Good afternoon and thank you for your continuing support of Nanophase. There have been a lot of positive changes, as well as some challenges, at our company over the past two months. Based upon the progress we've made internally since our August 15th announcement of management changes, it's still hard for me to believe only two and a half months have passed. In this call, I'll of course cover third quarter results, but more importantly, I intend to set a new tone and to encourage you to look at the longer-term picture for Nanophase.
Let me cover the financials in brief, then I'll fill you in on the way we are now oriented and why I'm optimistic about the Company. For the third quarter of 2008, revenue was down 19% to $2.1million, with nine-month numbers being down 16% to $8.1million. For the quarter, this reduction was mainly due to BYK and BASF working down inventories and the impact of the economy on the housing and consumer markets. Revenue from BASF was down 13%, to $1.1 million. With respect to our largest coatings customer, revenue was down 15% for Q3, to $470K. Revenue from Rohm & Haas Electronics Materials was up $130K, to $270K in total, while revenue from BYK Chemie was down $270K, to less than $100K, due largely to comparative inventory building in 2007.
In terms of the P&L puts and takes, I'm going to focus on the nine month numbers to allow for better comparability year over year. Our margins held up well, but were of course impacted by the reduction in volume. For the nine month period, our gross profit was down $315K on a total revenue reduction of $1.5 million. This reflects a better product mix with improved margins, and a decline in raw material pricing which resulted in a reduction of more than $460K in top line with minimal margin impact.
R&D expenses were down 6% over the nine months. We expect these to increase over the next year to accommodate the addition of applications development resources to support our expanding sales effort.
Without strengthening the R&D applications group, we won't be able to effectively support our new senior sales person and the marketing professional we expect to hire soon. New salespeople on the street are driving these staff additions. This is an investment in our future that simply has to be made if we are to leverage all of the work we've been doing and maximize the value of our applications development and production capabilities.
SG&A was up 7%, mainly due to the expensing of previously capitalized patents, and patent applications we are no longer pursuing. We've reduced consulting fees this year and expect legal fees to go down next year as we hit calmer waters.
We had $1.6million in severance charges primarily relating to packages for the company's former CEO and EVP of sales. About 40% of this was composed of FAS123 equity compensation expense relating to the contractually accelerated vesting of stock options and the GAAP accounting required to recognize this. Going forward, we've eliminated more than $750K in annualized cash salary and benefits with the two highest paid Nanophase executives having left the business in Q3 of 2008.
Please see the schedule accompanying our financials in this press release for a further breakdown of non-cash items.
Moving to the balance sheet highlights;
Nanophase ended Q3 with $15million in cash and investments. Our cash burn from operations was about $1.3M for the first nine months of 2008, versus $1.5M for the same period in 2007. Going forward, we intend to manage cash as well as we can, without sacrificing the drivers to future growth in sales and R&D. That said, we have enough cash to take us safely through next year and to position us for a stronger 2010.
Running through what's been happening with our existing partners and customers:
We expect BASF to be down about $1M year-over-year, about half due to reductions in the underlying raw materials, which drive our pricing but have little impact on our margins, and the rest mainly attributable to their working down inventory. Depending upon economic challenges, BASF is expecting unit growth for the next several years for our materials used in their sunscreen products. Two things need to be clear regarding BASF: 1) They are an excellent partner that will provide us with a strong leg to our business for the foreseeable future and 2) This business, again, depending upon the economy, will probably average single digit growth for the next several years. As such, BASF's growth, while important to us in terms of helping to fund our business, will not be a significant driver of Nanophase's total growth as we expand sales efforts and further diversify our customer base.
Next, by its own estimation, our large architectural coatings customer is doing well, but its business depends heavily on a number of external economic factors, including consumer sentiment and the residential construction sector. Due to the current state of this sector in the U.S., we expect a significant decline in this business for 2009.
Rohm & Haas is seeing a downturn in their ceria slurry sales as well, which has resulted in a small reduction in our expected revenue from them in Q3 & Q4, but has the potential to bring 2009 sales down even further. Currently, the semiconductor industry is undergoing challenges, in some cases resulting in plant closings and consolidation. We expect these things to have some impact on our business going forward.
Our sales to BYK Chemie were down significantly from 2007, as they continue to work off inventory of our materials. They've had a few successes in coatings applications with our materials, but we don't expect these to accumulate to seven-figure total revenue for 2009.
Also, I just returned from Japan last week from visits with C.I. Kasei, our licensee and partner there. Nanophase brought a marketing and technical support team to share ideas and visit several customers.
Although we have yet to see revenues significantly beyond the $300K in annual license fees from C.I. Kasei, we believe we'll be able to help them better exploit the Japanese and Asian markets for our materials and, in the process, we expect to learn more from them about potential markets we may be able to attack here in North America and elsewhere outside of Asia. We will give and receive more attention within this partnership than in the past, and we anticipate this should lead to expanded revenues for Nanophase over time.
Now I'd like to give a bit of near-term revenue guidance. We expect fourth quarter revenue to be roughly flat when compared to the third quarter and expect 2008 revenues to be roughly $10 million. Although the inventory build that took place at BASF and BYK Chemie in 2007 is being worked down, our outlook for 2009 is for lower revenue than in 2008.
In terms of guidance for 2009, taking a realistic look at the revenue we have the best visibility toward, and anticipating a sluggish global economy in 2009, we see total revenues potentially reduced by 20-25% for next year, or down roughly $2 million. Given what we know from our existing customers, and some new customers that will have modest 2009 impact, this is the view our current visibility allows us. Unfortunately, we can't give better information regarding potential upsides, as it's all related to customer timing. Revenue for the latter part of 2009 and 2010 is also dependent upon our ability to develop and successfully market new applications with our expanded R&D and marketing efforts. It's also fair to say that we do not envision a new revenue stream for 2009 that would raise annual revenue beyond 2008 levels. That said, we expect sales to start to rebound by late 2009 as new programs and customers ramp up. Of course, we'll update this guidance next quarter.
As we complete our transformation to a market-driven sales approach, and direct selling wherever possible, we anticipate having much greater control over our destiny and an improved ability to make more accurate forecasts for future business, revenues and margins.
Our track record shows we are able to develop superior nano-engineered solutions for a variety of applications.
We have shown we can consistently deliver products with 100% customer satisfaction.
The missing part of the equation - and one we are focusing much of our time and attention on - is to support our unique capabilities and drive revenue growth with a skilled and aggressive sales and marketing group.
Our success hinges upon our fully migrating from an engineering and manufacturing-centric company to a marketing and sales company.
We are undergoing a complete re-focus on the way we go to market. We are adding sales and marketing people, along with R&D application development support, to allow us to better penetrate a select number of targeted markets. We are moving to a mile-deep approach in these markets to fully leverage our knowledge and capabilities. In October, we hired Bill Turner as senior account manager.
Bill has worked in the chemical industry for 17 years, for Air Products, Akzo Nobel, Nalco, and, most recently, Huntsman. Also, we are in the process of hiring a Marketing Director who will help to make our strategies and our sales force more effective. By this time tomorrow, I will have helped to interview our third candidate for this position…all just this week!
We are also in the process of adding both junior- and senior-level support to our R&D applications group to accelerate applications development and to give added traction to the sales effort. With our accelerated sales and marketing efforts, we'll need more people on our applications development team to keep up with the new opportunities and the flow of requests for market-targeted samples.
Part of the reason we recently created what we call our Technology Forum, is to focus on new technologies and competitive threats while ensuring that R&D, under Dr. Pat Murray, our newly-promoted VP of R&D, is giving most of its attention to applications development that will focus on nearer-term revenue opportunities. Our Chief Technology Officer, Dr. Richard Brotzman, is managing the Technology Forum.
We feel that there are enough opportunities available to Nanophase, in markets we're already involved with, to generate a multiple of current revenue through new applications.
The excitement and level of enthusiasm about the future here at Nanophase has never been higher. We have a highly motivated sales force that's here to be a part of something big. For example, driven by Chuck Cucuras, our Director of Sales and resident bulldog, we recently met with a prospective customer on a Saturday in Romeoville to hammer out terms and try to get a project moving forward that may result in significant revenue in 2010. I was there, along with Chuck and David Nelson, our newly promoted VP of Sales & Marketing, for the better part of the day making it happen! We now have multiple people traveling every week, including me! Acting as CEO, I recognize that I must be the face of Nanophase in every regard. I also need to be the Company's top advocate.
Marketing & Sales is now being run under the able leadership of David Nelson, with a new enthusiasm and a more effective approach to building business. I am at the disposal of our team and have been involved much more in direct customer contact at the executive level. This level of top executive attention is something that we believe will also help to move things forward more quickly. We know that the more we touch the customer, the better we understand the markets, which will lead to more robust sales activity.
My focus is doing what needs to be done to build the enterprise value of Nanophase, for the long haul, and I'm not willing to settle merely for long-term incremental growth. I know that our valuation will follow our results. The energy throughout our organization toward our new approach is very high. I've spent a good deal of time building a new management team. We've been working to transform the culture of Nanophase to one with strong internal transparency, and greater communication and interaction among all the employees and managers. This is a necessary building block towards helping us to get the entire organization aligned with a shared set of goals and values.
As we go down this path, examining new strategic options, as well as examining new ways to approach the markets we're currently in, I can't help but be confident that we're on track to succeed. I expect 2009 to be a critical year. We won't see significant new revenue, but 2009 will be significant.
We are changing the company culture.
We are undergoing a complete re-focus of how we go to market and how we view our technology.
We are also building the sales and applications development engines in the business to capitalize on what we know and to pursue business opportunities we previously might have missed.
And, of course, we are intensely focused on building pipeline, including new applications that will show significant growth, both in number of customers and dollars of revenue, for 2010 and beyond.
Nanophase has a solid cash position and a reasonable burn rate. We'll deal with severance payouts and operational burn and still walk out of 2009 in a good spot looking toward 2010. While we're very aware of how important it is for us to conserve cash during this transitional period, I'm also focused on making the sensible investments in our sales and applications development structure to position Nanophase to grow and thrive.
This is a different company now with a different approach.
In terms of ongoing shareholder communications, Nancy Baldwin, our newly-promoted Vice President, will assume primary responsibility for dealing with investor and shareholder contacts between quarterly reports. As things settle here, we'll also try to present several times per year at various events, and selectively reach out to the investment community in order to get more exposure for Nanophase.
As CFO, I responded regularly to the many investor calls and notes I received out of a sense that all of us have a common interest. And we do. Given the nature of my role today, and the critical nature of what we're all vigorously working toward, my time needs to be focused on building this business in terms of sales and strategy, and I will now apply as much of my effort as possible towards that. This is clearly the best way for me to serve our common interests.
I am confident and optimistic about the future of this company, OUR Company. Internally, I have taken to referring to Nanophase as OUR Company and I fully recognize that our shareholders are part of the Nanophase family. I as Acting CEO, WE as Nanophase management and employees, are aligned with YOU, our shareholders, in the goal of doing everything we can to build the value of Nanophase for the long-term.
I appreciate your time today, and I'm available for any questions that you may have.