Jess Jankowski, President & CEO

Good morning!

We appreciate your participation in today’s 2010 year-end conference call.

Delivering on our marketing strategy, managing costs and executing in the marketplace drove our improved performance in 2010. This was a pivotal year for Nanophase. We established a number of important milestones for 2010 and ’11, and I’m pleased to say we met many of them in 2010. This resulted in a 50 percent increase in revenue for the year, and positioned us for continued growth through the next several years. Our expectations entering 2010 were high, and we’re optimistic about our continuing success as we enter 2011.

Frank, would you please provide a brief review of the financial highlights for 2010?

Frank Cesario, CFO

Thanks, Jess. Good morning, this is Frank Cesario. I’ve now been with the company for almost two years, and I’m pleased with the company’s successful evolution into a debt-free, entrepreneurial company that is working smarter and delivering more with less.

Before I begin with an overview of our financial results for the fourth quarter and year-end, let me remind you that all financial results for these periods are stated in approximate terms. 

For the fourth quarter, we were pleased to see revenue increase 29 percent. We reported revenue of $2 million, versus revenue of $1.6 million for the comparable quarter in 2009. Each quarter of 2010 resulted in higher revenue than its comparable 2009 quarter — a trend we expect to continue as we enter 2011.

We were also pleased to see an improvement in gross margins on a comparable quarter basis. Gross margins for the quarter were 18 percent, compared to gross margins of 14 percent for 2009. 

The net loss for the quarter was $1.2 million, or $0.05 per share, versus a net loss of $0.7 million, or $0.03 per share, for the comparable quarter last year. This is due in part to a small increase in R&D expense, as well as SG&A and that the fourth quarter of 2009 had a one-time benefit of $440,000 due to the reversal of impairment charges on auction rate securities that we sold at par.

For the year, we reported revenue of $9.5 million, a 50 percent increase, when compared to revenue of $6.3 million for year-end 2009.

A growth in revenue produced an exceptional year for gross margin, where gross margin dollars increased 165 percent. Gross margin as a percentage of revenue for the year was 27 percent, compared to 15 percent for 2009, indicating better usage of our fixed assets and a benefit from a full year of a more efficient operating structure.

Net loss for the year was $4.1, or 19 cents a share, versus $4.9 million, or 23 cents a share, for the year end 2009. It is useful to note a one-time $700,000 contract termination charge, was taken in Q3 of 2010, and 2009 featured both a severance charge of $800,000 offset in part by a reversal of prior asset impairment of $440,000. Jess will discuss the impact of this contract termination and reconfigured customer relationship in his discussion.

ur balance sheet for the year remained strong, as we finished the year with $5.7 million in cash and cash equivalents. Again, we have no debt.

ue to dramatically increased cost and supply concerns involving certain commodities, particularly ceria in our business, we were forced to use substantial working capital for securing inventory that we received in December 2010. Currently, we have purchase orders in hand for products using most of these materials, allowing us to monetize the incremental costs during the first half of 2011. It is difficult to determine how long these inflated prices will continue, but please know that we are monitoring the situation closely.

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

Jess Jankowski, President & CEO

Thanks, Frank!

We began 2010 with the history-making launch of NanoUltra, a breakthrough end-user product for commercial window restoration and cleaning. Then, later in the year, we launched our NanoArc® aluminum oxide dispersions for scratch resistant coatings. Finally, we finished the year with a 50 percent increase in revenue. 2010 was a good year for Nanophase on many fronts.

We’re happy that our relationship with BASF is stronger than ever, and we expect we’ll continue to build our business within BASF, as their distribution within the personal care products industry looks to gain even more momentum.

Also, as 2011 unfolds, you’ll be hearing more about our NanoArc® product line. As I mentioned, we launched our aluminum oxide dispersions for use in UV-cured coatings late in 2010. Our nano-based aluminum oxide enhances UV-cured solutions by providing very thin, durable, and highly transparent coatings, with superior scratch and wear resistance. We expect these important advantages to protect and extend the lives of thousands of products, from cell phones and computers, to wood furniture, to graphics for art packaging and magazine covers.

As Frank mentioned, in 2010 we also terminated an exclusive, long-term joint development agreement, and then replaced it with a new five year non-exclusive supply agreement. This new agreement with BYK Chemie, a subsidiary of Altana, has provided significant opportunities for our customer direct business model. Now we can engage directly with select manufacturers of coatings for electronics, wood products, and graphic arts, to demonstrate the substantial benefits our nano-based aluminum oxide provides, when incorporated in their UV-cured coatings.

Later this month, we’ll be showcasing our new aluminum oxide dispersion solutions at the European Coatings Show in Nuremberg. This show provides the perfect venue for Nanophase to introduce manufacturers, and potential end users, to our new NanoArc® products. Really, we’ll also be introducing them to the “new Nanophase.” This show is the big one. It’s the largest global coatings show, alternating annually between the U.S. and Europe, and will give us exposure to most of the universe of coatings manufacturers. We’ll have more to discuss after the show, but we expect to achieve some new business in this area in 2011, with more building in 2012.

The scratch-resistant coatings markets for electronics, wood and graphics, are critically different from the UV-resistant architectural coatings market that we’ve been developing.

Here are three key differences worth noting:

1)  The chemistries in the scratch-resistant marketplace are more straightforward, which should lead to quicker applications development and acceptance;

2)  The pre-market testing cycle should take months, instead of years, as the bulk of the durability work we’ve done, and expect to do, centers around scratch- and rub-testing. Remember with outdoor wood durability testing, the industry standard, requires several changes of seasons to fully understand the impact of the natural freeze-thaw cycle. That’s not a limitation here. and;

3)  We don’t expect seasonal demand to have the same revenue cyclicality as with either sun care products or UV-resistant architectural coatings. Currently, the bulk of our business builds in Q1 and Q2, then tapers off to its lowest levels in Q4.

This new market, scratch-resistant coatings, will provide a nice balance among our top markets in terms of time-to-market and seasonality.

Moving on, another highlight is the recent addition of Ed Tyler to our Board of Directors. Ed is a seasoned technology veteran, with a solid background in nanomaterial solutions, who brings his broad experience in technology commercialization to Nanophase. Ed also brings his knowledge of the financial community. We expect him to be a tremendous asset to the company, as we continue to expand our customer direct business model.

Our performance during 2010 provided a clear validation of our strategic transformation, from an indirect supplier of nanomaterials, to a direct seller of nano solutions. As with any major transformation, there’ll be some bumps in the road, but we feel that we’re on a solidly upward trajectory, with a good outlook for the coming year. 

Our relationship with BASF is strong; and the change in our business agreement with Altana will allow both companies to gain the ability to better capitalize on their respective intellectual property development, and to provide more options and opportunities in our respective markets. Another significant benefit of this new agreement is the freedom to sell nanomaterials not only through Altana’s BYK Chemie division, but also directly to the coatings industry through our own sales and marketing activity.

This is all building up to the fact that 2011 will be an important year for the emergence of Nanophase as a stand-alone provider of solutions for the broad coatings marketplace. We believe our UV-resistant architectural coatings materials will begin generating revenue this year, with a modest ramp-up in the last half of the year. We expect our scratch-resistant additives to generate revenue in 2011 also, with growth into 2012. We also expect to launch more products in 2011, some that should generate revenue this year, and then ramp more significantly in 2012. We continue to focus on a variety of applications that differentiate our products from competitive products, and target unmet needs in our four top target markets, which are:

-Personal Care (our sunscreen additives)
-UV-Resistant Architectural Coatings (these are mainly for outdoor wood)
-Architectural Windows (here, we’re looking for potential consumer applications), and;
-Scratch-Resistant Additives for Electronics, Wood and Graphics

The speed at which we continue to make progress with our customer direct model will be affected both by the continuing economic trends, and the normal timing of the adoption cycles in the markets and industries we serve. As I mentioned, we launched two product lines in 2010, and expect to launch one or two more toward the end of 2011. We’re working with potential customers and their feedback will help determine the timing of the launches.

We’ve started to see the benefits we expected when we launched this direct selling process two years ago, and look to continue our momentum. As often as we discuss our capabilities, awareness of Nanophase among the broad universe of potential customers is still relatively low. We’re working hard to change that, but this also means that there are still lots of opportunities here! We look forward to keeping you posted on our progress.
Operator, please begin the Q&A session.

In summary, our strategy for 2011 hasn’t changed: Our goal is to build shareholder value and a strong, viable company, one that we can all be proud of. While we don’t provide projections, we're moving into 2011 with confidence, and a more complete family of nano-enabled solutions to enhance our customers’ products. Your management team expects to see a continued growth trend throughout 2011.

I appreciate your time today, and we always try to be available for any follow-up questions you may have.

Thank you.