FIRST QUARTER 2012 CONFERENCE CALL

 

Jess Jankowski, President & CEO

Good morning everyone!  We appreciate your joining us for our first quarter 2012 financial conference call.  With me today is our CFO Frank Cesario.

First, I want to apologize for the tardiness of this call.  I wanted to wait until we filed our S-1, which most of you have probably seen, before our Q1 financial call to avoid being non-responsive, or appearing disingenuous when asked about capitalization.  We are seeking to raise around $2.4 million.   At the end of our call, Frank and I will respond to any questions you may have regarding this offering, limited of course by the fact that we are, by definition, in a quiet period, and have to be sensitive to our pre-effective, and pre-closing, disclosures.

Getting on to the results, I’m happy to report that the first quarter of 2012 was much stronger than the fourth quarter of 2011, something for us to build on as we get into the meat of this fiscal year.  Our most important goal as shareholders, and members of your management team, is to continue our progress toward what we expect will be our third consecutive year of revenue growth, as we strengthen our bottom line, and improve shareholder liquidity.

We’re seeing new orders from diversified businesses, including companies incorporating our scratch resistant additives launched last year.  These additives are being included in three different products that are just being commercialized by their respective manufacturers.   
These product introductions are expected to boost revenue growth as they gain momentum.  I’ll go into a little more detail about our product initiatives after Frank provides a short overview of our financial results.  Frank, would you please take a few minutes and provide the financial update? 
 

Frank Cesario, CFO

Thanks Jess.  

Good morning, this is Frank Cesario.  Before I begin today’s overview of our financial results for the first quarter, please remember that all financial results are stated in approximate terms.  

Revenue for the first quarter was $2.4 million, versus revenue of $2.8 million for the comparable 2011 quarter.  Gross margins were 23% versus 33% for the comparable quarter, highlighting our sensitivity to small changes in revenue volume, which offers a very positive feature as we add new sources of revenue to our mix.  As Jess mentioned, the first quarter of 2012 revenue was higher than the fourth quarter of 2011.

The net loss for the quarter was $0.8 million, or $0.04 per share, compared to a net loss of $0.6 million, or $0.03 per share, in the first quarter of 2011. 

During the quarter we spent $0.4 million of net cash finishing the quarter with $2.3 million in cash and cash equivalents. The company is debt free.   

The quarter featured a few unusual events for Nanophase.  On March 20, 2012, Nanophase began trading on the OTCQB marketplace, joining more than 3,000 other companies ranging from smaller to much larger than Nanophase. Trading on the OTCQB marketplace began seamlessly with our stock symbol remaining the same, NANX.  We at the Company appreciate the terrific job the folks at OTC did with the transition.  While we were disappointed to lose some of our shareholders during the transition, those shareholders who stuck with us through the transition and those who have come into our stock have seen the share price stabilize with a significant increase in trading volume. 

We recently filed an 8K regarding the relationship with our Japanese partner, CIK NanoTek.  Nanophase and CIK have been in an exclusive partnership for several years, under which Nanophase has provided an IP license and an area of geographic exclusivity, while CIK has paid a royalty to Nanophase.  The parties agreed earlier this year that, upon termination of the existing agreement, our two companies could cooperate or compete freely without territorial restrictions or royalty arrangements. 

This is a continuation of our strategy to conclude exclusivity agreements, as we have done in many areas, other than with BASF for personal care applications where the exclusive partner model has worked so effectively for both sides. We find the added flexibility of removing the exclusive aspect of relationships helps both parties and tends to enhance our customer/partner relationships. 

A few weeks ago we announced the sale of the “NanoTek” trademark” to CIK for use in Japan in exchange for $5,000.  We also agreed to accelerate the royalty payment due in April 2013 to April 2012, which is $300,000 less an early payment discount of 7 percent.  Both companies are now that much closer to operating freely, running the gamut from competition to collaboration on various commercial opportunities. 

Finally, I would like to note the registration statement that we filed yesterday, indicating that we intend to sell approximately 7 million shares of stock to our stockholders at $0.33 per share.  For those who aren’t familiar with a Rights Offering vehicle, it is an offer to sell stock only to our stockholders as of the record date.  Nobody else can participate.  No stockholder has to participate, but those who do have a range of alternatives available for their participation level.  More information will be forthcoming, and we urge any interested parties to read the registration statements and prospectus.  Because we have an offering of shares outstanding, please understand that we have to be more guarded than usual with respect to any forward looking statements. 

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


Jess Jankowski, President & CEO

Thanks Frank!

Now, to the extent it is currently appropriate, I’d like to provide a progress report on the initiatives we discussed during our year-end conference call.

A number of our coatings applications have been introduced to the marketplace at industry shows over the last 18 months, and just a year ago we launched our scratch resistant products.  As a matter of fact, over the last two weeks we participated in the Radtech UV/EB show in Chicago (a national show), and the American Coatings Show in Indianapolis (an international show), continuing to stimulate demand for our scratch-resistant products.  I was heartened by the attendance at our booth for these two trade shows.  We now have customers, and companies with whom we’re working to commercialize products, telling prospects about how great our products are, and how much they appreciate what Nanophase brings to the table.  Now we’re getting somewhere!  Product introduction, incorporation, and building an aggressive marketing campaign, around a new, or a newly improved product, doesn’t happen overnight, but industry feedback is positive, and we’re beginning to displace existing materials in a variety of coatings.  The sales in these applications are growing, and the feedback is exciting.  It takes time, but our strategy is helping us to build momentum!

While the architectural paints and stains applications represent a modest percentage of our revenue, the industry is beginning to recover, and some of the large players have posted better than expected first quarter results.  This is relevant to Nanophase, as our products are used and developed for several paint and stain formulations, and we expect to have additional opportunities as the economy continues to improve.

In terms of polishing, we’re not yet seeing increased revenue from our precision optical polishing business.  The cost of cerium oxide, a Rare Earth element, has fallen by about a third from its 2011 peak, but still remains significantly higher than it was two years ago.  This increase in price has encouraged customers to shift away from cerium oxide related solutions, and, generally, to be more cautious about adopting new products using this material.  It’s our expectation that the price will stabilize, and possibly continue its gradual decline, as additional providers of cerium oxide enter the market, displacing high cost materials from China, and the outstanding World Trade Organization complaints get adjudicated.  These products are primarily used in the electronics industry.  Did you ever think we’d be complaining about the high cost of Chinese exports?

I would normally discuss new product development activities and prospective or potential launches in more detail, but hope you understand why this is more difficult in light of the outstanding Rights Offering solicitation.   

Here are a few more things I want to highlight for you:

Our licensing agreement with Japan-based CIK NanoTek expires in April 2013, although we expect to maintain a continued strong working relationship with them. 

This expiration will provide Nanophase access to new markets within Asia, where we have some familiarity, so we look forward to developing this geography in the future on a direct customer basis. This looks to be a classic win/win scenario for both of us. 

Last year, the company established a program to explore select markets within the energy sector, where its nano-based products can address some of the market’s many unmet needs.  This is a growing industry that has invested, and continues to invest, millions of dollars into research and development.  At this point, no specific company has built the perfect product, or achieved a leadership position, in technical areas where nano-solutions are being sought.  We’re exploring several solutions to meet an existing need in the industry, and are in the various stages of prototype testing.  We plan on beginning a targeted market outreach, particularly in one area, which has provided strong indications of potential future success. 

We have a solid pipeline of opportunities across several product lines, and target markets, where we expect to create and grow new revenue for 2012 and 2013. Looking to the remaining three quarters of 2012, we expect moderate amounts of new revenue from the following product areas:

 - Our coatings products, primarily scratch-resistance additives, but also in other coatings applications;
 - New polishing products in various areas outside of our traditional CMP market. (For the uninitiated,“CMP” refers to chemical -mechanical-planarization, or polishing, of semi-conductor wafers); and
 - Products introduced to several opportunistic markets.

In 2013, we also expect added revenue growth from:

 - The maturation of a number  of our coatings applications; 
 - An expansion of our new polishing products; and
 - The introduction of some new personal care products.  With the company’s current business cycle, these new products should begin to generate meaningful revenue in 2013.  You’ll hear more about these new products throughout the year.

This new business is very important for driving our year-over-year revenue growth, since we’re also experiencing flat or declining revenue in some of our mature products, particularly with the high cost of Ceria for CMP polishing. 
   
New business growth is an important measure to me because it signals that the direct selling model is beginning to deliver, and we are definitely moving in the right direction!  In my view, we have significant potential, and a solid foundation from which to continue our growth.  While we aren’t making revenue projections, we expect there to be measurable top line progress in 2012, and we expect it to come from new customers and new products.  Again, we know that we are losing some legacy revenue from 2011, but we still believe we’ll have year-over-year revenue growth.  This is evidence that things are coming together.  The model is starting to deliver!

I look forward to talking more about progress in our new application areas as we continue through 2012, and plan to keep you posted on our progress through news announcements and conference calls.  Although most of our investors listen to the webcast, or review the transcript, after the call, we’d like to invite those participating live in today’s call to ask any questions you may have, or to share your comments.  We’ve also received some questions from shareholders via e-mail, a few of which we will address before we end the call. 

Nikki, would you please begin the Q&A session?

We’re fully confident that we have the know-how, products, business strategy and potential to achieve our goals.  We appreciate your continued support, and, while we try to be available for any follow-up questions you may have, until we’ve concluded our rights offering, we’ll have to be cautious in our responses.  Thanks for your participation and enjoy the rest of your day!