Jess Jankowski, President & CEO

Good morning everybody! We appreciate your joining us for our fourth quarter and year-end 2012 financial conference call. Along with me today is our CFO, Frank Cesario. As we expected, we finished 2012 with a much stronger fourth quarter than has been typical. Q4 revenue was a million dollars better than the prior year’s fourth quarter, which is a testament to not only the growth of our business, but also a moderation to our seasonality. 2012 capped our third consecutive year of revenue growth and, especially important in these times, our 3rd consecutive year of bottom line improvement. We burned zero cash for the first six months of the year, and ended the year with our lowest cash burn as a public company! We not only reduced our operating spending, we increased our capabilities in areas that matter, areas that offer future potential, ranging from incremental business to game-changing opportunities. I like where we’re at, and all of this is before adding Kevin Cureton to our team as Vice President of Sales, Marketing and Business Development. Kevin has a rich history of success in substantially growing businesses in areas important to Nanophase, having been instrumental in founding and building Amcol’s Health & Beauty Solutions business. He also has a strong technical and business development background with a focus on specialty chemicals and advanced materials, including additional commercial development roles at Air Products, Borden and other significant companies selling into the same markets that Nanophase is targeting. Lastly, and critical in our environment, Kevin’s been an entrepreneur, having started, built and sold his own small business in the past, so he well understands the dynamics Nanophase must operate under. As you can tell, we have every expectation that adding Kevin to your team will only make us that much stronger, and help us to move things faster as we enter 2013.

After Frank provides a short overview of our financial results, I’ll go into a little more detail about our continuing progress through 2012, and our new 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 fourth quarter, please remember that all financial results are stated in approximate terms. 

Revenue for the fourth quarter was $2.7 million, versus revenue of $1.7 million for the comparable 2011 quarter. 

Gross margins were 25%, versus 4% for the comparable quarter, as we saw the benefits of our continuing improvement process partner with the increase in revenue volume. This improvement on only $1 million of additional revenue offers a very positive element of leverage as we add new sources of revenue to our mix. 

The net loss for the quarter was $0.6 million, or $0.02 per share, compared to a net loss of $1.3 million, or $0.06 per share, in the comparable 2011 quarter. 

We were pleased to see the bottom line improve on a year to date basis for fiscal year 2012 with a $2.4 million loss, compared to a $3.4 million 2011 loss. As we described in more detail in the financial press releases, our bottom line has improved every year since 2008, with losses decreasing from $6.4 million in 2008 to $4.9 million in 2009 to $4.1 million in 2010 to $3.4 million in 2011, now to $2.4 million in 2012. And as we have stated previously, the majority of the 2012 net loss is comprised of non-cash charges for depreciation, amortization and equity compensation. 

Bottom line results flow to cash balance. We started the year with $2.7 million in cash and cash equivalents, added $2.2 million in net proceeds from the rights offering, and ended the year at a $4.2 million cash position. Our company remains debt free. 


Jess Jankowski, President & CEO 

Thanks Frank! 

2012 was a good year for Nanophase. I’m never quite happy with our progress, and I won’t be until our trajectory is much steeper, but we accomplished things that have strengthened your company and moved us toward a much more stable path. 

There are a few key things that I would like to discuss relative to what we’ve been building at Nanophase over the past few years. As some of you may recall, Nanophase had four exclusive relationships entering 2009. These were with BASF for personal care, Dow for polishing, BYK Chemie for coatings, and a license to CIK NanoTek for a broad field of use in Asia.

In 2009, we re-structured our relationship with Dow so that we were able to go directly to market, with various polishing applications in areas that include CMP, but also in other areas that Dow chose not to develop. These range from additional microelectronics applications to precision optics polishing. While Dow remains a good customer, they are a single customer, among a growing group, that are evaluating and purchasing our slurries and dispersions for a series of precision polishing applications. We’ve recently developed and launched a new product in this area, and have seen our business expand beyond Dow. At a high level, as all of these industries that we serve target finer surface finishes, smaller line widths, and more delicate architectures, this plays to the inherent strengths of our products and our development team. This is why we continue to believe that polishing will become a significant core area for growth.

In 2010, we re-structured our relationship with Altana/BYK Chemie to make it non-exclusive. BYK Chemie remains an excellent customer of ours, but our business development goals differ. We’re not replacing conventional materials with-like materials, we have a more involved business development cycle, and felt that we needed the ability to go directly to the entity using our materials in order to develop markets to optimum levels. We’re certainly now better-positioned to play to our strengths. In March of 2011, we launched a suite of engineered scratch-resistant additives at the European Coatings Show in Nuremberg, and we continue to gain momentum in the coatings additives space. As a matter of fact, our scratch-resistant additives were featured in Paints & Coatings Industry, or PCI, a major trade publication, in February. In March, we’re heading back to this biennial show in Nuremburg to follow up with customers that we’ve developed for these products in the meantime, and to market-test a new product concept, for a brand new area in this space, driven by our development team in search of a solution to an existing unmet need.

Regarding CIK NanoTek, while we remain on excellent business terms, our exclusive license terminates on April first of 2013. This will allow us more flexibility as we evaluate opportunities in Asia that were previously unavailable to us.

Lastly, while we remain in a mutually exclusive relationship with BASF in our personal care/sunscreen actives business, things are moving in a very positive way there as well, and that may be an understatement, in terms of the quality of the relationship. This relationship has never been better, and the mutual trust is bearing fruit. In 2012, Nanophase developed a new particle, and a new product that BASF launched during the summer. We expect Z-COTE LSA to begin building volume soon, and we expect our product suite here to continue to expand. 

Additionally, demand for our existing products is up, due to several factors in the personal care market that favor our inorganic solutions. We have an all-natural mineral-based product that customers like, and several of our competitors’ organic products have been disallowed by the FDA. It also appears that zinc oxide will be approved as a full-spectrum UV-blocker for personal care applications in the EU by year’s end. Our hard work and your patience are paying off.

What I’ve described here, in talking about the change to our partnerships, and our ongoing work in sunscreen actives, scratch-resistance additives and polishing chemistries, represents a successful expansion of our core applications areas. We’ve devoted much of the last several years to doing this, and we expect to see continued growth here. We expect this core business to drive us to cash flow breakeven, and we know that it can drive us to profitability. Our plan is to achieve cash break-even, using adjusted EBITDA as a proxy, within the next year or so. The main risk to achieving this is our customer concentration, with BASF having an outsized impact on our near-term outlook. We continue to address this through new business development. 

That all being said, from where I stand, break-even is not enough. We’re also focused on enhancing ROI, yours and ours; by developing new products for new applications areas that show promise to accelerate growth and profitability. We’ve managed the business effectively and frugally, eliminating waste, while investing in development. Our consistent bottom line improvement over the past three years has shown this. Now that we can finally see cash breakeven more clearly, it’s allowed us to focus on the next level of innovation. We’ve started to expand our franchise by developing products in a few new areas related to the energy space. 

We filed a patent application a few weeks ago in one energy-related area that we hope will open up some new opportunity for Nanophase. Time will tell, of course, but we think we’ve found a way to address an unmet need, that has been accompanied by a good deal of commercial pull, in an area where innovation relies heavily on advanced materials. Again, we are playing to our strengths. We also plan on bringing a fundamentally new particle to market in 2013, to address another energy-related area with a similar unmet need. In this case, we’ve been working with a potentially large alpha customer. We hope to have something more to share in this regard later in the year. Both products, while in different areas, were designed to address existing commercial problems; problems that our specific technology may be uniquely suited to solving. There’ll be more to follow on this.

Earlier, Frank mentioned our $4 million of cash in the bank. Our supply agreement covenant with BASF has been amended as of late last year. One of the changes reduced our cash maintenance requirement, as an exclusive supplier to BASF, from $2 million down to $1 million. As a result, today our cash in the bank is worth that much more to our business. Both companies, Nanophase and BASF, continue to build on the solid foundation we’ve set, and I look forward to both of us gaining significantly, as we approach the personal care market with excellent new products enabled by our technology and the experience we bring to the table. 

We are really in a good spot today. To recap, these are some of the reasons that continue to fuel my optimism:

And all of this is before adding Kevin Cureton to our team. Kevin brings the energy, experience, judgment and sales leadership that I believe will help us to climb higher and faster. We have big expectations and I see Kevin stepping up to the challenge.

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. 

Samya, 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!