Joe Cross

Interactive Q&A: Joe Cross, President and CEO of Nanophase Technologies

Nanophase is pursuing relationships with architectural coating companies for a variety of products; this is a Focus Market for us.

Interactive Q&A: Joe Cross, President and CEO of Nanophase Technologies

Blake – we don’t really track US versus European sales; we tend to track by market/customer. Most of our overseas sales (Europe/Asia) are through our market partners – BASF, BYK Chemie, and Rohm & Haas CMP Technologies.

Considering the recessionary pressure in the US, we are currently watching architectural coatings and consumer cosmetic products closely.

Interactive Q&A: Joe Cross, President and CEO of Nanophase Technologies

Bruce – obviously, we are highly dependent on our market partner, Rohm & Haas, to develop this market and expand sales. This is not a market we could even consider entering without a market partner like R&H. Based on the latest information from R&H, we anticipate this market will continue to grow over the next 3-5 years in a material manner to Nanophase assuming the slurry development evolution occurs as currently planned.

Applications where we anticipate the most growth in the next 12-36 months, from the perspective of new business or customers, would likely be in applications for industrial coatings, architectural coatings, and, perhaps, CMP. We are pursuing several other applications, many of which are exciting, so this list could well change in the next six months.

Interactive Q&A: Joe Cross, President and CEO of Nanophase Technologies

Steve – it is our impression that the market opportunity is currently large enough and still growing due to the introduction of new semiconductor technology nodes, that a general industry slow-down should not have a material impact. Based on our last business meeting with R&H and the continuing joint technical effort in polishing slurry development, we believe there is growth opportunity. To the best of our knowledge, the market pull for the nanomaterial-based slurry with R&H is significant and appears to have opportunity to be used in other technology nodes.

Interactive Q&A: Joe Cross, President and CEO of Nanophase Technologies

Friend, I understand the frustration. Through our market partners and with our customers, we have encouraged marketing the ‘nano’ advantages. In the sunscreen market, major brands simply recognize that consumers tend to purchase on price versus performance as long as the consumer thinks the “SPF Rating” is acceptable. While that is naïve on the part of the consumer, that seems to be the way it is. Secondly, NGO’s like to attack nanotechnology, and anything else that may be new it seems to me, and major consumer brands simply do not want to do battle with these groups, who use innuendo fluently and get sympathetic media coverage. In sunscreens, it may surprise you, our nanoproducts seem to be endorsed and encouraged by some dermatologists and medical personnel who recognize the broad spectrum benefits of nano zinc oxide, in this case, versus the perhaps harmful effects of alternative organic materials.

Relative to architectural coatings, the NanoGuard trademark promotes the nanotechnology enabled performance of the coating. There have been marketing materials at most retail locations we have checked, so I am surprised at your experience. Check out the company website - it has a video showing advantages of the material.

Interactive Q&A: Joe Cross, President and CEO of Nanophase Technologies

At this moment, we have candidates in the interview process and anticipate completing the selection process in the near-term. As I noted above, we have qualified and quantified over 40 markets and down selected about 20. New sales personnel will be targeting potential new customers in these markets.

Interactive Q&A: Joe Cross, President and CEO of Nanophase Technologies

Thank you for the questions; let me try to answer these in the same relative order.

First, we have an exclusive global relationship with Rohm & Haas for nanomaterials in semiconductor polishing. As you may know, R & H is also a significant stockholder in Nanophase. Within this umbrella, there are several activities underway. For obvious reasons, we are unable to comment on specific customers or activities.

With Rohm & Haas, we believe that we have an excellent corporate relationship. We have initiatives and discussions in a variety of areas where there may be synergism between nanomaterials and their products. Again, we are unable to comment on specifics.

Our water-based technology is ready now and is being sold commercially in large volume specifically to the architectural coating and polishing industries. Our dispersions are typically stable for at least 2 years. We believe that dispersions are likely the delivery vehicle of choice for nanomaterials and Nanophase is rather uniquely well positioned to deliver.

Interactive Q&A: Joe Cross, President and CEO of Nanophase Technologies

Frank – first, the conference call (and all of our conference calls) are available on our site, nanophase.com under Investor Relations; please review at your convenience.

Relative to the call, it turns out that there were some technical problems with the company that handles this for Nanophase. Several questioners could not get noticed and therefore the questions were not asked as part of the call. The analysts did call us later and we were able to answer their questions.

Relative to revenue growth, understand that we expect revenues from our market partners (BASF, BYK Chemie, and Rohm & Haas CMP Technologies) to continue to grow going forward. We also expect revenue from current customers to continue to grow. So, there is a base of revenue growth in place for the future.

Additionally, we have to continue to add new markets and new customers. To accomplish this, we have been reworking and honing our business development and sales strategy during the last half of 2006 and through 2007, and seeing increased success. Steps we have taken include:
• Restructuring and reskilling the sales and business development team: during 2007 we hired Kevin Wenta, as EVP of Sales and Marketing, and David Nelson as Vice President of Sales – both with excellent experience in chemical sales. This process continues; we are now searching and plan to add 1-2 additional Sales Directors. Moreover, Dr. Brotzman, who was focused solely on R&D, is now predominately in a technical sales and marketing role for the Company, supporting customer business development and sales where he is adding tremendous value.
• We have also worked hard to hone our five stage gate business development model and processes. If you are familiar with this model, essentially Stages 0 to about 2.5 are considered the discovery Stages and about 2.5 to 5 are develop and implement stages. We believe that to reach the 50+% annual revenue growth rates desired, we have to improve the discovery Stages; we seem to do well in the develop and implement Stages.
• To improve the discovery stages, we have taken several synergistic steps:
o First, we have increased our depth and level of understanding in target markets by consolidating and ranking about 44 market segments, but focusing on the top 20. Market segments include energy, building & construction, printed electronics, and automotive to list a few and provide a flavor of the effort. First with the top 20, and then the remainder, we are driving to the customer value proposition to understand the performance and cost required for specific applications.
o Secondly, we have refocused our application scientists and engineers solely on these target markets and our product development efforts are directed to demonstrating the value of nanomaterials in these specific markets. For example architectural coatings – we have installed equipment to test the benefit of nanomaterials in commercial formulations in a manner similar to architectural coating companies. We purchase commercially available architectural coating materials and use our developed applications knowledge to add our engineered nanomaterial solutions. We then apply the coatings to the appropriate substrate, test the samples to industry standards, and, finally, visually and quantitatively demonstrate the value of using Nanophase to leaders in the marketplace. This approach gets much better customer attention and mindshare, demonstrates the value of nanomateirals in their particular products, and significantly reduces the TTM.
o Thirdly, we are developing more opportunities in these targeted market segments – the sales team has been given goals designed to increase directly touching the end customer on a weekly basis. We have increased customer touch 2-3X. We have also increased our presence at application trade shows such as coatings, electronics, and similar target markets to improve and extend our market knowledge and emphasize the advantage of nanomaterials in specific market applications for enhanced performance.
o Fourth, we are taking a much more rigorous approach to qualifying and quantifying opportunities to select those opportunities in the target market that are most likely to succeed, provide the largest revenue opportunities, and appear to have the shortest TTM. Our improved process allows very close examination of each opportunity before it moves through a stage gate.
In summary, we have given a great deal of thought and market research to select market targets and increasingly focus our efforts and resources to optimize the potential for revenue growth. Again, our vision is to reach $50M and then $100M in sales; to do so, we have to increase annual revenue growth to 50%. We have restructured, reskilled, and honed our business development and sales effort and implemented or refined processes to achieve these goals. We are adding additional sales personnel to increase market and customer contacts.

Interactive Q&A: Joe Cross, President and CEO of Nanophase Technologies

Ralph – there is no basis to the speculation in the sense of us working with NanoSolar. We are familiar with the company and its technology. Relative to Nanophase, as solar applications evolve toward increased efficiency and performance, there may be an opportunity for nanomaterials. It is not a market that we envision developing in the very near future.

Interactive Q&A: Joe Cross, President and CEO of Nanophase Technologies

Ralph – if you consider the entire chemical industry, I think you will find a variety of companies with different multiples. Basic materials are at one end of the industry with multiples normally associated for that group. Specialty chemical companies, which are typically viewed as technology companies, command increasingly higher multiples generally due to higher gross margins. As Nanophase grows, we would expect to be considered at the upper level of specialty chemical companies and demonstrate the gross margins that would justify the much higher multiple.

Interactive Q&A: Joe Cross, President and CEO of Nanophase Technologies

Lisa – this is a tough question. Valuing patents, in the sense of attempting to attach a dollar number, is a difficult, expensive process that we would not consider. So, I just do not know how to answer that part of the question. In general, the patents that encompass our basic technologies and those relating to applications would seem to us to be the most valuable. Going forward, given the changes at the US PTO and business reality, we expect to focus on application patents and keeping internal technology more in the proprietary information arena.

Interactive Q&A: Joe Cross, President and CEO of Nanophase Technologies

Yes, you do have have some good questions - a "multi-parter". Let me attempt to answer your questions in order:

- As we have stated before, we believe that our break-even is around $16-18M in annual sales depending on product mix. We have not provided guidance as to when we expect to attain this. Beginning in 2008, we started providing revenue guidance and expectations; keep watching.

- I am not exactly sure how to answer this without offending Dr. Brotzman! While Dr. Brotzman is our lead scientist, and has recently been promoted to CTO, we have added to the scientific and engineering staff. In R&D, where the emphasis is 'D', we have an additonal PhD and three chemists to support customer application development. We have also assembled a highly competent engineering staff including, we believe, one of the world's leading plasma physical chemists, to advance our technologies and constantly improve our manufacturing prowess. Given our size, we have a highly competent group of engineering and scientific professionals.

- As we have stated on conference calls (see a total compilation on our website), we need revenue growth. We have restructured and reskilled sales and marketing during 2007 and are currently adding to this staff to increase sales initiatives. We believe that our current equipment should support $20-25M in sales depending on product mix. To reach $100M, we would have to add capital and probably reconfigure our Romeoville facility; exact capital numbers would depend on product mix. At this point, we believe that we should be able to handle the bulk of capital funding with cash currently available plus that generated as revenue grows.

- Let me be very clear on this; most of our R&D costs are 'D' to create new products for markets and applications, or improve current operations to improve yield or reduce cost. Beginning in 2006 and going forward, we have adopted a conservative patent strategy that recognizes the changes at the US PTO and the practical reality and costs of enforcing patents. It is preferable in many instances to keep IP as proprietary rather than patent. One cannot simply look at the Company's R&D expense and equate it to the cost of patents issued. As I explained, above, there are many other activities that are shown in R&D expenses.

Interactive Q&A: Joe Cross, President and CEO of Nanophase Technologies

As we have annual growth revenues averaging 30+% each year in 2005-2007, the Company has also grown gross margin. As a percent of sales, gross margin grew tenfold in 2005 over 2004. Gross margin further increased about 50% in 2006 over 2005 and grew to 26% of sales in 2007. Gross margin, and growth therein, drives profitability. With increasing revenues and gross margins, Nanophase will reach profitability in the near future. With over $50 million in NOL carry forward, Nanophase does not expect to pay taxes for a considerable period of time.

Interactive Q&A: Joe Cross, President and CEO of Nanophase Technologies

As to your second question regarding competition, Nanophase's competition usually is an alternative technology that may provide the same benefit in an application at perhaps a better price point. We rarely encounter nanomaterial competition. Nanophase is clearly a global leader in nanomaterial technnologies and is generally perceived so by large multinational companies, such as BASF.

Relative to the future, we evaluate markets and opportunities based on the value proposition and time-to-market (TTM). We are evaluating about 40 markets at this moment and believe that we currently have the right mix of engineered nanomaterial products to address these markets. Going forward, should we encounter a market with a suitable value and TTM proposition that would require new nanomaterials, we will certainly consider that. Our technologies have the capability of producing a considerable number of nanomaterials.

Interactive Q&A: Joe Cross, President and CEO of Nanophase Technologies

Since our most recent conference call, we have not seen anything that would increase our guidance at this time. The macroeconomic climate in the US, and most of the rest of the world, seems to have worsened; many believe that the US economy has already entered recession. From a qualitative viewpoint, we are concerned with an economic slowdown relative to the consumer and, thus, on products using our nanomaterials. We are continuing our cautiously optimistic view for 2008.

Having said that, we have several new market and customer initiatives that appear promising in the near-term (2008-2009) and are quite focused toward our internal goal of reaching 50% annual revenue growth going forward.