Good day, ladies and gentlemen, and welcome to the Nanophase Second Quarter 2018 Financial Conference Call. [Operator Instructions] Also as a reminder, this conference call is being recorded. The words expect, anticipate, plan, forecast 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 the news release. Those 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 materials changes in development and distribution relationships, the impact of competitive products and technologies, possible disruption in commercial activities occasioned by terrorist activity and armed conflict, and other risks indicated in the company's filings with the Securities and Exchange Commission. Nanophase undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties. At this time, I'd like to turn the call over to the President and CEO, Mr. Jess Jankowski. Sir, please go ahead.

Thanks for the intro, Dulum. Good morning to those listening live. We're happy that all of you are here and we do appreciate our investors who've chosen to listen online at their convenience. Your company has had a great Q2. I'm thrilled to be discussing successful product launches through Solesence, nice volume in our advanced materials business driven by personal care, and a macro situation that continues to improve. Jaime Escobar, our Chief Financial Officer is joining me again today. During this call, I'll be giving an update on our progress in new business development, particularly within Solesence along with updates on our advanced materials business, and of course, second quarter results. I'm also going to discuss our view of the current market dynamic for sun protection as it impacts both our traditional markets in daily wear and activewear sunscreens and in our new markets for fully-formulated prestige cosmetics. For Solesence, we hit all 3 of our Q2 launch targets and demand is better than expected. In our advanced materials business, we also saw solid demand that appears to be set to grow at a higher than incremental rate in 2019. Our second quarter 2018 revenue was $4.1 million, representing a 15% improvement over the same quarter in 2017. We also showed $88,000 net profit for Q2. Our 6-month revenue numbers were $7 million, above flat when compared year-over-year. The 6-months profit numbers were negatively impacted by what we believe was the anomalous Q1 we had this year. In terms of our forward strategy, which I'll expand upon later in the call; as a company, we are becoming more and more focused on skincare and cosmetics application. Consumer demand, regulatory forces and the success of our Solesence technology are things that are creating momentum, momentum that we expect to sustain for the foreseeable future. Before I go any further, I'd like to introduce Jaime Escobar, our CFO, who will give us a quick overview of our financial results. Jaime?

Thanks, Jess, and good morning everyone. Before I begin today's overview of our financial results for the second quarter of 2018, please remember that all financial results are stated in approximate terms. Revenue for the second quarter of 2018 was $4.1 million versus $3.5 million in 2017. The net profit for the quarter in 2018 was $88,000 versus a net profit of $22,000 during 2017, both with a $0.00 net income per share. For the 6-months ended June 30, 2018, revenue was $7 million versus $7.1 million during 2017. The net loss for the first 6-months of 2018 was $836,000 or $0.02 per share, versus a profit of $68,000 during 2017 or net income per share of $0.00. We saw an excellent rebound during the second quarter this year versus the first quarter results, but we still continue to show a year-to-date loss. This loss was largely a function of first quarter lower revenue volume and a reduction in finished goods inventory, resulting in less overhead absorption along with a less favorable product mix, production cost increases, and an increase in R&D expenses related to the Solesence ramp up. Jess will discuss this further in a few minutes. We ended the first quarter in 2018 with a $1.3 million cash position and $500,000 drawn on our working capital line of credit. Jess?

Thanks Jaime. We're at a nice spot right now, both for Solesence and Nanophase. We market active ingredients and finished products that are primarily enabled by high performance mineral UV absorbers. Our products offer full spectrum protection while being derived from naturally occurring minerals without some of the side effects associated with traditional chemicals-based materials. Demand for minerals-based full spectrum UV protection continues to increase, part of which is being driven by a growing awareness of the limitations of the chemicals-based alternatives. The State of Hawaii has recently joined Australia in banning some of the more common chemical UV absorbers used in the cosmetics and sun care markets to avoid their negative effects on marine habitat. We believe that this along with increasing consumer preference for mineral sun protection will continue to result in additional demand for our minerals-based ingredients. Of the offerings in our portfolio, Zinc oxide active ingredients and fully-formulated Solesence products stand to be the biggest beneficiaries of this growing market awareness. Our advanced materials business is growing with their primary focus on business and product development in this area being on personal care applications. We have titanium dioxide and zinc oxide products in the market today with zinc oxide representing the lion's share of our volume. Zinc oxide, in particular, appears to be growing in popularity with consumers. Given our strong history in this business, we are well positioned to capitalize on this new demand. As mentioned in the press release, through its first major customer, Solesence had 2 successful launches of new finished products in Q2 formulated by our team, along with the successful launch of a formulated intermediate ingredient. All 3 of these products utilize our patented and proprietary Active Stress Defense technology to protect people from the damaging effects of the sun. In the second quarter of 2018, this volume composes more than 10% of our total revenue. We expect an additional product launch to come from a different customer later in the third quarter and fully expect more launches through early-to-mid 2019. We're also expecting higher volumes of the products launched in Q2 as they go through the reorder process. Initial indications are that consumers like the products and they want more. Our third quarter also looks good and we're working on delivering more Solesence product launches for the fall of this year and spring of 2019. As you may recall, we hit an all-time high in revenue in 2017 at $12.5 million. It was up by 16% or above $1.7 million from 2016. The 2017 increase was driven by strength in our coatings business and some growth in our personal care business within advanced materials. We expect coatings to be down in 2018 with increases in personal care materials to more than make up any shortfalls. Further, we expect Solesence sales to bring us to another new record revenue level for 2018. Solesence will be exhibiting next week at Cosmoprof in Las Vegas. Cosmoprof is the leading B2B trade show encompassing all sectors of the beauty industry under one roof. Last year, more than 36,000 visitors engaged with almost 1,300 exhibitors from 45 countries. It's a great venue for Solesence and we expect to do some meaningful business there. If you're in town, stop by and visit us in the cosmetics and personal care section. I expect our booth to be fun and crowded. Although most of our investors listen to the webcast or review the transcript after the call, I'd like to invite those participating in today's call in real-time to ask any questions you may have. Dulum, would you please begin the Q&A session?

[Operator Instructions] Our first question comes from [ Randy Kay of RKA ]

About the Solesence product, is it subject to the seasonality that the zinc oxide products are? In other words, the zinc oxide seems to do really, really well Q1, Q2 getting ready for the summer, what about -- how does Solesence fit into that?

Okay. Well, before I begin with the Q&A, I just want to reiterate that I'll do whatever I can to answer the questions but I've got to be cautious about protecting the confidentiality of our customers and not offer to anything that might weaken our competitive position or negotiating abilities. Relative to your question, the largest feature of the business that creates the base business, the advanced materials, personal care business that creates the drop off in Q4 is that the bulk of that volume is in the NAFTA region. We have some growing business in Asia, in Australia, that should help that. With respect to the Solesence products, most of them are not in what you would call the sun care category. They're much more related to cosmetics. So there should be less seasonality than we've seen in the past. The other thing will be in terms of launches and it's yet to be seen where that volume is going to go. We should have some Q4 ramp to support that. And I -- this year, I don't expect a ton of Q4 ramp. There might be some as we go though, given the launch cycle, the end of Q4; Q1, I guess, still be a pretty good time for us and that seasonality will be tempered both by the type of products that the Solesence -- the brands that we are selling through our -- selling as well as the fact that we think we'll start seeing more demand on the other side of the world where the seasons are opposite.

Can you also help me understand, when you use the word anomaly for the cause of the increased costs for Q2. Can you give me a little color on that, what exactly are you thinking or speaking about?

Sure. Well, we had several things. I mean Jaime mentioned a few, we left the end of the year with a pretty large, pretty substantial inventory level and as such, given some of the constraints we operate under -- we didn't ramp up production as quickly in the beginning of the quarter as typically we would, and we also had some -- a little bit of lumpy demand. By the time we got towards the end of that period, demand was great guns and going to be better than it has historically been. And you really don't get that back on the front end. We also -- while we are very excited about this call and about the quarter and the launches, we're behind where we expected to be. And so we did a fair amount of testing and a lot of other marketing and ramping related activities in Q1 that may well have been or would better have been done throughout the prior year and we just had to -- we're pushing as hard as we can to get it done. I think once things level out, I think there was an anomaly relative to the depth of the loss in Q1 and I think as we level out and we get at a more regular launch pattern in some substantial base business, we'll see a lot less of that.

And lastly you said the emphasis on this company profile going forward seems to be a lot in the skin care business or mostly in the skin care business. What does that portend for the future of the solar coverings and the grinding or the polishing business?

Sure. Well, essentially some time ago, we stopped doing the direct product and business development in those areas. Now, as you recall, on the polishing side, we announced our collaboration with M&S which is deeply committed to serving the optical polishing market. We don't expect that business to go away, however, we're not actively developing new products and we are not handling the customer interface anymore. The solar control business, we really haven't had much volume and that's something that we've decided not to put the resources toward, because we believe the payback is much better relative to Solesence, and also a matter of focus, I think the stronger we get in an area, you know how it is, the more you do it, the better you get at it. I think that's a better focus. As far as coatings goes, we're still -- we'll still work closely with key customers in certain areas and those are areas that if those customers wish to take the lead and do development, we'll support that. Potentially if they wish to pay for development, we would support that. But our top focus right now, as you pointed out, is definitely skincare and cosmetics, because we see that as the greatest area for us to grow and the demand -- the market is asking for what we provide, which is just a great place to be.

Our next question comes from Ron Trotter, a Private Investor.

Can you provide any additional color about the market acceptance by the ultimate customers of the Solesence products?

I really rather not at this point, just based on the knowledge that we have is -- the knowledge that we have that's not confidential is strictly the sales volume. I think the products are selling well, from what I could tell. I think we're going to have additional demand in Q3 which is going to be great. And as I mentioned, we are also planning to have an additional launch with a different -- additional customer in Q3. I mean with that, I think generally or in my sense just from being at the shows and talking to our customers which are brands, there is a very positive view of the products. They feel good, they look good and they are providing something that's difficult to find, which is protection against both the UV, and to a degree, pollution. So the free radical quenching that we talk about is something that has to be distilled in the consumer terms. And the consumer side of that is an anti-aging process, looking better, feeling better, and eventually -- I mean everybody should be wearing sunscreen, rain or shine, the elimination or the reduction of skin cancer.

Do you have the capital equipment and working capital necessary to fund the Solesence growth that you're anticipating? And if not, what are your plans for acquiring it?

That's always an active discussion. We have, it's not a capital-intensive business and our leverage is good. One of the reasons we find it attractive is that the footprint required to support Solesence volume is much less than our typical industrial product used to be or even our advanced materials and personal care. We may be at a point where we need to put in more capital and we need to raise that. I think it'll be available relative to CapEx for that kind of thing. And on the working capital side, I think we also have ways to address that should it become necessary. Typically, for those that are relatively new, our biggest issue relative to that is the contract we have with one of our -- with our largest customer, which has a covenant that requires us to carry $1 million in cash on the balance sheet at the end of each reporting quarter. That's -- I really manage more to that than I manage the actual risk of not having capital to run the business and I think we're handling that pretty well and I don't see an immediate issue.

Our next question comes from Ron Richards, Private Investor.

Just last quarter -- heard your last answer, I think you said the results for the last quarter were impacted by expenditures that were delayed from the previous year into Q1. I thought last quarter you also mentioned that the Q1 figures were impacted by revenue that was delayed into Q2. If I remember that question correctly, how much revenue was delayed into Q2 and how much of an impact is that having this quarter's figures?

Sure. Okay, well you're correct, relative to that the answer -- the testing and the R&D expenses are below the line relative to COGS and we have incurred a fair amount of that, that should have been last year. This year, we have incurred costs relative to cost of goods in getting these -- making sure that these launches happened on time that where Q1 bleed into Q2 that impact the results. In terms of volume moving forward into Q2 from Q1, I don't want to disclose the exact volume that is moving forward. I will tell you that we are still going to have some volume in Q3 that could have been delivered in Q2, has this shifting not happened in Q1, which is, I realize it's a -- whose on third kind of analogy, but we -- the way it was, the demand came in, as I said, it was a little lumpy and had that not been the case, the first half would have had higher revenue in total than it actually did. As such, I'm expecting a good Q3 that will probably be better than average and I'm definitely expecting that the whole year, when taken in a whole, is going to be better than -- total revenue better than 2017 significantly.

[Operator Instructions] Our next question comes from James Liberman of [indiscernible].

It looks like we're finally beginning to lift off. Can you talk more about the cosmetic products or any of the names or the products that you like personally that we as shareholders might look for and use and be able to talk to our friends about?

I really can't. Part of the issue is -- I mean we have contracts out there and some are public and you could find them. We are in a series of very -- of products with one particular customer that we launched. They're good products, they're doing well. If you get on our Solesence website, you could see some of the things. Part of the issue just is the -- our branding and our marketing is through Solesence and we are trying to keep that as segregated as we can. Part of it is that, we're really -- this place is happening right now Jim. We're going like crazy and I haven't -- I'm not clear exactly on specifically what I can share right this second and not and I don't want be in a position where I do any damage to a customer relationship. But we are in both -- we are selling an ingredient that is enabling and highly formulated as well as we've created 2 new products. And I think we're working on getting some of that on the Solesence website and it's a question of negotiation and you know how that is. I think we'll see more and more of it though and I think some of these announcements that our customers are making, I mean Solesence is on the label of one customer in particular, which is a big plus for us.

So do you expect that the other companies that you'll be working with will also allow you to have the Solesence on the label?

That's our goal and currently the name Solesence and our patent number is on the label. We, at some point, would like to see our logo on these labels. We are also -- we talked some time ago about both the white label business and the custom formulation business and those will have different impacts as well. I think as we build the brand which we are aggressively trying to do, it will be more of an asset than something we have to negotiate to those brands. And at this point, everybody is -- you know how it is, everybody is trying to get as much as they can for themselves in it and we are really, what I guess I think is best, we are bringing a solution to a problem that has existed for a while. There is a lot of demand. We're just in a very good spot. I mean I'm excited -- I don't excited easily, having been through what I've been through around here over the period. And I think...

I was going to say...

I think we hit it. I mean that was probably, [ past one ] might have been the most effusive press release that I've prepared in years and it's great to see it. The place is energized. We've got a lot of excited people around here and lot of really tired people and that's part of, I apologize for not having a better answer to your initial question and part of it is just, everybody is running right now.

So, without being more specific, can you say whether the excitement and the place is hopping, is that more to do with 1 or 2 particular companies and just expanding different products within those companies or just many other companies coming to you?

Well, the change we made in the beginning of the year when we consolidated our R&D development group and our sales marketing business development team has created -- under Kevin has created a business development organization that is even closer to the customer. We brought in more expertise. Several of us will be in Las Vegas next week selling and so there's a lot of excitement. And with that comes, there's a lot of product development, both for current customers, for the customer we're talking about launching in Q3 and then for future customers because part of that requirement is making sure that we can deliver. So different parts of the organization; operations group is just hitting it out of the park right now, getting everything done we need to get done both on making the materials for the Solesence products as well as our business with personal care and other things. They are cranking, R&D is cranking, sales is cranking. We're working hard and between Jaime and I on the finance side making sure that everything is coming together and we can support it all. It's just really a good place to be, lot of energy.

Well that's really exciting and I recognize this is the focus and you're beginning to see some great results. But are you saying that we could go online and get some guidance or you say we have to feel for ourselves to determine where to find your products?

I think on the Solesence website, you might see some things. We're also -- at least one of our customers is up for a potential award this year and if they were to win that I think that there will be some publicity related directly to where we're at.

Does this have anything to do with the upcoming Las Vegas show or is independent of that, the award?

No, it is related. So we'll see where that goes and I'm treading lightly, because in the past we've -- in our industrial business, we've created some waves with some of the customers that basically are saying, "Hey, you're hurting my competitive position." I don't want everybody to know from whom I'm buying and everybody has an [ extra grain ] that's slightly different on agenda and ours certainly is to sell as much material as we can at the highest rates possible with the most satisfied customers in all of the things, need to be balanced.

But in this case you're seeing -- your Solesence is being part of the potential marketing benefit to some of the customers you're working with now. So it may be -- yes, okay.

And that's absolutely our goal. I mean it's trait to talk about the [ NutraSweet ] or the intel inside. But our goal is that, people will want the Solesence logo on their products, because they'll equate it with better, safer protection, longer lasting, as well as protection not just from UVA and UVB, but the effects of pollution on the skin, which is another issue that we address. So, I think you're going to see more of that. I mean, that's certainly what our plan is. We'll see where that goes over time, but we really -- we're ambitious and we're aggressive about it and this is the beginning of us delivering on that. So it's an exciting time.

Thank you. It's exciting to hear that, hint of enthusiasm in your voice as well. Alright, good luck to you.

Our last question comes from [indiscernible], Private Investor.

First of all, I'd like to thank all the people at your company for their dedication and their stick-to-it-iveness, I appreciate it. And you may have all -- but thank you so much for your effort. And then, I'd like to ask and you've already answered, but is there a possibility of spin-off products with Solesence or not? And thank you for taking my call.

There is definitely, I mean, the way we're approaching the market is the spin-off products will be many. The Solesence is a technology that is broad and putting it in different materials whether that's something like a direct face or a body product, a primer, a lips product, under-eye product, there's a whole range of things that potentially could be spun out of there, as well as other products that are not directly -- that are very related to the market aren't directly related to the Solesence technology, but will be bundled nicely. So we are -- at this point, we are focused on getting the first wave of launches having them be successful and growing and we are in the process of moving forward to try to get more of that happening. After the show that's coming up, we may very well have an even broader pallet of things displayed on the solesence.com website which can get you there, but you asked exactly the right question and that's what our goal is, to have a very broad portfolio of Solesence-based product.

Thank you. I see no further questions in queue. At this time, I'd like to turn the call to our CEO, Mr. Jess Jankowski for closing remarks. Please go ahead.

Thank you, Dulum and thanks to all of you for participating today and for your support of Nanophase and Solesence. We expect 2018 to be a pivotal year for both Solesence and Nanophase. We've identified demand for our products in the large and growing market and we have earned the experience and built the capabilities to allow us to keep building momentum. I'm looking forward to the opportunity to discuss the business with all of you again soon. And remember, rain or shine, you need protection from the sun. Have a great day everybody.

Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.