Jess Jankowski, President & CEO 

Good afternoon! 

We’re happy that you could join us for our third quarter financial conference call. I wanted to begin today by calling to your attention the dramatic improvement in cash flow that we’ve experienced over the last nine months. I also want you to know that we’re continuing to manage our business to provide a series of growth engines pushing us forward into positive cash, with a base for continued successful results. We’re not there yet, but we’re well on our way.

During the third quarter of 2010, we continued our positive revenue growth trend with a 21% increase in quarterly revenue, and a 57% increase in revenue for the 2010 nine-month period. The best news is that we remain confident that we’ll finish 2010 with full-year revenue 40 to 50% higher than in 2009! 

Let’s get started with our CFO, Frank Cesario, providing a financial overview.

Frank Cesario, CFO

Thanks Jess. Good morning. This is Frank Cesario and I also would like to thank you for joining today’s call. You may have noticed that we changed the time of day for our financial conference call to accommodate our current investors and members of the financial community. As we generally speak with you only on a quarterly basis, please let us know whether you find this time change convenient. 

Please remember that all financial results being discussed today are stated in approximate terms. 
We are pleased to report that revenue for the third quarter ended September 30, 2010, increased 21% to $2.1 million, compared to 2009 revenue of $1.7 million—which happened to be the best revenue producing quarter in 2009. Our positive revenue trend sets the stage as we expect to finish the year with a significant increase in revenue, 40 to 50% over 2009 revenue, and position Nanophase for continued growth throughout 2011. 

While our gross profit for the quarter was relatively flat and margin percentage slightly lower, compared to the same quarter in 2009, the gross profit margin for the 2010 nine-month period rose to 29% — a considerable improvement, compared to a gross profit margin of 15% for the 2009 nine-month period. 

Again, I would like to point out that the lowest gross margin percentage reported in 2010 was close to the highest gross margin percentage reported during 2009 – yet another milestone for the company’s lean operating strategy.

The net loss for the quarter was approximately $1.6 million, or $0.07 per share. This loss included a one-time-charge of $700,000 related to a contract termination which Jess will discuss later in the call. Without the one-time-charge, the net loss for the quarter was flat, compared to the 2009 third quarter.

The net loss for the 2010 nine-month period was $2.9 million, or $0.13 per share. This is a sizeable reduction, compared to the 2009 nine-month period, which posted a net loss of $4.2 million, or a loss per share of $0.20.

Our balance sheet remains strong, as we finished the third quarter with no debt and $6.7 million in cash and cash equivalents, and investments.

I would like to turn the call over to Jess to provide an overview of the third quarter. Jess?

Jess Jankowski, President & CEO

Thanks, Frank. During the third quarter, we announced a major positive change in our long-term relationship with Altana Chemie, the parent of BYK Chemie. What had been an exclusive supply agreement, for a broad array of nanomaterial applications, has been modified to a non-exclusive supplier/customer relationship. Over the past several quarters, we’ve discussed the expansion of our marketing plan to include both a partner strategy and a new customer-direct sales strategy. Over the years, Altana’s been a good partner, but for both companies, business strategies have changed and markets diversified. To better complement these changes, management of both companies decided to revisit our exclusive arrangement, with an eye toward adding flexibility to our working relationship. Our exclusive agreement was scheduled to terminate in March of 2012, but we both recently agreed to terminate it early and replace it with a non-exclusive, five-year supply agreement. With this change, each side gains flexibility in serving its customers. Altana initially made a significant investment in Nanophase products and market development, during the six years since we embarked on the original agreement. In late August, in recognition of that, we agreed upon a $700,000 one-time charge to terminate the exclusive relationship, and to create a non-exclusive supply agreement. Nanophase paid Altana $350,000 in cash, and agreed to offer up to $350,000 in purchase discounts during the five-year term of the new supply agreement. We believe this new agreement will benefit both companies. We remain on good terms with Altana, and BYK Chemie, and we look forward to continue working with them under this new structure. From my perspective, this new agreement allows us to more effectively market and sell to a much broader group of companies. The original agreement afforded Altana broad exclusivity for sales of nanomaterials to the inks, coatings, sealants and plastics markets, among others. While this didn’t limit our ability to market nanomaterials through our partnership, it did limit our ability to promote our suite of products, and certainly we couldn’t promote any Nanophase-branded products in any of these markets. Further, with limited exceptions, we couldn’t sell directly into these markets, but needed to pull any sales we made through Altana. These were limitations that had the potential to extend our times-to-market in these broad applications areas.

If you look back through 2009, you may begin to see a strategic pattern here. In example, during 2009, we also modified our relationship with Rohm and Haas (now part of Dow Chemical) in a similar fashion, from one of mutual exclusivity to a more traditional supplier/customer relationship. As our revenue has indicated, we’ve benefited from the new arrangement, just as Dow can now work with a broader group of suppliers. As time goes on, we’ll continue to explore various polishing opportunities, both with Dow Chemical and through additional direct channels as we identify them.

I’d also like to emphasize, that the strategic changes to our agreements with Altana and Dow, have no impact on our exclusive relationship with BASF. We continue to sell nano-sized zinc oxide to BASF, for use as an inorganic UV-blocker in sunscreens, and other skincare products, within the personal care market. Our relationship with BASF has been extremely beneficial and we are committed to remaining their exclusive supplier of nano-sized zinc oxide for the Personal Care market. They have been a solid partner, and continue to provide a strong channel to market for our materials. The BASF “partnership” continues to function as we originally envisioned it would. They have been, and continue to be, an important part of our success, and an important part of our business going forward. 

Now, let me give you the status of several of our customer-direct markets:

Exterior Coatings remains our largest customer direct market, and numerous projects continue to move through the development queues. In Nanophase’s parlance, Exterior Coatings generally refers to applications that call for UV-resistance in outdoor environments, in an application requiring a high degree of clarity, like a wood stain. We expect a number of these projects to roll out in 2011, with an expansion of the roll out in 2012. With all the testing that must take place, both in-house and at potential customer sites, the exterior coatings market continues to have the longest lead time. 

We expect the other direct markets we’ll discuss to have shorter times-to-market. This is due to the fact that their related testing regimes should be much less extensive.

With this year’s introduction of the NanoUltra line of architectural glass cleaning and restoration products, our goal was to use the professional window cleaning market to develop modest near-term revenue, but more importantly as a proof of concept, and ultimately a platform, to develop NanoUltra as a consumer solution. The $9 billion consumer market for product-based solutions is substantial and well-developed. We’re continuing to build and service the professional market throughout North America and internationally, while we work toward successful application development in the consumer space. NanoUltra continues to develop and we know we’ve yet to tap in to the full market potential here. Our marketing of products into other segments, including Hard Surfaces, which generally capitalizes on the abrasion-resistant features of our materials, Polishing, and Plastics, has increased our sales opportunities as well. We fully expect these segments to become larger components of our business in 2011 and beyond. You can expect to see one or more new product announcements pertaining to these segments in the coming months. As a direct result of the negotiated acceleration of the termination of our exclusivity with Altana, activities to expand our marketing reach, and to publicize our Nanophase-branded products to markets like Hard Surfaces and Plastics, are being aggressively undertaken today, rather than waiting to 2012. 

I would now like to open the call up for questions. 

Operator, please begin the Q&A session.


As I mentioned at the beginning of the conference call, we’ve experienced a dramatic improvement in cash flow this year. And we’re managing our business to provide a series of growth engines pushing us forward into positive cash flow, with a strong base for continued successful results. We appreciate your patience, as we have carefully manage this progress, step-by-step, to ensure lasting benefits to our shareholders and our customers. We’re all here to build a bigger, better and stronger Nanophase!

Thank you for your participation in today’s call. We’ll look forward to discussing our year-end progress with you in several months.