THIRD QUARTER 2012 CONFERENCE CALL


Jess Jankowski, President & CEO

Good morning everybody!  We appreciate your joining us for our third quarter 2012 financial conference call.  With me today is our CFO Frank Cesario.  Before I get started, we’d like to extend our good wishes to our friends on the east coast, many of whom are coping with trying circumstances inflicted by the weather, for whom calling in today is among the least of their concerns.  We also extend our good wishes to our customers, many of whom are also struggling through this difficult week.

In a minute, Frank will present results that will confirm what we’ve been saying all year – that while we trailed last year’s performance in the first few quarters, a more stable 2012 should show full year revenue and financial performance exceeding that of 2011.  

We have seen those lines crossing during the third quarter, with our bottom line and cash flow consistently growing stronger during 2012, than they were in 2011.  We expect this fourth quarter to significantly outpace the fourth quarter of 2011, and continue to believe that the full year 2012 revenue will exceed last year’s.  When we closed 2011, we felt we had positioned ourselves well to enter 2012.  Now I can say that, as we’re closing 2012, we feel even stronger about our prospects going in to 2013.  We have new customers coming online with growing commercial revenue. 

Our largest customer has commercialized new products that we co-developed, resulting in their ability to launch an expanded line of personal care products.  We’re reaching the end of a multi-year qualification process that may yield game-changing results.
  
In a few other areas, we’re now awaiting commercialization decisions from several other customers as well.  And all of these prospects are additive.  And we’ve done this while strengthening our balance sheet responsibly, while continuing to invest in projects to support future growth.  We’ve avoided the “bet the farm” path taken by so many companies engaged in business development to build revenue, instead, adopting measured improvements in our structure, and remaining focused on solid opportunities for growth.  Lastly, we survived the pricing and availability drama of the Chinese rare earth material squeeze, which began late in 2010.  Cerium oxide is now dramatically off of recent highs and appears to be stabilizing.
  
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 third quarter, please remember that all financial results are stated in approximate terms.  
Revenue for the third quarter was $2.1 million, versus revenue of $2.2 million for the comparable 2011 quarter. 

Gross margins were 25% versus 16% for the comparable quarter, as we saw the benefits of our continuing improvement process overcome our sensitivity to small changes in revenue volume.  The thought of such sensitivity to potentially higher revenue volume offers a very positive feature as we add new sources of revenue to our mix. 

The net loss for the quarter was $0.7 million, or $0.02 per share, compared to a net loss of $1.0 million, or $0.05 per share, in the comparable 2011 quarter. 

We have talked about 2012 revenue being more backloaded than 2011, and were pleased to see the bottom line improve on a year to date basis for the first nine months of 2012 ($1.8 million GAAP loss) despite $0.7 million less in revenue from the same 2011 period (with a $2.1 million GAAP loss).  With fourth quarter revenue expected to be far higher during 2012 than 2011, we feel positioned to show continued bottom line results.  As we described in more detail in the financial press release, 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, finished the first quarter with $2.3 million, and ended the second quarter back where we started, at $2.7 million. No funds were received from the Rights Offering until July, so only during the third quarter did the $2.2 million in net proceeds get added to our cash balance, creating an end of the third quarter $4.6 million cash position.  Our company remains debt free.   
Jess?


Jess Jankowski, President & CEO

Thanks Frank!  Unlike prior years when our seasonal business would be slowing down, we’ve seen a steadier product flow in the third quarter, and see that coming again in Q4.  
Sure, we have some seasonality, given our top selling product goes in to sunscreens, primarily for the North American personal care market, but a combination of new market areas and products, new materials launched with our largest customer, and, we expect,  broader future geographic coverage, have all helped to create a more solid foundation for Nanophase. 

As we announced during the first half of 2012, our largest customer, BASF, launched a new product, co-developed by Nanophase, called “Z-COTE LSA.” This product provides material properties that some customers, many of whom don’t currently use our existing zinc oxide for personal care products, have been demanding.  The commercialization process is unfolding, and we’re starting to see pickup into supply chains. 

Our push into new opportunities, across a few carefully selected product lines and markets, has proven useful in building new revenue.  We see this as a growing base for our efforts heading into 2013. That said, we’re not simply waiting for these efforts to produce results in a static environment.  We continually modify our go-to-market approach, looking for the highest upside, in the shortest time period, without taking on so many projects that we can’t complete them successfully.

We add only that infrastructure that is absolutely required to build toward our objectives.  And, we’re very selective in resource deployment, a discipline that you, our owners, have the right to expect.  We’ve spent several years getting better at this model, and I like what I see.  We’ll further refine this approach as we continue to emphasize a healthy balance of speed-to-market and magnitude of opportunity.  I look forward to speaking with you again in 2013 to discuss those initiatives. 

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. 

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.  Also, our hearts are with those many on the east coast that have been affected by Sandy.  Thanks for your participation, and we hope you are all safe and dry.