Jess A. Jankowski - President and CEO Frank J. Cesario - CFO

James Liberman - Wells Fargo Advisors Bill Chapman - Morgan Stanley

Good day, ladies and gentlemen and welcome to the Nanophase Second Quarter 2014 Financial Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder this conference call is being recorded. At this time I would like to take a moment to read the Safe Harbor. 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 important factors that 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 nanocrystalline material, changes in development and distribution relationships, the impact of competitive products and technologies, possible disruption in commercial activities accessioned 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. And now I would like to introduce your host for today’s conference, Mr. Jess Jankowski, President and CEO. Please go ahead. Jess A. Jankowski: Thanks, Kate. Good morning everybody. Thanks for joining us today for our second quarter 2014 financial conference call. Frank Cesario, our CFO is with me again today. We have strong financial results this quarter and we continue to see success in our ongoing business development efforts. At a high level, as we discussed briefly in the press release, our Q2 2014 revenue came in above that of the same quarter of 2013 and again we were ahead of the averagely quarterly rate of last year. Additionally our Q2 bottom line approached GAAP breakeven and we even generated a bit of positive cash. While we haven’t yet achieved regular positive quarterly cash flows and don’t expect to do so this year we are well on our way. As I said this is a direct result of focusing only on the top opportunities as well as running our business as efficiency as possible. Even though this was a good quarter I don’t like to get caught up in incremental quarterly changes. There could be a distraction from where are working to accomplish in developing sustainable business over the typically drawn out times the market the company has experience in advanced material applications. We are all focused on increasing our revenue and our margins in a material way over the next term. We believe we have identified a number of markets that make our growth expectations sensible and as I keep saying the goal we are all after is the significantly increase the equity value of Nanophase. After Frank provides a short overview of our financial results, I will talk about our key business development goals for the near and mid-term. These are focused on these main areas; personal care technologies, surface finishing technologies and energy technologies, including energy storage and solar control. Frank? Frank J. Cesario: Thanks, Jess. Good morning. This is Frank Cesario. Before I begin today's overview of our financial results for the second quarter 2014 please remember that all financial results are stated in approximate terms. Revenue for the second quarter was $2.9 million versus revenue of $2.7 million for the comparable 2013 quarter. Gross margin were 36% for the quarter versus 32% for the comparable period of 2013. Net loss for the quarter is a $100,000 or a [zero] per share less than $0.05 per share compared to a net loss of $500,000 or $0.02 per share during the comparable 2013 period. The six months ended June 30, 2014 saw a revenue of 5.5 million versus $5.7 million for 2013. Gross margins were 32% in 2014, versus 31% in 2013. Net loss for the 2014 six months period was $500,000 or $0.02 per share versus $900,000 or $0.03 per share in 2013. Many will recall that we have virtually no receivables at the end of 2013. We have rebuild our working capital position to normal level and as of the second quarter 2014 with $2.4 million cash position. Other than working capital cash consumed by the business was less than $200,000 during the first six months of 2014 and it was positive during the second quarter as Jess mentioned. Of the new cash outflow during the first six months of the year all but $20,000 related to our modest annual capital spending and prior to significant new revenues the pursuit of which Jess will describe further. Our company remains debt free. Jess? Jess A. Jankowski: Thanks Frank. I am happy with our financial performance for Q2 and I expect it to continue to improve overtime. Since the financial results speak for themselves I’d like to visit our main business development areas. These remain our primarily focus as we strive to build Nanophase to achieve the highest sustainable value possible for its shareholders and stakeholders. Again they are personal care technologies, surface finishing technologies and energy technologies, including energy storage and solar control. We expect these to make a meaningful difference in the near and medium terms. Relative to personal care technologies which is composed largely of our active ingredients for inorganic sun creams we are continuing to see good market feedback for our zinc oxide. We attended the New York Society of Cosmetic Chemists Supplier's Day exposition in Q2 where BISF prominently displayed and promoted the [inaudible] line of product which as many of you know have been designed and manufactured by Nanophase. Walking the show, speaking with multiple personal care companies as well in meeting with BASF we see positive signs and continued growth for our products. Our goal is to continue to develop new products in this space and to see revenues continue grow at least incrementally if not better. We expect this market to continue to be a strong one for Nanophase. Switching to what we call surface finishing technologies, which I consider represent both near and mid-term commercialization opportunities we continue to expand our presence in the optics policy market. We're doing this by engaging in various focused and industry-wide marketing activities identifying and working with consulting experts and most importantly by keeping our feet on the ground at existing and potential slurry customers. Recall that a slurry in this context is a proprietary mixture of chemistry and particles both things being critical for success that is used in various types of optics polishing machines to produce lenses and glass for many high-end applications. At the risk of being repetitious advanced in photonic devices and related lenses, brewers, prisms and other optics are currently driven more and more by the demand for finer and finer surface finishes which are achieve via precision polishing. What perhaps has been an area that I haven't highlighted enough in the past is that these manufacturers are also highly focused on achieving increases in throughput. Our slurries can provide these increases to enhance removal rates and more importantly reduce process time required to achieve the desired surface finish. Optics polishing is a capital intensive business and we believe that we can offer multiple benefits in our value propositions in this market. To this end we're continuing to expand our capability in direct application support for optics. We're further enhancing the polishing laboratory we built in Q1. In order to better serve our customers and potential customers, we've expanded the metrology equipment and have plans to add a second type of polisher. These additions will allow us to address a greater part of the market more directly and more effectively. Some of ways this lab will help us to expand our business development efforts are by allowing us to generate a more complete data package to open the door to prospective customers. We’ve also bolstered our analytical capabilities which will help us in hitting each customer's ideal running conditions more quickly. Once trials begin and we are called on to bring our in troubleshooting experience into the mix we will be ready. According to limited feedback we’ve received to-date we're developing a reputation as a good commercialization resource in this market. We're doing all of this to enhance the sales process and to make it easier for our potential customers to make their decision to run trials with our slurries. This is a bigger decision for them than it may first seem because both optics polishers prefer to do their new materials testing on the platform, sacrificing productivity today for promised gains tomorrow. This means it's harder to get them to break in the daily production to run our slurry initially. Fortunately it also means that the results of these trials will be more meaningful than those done at large scale and the further post trial scale up on the customer side is less involved. All-in-all we expect these additions to our selling toolbox to help us to bring the business development cycle to a close sooner. To further capitalize on this we also exhibited at the Optatec Show in Frankfurt, Germany in Q2 and we believe we made new contacts there that may translate into 2015 revenue in addition to the existing development work we've been doing here in the U.S. Currently we have purchase commitments extending through year-end that will exceed 2013’s full year polishing volume. Our polishing revenue in total for 2013 was just a few hundred thousand dollars. We expect to roughly double that volume in 2014 and expand upon this further in 2015. The way to look at this, we're addressing obvious market need in our approach to this space and we're continuing to receive positive feedback. Our immediate goal here is to build surface finishing technology to a point where it exceeds $1 million in business to Nanophase in 2015. Relative to our two new energy technologies which I consider to be in the mid-term commercialization group we continue to make solid progress. We refer to these two areas as energy storage referring to batteries and now solar control which refers to several applications involved with improving energy conservation. Our market reach has expanded to a point where we are now willing to be at least a little more specific in describing these areas. For the battery work since the last call we’ve had meetings with three companies that produce more than half of the world's alkaline batteries. While due to confidentiality restrictions we can't specify the details we have active projects with the leading companies in this area. While we’re further long in the battery applications than in solar control, based on test results and market feedback in both areas we see opportunity for very large profitable volume across our energy portfolio. Ultimate commercial success remains to be seen here particularly given our limited past exposure to this markets. But we are making progress and both markets are demanding improvements that we believe we can deliver. While it’s difficult today to determine the revenue that will come from the first year of our product’s future commercialization we are pursuing these energy applications because we believe they can both contribute seven figure revenue in the midterm. In both of our energy businesses we are making good headway toward commercialization. At the end of the third quarter we will be prepared to share more details around the timing for revenue in these businesses. To summarize right now our focus is very sharp in these areas, we see all of them personal care, surface finishing technologies and the two energy applications as the markets where we can win in the near and mid-term and we are going after them aggressively. I like where we are right now. With that I’ll finish up. Although most of our investors listen to the webcast or review the transcript after the live call we would like to invite those participating in today's call to ask any questions you may have or to share your comments. Kate, would you please begin the Q&A session.

Thank you. (Operator Instructions). And our first question comes from James Liberman with Wells Fargo Advisors. Your line is open. James Liberman - Wells Fargo Advisors: Thank you, it’s good to see you making such good progress. Jess A. Jankowski: How are you doing Jim? James Liberman - Wells Fargo Advisors: Very well, thank you. And I guess I want to ask -- I had never heard this -- maybe I have been remiss it but haven’t heard this comment about this solar control. Is that something you can talk more about? Jess A. Jankowski: That’s because we haven’t described it in exactly those terms in the past. It’s an application to keep solar energy from entering things, mainly architectural or automotive type of things, a couple of different way to go at it but essentially it will be an energy saving application. We have talked to it before about energy control and kind of avoided the specifics, probably because we are in the midst of meeting with several companies trying to roll it out and what we didn’t want to do have anything floating around there before we had better and stronger understanding of it. We think overtime it could be a really good market for us. It plays to our strength. One of the things about it and you know I can’t get into the technical detail but essentially we have the ability to as engineer particles at the surface level sometimes to the tune of creating multi element single particle oxides that have different wavelengths effect. And so in this case we believe we’ve found a way to exceed performance in the market for controlling solar energy coming into something. So it’s not a solar energy application, I have had people ask me about that. It’s really solar control, keeping things from basically getting warm from solar or IR radiation. James Liberman - Wells Fargo Advisors: Okay, well that sounds intriguing. Also regarding the polishing slurry business hasn’t started to roll-out again. One can get the impression that the opportunities there are really enormous that you give us some guidance that as relatively modest as you could reach a $1 million or so a year but couldn’t this be a much broader business? Jess A. Jankowski: Yeah, that’s not -- I didn’t say it could a $1 million a year, my goal, our goal is that it will be at least $1 million next year. James Liberman - Wells Fargo Advisors: Okay. Jess A. Jankowski: It could be a much bigger business than that over time. The difference here years ago we were very involved with a large -- what [inaudible] has in the CMP Polishing business and we were providing a basically a dispersion to them and they were incorporating it into a slurry in a very different application, semi-conductor wafer polishing. In this case we are actually we have engineered design and completely owned the slurry. So we are selling a finished product to an optics manufacturer that has to do nothing to it but put it in their system and with the experience we have built over the last ten years, I mean these are the kinds of things Jim, that weren’t really available to us when we were still exclusive with [Roman Hires] when it became Dow. James Liberman - Wells Fargo Advisors: Right. Jess A. Jankowski: And as we move forward we realized these individual applications are not going to be as big you know at one point you know we did over a $1 billion for the business with just Dow. I think there are potential seven figure customer out there but I think there they’re they maybe handful but I think there are many customer that are in that one, two, three to $500,000 a year range and we bring some value to them, particularly you we are helping out on the platform we are helping them help us to basically understand what their processing requirements are. We build this small polishing lab. I can really say it’s not really a small polishing lab it’s a relatively inexpensive polishing lab, but I have been concerned about translating to the shareholders base that’s we just spent a ton of money do this. It wasn’t an expensive thing as much as this. We now have capability and we are adding the second polisher any day now. We are waiting it to be delivered to address a big chunk in the market and then on the metrology side we have the same equipment as our customers have. So if you go back a minute and think about the CMP business we were never going to have a clean room and atomic microscopes and $10 million polisher and all those thing that are required to basically get down and dirty into the application to understand that. The optics business is more straightforward, plays to our strength fortunately or unfortunately depending on how you look at the history of Nanophase in developing the quantity of products dispersion and particles that we have over the last year really beginning in the -- days but really getting ramped up during the big and we were more the architectural work we built a high degree of expertise in dispersion chemistry and then you put that on top of polishing understanding we built we have got a nice combination. I think this business will be different than the other two -- then the two energy applications say because it will be greater quality of smaller customers where it’s when we talk about energy you are talking. We talk to three companies that can control more than half of outgoing battery production in world. So if we get one of those and it gets rolled out that can be sizeable revenue. Your hit rate is going to lower your upside is going to higher. It’s different kind of selling. We are playing to re-strength here and we are also very keenly aware that we have to build revenue in the near term. James Liberman - Wells Fargo Advisors: No I think that you have really put together a great profile and looks like you are doing you still execute much better. Thank you very much. Jess A. Jankowski: Thanks Jim.

(Operator Instructions) Our next question comes from the line of Bill Chapman with Morgan Stanley. Your line is open. Bill Chapman - Morgan Stanley: Yes, Frank good morning. Frank J. Cesario: Hi, Bill. Bill Chapman - Morgan Stanley: Hello guys. Could you give more clarity on the BASF if they are promoting the zinc formulation that you guys are presenting or offer is this any way to go into a bigger launch in Europe in other parts of the world? Jess A. Jankowski: Well it may very well, the business is growing so, I know you are probably a little more up to speed on this but for some of our investors out there we are making an inorganic zinc oxide particle we coding. It’s close to an all natural the coding isn’t natural the particle is natural and what they did was they exhibited -- they actually build something raw wire which is pretty interesting and they showed where their ingredients come from and the narrow base ingredients are a big part of that. We are their only inorganic sun blocker right now in our zinc oxide. That business in the United States has been growing. Our business is up I don’t the number off the top of my head but I think our business is probably up 25% to 30% over the last four years. It growing in the U.S. There have been expansion in the Europe approval process to allow zinc oxide more room into their market. I am as not familiar with all the FDA type requirements in Europe but I know that for a long time zinc oxide was frowned except in Germany and we are seeing it starts to grow and there is the demand for zinc oxide in Japan, in China, in Korea. So I expect that demand to end up making its way to us. I do think though their focus is really on the natural piece and building on the U.S. market they are also marketing internationally but the show is the biggest U.S. show and it was mainly geared toward U.S. customers but that market build will continue to grow. I have said that our goal is that our personal care area grows at least incrementally if not more over time. The reason that I said that instead of saying maybe will grow more is because it is a little difficult to understand the complete flow of time at least here to the time it get BASF to the time that is it gets to their customers. And we're not completely up on every inventory issue and how much somebody might have. Historically this business continues to grow. It's looking like at least last year's business so far, maybe a little better. And I have -- I think there is significant upside for us there but the upside there because it's a mature market isn't going to be a double. It's probably going to be incremental growth over a period of years. I think something else to consider that's interesting that isn’t as well known and while this business grows, the share of North American market that BASF has keeps, shrinking, meaning the total pie keeps getting bigger. They're servicing bigger demands from their customers and there are more customers coming online. So I view this as a positive for the zinc oxide business and really the in organic business in general. There is also a titanium dioxide which we're not all that involved in these days but that's another inorganic that's out in the marketplace and seeing some positive movement. Bill Chapman - Morgan Stanley: Okay. Thank you. Let me ask you on the batteries, you mentioned they were looking for some improvements. Is it something you can execute, are you hopping in the next quarter or two? Jess A. Jankowski: No. No, I don't. I mean it all depends what you mean execute. It is [inaudible] this year that will lead to some volume next year but the more serious volume would be in 2016. I really think the -- if you look at the business and where we're sitting, the big drivers for growth over the next 12 months are going to be personal care and polishing. In addition to, we have a market basket of products that wax and wane a little bit and we're getting some positive feedback from some customers on a few things that are very positive. But when I look at the battery business, I call that a more of a midterm benefit to us in my head near term is this all happens within a year. Midterm I think is more like it might start to happen in the year and I believe more like a year beyond that. But I do think it's a very viable thing. As part of this which I have to consider is the – I can't disclose where we're at and we will talk more in Q3 about the timing of revenue. But there is a cycle relative to testing and we do a lot of testing than a customer does a lot of testing, R&D type testing and the customer actually build a series of batteries then they build ten and thousands of batteries then they make trial run, then they do a trial market and then it gets rolled into a more of a full blown market launch. We just think that we are learning about a little more in terms of how that – how that's all going to unfold. I think in the end I can say with a degree of confidence that the battery application is seeing some traction in terms of the customers are giving us very good feedback, that we're doing some good things. That feedback is not complete yet and hopefully when we get to the end of Q3 we'll be able to share a little bit more. Bill Chapman - Morgan Stanley: Okay. Thank you very much. Jess A. Jankowski: Welcome.

And I am now showing any further questions at this time. I'd like to turn the call back over to Mr. Jess Jankowski for closing remarks. Jess A. Jankowski: Thanks Kate. We appreciate the continued support of our longer term investors and we appreciate the enthusiasm and support of our new shareholders. We're working hard here and we're seeing that payoff as we go. All of us continue to work toward our ultimate goals and I will say it again of becoming an exciting company with significant growth and profitability. Thanks again for joining us today.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect. Everyone have a good day.