Solesence Inc (SLSN) 2003 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Nanophase Technology conference call. (OPERATOR INSTRUCTIONS). The words expects, 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 important 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 the customer to cancel a purchase order or supply agreement, demand for and acceptance of the Company's noncrystalline materials, changes in development and distribution relationships, the impact of competitive products and technologies, possible disruption in commercial activities, occasion 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. Thank you. Mr. Joe Cross, you may begin your conference.

Welcome to the Nanophase conference call to review the fourth quarter for 2003 and fiscal year 2003. Jess Jankowski, Vice President and Corporate Controller and I will be hosting the session. For today's discussion, Jess will review the financial results for the two periods, after which, I will return to discuss 2003 highlights, the Company's position entering 2004 and some of our expectations for the new year. Jess, would you please review the financial results.

Good morning, and thanks for your continuing interest and Nanophase. As I review the financial performance of the Company for 2003, I intend to do so at a more strategic level for this call. This way I can highlight what has been driving the financial results of the business versus (indiscernible) on the financials. More details are included in the financials accompanying our press release of March 3. All numbers will be in approximate terms for ease of discussion.

Revenues for 2003 were roughly flat relative to 2002 at $5.4 million. For the year, product revenue was down 120,000 and other revenue was up $166,000. The increase in other revenue for 2003 related to the sale of a PVS reactor at C. I. Kasei, our Japanese (indiscernible). Relative to product sales, actual revenues were approximately $1 million below our expectations entering 2003, which were based on current customer forecasts at that time. These reductions were due to unplanned weaknesses in some key areas. Sunscreen revenue from our largest customer was down about $600,000 from 2002. This has been attributed to excessively overcast weather, particularly the Eastern U.S., and the impact that had on the sunscreen business in general. Management expects 2004 to be somewhat stronger than 2003 with respect to this sector, and orders to date for the first quarter appear to support this view. The Company saw little volume in its abrasion-resistance flooring and auto catalyst businesses for 2003. Taken together, these reductions in volume represent a $450,000 decrease in product revenue from 2002. Our current flooring and automotive catalyst customers are not predicting particularly strong comebacks in '04, but management expects other similar initiatives in these markets to take root this year. We believe the technology is sound, and that it allows for a competitive advantage. With customers who are more focused on these developing markets, we anticipate that inroads should be made during the year. On the positive side, the fine polishing materials business was up by more than $900,000 in 2003. Although we have not yet seen end-users of these materials move significantly to commercial production, we have been continually informed by our customers that our material is performing much better than industry standard materials. In some cases, on joint customer calls, we have been given first-hand corroboration that our metals materials performance has been stronger than other materials tested. None of this means that we will have significant 2004 volume in CMP materials, but it does lead us to expect that Nanophase will benefit from revenue growth once these materials get past the remaining hurdles to adoption.

Backing out the cost of the PVS reactor sold to C.I. Kasei, the cost of product revenue was roughly flat year-to-year. Depreciation was up $175,000 on items that were in service for all of 2003 versus only a portion of 2002. So hard costs were driven down again. It's important to note that Nanophase has an existing manufacturing infrastructure that could support a multiple of 2003 volume without significant augmentation.

Our margins suffered this past year from not having enough revenue to absorb the manufacturing overhead that is required to work with the customers we have and the new ones we expect to have. Much of this infrastructure supports compliance with FDA and U.S. pre (ph) standards for sunscreen material as well as the exacting performance requirements of the electronic chemicals industry for CMP materials. The good news is that as volume grows, we expect our solid variable margins to drive gross margin growth.

R&D expenses were up $330,000 year-over-year. R&D salaries, which encompass our R&D and advanced engineering groups, were up 150,000, but are expected to drop by a similar amount during 2004. Our scientists and engineers also spent about $100,000 in additional materials development at testing. Much of this was related to our new NanoArc synthesis technology. And as part of our recurring theme for 2003, depreciation increased by about $64,000. SG&A expenses expanded by $240,000 year-over-year. While total salary costs was down slightly, D&O insurance premium increases as amounted to more than $300,000, but are expected to actually decrease to some extent during 2004.

In total, the Company lost 38 cents per share this year versus 35 cents per share last year. Note that depreciation amounted to about 10 cents or $1.5 million of the Company's loss for the year.

Moving to the balance sheet, Nanophase ended the year with $5 million in cash and investments, and expects to exit the first quarter of 2004 at about the same level. This is an area that we continue to monitor closely. Looking at AR, less than one-half of 1 percent of our $1.2 million in accounts receivable are past due. 96 percent of this balance is made up of receivables from our three largest customers, BASF, Rodel, now Rohm and Haas Electronic Materials, and C. I. Kasei. These same customers accounted for 61 percent, 22 percent and 7 percent of our 2003 revenue, respectively. As you can see, inventories have gone down by about $300,000 to $680,000. Approximately -- I did not say that clearly, they went down to $680,000 and were reduced by about 300,000. Approximately 350,000 of this balance represents raw materials with the balance being finished goods. Given the Company's lean manufacturing discipline, it's a priority to keep inventory levels as low as possible while still maintaining the ability to respond to requests for material volumes outside of what (indiscernible) plant. This balance may fluctuate based upon product revenue mix, material leadtimes and the overall economics of advanced (ph) production of various materials. Management continues to work on minimizing required working capital by holding inventory growth to a practical minimum.

Down further, equipment and leasehold improvements amounted to $8.2 million in total, which includes $220,000 for capital additions for 2003. As our previous buildouts are largely complete, 2004 capital requirements are projected to be minimal. Any larger capital expenditures will be market-driven and most such large projects are currently planned.

On the liability side, adding the current and long-term debt and lease obligations together, the Company has about $1.3 million in total debt. 850,000 of this represents the noted favor of our largest customer for equipment to produce sunscreen nanomaterials, which you may recall, we paid back on a per kilogram shipped basis. The lion's share of the remaining balance relates to finance business insurance premiums.

Payables for plant year-over-year and accrued expenses went down by $250,000. Highlighting the largest categories of accrued expenses, 40 percent of the total relates to accrued payroll items, and 15 percent relates to accrued professional fees.

Looking at additional paid-in capital, you'll notice that business (ph) increased by $2.6 million year-over-year. This is due to the September 2003 private placement by Grace (ph) Investments for $2 million and approximately $600,000 received by Nanophase throughout 2003 relating to option exercises. Thank you for your attention. I would like to turn things back over to our President and CEO, Joseph Cross.

I would like to briefly summarize the Company's progress during 2003 in two general areas. First technology, and operations and secondly, business development and sales. After which, I would like to review some expectations and target markets for 2004.

Beginning with technology during 2003, Nanophase continued to strengthen its intellectual property portfolio adding to its patents, pending patents and proprietary knowledge. Ending the year, Nanophase had six U.S. patents for its nanoparticle synthesis technologies, two U.S. patents for its surface treatment technologies and one U.S. patent for nanoparticle applications and coating (ph). Additionally, the Company has the following pending U.S. patents. Three in nanoparticle synthesis, two in nanoparticle surface treatments, involving dispersion of nanoparticles in various media and three in nanoparticle applications. Correspondingly, there are 12 formed counterpart patent applications pending. We believe that some of these patents will issue this year at a time and choosing of the U.S. patent office and the appropriate foreign patent authorities. Additionally, we plan to file at least three new U.S. patent applications during the coming year. 2003 saw continued improvement and evolution of the Company's process technology. We were again able to reduce the variable portion of manufacturing product cost by 4 to 27 percent, depending on the specific nanomaterial which translates directly into increased gross margin. I think that it is indicative of our capability and expertise since starting this manufacturing cost reduction effort in late 1999, the Company has reduced the variable manufacturing cost of volume products by about two-thirds.

Following the Company's lien manufacturing discipline, we were able to increase the PVS reactor utilization during 2003 by 7 percent and the new NanoArc synthesis reactor utilization by 25 percent. Looking at this from a different view, by increasing utilization in the PVS reactor bank, Nanophase effectively added another PVS reactor without any capital costs.

We also developed a major process innovation during 2003 which we are now implementing, that will, we expect, will increase our PVS reactor output by about 30 percent for volume products. This innovation is expected to reduce manufacturing costs. But equally as important, coupled with increased reactor utilization, this new technology is anticipated to significantly reduce the Company's need for capital, infrastructure and facilities to add PVS reactors as volume grows. Another terms, in our facilities costs, coupling increased utilization and increased rate, the Company will add almost $1 million worth of current reactor capacity and output for no capital investment. Responding to market demand for liquid format versus solid materials, we implemented pilot nanoparticle dispersion capability for additional nanomaterials for target markets. Nanophase's patent pending dispersion technology provides the capability to manufacture 30 to 50 percent by weight, non-agglomerated nanoparticle dispersions that are highly stable for up to two years on nanomaterial dispersion tests to-date. As mundane as this newly developed technology may sound on the surface, we believe that nanoparticle dispersions are an absolutely critical capability for success in the nanomaterials market. We also believe that Nanophase has now developed an industry-leading position in nanoparticle dispersion technology.

Lastly, we introduced several new materials during 2003 that are targeted to focused markets or applications. Operationally, the Company continued its excellence performance. We achieved ISO 9001 2000 certification, which represents the most current global quality standard. This level of operational performance is vital to successfully sell to large U.S. and European companies. We again achieved 100 percent customer product acceptance and 99.9 percent customer service levels on 2003 product shipments. We also continue to make excellent progress in our drive for Six Sigma process control at Nanophase. We have progress from about the One Sigma level in 1999 to well over Five Sigma as an average in all of our processes.

Lastly, Nanophase continues to enjoy excellent relations with local, state and federal agencies in safety and environmental areas. From a marketing and business development perspective, during 2003, we added a new vice president of business development Dr. Ed Ludwig, and new insight sales customer service manager, Bokolows (ph) Kwalcheck (ph). Both of these individuals have added considerable talent to the entire effort.

We believe that we have considerably improved our marketing activities during 2003 and entering 2004. As the nanomaterial technologies and market leader, we believe we need to be better known, especially during a time when manufacturing industries are getting increasingly interested and active in nanotechnology. We constructed a new and improved web site with greater search capability that has doubled the number of site visits with increased time per visit by about 50 percent. Correspondingly, the number of contacts to Nanophase has approximately doubled. We have and are continuing to improve the identification capability of our web site for major search engines, such as Google and Yahoo! to handle the bulk of global searches. With continuing improvements, we expect this trend to continue in 2004.

In parallel, we have initiated an identity add marketing campaign and title drive-in (ph) product innovation the we expect to appear in targeted publications, such as Small Times, Chemical and Engineering News and Chemical Market Reporter in 2004, specifically around nanotechnology focused issues. Thirdly, in regard to marketing, we've increased our efforts in industry organizations and conferences to improve our presence and communicate the technology and capability. The Nanotech 2004 meeting next week in Boston is a good example. At this globally attended conference, we are scheduled to deliver three technical papers as well as exhibiting our integrated platform on nanotechnologies. Literally at the same time, Dr. Brodwin is scheduled to present a keynote address to the nanoparticle's 2004 conference. We believe that all these activities will contribute to an increase in business development opportunities.

We have also reorganized the entire business development and sales effort during the last four months of 2003 to increase the structure and focus of development efforts. We are taking a much more rigorous approach to quantifying and qualifying market opportunities. and a much more active approach in partnering with companies in target markets. Similarly. we are not continuing in areas where there's not a clear active market pull. We've spent too much time in areas where there's only a technical pull, such as with a central research organization in a Company. We have instances PVP process for business development efforts and a stage-(indiscernible) process to monitor, measure and judge progress.

Business development and sales executives have been given well-defined assignments and goals aligned along target markets and customers. We have identified tactics and actions for focused markets, customers and potential partners and are executing on those throughout the organization. We are becoming increasingly market-driven and have restructured organizational activities and assignments accordingly.

Entering 2004, we believe that our strategy has been effective and we have now developed the integrated nanomaterials technology infrastructure, manufacturing prowess and business development focus to broadly attack markets. We also are considerably more optimistic about market conditions and business development initiatives that are underway. First, as a manufacturing sector has improved, we have seen increased interest in demand for nanomaterials in new products and to improve current products from this sector. Additionally, as I stated during the last conference call, the Chemical Market Reporter, as well as other industry newsletters, is forecasting continuing improvement in the chemical industry during 2004. We believe this is promising. since this is a sector that we view as a prime market for nanomaterials.

2003 may have been the year where nanotechnology and specifically nanomaterials started a solid migration from the academic and government realm into the business new product development arena and increased application use. We believe this trend is apparent in the 37 percent growth in the Company's research materials business during 2003 and the 72 percent growth in nanomaterials samples requested from the Company. This is also buttressed by the strong business development activity the Company has seen since about October 2003. As the manufacturing sector continues to improve and expand its nanotechnology initiatives, we believe that Nanophase is exceptionally well positioned in the nanomaterials field to the evolution and improvement if our technology, infrastructure and manufacturing capability over the last two years. The Company has a strong IP position, which we anticipate will continue to get stronger. Our technologies have been demonstratably scaleable and robust; we have an integrative platform of commercial nanomaterial technologies to deliver nanoparticles, coating nanoparticles and nanoparticle dispersions. We clearly have the infrastructure and capability to deliver commercial quantity and quality of the nanomaterials we manufacture. We believe that Nanophase is in a leadership position in the nanomaterials field, fully capable of addressing the Company's focused markets.

Lastly entering 2004, the Company is pleased with its cash position, and assuming timely collection of Accounts Receivable, should leave the first quarter with about 5 million in cash. As you are aware, Nanophase has filed a universal shelf registration statement and hopes to raise at least 10 million during 2004 in an orderly fashion that will be used to increase business development, sales and marketing efforts, and for general corporate purposes.

During 2004, Nanophase plans to focus on three primary areas. First and foremost, business development and revenue growth. This is clearly the most critical area in the Company and where I will be spending most of my time; secondly, expanding the Company's intellectual property portfolio; and thirdly, continuing to improve operations and process technology and developing new nanomaterials for targeted markets.

Since I have addressed the latter two areas early in this conference call, I would like to confine my remaining 2004 remarks to business development and potential revenue growth by specific key market targets. Before I begin, let me remind you that much of Nanophase's activities involve business and application development, with specific partners or companies and target markets. Since it is the beginning of a new year, and the Company has evolved and improved its approach, I would like to provide an overview of target markets and a summary of the Company's anticipated activities in these areas. In the personal care market, we have seen increased interest from several companies for nanomaterial applications both in the US and in Europe. While we have several development efforts underway, let me comment on just a few. Beginning with our (indiscernible) sunscreen and personal care markets, BASF and Nanophase have the technology development agreement in place to jointly develop a second sunscreen material which is targeted for Europe and Asia. Assuming that the target launch is reached, we expect the nanomaterial demand for sunscreen should begin growth during late 2004 and appreciable growth during 2005. As part of the technology development agreement, BASF and Nanophase also plan to co-develop products for other personal care applications.

Secondly, we have just signed a development agreement with a $1 billion Company to co-develop personal care products apart from those we are collaborating on with BASF based on nanomaterials technology. We expect that development to begin around second quarter 2004 for two specific product areas. Depending on the specific development projects as they become defined, we would expect our co-development partner to fund some agreed portion of the specific development projects.

Thirdly, we have been developing nanomaterials for our personal care application with a leading global supplier of personal care products. They have stated that they expect to begin launching new products containing our nanomaterials during the second half of 2004. In summary, Nanophase continues to believe that sunscreens and personal care products represent a significant market opportunities for nanomaterials with definitive revenue growth potential over the next three years. The fine polishing market, we believe, represents a promising area for potential revenue growth and is a market where we believe that Nanophase may be uniquely positioned. This is a market where nanomaterials bring value, both in size and uniformity, for instance, as semiconductor feature size decreases, as well as rather novel application selectivity. It is also a market where we believe Nanophase's technologies offer distinct competitive advantages in nanoparticle creation, and in situ surface chemistry modification by our NanoArc synthesis process, and in the Company's ability to manufacture highly stable nanoparticle dispersions. Moreover, the Company's ability to manufacture multiple elements in a single nanoparticle, including rare earth materials, we believe, is potentially a competitive advantage for future technology nodes. In view of the Company's technology's initial results from several application trials during 2003 and the relationships that we have formed, we are optimistic about revenue growth in the fine polishing markets during 2004 to 2007. Within the fine polishing market, Nanophase is focused on the following sectors. CMP for semiconductors, hard disk substrates, particularly the newer glass-based compositions, optics and photomasks. This market, which is estimated to be about 900 million in total slurry value by 2005 -- note that is slurry value and not nanomaterial value -- is and will continue to be a major focus for Nanophase. Do understand that an often unpredictable amount of time, which I recognize is a frustrating concept for inventors, is required to fully develop and sell applications in this highly demanding market and to (ph) significantly penetrated market. Addressing CMP for semiconductors first, our market partner, Rodel, which has recently been re-named as Rohm and Haas Electronic Materials CMP Technologies, and which I will call RHEM as we go forward, continues to make definitive strides towards market penetration. Although the rate of market introduction has been slower than RHEM or Nanophase initially anticipated, we believe that RHEM is now well positioned for significant growth in this market.

During the last quarter of 2003, there was a considerable flurry of activity. RHEM made significant progress in slurry formulation to improve defect levels in wafer polish. Also during the last quarter, IMEC, that is IMEC, which is a European testing facility that is supported by semiconductor manufacturers and chartered with testing and identifying best-of-breed technologies, released its report, which evaluated the RHEM slurry as its process of record, which is the top rating. IMEC's recommendation is essentially an endorsement, and has created considerable interest for RHEM on the continent among semiconductor manufacturers. About the same time, RHEM officially market launched its new slurry, Celexis, which RHEM identified as using Nanophase's technologies -- for the SEI segment of the market, is offering a high selectivity, low defectivity (ph) slurry that provides excellent planarization and clearing.

Entering 2004, RHEM and Nanophase have again collaborated to further improve the slurry product. We believe the current testing results from the approved Celexis slurry are exciting and demonstrate wafer polishing results that were clearly seen to be market leading, based on our knowledge of competitors' products from actual production testing.

At this point in time, approximately five semiconductor manufacturers representing several actual fabs have stated they plan to enter trials during 2004, while that number may increase over time. RHEM and Nanophase have an active partnership. We are making joint sales calls to potential customers. Recently, for example in Europe, joint industry presentations, for instance, just last week at the CMP Mobile Air (ph) Interconnecting conference, and our continuing development for current and future technology nodes to semiconductors.

Despite everyone's best efforts, the timing of customer testing and acceptance we have found is not feasible for RHEM to predict, which makes the amount and timing of revenue flow to Nanophase equally difficult to predict. Nanophase now anticipates that our previously stated revenue expectations under our cooperation agreement will be largely deferred to 2005 and thereafter. In view of that, in the importance of continued joint product development for current and future semiconductor technology nodes, RHEM has arranged a $600,000 funded development agreement with Nanophase for 2004. Both RHEM and Nanophase have every expectation that the Celexis slurry will make significant inroads into this market. And we're looking forward to expanding our mutual growth over the next three years.

Turning to hard disk drive, or hard disk substrates composed of glass in our ceramic materials for the new generation of disk drives -- as we stated in our last conference call, there is an estimated 180 million slurry value market opportunity that the Company is pursuing. Focused on our market leading manufacturer to optimize our nanoparticle dispersion formulation and obtain empirical test data, we are in testing for glass and ceramic hard disk for their 2004 product line. Comparing current market materials to our NanoArc dispersions, tests (ph) added to date remain encouraging with improved planarity, high selectivity and very low surface (indiscernible). In parallel, we are also involved in testing with the manufacturer, re-write heads (ph). This is an area that we expect continued progress during 2004. The optics area, which is estimated at over 70 million in slurry value, has considerable activity since our last conference call. Once (ph) a supplier (ph) of optical polish and equipment has selected Nanophase's NanoArc nanoparticle dispersions as their recommended polishing media. Additionally, one end-user of polishing slurries has selected the Company's nanoparticle dispersion for an optics polishing application. The Company expects pull (ph) for these new application customers to begin ramping production during 2004. Additionally, several customer-specific application development projects remain underway for optics polishing equipment. Fine polishing for optics is a market sector where the Company expects continued growth. Relative to catalyst, under which we would include both chemical and environmental catalysts, we have made inroads during 2003 and expect further progress during 2004. For example, we have been in development with a company for a chemical curing catalyst application. The developmental (ph) results have been excellent. And the product is now in field tests in Europe and the U.S. Based on information from the customer, we believe that this product should launch by late summer. While we currently have a small level of sales into the catalytic converter market, we would like to appreciably increase sales in this area, and have modified our approach to the market during 2003, which we will anticipate will produce with positive results. We are currently in second-level testing with a major automotive OEM, and undergoing development with two catalytic converter manufacturers. In the industrial antimicrobial area, we have launched several business development initiatives during 2003 that are continuing in 2004. Current application development includes wood preservation, and antimicrobial (ph) clear coatings adhesive caulks and sealants, thermoplastics and textile applications.

Relative to wood preservation, which refers to pressure (ph) treated wood, we're working with a major supplier in the industry, and have nanomaterials in approximately ten different formulations that are in testing. In accelerated life (ph) testing to date, nanoparticles have demonstrated the unique ability to penetrate deeply into wood fibers and provide long-term preservative capability. While success is not assured. we are optimistic at this point. If successful, this application would present a significant revenue opportunity and growth market for the Company.

While we are unable to be specific, the textile application involves both UV production and antimicrobial activity in textiles. Our development partner has stated that they intend to begin product market launch during mid 2004. Adhesive and caulk applications typically involve some combination of antimicrobial activity, increased abrasion resistance or increased temperature resistance. Lastly, we have recently introduced the silver doped tin oxide for industrial antimicrobial activities and received solid initial interest. We plan to continue the market introduction and application testing the material during 2004.

Our last major focus market, but clearly one of the best opportunities, is coatings. Several advanced forecasting studies indicate that nanocomposites in coatings would become a large market for nanomaterials. This is a very broad field. It includes such areas as paints and coatings, for example, powder coatings, general industrial coatings, architectural coatings, (indiscernible) coatings, printing inks, automotive OEM and refinished coatings and UV curable coatings, additives for polymers and plastics and applications for use in coatings and sealants for food packaging, varnishes and compounds made for electrical insulation purposes. We have received considerable interest in this market over the past six months and are excited about the application development underway and believe that coatings may become a major growth area for Nanophase over the next three years.

Since this is such a broad field, let me discuss a few examples. One area of opportunity that Nanophase plans to attack this year is abrasion or scratch resistance for automotive clear coatings. We have completed considerable development work during 2003 for this market, and have a plan in place that we expect will make further inroads. We believe this is a market that appears to have potential demand and market pull for this application in both the U.S. and in Europe. We expect to be launching two new nanomaterials by summer that are directed to this market, as well as other abrasion-resistant coating applications. We have customer-specific development for this application and expect definitive progress during 2004. To understand, this is an application that may take some time to get to the market. As a second example, one customer is currently launching a sublimation coating with our nanoparticles in a decorative application for plastic and ceramic materials. We expect that the Company will make considerable progress in coatings during 2004 to 2007, and believe that this is a market that may well be a significant revenue growth area. In summary, we believe that Nanophase has significantly improved its new business development processes and marketing efforts during 2003 as keenly focused on markets that we expect are of adequate size to drive revenue (ph) (indiscernible) companies (indiscernible) over the next two or three years. We believe that these efforts are well directed, robust and cover opportunities that offer significant revenue potential. Relative to perceived competition, the Company's solid infrastructure and operational expertise, leadership in the supply (indiscernible) nanomaterials technologies and solid and growing IT portfolio, Nanophase is well positioned for its target markets and revenue growth. That concludes our prepared remarks. We are available for questions.

(OPERATOR INSTRUCTIONS). Nicholas Pay (ph).

A couple of questions, I was reading the January issue of the Nanotech Report by Forbes Wolf, and it mentions that BASF is using nanotech particles for painting, self-cleaning surfaces, toothpaste; they are working on all of those areas. Is that us?

I am sorry, I missed your question.

Is that us we are talking about there? Are we the ones that they are testing for painting?

You put me in an awkward spot here. I can say this. I can say we had a broad discussion with BASF in personal care coatings and catalysts. I can't speak specifically to any particular product because of the agreements we have signed. But I think it is safe to say that in the last six months of 2003, we have significantly expanded our relationship with BASF from a business development level, and are doing a lot of business development with BASF directly in Germany.

Can I ask that a different way then. Is ours an exclusive arrangement such that I can infer this is not a competitor?

We have an exclusive arrangement with BASF personal care products, primarily for one nanomaterial. We have not went exclusive with them for other materials at this time and would rather not. We're working with them across a broad area of development, but we are trying to avoid exclusivity.

I did not mean exclusive in the sense of our not being able to sell anyone else, I meant in the sense of their not buying from anyone else?

That would not be the case. We don't have a relationship -- BASF is a $32 billion (ph) chemical company, as you know. We do not have a relationship with BASF that would preclude them from buying nanomaterials with somebody else or working with somebody else on nanomaterials.

The only reason I am asking this is since we seem to have a developing list of intellectual property and patents and we are lowering costs and doing all these wonderful things, our sales revenue is, of course, not increasing. So the question that leaps to mind is the competitor getting all of this wonderful growing market we keep reading about?

I can say this. To the best of our knowledge in the nanomaterials area, that is distinctly not the case. We are familiar with most of the competition in the U.S. and some of the competition in Europe. We don't have a lot of visibility in Asia. But to the best of our knowledge, we are definitely the leading nanomaterials supplier. And we have been told this globally.

I will tell you an anecdotal story. We were visited by very large chemical company from Europe that I cannot name, who are very focused on nanotechnology. Now this is their numbers, these are not my numbers. I will not guarantee any of these numbers. But they swear that they looked at 800 nanomaterial companies globally. They physically visited 60; Nanophase was the only real company they found.

I remember you mentioned that at the last conference call.

I think that speaks to where we stand within the nanomaterials industry. I think that relative to revenue growth, it's been about the last six months that we have seen manufacturing industries and even the chemical industry, get very aggressive for nanomaterials. I think beyond a doubt, the business development, relative to new products, are higher value products. It's very difficult when there was a manufacturing recession. I think their manufacturing is beginning to come out of that. The amount of customer visits and business development activity over the last four months has been the strongest we have ever seen at Nanophase. Literally I don't think there has been a business day go by on average that we have not been at a customer or had customers here.

Let me ask you about one other reference they made in this report. Inglehart, which is clearly a real company, already sells, I am quoting, a Z-like (ph) catalyst for petroleum refining produced by a nanoscale self-assembly process, also sells effect pigment products for the cosmetic, called reflex, and automotive finish markets, called lumina, with optical properties controlled by manipulating the thickness of a nanocoating on a pigment particle, and was awarded a national medal of technology in 2002 for its invention and commercialization of a three-way catalytic converter for the reduction of automobile emissions. They are clearly a player.

Yes, they are.

Obviously, it says they are already selling all of this. So it isn't just testing. It's real sales. Are we in the same applications, trying to compete with them?

No, actually we are not trying to compete with Inglehart; we are trying to work with Inglehart.

It mentions Dupont as cranking out 1,000 tons a day of high-purity titanium dioxide nanoparticles; I assume we are not in that?

No. That is not a good market for the Company. We would be fighting both point Dupont and Degussa.

That's exactly why I asked the question, because there is no way you're going to beat their cost at 1,000 a day, and it's a commodity, and you don't want to do that.

My other question was this, that you mentioned your costs are going down dramatically due to Six Sigma and other things, and that there had been a total of two-thirds reduction in operating costs -- production costs. Our cost of revenue is actually up 4 percent over a year ago. It doesn't seem to reflect that.

Our variable costs have been down two-thirds. But typically, we have a certain size -- most of that is (indiscernible) manufacturing costs. In our cost of goods, we have about $1 million worth of depreciation on top of the infrastructure cost, which is why as volume grows, you are going to see the gross margin grow at a greater rate than revenue because we will have the ability to absorb a lot of those fixed costs.

Fine, that's clear. Thank you, very much.

Bruce Brewster (ph), Brewster Asset management.

My question is somewhat of a strategic or philosophical in nature. In this call, obviously, you are putting a great deal of emphasis this year in marketing, joint ventures, product development. And you have a marvelous technology. The federal government recognized it. But you, not dissimilar to others in the industry, are not showing the kind of growth that would seem to me commensurate with your outstanding products. I mean, phenomenal products. Technology that many people agree is going to revolutionize many industries over the next several years. I do not understand why these products have not caught on faster. And I have focused for instance, on abrasion-resistance products, that apply not only to flooring but other areas. And just in flooring, I cannot imagine why there has not been broadscale acceptance of something that would allow a warranty of five times as long on flooring. It seems to me it's cost effective, simple, driving market kind of application. And this is only one of many, many applications that you alone have discussed today. And it's not just you, it's everybody in the industry seems to be falling far short of what would seem to be the potential of nanotechnology. You realize this, I understand. And you are doing things about it. But I think you have realized this before and it's industrywide. What could be causing this? Why isn't the industry jumping on these revolutionary ways to improve products?

I will tell you my view. Again, I think an overriding theme that we have seen talking to customers over the past two years at conferences and in other industry gatherings, the recession has really thwarted new product development. It has been obvious during the last two years -- we have worked with product development people at companies to launch a product in nanomaterials and called on a Friday and they were no longer there (ph). That is not a myopic experience; that has happened more than once to us. So I think when the manufacturing sector was in a recession, there were considerable layoffs; new development people were hit hard. There was not a lot of new product development work. I think, recently, even in 2003, the momentum started to shift to the manufacturing side of the business. Nanomaterials, whether it's our materials or carbon nanotubes or fuller (ph) ease (ph) or anything that is typical goes into a product or process -- unless the audience is somebody that makes a product or needs it for a process -- it's really -- it's not a very good discussion. Since I have been at Nanophase, there's been a lot of hype out there in the industry. There has been a lot of academia hype. The government has done its share of hype. Mike Roco (ph) is one of the type hypsters (ph), in my mind, in the entire industry. So there has been a lot of hype. But the industry that needs to buy the product, which is the manufacturing sector, has just come alive. We have seen that very demonstratably in the last six months. But we have been literally inundated in the last six months with activity. So I think that is part of the reason. I also think -- I will tell you this honestly -- I also think that it's only been in the last year that we have seen key companies begin to organize nanotechnology efforts. Two years ago, you could not find a major OEM with a nanotechnology efforts. Now there are people who are hiring people and starting nanotechnology efforts inside their companies, Hewlett-Packard, General Electric, Rohm and Haas, and the list goes on.

So companies are now getting focused and I think that was a 2003 phenomenon on nanotechnology. And it took a while, I think, when this got organized. We are dealing with a very large company, for instance, that have the nanotechnology efforts. So when they assembled this group and they funded this group, the first problem was not invented here. They wanted to develop everything internally. They did not want to work with anybody in the nanotechnology industry. That is not an isolated phenomenon. I have been in discussions in at least two conferences in the past three months with other nanotechnology people. So I think that those two are overriding reasons. But I would tell you honestly, I think exchanging. I see a big move to manufacturing industries getting highly involved with nanomaterials. And our level of activity, I think, speaks to that.

None of that in (ph) here (ph) seems to be something that is going away, because that is an ego-based thing.

That is not going away in big companies.

What?

That's not going away in big companies. I will just tell you that, in the central research areas and in nanotechnology efforts that we have encountered at big companies, there is a real strong NIH (ph) factor. And that has only changed in the last little bit.

But take my stupid example of flooring abrasion resistance. The housing industry is at an all-time level. I don't know specifically how flooring is, but it must be very strong. They do not have the budget to improve upon product for flooring?

No, I really don't know the answer to that. I would tell you that there does not seem to be a lot of market pull in that. Again, to my comments, one of the things we've really tried to do last year, evaluating our efforts, was our technical pull or a market pull; the flooring market is a technical pull. There are definitive advantages for abrasion resistance. But talking to business people inside of flooring companies, it became really apparent that there was not a market demand. So it wasn't -- it was on development project, frankly, that looked like it was going to go on forever with several of these companies. We have essentially put those on the back burner, because they are not seeing a market demand. I think we have talked about this before in conference calls. We had a similar experience in carpeting. Working with a company, we developed a nylon carpet with antimicrobial properties, which we thought --

(Inaudible) for mold and other things?

Yes, which we thought this was a killer product concept. That company has since tabled that product, they cannot find market demand with the consumers. So I think what sounds good technically in some of these applications falls apart when you get to the market pull side of the equation. And that is something we have learned painfully over the last 12 months.

Consumers are not oriented to demand things that they have not been pre-conditioned to demand. Antimicrobial agents for carpeting is very important because of mold and other things. But if the consumer does not know about it, there is not going to be any pull.

I understand that. But if the carpet companies don't go out and promote that interest or excite that interest, --

Do you think it is that people just do not know of the import of nanotechnology so they are not insisting upon it, so the manufactures are not delivering it?

I think this -- I think consumers in the U.S. are much less knowledgeable about nanotechnology than consumers in Europe. From attending conferences and talking to people, that seems to be the case. But we are a 49-person company. And kind of the approach we've taken to 2003 that if we are in a development project with a Company and we can't get to the business leaders and we can't determine a market pull, we back away.

I think that's exactly correct.

Because we have been, for the last two years, too involved in development efforts with -- that are in the bowels of a big company, that we are told is just the top priority for the Company. And when we get to the bottom of it finally and get to the business side, it's a technical project. It's not a market pull. And we have got to find applications where there is definitive market pulls.

I would agree, thank you.

Doug Allison, UBS.

We certainly have a lot of irons in the fire. And I apologize for asking you to kind of repeat yourself here on the patent structures. Do we have the key technologies in analog synthesis, PVS dispersions coatings and mixed metal oxide stuff, the dope stuff -- do we have those key technologies covered by patents? What is the time line on future patent applications, if you can help us out on that?

Our key technologies are covered by patents or pending patents. The length of time through the patent office is lengthy, and it's not predictable. It is very frustrating, frankly. But it's not predictable as to when patents will issue. So I would say that all our key technology is covered by patents or pending patents. There is some of our key technology that we have elected to keep proprietary. Because that is the safest way to keep it, rather than (inaudible). The patents that we are looking at, we expect to have provisional patents, I would say filed by late summer. We think these are key technologies; we are working on them.

So the NanoArc synthesis equipment and manufacturing processes is secured by patents here at this point, or is the patent pending?

Some of those -- we have one of each. Actually we have one patent that was issued. We have some that are pending. And in that particular process, we have elected to keep some of that proprietary. There is good news and bad news to patenting anything. The bad news is it teaches.

Are you bumping up against other competitors' patents?

Not to date.

You are not aware of any that have been filed that would compete as far as you know at this point?

During the last year, we have seen a couple filed by a Japanese company. We have had those reviewed by our patent attorney and they are not an issue. Those were the two we were most concerned about over the last year.

Have you seen any patent applications that are for the semiconductor polishing area that would be a problem from people like Cabot?

Cabot is a very viable competitor out there. Cabot Microelectronics, which has the leading position, I believe, in the polishing CMP marketplace for semiconductors, buy most of their materials from Cabot Corporation. If you listen to the last Cabot Micro conference call, they admitted that they are having trouble in several market, especially as feature size decreases. We think why that is as follows. The process they use is flame pyrolysis. Essentially, nanomaterials made under flame pyrolysis looks like a grapevine with grapes hanging off; they are not discreet particles. So then you have to go through some kind of process to break these things apart and put them into dispersion. When these particles, because of the way they are made, hit a workpiece, they are very fryable (ph) and they tend to shatter. So when applications that we have encountered those materials in the marketplace, ours have performed on a much superior level. Because we have discreet single crystals that don't shatter. So I think it is our view, and the view of our partner, frankly, is that the technology we use to make nanoparticles for polishing, especially for CMP, is probably superior to flame pyrolysis technology for this application. But make no mistake about it, Cabot and Degussa both are very -- have significant prowess in the flame pyrolysis market. And they are very large companies. Cabot is about one billion in sales, I believe. And Degussa, I forget, but it's a good number.

In the wood preservation area, are your nanoparticles cost-effective relative to what they were using a year ago or that they've been stopped from using?

We believe so.

So it is not going to be a dramatic cost increase for the wood industry if they move to nanoparticles for preservation?

That is my understanding.

You had an announcement on business three or four months ago. Anything going on there in the medical application or x-ray detection?

Yes, actually, we are in development with that particular material for the applications we mentioned in the press release. That is still a very active program for us.

Is that a near-term possibility for revenues?

I think that's more mid-term possibility for revenues, just because of the testing that has to go on -- that seems to have to happen -- for appliances in that industry.

Is the sunscreen -- is there some seasonal pattern in sunscreen sales?

We have not seen that yet. We know that it is sunny somewhere all the time. It's not normally in Chicago, is it, Doug? But somewhere it is all the time. So we have not seen seasonality to the pattern. We have seen, entering this year, increased demand for the materials though.

One other question on the cash burn. Did I hear that you did not anticipate any cash burn for '04? The cash level was going to be the same --?

For Q1 of '04, only, it would be about even.

Okay, thank you. Thanks a lot. Let's hope we have a good year here.

We plan to.

Tim Kelly (ph), Dodey (ph) Management.

You mentioned early on that the nanoparticle dispersion is critical in the marketplace. Could you elaborate on that a little bit? And I also thought you implied in that comment that Nanophase's technology or products are significantly better than competitors'.

That's true. I actually attended a conference mid last year where a university professor presented an entire paper why you could not disperse nanoparticles ,which I thought was kind of amusing.

We make nanoparticle dispersions that are unique in two ways. First of all, as we made nanoparticles in the NanoArc synthesis process, we can affect the surface chemistry of the particles in a rather unique way. I won't describe it because it is kind of proprietary. But we can affect it such that the nanoparticles are easily dispersed, and are highly stable dispersions. I mean our CMP dispersions, we have tested now up to two years, and they are stable. The major competitor on that market, as I understand it, their dispersions are stable less than eight hours. So we have not seen -- we have not encountered anyone in the nanomaterials world that makes stable dispersions, across a broad range, other than us. I am not saying there is nobody; we have not encountered them; we have not seen them. And we have heard this from a number of companies, by the way. But we think it's a very --

In terms of -- you said you are reorganizing the BD (ph) and the sales structure. Are you changing salespeople? Are you just changing sales processes? What kind of changes are going on specifically?

First of all, we've instituted more rigorous processes for the business development. What we would like to do -- we get a lot of opportunities from people calling from us doing business development from presentations. And what we are trying to do is weed out the chaffe really early in the process, which is not something we have done well. I am talking again about the technical pull versus the market pull. And I think we're doing it much better now than we have ever done then. I am also much more actively involved in that area than I have ever been since we have been with the Company. And I have kind of assumed the role of chief marketing and sales officer for the company. There is just very increased focus on business development and sales. I think the rest of the Company, frankly, as was our strategy when we started this journey in 2000, we have gotten the technologies -- we have gotten technologies now ready to deliver; we are commercially viable; we have high quality products; and now the focus is to grow revenue. So I think the major change is we have become a very market-driven company. And the last vestiges of a science shop are probably gone.

There are no further questions at this time, sir.

All right, thank you. Thank you, so much, and we will talk to you again next quarter.

Thank you for participating in this morning's teleconference. You may now disconnect.