Good afternoon and thank you for your ongoing support of Nanophase. There continue to be many positive changes, as well as some challenges, at our company since we last talked.
In this call, I'll cover fourth quarter and full year results, but more importantly, I'll continue to discuss forward progress and the ways that Nanophase has become a stronger company over the past few quarters. This is the first time we've had our annual call after we've filed the 10-K. There's quite a bit of financial detail in that document, so I'll cover most financial information in brief.
I've had an aggressive travel schedule this year so far, along with a challenging year-end audit, due to some specific changes to the way we report things in our financials that have extended the typical audit time frame. We also wanted to be able to discuss some customer issues that would have been off the table for this call had agreement not been reached in the last few days. We expect to be on a tighter schedule going forward.
Let me cover the financials in brief, which will, as always, be stated in approximate terms.
Revenue for the fourth quarter was $2.1 million and in line with management's expectations. Revenue for the fourth quarter of 2007 was $2.6 million. The net loss for the quarter was $1.9 million, or $0.09 per share, compared to a net loss of $1.3 million, or $0.06 per share, for the fourth quarter of 2007. I'll go in to more detail as we discuss the full year numbers for sake of better comparability.
Revenue for the year was $10.2 million, compared to revenue of $12.2 million for the same period in 2007. As a percentage of total revenue, gross margin remained at roughly 26 percent for both years. We were encouraged that, although revenue volume was down, and 2008 was a difficult year, even though the dollar margin was down, we were able to maintain this margin percentage. This was largely a function of a better revenue mix in 2008 than in 2007, and reductions in surcharges for raw materials pricing in 2008, that resulted in reduced revenue while allowing for a greater recovery of our costs of production. Net loss for the year was $6.4 million, or $0.30 per share, while the net loss for 2007 was $3.7 million, or $0.19 per share. Twenty-five percent of the 2008 loss, $1.6 million, was attributed to severance charges. Another 10% of this loss reflected an impairment charge related to our Auction Rate Securities. Although we don't feel we'll need to liquidate these securities to fund operations, given their current illiquidity, and the current economic climate, we were required to seek a valuation opinion, using a discounted cash flow model that indicated their value was impaired by 11%. This resulted in a $660K charge to reflect that impairment. In total, this charge, and the severance, amounted to $0.11 per share of the $0.30 per share loss for 2008.
Additionally, the Company has decided to change our method of accounting for patent costs. We will now expense patent costs as incurred instead of capitalizing them. We made this retroactive change in Q4, and showed the accounting impact in detail in the 10-K. The Company believes that it no longer has the ability to reasonably predict whether a patent will be granted, when it will be granted, or whether all claims will ultimately be upheld. Given that, we believe that it's preferable to expense all patent costs when incurred as period costs. This amounted to an increase of $41K to our 2008 net loss, and an increase of $133K to our 2007 net loss. This change will allow for greater transparency and more consistent quarterly comparability. As an aside, this is really more of an accounting issue than a statement on our technology. We continue to build intellectual property value all the time. Some will result in the pursuit of patent protection while much will serve to continue to enhance our competitive advantage. Given the unpredictability of the USPTO and foreign patent offices, this new treatment will help to make our financials more clear.
Regarding operating expenses and cash flows...
As we go forward, the senior management changes in 2008 will eventually result in annualized savings of cash salary expenses of $750,000, the bulk of which will begin to be seen in Q3 of 2009. In addition to the recent resignations of two executive officers in February, we have taken further measures so far in 2009 to reduce both operating expenses and, more importantly, cash used in operations. We eliminated 12 additional positions that became redundant, due in part to the economy and in part due to the company's shift in business strategy, which I will discuss a bit later. We expect these new 2009 measures to reduce operating expenses by an additional $1 million in 2009, and $1.2 million in 2010. Of course, we believe that these staffing changes will not limit our ability to execute our business plan through 2010. All told, we expect the 2008 and 2009 changes in senior management, and reductions of other staffing, to result in the annualized reduction in operating expenses of approximately $2 million, or $500K per quarter, beginning in Q2 of 2009. In terms of cash impact, for 2009, this should result in a reduction of cash used of approximately $1million, growing to a cash savings of $2 million in 2010 as the last of the severance obligations are satisfied. The changes we made reflect both the economy, and our migration from a partner-driven - volume manufacturing model, to a customer direct model. Let me break down the revenue outlook for 2009, and then I'll expand upon this further.
Revenue from BASF amounted to $4.9 million, or 48% of our 2008 business, and was down $1 million from 2007, due to reduced volume and reduced pricing. The pricing reduction was directly related to lower commodity raw materials inputs. We expect BASF volume to be down approximately 10 percent in 2009 due to softness in the consumer products markets. Long-term, the sunscreen and personal care markets should continue to grow, but probably at a single digit pace.
Revenue from our largest architectural coatings customer amounted to $2.5 million or 24% of our business in 2008 and was down $600K due to the impact of the economy on the housing and home improvement markets in general. We expect continued softness here in 2009, with potential significant reductions in this volume until the economy and housing improves. In the longer term, we believe exterior coatings will remain a vital part of our business. I'll discuss this key market further in a few minutes.
Revenue from our largest polishing customer amounted to $1.2 million, almost 12% of our business in 2008, a $400K increase from 2007. Given the battering the semiconductor markets have been taking, and the fact that, due to the sudden drop in demand from their customer base, we now understand our CMP customer accumulated significant inventory in 2008, we expect minimal volume from this customer in the first half of 2009. It's too early to tell what the second half will bring. An important and positive development here is that we have changed our contractual relationship so we are no longer mutually exclusive with this customer. We are free to explore other CMP market opportunities as part of our customer direct model. As I alluded to earlier, there's more detail on this in our 10-K.
Our sales to BYK Chemie were down significantly from 2007, as they continue to work off inventory. 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.
With limited ability to predict how current economic conditions may impact our strategic markets, along with the 18-36 month times to market that we typically experience, we continue to take a conservative approach to 2009 and, in line with previous guidance, expect revenue to be approximately 25% lower than in 2008. This reduction is due largely to sales projections from our existing partners and customers. Clearly, for 2009, housing and the semiconductor markets will have an outsized impact on our top line. This outsized impact really reinforces the importance of our new strategy to shift from a strictly partner-driven model to a direct selling model where, while still supporting our partners, we emphasize the development of a greater diversity of customers and markets. And, as we will discuss we are aggressively pursuing market opportunities. However, because it's taking time to implement our new strategy, and because of the economy, we expect the first quarter of 2009 to be our softest quarter. We believe total revenues will be down by more than 50% from Q1 of 2008, putting them in the low one-million dollar range. Looking to late 2009, we're prepared for a rebound in sales when the economy strengthens and, when we get toward the end of the year to possibly see an even greater influence from our more aggressive marketing programs, as our ready-to-go products, and innovative applications, attract new customers from a variety of industries, both through direct-selling and in support of our partners.
Moving back to cash..we exited this past year with $13 million in cash and investments, after using about $3 million in 2008. For 2009, we expect to use more than that due to our loan from BYK coming due, and cash severance payouts for former senior executives and, to a lesser extent, the twelve employees whose jobs were eliminated in February. That said we have enough cash to take us safely through 2009 and to position us for a stronger 2010.
Although we've taken steps to operate as practically and efficiently as possible, we're not playing defense, we're looking to the future. Our new way of going to market will make Nanophase a fundamentally different and more successful company. I have spoken about our new approach to selling several times, but I think it bears repeating.
First, within the last twelve months, we've refocused our research and development efforts so that they are aligned with the market driven, customer direct model. We have become intent upon building applications expertise. We're taking this approach, instead of stopping at the new product development stage, and then relying upon our market partners to sell those products. As a product of this new model, we are working to carefully select a relatively small number of markets which we can understand intimately, talking to customers and potential customers in those areas, and then tailoring our product offerings towards true unmet needs where there is a strong value proposition. We believe that this approach will result in a higher number of quality opportunities upfront, and a faster rate at which we can move those qualified opportunities through our sales cycle to revenue. While many of the factors related to how quickly a prospect becomes a customer are still outside of our control, this new approach essentially helps to ensure, that the customer receives the best Nanophase product for their particular system, the first time. This is where we believe we have developed ready-to-go products which will certainly serve the customer's needs much more directly than we were able to in the past. Remember, in most cases we are not selling a product - at least at first – we're introducing a brand new technology offering new capabilities and solutions. So with our focus on; 1) understanding the unmet application needs upfront and 2) understanding the application attributes of our nanomaterial products, then guiding the customer to match the two up, we believe the prospects for success will be dramatically improved relative to the previous model.
What this means is that as we work directly with customers, typically chemical companies, we now add value to the customer, and the customer's customer, and are not just selling our product. This really amounts to us taking a more pragmatic approach to R&D. Applications development is where we are making our investments. This is a key difference that will open many more doors for Nanophase. We believe that these odds are much better.
Secondly, while we support products to be sold in various markets through our partners, we have reached a level of applications development and market expertise in one broad market, exterior coatings (which includes paints, stains and industrial coatings), that, in many cases, has given us a knowledge level that exceeds that of our customers. This is another Nanophase first. This work has helped to position Nanophase as a value added solution provider that not only brings unique advanced nanomaterials to the party, but also brings knowledge of their application that is often missing. We understand both what the market needs are, and what the performance requirements of the materials are. While this won't shorten time-to-market as much as we'd like, it will increase our hit rate.
I continue to recognize that our job is to build the enterprise value of Nanophase. We do that best by taking the time to understand the markets and applications first, then to approach qualified customers and partners where we know the likelihood of success is highest. This is where our value will come from. It's the applications knowledge that will drive our growth, and our value.
When I began in this role in August, outside of our partners in the personal care and CMP markets, we had almost ninety opportunities in 14 markets that we were trying to understand and service. This was simply too many markets to pursue effectively. As part of our extensive strategy work, we have narrowed our potential top markets down to six, and we will continue to dig deeper. As with the exterior coatings market, our goal is to understand several key markets in-depth, and focus most of our resources there. We are utilizing an extensive process to analyze these markets, including size of opportunity, availability to Nanophase's technology, and price sensitivities. Once we're through evaluating these six targeted markets, unless they're all home runs, we'll adopt the ones that serve us best, and keep working the process. Please be clear, over time, we could significantly grow our business just around exterior coatings. But, I recognize that one market, plus growth from our partner-driven businesses, may not yield a steep enough growth curve for this business. If we end up focusing on even three solid markets, in addition to supporting our partner-driven growth, we'll have a steady pipeline of opportunities that will see a higher degree of commercialization, and lead to a bigger, stronger, company. While you might think that fewer markets would mean fewer opportunities, the opposite is true. Our new focus, has led to more visits, with more customers, and more, better vetted opportunities, than ever before. We continue to refine this focus to our best advantage. Due to our near-exclusive reliance on partners, Nanophase hasn't had to go through this level of market and applications analysis before. Although some of our market partners have been quite successful in certain areas, we need to have a direct customer interface to really move things along.
We'll always remain open to new opportunities in other markets, but if they are outside our top markets, whether that's three or more, the level of wholesale organizational focus, from marketing, applications R&D, sales, engineering, manufacturing and finance, must be reduced to avoid scattering resources. We need to focus the bulk of our people and money on our top markets and in supporting our market partners. To reiterate, we believe there are enough opportunities available to Nanophase, in markets we're already involved with, to generate a multiple of current revenue through new applications. This realization was the rationale behind our migration from an engineering and manufacturing-centric company to a marketing and sales company. The opportunities are now there, we need to identify them and go get them.
At a high level, as CEO, I recognize that I must be the face of Nanophase in every regard. I am also the Company's top advocate. I continue to be actively involved in customer meetings and opportunities. Currently, and the timing of this call is a by-product of this, I am also working on my replacement as CFO. We are actively identifying candidates for that position, to allow me to concentrate all of my efforts on leading the company in its new direction. Be assured, my primary daily focus is doing what needs to be done to build the enterprise value of Nanophase as effectively as possible. I know that our valuation will follow our results, and I am focused on results.
As I said in our news release, we are both realistic and optimistic about the current and long-term prospects for Nanophase. We have made many hard choices that we're confident will bear fruit in the near term. We are close to completing the formation of our new leadership team, and are putting the final pieces in place to leverage our capabilities for maximum growth.
2009 will be a critical year. We have:
A new management team
A new sales strategy
A new ready-to-go product approach
New strategic markets
New applications
And a solid balance sheet
Difficult decisions have been involved all along the way. The elimination of jobs and resignations in February amounted to a reduction in the Nanophase employee base of 25%. Additionally, the structural changes we made earlier were necessary steps toward helping us to get the entire organization aligned with a shared set of goals and values. The level of enthusiasm and commitment to the future at Nanophase continues to remain high. We have a highly motivated sales force that's here to be a part of something big. Our R&D group is thrilled with the change in direction and our entire company is aligned with our strategic vision.
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. As you can see, this is a different company with a different approach and we are optimistic about the future.
I appreciate your time today, and I'm available for any questions that you may have.