Jess Jankowski, President & CEO

Good afternoon! 

We appreciate your participation in today’s third quarter update. The financial statements disseminated today validate that our business strategy, including our new sales and marketing models, is beginning to generate positive results. Your management team and board of directors are confident that we are heading in the right direction for Nanophase and its shareholders. Expectations are high! 

It can be challenging to discuss the progress we’re making without providing our competition with useful information, but I did want to share with you, in general terms, the progress we’ve made over the past several months. 

We’re optimistic that you’ll share our excitement about the potential of your company. Before we go into an overview of our progress, I’d like to turn the conference call over to our new CFO, Frank Cesario, to briefly review the financials for the third quarter. 

Frank Cesario, CFO

Thanks, Jess. Good afternoon, this is Frank Cesario and this is my first opportunity to speak with you since joining the company in June. 

I am excited about being part of this dynamic new management team, and hope our shareholders will share in my excitement, as we continue to focus on our business strategy and the milestones established by the management team and the board.

As I provide an overview of the financial results for the third quarter, remember, they are always stated in approximate terms.
Revenue for the third quarter was $1.7 million. Revenue for the first quarter was $1.4 million; and we reported revenue of $1.6 million for the second quarter. 

While we have enjoyed sequential incremental growth as 2009 has unfolded, the marketplace remains very tight with our customers squeezing their inventories aggressively. Based on this dynamic, our fourth quarter expectation is for more of the same, with baseline expectations at around $1.2 million. 

As a percentage of total revenue, gross margin for the quarter was 27 percent, an increase of 93 percent over the comparable 2008 third quarter. On a consecutive basis, gross margin improved significantly, with gross margin of 6 percent in Q1, increasing to 11 percent in Q2. 

For Q3, while our revenue was off for the quarter by $300,000, our year-over-year gross profit improved by $200,000. This is a result of our lean business strategy, which has reduced fixed manufacturing costs, while providing a manufacturing structure that is now sufficient to support significantly higher levels of production without an increase in fixed costs.

The net loss for the third quarter was $875,000 thousand, or $0.04 cents a share, a significant improvement, when compared to a net loss, including severance charges of $1.6M, of $2.8 million, or $0.13 cents a share, for the third quarter of 2008. Running leaner has had a considerable impact on our bottom line.

Our balance sheet remains strong, as we finished this past quarter with $3 million in cash and cash equivalents, and an additional $5.3 million in longer-term investments.
We paid off $1.6 million dollars of debt during 2009; with the final half-million dollar payment made in July. We are now debt free.
Finally, I understand we have had discussions here, and in our filings, regarding the $6 million in auction rate securities that we weren’t able to sell due to the freezing of that credit market. We have been looking to sell them at close to their par value, and during October were able to sell one of those three bonds for more than $1.7 million in net proceeds. That cash will be reflected in our year-end balance sheet. 

Now, I would like to turn the call back to Jess Jankowski.

Jess Jankowski, President & CEO

Thanks, Frank.

In light of the overall economic conditions, I’m pleased that we’ve been able to significantly improve our gross margins and reduce our cash burn. And, as of July 2009, we are debt free with a strong balance sheet. 
We are NOW seeing the effects of the extensive measures we implemented to adjust overhead, reduce costs, and add product and market diversity through the addition of new sales and marketing strategies. 

Over the last nine months, we have seen our partners aggressively managing their inventories, as revenues have declined considerably. This has resulted in a decrease in the frequency, and quantity, of orders to their supporting vendor groups, including Nanophase. We are working closely with our partners, but it is difficult to project their recovery cycle timeline. On the other hand, we are beginning to see incremental growth, and signs of recovery, with potential new customers. 

We have also reached the point with several customers where we have seen them launch new products incorporating our materials that have not yet been embraced by their markets. It’s too soon to tell whether these will grow in 2010 or not. Some of our efforts are around higher-end products which may get better traction after an economic rebound, but have yet to show us the growth we expected. 

Transforming a company’s business strategy is always difficult, and even more so when the economy is so unpredictable, and I believe our stock price reflects that unpredictability. Sometimes, you have to take a few steps back in order to move forward and reposition for growth. 

I’d like to remind our shareholders that we have made tremendous progress in the last several months — progress that will position the company for a sustainable level of commercialization.

While all of this takes time, it will make Nanophase stronger and more self-reliant. We are running your company with much more of an entrepreneurial focus than ever before. The speed at which we continue to make progress will be affected by both the economic climate, and the rate of our migration from a totally partner-driven, volume manufacturing model, to one that is dominated by a more aggressive customer-direct component. 

We have worked with our partners for many years and will continue to strengthen those relationships. Overall, their markets have stabilized at a lower level, but the personal care markets are still robust; and the housing market is beginning to show signs of life, which will, in turn, require paints and coatings for remodeling, renovations and, we all hope, new housing starts.

We have positioned Nanophase for the rebound of these markets, and we continue to aggressively pursue other multiple-market opportunities.

Our business strategy, leaner operations, and new market opportunities are helping us to become a more successful company. Our investment of time, energy and money, in applications development and customer outreach, has positioned us to capitalize on those opportunities that are available now, and those opportunities that will continue to expand as the economy improves. 

Operator, please begin the Q&A session.


Our level of enthusiasm and commitment to our shareholders and the company’s future couldn’t be stronger. All of us are aligned with our strategic direction: to build shareholder value and a strong, viable company – they go hand-in-hand.

I appreciate your time today, and I am always available for any follow-up questions you may have.