I would now like to introduce your host for today's conference, Jess Jankowski. Mr.

Jankowski you may begin.

Good morning, everyone. We appreciate your joining us for our first quarter 2012 financial conference call.

With me today is our CFO, Frank Cesario. First, I want to apologize for the tardiness of this call.

While we don't want to steal Mr. Zuckerberg's thunder, we couldn't put it off any longer.

I wanted to wait until we filed our S-1, which most of you have probably seen before our Q1 financial call to avoid being non-responsive or appearing disingenuous when asked about capitalization. We are seeking to raise around $2.4 million.

At the end of our call, Frank and I will respond to any questions you may have regarding this offering, limited of course by the fact that we are, by definition, in a quiet period and have to be sensitive to our pre-effective and pre-closing disclosures.

Getting on to the results. I'm happy to report that the first quarter of 2012 was much stronger than the first quarter of 2011, something for us to build at as we get into the meat of this fiscal year.

Our most important goal as shareholders and members of your management team is to continue our progress toward what we expect will be our third consecutive year of revenue growth, as we strengthen our bottom line and improve shareholder liquidity. We're seeing new orders from diversified businesses, including companies incorporating our scratch-resistant additives last year.

These additives are being included in 3 different products that are just being commercialized by their perspective manufacturers. These product introductions are expected to boost revenue growth as they gain momentum.

I'll go into a little more detail about our product initiatives after Frank provides a short overview of our financial results.

Frank, would you please take a few minutes and provide the financial update?

Thanks, Jess. Good morning.

This is Frank Cesario. Before I begin today's overview of our financial results for the first quarter, please remember that all financial results are stated in approximate terms.

Revenue for the first quarter of 2012 was $2.4 million versus revenue of $2.8 million for the comparable 2011 quarter. Gross margins were 23% and 33% for the comparable quarters, respectively, highlighting our sensitivity to small changes in revenue volume, which offers a very positive feature as we add new sources of revenue to our mix.

As Jess mentioned, it was stronger than the fourth quarter of 2011. The net loss for the quarter was $0.8 million or $0.04 a share compared to a net loss of $0.6 million or $0.03 a share for the first -- comparable first quarter?

During the quarter, we spent $0.4 million of net cash, finishing the quarter at $2.3 million in cash and cash equivalents. The company is debt free.

The quarter featured a few unusual events for Nanophase. On March 20, Nanophase began trading on the OTCQB marketplace, joining more than 3,000 other companies ranging from smaller to much larger the Nanophase.

Trading on the OTCQB marketplace began seamlessly with our stock symbol remaining the same, NANX. We, the company, appreciate the terrific job that the folks at OTC did with the transition.

While we were disappointed to lose some of our shareholders during this transition, those shareholders who stuck with us and those who came on board have seen this share price stabilize with a significant increase in trading volume.

We recently filed an 8-K regarding the relationship with our Japanese partner, CIK NanoTek. Nanophase and CIK have been in exclusive partnership for several years, under which Nanophase has provided an IP license in the area of geographic exclusivity, while CIK has paid royalty to Nanophase.

The parties agreed earlier this year that upon termination of the existing agreement, our 2 companies could cooperate or compete freely without territorial restrictions or royalty arrangements. This is a continuation of our strategy to conclude exclusivity agreements, as we've done in many areas other than with BASF for personal care applications, where the exclusive partner model has worked so effectively for both sides.

We find the added flexibility of removing the exclusive aspect of relationships helps both parties and tends to enhance our customer partner relationships.

A few weeks ago, we announced the sale of the NanoTek trademark to CIK for use in Japan in exchange for $5,000. We also agreed to accelerate the royalty payment due April 2013 up to April of 2012 with just $300,000 less an early payment discount of 7%.

Both companies are now that much closer to operating freely, running the gamut from competition to collaboration on various commercial opportunities.

Finally, I'd like to note the registration statement that we filed yesterday, indicating that we intend to sell approximately 7 million shares of stock to our stockholders at $0.33 per share. For those who aren't familiar with the rights offering vehicle, it is an offer to sell stock only to our stockholders as of the record date.

Nobody else can participate. No shareholder has to participate but those who do have a range of alternatives available for their participation level.

More information will be forthcoming, and we urge any interested parties to read the registration statements in perspective. Because we have an offering of shares outstanding, please understand that we have to be more guarded than usual with respect to any forward-looking statements.

I'd like to turn the call back over to Jess.

Thanks, Frank. Now to the extent that it is currently appropriate, I'd like to provide a progress report on the initiatives we discussed during our year-end conference call.

A number of our coatings applications have been introduced to the marketplace at industry shows over the last 18 months. And just a year ago, we lost our scratch-resistant products.

As a matter of fact, over the last 2 weeks, we participated in the RadTech UV/EB Show in Chicago, which is a national show; and the American Coatings Show in Indianapolis, an international show, continuing to stimulate demand for our scratch-resistant products. I was heartened by the attendance at our booths for these 2 trade shows.

We now have customers and companies with whom we're working to commercialize product, telling our prospects about how great our products are and how much they appreciate what Nanophase brings to the table. This is really where you want to be.

Product introduction, incorporation and building an aggressive marketing campaign around a new or newly improved product doesn't happen overnight but industry feedback is positive, and we're beginning to displace existing materials in a variety of coatings. The sales of these applications are growing and the feedback is exciting.

It takes time, but our strategy is helping us to build momentum.

While the architectural paints and stains applications represent a modest percentage of our revenue, the industry is beginning to recover and some of the large players have posted better-than-expected first quarter results. This is relevant to Nanophase, as our products are used and developed for several paint and stain formulations, and we expect to have additional opportunities as the economy continues to improve.

In terms of polishing, we're not yet seeing increased revenue from our Precision Optical Polishing business. The cost of cerium oxide, a rare earth element, has fallen by about 1/3 from its 2011 peak but still remains significantly higher than it was 2 years ago.

This increase in price has encouraged customers to ship away from cerium oxide-related solutions and generally to be more cautious about adopting new products using this material. It's our expectation that the price will stabilize and possibly continue its gradual decline, as additional providers of cerium oxide into the market displacing high-cost materials from China and the outstanding World Trade Organization complaints get adjudicated.

These products are primarily used in the electronics industry. Tell me, did you ever think we'd be complaining about the high cost of Chinese exports?

I would normally discuss new product development activities and perspective or potential launches in more detail. But I hope you understand why this is more difficult than later the outstanding rights offering solicitation.

Here are a few more things I want to highlight for you, though. As Frank mentioned, our licensing agreement with Japan-based CIK NanoTek expires in April 2013, although we expect to maintain a continued strong working relationship with them.

This expiration will provide Nanophase access to new markets within Asia, where we have some familiarity, so we look forward to developing this geography in the future on a direct customer basis. This looks to be a classic win-win scenario for both of us.

Last year, the company also established a program to explore select markets within the energy sector, where nano-based products can address some of the market's many unmet needs. This is a growing industry that has invested and continues to invest millions of dollars into research and development.

At this point, no specific company has built a perfect product or achieved the leadership position in technical areas, where nano solutions are being sought. We're exploring several solutions to meet the existing need in the industry and are in various stages of prototype testing.

We plan at beginning a targeted marketing outreach, particularly in one area, which has provided strong indications of potential future success. We have a solid pipeline of opportunities across several product lines and target markets, where we expect to create and grow new revenue for 2012 and 2013.

our coatings products, primarily scratch-resistant additives, but also in other coating applications; new polishing products in various areas outside of our traditional CMP market. For the uninitiated, CMP refers to chemical-mechanical planarization or polishing of semiconductor wafers and products introduced to several opportunistic markets.

In 2013, we also expect added revenue growth from the maturation of a number of our coatings applications and expansion of our new polishing products and the introduction of some new personal care products. With the company's current business cycle, these new products should begin to generate meaningful revenue at 2013.

You'll hear more about these new products throughout the year. This new business is very important for driving our year-over-year revenue growth, since we're also experiencing flat or declining revenue in some of our mature products, particularly with the high cost of ceria for CMP polishing.

New business growth is an important measure to me, because it signals that the direct selling model is beginning to deliver and we are definitely moving in the right direction. In my view, we have significant potential and a solid foundation from which to continue our growth.

While we aren't making revenue projections, we expect there to be measurable top line progress in 2012, and we expect it to come from new customers and new products. Again, we know that we're losing some legacy revenue from 2011, but we still believe we'll have year-over-year revenue growth.

This is evidence that things are coming together. The model is starting to deliver.

I look forward to talking more about progress in our new application areas as we continue through 2012 and plan to keep you posted on our progress through news announcements and conference calls. Although most of our investors listen to the webcast or review the transcript after the call, we'd like to invite those participating live in today's call to ask any questions you may have or to share your comments.

We've also received some questions from shareholders via email, a few of which we will address before the end of the call.

Nicky, would you please begin the Q&A session?

It really begins to sound like things are beginning to turn for you. I was happy to hear that you're getting some improvement in the exterior coatings area.

Is that actually from the old bear [ph] relationship? Or it's just something else?

Can you comment on that?

Those are not necessarily coming from that old relationship, although they have a robust product line that continues to grow but more on an incremental basis. We're seeing other customers and other products growing in the coatings business.

We also expect, because the first quarter has been stronger for them to see some volume stimulated. BYK is still a good the customer but as I tried to hit at -- we are really focused on new business just because -- their legacy business is a nice leg to the stool and we've got some new volume coming from it but essentially, the new business is what's going to push the company.

And I would clarify that when I say new business, we are also expecting some new business from BASF with new products as the year goes on, but that won't materialize into significant revenue until 2013.

So may I sort of ask for a little bit more clarification? There was the other part of the business, the Exterior Wood Coatings, that was separate from there that you were working on for a while, is that where you're beginning to see some signs of life?

I think we're seeing more -- we may see some there and some of the other coatings that are -- they're both UV resistant and other exterior wood coatings. I expect to see more growth from the scratch-resistant products relative to coatings.

We haven't seen the success we expected in the exterior UV blocking coatings. We haven't dropped the efforts but essentially the work we're doing is done, and now that's in various customers.

And some of that feedback hasn't been as good. The feedback on the scratch resistant has been very good, and we've got some other things that are moving forward.

So I expect growth, and I guess -- and what I can tell from some of the questions that I've been getting from shareholders, and I apologize to those of you who have reached out to us, we've been in a quiet period and I've been completely unresponsive for the last several weeks. But we expect to lose about $1 million in revenue from last year from the Dow business as the CMP business slowed down, and that's being given by decrease not necessarily in pricing but a decrease in volume on their side because these costs have gone so high.

I expect us to have more revenue in 2012 than we did in 2011 while still being down $1 million from that legacy business. The jury is still out on where BASF goes for this year.

I don't expect it to be significantly more than last year, but we never know because it's a tough business and it's cyclical. But I do expect at least some degree of top line growth while losing that.

So essentially, that means we'll have picked up $1 million plus of new business this year, which is exciting.

Are you able to comment more on the hard surface coatings, some of the -- just broad areas that you might see it showing up in? Or is that still something you can't talk about?

Broadly, the -- we're getting good feedback from the graphics business and overprint varnishes. We're getting feedback that, that commercially had electronics coatings and at some of the coatings of items like woods and things like that, that's moving forward well.

We also, though, are struggling with -- we have some customers that are choosing not to share that detail with us and partly, it's because of our business model. What we do is we'll go to a customer and they'll say, "Look, I have this coating.

It's a polyurethane coating or it's a UV-cured coating. I need to make it harder and scratch resistant, what can you do for us?"

So we say, "Well, give us your formula and we'll put something in it. We'll make it better for you."

One of their first questions almost always is, "Well, we want exclusivity on your material." And we routinely say, "No."

Not that we would say no forever and -- if the biggest company in the world came in here and guaranteed us business, we might go exclusive. But at this point, our motto is we absolutely don't go exclusive.

And so what that drives is a little bit of detachment between what that customer is going to do until they actually get a full-blown launch out there and potentially file their own application patent and what they can't do. So that's one of the limiting features that -- because they can't lock us up, they really don't like to tell us everything because their concern -- although we don't do this, their concern is, "Gee, you can go to the guy down the street, who's trying to sell the same things I am."

I tell them that, "Now we do go to the guy down the street, but we don't disclose what we've learned from each customer." But that's a limiting factor in the model, but I am -- what we're going to do over a period of time is, as these businesses grow, we'll discreetly talk about the growth within each business, as we get to the point where it's material to our top line revenue.

So when you're starting to see $1 million with the business and a chunk that's related to scratch-resistant coatings or coatings in general that new -- we'll will talk about that more in terms of our product group, and that will make things a little more clear.

Okay. Well, we had some questions.

I answered part of them in Jim's 2-part question. We answered some of the questions that came through.

Some of the feedback also had to do with the -- in terms of the rights offering. Part of the reason that we use this method to raise capital is because we view it as fairest to our existing shareholders.

Many of you have been along in support of the company for a long period of time. And to the extent that nobody wants to get diluted, and as a management team and as the CEO, I prefer not to be diluted either.

However, we're in a position, where we have not only contractual obligations to keep a certain amount of cash, but we also want to be in a position of financial strength. But we negotiate with customers and prospective customers who, increasingly, because they're not as familiar with dealing, we generally deal with pretty big companies, dealing with companies at our level and they like to have that degree of solidity.

So our thought was, and our board of course agreed, that we would go about it in this method and we would basically allow everybody to share in the offering to the extent they wish to and reward those that have stuck with us through this process several years since we changed things around at the business. It's taken a while.

It's starting to come in. We still have to deal with a 2-, 3-, 4-, 5-year time to market, but we've been in the market for a while.

And some of these things are starting to come in as they happen more quickly like the anecdote about the people coming to our booth and selling our stuff to other people for us. As they mature, more of these things will happen in a better way because we'll get more credibility in the marketplace.

That was one question I wanted to address. And then somebody here asked the question about the BASF covenant.

Obviously, we're relating that directly to the -- people are very concerned about that -- relating that directly to the fund raise, although we have other ways to bulk up our cash if we need to. It just can't become a distraction, and we don't want that to be what we focus on, on a day-to-day basis.

Additionally, probably the last question was, BASF was up a little bit in Q1. Their volume looks pretty good for this year, but there's always a -- there's something that we refer to as the filling season, which happens from really July through the end of August and September that dictates what the end of the year looks like and what the first quarter of next year looks like.

And so we're up in the air in that. I would suggest, while I'm limited in what I can cover, that maybe you guys, our investors, get on the BASF website and look up their zinc oxide products, because there are some interesting marketing they're doing and some things that we're excited about in terms of other types of products.

And HP-1 is what they refer to our materials as and that might be a good place for people to look. But I also do not want to undermine anything their doing.

So we're not making press releases. And now that we're in this quiet period, anything that we do has to be things we would do in the normal course of business.

And normally, I would wait until things got a little further. So that's about all I have to cover in addition to what questions you asked.

Are there any more questions out there, Nicky?

Okay. Let me close then by saying, we're fully confident that we have the knowhow, products, business strategy and potential to achieve our goals.

We appreciate your continued support. I appreciate your continued support.

And while we try to be available for any follow-up questions you may have, until we concluded our rights offering, we'll have to be cautious in our responses. Thank you for your participation and enjoy the rest of your day.