PEN Inc. (OTCQB:PENC) Q3 2016 Earnings Conference Call November 21, 2016 1:00 PM ET
Elaine Ketchmere – Compass Investor Relations
Scott Rickert – Chairman and Chief Executive Officer
John Hollister – Chief Financial Officer
Good afternoon and welcome to the PEN, Inc. Third Quarter of 2016 Webcast. Please note this event is being recorded. I would now like to turn the conference over to Elaine Ketchmere of Compass Investor Relations. Please go ahead.
Thank you, operator, and good afternoon, ladies and gentlemen. I’d like to welcome everyone to the PEN, Inc. earnings webcast for the quarter ended September 30, 2016. Today, we’ll hear from PEN’s Chairman and Chief Executive Officer, Dr. Scott Rickert; and Chief Financial Officer, John Hollister.
Before we get started, please note that we’ll begin with prepared remarks followed by the question-and-answer session. During the Q&A, we’ll be answering questions that have been submitted by shareholders and webcast participants. Please also note that today’s webcast contains forward-looking statements that involve risks and uncertainties concerning our business, products, and financial results. Actual results may differ materially from the results predicted.
More information about potential risk factors that could affect our business, products, and financial results are included in our annual report on Form 10-K for the fiscal year ended December 31, 2015 and our Form 10-Q for the quarter ended September 30, 2016 and in reports subsequently filed by us with the U.S. Securities and Exchange Commission. All documents are available through the SEC’s Electronic Data Gathering Analysis and Retrieval System, EDGAR, at www.sec.gov or from our website. We hereby disclaim any obligation to publicly update the information provided here including forward-looking statements to reflect subsequent events or circumstances. This conference call is being webcast through our Investor Relations website. This is also being recorded and an on-demand replay will be available tomorrow.
And with that, I’ll turn the call over to Scott Rickert, PEN, Inc.’s Chairman, President, and Chief Executive Officer.
Good afternoon. Thank you for joining us today for the earnings webcast. In the third quarter of 2016, we saw a slight uptick in sales of our health and safety products supported by our portfolio of CLARITY branded products and our gross margin remained strong. We also achieved a dramatic improvement in the bottom line and generated positive cash flow from operations.
I will share some operational updates with you shortly. First, John Hollister, PEN’s Chief Financial Officer, will provide more details on the third quarter results. John?
Thank you, Scott, and good afternoon to everyone on the call. As Scott mentioned, we achieved very solid improvement in reducing our net loss for the period. Thanks to strong gross margin and improvements to our cost structure. For the third quarter of 2016, net loss was reduced to $211,000 from $757,000 a year ago. Q3 loss was $0.07 per basic and diluted share versus $0.25 a year ago.
As the slide shows, for the quarter ended September 30, 2016, total revenues were approximately $2 million in line with the third quarter of 2015. Sales from PEN’s Product Segment, most of which are health and safety products, were $1.8 million, up 6% from a year ago. I would like to remind our listeners that due to variability and the timing of purchases by our customers, Product Segment revenue can fluctuate significantly from quarter-to-quarter.
Revenue from R&D services for the third quarter of 2016 was $225,000, compared to $337,000 in the third quarter of 2015. The decrease was primarily due to fewer contracts being performed in the current quarter in part because of our decision not to seek government research contracts that include a cost share.
Moving on to next slide. You can see on this slide that gross profit in the third quarter of 2016 was $631,000, up 22% from $516,000 in the third quarter of 2016. Gross margin also improved coming in at 31% compared to 26% in the year ago period. Product segment gross margin for the third quarter was 37% compared to 40% a year ago due to differences in the assortment of products sold. I would like to point out that in the first nine months of 2016, Product Segment gross margin was 41%, essentially unchanged from the year ago period.
Gross margin in the R&D services segment for the third quarter of 2016 was negative 15% compared to negative 44% in the year ago period. The improvement was due to lower cost of revenues. While not reflected in our GAAP generally accepted accounting principles financial statements. The Design Center in Austin, our R&D services operation, has successfully reduced its occupancy costs through two subleases and one shared facility lease. If that could be reflected according to GAAP in our statements, a R&D segment would show an operating profit.
Returning back to numbers reflecting overall PEN, operating expenses totaled 867,000 in the third quarter of 2016, down 31% from the same period last year. This was due to lower salaries, wages and related benefits in each of the two segments. This significant reduction in our operating expenses is due in large part to the restructuring that we've gone through in Austin, which includes of course the subleases just mentioned.
And as Scott mentioned earlier, we are now working to further right-size and reposition our Ohio operations. We expect further improvements to our cost structure with the potential for significant operating leverage in the future.
Moving to our cash and financial condition, as of September 30, 2016 PEN held cash and cash equivalents of $127,000 as compared to $263,000 at the end of 2015. As of September 30, 2016 PEN had short-term debt of about $1 million, down from $1.4 million at December 31, 2015. In the first nine months of 2016, PEN generated did not consume but generated cash flow from operations of roughly $188,000.
With that, I'd like to turn the call back over to Scott Rickert.
Thank you, John. Our financial results clearly demonstrate that we are riding the ship at PEN. After successfully transforming our operations in Austin into an innovative nanotechnology design house, aligned with PEN's mission. We are now focused on realigning and right-sizing our Ohio operations.
I'll provide more detail on that along with some other operational updates on our business next. Those of you who have been following PEN, no, that we have some of the best health and safety products available in the market today. ULTRA CLARITY eyeglass cleaner has been the industry benchmark for more than 20 years.
And CLARITY DEFOG IT is the best performing anti-fog product on the market today trusted by the military, and by safety professionals, and athletes worldwide. We have many other product categories that also hold promise, ranging from various coatings and surface treatments to thermal management materials and printable inks and pastes. We sell our portfolio of 25 consumer and industrial products under our own brands and private label for customers.
Currently sales by volume are dependent on the requirements of our large private label customers. One of the major pushes in 2016 is expanding our own brands by introducing innovative new products, new product categories and expanding distribution channels. To that end, we introduced several new health products including an anti-reflective lens cleaner, CLARITY AR, alcohol-free lens cleaner CLARITY FREE and new product formats, namely gels and foamers.
We have entered the consumer electronics category with the addition of CLARITY ADVANCED screen cleaner and made inroads into the mass market retail channel with a win at a well-known regional grocery chain.
My vision for PEN is to build a marketing powerhouse, grounded in nanotechnology that addresses big problems in large addressable markets. We took a major step forward in realizing that vision, when we brought a new leadership with extensive experience in marketing and branding, high-level strategy and general management.
To right-size and reposition our Ohio operations to become PEN brands. A retail consumer products business focused on the areas of health, safety and sustainability. The first stage of this process involves showing up our existing business, streamlining manufacturing and repositioning our own brands in the retail market.
We will then be in a better position to relaunch our environmentally friendly surface protector, which continues to be a very important product for PEN. The need for safe and effective products that protect us from disease is building. And we remain confident that our environmentally friendly surface protector has the potential to be a first in category product for the very large addressable market.
At the time of the initial product launch last year, we lacked the marketing, branding and financial resources to achieve our goals. When the time is right, we will relaunch this incredible product into the market in a more thoughtful and supportable manner.
I am extremely pleased with the progress we have made thus far at PEN brands. And I'm confident in the direction we are headed. Ultimately, we want PEN brands to be known for having the right solutions to today's problems. One of the major objectives following the merger was to reshape Applied Nanotech from a patent house into a Design Center aligned with PEN’s mission.
Today our team of renowned scientists is focused on developing breakthrough new products that can be commercialized, in addition to performing development contract services for government and private entities. Although, revenue from this segment has declined, this was primarily due to a decision to move away from cost share research contracts.
As John mentioned, gross margin has improved significantly this year. The Design Center is a powerful incubator, developing best-in-class innovative new products for large addressable markets. Commercial sales of our new graphene foils to make the isotopes for PET, Positron Emission Tomography scans continues to build and expanded testing of graphene windows, used in the fast growing nuclear medicine diagnostics market are encouraging.
We are also seeing strong interest in our multifunctional metallic inks for 3D printed electronics. The 3D printed electronics market holds tremendous promise. And we hope to become a trusted supplier to major players in this fast and large growing market.
In closing, our results thus far in 2016 speak to a significant improvement in the business. Going forward, we will look to complete the turnaround by right-sizing and repositioning our Ohio operations as we build a growing retail consumer products business grounded in nanotechnology.
With several established best-in-class health and safety products and experienced marketing and branding team and a rich pipeline of new products. We look forward to entering the New Year in a stronger competitive position.
With that, I will turn the conversation over to Elaine Ketchmere to direct the question-and-answer session. Elaine?
Q - Elaine Ketchmere
Thank you, Scott. We’ve received several questions from investors in advance of today’s call including a few questions about the HALO relaunch. Why is the relaunch of HALO necessary if the product is good as it was advertised originally? Have you changed the product formula and if so in what way for the relaunch?
Very good questions. The relaunch of our environmentally friendly surface protector has nothing to do with the product itself. We believe it truly is remarkable and revolutionary and we have made no changes in the formulation. As I mentioned in my prepared remarks at the time of the initial product launch last year we lacked the marketing, branding and financial resources to achieve our goal. When the time is right, we will relaunch this incredible product into the market.
And here is the last question, Scott. Cost share contracts are often required for the contractor to end up with a whole or shared ownership of the resulting patents. Can you comment on the decision to avoid such contracts from that point of view?
Be happy to. Some of our longstanding investors are more familiar with the patent house business model of Applied Nanotech. While the breakthroughs in resulting patents were very exciting, this was not a viable strategy to support an ongoing business. Therefore once the merger was completed, one of our primary objectives was to keep the best of Applied Nanotech mainly its groundbreaking research team and rich IP portfolio and reshape it into an innovative design house. That supports PEN's mission. The Design Center is now a powerful incubator developing best-in-class, innovative new products for large addressable markets.
I want to thank everyone again for attending the call. I hope you are as excited about the future of PEN as our management team is. I look forward to sharing additional information about PEN in the coming months.
Thank you, Scott. Now on behalf of the entire PEN management team, we thank you all for attending. As a reminder an on-demand version of this webcast will be available online shortly. This concludes our third quarter 2016 earnings call. Thank you again for attending. Operator?
Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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