Solesence Inc (SLSN) 2003 Q2 法說會逐字稿

Ms. Baldwin, you may begin your conference.

Thank you. This is Nancy Baldwin. The words expect, anticipates, plans, forecasts, and similar expressions, are intended to identify forward-looking statements. Statements contained in this news release that are not historical facts are forward-looking statements that 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 factors could cause actual results for future periods to differ materially from those expressed in this news release.

These important factors include, without limitation, a decision of a customer to cancel a purchase order or supply agreement, demand for and acceptance of the company's nanocrystalline materials, changes in development and distribution relationships, the impact of competitive products and technologies, a possible disruption in commercial activities occasioned by terrorist activity and armed conflict, and other risks indicated in the Company's filings with the Securities and Exchange Commission. Nanophase undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.

Now I'm turning the call over to Joe Cross, our CEO.

Thank you. Welcome to the Nanophase conference call to discuss the second quarter and first half of 2003. The Nanophase attendees (ph) the session besides myself is just Jess Jankowski, Vice President and Corporate Controller. The other Nanophase officers are not available for the conference call. The agenda for today's discussion is first, Jess will review the financial results for the quarter. I will then return to summarize the Company's progress during the first half, review our sales target markets and update business development initiatives. After our prepared comments, we will be available for questions.

Jess, would you please review the financial results for the second quarter?

Good morning, and thanks you for your continuing attention and support. Keep in mind all numbers are approximate. For the second quarter of 2003, our revenues were 1,308,000 versus 1,662,000 for the same quarter last year. For the six month period ended June 30, 2003, our revenues were $2,972,000 versus 3,070,000 for the same period last year, a 3 percent decrease.

For purposes of this discussion today, given the quarter-to-quarter variability of the business, I will speak mainly in terms of six-month numbers, which are more representative of the financial condition of the business. Lower product sales to our largest customer, combined with no volume from two of our smaller but consistent customers for the first half of 2003, has resulted in a reduction in product revenue of $570,000 for the period.

This reduction was partially offset by sales volume from Rodell (ph), which we expect to be our second largest customer in 2003. Of the $401,000 in other revenues thus far in 2003, approximately 240,000 related to the sales of a PVS reactor to C.I. Kasei, our Japanese licensee, to support demand from their customers. The majority of our total revenues continue to come from products.

We had $190,000 in gross margin for the first quarter of this year versus a $373,000 positive gross margin for the same period in 2002. If we dig a little deeper, we see that the decrease in margin has been driven by the increase in depreciation, along with the relative size of our fixed manufacturing overhead. Our direct labor and direct materials costs, as a percentage of product revenue, have gone down by 50 percent between these two periods.

This decrease in variable costs reinforces management's view that incremental increases in product revenue will prove to strongly enhance gross margin, given that costs relating to added revenue will amount mainly to variable costs. Based on Q2, '03 data, annualized depreciation expense recognizable as part of the fixed costs of manufacturing, currently amounts to $1.1 million. At the beginning at this point, I had said that the gross is for the first quarter -- it's the first half. We had $190,000 in gross margin for the first half of this year versus $373,000 for the first half of last year. I mis-spoke there.

Continuing on, management expects that gross margins, taken for the year as a whole all, should be positive. Given our visibility, which is limited, quarter-to-quarter variability in various margin drivers such as product mix and volume are difficult to predict. We continue to aggressively attack variable product costs.

Moving down, research and development expenses down about $35,000 from the first half of last year to the first half of 2003. This reduction is due mainly to bonuses accrued in 2002 being higher than bonuses accrued in the same period in 2003. As an aside, no bonuses were paid either for 2002 or 2003 in this period.

SG&A increased by $89,000 in the first half of 2003 compared to the same period last year. There were a few compensating changes within the category that will impact future costs. Director compensation appeared to go down by $130,000, given that it was recorded in lump sum in Q1 of '02 and began to be accrued monthly in 2002 also.

This resulted in twice as much total director compensation being recognized in 2002, the year of the change in recording convention, than in 2003. An offset to this favorable variance was that business insurance costs and legal fees relating to our current securities litigation increased by almost $300,000. On the bottom line, we lost 20 cents per share for the first half of this year versus 20 cents per share for the first half of 2002.

Now, it should be noted that on an annualized basis, the Company will now recognize approximately $1.5 million, or 10 cents per share, in depreciation and amortization expense. This total was up 375,000, or 2.5 cents per share from the annualized number at June 30th of last year. Without this additional depreciation, the loss per share for the six months ended June 30, '03, would have been 17.5 cents per share, not 20 cents per share.

As I said last time, management has not let up in terms of cost containment. We have been driving discretionary costs out of the business as opportunities arise. Part of the cost escalations or apparent lack of substantial cost reduction progress you're seeing relates to those costs that we can't control. Insurance and legal costs continue to be difficult to manage. Audit fees, along with securities-related legal fees, continue to climb with the advent of all the shareholder protection legislation that has been passed in 2002 and continues to be expanded in 2003.

I'd now like to spend a little time walking through the major categories on the June 30th, 2003 balance sheet. Again, all numbers are approximate. At June 30th, we had $5.4 million in cash and investments. Accounts Receivable amounted to $830,000. Ninety-seven percent of this balance is current, and management expects all of it to be fully collectible.

Receivables from the Company's largest customer, Ann (ph) Rodell (ph), its new policy customer, amounted to 78 percent of the total. This amount reflects the percentage of their quarterly volume that shift in June and was not due in owing (ph) until after the second quarter close.

Moving down, inventory has decreased by $144,000 between the end of '02 and June 30th of this year. We have made every effort to keep inventories at the minimal levels that we can, and still be able to service the needs of our existing customers. For the half-year ended June 30th, '03, inventory turns amounted to seven times annualized total sales. Keep in mind that this number was five times at December 31st of '02.

Nanophase is often subject to rapid changes in its customers' demand for product on a quarter-by-quarter basis. Given our current visibility, which is still not much better than 60 days, and a reliance on one very large customer, one growing customer, and several other smaller customers for the lion's share of our volume, quarter-to-quarter comparisons don't always yield meaningful information. We continue to manage inventory levels closely.

Nanophase anticipates spending approximately $325,000 in capital for new projects in 2003, along with some smaller expenditures to close capital projects that began last year. Through June 30, the Company spent $156,000 on CapEx. For comparative purposes, the Company spent more than $550,000 on CapEx during the first six months of last year, and a total of $1.7 million during the whole of 2002.

Another thing I would like to address on the June 30th balance sheet is the Company's roughly $1.2 million in long and short-term debt. The majority 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, which is being paid back on a (indiscernible) product shift basis.

As you may recall, in March, this customer agreed to change some of the covenants of the loan agreement in order to ease any potential financial pressure on Nanophase. The balance of the $1.2 million in debt reflects insurance premiums and leased equipment that management elected to finance.

Thanks, again. I'd like to turn things back over to Joseph Cross, our President and CEO.

Thank you, Jess. As we have stated previously, most recently, at the June stockholder meeting, the Company remains focused on four integrated key strategic goals -- technology accumulation leadership; solution delivery capability relative to target markets and lead (ph) potential customers; operational excellence; and lastly, but most importantly, revenue growth and financial performance. Relative to the first half, I'd like to summarize the Company's progress towards each of these.

Nanophase continues to add to its intellectual property. The company now has 22 U.S. patents and patent applications, 24 foreign patents from patent applications, and has amassed considerable proprietary technology. We have additional patents and patent (indiscernible) in the pipeline and expect the continuing (indiscernible) in our intellectual property to stay in both nanotechnology and application for nanomaterials.

Towards (ph) the Company's solution delivery goal we believe that that goal, which we established during 1999, has been largely fulfilled relative to our current target markets; for further refinement improvement will continue. Nanophase now has two distinct but synergistic processes to create novel nanoparticles, the PVS process that was the Company's original technology, and the recent NanoArc? synthesis technology. To this we have added and continue to refine our service modification technologies. This technology spans insutu (ph) technology, which modifies a nanoparticle surface as it is created, to various coatings designed to meet specific applications.

Further, the Company is able to take these nanoproducts and supply them in dispersions, formulations and coatings, depending on market or customer need. So Nanophase currently markets and delivers nanoparticles in the form of nanopowders, coated nanoparticles, an example of which is sunscreen nanomaterials, and nanoparticle dispersions, primarily for the several polishing markets we are entering. This platform of integrated nanotechnologies has greatly enhanced the Company's ability to penetrate markets and succeeded in applications.

Towards our goal of operational excellence -- Nanophase has an integrated engineering and operations function that delivers current products to customers, creates new nanomaterials and refines and improves processes. As we demonstrated at the recent stockholder meeting, this group continues to deliver impressive results (indiscernible) new nanomaterials and improving (indiscernible) as reducing variable manufacturing costs. So we began to suffer (ph) in 1999 in PVS process, which included recruiting the engineering talent to fulfill the mission.

Reactor output has increased over four times; direct labor has been reduced by 75 percent; material handling, which once required three people per shift, has been eliminated; and process control has been approved from the one sigma level to now well over five sigma. This continuing effort is still producing remarkable results during 2003. For example, comparing the first half of 2003 to the same period in 2002, Nanophase is producing the same volume on two shifts that previously required three shifts.

During this evolving, continual improvement during 2003, we have been able to reduce labor by another 20 percent and approve output per hour worked by over 15 percent. In our relatively new NanoArc? synthesis manufacturing area, we have improved process utilization by about 30 percent, meaning more production per dollar of asset. Looking forward, we expect to increase PVS ray (indiscernible) output by another 25 to 30 percent by mid '04, and continue reducing variable product costs to increase gross margins.

In parallel, the Company's highly integrated quality infrastructure is delivering impressive results. Both of our facilities were certified to the new ISO 9001/2000 standards during April. ISO certification is a critical company attribute to our current and potential customers. Nanophase continues to experience zero customer product returns, and a customer service rate over 99 percent.

Nanophase takes the same mentality of excellence with our environmental health and safety regulations. From an employee health and safety perspective, Nanophase has now over a half a million man hours worked without a loss time accident.

Environmentally, the Company is a solid corporate citizen and has enjoyed excellent relations with federal and state regulations. Moreover, Nanophase has reduced waste nanomaterials and air emissions by over 80 percent during the past year.

In summary, Nanophase operations and processes continue to be very demonstrably scalable and highly controllable. The company has instituted management and manufacturing practices normally found in more sophisticated, larger companies. The results of these efforts are clearly appreciable, and will help drive the Company's future success. (indiscernible) our remaining and most crucial goal, that is revenue growth, leading the financial performance.

Let me read you the Company's business and market development sales initiatives. Currently, increasing revenue is the Company's first priority and drives the financial performance desired. First, Nanophase remains highly focused on specific markets and within those markets, target customer company-development (ph). It is important, I think, that investors understand the rationale for this.

While Nanophase has rather unmatched expertise in nanomaterials, we do not have the expertise, personnel nor equipment to empirically test nanomaterials (indiscernible) most specific applications or relative to performance requirements. Understand that application performance is not always well-qualified. Equally true is that there are not always tests able to simulate performance. Nanomaterial performance has to be actually evaluated in the application. For that reason, a potential customer is required to co-develop nanomaterials solutions and generate the performance stated (ph) to demonstrate success.

Secondly, many of the (indiscernible) partners also offer a global sales distribution capability and establish market presence and customer base, which Nanophase could not hope to match (indiscernible) size. In some markets, an example of which is semiconductor polishing, our (indiscernible) partner, in this case Rodell, also has complementary product offerings and a global customer technical service capability that is vital to the success in this market.

Relative to markets, we have differentiated market opportunities as current and near-term, midterm and mid to longer-term based on our perception and estimates of probable time to market. However, the company is now (indiscernible) the point in time that a spectrum of potential opportunities is being managed to create a corollary spectrum of revenue growth opportunities.

Relative (ph) to current and near-term markets, we believe that a major growth area continues to be personal care and including (ph) sunscreens. In the latter area, our nanomaterials are currently being used by consumers in both daily wear applications and beachwear sunscreen products in the U.S. and Asia. An example of beachwear is Coppertone's new Spectra 3 line that contains our nano zinc oxide. While daily wear products are best noted by the Olay product line.

Additionally, with our partner, we're developing a generation two Nanocoated (ph) material for sunscreens that is primarily directed towards the European market, and (indiscernible) targeted market introduction by mid-2004.

Additionally, our nanomaterials are being used in personal care products such as foot powder and skin care products. We're targeting additional applications in the personal care market working with several companies that are in various stages of the business development cycle. We're (ph) now at liberty to discuss specific applications. The company currently expects appreciable revenue growth in this market area during 2004 to 2006. While I'm not making a forecast here, annual revenue for these products have the potential to at least double over the next two to three years.

A somewhat overlapping market area, in the microbial applications, includes some personal care items, fibers filters and textiles plus others. The Company believes that nanomaterials offer increased coverage and persistence in applications. Nanophase has several potential customer specific initiatives in each of these general areas.

Continuing with current and near-term markets, we continue to believe that polishing applications for semiconductor photomasks (ph), optics and disk drives are potentially strong revenue opportunities for the Company. To understand the size of this opportunity somewhat, let me provide the following information. Total polishing slurry (ph) value, that is not our material value nor expected revenues for polishing, is estimated to be over 900 million by 2005 by independent sources such as Klein & Company and Gartner Dataquest. Approximately 72 percent of this will be semiconductor polishing.

Key market drivers going forward, for semiconductors are new technology nodes (ph) that include smaller circuit line with larger wafers, new materials and increased number of polishing steps. In all of these, we believe that nanoparticle dispersions may play a significant role.

The current Nanophase Rodell, nanoparticle slurry, is formerly directed at SDI (ph) and SON (ph) Technologies. SDI is approximately 50 million in slurry value, and growing at a compounded annual growth rate of 50 to 20 percent by several estimates. We do not have reliable figures on the SON portion of the market, but we currently believe that it may be some two to three times the size of SDI, and appears to be growing rapidly. This product is now being introduced to the market, focusing on the top 10 to 12, top-tier semiconductor manufacturers, and early results have been very encouraging.

Production trials have reported improved planarization and significantly improved defect levels, up to a 75 percent improvement, frankly, relative to the materials currently on the market. However, the speed of market acceptance and adoption is just not predictable at this time.

Additionally, Nanophase is developing new nanoparticle dispersions that are in early stage testing for other technology segments for semiconductors. Nanophase's NanoArc? synthesis and dispersion technologies are a critical advantage in this market. They allow the company to provide an evolving platform of nanomaterials, including single crystal mix elements, and highly stable dispersions to address current and future technology nodes for semiconductor manufacturing in a manner that we believe is unique. In total, the Company's development efforts are currently directed to provide nanomaterials dispersions, including the newer mixed element nanoparticles, which we believe should potentially address well over 50 percent of the semiconductor market by 2006. Disk drives are expected to account for about 20 percent of this polishing market, or about 180 million in slurry value. Again, that is not our material value or perceived revenue.

Technology drivers that we believe may be addressed by now in particle dispersions are a shift in substrate materials to glass and ceramic compensations (ph), and increased surface finishing requirements. In initial testing, our nanomaterial dispersions appear to provide improved planarity, high selectivity and a very low (indiscernible) surface finish. One major disk drive manufacturer has indicated that a company that it plans to use our nanoparticle dispersion for its 2004 product launch. Nanophase currently has expanding customer focus to (indiscernible) in this area.

Precision Optics, a relatively new initiative for the company, is predicted to be about 8 percent of the polishing market in 2005 or about 70 million. Again, that is slurry value. We believe that nanoparticle dispersions potentially address lower surface roughness requirements for laser applications, and high-end imaging applications. We have initiated customer testing for specific applications and expect to enlarge our testing efforts.

Lastly, photomask. What we currently have for commercial product is expected to be about a $10 million market in slurry value in 2006. Our materials have been demonstrated improved planarity surface finish and the ability to polish some of the new ceramic materials coming into the market. A paper presenting photomask polishing improvements due to Nanophase nanoparticle dispersion is being presented at a major photomask conference in mid-September by one of our co-development partners. Nanophase is currently working with photomask manufacturers to expand this market penetration and product line.

Continuing with current and near-term markets, the company is still focused on transferring functional coatings for various markets. Examples include flooring, where we have a current customer, auto finishes, plastics, wood finishes and over-print (ph) varnishes. In the mid and long-term markets, that is relative to expected time to market, Nanophase has efforts in biosites for marine antifiling (ph) and wood treatment, catalysts, including catalytic converters, thermal spray and fuel cells.

Finally, the company has several specific development initiatives that do not fit neatly into any of these categories, but nonetheless represent significant future potential revenue opportunities.

In summary, the Company is focused on five major market areas -- antimicrobial applications for personal and industrial products; personal care, including sunscreens; abrasion and scratch resistant coatings; catalysts and polishing markets. The Company business development marketing efforts have been significantly improved and expanded during the first half of 2003. We believe that our efforts are well-directed and robust. We fully expect these markets and the additional opportunities I mentioned previously to drive the Company's revenues. That includes our prepared remarks.

We are available for questions.

Donald Hutchinson (ph) with Merrill Lynch.

Good morning, Joe. I just have one question. I think that most folks who are long followers of Nanophase are probably most frustrated by the lack of, you know, new orders, to be honest. I am curious. You just mentioned that there were substantial improvements in the marketing effort over the last six months. I am curious to know exactly what those are, and exactly, you know, based on what they are, where were the problems before?

One of the things that I guess I have been frustrated with, myself, is that, when we classify these product initiatives into long-term, short-term, you know, whatever -- the question remains is -- what happened to the short-term ones? You know, that time frame on many of these things has gone by long ago. So, if you could address that, I would appreciate it.

You know, relative to our focus, especially this year, we have been really focusing on the polishing markets. The materials that we're producing for these markets in testing today, have just shown pretty extraordinary performance, whether it's in semiconductors photomask or hard disk drives. And even some of the newer optics things that we are doing. And, we pretty much directed a lot of our energy towards that market.

Now, we're not neglecting some of these other markets, but we're just having such success, frankly, introducing these products. The product introduction cycle has been slower than we anticipated, Don. And, it's been slower than actually Rodell anticipated. I don't think this is surprising. I've talked with CTOs of a couple of major corporations lately, that are significantly bigger than Nanophase. And major companies are seeing the same thing. Product introduction cycles are just taking longer in the marketplace at the current time. I think it's due to the softness of the manufacturing sector, at least that seems to be the common wisdom.

So, most of our efforts have been directed towards the polishing market. I think, in the first half of this year, we made major progress in the hard disk drive market. And, I think the fact that a major manufacturer has indicated to us that they intend to use our products in their 2004 product launches is significant. I mean, that's a relatively new activity. We have had very good success expanding our initial effort, introducing polishing materials in the SKI/SON (ph) market, from one focal point to 10 to 12 now. And, we've expanded it from the U.S. to Asia, and Europe. So, that's been a fairly significant effort for us and for our partner. So, that's been our primary focus.

You know, relative to the business development effort, we brought Dr. Ed Ludwig in about four months ago, and Ed's doing a really good job for us, organizing and providing a lot of energy. We also just added a new person as a manager of customer service that's upgraded the talent in the area a lot. So we've got some new talent in the business. We have kind of refocused our things, based on what we see in the market arena at the current point in time. It has been very fluid out there, at least, from maybe my myopic perception of reality.

The sunscreen market -- the sunscreen demand -- has been unfortunately down in the first half that we did not anticipate. According to our partner and other people we have talked with -- in fact, there's independent data in like Business Week -- sunscreen materials are not selling because the east coast has had so much rain, and a lot of the U.S. has; it's been a wet summer and a wet spring. So the sunscreen sales are down in the U.S.

We also had one of our customers, a foreign customer that's a nice size customer for us -- they've typically done about $300,000 per year. They're in Chapter 11 due to asbestos litigation. Their demand has just not been there for us this year. So we took a hit of almost $600,000 in revenue during the first half that we didn't expect to take, frankly.

But, as far as our business development initiatives, primarily, and again, focusing on polishing and personal care, which, right now, is our most exciting and rapidly moving things, we've had a lot of progress in the first half.

What about the introduction of the new version of the sunscreen? Is there a delay in that?

Well, there's not been a delay. It turns out it's a little bit more of a knottier problem than we understood, the more we've gotten into. We're trying to come up with a -- frankly, the focus has changed also, Don. We were trying to come up with a coating for a sunscreen product with our partner. Now, understand on this, we are doing all of the development and all the engineering on this. And, it was set on a certain set parameters, but that has been expanded -- those parameters have been expanded relative to some new requirements they have determined in the European marketplace and part of the Asian marketplace.

It turns out that sunscreen formulations for both beachwear, which is what the category is called, and for daily wear -- there's a wide variety, depending on the country, skin tones and all those kinds of things. So, we probably slipped about three to five months on our roadmap, just based on a new set of goals and targets on this. But, we are still targeting -- both of us are still targeting a mid-2004 product launch. We have made the initial samples. They're in testing at major European suppliers at the current time to the market. So, we are waiting for some results from that.

What is the likelihood that some of our nearer-term type of marketing initiatives would come to fruition here before the end of the year?

Don, I don't have the answer to that. You know, part of the difficulty we are having is -- and let me answer that this way. We have some personal care opportunities that we cannot judge. There is a lot of excitement. Some of the companies we're working with on some of these personal care opportunities -- it gets very difficult to judge the speed that they're going to move. I mean, these companies move at a much different speed than we move.

Is that the antimicrobial stuff?

Some of it's antimicrobial, but there are some applications that I'm not at liberty to talk about, that you know, frankly, our competitors listen to this conference call. In fact, there's one on right now.

All right you guys -- get some orders moving!

So, I don't want to go into -- the customers or the products we're targeting in the personal care area.

The other point is, in the polishing arena, it is very difficult to judge this. It is very difficult for our partner to judge this. We just had a two-day meeting with our partner, all of us trying to figure out what's going on. There again, 10 to 12 top tier semiconductor manufacturers -- in the midst of evaluating our product for STI and SON. And the results have been really good so far. But these guys, these guys -- that is at risk adverse industry, semiconductor manufacturing, and I think everybody's aware of the state of semiconductor manufacturing at the current time. Those situations are very fluid. They are difficult to predict.

And parallel to that, we have introduced kind of a corollary nanoparticle dispersion polish that's being looked at by at least two major companies -- seems to be going very well. But, again, I can't predict that either. So, I really cannot honestly answer you as to when these things are going to hit. We have not had a good record trying to guess when these things are going to hit. So, I just kind of gave up guessing, here. But, we've got some very large opportunities, primarily in the polishing and personal care markets that's a very dynamic situation, and we're very excited about it, frankly.

These are very large markets that -- and again, in the polishing market, we have a real unique capability here, in -- especially relative to slurries, and the fact that we can move to higher technology nodes. Semiconductor manufacturers and others in precision polish and disk drives are very reluctant to work with people who have a myopic solution or solution for today's technology. They want to see the capability to move forward on technology nodes. We have demonstrated that capability with the NanoArc? synthesis processes and our dispersion technologies. And it's all kind of bound together with the insutu surface characteristics we can put on a nanoparticle. So, we are pretty excited about that market. We see that as a very significant growth area for us.

Is there anybody else that's basically trying to peddle something that's pretty damn identical?

There are people out there with products that are not identical, but they have products. There are other -- there are manufactures out there, in fact, like in the STI/SON marketplace, Hitachi has a product out there, that's for processor record at the current point in time. We have several advantages, we believe over this material. First of all, our material dispersions are very, very stable. Hitachi, from what we have seen, tends to settle out in a very short amount time, which is a major failure. Secondly, our material tends to have a much higher degree of selectivity and a much more consistent particle size.

The 75 percent defect reduction I mentioned in my prepared comments were compared to the Hitachi material, for instance, which is a process of record, right now for STI in the industry. So, we feel pretty good about this and so does our partner, Rodell. And, I think the fact that the -- while the market introduction on this has lagged longer than we anticipated, by almost six months, frankly, due to situations beyond our control, the fact that the top 10 to 12 semiconductor manufacturers are evaluating this, demo-ing this, and have this in production trials at the current point in time is rather significant for that industry.

Nicholas Pey (ph), a private investor.

Good morning, Joe, how are you today? First I want to say that -- compliment you on the progress you've made internally in your cost controls, research and other efforts, trying to do what you can do to control the situation. And then, of course, I want to move to the obvious need to get the top line going, because that really is the answer. You can't save yourself.

And I have a question with regard to each of these current market opportunities in no particular order here. Let's take the flooring and the personal care. With a single flooring customer in Chapter 11, are you required by your contractual relationships with the flooring manufacturer and with the personal care sunscreen manufacturer to supply them exclusively? Or are you permitted to go to others in those industries?

In particular with the flooring customers, the exclusivity has expired. We're taking that to the broader market, okay? Let me address the personal care in two different piles, if you don't mind. In the sunscreen arena, our partner has a global patent that has -- was recently challenged by another major company and the patent court reaffirmed the patent. So, it's a very strong global patent. So, we definitely have an exclusivity with that. And again, our global partner, which I think everybody knows is BASF, has a sales and distribution system that we can't afford to touch. And they are actively selling this -- you know, the product was first rolled out in the United States.

It's gone through Latin America. It's gone to Australia. It's in Europe; although it has had much success in Europe as we had hoped, or they hoped, frankly, because of the difference in the composition of materials over there. And in Asia. So, the sunscreen -- we are wed to BASF and we're very happy with BASF -- they are a very good partner for us. You know, relative to personal care, we have an agreement with BASF for the personal care market and they are selling into the personal care market. During the first half of this year, we have reached an agreement with the BASF that allows us to go out and also sell into the personal care market; and since we've reached that agreement, we have several strong initiatives in the personal care arena.

Great. Okay. Thanks. Secondly, in the polishing area, I sense that perhaps the manufacturers are looking at this as something they are going to have to do when we move to smaller line widths down to 90 and so on, as opposed to something that they should be doing right now because it might be a cost savings. Could you confirm that indeed it would save them money right now to go ahead and get started?

I want to answer this very carefully. The first semiconductor manufacturer that this product was introduced to is a major supplier of DRAMs. That's about as far as I want to go with that.

Okay.

The cost savings to this customer, based on the reduction of defects -- now, understand that in a semiconductor manufacturing, there's a lot of other criteria besides reduction of defects; so that is indeed, true. However, based on a reduction of defects, an improvement in yield, this is a major -- a very significant -- we have modeled this, and it's a very significant improvement to their bottom line.

I think that there is enough financial incentive here for them to do that. There's a thing in semiconductor manufacturing called cost of ownership. If you (indiscernible) semiconductors' manufacturing costs, I believe this is true -- but don't totally hold me to this -- I believe that slurry costs is like, up in the top five. In fact I think it's like, number three, as I recall. So, they are very concerned about the cost of ownership. Rodell and we have worked very hard over the past four months as we've been really attacking the market in a broad way to get the target ownership -- cost of ownership targets -- to meet customer requirements. Okay?

And, we have succeeded in doing that. So, we don't believe that there's anything particularly standing in the way of the market introduction. The performance of the material is, indeed, superior. The cost of ownership, we believe that Rodell has worked and gotten under control, and they have demonstrated that with charts and data to us; so we believe that to the true. So, I think we're in a product introduction cycle that frankly, Rodell is attacking very vigorously. I mean, just supporting a product introduction, 10 to 12 semiconductor manufacturers on three continents is not an insignificant effort?

Well, I can certainly concur with that kind of an effort, you couldn't be asking for them to do much more than that. It begs the question, why isn't everybody immediately switching to us?

Well, you know, we've been a little surprised with that too, to be honest with you. Rodell who is much closer to the (indiscernible) customer base than we are. As indicated, it's just a very risk-adverse industry. The other issue is -- and this is a general issue that we have found across all our marketplaces -- is that all these companies have downsized -- or rightsized -- whatever the acronym you want to use is -- they have taken out a lot of engineers, and a lot of product development kind of guys. I mean, we don't necessarily work with R&D people so much as we work with product development talent. And, companies have just decimated that capability to save money.

So, I think that -- and Rodell has indicated this to us, too -- there's not as many people out there during product development as there used to be, as everybody's downsized. So, I think it's a lack of resources -- the risk-averseness that has taken more time to take this to the market, because again, the results are truly compelling. There is an association in Europe called IMEC (ph) that does best-of-breed for semiconductor manufacturers. And according to Rodell, the Nanophase Rodell slurry came out in top place on that evaluation.

Well, Joe, is our slurry compatible with the machinery that utilizes the current slurries? Is there a capital of cost change involved here?

No, no.

So it's a matter of working off old inventory of slurry, which by now, they have plenty of time to do.

It's not really that; I think it's much larger than that. Semiconductor manufacturers -- again, depending on the (indiscernible) manufacturing number of players, this varies -- but it can be up to two weeks -- they can have two weeks of production in process before they find out something has gone totally wrong. So they could have a huge scrap issue. So they are very -- they hate to change once they get started, because frankly, semiconductor polishing -- while there's a lot of science in it, there is also some are in this. This is not just a total scientific endeavor, working at that future size.

So, I think they are very risk-averse. I don't think that what we are seeing is abnormal in a down industry, with reduced personnel, even though the product appears to be very good at this point in time. I mean, we, as management always walk a line between being too excited and try to be pragmatic, to be real frank with you. But, we are very excited about this. I mean, the results of this have been highly encouraging. This is a huge market. I mean, out of all the markets the company is addressing, the fact, that we think we can develop products to attack about 50 percent of a $900 million slurry market, again, that would not be our revenues -- that would be the -- because there's independent -- we use that as a benchmark, frankly, because there's independent market research there that's publicly available. Okay?

I understand the potential; I'm not questioning that at all. What I'm saying is, that, if you are running flat out because customers are just piling in over the (indiscernible ) -- the market is hot, they need product, you're not going to experiment with a new process that may as you say, cost you two weeks of scrap. You're going to do it when things are soft and you've got down time, and you can utilize the machinery to try something; and if you have to throw it away, it's not going to kill you in the marketplace. Now is the time. We think so too. (multiple speakers) You've got to bite the bullet sometime; this is the time to do it.

No, that's exactly our pitch, frankly. I think that the evidence of that is true, is the top 10 to 12 semiconductor manufacturers are doing that. I mean, relative to when Rodell was ready to go to the market, which was roughly after the first quarter of 2003, roughly, okay? We worked with one major manufacturer in the first quarter to find -- because there are a lot of aspects, again, to a slurry besides nanoparticles; there's a chemistry aspect and Rodell had to get theirs fine-tuned. And they started really hitting the market after about the first quarter.

So, I would tell you that within a three to four month time period, we went from one to twelve product introduction sites or 10 to 12 product introduction sites, which frankly, I think is very significant. And there's a high level of excitement, both at Rodell and Nanophase about the potential for this.

Well I certainly hope, then, that the 2004/6 is just a conservative estimate. And that it will be sooner than that. And my last category, of course, is the one of fibers and textiles. And I think there's a certain importance there, because, while we may be captive to cycle in polishing, we can only, you know, push those people as far as their business moves. Consumer product business is hot. I mean, people are buying clothes and textiles and things. It is a growing, vibrant part of our economy. And, these customers, according to my notes, have been testing these products for over a year.

It seems to me, at some point -- it's not a difficult decision, even though they do have to invent ways to test the additional wear resistance and microbial qualities and all the other things that we say it will do for them -- you know, it's not rocket science. And there are consumer products labs who do that stuff routinely, like Consumer Reports or somebody. I mean, it seems to me we ought to be going somewhere with those people by now.

Well, we are. Appreciate that it took sometime to develop the technology to put nanoparticles inside of carpet fibers or other fibers -- okay? That's not something we do; that's something we had to work with people on. And most -- as it turns out, a lot of these people who make those products use compounders to make the nylon or whatever that goes in them. So it's been a kind of three-way development for a while. The progress on this, quite frankly, has been halted -- not halted -- delayed -- by the fact that -- the division we were working with for a major corporation was recently sold to another major corporation -- okay?

So, we went through three to four months of confusion in this product, and in this development, as the "merger" or whatever you want to call it took place, and people found out who was still employed. Okay? Because essentially, the acquiring company had an effort something like this, and acquired the division from another company and then there were people falling out, okay? We have gotten past that.

And, in fact, we have made high-level contact, in fact, CEO-level contact with the acquiring company -- and believe me, have gotten this re-focused, and that is on a forward path. And they are indicating to us that they would like to introduce this product in 2004. Okay? And so that's the path that we are on with that. Now, because of the sale of the division, we lost three to five months.

Okay. Well, that sounds more encouraging. Is there just one single company we're working with in this --

No, actually, we work with one company to develop the technology, which is kind of our business model. I mean, understand, there's only 53 of us here. So we cannot -- we're trying to work in these five target markets. And as I mentioned, we also have other opportunities that really are very significant that don't fit neatly in those niches, okay? That are really interesting applications for nanoparticles that have large revenue potential.

So, with 53 of us, we tend to try to focus on a market leader who is interested in working with us; and you need to understand, not all market leaders in our target markets are willing to work with us, okay? So, we perfected, or worked on the technology with one person. Now, we are working with other companies, which is kind of our business model. We learn how to do it with the market-leader and we understand what's involved because, again, putting nanoparticles inside of a carpet fiber in this instance, is not an easy trick as it turns out. So yes, we have other customers we're now working with; in fact, we have one coming in in here in a couple of weeks.

Doug Allison (ph) with UBS.

Just going back to the Rodell and their testing. I assume that you're still pretty much in the initial testing volumes for the different manufacturers -- semiconductor manufacturers. Have they come back and requested any refinement in the Nanophase part of the slurry?

No, no. We are shipping to them the same nanomaterial dispersion that we were shipping to them last September, last November. They've not asked us to do anything. We're very pleased with this product. This product that we are shipping in (ph) Rodell is very similar to the product that we shipped to the photomask market. And it's very similar to the same dispersion product that we're starting to test in the disk drive market and the optics market. It's a very good product as it stands.

So, what they've had to do, to be honest with you, Doug, they've had to get the chemistry exactly right and the cost of ownership exactly right. And then, there are multiple factors that are looked at in polishing semiconductors -- the pad, the conditioner for the pad, all kinds of things. They had to do enough testing in their laboratories -- they have like over $20 million investment in their laboratories to do this. They have their own semi line and their own meteorlogical (ph) equipment -- metrology excuse me -- to do this. And so, you know, it's just taking some time to get this (indiscernible ) home.

But again, they did the same thing we did. They worked with the lead customer in the marketplace. And to the earlier gentleman's point, on a line that was down because of the market, to kind of hone this thing, and then they took it out to the larger market. So, right now we are in stages from what's called demo to initial production trials with various manufacturers right now.

Okay. Have the semiconductor manufacturers come back to Rodell and asked for modifications in the chemistry that Rodell provides?

Yes, to the best of my knowledge, they have. That's what consumed the first quarter, actually, part of the second quarter, is getting the chemistry exactly right. And that relates to the cost of ownership issued for the semiconductor manufacturer, as well as the exact pad combination. Okay? So, that was not something that we had expected, quite frankly. We had thought that their chemistry was a little further along than that.

Okay. Now the semiconductor manufacturers -- have they had to change their manufacturing processes in any way to accommodate your slurry?

Not significantly, to the best of my knowledge -- okay? I don't have perfect information on this, but, part of the effort on the chemistry and the entire system -- systemic process for the polishing, Doug, was to match the current manufacturer's processing needs. Okay? So, clear times through a chamber is a big deal, apparently, to the semiconductor manufacturers, and we wanted to have the same kind of clear times -- all right? Because, that's how they do it. As you're removing layers of polish at that level, it's based on time through the chamber, apparently, is a very critical way to measure this thing.

So, I think that they -- to the best of our knowledge, all those issues have been resolved. The fact that the major corporation has now moved to production trials is a very encouraging sign to us that learning has been taken. And again, it has been expanded to the remainder of the top tier suppliers in the semiconductor world. And, yet again, I just want to emphasize, from an independent testing source, IMEC in Europe, which is funded by the semiconductor manufacturers -- we came out as the slurry for the polishing - for the slurry of record -- what's called the process of record, as the best slurry they evaluated.

Okay. In the Shot (ph) Lithotech. (ph) business, how -- anything new there? (multiple speakers) Has that picked up?

Shot Lithotech is going fine. They are a photomask manufacturer. They are actually the company that's presenting the paper at a large photomask conference in September on the West Coast -- I think it's in San Diego or Monterey -- at a major photomask conference, involving our nanoparticle slurries. We're also -- in photomask, Doug, there's a two-part polishing process. Right now we're in the second part, the finest (ph) part, and achieving very good -- achieving just exceptional results, and that's why, frankly, they are putting out the paper. They're working with us to develop a product for the first stage photomask polishing. And we have three different things over them right now for them to be working with.

And, the Asian opportunities -- anything that you can comment on there?

No -- not under the same -- (indiscernible) the same general umbrella. You know, again, part of the strength of being a partner with the Rodell is that Rodell has a very strong Asian presence. Okay? And you know, we do not have a strong Asian presence. We have a partner in Asia, but that is not a strong Asian presence in the technology community like semiconductors.

Okay. What is the -- your Asian partner -- what areas are they working in?

They're working in fairly different areas than we are. Their business model is just significantly different than ours. Significantly different than ours. They're more of a small quantity niche market operation.

Not big volumes?

No.

They have an exclusive license with you? And if they do, how long -- how far out does that extend?

I don't remember how far out that extends. So, I'm not being evasive; I just don't know. They have an exclusive, solely for the PVS technology, not for the NanoArc? synthesis technology, not for our dispersion or coating technologies, okay? They have an exclusive, solely for the original PVS technology; again, this was done way before my time -- and only in specific markets. And those markets do not include polishing markets at all. So, they have no right to those markets.

Okay. And, you seem to be running up against the problem of having enough cash. How do you feel about that for the future? Do you have opportunities to get additional financing if these continual delays continue to happen?

This is Jess Jankowski. We are comfortable with our current cash position. We are under discussion in terms of making sure that we stay in a strong position. And we are comfortable that we also have options if the time comes that we do need to raise cash, that we will be able to do it in a way that will cause minimal dilution to the shareholders, and be in the best terms possible.

And Jess, I think, if I heard you right, you mentioned that there were some orders that came after the second quarter, after June 30th -- or did I mis --

No. What I was saying was that the accounts receivable for Rodell, particularly BASF, we shipped at the end of the second quarter, so the balance was a little higher. And they will being paid -- they were paid in July.

Okay. Thanks a lot. I hope we get things going here.

We're going to, Doug.

And everything does sound encouraging. So, we've got to get the rest of -- get the end markets moving here, and I think we will be okay. Thank you.

Steve Springer (ph) with Target Capital.

Good morning. I have a comment I'd like to make, in response to an answer, Joe, that you gave to Don Hutchinson's series of questions. I have been on these calls for a couple of years, and, it is frequently stated on these calls that there are very large opportunities and very large markets and so on, which, of course, I believe. I think it's true. Nonetheless, you, in response to Hutchinson's question -- one of Hutchinson's questions -- you stated that you really couldn't go into any details because there's at least one competitor on the call.

That was in regard to personal care applications, only, Steve.

Right. But whatever. I'm going to tell you that we're co-owners of this business who have risked our capital. And, we are entitled to a thorough and detailed explanation of company developments and prospects. Reg FD has changed the way companies communicate, particularly small companies that have virtually no research provided by outside " objective" sources. As a result, we are dependent on communications with you, essentially, four times a year, for an hour. Right? It is unacceptable that we are subject to -- that we are restricted in what we can learn about our company's business because some competitor is on the phone.

Well...

And what I can say about this is, it's incumbent on the company -- it's necessary for the company -- to figure out a way to communicate with us in a complete and open manner, and some how avoid doing that, and communicating information to the competitors.

No, I understand your point; I think that's a solid point. I would like to -- just so you know, Steve, we did cover more information at the stockholder meeting, where it was a much more -- we're a little bit more close company and we knew everybody, you know? So, we did cover a little more specifics relative to personal care. But, do understand there are some things I don't talk about. And, you know, maybe "significant" is a bad word. We have companies that we're working that are very large opportunities.

And when I say a large opportunity I'm talking about our people (ph) -- we perceive the annual revenues as well over $1 million -- okay? We have three or four of those in process with companies I cannot talk to you about because we have signed things -- all right? And so, I can't talk to you about those -- even under Reg FD, I can't talk to you about those. And understand -- and I know you know this -- but under business development situations some of this stuff don't (sic) come to fruition, you know? Even at the end of the line. We've had people decide not to do it, for whatever sets of reasons.

But, honestly, at least in this conference call, we went to a great extent, we thought -- okay? -- to try, especially with some of the near-term markets trying to help provide some information to investors about the market size and what stage it was in -- to try to do that. You know what I mean? We really are trying to do that, Steve.

Okay. Well, maybe we should find a way to distribute the communications that are made to people who have the time to travel to the annual meeting, and who are known to you as bona fide shareholders. Maybe there should be a way to distribute where, coming to New York, for example, and holding meetings with institutional shareholders or others -- analysts, whatever. But, I think there's a need for some greater transparency. So, I would just make that comment.

(indiscernible) I appreciate the comment; I agree with the comment. You know, we want to comply with Reg FD. I mean, we are really anal about that. But, we also don't want to say anything that's going to get the company in trouble, given the the litigious nature of (multiple speakers)...

Yeah -- I'm on-board (ph) that 100 percent I just, you know....

We're coming to New York in the not-to-distant-future. And, we will set up a session.

On the product development side, I'd like to make the observation that, when we talk on these calls, and discuss the various opportunities, it is really remarkable to consider the diversity of these industries. You are talking about flooring and slurries, you know? Computer chip development products. We are talking about sunscreens, and we are talking about fibers for clothes. I mean, it's run the gamut, virtually, of industry. And, as a result, it does not surprise me that a staff of 53 people has difficulty in the sales and marketing end, because you have relatively few synergies. You are going from one industry that has completely different dynamics to another industry that has distinct dynamics. I believe that to be the case. Therefore, the question arises -- would it not be helpful to try to put together product development -- or rather marketing partnerships with larger entities who have particular expertise and penetration of specific industries?

Okay. Maybe I was not clear with that. That is, indeed, what we tried to do -- okay? In the sunscreen arena, that's exactly where we have that relationship with BASF. In the polishing arena that's exactly where we have the relationship with Rodell. Our relationship with Rodell, however, has been defined (ph) for those two technologies and those that I mentioned. We have, on our own, addressed the photomask, the hard disk drive and some of the other technology nodes.

Now, we have a expanded our relationship with Rodell to develop the slurries I mentioned my prepared comments for other semiconductor applications, because we believe Rodell is just the best partner we can get, right this minute, in that industry -- okay? We are very happy with the relationship.

But honestly, Steve, we try to do that. Don't -- let me caution you -- at a fundamental level -- in the technology whether it's making the nanoparticle or putting a certain service finish on a nanoparticle -- or dispersing nano (ph). There's a lot of these that look dissimilar, but the core technology is not vastly dissimilar -- okay? And we have learned an awful lot, that transfers from one marketplace to the other marketplace, as we have learned how to work with this technology. Perhaps, that's been the most frustrating thing for me -- is how long it's taken us to learn how to work with the technology. You know, relative to applications.

But, I'm not really talking about technological synergies. What I'm talking about is marketing. I'm talking about -- once you develop these products, marketing them into these very, very diverse industries, worldwide. So, while you do have a relationship with a market leader like BASF or Rodell, what I'm talking about is a marketing organization, or a distributor who is distributing -- has a leadership position distributing into and across an entire industry -- that is able to take on your products in some way. In other words, some sort of a marketing hookup separate and apart from your client.

No. No. Okay -- I understand what you're saying. Actually, we are looking at those. We're looking at marketing relationships -- the polishing arena is a good example. We're looking at market relationships outside of our Rodell -- outside of our Rodell agreement. Not to go against that agreement, but outside of our Rodell agreement -- to increase our -- you know, people on the street, people in their face (ph). We are actually -- we're talking to a couple of people right now, and may actually sign agreements with them. So, we are looking at that.

In those areas where we do have products that we think transfer relatively easy to an application, we are looking at that. A lot of these -- there is some development required, however, to get these in a specific application. And, in those cases -- and given the length of time they are taking, Steve, I am not sure that more people would be necessary. I mean, we are handling this relatively decently, we believe. I mean, we're all working a lot of hours. But I think we are handling this relatively decently. I mean, we've gotten very good at juggling all these balls.

And there's about 54 people, I believe, in the business. And, when I came here in 1998 there was 58. So we have not added headcount. However, we have reduced the quantity of Development (ph) relative to volume in the business. So there are more professionals in development, sales and marketing. You know? So, we have added some talent in those areas -- within the realm of affordability.

I don't want you to think, or the staff to think, that I'm critical of their efforts. I understand. I mean, all you have to do is get on a conference call with a software company and you find out a lot about what is going on in technology, worldwide. This is not -- the problems that people have in selling through new technological solutions today are not limited to this business.

No, I understand that.

Nonetheless, we've got to do something here, because were not getting traction.

We're not -- we agree with that, Steve.

Okay, well, we agree, so, what I would like to hear, at some point in the near future -- what concrete steps are being taken? This is a situation that has developed over a period of years; it's been this way for years. I remember a couple of years ago when there was an estimate out there that they were going to do something like $23 million in sales.

Now, that doesn't -- an estimate from somebody doesn't mean that it's going to happen or that it's true or that you're deficient if it doesn't happen. Nonetheless, we have been stuck here some for period of time. And, it's my opinion that something has to be done about it. I don't know exactly what it is; I have some ideas. And maybe we should talk about it -- I don't know.

But, I think that -- today the stock is down 15 percent. Obviously, there's disappoint with the results. So, you know, I would like to hear some constructive ideas about what can be done about this seemingly, you know, constant situation, in part due to the economy.

So, now I have another question. The government budgets, worldwide, for research into nanotechnology, in general, are expanding rapidly. At least, based on what I read. And, we have talked about is in the past, Joe, you and I. And, I understand that getting involved in government projects for the year 2025 is not really what the agenda of the Company is.

Nonetheless, these budgets are getting bigger and bigger. And, I wonder whether or not it would be attractive for this company to try to access some of these research dollars to find -- there must be some projects out there that have some connection with what we are doing. (multiple speakers) and to take some of these dollars and to develop products for Darpo (ph), or whoever it is -- the DoD -- and then, you know, convert those products for use in the commercial arena?

Okay. Let me tell you where we are on that. Right now -- the last numbers I saw -- the federal government is going to spend about 2.3 billion in the next few years in quote nanotechnology. We all read that. Let's understand there's a lot of forms of nanotechnology. This goes all the way from genomic research to Mims (ph) to us -- and a lot of points in between. So it's (indiscernible) everywhere. It's primarily directed at universities.

We look every month at proposals on the street -- okay? We have not found one that we are interested in. A lot of these are -- the reason the government quote/unquote funds research is that they're too risky for normal businesses. And indeed, a lot of these are that -- okay? And they are well outside -- they're well outside our focus. If we could find a project, actually, that was inside our focus, somewhat directed towards, you know, the directions we're moving in the business, we would be more excited. Now, recently -- actually, this month -- there are two proposals that hit the Street, that we are going to respond to. Because there -- we don't lose -- it doesn't appear that -- our major concerns or loss of IP -- and who owns the IP if you go do this -- okay? And, being able to recover our costs.

Most of these government programs -- and investors need to understand this -- they are cost-matching. These are not free money; they are cost-matching. Everyone we have look and gotten excited about -- and talked -- we have talked (indiscernible) people, Steve -- we have talked to -- I can't remember the guys name -- at NISS (ph) -- we've talked to the guy at NISS (ph) -- and most everything is government-matching. And you can match in-kind by putting people on it, dedicating, you know, resources, whether its buildings or equipment. So you can do it in-kind. But, all these are matching; none of these are free. But, we are looking at two those now. And we may pursue those.

Okay. Thank you.

David Schecter (ph) with Express Multi-funding (ph)

Guys, I want to tell you, I've been a stockholder with this company for a long time, and it's really tough, but I'm hanging in there. I really believe in what you guys are doing. And I want you to keep at it, and everything will be just fine. Don't worry about the market; they're a bunch of idiots! Just run your business.

Thank you.

Good luck.

Todd Colby (ph) with Colby, Jacobson and Gordon (ph).

If I could follow up Don Hutchinson's question. Let me see if I can phrase it this way. Is there any possible short-term intact impact, say by the end of the year, from products that are farther along the development curve than polishing -- for instance, catalytics, coatings, things that we've been talking about for years?

Look, there are -- and see, that's part of my hesitation on making forecasts right now. There are three to four situations that could possibly hit before the end of the year. I cannot tell you that's going to happen, okay? We have three to four large situations -- some of which are some of those other little weird things that we're working on with large companies that are two years down the development path, because these large companies are moving slow.

But all of a sudden, they've caught in a fire, so yeah, some of this could start happening by the end of the year. I would not, if I was you, rule out some significant movement in some of these polishing arenas between now and the end of the year. I think that is a possibility. I couldn't give you a percentage of possibility.

But, again, the fact that we're out in a large way with Rodell in the semiconductor arena -- the success we had, frankly, with this disk drive customer is really exciting for us. Some of the initial success we're having in the optics arena is very exciting to or us. In fact, we're actually expecting our first order from an optics customer here this month, okay, which has been a very short time. It's not a big order but at least it's a start. So, from a hit between now and the end of the year, we're looking at a couple of these opportunities that I'm not going to go into.

Even though, I know that irritates Steve; I just don't want to go down there because they may or may not happen yet. But they're well down the path, and the customer's working diligently on (indiscernible) product. In the polishing arena, frankly, I think are the Company's best chances for major hits between now and the end of the year.

Along that line, maybe you could acquaint me better with the process. You said we've gone through them demos and we're now into trials. Could you explain the different stages that these companies go through? I mean, the last time I asked you this question was on the Philips TV tubes. You know, but there are apparently different steps -- that are carefully defined. Could you tell me what the steps are and which step we're at now?

Okay, I will do the best I can, okay? This is not my field of expertise. They start out -- first of all, they start out with the typical value discussion. The second step -- as I understand it -- is called a demo, okay? The third step tends to be where the semiconductor manufacturers, as well as I understand this, give Rodell some wafers to polish and report results back, okay? Which Rodell does an extraordinarily good job of this with their $20 million worth of metrology equipment.

Then, the next step would be an initial trial. And they would go to a production trial. And then they tend to go -- as I understand it -- they tend to go to what's called a variability trial where they'll try three different lots of material and make sure they get the same results. Okay? And then it's a production trial in a line. As I understand it, more or less, those are the steps. Okay? And, we're -- with the first customer, we're at that last step of the three production lot trial.

With variability trial level?

Yeah. And so, of these ten to twelve customers, we're all the way from the demo stage. We just, I think, within the last two weeks, Rodell has done five different demos at five different customers, if I remember the numbers correctly. So we've got all increment (ph) demo stage to, you know, testing lot to lot variability in the semiconductor polishing.

I've asked you the following question before, and I cannot really remember the answer, if you gave me one. And that is, has the Board of Directors ever articulated a response, or any kind of statement or policy on how they would respond to an offer of a merger or a takeover?

I don't think they have articulated that, publicly. We have discussed that. We have an executive committee on the board. We have discussed that at the executive committee. The executive committee would entertain -- would entertain an offer if it was fair to the stockholders. Okay? You know, there are companies that have talked with us in the past; there are companies that are talking to us now from some level of interest -- okay? Those things, I think, happen all the time, you know?

The companies that tend to be interested in a company like Nanophase -- tend to be chemical companies -- surprise -- okay? And, I think, if the proposition was made for the board, it was fair to the stockholders, I think the board would consider it. Our board is a very professional, independent board of very seasoned businessmen. I am sure they would do the right thing. They always have.

I have a question for you or maybe for Jess. He discussed the SG&A number and he talked about board compensation and your expenses from litigation and so on. What is the -- is the -- are those expenses behind us -- the litigation? In other words, would he expect SG&A to decline, say, the same? Or, would we continue to be absorbing expenses from insurance litigation, accounting, all the other things he mentioned?

This is Jess Jankowski. With respect to the litigation, those expenses should go away, barring any unfortunate new litigation which we don't anticipate. We do expect our accounting and legal fees to continue to rise. But those aren't the lion's share of the increases. I think those will rise because as they flush out Sarbanes-Oxley, they keep putting on more work, basically, for us and our auditors.

This year, they're talking about them expanding their audit to be more of a fraud audit on everybody than they used to. In the 404 rule that came out, we've been exempted from for another year, that internal disclosure -- internal control bought it; but that will probably cut another $20,000 or $30,000 over a period.

With respect to insurance, we had a very large increase in business and director's officers insurance last year. I don't anticipate such an increase to happen again this year. Although, judging from the markets, many of the players have pulled out of the market, and there are many players that don't wish to underwrite companies like Nanophase, size-wise. So, I wouldn't anticipate it to go down. The directors' compensation will be flat.

If you look in the proxy, you know, there -- the way we're set up, they get $25,000 of combined stock and cash to cover the tax on the stock -- restricted stock -- on an annual basis, and that's the $130,000 I discussed. That will stay flat. We don't anticipate headcount rising. We are doing what we can to control rent. That goes up at a minimal level. I don't see this -- although I don't see it drastically going down, I don't see the increases we've seen in the past continuing.

Again, it's hard to anticipate litigation. and it's hard to get them ahead of the underwriters at the insurance companies. That probably will be increasing, but I think it will be more incremental than not.

Those are my questions.

There are no further questions at this time.

We will end the conference call at that point. Thank you for attending and thank you for the questions. And we will talk with you again next quarter.

Thank you for participating in today's teleconference. You may now all disconnect.