SECOND QUARTER 2010 CONFERENCE CALL
Jess Jankowski, President & CEO
We’re glad that you could join us today for our second quarter conference call.
We had another solid performance in Q2, with revenue increasing 100% over last year’s second quarter. And we feel confident, that by the end of the third quarter, our cumulative revenue will exceed what we posted for all of last year, leading to a much better 2010 than 2009.
Our gross margin rose from approximately $200,000 for the second quarter of 2009, to $1.2 million this quarter, leading us to achieve a positive cash flow for the quarter. Before I share some more of the highlights with you, I‘d like our CFO, Frank Cesario, to provide a financial overview.
Frank Cesario, CFO
Thanks, Jess. This is Frank Cesario and I would also like to thank you for participating in today’s call.
As a reminder, all financial results I’ll discuss with you today are stated in approximate terms.
For the second quarter ended June 30, 2010, we reported revenue of $3.3 million, an increase of 100%, when compared to revenue of $1.6 million for the second quarter of 2009. As Jess said, we expect to see continued revenue growth on a comparable quarter basis, which will allow us to surpass 2009 revenue on a cumulative basis during the third quarter of this year. Jess will discuss our revenue drivers later in the call.
Our gross profit margins rose from 11% for the second quarter of 2009 to 36% for this year’s second quarter. This is an increase of over 200%. We are very pleased with this improved performance.
The net loss for the quarter was approximately $100,000, or half a penny per share. This is a significant improvement over the second quarter of 2009, when we announced a net loss of $1.2 million, or $0.06 per share. As of February 2010, we completed all payments under the 2008 and 2009 restructuring programs. Going forward, our overhead is much lower than it had been and the results are starting to show.
Our balance sheet remains strong, as we finished the second quarter with no debt and more than $7 million in cash and cash equivalents, and investments.
I would like to turn the call over to Jess to provide an overview of the second quarter.
Jess Jankowski, President & CEO
So far in 2010, we’ve announced two much stronger quarters and expect our third quarter, when compared to last year’s third quarter, to continue to demonstrate revenue growth. The measures we’ve taken to reduce costs and increase efficiency, along with increased capacity utilization, have contributed to an improved bottom line, and positive EBITDA, for the second quarter. That’s earnings before interest, taxes, depreciation and amortization.
We’re certainly pleased with the results we’ve been able to share with you for the quarter and six-month period. But, the economy continues to be challenging for our customers, which in turn affects Nanophase’s revenue. These last two quarters have seen orders begin to increase, primarily from our partner in the personal care market, as well as through sales to the healthcare and electronics markets.
We are maintaining a close relationship with these customers as they set their inventories to meet demand. During 2010, we expect these markets to continue to be the largest revenue contributors, while revenue from our customer direct model, and NanoUltra™, should have more of a growing impact on the top line, as we move into next year. We still see, however, that many of our customers, and potential customers, are keeping their R&D organizations lean. They are not adding staff, and tend to be focused less on longer term projects (where we typically fit) than in years past. This surely has been driven by residual uncertainty about the economy. For the same reasons, few customers are excited about adding costs to their products, even if this brings improved performance. Fortunately, as a result of our application knowledge and our excellent, full scale operational efficiencies, we can often deliver improved performance, with costs being similar to, or lower than, those of conventional solutions. Further, we can be competitive here while still creating a very attractive business for Nanophase. Because of this, we rarely have trouble gaining the interest of potential customers to work with, and this allows us to keep the sales development pipeline full.
As you may remember, the largest customer direct market in our pipeline has been exterior stains and coatings. We’ve identified and have been working with a number of potential exterior coatings manufacturers for the last 18 months, as they test and evaluate our products. This has required some heavy lifting, but in a number of these pilot programs, we are at the stage where revenue generation should be signaled by the end of this year, with more significant revenue beginning in 2011, and more following in 2012.
Historically, in the specialty chemical industry, whether it be for inorganic nanomaterials or traditional organic chemicals, this process generally takes one to five years,… depending on the segment, application, and customer. Because we’ve little direct nanomaterial competition in the marketplace, the manufacturers of materials, including exterior coatings, often require an educational process to understand the benefits of our inorganic ingredients vs. the organic ingredients that have traditionally been deployed. Once the process is complete, the demonstration period begins, culminating, if successful, in future revenue.
The in-house and customer testing of our revolutionary technology continues to provide solid evidence, that our products can extend the longevity of clear and semi-transparent stains for wood and wood products, beyond what many organics can, and at a competitive cost.
We‘re confident that after our first larger customers are marketing coatings that incorporate our technology, the time-to-market for future products with these customers will be significantly reduced.
In addition to exterior coatings, we are making substantial inroads in other markets, such as hard surfaces, which mainly refers to transparent abrasion-resistant coatings, and plastics. Also, our NanoUltra™ family of architectural glass products began shipping at the end of the first quarter. While launching a new product in an unpredictable economy can be challenging, we are pleased with the progress made so far.
We’ve begun to demonstrate the benefits of NanoUltra™ in resort settings, in several desirable commercial properties, and in several other applications. We also have a growing number of distributor partners that we expect to contribute to future growth. We’ve yet to see significant revenue from these products, but they are working there way in to the market and we expect revenues to grow. It is clear that our customer direct model remains the catalyst for future growth of our company.
While this business develops, it is also very important that we maintain a strong business base with our existing customers on which to build. This year, we’ve seen a nice rebound in sales of ingredients in to the personal care markets, particularly for sunscreens. We may also get help from the government in this market, as new chemical regulatory disclosure on full spectrum UV products will benefit Nanophase’s materials and their naturally effective UVA and UVB blocking attributes. In addition to our “all natural” nanomaterials, organic chemicals commonly used would require increased testing, scrutiny, and disclosures by the FDA.
This could lead to positive exposure for our safe, natural and effective materials. As many of our long term investors know, Nanophase has maintained compliance with FDA standards for years, and has an excellent regulatory track record. Given this, we welcome these opportunities to differentiate our materials and our company.
I reiterate that during 2010 we expect our well-established partners and customers to continue to be the largest revenue contributors, and expect sales from our customer direct model, and NanoUltra™, to have a growing impact on revenue as 2010 progresses into 2011. This is the plan and we’re pleased to see it moving in the right direction. Our goal is to have multiple, successful revenue channels from a mix of partners, customers and end users. All in all, we expect 2010 to be a much stronger year for Nanophase.
Before we begin the Q&A session, I’d like to add that during the second quarter, we regained compliance with NASDAQ Rule 5450 - the $1.00 bid rule. We’ve also been added to the Russell Microcap index. Over the past several months, our stock price has stabilized, to a degree, and our daily trading volume has increased during a rollercoaster market. While we don’t distribute a large number of news releases, we’ve been participating in industry conferences, meeting with potential and current customers, and we’ve been more active in sharing our story with members of the financial community. As our company fundamentals continue to improve, we’ve made it our goal to attend more financial conferences and to increase our meetings with the financial community in the fall.
Operator, please begin the Q&A session.
In summary, the economic recovery remains shaky, but over the course of the year, we see a positive outlook for Nanophase, as we look to the third quarter to be another winner.
I appreciate your time today, and look forward to speaking with you after Q3 results are in. Thank you.