|
Joseph
Cross, President and CEO
- Welcome
to our second quarter 2001 conference call. The Nanophase
attendees for this session are: Dan Bilicki, VP Sales and
Marketing; Dr. Don Freed, VP Business Development; Dr. Gina
Kritchevsky, VP Technology and Engineering; Dr. Richard
Brotzman, VP R&D; Jess Jankowski, CFO and Corporate
Controller; and Bob Haines, VP of Operations.
- To
begin, Jess Jankowski will review the financial results
for the second quarter and the first 6 months.
Jess
Jankowski, CFO and Controller
- Good
morning and thank you for attending.
- For
the second quarter of 2001, our revenues were approximately
$1,049,000 versus $1,105,000 for the same quarter in 2000.
The majority of our revenues continue to come from products.
- We
had approximately $43,000 in gross margin for the second
quarter of this year. This was achieved mainly through many
of the Company's manufacturing cost-saving measures being
fully recognized in second quarter production. We also incurred
a charge to inventory of approximately $110,000 due to costs
of production being lowered to the extent where we felt
an adjustment to reflect lower current costs was prudent.
We feel that gross margins should remain positive through
the balance of the year. The extent to which they remain
positive, as a percentage of revenue, will be dependent
upon revenue mix, revenue volume, and the Company's ability
to continue to cut costs. Continued savings relative to
manufacturing costs should boost the gross margin, relative
to this quarter, in the second half of the year. On the
bottom line, we lost 9 cents per share for the second quarter
of this year versus 9 cents per share for the second quarter
of 2000. We increased our allowance for doubtful accounts,
relating to a collection issue, by approximately $120,000,
which contributed approximately one cent to our loss for
the quarter.
- For
the six months ended June 30, 2001, revenues were approximately
$2.2million versus $1.7million for the same period in 2000.
With respect to earnings per share, Nanophase lost 18 cents
per share for the six months ended June 30, 2001 versus
20 cents per share for the same period in 2000.
- I
would now like to spend a little time walking you through
the major categories on the June 30, 2001 balance sheet:
- All
numbers are approximate….
-
At June 30th, Nanophase had $12.8million in cash and
investments.
-
Accounts Receivable amounted to $542,000. Receivables,
in relation to sales, have come down dramatically. Our
largest customer, who was formerly at 60-day terms,
is now at 30-day terms and up to date on payments.
-
Inventory has gone up by $625,000 between the end of
last quarter and June 30th. Much of this build-up was
anticipated and controlled by management. We are now
at the peak of the inventory plan announced earlier
this year. The majority of 6/30 inventory relates to
product or materials for the Company's largest customer.
- The
only material in inventory that had been unanticipated is
$350,000 worth of both raw and finished goods built in order
to satisfy anticipated business from a catalytic fuel additive
customer that did not materialize in the second quarter,
as originally expected. This business may materialize later
in the year. In the third quarter, we will have an additional
$300,000 of raw materials coming in to support this same
business. The reason that we have accumulated as much of
this material as we have is that the lead-time, from start
to finish, is three to four months. None of this material
will be wasted, but our schedule to produce and ship the
balance of it will be moved out into 2002. We intend to
reduce current inventory levels by approximately 20% by
the end of the year. We continue to manage this situation
closely.
- Changing
to another key area of focus:
-
Capital expenditures have amounted to $3.8 million dollars
in the first six months of this year. We anticipate
spending an additional $3.5million in the balance of
the year.
- Most
of our spending is earmarked for three main categories:
+ The pilot manufacturing facility in Romeoville
+ The powder coating area in Romeoville
(Includes upgrades to existing building utilities, like
electrical power and related controls, and other things)
+
Planned capacity expansion to our Burr Ridge facility
- Another
thing I would like to address on the June 30th balance sheet
is the Company's roughly $1.7million dollars in long and
short-term debt. 74% of this, which is currently classified
as long-term, reflects the previously disclosed $1.3million
loan from a customer.
- Lastly,
we have also had significant increases in accounts payable.
This is mainly a function of both the Company's capital-spending
plan and the inventory build.
- Given
the current outlook, we plan to exit this year with $7-8
million in cash and investments. Based upon the visibility
that we now have, we have more than enough cash to fund
our business plan through 2002 and for the foreseeable future.
- Thanks
for your attention, now I'd like to turn things back over
to Joseph Cross, our President and CEO.
Joseph
Cross, President and CEO
- This
past quarter, and indeed the first six months of 2001, has
been characterized by significant technical successes and
technology growth throughout the company. Increasingly,
we believe, the company has lengthened its lead in nanocrystalline
technology, application development, and commercial manufacturing
of nanosolutions. We are not aware of any other company
with even remotely similar capability. This technology and
leadership continues to be the company's core strength,
principal value, and foundation for future growth.
- We
have been able to essentially achieve our stated manufacturing
cost reduction goals for 2001 in the first half of the
year. Based on the break-through we have achieved in
the PVS process technology, we expect to achieve an
equal amount during the second half, essentially doubling
our stated reduction goals to achieve at least a 30%
manufacturing cost reduction. This break-thru, coupled
with our recent drive to lean manufacturing, also provides
a solid foundation for continuing manufacturing cost
reductions during 2002.
-
Another
result of this series of improvements has been a significant
increase in output per reactor. As we continue to implement
these on all of our equipment, we expect to increase
output per reactor from 50-100% from our baseline position.
Stated another way, from our baseline start at the beginning
of 2000, we expect to achieve increases in output per
reactor up to 4 times the baseline rate.
-
Thirdly,
these changes have provided significant product quality
improvements in particle size control as well as increasing
the purity and quality of our materials. We believe
that this will have an appreciably beneficial impact
on penetrating markets for certain applications as we
go forward.
-
The
second area of technical innovation has been in our
application science where we have experienced several
breakthroughs relative to our target markets. As an
example, we have recently developed and announced the
technology to suspend our nanocrystalline materials
in an extensive range of liquids, which has direct positive
impact for transparent functional coatings, catalysts
- including catalytic fuel additives, heat transfer
fluids, and slurries for a variety of applications.
We have also achieved breakthroughs in other areas that
we cannot address until we are able to protect the intellectual
property.
-
The
last significant area of innovation has been in commercializing
our new nanocrystalline manufacturing process, Audrey,
which we view as complementary to our core PVS process.
During the first and into the second quarter, we successfully
established the process capability to produce multiple
materials, including mixed metal oxides, at highly competitive
cost and production rates. Beginning this quarter, we
will begin to commercialize materials in a priority
dictated by market demand. We do not expect the Audrey
process to significantly impact revenue until possibly
late fourth quarter or early 2002.
-
Quite
obviously, despite what we perceive is a very difficult
economic environment, the company is extending its lead
in nanocrystalline technology, including commercial
manufacturing. That is, we believe, the real value of
Nanophase - the intellectual property and proprietary
knowledge in an emerging science with vast potential
and multiple market applications.
-
Another
large area of focus and effort for the company has been
to complete the construction and implement a production
coating facility, primarily for our largest sunscreen
customer, and a pilot manufacturing facility to be able
to deliver nanocrystalline materials in dispersions, coatings,
and formulations to our target markets and customers.
The coating facility is beginning operation as I speak
and will be producing the initial qualification lots for
our customer over the next 30 days. During the remainder
of the year and into early 2002, we will be building production
volume in the facility, which will reduce our dependence
on a third party contractor and increase margins.
-
The
pilot line facility, which is scaled to produce moderate
commercial quantities, is in the final stages of construction
and is expected to be complete and operational in the
August/September timeframe. This capability is vital for
Nanophase to penetrate certain markets and grow revenues
over the next 2-3 years.
- Regarding
revenue for the quarter, obviously we were unable to achieve
the quarter-to-quarter revenue growth that we expected,
largely due to exiting an exclusive relationship with a
European customer for catalytic fuel additives that impacted
expected sales this quarter by at least $530,000. Frankly,
their inability to honor their commitment for the second
quarter was a factor in that decision. However, we believe
that this was the right decision for the company for the
long-term horizon. We are proceeding with rigorous testing
of the materials and have formulated a tactical plan to
align Nanophase with the proper partners to explore this
application and define a prudent path to the market. Dr.
Freed will cover this topic in more depth later in the conversation.
- Before
I turn this over to Gina for an update on our other technology
initiatives, let me address one last topic that seems to
have caused concern in the investment community. As many
of you are aware, three Officers and one Director sold some
stock this past quarter.
-
In regard to the Officers, first, stock options are
a form of compensation in this company. In each case,
the Officers involved had personal reasons for their
decisions, as is their right to manage their own compensation.
While the timing turned out to be awkward, related to
our decision to exit the relationship with the European
customer, all the factors that led to that decision
were not known until literally hours before the press
release. As soon as those factors became known, the
company imposed an immediate internal blackout and all
insider activity ceased.
- Secondly,
the Officers and key Managers of this company are completely
vested and in tune with the aspirations of the stockholders.
Despite the message board rumors, I personally have
not disposed of all of my stock options and, as publicly
filed, hold about 400,000 options. The key Nanophase
team holds over one million options, as reported openly
in our public documents, and is fully confident in the
company's future, the power and multiple applications
for nanocrystalline technology, our leadership position
in this emerging science, and the probability of stock
appreciation. To put this in perspective, the Officer
sales amounted to only 3% of the options held. By another
measure, it was only 0.3% of the outstanding shares.
In my own view, the concern I personally received from
the investment community seems out of proportion to
the size of the event.
-
Concerning the sale by the Director, who retired from
the board, his stock option grants only allowed a 30
day period from leaving the company or board to exercise
options or the grant is cancelled. Obviously, the retiring
Director chose to exercise rather than lose the option
value.
-
Lastly, in the future, there will undoubtedly come a
time where certain Officers for their own personal reasons
may choose to exercise options and manage their compensation.
The investment community should not leap to the conclusion
that such a decision implies any lack of confidence
in the company's future. Insiders exercise options constantly
across all industries - in fact, June of this year was
the largest insider sales month in quite some time according
to the media - and they seem to do so largely with little
or no outcry. Nanophase insiders should not be held
to a tighter standard.
- Now,
let me turn this over to Gina for a summary of our technology
progress.
Dr.
Gina Kritchevsky, VP of Technology and Engineering
- Thank
you Joe,
- Good
morning, I want to update you on the tremendous progress
that Nanophase had made over the last quarter in both R&D
and Advanced Engineering and discuss a bit about our plans
in these areas for the third quarter.
- We
are continuing to focus much of our effort on several aspects
of our Audrey process. We continue to make improvements
to the subsystems of our pilot Audrey reactor. These modifications
will contribute to reducing overall system and product costs
for our production Audrey materials. The second area of
concentration is the development of full commercial processes
and data for selected Audrey materials. The third is a continued
screening of new potential materials for the Audrey process.
During the second quarter we successfully manufactured mixed
metal alumina-silica materials and mixed rare earth oxides.
- Due
to the differences in the PVS and Audrey processes and in
the feed materials, some products can be produced more efficiently
on Audrey and some on PVS. The primary purpose of Nanophase's
Audrey process is to expand the variety of materials that
Nanophase offers and the secondary purpose is to reduce
the cost of producing these materials. Although the Audrey
process has demonstrated some substantially lower cost feed
materials and higher production rates, we have also made
tremendous progress reducing PVS costs this year. I expect
that in future years, Nanophase will be using more than
two or three processes to produce our nanoparticles.
- Next,
I would like to describe another new engineering initiative,
our Advanced Engineering Laboratory. The strategic value
of this laboratory is to allow rapid penetration of new
markets through the ability to quickly produce initial quantities
of new materials for market evaluation. Initial goals are
aimed at developing new non-oxide nanoparticle powders for
customer evaluation, to continuously improve existing nanopowder
production processes, and develop new dry powder treatment
processes that add value to Nanophase nanopowders.
- Construction
of the Advanced Engineering Laboratory Reactor is underway
at the Romeoville facility and initial operation will begin
late in the third quarter of 2001. The new reactor will
ultimately combine elements of PVS and Audrey with greater
control of the reaction conditions to develop processes
to produce non-oxide materials to expand the pallet of the
nanopowders currently produced at Nanophase. The first project
for the reactor will be production of large quantity samples
of two new High-Performance (HP) nanopowders for trial in
emerging applications. Projects will include the production
of nanosized metallic powders and the development of non-oxide
nanopowders including nitrides and carbides. The reactor
design is highly modular, allowing reconfiguration and enhancements
as development needs dictate.
- In
the R&D and applications development area, we have made
substantial progress in improving the properties of our
dispersions and coating formulations. We have done this
through work on several fronts; our new high performance
HP materials demonstrate narrowed particle size distributions,
new technology to produce stable dispersions of nanocrystalline
metal oxides in organic resins and solvents, such as alcohols,
hydrocarbons and fuel oils. This development allows Nanophase
to suspend its nanocrystalline materials in an extensive
range of liquids to address a wide range of customer applications
and a newly developed ability to modify the surface chemistry
of the nanoparticles by vapor phase post reactions. We have
filed an application for patent coverage for this new dispersion
technology.
- To
summarize our developments and progress in technology and
R&D and application engineering over the quarter; we
have improved the PVS process to achieve both rate and cost
improvements for all our current PVS products. We are also
continuing our successful development of the Audrey process
and products, which are complementary to PVS and will provide
new nanomaterials for Nanophase. Both the new commercial
scale coating facility and the pilot dispersion and coating
facilities are nearing completion. Finally, in the application
development area, we have made substantial breakthroughs
this quarter in the development of technology to disperse
and compatiblize our nanopowders into numerous solvents
and polymers, which enable us to bring more value to our
customer's products.
Joseph
Cross, President and CEO
- Thank
you, Gina. Dr. Don Freed will now address business and market
development initiatives.
Dr.
Don Freed - Vice President, Business Development
- Good
morning - and thanks for your interest. As part of our business
development activities, and because Nanophase is receiving
a lot of interest in catalyst developments, I thought I'd
spend a brief moment covering our activities in that area.
- As
we announced previously, we are vigorously pursuing our
catalytic fuel additive strategy - and I'd like to explain
why this is so important. As you know, the Company currently
supplies nanocrystalline materials for use in automotive
catalytic converters where because of their unique crystal
structure and high surface area they improve converter efficiency.
We believe that similar improvements will also be gained
by introduction of these kinds of materials directly into
both gasoline and very importantly, fuels for diesel and
two stroke engines, which we believe could have a substantial
impact on vehicle emissions reduction.
- We
are also in the process of testing and evaluation of our
catalytic fuel additive at Ricardo Consulting Engineers,
one of the premier engine/fuel consultants in the world
and one used by many engine and fuel companies. As we recently
informed you in our last press release, we have also filed
for patent protection for our inventions relating to this
technology. Upon completion of our testing we expect to
initiate discussions with potential partners both in industry
and government. We also expect that these potential partners
will want to make their own independent evaluations. Since
this program will take some time, we do not expect sales
in this area much before this time next year. Obviously,
in order to protect Nanophase's interests in this field,
we cannot say more than I've told you today however, when
we can, you will certainly be informed.
- Interest
in using the Company's unique nanomaterials remains high;
in fact we have more opportunities in the pipeline now than
at our last call. However, the serious global economic slowdown
is severely impacting our time-to-market - what we are seeing
in the business development area are customers taking a
lot longer to evaluate our products, for example just last
week, two customers informed us that plant trials with our
materials, which we had expected to occur in late July,
would now not take place until mid-August. Remember that
our product development cycle has several key steps at the
front end - in particular value assessment and initial customer
evaluations - and of course, a change in schedule will happen
occasionally, but when it becomes a frequent occurrence,
you can tell that the global recession is having a widespread
effect.
- So
what are we doing about it? Well, to begin with, we've about
doubled the number of opportunities and programs that we're
working on - and because when a program experiences delays
such as I mentioned in the case of the plant trials, our
R&D staff has time to tackle additional programs. Many
of these new programs are in the same focus areas of personal
care, abrasion-resistant coatings, environmental catalysts
and thermal spray, so that we can use our already developed
know-how and technology effectively and quickly.
- However,
there are also several new programs where the benefit of
our nanocrystalline material is only realized if the Company
supplies a slurry or dispersion of particles. In the past,
we could only supply these materials in laboratory quantities.
We can now take advantage of our new Pilot Line capability
to supply sufficient quantities of product for initial evaluations
by potential customers as well as ongoing small-scale or
quick turnaround production - for example we have a number
of customer plant trials pending in the wear-resistant fabric
and anti-static coating areas. Customer requirements for
these applications
are well beyond laboratory scale and we see the Pilot Line
as enabling Nanophase to expedite customer adoption.
- Secondly,
we've increased the number of joint programs that we're
cooperating on with the C. I. Kasei subsidiary of Itochu,
our Japanese licensee. Although Japan has also been affected
by the severe economic slowdown, our tactics here should
help us.
- We've
also just brought on the former vice president of marketing
of a major chemical company as a consultant to help us develop
additional business opportunities. All of these steps are
designed to increase the opportunity and reduce the time
needed to get to production.
- Now,
I'd like to turn it back to Joe Cross…
Joseph
Cross, President and CEO
- Thank
you, Don. Dan Bilicki will now summarize our marketing and
sales activities.
- Dan
Bilicki, VP Sales & Marketing
- As
reported, revenue from Q2 was $1 million 49 thousand with
$957K or 91% being derived from sales of products. This
is essentially in line with Q2 of last year.
- A
critical success factor for Nanophase is building relationships
with lead customers within many diverse industries that
will allow us to capture the business while providing cost
effective products or processes. The skill involved in choosing
lead customers is finding one with an unsatisfied need,
an internal champion, and a lead customer that is playing
offense rather than defense.
- The
business plan for 2001 was assembled during the fourth quarter
of last year when many lead customers where playing offense
and our time to market objective was decreasing from our
target of 12 to 18 months. Also during this time in the
manufacturing area there was a significant level of confidence
and interest in exploring new science and technology. Over
the last six months, a global economic turndown has resulted
in layoffs, budget cuts, and a lessening of confidence,
this has impacted Nanophase primarily by increasing our
time to market.
- As
you have just heard from Don Freed, the level of business
development activities remains good. However, we have experienced
a serious slow down in the speed with which these opportunities
are being evaluated and turned into product sales. The time
to market slowdown caused by uncertain economic times further
clouds our already limited visibility making the forecasting
process very difficult.
- An
overview of our product sales progress by key market segment
for Q2 as well as an outlook for Q3 follows:
- In
the Personal Care market segment product sales for the first
six months of 2001 were 10% ahead of last year, but still
lower than our original expectations. The ZnO surface treatment
system has been mechanically completed and following the
commissioning phase, product will be available for shipment
in August.
- During
the Q1 conference call we mentioned that Nanophase had two
non ZnO Personal Care initiatives underway. The application
in the trial stage has been delayed due to customer resource
allocation and will not launch until Q1 2002. Due to economic
concerns, the customer has delayed the decision on the second
application until Q4 of 2001.
- On
the positive side, Nanophase has received its first ZnO
purchase order for a new product launch involving a printing
application.
- Recent
breakthroughs in our ability to disperse nano-crystalline
materials in various media have further extended our product
capabilities in the transparent functional coating area.
As a result of our collaboration with our Japanese partner,
Nanophase will begin to offer a range of highly dispersed
nano materials that have a narrow particle size distribution
with uniformly small particles. ZnO dispersion is currently
being utilized by a Japanese lighting manufacturer for UV
attenuation. The polishing of glass semi conductor masks
represents another market opportunity for these high quality
dispersions.
- In
the Catalysts area Nanophase has a number of new products
under evaluation by our catalytic converter customer. Test
results for these new products were expected in June, however
due to delays the results are now promised for the end of
August. As reported testing of our catalytic fuel additive
is currently underway. Upon completion of the test work
and evaluation of the results Nanophase will begin active
exploitation of this application in both the commercial
and governmental sectors.
- In
the ceramics market good progress has been made in the thermal
spray market as Nanophase has developed new products including
chrome oxide that are currently being tested.
- In
Summary: Q2 product sales where essentially in line with
product sales of last year. Product sales for Q3 are expected
to remain flat with respect to Q2.
Joseph
Cross, President and CEO
| Operator: |
Thank
you. Ladies and gentlemen, at this time if you have
a question you will need to press the one on your touchtone
phone. You will hear a tone acknowledging your request.
Your questions will be taken in the order that they
are received. If your question has already been answered
you may remove yourself from queue by pressing the pound
key. If you are using a speakerphone, please pick up
your handset before pressing the button. One moment
for the first question.
Doug Moffat, please state your company name followed
by your question. |
| Doug
Moffat: |
Yes,
Robinson Humphrey. Good morning. |
| Management: |
Good
morning, Doug. |
| Doug
Moffat: |
A
couple of clarifications, if you will. When you talked
about inventories to begin with, you made several comments,
one about lowering the cost of inventories and then
about the raw material component of inventories being
up by $350,000 and so I'm a little confused. I wonder
if you could expand on that? I guess I'm not quite sure
of the significance of the inventory write down and
why that is necessitated. And then maybe what the work
off period will be for this, I guess in total, the $600,000
of additional raw material inventory? |
| Jess
Jankowski: |
Doug,
this is Jess Jankowski. The workout period is unclear,
it depends on acting CFO & Controller how the business
unfolds. The $350,000 is a combination of both raw materials
and finished goods that was built to support anticipated
volume, not just for the second quarter but also the
balance of the year as is the additional $300,000 coming
in next month and that's because of the lead time being
so long and the volume being so large. The write downs
have nothing to do with value, they have to do with
our cost of production. We effectively analyze our standard
costs, most of the cost saving measures we've put in
are now fully in production in the second quarter and
we decided that the prudent thing to do would be to
bring the inventory values that are sitting on the balance
sheet down to a level that equals what it costs to produce
the material. |
| Doug
Moffat: |
|
|
Okay.
And then also on the increase in the doubtful accounts,
who is that customer? Is that the European catalyst
customer that's not taking material? And whomever it
is, is this fully reserving this customer? |
Jess Jankowski:
Acting CFO & Controller |
At
this point we can't discuss the exact customer. It's
not fully reserving the customer but the majority of
the potential is covered and we think we're in a very
conservative position. |
| Doug
Moffat: |
Okay.
And then I wanted to ask a little bit about the fourth
quarter prospects. I understand your visibility is far
from clear here on the fourth quarter, but it sounds
like you're thinking that sales from the third to fourth
quarter can potentially ramp up quite a bit here to
better than $2 million. Can you talk about what the
deltas that you're hoping for would be to get you there? |
Dan
Bilicki:
VP Sales & Marketing |
Doug,
this is Dan Bilicki. We've, as indicated, looked at
Q3 and see that it's probably going to be in line with
Q2. However, there are some very interesting potentials
that are coming through that we hope to see bring Q4
up to a level that matches our expectations for the
year. |
| Doug
Moffat: |
Can
you just give me some flavor for what has to happen
at customers and so forth to make that happen? |
Dan
Bilicki:
VP Sales & Marketing |
Several
of these planned trials that have been delayed are now
finally going to be happening in Q3. We're very hopeful
that as a result of that we're going to see the benefit
in terms of additional sales. |
| Doug
Moffat: |
I'm
more interested in just what kind of activities at the
customers and so forth have to happen for that sales
increase to develop. I guess what Dan was saying is
that there are trials out there that can finally happen
and then I presume there would be commercial business
developing immediately right after that. |
Dan
Bilicki:
VP Sales & Marketing |
That's
correct. As you know, in our process we start with concept,
move into trial and then we move into pre-production.
In several of these that we hope to happen earlier this
year are in the major trials stage and those have been
continually backed off, but we expect those to happen
in August. So we're hopeful that once they do happen
we'd start to see the benefit of those trials move into
the sales side. |
| Doug
Moffat: |
Then,
just one final question and I'll get off here. In terms
of the new improvement in the production process to
allow you a tighter size particle distribution, etc.,
how long will it take you to benefit from that in the
marketplace? Will it take some period of time for customers
to evaluate the new improvements, etc.? |
Dan
Bilicki:
VP Sales & Marketing |
Those
new improvements, what we've done, Doug, is we did a
stroll back through the history of Nanophase and looked
in our archives and said, well, there was this customer
that wanted this particular application that we just
couldn't quite meet their requirements. Now with this
new technology we're going back and reopening those
opportunities to see whether or not the new material
will actually provide the benefit that the customer
is looking for. |
| Doug
Moffat: |
So
is it like a six-month process to get traction? |
Dan
Bilicki:
VP Sales & Marketing |
Yes,
it is. Because we'll start it a little faster than we
are normally able to start. |
| Doug
Moffat: |
Okay,
good. Thank you. |
| Operator: |
Loren
Ben, please state your company name followed by your
question. |
| Loren
Ben: |
CIBC
Oppenheimer. Good morning. A lot of the questions have
been answered but why do you file so many press releases
telling us about all this new technology? As I said,
I think you've answered quite a bit of it. |
Joseph
Cross:
President & CEO |
Loren,
this is Joe. |
| Loren
Ben: |
Hi,
Joe. |
Joseph
Cross:
President & CEO |
|
|
We're
trying to adopt more of a guerilla marketing approach,
frankly. While those of you on this call know who we
are and what we do, there are a lot of people out there
who don't and we're trying to expand our reach into
several other key markets, primarily in electronics.
So we've adopted a strategy of trying to make product
announcements when it seems proper to do so. Those are
also released through industry journals. For instance;
on the product release for the HP materials that we
put out a couple weeks back, that's already been picked
up by several industry journals like Chemical and Engineering
News and others. We've got several customer calls, in
fact we had about six yesterday who read that article
and called us to talk to us. So part of the reason we're
announcing that is not so much to the investor community,
it's more for potential customers and trying to get
our name out there into broader circles and to create
more opportunities for the company. |
| Loren
Ben: |
Fair
enough. The second question would be, as you develop
these new technologies and you're looking for applications,
do you have a batting average as to when somebody comes
to you with an idea and you think you have an application
or you have the ability to develop something? Do you
have an idea of whether you can hit 20% of them, 30%
of them? |
Don
Freed:
VP Business Development |
Loren,
this is Don Freed. |
| Loren
Ben: |
Hi. |
Don
Freed:
VP Business Development |
Hi.
30% would be spectacular. But part of it, the goodness
of the batting average depends on how good we are at
evaluating and valuing it to begin with. We get a lot
of calls, there's a lot of opportunities and we spend
most of our time in the early days trying to figure
out (A), is there value for the customer or potential
customer and (B), is there value to Nanophase? Those
have to click before we can get even to the concept
of the batting average. When we're good at doing that,
we're probably seeing between 10% and 20% of these things
move down the pipeline heading towards ultimately getting
into commercial business. That's not a bad batting average
as high tech companies go. I've never seen anyone do
much more than 20%. If you're doing more than 30% it's
magic. It's hard to know, so I think we're doing a pretty
good job but it's only as good as our up front screening.
|
| Loren
Ben: |
Okay.
And the last question, regarding your pipeline, A pipeline
has to be filled up, you have to stuff in one end before
it comes out the other end and the question is how close
are you to having stuff coming out the other end on
a steady basis? |
| Don
Freed: VP Business Development |
I
think it's back to the concept of the question that
Doug answered. There is stuff all along the pipeline.
Obviously there's more at the front end of the pipeline
because things fall out. But there is a stream of product
applications at the other end waiting for a lot of things,
including the plant trials that both Dan and I mentioned
and customers making final decisions. Of course that's
being impacted by the sort of bunker mentality that
a lot of companies have adopted, particularly with our
customers because we sell largely into the manufacturing
sector. So the opportunities are there, it's just difficult
to have visibility on the time at which they'll pop
out. |
| Loren
Ben: |
So
when the economy does turn the corner you expect the
spigot will open up a little bit faster than it is now
certainly? |
| Don
Freed: VP Business Development |
Yes,
we do. |
| Loren
Ben: |
And
do you think you'll be ready from the manufacturing
standpoint; will you have enough plant and equipment
in place to meet the demand?
|
Joseph
Cross:
President & CEO |
Loren,
this is Joe. Yes, I think so. With the improvements
that Bob and his team have made this year, we've really
increased the output per reactor. If you look back since
maybe the day I walked in the company, which is my first
shot at looking at the company, at that time in place,
we had one reactor per operator so there was a human
on every reactor we were running. Right now we're up
to about six reactors per operator.
So we've made a lot of progress relative to the amount
of staffing we have to provide for a reactor. We made
a lot of progress in output, so essentially we reduced
our capital needs going forward in some sense relative
to reactor costs or adding reactors for capacity. So
right now to the best of our knowledge, and again our
visibility is nowhere near 100% perfect, essentially
we feel like we're in pretty good shape from a reactor
standpoint for next year. Again, we achieved several
gains over the last six months and a little bit previous
to that even in getting very good at manufacturing nanos.
In fact, I think that's one of our core competencies.
We really have learned how to manufacture nanocrystalline
materials. |
| Loren
Ben: |
Okay,
great. Thanks very much. |
| Operator: |
Steve
Springer, please state your company name followed by
your question. |
| Steve
Springer: |
Yes,
Target Capital. I'd like to ask a question regarding
time to market. In the past, the time to market has
been discussed as something like 12-18 months and it
just seems as if we've hit the wall here in a hurry
and the business outlook has changed dramatically from
guidance earlier in the year. I wonder if you could
discuss a little bit about what kinds of commitments
you're actually negotiating with these companies? For
example, we have $300,000 in raw materials that came
in for fuel additives in the quarter, another $300,000
coming in the third quarter, and I'm wondering what
... those raw materials were purchased against some
sort of indication that there was going to be an order.
I'm wondering what kind of an order is that? |
Joseph
Cross:
President & CEO |
Steve,
this is Joe. Let me address that. In that particular
instance this had been a discussion between Nanophase
and a European company that goes back well into at this
time last year. The reason we ordered that material
was due to the following. During the development negotiations
both companies had signed a memo of understanding and
this memo of understanding was very explicit and part
of the details listed specific quantities, specific
deliveries and specific timeframes according to the
customer's schedule. Now a memo of understanding is
not binding. We had taken that memo of understanding
and had it put into a legal agreement, which was in
front of the customer who had assured us they were going
to sign the legal agreement until right at the end.
So because of the lead-time on this material, which
is about four months, based on the memo of understanding
the company had reached with the customer and indeed,
the legal agreement that the customer verbally said
was okay, we had to order the equipment in order to
meet the time table, I mean order the material in order
to meet the time table, so that's what we used as a
basis. Frankly, a memo of understanding and a legal
contract that specifies material deliveries is a pretty
solid basis on which to forecast normally in my experience,
although this case did not turn out that way. |
| Steve
Springer: |
It
didn't turn out that way because effectively the client
reneged on a verbal agreement? |
| Joseph
Cross: |
I
don't think the client reneged, but I think the net
effect is that's probably President & CEO true.
What I think really happened is the client is totally
undercapitalized to make the agreement. I think the
client expected to have a certain level of capitalization
by the time it came to signing the legal agreement.
Our perception is they did not have the capital in place
and could not live up to the agreement, which was the
first indication we had frankly that they were undercapitalized
because they had led us to believe they were highly
capitalized. |
| Steve
Springer: |
Yes,
okay, well just to beat this to death, under these circumstances
why is it that we're protecting this entity and not
disclosing who it is? What have they done that has earned
that respect as opposed to the way that they've treated
Nanophase? |
Joseph
Cross:
President & CEO |
Let's
say they've acted in a fashion that we've lost a lot
of confidence in them. We are following a process that
has been recommended by our legal counsel and that's
exactly the process we intend to follow in this instance.
|
| Steve
Springer: |
Okay.
I mean, I just find that we're in a situation where
there's a great deal of secrecy requested by putative
clients. |
Joseph
Cross:
President & CEO |
Oh,
I understand that this is a multifaceted topic, not
just related to orders and excess inventory for orders
that failed to materialize. We're acting, as I said,
on the advice of legal counsel and that's the process
we intend to follow. |
| Steve
Springer: |
Yes,
I'm not quarreling with that, Joe. I think you've answered
the question, but I'm just saying that in general when
we talk on these calls about new business applications,
what industries they go into and other details, there's
a great deal of secrecy surrounding these discussions.
And many of these projects get pushed out and out and
out and of course you're guiding based on your best
indications, I understand that. Clearly, the economy
has fallen off a cliff in some areas, it's just been
a very rapid slowdown. So I don't have a quarrel with
you in that respect, but I'm just saying that there's
a paucity of information and we're in a vacuum. And
so to the extent that you can make more information
available I think it would be helpful. But I'm not quarreling
with the management and what you're trying to do here
and I recognize that it's a very difficult situation.
|
Don
Freed:
VP Business Development |
Let
me answer that, Steve, this is Don Freed. There's two
reasons.
Primarily one is, as we've mentioned before, customer
confidentiality is important to our customers and they
request it because we're giving them a competitive edge
that they don't want their competition to know about.
But more importantly than that is the field of nanotechnology
has grown at an amazing clip and there's a huge amount
of awareness out there. There are potential competitors
out there following every move that Nanophase makes,
they read our press releases, they listen to our conference
calls, they're all over our website. We do not intend
to point the way for potential competition to either
go to a named customer or more importantly, a named
application and so we do it to protect our interests,
your interests, the company's interests, everyone's.
We can't be in the position of pointing out the way
for potential future competition so we have to maintain
secrecy. |
| Steve
Springer: |
Okay.
|
Dan
Bilicki:
VP Sales & Marketing |
Steve,
this is Dan Bilicki and I'd like to throw in one more
bit here. In the past there were discussions and press
releases about companies that Nanophase may have been
doing some development work with. And really development
is a very, although we try to minimize the amount of
risk associated with it, it's still very risky in terms
of the customer's input and our input. So rather than
go out and talk about all these things in the development
stage, we want to get beyond that and we want to be
able to talk about contracts and business, not development.
|
| Steve
Springer: |
I'd
just like to ask one other quick question. To what extent
do you believe that we are developing products that
offer a compelling cost benefit to the extent that as
we go forward companies will see that there is a compelling
benefit to them to introduce the product regardless
of whether or not GDP is growing at 1% instead of 3%? |
Joseph
Cross:
President & CEO |
Steve,
it's Joe. I think in a couple of areas that we provide
immense value. The people who have worked with our abrasion
resistance materials, frankly, are constantly surprised
at the property they get and what they think it will
do for them in the market. We had another situation
that just happened yesterday where a customer ran an
initial evaluation of our product, our abrasion resistant
coating, on their particular material and they were
just surprised and excited and we're going forward.
So I think in abrasion resistant coatings and in transparent
functional coatings we bring a lot of value.
We really believe we've got some real opportunity in
thermal spray, we've made some breakthroughs in thermal
spray this quarter that have been very significant and
very surprising. We're trying to come up with a path
to get this better to the market than we've been able
to in the past. Environmental catalysts for this company
are a very strong growth area. But in each of these
cases, it takes time to get the data to prove to people
the value of the application. While people here know
who we are, like I said before, there are a lot of people
out there who ought to be buying from us that have never
heard from us, that's why we're trying to increase our
marketing and get our name out to a broader sphere of
companies. So I think that we're on the cusp of achieving
that in several critical markets to be really frank
with you. We're pretty excited about those markets.
|
| Steve
Springer: |
Okay,
thank you. |
| Operator: |
Ladies
and gentlemen, if there are additional or follow up
questions, please press the one at this time. Remember
to pick up your handset before doing so. One moment
for the first question.
James Liberman, please state your company name followed
by your question. |
| Jay
Liberman: |
Yes,
Tucker Anthony. It's more of a comment and observation
than it is a question but it may evolve into a question.
What I think I'm hearing is basically the cusp or the
introduction of a new industry of nanomaterials. I think
that's what you've been trying to say and I feel that
some of the questions miss the point of what's happening
here.
What it appears to me is that any transition like this
is going to take a varying degree of time, which is
somewhat unpredictable. But rather the observation is
that any transition because of the indeterminate time
has to be understood in that timeframe. So whether it's
a quarter or two that you're missing, a prediction that
you made that was maybe viable a year ago is really
insignificant compared to where it's going. It just
seems to me that focusing on quarter-to-quarter is missing
the point and missing the great opportunity that's there
ahead of us and I think this is a great opportunity.
I'm more excited now by the technological breakthroughs
you've made and the positioning in the marketplace because
if anyone decides to create a new material in the laboratory,
who are they going to come to produce it? It's not just
the materials that you're doing, it's where you're positioning
in the marketplace and I couldn't be more pleased with
where we are right now. So that was my comment, if you
want to comment on my comment, that's fine. |
Joseph
Cross:
President & CEO |
I'll
comment on your comment since you commented on our comments.
Look, we feel the same way, whereas we're frustrated
with the revenue picture, we're equally as excited with
the technology breakthroughs this year. Most of the
technology breakthroughs that we talked to you about
are like the tip of the iceberg, because we're not talking
to you about the other 90%. One, we really don't want
it out in the public domain right now. Two, we're working
with at least two Fortune 100 companies on nanotechnology
initiatives that they have and we're looking at and
we're working together on that. We can't say much more
than I just said about that because we have an agreement
that says we won't. So there's a lot of technology in
this company. We believe that this technology is very
powerful. So the fact of the matter is we think this
is a long-term proposition.
Now we're a little frustrated with the economic situation
and we're a little frustrated with the fact that we
deal with a lot of big companies who move at glacial
speed and for whom a quarter is a measurement of time,
because for us an hour is a measurement of time. So
in this kind of economy, frankly, the glacial speed
is even getting slower if it's possible. So we still
believe in the power of this technology, we think that
this company has amassed an incredible amount of intellectual
property, especially in the last six to nine months,
we've made some huge breakthroughs and we have some
things happening that we haven't announced that are
equal in power, we believe. So we think this market's
definitely going to come, there are multiple market
applications for this. It's tough for 55 people to address
all these markets and all these opportunities and that's
just the way it is. We're trying to take our best shot
at what looks to be the most powerful and we think we're
doing it. |
| Jay
Liberman: |
Thank
you very much. |
| Operator:
|
Donald
Hutchinson, please state your company name followed
by your question. |
| Donald
Hutchinson: |
Merrill
Lynch. Anyone could answer these questions, I guess.
I heard before a comment that the lost contract with
the automobile or the fuel catalyst has a chance of
reviving. Any comments on the possibilities of having
that resurfacing in the fourth quarter here? |
| Joseph
Cross: President & CEO |
This
is Joe Cross. We think there's a probability for that.
We're going on what the potential customer is telling
us. But again, we're a little less confident in this
customer than we have been in the past and definitely
it will not be an exclusive relationship, it'll be a
non-exclusive relationship. But the customer maintains
that we're the only place on earth they can find this
material and we believe they're accurate based on our
testing. They've indicated they're going to continue
the relationship with us totally on a purchase and supply
agreement basis and they may come back and need more
material in the fourth quarter, but we have to see that
happen first. |
| Donald
Hutchinson: |
Are
they still actively engaged in testing or using it or
doing whatever they were doing? |
Don
Freed:
VP Business Development |
Yes,
this is Don. Yes, they have a program, they're moving
forward albeit at a probably slower rate, because as
Joe said, they are under capitalized but with the proper
protection we believe that it's a potentially viable
customer. As I said at the outset, and as we told you
before, we've adopted a non-exclusive strategy for the
catalytic fuel additive. And that means that offers
us broader exposure, it caused us a little pain but
at the end of the day we think it's the right strategy. |
| Donald
Hutchinson: |
I
made a note to the effect that there were some test
or another with a new material involving automobiles,
not the environmental catalysts that was supposed to
be done around June. Could you elaborate on what happened
with that? |
|
|
|
Dan
Bilicki:
VP Sales & Marketing
|
This
is Dan Bilicki, Don. What we were referring there, in
my comments is that we expected the test results from
this in June and that was the initial thought from the
customer. He has since revised that and indicated to
us that it won't be until August or at the end of August
and we've now scheduled a meeting with the customer
around the 22nd of August. |
| Donald
Hutchinson: |
Okay.
So this particular material is not the stuff that's
being currently used cerium oxide? |
Dan
Bilicki:
VP Sales & Marketing |
No,
it's a unique material that they had in a test that
lasted for almost six months. |
| Donald
Hutchinson: |
Okay,
that's it. Thanks. |
| Operator:
|
Todd
Cobey, please state your company name followed by your
question. |
| Todd
Cobey: |
Cobey,
Jacobson and Gordon. I had a couple of questions. First,
could you address the $400,000 growth in the first six
months of the year in SG&A? Perhaps tell us how
much of it is sales, how much of it is administration? |
Jess
Jankowski:
Acting CFO & Controller |
This
is Jess Jankowski. Most of that is administration and
not sales. Much of that relates to the addition of Bob
Haines as our VP of Operations as well as relative moving
expenses for him. And we don't expect most of that to
recur. |
| Todd
Cobey: |
Okay.
Second, I wanted to get some context to the questions,
which my colleague from Tucker Anthony had thought was
misplaced. I think everybody on this call who follows
the company is impressed with its technological
abilities. But many of us have seen a dozen companies
that have had excellent technologies that were unable
to convert them into meaningful commercial success.
The one that we're probably most familiar with would
be that Apple always had better technology than Microsoft.
It's the conversion to marketing and sales, which meant
the difference in many companies, as we all know. So
that I think is one reason that that's so much of an
emphasis on the call. We think you've done splendidly
in the other areas.
I wanted to direct it to the company's posture in negotiating
some of these agreements in terms of confidentiality.
I know the customers ask for it, I've done some of that
myself. They always ask for it, but it never seems to
be a deal breaker if they really want the product or
the materials. And from the company's side, Dr. Freed
mentioned that he didn't want to tip his hand to the
competitor. It's been my experience that competitors
always find out about what you're doing anyhow. I think
that if you were able to announce some of these customers,
it would play into the concerns that Joe mentioned about
getting the name of the companies around and making
a greater number of customers aware that we have these
products. There's nothing like picking up a paper and
seeing that somebody who is a competitor or in the line
of business has signed a contract with somebody to get
your name around. I think especially if we're as far
ahead of the competitors as I've heard on this call,
in this call and other calls of the quarter, it wouldn't
be as damaging to our competitive situation if we could
take a more aggressive stance and said we don't want
confidentiality. It's in the interest of our shareholders
and in the interest of the companies position in the
marketplace to let people know who we're dealing with.
That also could be said for exclusivity in terms of
contracts but that's another issue. |
Joseph
Cross:
President & CEO |
Let
me address those points. When we all first came here
is a couple of years ago, we found ourselves confronted
by the situation that existed, frankly, and we thought
that we had to build up a base of business. Now part
of the cost of that for an unknown entity with a couple
of these customers has been exclusivity. None of us
are real excited about exclusivity, it's not a path
that we like. I think that if a customer wants to work
with us on an application that could be a significant
application and they want a six-month head start for
their cost of development, I think that's a reasonable
discussion. But I think we did some things in the past
to try to build up a base load of business that you
should not interpret as our forward demeanor and, indeed,
we've moved away from that significantly with our current
customers.
On the other hand, we have had customers look us in
the eyes and tell us if they ever see their name in
print, that almost in a punitive fashion, they would
go elsewhere. That has nothing to do with the value
of the material, at the end of the day they're the customer.
So I hear you when you say that that's not normally
a deal breaker, we have seen that in some cases. In
fact, our largest customer has told us flat out they
never want to see their name in print again. Not that
it would jeopardize our current business, but we have
several other initiatives underway with that huge company
that we do not want jeopardized just because we need
to be able to speak their name.
There's some obvious things about saying the customer's
name and there's some subtle things about saying a customer's
name that could impinge upon future business. We don't
enter into those things anywhere near easily as we did
before because we have a base load now, and we've got
a little bit of track history in manufacturing and delivery
and sales so we're much more selective on that. But
there will be times when customers come to us and say
if we ever say their name or we ever talk about their
specific application they'll walk. I've been told that
personally by two major customers. |
Dan
Bilicki:
VP Sales & Marketing |
This
is Dan Bilicki, I'd like to add to that a bit. When
we begin any of these processes of trying a joint development,
we sign nondisclosure agreements between our respective
companies to ensure who owns what IP. In two initiatives
that we're currently involved with, in those agreements,
it specifically stated that we are not allowed to mention
the customer's name. And if we want to do this project,
we're going to have to go along with that. It's not
a negotiating point, that's their standard boilerplate
situation. So we're not about to change that because
we're Nanophase. We're going to go after the business
and we're going to honor their request. |
| Todd
Cobey: |
I
understand, Dan and Joe, and I appreciate your comments,
especially Joe's about how the posture of the company
may be changing as you came to credibility in the marketplace
and I'm pleased to know that. I want to make sure that
management understands how critical this is to shareholders
and to any plans the company may have to sell additional
equity. |
Joseph
Cross:
President & CEO |
I
think we understand, I really do believe we understand. |
| Todd
Cobey: |
Do
you understand that it's really enormously frustrating
and critical when we hit these bumps and when we hear
something like a BASF, or the United States Navy, it
creates an enormous degree of comfort as well as at
the time excitement. You can see, for instance from
a shareholder's point of view, that whenever you make
an announcement of a new customer the stock responds
much more so than when you send out a press release
about some IP improvement or manufacturing breakthrough.
I know you know that it's important but I've been doing
this a long time and it's very important. |
Joseph
Cross:
President & CEO |
Listen,
I know it's very important. As somebody in the company
who talks to the investment arena and has to make presentations,
trust me it's highly awkward standing up and talking
about things without being able to name customers. So
I'm a little frustrated with it also, but I think we
had a certain path early over the last two years to
try to get some base business and sales and we had to
give some things away maybe. Going forward in the future
there's no doubt there's going to be major concern to
Dan's point. We have a major opportunity we're working
with, probably with a Fortune 50 company, and we think
this is a significant, significant piece of business.
If we ever mention their name, they'll walk in a heartbeat
because they're big enough, they don't care. They'll
just walk. And we brought a lot of value to this application,
things they've never seen before, but they're real funny
about it. So there'll still be customers where we won't
be able to talk about but going forward in the future,
we're going to take a position as well as we can with
customers that we're going to be able to talk about
customer applications. But that's not always going to
work for us. We're as sensitive to that as you are. |
| Todd
Cobey: |
Okay.
The other issue, which got kind of got lost, although
you did address it, was exclusivity. And again when
I had an opportunity to be involved in these kind of
negotiations, the one thing that keeps a big company
from putting it off and putting it off and the guy doesn't
want to write a memo to his boss and then the boss moves
on and somebody else comes in, is the fear that a competitor
will get a hold of the advantage that you've negotiated.
I just wondered if you're taking the same position if
you're taking a more aggressive stance on exclusivity
as well as confidentiality? |
Joseph
Cross:
President & CEO |
Yes,
we are. Now that we've got some base business and some
business in specific markets, we are much more askance
about giving away exclusivity. We will negotiate. In
fact, we are working with customers at this moment that
have asked for a three to six-month head start. I think
that's a fair discussion. |
| Todd
Cobey: |
Yes.
I do, too. |
Joseph
Cross:
President & CEO |
So
if they want a three to six months head start on the
market, I think that's fair, but we are not entering
exclusive agreements with anyone very easily at this
point in time. Now on the other hand, frankly, if somebody
brought a piece of business that was worth several million
dollars to this company and they wanted exclusivity
and we thought at this point in our lives that was a
reasonable business discussion to advance us to the
next level, I'm not sure we'd walk away from that necessarily
either. So I think it has to be looked at in context
of several different parameters, but in general we don't
give exclusivity away lightly. |
| Todd
Cobey: |
Thank
you very much. |
| Operator: |
Tom
Laird, please state your | |
