Solesence Inc (SLSN) 2002 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Nanophase Technologies First Quarter Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during , please press star then zero on your touch-tone telephone.

If anyone should disconnect and need to rejoin, please dial 703-871-3597. And as a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. of . begin.

Good morning, everyone, and thank you for joining us today to discuss Nanophase's first quarter results. By now, you should have all received a copy of the press release which went out last evening. And if anyone's missing a copy or a page from the release, please call our office at 312-640-6688 and we can resend the information.

Before we begin I wanna remind everyone that the words expect, anticipate, plans, forecasts, and similar expressions are intended to identify forward-looking statements. Statements contained in this conference call that are not historical facts are forward-looking statements and are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

These statements reflect the company's current beliefs, and a number of important factors could cause actual results for future periods to differ materially from those expressed in this conference call. These important factors include, without limitation, a decision of the customer to cancel a purchase order or supply agreement, demand for an acceptance of the company's nanocrystalline materials.

Changes in development and distribution relationships, the impact of competitive products and technologies, possible disruption in commercial activities, occasioned by terrorist activity and armed conflict, and other risks indicated in the company's filings with the FCC. At this point, I'll turn the call over to Joe Cross.

Good morning, and welcome to our conference call to discuss the first quarter of 2002. The Nanophase attendees for the session are Dan Bilicki, Vice President Of Sales And Marketing; Dr. Don Freed, Vice President, Business Development; Dr. Richard Brotzman, Vice President R&D; Jess Jankowski, Vice President and Controller, Dr. Gina Kritchevsky, Chief Technology Officer; Bob Haines, Vice President Of Operations; and , Director of Industrial Relations.

To begin, Jess Jankowski will review the financial results for the first quarter. I will then summarize the company's progress in the first quarter, after which Dr. Don Freed will provide an overview of the companies new business development initiatives and multiple markets. Dan Bilicki will address progress in the company's marketing and sales efforts. And expectations for the second quarter. Dr. Gina Kritchevsky will provide an update on our technology progress. Following our prepared comments, we'll accept questions that you may have -- Jess.

Good morning and thank you for your continuing attention and support.

Please keep in mind, all numbers are approximate. For the first quarter of 2002, our revenues were a $1,408,000 versus $1,072,000 for the same quarter last year, a 31 percent increase. The majority of our revenues continue to come from product.

We had $113,000 in gross margins for the first quarter of this year. This positive growth margin was achieved through a combination of favorable product mix and the fact that we are starting to see many of our manufacturing cost saving measures come true. We now feel that gross margins for the year, taken as a whole, should be positive. Given our visibility, quarter to quarter variability in various margin drivers such as product mix are difficult to predict.

The extent to which we remain positive, and the percentage of revenue, will be dependent upon revenue mix, revenue volume and our ability to continue to cut costs. Relative to Q1 of 2001, a major difference relating to the bottom line was the decline in interest income of $220,000. This was largely a function of pure funds available for investment, coupled with lower interest rates.

On the bottom line, we lost 11 cents per share for the first quarter of this year, versus eight cents per share for the first quarter of 2001. I would now like to spend a little time walking you through the major categories on the March 31st, 2002 balance sheet.

Again, all numbers are approximate. At March 31st, we had $5.5 million in cash and investments. You know, this might be a good point to take a step back and discuss the rate of expected cash burn in 2002, relative to that in 2001.

In 2001, we used $5 million in our operations, and used $5.5 million for capital expenditures to increase capacity and add capability as we've previously discussed. This was offset in 2001 by $300,000 in loan proceeds, net and principle payments. If we net these three items, cash outflows for 2001 were $10.2 million dollars. On a quarterly basis, this brought our total cash burn to a little over $2.5 million dollars.

For the first quarter of 2002, we used $900,000 in our operations, and spent about $1.1 million on capital, 75 to 80 percent of which related to the finalization of projects begun in 2000 and 2001. What I would like you to take away from this is that, in terms of cash flow, 2002 will not be a repeat of 2001. Our overall cash burn rate for 2001, and the first quarter of 2002, was heavily influenced by spending on capital.

Aside from any expanded working capital required to support a potential revenue spike which, by the way, I'm not forecasting here, we expect to see a decrease in cash used from operations for the balance of this year. If opportunities come before us that make business sense, but require significant capital outlay, we will finance them via other means than depleting our current operating cash.

Back to the balance sheet. At March 31st, 2002, Accounts Receivable amounted to $1.1 million. Eighty-five percent of our receivables were current, with only 3 percent being over 60 days. We expect all of our receivables to be fully collectable. Two reasons that are receivables appear large in relation to sales are that we have an accrued receivable, leading to a minimum royalty due us from a licensee, which amounts to $300,000 per year and is accrued at a rate of $75,000 per quarter.

Most of these monies are not due until the middle of this quarter. As the quarters go by, this builds our AR. It may lead people unfamiliar with this relationship to assume that we are not collecting on a timely basis. This receivable makes up 32 percent of our AR balance. Also, receivables from the company's largest customer amounted to 47 percent of the total. This amount reflects the percentage of their quarterly volume that shipped in March and was not due and owing until after the first quarter closed.

Moving down, inventory has decreased by $150,000 between the end of 2001 and March 31st. We have made every effort to keep inventories at the minimum levels that we can and still be able to service the needs of our existing customers. We continue to manage this situation closely. Another thing I would like to address on the March 31st balance sheet is the company's roughly $1.4 million of long and short term debt.

Eighty-six percent of this, which is currently classified as both current and long term, reflects funds received against the previously discussed $1.3 million loan from our largest customer. This loan was used to build a coding facility at Nanophase's Romeoville, Illinois location that has allowed the company to both strengthen its relationship with its largest customer, and to further extend our products in that customer's supply chain.

The other 14 percent reflects insurance premiums and leased equipment that management elected to finance. Lastly, we've also had a reduction of $390,000 in our Accounts Payable from the end of last year to the end of this quarter. This is mainly a result of making final vendor payments on our 2000 and 2001 capital spending plan. Generally speaking, in terms of our balance sheet strengths, the company is aware of its cash position, its business needs, and its contractual obligations.

We have no further comment on that at this time. Thanks for your attention. And I would like to turn things back over to Joseph Cross, our President and CEO.

Thank you, Jess. The first quarter, we believe, was an excellent start to Fiscal 2002, with revenue 30 percent above the comparable period last year, and increasing 14 percent sequentially quarterly. Business development activity remains strong, as Don will discuss shortly. And growth in our existing customer base has been good, as expected.

We continue to expect existing products and customer revenue to provide approximately $5 million in revenue in 2000, as well as provide an increasing revenue platform for 2003. As Dan will detail shortly, we continue to forecast approximately $3 million in revenue during the first half of 2002, which is a 40 percent increase over the same period last year.

The Nanoworks Synthesis Process Technology has progressed well, and we're beginning to commercialize our first product in the ultra fine polishing market, where the nanomaterial has enjoyed early initial success. Going forward, we continue to have significant expectations for this market and for the growth of new products from the Nanoworks Synthesis Technology, which we perceive as breakthrough technology, and well ahead of competitive technology.

Our application developments for new markets and new opportunities also made good progress. This is manifested in the three new patent applications to date during 2002. Gina will provide additional details in this area later in the conversation. From an operational perspective, we continue to perform excellently. Operations, that is manufacturing commercial quantity and quality nanomaterial solutions, has definitely become a core strength of this company, and a key differentiator in the emerging nanotechnology industry and the markets we can address.

During the first quarter, we continued to reduce manufacturing costs, which continues to increase gross profit. And we expect this activity to be equally as successful during the remainder of the year. We also completed operational implementation of the nano and equipment that is now in production on a two shift basis, five days a week, primarily for sunscreens and personal care products.

Equally as important to penetrating our target markets and revenue growth plans over the next 18 to 21 months, we completed installation of the new Nanoparticle Dispersion Equipment and began trial deliveries of nanoparticle dispersions and formulations to potential customers. Coupled with the application developments mentioned earlier, this is a significant capability for the company, and directly addresses the needs of potential customers who prefer nanoparticle solutions in a liquid matrix that is easier to handle in their production environments.

In summary, as I have stated previously, Nanophase entered 2002 with significantly improved market application capability and delivery tools than we entered 2001. We believe that the company has created an integrated series of nanomaterial technologies, from nanoparticle manufacturing to nanocoating to dispersion of nanoparticles in various liquid media.

We believe this is an industry-leading suite of technologies that allows the company to address significantly more markets, while increasing the probability of success and potential applications. We continue to believe that the company's technology advances, significant improvement in operations over the past 18 to 24 months, and a momentum in business development and sales, clearly differentiates Nanophase versus potential competitors in nanomaterials.

Lastly, before I hand the conversation over to Don, let me address yesterday's ill-timed press release regarding litigation against the company, which, by the way, is old news, since I know I will get a question and since it seems to have caused undue concern with some of our stockholders. The timing, we think, was irregular, and perhaps not coincidental, given that the action occurred four to six weeks ago.

The release, we think, left out some important details. First the suit was amended, as the release noted, since the company had filed for dismissal to their original filing. The release also failed to note that the company has already filed for dismissal again in response to the amended suit. Secondly, to the best of our knowledge, there is essentially only one legal firm with a Chicago connection involved in the suit.

Again, to the best of our knowledge, this suit was filed by one individual who purchased 200 shares of stock two weeks before the end of the fine period, and well after the information concerning relations with the European customer was publicly disclosed. And after all, the alleged misrepresentations had been absorbed by the market. No class has been certified in the suit. We believe that this suit is entirely without merit and are awaiting the court's ruling on our dismissal filing.

Let me also remind you, irrespective of this suit, that the company maintains sufficient DNO insurance. Beyond this, the company has no additional comments on the matter, other than to state that this was thoroughly discussed in the company's 10-K filing. Don, would you now please summarize the company's activities ?

Good morning, and thanks for your continuing participation and interest.

I'm pleased to report that customer interest in Nanophase capabilities and products remains high, particularly in two of the new market areas which I'll discuss in a few minutes. But I will also remind you that our potential competition routinely listens to our conference calls, so that we are unable to provide a lot of detail.

Also before I begin, I would like to mention that we've just added to our business development resources a new Director Of Business Development, Mr. , who comes to Nanophase with close to 10 years of business development experience in multinational companies. Greg has a BS in chemistry and an MBA, and will initially focus on creating additional opportunities in the ultra fine polishing, anti-microbial, and wear and UV resistant coatings market segment.

The opportunities that we're working on fall naturally into three groups: current business, which I will not cover, since that is normally not in the province of business development, but about which Dan Bilicki will be providing more information in a few minutes. Business development is really about positioning the company for future growth. And the programs that we are pursuing consist of short term opportunities, that is, those that we expect to mature to commercial scale in 12 to 18 months or thereabouts, and midterm opportunities, those which have a time horizon of 18 to perhaps 36 months or more.

Now, the advances in technology that we've been making, plus the significant capital investment in coating and dispersion facilities made during the past 18 months, are enabling access to significant new opportunities. For example, within the short term opportunities faced, the technology advances in our new Nanoworks Synthesis Process, coupled with our new dispersion line, are allowing us to provide highly uniform dispersion of nanoparticles for use in ultra fine polishing of semiconductor wafers, rigid memory disks, glass photo masks and optical lenses, all new market areas for Nanophase.

Customers are reporting to us that they are achieving significant reductions in the number of defects produced during wafer polishing, and vastly improved selectivity with the company's nanocrystalline particles, as compared to competitive material.

We continue to make progress in another very exciting short term market opportunity, anti-microbial applications. We believe that this is due to the large surface area of our materials, which makes them effective against microorganisms, and their insolubility in water, which provides a degree of permanence.

The first of our customers to use our nanocrystalline materials for water purification products is, we believe, nearing production. And we are seeing strong interest in the evaluation of our nanocrystalline particles for antimicrobial protection for hard surfaces.

In the textile nanotechnology area, we noted during our last call that we were working with industry leaders in the nylon, polyester and polypropylene fibers markets. We're developing surface engineered nanoparticles that can be incorporated directly into fibers to develop better wear and UV resistance properties. Our surface treatment and dispersing technology, covered by our recent patent application filings, is important here, because that is the enabling technology that makes our nanocrystalline materials compatible with the polymer fibers.

I should mention, however, that this application probably falls into the midterm market category in terms of timing to commercial production. In addition to the above, we continue to develop applications in the areas of lighting, and in microelectronics.

In the latter, we are co-developing applications with a number of lead customers for photo printing, specialty products for digital printing, and photocopying, to name a few. And, of course, we have an ongoing effort in nanocoatings. All told, we're quite optimistic about our prospects. And within the markets referred to above, we're currently pursuing between $20 million and $30 million dollars worth of potential opportunity.

I do need to remind you, however, that the decision to use our product is often a binary decision. And that, coupled with limited visibility, makes it difficult to predict just when a particular application will result in production orders. Now I'd like to turn it over to .

Thank you, Don.

Good morning and again, thanks for your interest in Nanophase. As reported, total revenue for Q1 was $1.4 million, with $1.29 million, or 91 percent, being derived from sales of products.

The product sales revenue represents a 31 percent increase over Q1 of last year, and 11 percent increase over last quarter. Q1 product sales into the personal care business were two percent ahead of plan. Projections for the first half of 2002 put personal care sales volumes at eight percent above our forecast.

Personal care business is the largest segment of Nanophase, and new application opportunities for our products are rapidly developing. It is expected that product revenue from personal care market segment for 2002 will exceed 2001 by 30 percent. Product sales into our flooring applications for Q1 were 17 percent ahead of our annual plan, as one of our customers launched a new product line, resulting in increased product sales from filling the pipeline.

The first half outlook for these applications is projected to be nine percent ahead of plans.

Sales revenue from environmental customers in Q1 was 32 percent of our annual forecasts, due to heavy demand from a major customer. Product sales into this market segments for the first half of '02 are expected to be slightly ahead of plan.

As reported during our last conference call, technical advances made in manufacturing of crystalline particles by either Nano or process, or Audrey, as it was previously called, have opened up significant opportunities in the ultrafine polishing market.

Applications in this market segment include ultrafine polishing of semiconductor wafers, rigid memory disks, rewrite heads, glass photo masks, and optical lenses. As a result, sales revenues generated in ultrafine polishing applications increased from a low base in Q4 of last year by 76 percent in Q1. Revenue generated from Q2 sales in this market segment is expected to increase over two one by five fold.

With product shipment to date, purchase orders and annual supply agreements in hand, the company has a current ship and order backlog of approximately $5 million for 2002.

Which, of course, is 24 percent ahead of the total revenues generated in 2001. Second quarter sales revenue for 2002 will be in the range of $1.6 million, resulting in a revenue for the first half of 2002 of three million, a 40 percent increase over the same period in 2001. Now I'd like to turn the meeting back to Joe Cross.

Thank you, Dan. Dr. Gina Kritchevsky will now provide an update on technology progress.

Thank you, Joe.

Good morning. I'd like to take this opportunity to provide an update on several development efforts, program, progress in the protection of our intellectual property, and some of our recent endeavors to broaden our awareness of nanotechnology advancement in the business and potential government funding arenas, as well as technology. And lastly, to increase the visibility of Nanophase within these forums.

We've been developing and supplying to our customers new and improved nanoparticle dispersions for use as abrasives in various polishing applications such as photo mask and semiconductor wafers. These products demonstrate further commercialization progress of our nano produced nanomaterials.

We are also developing zinc oxide and of zinc oxide for several applications requiring antimicrobial characteristics. Formulation development for abrasion resistant coatings also continues to be a very active area. In total, we have over 150 samples under evaluation at customers and potential new customers. We continue to build in the area of intellectual property, with patent applications filed this quarter covering aqueous nanoparticle dispersions at various pH ranges for multiple applications, composite catalyst systems, and an application covering extensions and improvements of our core nanoparticle synthesis technology.

The U.S. Patent Office has allowed our patent on transparent conductive coatings containing nanoparticles. The emerging fields of nanoscale science, engineering and technology are continuing to attract more and more interest and attention, and of course funding. We see this reflected in the increasing number of university research programs in the nano area, and the resultant spin-off companies.

In the government funded nanoprograms both in the U.S. and in countries such as Japan, Germany, the UK, and others, there are also an increasing number of nanotech consortia.

And most technical organizations have included at least one nanotechnology symposium in their annual meeting. I think that one could easily attend a nanotech meeting every week of the year . Over the next several years, I believe there will be a , and the stronger players will emerge in each of these areas. Certainly improvements in product costs and broadening our intellectual property portfolio and our customer base are helping to establish Nanophase as one of the strongest players in the nanomaterial segment.

However, in order to better position ourselves for the shakeout, we're increasing our efforts, evaluating the merging nanomaterial technology for potential acquisition or licensing. We're expanding our presence at a number of industry and nanotechnology meetings in order to ensure that Nanophase remains at the forefront of nanotechnology, and the leading producer of nanomaterials, and more importantly, nanomaterial solutions.

Thank you, and I'd like to turn it back over to Joe Cross.

That concludes our prepared comments at this time. We're open to your questions.

Thank you, sir. Ladies and gentlemen, if you have a question at this time, please press the one key on your touch-tone telephone. If your question has an answer, or you wish to remove yourself from the queue, please press the pound key. Once again, if you have a question, please press the one key on your touch-tone telephone. Our first question comes from of Brewster Asset Management. Your question, please.

When you talk about the size of the total potential opportunity in front of you as a specific dollar amount, does that mean the revenue per year, or total for the project:

respond to that.

Yes, in terms of the potential opportunity, that's the value of the opportunity in a year. OK, then annual revenue per year, but of course, does that answer your question?

Yes. I have a further question. I thought I heard the prior speaker talking about a shake out, was I, did I understand that correctly? If so, why would you oppose such a shake out, if coming in such a young industry?

What I'm talking about is the large number of meetings, what you see very often is the same speaker giving the same talk four, five times.

OK, generally, when an industry is new, all the different organizations, the chemical society, the physical society, the material society, the chemical engineering society will all have meetings in this area. And then, over time, one or two of these organizations will kind of take ownership for the area.

OK, so you're not talking about a of the demand for the product relative to the supply?

Not at all. Not at all.

OK, thank you very much.

Thank you, sir. Once again, ladies and gentlemen, if you have a question at this time, please press the one key on your touch tone telephone. Our next question comes from of . Your question, please.

Hello, gentlemen and women. The question I have relates to the forecast for revenues, which you know, the initial indications are probably a little bit more encouraging than I realized, and I see that in stating the $5 million expectations for the year, you've left it to merely what's there been shipped or, or possibly booked for the rest of the year and leave very little additional for the, for the imagination in terms of expectations going forward.

So if you've already got this under control right now, $5 million comfortably, couldn't you be a little bit more expansive? Or is the climate so perverse and negative that you have to be this conservative?

OK, , this Joe. I want to make sure people understand this. The way we're trying to communicate with the investment community is we're trying to, we're trying to provide a base forecast with existing customers and existing products. Which is the $5 million number. And as the growth, as Dan mentioned, we think we'll grow 30 percent and by the way, we think there's potential upside in the $5 million revenue base for 2002., with existing customers and existing products, primarily in the personal and healthcare markets and ultrafine polish.

However, on top of that, we expect to close some of this new business that mentioned. What we are not forecasting and really, don't have the visibility to forecast is, is the actual timing and quantity of these. We are in at least two very dynamic situations on that front with new business, and in close discussion with potential customers, but the fact is that we still are not comfortable, that we understand the timing and, and we think, we think obviously, referring back to my comments on the press release from the legal firm yesterday, the climate is so perverse that we're going to fail-safe relative to forecast, rather than expose the company to what we consider to be trivial law suits.

Because it, so that's kind of what we're doing and, and frankly, we're going, we're going to try to provide as much guidance as we can, but we believe it's going to be on a quarterly basis, pretty much as we said in the earnings release. Right now, we can forecast very accurately the second quarter, which we forecast at a $1.6 million and frankly, that's a lock. We cannot forecast yet the third quarter because we still have issues with two very large customers in a state of flux.

can tie down the numbers. But we probably won't have them tied down for a couple weeks and as soon as we do, we'll issue guidance on the third quarter.

OK. That's a help, actually. Thank you very much.

You're welcome, .

Thank you Sir. Our next question comes from of Target Capital Management. Your question please?

Good morning. I'd like to see if I could get a little more color on the probability of market acceptance of some of the initiatives that you have underway. Obviously, with a hundred and fifty samples under evaluation at customer locations, you cross many industry boundaries.

And what I'd like to know is, if you can give some more information about the likelihood that your innovations will reduce customer costs. That is to say that they will be able to bring out products that will lower their production costs or the degree to which they will be required to substantially change the way that they manufacture their products, resulting in considerably more capital expenditures, in order to be able to introduce these products?

OK, , let me start responding to that and I'll ask to pick it up. You know first of all, you know the samples that we mentioned now, these are all engineered samples. These are all samples that we've engineered with our application science team. Working with customers for a nanosolution to a problem. The only way we're successful, by the way, in closing the deal or getting a production contract if when we provide system value.

In all the customers that we have right now, we are providing system value on a system wide basis, even though they're paying between five and ten times, say, more for nanomaterial solution versus more of a commodity material solution. On a total system basis, they're saving an awful lot of money, or they're getting an awful lot of benefit. And I could discuss several of those in detail, in that regard.

In regard to the hundred and fifty samples, the timing of those is very difficult to predict and let me tell you why. We are dealing with some major corporations in central research. These are glacial responses that we get from these companies. In other situations, we're dealing with part of the research organization that's much closer to the customer and much closer to the product delivery, where things move much faster and we have several, we have several situations in that.

So it's hard to make a general statement dealing with Fortune 100 companies as to how long these things are going to take. OK, and I'll let Don pick up the response.

There's another, there's another side of this, Steve. Some companies come to us with problems because they do want to lower their system cost. A lot of companies come to us with problems because they want to offer improved performance in the market place. A good example of that is our flooring, you know, one of our flooring customers in vinyl flooring.

Where they get a significant benefit from incorporating our materials into their flooring. They get much better wear resistance. So what they're looking for is to increase market share. As an example of that, what they've done is, is introduce a second product, which is a similar based product, but it's one of the first vinyl products to achieve the light industrial use category.

This hasn't been done before. We believe our materials make that happen. So there's that aspect of it. In the ultrafine polishing area, system cost is important, but also performance is important. If we can provide a system of particles that enables a manufacturer to reduce defects by a significant amount, the end user gets higher throughput and better yield. So that, while it, that de facto lowers the system cost, but they also have a better product.

So, those are the two main categories. Lowering system cost, even though the price per pound may be higher, or significantly improve performance, which means greater market share.

And I just have one follow question and that is in the past you've discussed your progress toward a sixth sigma level, is that correct?

Yes Sir.

Could you describe what that means and where you are in that progress?

I'm going to ask Bob Haines, our Vice President of Operations, to respond to that.

We focus on continuous improvement. Whether it's part of quality, whether it's part of cause.

We measure ourselves against process standards and right now, much of our operation is approaching six sigma. We went from one and two sigma two years ago to five sigma last year and our goal is, in terms of consistency of product, consistency of yield and output, is to reach six sigma this year. And, of course, the benefits are a more consistent product to our customer and reduced manufacturing cost for us.

Bob, why don't you elaborate on exactly statistically what six sigma means.

Well, six sigma is, we take the process average and we look at the standard deviation and we always operate our process with plus or minus six standard deviation units from the process mean. So we have a very, very tightly controlled, predictable process.

This is the same program, this is the same program that Motorola has gained such fame for. OK, it's really, you know for a small company, and we're still only about 58 people or so, we are pretty, I believe, state of the art, as far as manufacturing prowess and I think that comes from having a senior management team that spent time in big companies and small companies, quite frankly.

Getting close to six sigma is quite an achievement for any company, to be real frank with you. And the lean manufacturing system that we, that Bob put in place and we're evolving now to reduce set-up time, to reduce product cost and to control the supply chain, is really pretty leading state of the art manufacturing excellence.

It's very impressive, thanks very much.

Thank you, sir. And the next question is a follow up from Bruce Brewster of Brewster Asset Management. Your question, please.

In looking at the sales outlook for the second and third quarter, obviously, you haven't put together the outlook for the third quarter, but would you consider whatever your achievement is in the second quarter to be a base from which to grow the third quarter? Or is it such that orders are delivered in a fashion that second quarter business might not be receivable in third quarter.

Bruce, we expect sequential quarterly growth throughout this year. That's our expectation. OK. So we expect every quarter to increase. First, you know, fourth quarter to first quarter we increase 14 percent. Second quarter to first quarter this year, we increased 14 percent. We expect third quarter to be a sequential increase to second quarter. We just can't predict, at this moment, the revenue dollars and the amount of increase.

Nor can we predict it for the fourth quarter, but we expect to leave again, the first half of this year, with three million in revenue, or 40 percent above last year. And we expect that rate of shipment to increase in the second half.

But in the accomplishment of that goal, do you see repeat business from customers every quarter, or do they order once a year, or once a month. Is it a steady flow of business from your plant to customers every quarter?

We, we've seen continuous improvement in our customer base, as indicated by the growth of our backlog and our order ships so far this year. Up to five million. If you recall, last quarter's conference call, we indicated that the, we looked at this year, but we only had four-and-a-half million. So we, you see that there's an ongoing improvement in that.

And what, the two piles we're looking at is the pile of business that we have as an ongoing business that is growing on fairly solid regular base, and the new business potential that we hope to start to bring through in the second half of the year.

I have a further question and it pertains to the uniqueness of your product. We've heard about several products maybe you could use them for example, you have zinc flooring and . Are these products unique or in that other customers cannot produce these, or are they subject to price competition from competitors?

this, , let me handle this. At the nanoscale, particle properties depend on several parameters. Our technology, quite frankly, we believe controls most, if not all those parameters and every time, every month, every year we get better control in this. So we have been able to achieve pretty significant control over the properties that influence the attributes of materials at a nanoscale.

Quite frankly, one can change one of the attributes of a given material at the nanoscale and have entirely different properties and different attributes and different performance. So it's kind of like somebody made a reference to this and we kind of stole it and used it, but it's kind of like the periodic table of the elements goes 3-D at the nanoscale because you have, because of the ability you have to engineer the materials.

So in zinc oxide. We make three different types of zinc oxide on a routine basis. One particular type, we believe, is applicable to electronics applications. And Don mentioned that the niches in electronics that we're looking at now. Another type is really good for SPF ratings and sunscreens. Another variety we think is very good in personal care applications and anti-fungal applications. We think this is a unique capability, quite frankly.

Excuse me?

You say this is unique.

We think, we.

Others do not make that same, those same three types of zinc oxide.

Not to the best of our knowledge. There are people out there now, I don't want to mislead you. There are people out there who make zinc oxide.

We don't believe that anybody, necessarily makes nanoparticles zinc oxide with as much purity as we do. Conforming to all, all the, all the requirements that we make it. Doesn't mean that somebody won't come up and develop that capability. But right now we are not seeing severe competition.

So you should be able to sell your product on a value to the consumer basis? Now you said the consumer basis, it seems to me, extraordinary, for instance, in flooring. Your ability to increase the wear of floorings that are very significantly, increase the value of their flooring.

You're absolutely right. However, there is always limitation because there are other ways of doing things. And when you -- pricing has to extract, first of all, a fair value, so that both the customer and Nanophase can draw the benefits from this. But there's also, you never ever find a company or a situation that is, where you have an unfettered position and no one else can match you. Because there's always ways around it.

OK, thank you very much.

Thank you, sir. Our next question comes from , from . Your question please?

Mr. , your line is opened. Mr. ?

Mr. Cross, it appears at this point, we have no further questions. Would you like to with any closing remarks?

Yes, we'd like to thank everybody for their interest and attention, and if called, I'd like him to notice that we, the company splurged and brought in conference phones, so the sound clarity was much better, .

Thank you again and we'll talk to you next quarter.

Ladies and gentlemen, thank you for participating.

END