows, finishing up on getting labor-saving capital equipment installed, and analyzing spending from a zero-based perspective. We are also focused on streamlining processes, and the related spending, that may have made sense several years ago under our pre-Solésence high-volume, low-transaction, manufacturing model.
With our strategy of focusing our product offerings mainly on finished skin health products through Solésence, as well as Personal Care Ingredients, we’ve charted a course that makes these types of improvements much more straightforward. Capturing more margin, and having it drop to the bottom line is our top focus today.
Something that I really can’t highlight enough, especially to our long-term investors, is that we are finally at a point where our marketing and sales efforts are yielding results…and these results are directly related to our strategy, our efforts, and our ability to address specific market demand effectively.
We’ve turned a critical corner here. This, for us at least, certainly has been the most difficult thing to achieve. In the past, we could invent things, we could build things, some of them great things, and ship things, but we were almost always reliant on our customers’ and partners’ willingness and ability to generate demand. We’ve all lived through the mixed results that this has caused. Another way to view where we’re going, particularly with Solésence, is that we are winning in the areas that we can control. Where we’re close to the end customer, we understand the markets deeply, and we’ve shown we can generate and satisfy demand. The biggest disappointments we’ve had, relate to areas where our control is limited, typically where we’re furthest away from the end user or customer.
Although most of our investors listen to the webcast, or review the transcript, after the live call, I’d like to invite those participating in today’s call to ask any questions you may have, or to share your comments. Daniel, would you please begin the Q&A session?
Thank you, Daniel. We have the expectation of several customer launches in Q1, including the one we’re expecting in January. We have purchase orders in hand, a solid growth engine in Solésence, and the minerals-based ingredients markets continue to expand, and back to controlling the things we can control, the more we can grow Solésence profitably, the more stable our Company becomes, and that’s what we’re going to do.
I’m looking forward to the opportunity to discuss the business again with you soon, and thanks again to all of you for taking the time to listen, and to support our exciting companies.
Have a great day & weekend everybody.