Jess Jankowski, President & CEO

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

Before we get to our financial results, and talk strategy going forward, I want to take a minute to thank those investors who participated in our recent stockholder rights offering.  This was a new and significant undertaking for Nanophase.  It was an opportunity to purchase shares of Nanophase stock that was only made available to our stockholders, who then purchased every available share of stock, by placing oversubscription requests for more shares than we had to sell.  I thank you for your confidence, and I share it.  Nanophase has been putting down deeper roots, with its more aggressive strategy, which continues to show signs of success. 

In this current economy, really, since 2009, we know that Nanophase’s most fertile opportunities for growth, namely in new product development, have suffered from a reduced focus throughout our customer base.  Many of our customers have been scrambling to cut costs and enhance short-term profitability, rather than invest in future growth through new product development and introduction.  I’m confident, that we would have had more new business growth during this period, had the macro-economic environment been more supportive.  It is what it is, and we have proactively managed within this environment, gaining momentum as we continue to launch and develop new products.   Even given these pressures, we still expect 2012 revenue to exceed 2011 revenue, which exceeded 2010 revenue, which exceeded 2009 revenue.  

It may be taking longer than any of us would prefer, but the business has been enduring, and is really taking shape. 

Getting on to the results, the second quarter was stronger than the first quarter of 2012, and the bottom line showed an uptick over the second quarter of 2011.  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 continue to improve shareholder liquidity, over and above what our shareholders have recently provided through the Rights Offering,…in terms of managing cash, and strengthening our balance sheet.   We’re seeing new orders from diversified businesses, including companies incorporating our scratch resistant additives launched last year, and some unique applications that are more narrowly focused.  We also can’t help but be enthusiastic that our largest customer just launched a new product line that we helped develop.  As you may recall, we announced the launch of our LSA zinc oxide about two months ago.  You’ll be hearing more about this product as commercial adoption accelerates.  These product introductions should boost revenue growth as they gain momentum.  After Frank provides a short overview of our financial results, I’ll go into a little more detail about our product initiatives.  Frank?

Frank Cesario, CFO

Thanks Jess.  

Good morning, this is Frank Cesario.  Before I begin today’s overview of our financial results for the second quarter, please remember that all financial results are stated in approximate terms.  
Revenue for the second quarter was $2.8 million, versus revenue of $2.9 million for the comparable 2011 quarter and $2.4 million from the first quarter 2012. 

Gross margins were 31% versus 34% for the comparable quarter and 23% for the first quarter 2012, 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. 

The net loss for the quarter was $0.4 million, or $0.02 per share, compared to a net loss of $0.5 million, or $0.02 per share, in the comparable 2011 quarter and $0.8 million, or $0.04 per share, in the first quarter of 2012. 

We started the year with $2.7 million in cash and cash equivalents, finished the first quarter with $2.3 million, and ended the second quarter back at $2.7 million. No funds were received from the Rights Offering until July, so that $2.2 million in net proceeds will show up in our third quarter financials as an addition to our cash, making our company that much stronger.  The company remains debt free.  

Before turning the call back to Jess, I would like to join him in thanking our stockholders for making the rights offering a success.  Jess?

Jess Jankowski, President & CEO

Thanks Frank!  We’re halfway through the year, so it’s time to see where we’re at.  I’d like to talk about launching new products, and creating incremental revenue streams. 

During the first half of 2012, we announced a new product offering with our largest customer, BASF, related to a new type of our zinc oxide referred to as “LSA.”  LSA stands for “low surface area,” and pertains to the material properties that some customers, customers who don’t currently use our existing zinc oxide for personal care products, have been demanding.  We couldn’t be more excited to be collaborating with BASF on this project, and to have seen it roll out to the world in May, and now to see it begin the process of working into supply chains. 

On the other hand, we aren’t a one trick pony.  Two customers recently moved us from development testing to commercial testing, creating products using our material on their production equipment as part of scale up processes.  We can’t disclose the entities or applications, frustrating, I know, but we’re talking about world class companies, each doing something novel, and each using our materials to make it happen.  We see them as having the potential to become six- to seven-figure revenue opportunities, respectively, on an annual basis.  Of course, this assumes these products pass the ultimate commercial test, namely, downstream customer acceptance, which is difficult to predict.  Additionally, we also have new solutions in a few hot areas that are approaching potential commercialization phases. We also see products in existing markets, like scratch resistant additives, continuing to progress.  We’ve also developed new polishing solutions, targeted to resolve particular issues in what may represent a multi-million-dollar addressable market for our materials.   This relates directly to the work we’ve been doing with Lewis University.  There are other smaller successes as well, and each builds upon the other. 

To reiterate what we said last quarter:

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

In 2013, we also expect added revenue growth from:

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 a key measure for 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.  The evidence tells us the model is working.

I look forward to talking more about the work we’re doing 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.  I will also be delivering a keynote speech at the NanoBusiness and NanoManufacturing Summit in Boston on September 6th, which I invite all of you to attend if you can. 

Although most of our investors listen to the webcast or review the transcript after the live call, we’d like to invite those participating in today’s call to ask any questions you may have, or to share your comments.  We’ve also received some questions from shareholders in advance, a few of which we will address before we end the call. 

Sayed, 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, as always, we try to be available for any follow-up questions you may have.  Thanks for your participation and enjoy the rest of your day!