See Notes to Financial Statements.

NANOPHASE TECHNOLOGIES CORPORATION

STATEMENTS OF OPERATIONSCONSOLIDATED BALANCE SHEETS

(Unaudited)

(Unaudited Consolidated Condensed)
(in thousands except share and per share data)

See Notes to Consolidated Condensed Financial Statements.

NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS 

(Unaudited Consolidated Condensed)

(in thousands except share and per share data)

See Notes to Consolidated Condensed Financial Statements.

NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY 

(Unaudited Consolidated Condensed) 

(in thousands except share data)

See Notes to Consolidated Condensed Financial Statements.

NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)(Unaudited Consolidated Condensed)

See Notes to Consolidated Condensed Financial Statements.

NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)(Unaudited Consolidated Condensed) 

(in thousands, except share and per share data or as otherwise noted herein)

(1) Basis of Presentation

The accompanying unaudited consolidated condensed interim financial statements of Nanophase Technologies Corporation (“Nanophase” or the, “Company”, including “we”, “our”, or “us”) reflect all adjustments (consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentationstatement of our financial position and operating results for the interim periods presented. All statements include the results from both Nanophase and our wholly-owned subsidiary, Solesence, LLC (“Solésence,” or our “Solésence® subsidiary”). Operating results for the three and nine months ended September 30, 2017March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.2021.

These financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2016,2020, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2020 as filed with the Securities and Exchange Commission.

We believe that cash from operations and cash on hand, in addition to unused borrowing capacity, which has recently been increased (see Note 7), may not be adequate to fund our operating plans through the next twelve months. We are working to reduce these risks and the results of the Company in this regard have improved markedly, but some of this is dependent on several things over which we have limited control. The significant revenue growth that we have experienced has required additional investment in both working capital and capital equipment. This has constrained liquidity and made cash management a top priority. Generally, our growth has required significant additional investment in working capital. To support our growth and reduce costs, we also intend to invest in additional capital equipment through 2021 and in 2022. Given these issues, and other commercial realities, we are monitoring the additional working capital demands that this could create as we continue to execute on our Solésence growth strategy. The timing of cash flows is critical. If cash generated from operations is not materially consistent with our plans, we believe that we may need to seek additional funding to address working capital demands. This uncertainty has caused us to be unable to assert that, for the next twelve months, we have enough current cash and guaranteed access to financing to fund operations, and to continue with our current growth strategy in terms of investment in capital equipment and in operating expenses related to Solésence, without securing additional financing.

These circumstances raise substantial doubt as to the Company’s ability to operate as a going concern under U.S. GAAP. The accompanying financial statements have been prepared on a going concern basis in accordance with U.S. GAAP. As such, no adjustments have been made to the consolidated financial statements for the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue operating as a going concern.

We believe that we will be able to secure additional financing if needed, but we do not have any additional financing commitments in place as of today. However, we may not be able to secure additional financing in a timely manner under commercially reasonable terms, or at all. If we are unable to secure additional financing, the operations of the Company might need to be curtailed to a certain degree, and we would need to delay capital expenditures related to our Solésence growth strategy, which could impede growth, and impact cost savings anticipated in 2021 and 2022.

(3) Description of Business

Nanophase Technologies Corporation (“Nanophase,” “Company,” “we,” “our,” or “us”) is an advanceda science-driven company which, along with its wholly owned subsidiary, Solésence, LLC (our “Solésence subsidiary”), is focused in various beauty- and life-science markets.  Skin health and medical diagnostics combined currently make up the great majority of our business and drive our forward growth strategy.  We offer engineered materials, and applications developerformulation development and commercial manufacturer withmanufacturing through an integrated family of technologies. Our expertise in materials technologies. We produce engineeredengineering allows us to effectively coat and disperse particles on a nano and larger, sub-micron, materials“non-nano” scale for use in a variety of diverse markets: personalmarkets in skin care, including for use in sunscreens as active ingredients and as fully developed prestige skin care products, marketed and sold through our Solésence subsidiary.  In terms of our life sciences focus, we have seen current conditions significantly increase demand for our medical diagnostics ingredients, as testing for various viruses, most notably COVID-19, has become a critical use of our technology.  Additionally, we continue to sell products in markets for architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, medical diagnostics, energy (including solar control), and a variety of surface finishing technologies (polishing) applications, including optics. We have recently expanded our offerings beyond active ingredients to include targeted full formulationsapplications— all of skin care products, marketed and sold by our wholly-owned subsidiary, Solésence ™ LLC (“Solésence” ™), which, was created duringalong with medical diagnostics, fall into the fall of 2016. The core of these solutions is a new surface coating technique for the particles that we believe will provide enhanced value to the marketplace.advanced materials product category.

 We target markets, in whichprimarily related to skin health products and ingredients, and diagnostic life sciences ingredients where we believe our materials and products offer practical solutions may be found using our products.and competitive minerals-based solutions.  We traditionally work closely with current and potential customers in these target markets to identify their material and performance requirements and market our materials to various end-use applications manufacturers.manufacturers, and our Solésence® products to cosmetics and skin care brands. Over the past few years, we have expanded our marketing efforts for our Solésence products and are seeing more customers responding to our successful products being sold into their markets.  Recently developed technologies have made certain new products possible and opened potential new markets. During 2015 we were granted a patent on a new type of particle surface treatment (coating) — now called Active Stress Defense ™ Technology — which became the cornerstone of our new product development in personal care, with first revenue recognized during 2016. In addition, through the creation of our Solésence subsidiary, we utilize this particle surface treatment to manufacture and sell fully developed solutions to targeted customers in the skin care industry, in addition to the ingredients we have traditionally sold in the personal care area.

Although our primary strategic focus has been the North American market, we currently sell materialmaterials to customers overseas and have been working to expand our reach within foreign markets.

During June 2017, we entered into a series of agreements with Eminess Technologies, Inc. (“ETI”). ETI is an established entity in the polishing area, and we believed ETI could more effectively bring our products to market while allowing us to focus on the launch of Solésence™. We provided ETI with the necessary know-how and exclusive license to make and sell some of our products in this space, for which ETI will pay us a royalty. For other products, we will continue to make them for ETI under an exclusive supply agreement. ETI paid us $36,000 for certain equipment used in product testing. Finally, in exchange for a one-time payment of $250,000, we assisted ETI in its development of dispersion capabilities relevant to the polishing materials field.

The Company was incorporated in Illinois on November 25, 1989, and became a Delaware corporation in November 1997. Our common stock trades on the OTCQB marketplace under the symbol NANX.

While product sales comprise the overwhelming majority of our revenue, we also recognize revenue from other sources from time to time. These activities are not expected to drive the long-term growth of the business. For this reason, we classify such revenue as “other revenue” in our Consolidated Statements of Operations, as it does not represent revenue directly from the sale of our nanocrystalline materials.products.

(3)(4) Revenues

Revenues are generally recognized at a point in time, typically when control of the promised goods is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods.

(5) Earnings Per Share

Earnings Per Share is computed using the Treasury Stock Method.

Options to purchase approximately 750,000 and 796,0001,590,000 shares of common stock that were outstanding as of September 30, 2017March 31, 2021 were included in the computation of earnings per share for the three months ended March 31, 2021.  Options to purchase approximately 1,000 shares of common stock that were outstanding as of March 31, 2020 were not included in the computation of earnings per share for the three and nine months ended September 30, 2017, respectively,March 31, 2020, as the impact of such shares would be both negligible andare anti-dilutive. Options

Earnings applicable to purchase approximately 803,000 and 493,000 shares of common stock that were outstanding as of September 30, 2016 were not includedand common stock shares used in the computationcalculation of basic and diluted earnings per share for the three and nine months ended September 30, 2016, respectively,are as the impact of such shares would be both negligible and anti-dilutive.follows:

(4)

(6) Financial Instruments

We follow the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)ASC Topic 820,Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.

Our financial instruments include cash, andany cash equivalents, accounts receivable, accounts payable and accrued expenses, along with the promissory note with no related borrowings described in Note 7, any borrowings on the working capital line of credit from Libertyville Bank and Trust, and any borrowings on the working capital line of credit, eachalong with the term loan from Beachcorp, LLC, and the promissory note payable associated with the convertible loan described in Note 5.7 below. The fair values of all financial instruments were not materially different from their carrying values.

There were no financial assets or liabilitiesinstruments adjusted to fair value on September 30, 2017 orMarch 31, 2021 and December 31, 2016.2020.

(5)

(7) Notes and Line of Credit

During July 2014 we entered into a bank-issued letter of credit and related promissory note for up to $30 in borrowings to support our obligations under our facility lease agreement. No borrowings have been incurred under this promissory note. Should any borrowings occur in the future, the interest rate would be the prime rate plus 1%, with the bank having the right to “set off” or apply unpaid balances against our checking account if we fail to meet our obligations under any borrowings under the note. It is our intention to renew this note annually, for as long as we need to do so pursuant to the terms of our facility lease agreement. Because there were no amounts outstanding on the note at any time during 20172021 or 2016,2020, we have recorded no related liability on our consolidated balance sheet.

During March 2015, we entered into

We have a Business Loan Agreement (the “Line of Credit Agreement”) with Libertyville Bank and Trust Company, a Wintrust Community Bank (“Libertyville”), our primary bank. This Line of Credit Agreement was subsequently amended on April 13, 2015.. Under the Line of CreditBusiness Loan Agreement, as amended, Libertyville will provide a maximum of $300,(i) $500 or (ii) two times the sum of (a) 75% of our eligible accounts receivable,receivables and (b) our cash deposited with Libertyville, whichever is less, of revolving credit to us, collateralized by a senior priority lien on our accounts receivable, inventory, equipment, general intangibles, and fixtures. Interest is payable monthly on any borrowings would beadvances at a floating interest rate of the prime rate at the time plus 1%. Availability to draw on the line requires us toWe must have at least $1 million$500 in cash, including any amountsinclusive of the borrowed amount, at Libertyville on the date of any advance. Advances may only occur at the beginning or end of a fiscal quarter and must be repaid in full within five business days of the advance. Amounts due under the Business Loan Agreement were paid in full on April 4, 2021, as required.  It is management’s expectation that the Business Loan Agreement will be renewed in May 2021.

On November 16, 2018, we entered into a Business Loan Agreement (the “Master Agreement”) with Beachcorp, LLC. Beachcorp, LLC is managed by Bradford T. Whitmore, who, together with his affiliate Grace Investments, Ltd., beneficially owned approximately 63% of the outstanding shares of our common stock as of March 31, 2021. The LineMaster Agreement relates to two loan facilities, each evidenced by a separate promissory note dated as of Credit Agreement was originallyNovember 16, 2018: a term loan to expire on March 4, 2016, but during March 2016 was extended until March 4, 2017. During February 2017, this agreement was further extendedthe Company of up to March 2018. We borrowed $250 on September 28, 2017,$500 to be disbursed in a single advance (the “Term Loan”) with a fixed annual interest rate of 8.25%, payable quarterly, accruing from the date of such advance and repaid it on October 3, 2017. No amount was borrowed on this linewith principal due on December 31, 2016.2020; and an asset-based revolving loan facility for the Company of up to $2,000 (the “Revolver Facility”), and to extend the maturity date, with floating interest accruing at the prime rate plus 3% (8.25% minimum) per year, with a borrowing base consisting of qualified accounts receivable of the Company, and with all principal and accrued interest due March 31, 2020, as amended. On March 23, 2020, the Company and Beachcorp, LLC executed the First Amendment to our Master Agreement that extends the maturities of both the Term Loan and the Revolver Facility to March 31, 2021. Effective September 8, 2020, the Company and Beachcorp, LLC executed the Second Amendment to our Master Agreement that expands the limit on the Revolver Facility from $2,000 to $2,750.  On December 23, 2020, the Company and Beachcorp, LLC executed the Third Amendment to our Master Agreement that expands the limit on the Revolver Facility from $2,750 to $4,000 and extends the maturities of both the Term Loan and the Revolver Facility to March 31, 2022. On April 21, 2021, the Company and Beachcorp, LLC executed the Fourth Amendment to our Master Agreement that expands the limit on the Revolver Facility from $4,000 to $6,000, extends its maturity to March 31, 2023, and reduces interest on outstanding borrowings from the prime rate plus 3%, with an 8.25% minimum floor, to the prime rate plus 2%, with no minimum rate floor. Additionally, the Fourth Amendment increased the amount of the Term Loan from $500 to $1,000, and its fixed interest rate was reduced from 8.25% per year to 5.25% per year. The maturity date of the Term Loan remains March 31, 2022. The Term Loan and Revolver Facility are secured by all the unencumbered assets of the Company and subordinated to Libertyville’s secured interest under the Business Loan Agreement. The Master Agreement substantially restricts the Company’s ability to incur additional indebtedness during the terms of both the Term Loan and the Revolver Facility.

On November 20, 2019, we entered into a 2% Secured Convertible Promissory Note with Bradford T. Whitmore in the principal amount of $2,000 (the “Convertible Note”). The principal amount is payable in a single payment on May 15, 2024 (the “Maturity Date”). The principal amount of the Convertible Note accrues interest at the rate of 2.0% per year, which interest is payable semi-annually on the 15th day of May and November, commencing on May 15, 2020. The principal amount and, at the holder’s option, accrued interest under the Convertible Note is convertible at the holder’s option into additional shares of the Company’s common stock in whole or in part and from time to time up to the Maturity Date at a conversion price of $0.20 per share. The convertible note contains a beneficial conversion feature since the Company’s stock was trading at $0.32 per share on the date the Company entered into the agreement. The intrinsic value of the beneficial conversion feature was $1.2 million on November 20, 2019 and is recorded as a discount on the convertible note. The discount will be accreted to the convertible note over the life of the note using the straight-line method. The balance on the convertible note was $1,164, net of a discount of $836 at March 31, 2021, and $1,097, net of a discount of $903 at December 31, 2020. Mr. Whitmore chose to exercise his conversion rights effective May 7, 2021, requesting that any accrued interest be paid him in the form of shares, as allowed in the Convertible Note. This will result in the accelerated recognition of the discount on the Convertible Note, to be recognized as interest expense in the second quarter of 2021.

On April 17, 2020, we entered into a Promissory Note (the “PPP Note”), dated as of April 16, 2020, in favor of Libertyville in the principal amount of $952 for our loan under the Paycheck Protection Program (“PPP”).  The Company may apply for forgiveness of the amount due on the PPP Note in an amount equal to the sum of the following costs incurred during the 24-week period beginning on the date of the first disbursement of the loan: (a) payroll costs, (b) any payment of interest on a covered obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), (c) any payment on a covered rent obligation, and (d) any covered utility payment, calculated in accordance with the terms of the CARES Act. No assurance can be provided that the Company will obtain forgiveness of the Loan in whole or in part.    The principal amount of the PPP Note accrues interest at the rate of 1.00% per year.  The Company will be required to pay any unforgiven principal and interest under the PPP Note in eighteen equal monthly installments, with the first payment originally being due on November 17, 2020 and continuing on the same day of each subsequent month until April 17, 2022.  Management applied for loan forgiveness in February 2021.  Payment of principal and interest have been postponed due to the request for loan forgiveness, and recognition of such will be dependent upon the outcome of the Company’s request under the PPP.  On March 31, 2021, the balance under the PPP note remained $952.

On March 31, 2021, the balance on the term loan was $500, the balance on the Revolver Facility was $3,365, and the balance on the Convertible Note was $2,000. For the three months ended March 31, 2021, and 2020, there was $131 and $111, respectively, in interest expense relating to these credit facilities held by Beachcorp, LLC and Bradford T. Whitmore. The accrued interest expense balance on these related party credit facilities amounted to $36, and $20, at March 31, 2021 and December 31, 2020, respectively. The obligations under the Convertible Note are secured by a security interest in all of the Company’s personal property pursuant to a Commercial Security Agreement among Mr. Whitmore, the Company and Solésence, LLC, the Company’s sole subsidiary. Given that Beachcorp, LLC is an affiliate of Mr. Whitmore, this amounts to all of this interest being owed to a related party. On March 31, 2021 borrowings were within the credit agreement limit with an additional $388 available. The balance of borrowing base, loan amount, and any excess payments required over the available borrowing base will change as frequently as daily, given the operational nature of the elements of the Revolver Facility.

(6)(8) Inventories

Inventories consist of the following:

(9) Leases

The Company's operating lease portfolio is comprised of operating leases for office, warehouse space and equipment. Certain of the Company's leases include one or more options to renew or terminate the lease at the Company's discretion. The Company regularly evaluates the renewal and termination options and when they are reasonably certain of exercise, includes the renewal or termination option in our lease term.

As of March 31, 2021, the operating lease right-of-use “ROU” asset had a balance of $1,886 which is included in the “Operating lease right-of-use assets” line item of these condensed consolidated financial statements and current and non-current lease liabilities related to the ROU asset of $477 and $1,656, respectively. As of December 31, 2020, the ROU asset had a balance of $1,827 which is included in the “Operating lease right-of-use assets” line item of these condensed consolidated financial statements and current and non-current lease liabilities related to the ROU asset of $431 and $1,651, respectively. These are included in the “Current portion of operating lease obligations” and “Long-term operating lease obligations, net of current portion” line items of these condensed consolidated financial statements. The discount rates used for leases accounted for under ASC 842 are based on an interest rate yield curve developed for the leases in the Company’s portfolio.

The office leases contain variable lease payments which consist primarily of rent escalations based on an established index or rate and taxes, insurance, and common area or other maintenance costs, which are paid based on actual costs incurred by the lessor.

Quantitative information regarding the Company’s leases is as follows:

Supplemental cash flow information related to leases is as follows for the period ended March 31:

The future maturities of the Company’s finance and operating leases as of March 31, 2021 is as follows:

The future maturities of the Company’s finance and operating leases as of March 31, 2020 were as follows:

(7)(10) Share-Based Compensation

We follow FASB ASC Topic 718,Compensation – Stock Compensation, in which compensation expense is recognized only for share-based payments expected to vest. We recognized compensation expense related to stock options of $45$42 and $140$52 for each of the threethree-month periods ended March 31, 2021 and nine months ended September 30, 2017, respectively, compared to $41 and $129 for the three and nine months ended September 30, 2016,2020, respectively.

As of September 30, 2017,March 31, 2021, there was approximately $305$206 of total unrecognized compensation cost related to nonvestednon-vested share-based compensation arrangements granted under our stock option plans. That cost is expected to be recognized over a remaining weighted-average period of 2.01.7 years.

Stock Options and Stock Grants

During

No stock options were exercised during the ninethree months ended September 30, 2017, 45,334 shares of common stock were issued pursuant to stock option exercises for proceeds of $14. During the nine months ended September 30, 2016, 44,500 shares of common stock were issued pursuant to stock option exercises for proceeds of $18. During the nine months ended September 30, 2017, 507,600March 31, 2021, or March 31, 2020. No stock options were granted compared to 419,390during the three months ended March 31, 2021, or March 31, 2020. During the three months ended March 31, 2021, 35,000 stock options granted during the same period in 2016. During the nine months ended September 30, 2017, 44,568expired, and no stock options were forfeited, compared to 64,900241,000 stock options which expired, and 140,000 stock options which were forfeited during the same period in 2016.2020. We had 3,351,0003,411,000 stock options outstanding at a weighted average exercise price of $0.79$0.57 on September 30, 2017,March 31, 2021, compared to 2,933,0003,332,000 stock options outstanding at a weighted average exercise price of $0.81$0.63 on DecemberMarch 31, 2016.2020.

The following table illustrates the various assumptions used to calculate the Black-Scholes option pricing model for stock options granted during the periods presented:

As of September 30, 2017, we did not have any unvested restricted stock or performance shares outstanding.

(8)(11) Significant Customers and Contingencies

Revenue from threefive customers constituted approximately 58%24%, 8%20%, 17%, 15% and 4%10%, respectively, of our total revenue for the three months ended September 30, 2017, and 67%, 7% and 4%, respectively, of our total revenue for the nine months ended September 30, 2017.March 31, 2021. Amounts included in accounts receivable on September 30, 2017March 31, 2021 relating to these threefive customers were approximately $1,078, $222$837, $812, $476, $855, and $102,$390, respectively. Revenue from these threefive customers constituted approximately 65%0%, 46%, 15%, 4% and 5%15%, respectively, of our total revenue for the three months ended September 30, 2016, and 69%, 3% and 6%, respectively, of our total revenue for the nine months ended September 30, 2016.March 31, 2020. Amounts included in accounts receivable on September 30, 2016March 31, 2020 relating to these threefive customers were approximately $784, $69$0, $896, $31, $180, and $122,$593, respectively. The loss of one of these significant customers, a significant decrease in revenue from one or more of these customers, or the failure to attract new customers could have a material adverse effect on our business, results of operations and financial condition.

We currently have exclusive supply agreements with BASF Corporation (“BASF”), our largest customer, that have contingencies outlined which could potentially result in the license of technology and/or the sale of production equipment from the Company to the customer intended to provide capacity sufficient to meet the customer’s production needs. This outcome may occur if we fail to meet certain performance requirements, certain other obligations and/or certain financial condition covenants. The financial condition covenants in one of our supply agreements with BASF “trigger” a technology transfer right (license and equipment sale at BASF’s option) in the event (a) that earnings for the twelve monthtwelve-month period ending with our most recently published quarterly financial statements are less than zero and our cash, cash equivalents and certain investments are less than $1 million,$500, or (b) of an acceleration of any debt maturity having a principal amount of more than $10 million. There are certain minimum finished goods inventory requirements with the new amendment to the supply agreement. This agreement also requires Nanophase to maintain certain finished goods inventory levels as “safety stock,” beginning in the first quarter of 2019, and increasing through the third quarter of 2019 to a negotiated level based on agreed demand metrics, in order to maintain the $500 non-cash component discussed above. After September 30, 2019, should our safety stock fall below the prescribed amount of material, the quarter-end cash requirement would revert to $1,000 in cash, cash equivalents, and certain investments. The safety stock requirement may be adjusted upon mutual agreement. The Company met its safety stock requirements at March 31, 2021.

Our supply agreements with BASF also “trigger” a technology transfer right in the event of our insolvency, as further defined within the agreements. In the event of an equipment sale, upon incurring a triggering event, the equipment would be sold to the customer at either 115% of the equipment’s net book value, or the greater of 30% of the original book value of such equipment, and any associated upgrades to it, or 115% of the equipment’s net book value, depending on the equipment and related products.it.

We believe that we have sufficient cash from operations and credit availability (See Liquidity and Capital Resourcescash on hand, in Management’s Discussion and Analysis in Part I, Item 2 of this Form 10-Q for a further discussion, as well as the description ofaddition to unused borrowing capacity, may not be adequate to fund our Line of Credit Agreement described in Note 5) to operate our business during the remainder of 2017.operating plans through 2021. If a triggering event were to occur and BASF elected to proceed with the license and related equipment sale mentioned above, we would receive royalty payments from this customer for products sold using our technology; however, we would lose both significant revenue and the ability to generate significant revenue to replace that which was lost in the near term. Replacement of necessary equipment that could be purchased and removed by the customer pursuant to this triggering event could take in excess of twelve months. Any additional capital outlays required to rebuild capacity would probably be greater than the proceeds from the purchase of the assets as dictated by our agreement with the customer. Similar consequences would occur if we were determined to have materially breached certain other provisions of the supply agreement with BASF. Any such event would also likely result in the loss of manysome of our key staff and line employees due to economic realities. We believe that our employees are a critical component of our success and it could be difficult to replace them quickly. Given the occurrence of any such event, we might not be able to hire and retain skilled employees given the stigma relating to such an event and its impact on us. Finally, any shortfall in capital needed to operate the business as management intends, including with respect to avoiding this triggering event as described above, may result in a curtailment of certain activities or anticipated investments.

Should events ariseWe expect to expend resources on research, development, and product testing, and in expanding current capacity or capability for new business. In addition, we may incur significant costs in preparing, filing, prosecuting, maintaining, and enforcing our patents and other proprietary rights. We may need additional financing if we were to lose an existing customer or suffer a significant decrease in revenue from one or more of our customers or because of currently unknown capital requirements, new regulatory requirements, or the need to meet the cash requirements discussed above to avoid a triggering event under our BASF agreement. Given our expected continuing growth in our Solésence business, we may also have temporary working capital demands that makewe cannot fund with existing capital, while remaining in compliance with the covenants included in our BASF agreement described above. We expect our single biggest financing need in 2021, as it appropriate for uswas in 2020, will relate to the funding of our working capital, which has grown significantly to support the growth of our business. In the likely event that we will need to seek additional financing, such additionalwe may seek funding through public or private financing and through contracts with governmental entities or other companies. Additional financing may not be available on acceptable terms or even at all, and any such additional financing could be dilutive to our stockholders. Such a financing couldshareholders. If we are unable to obtain adequate funds, we may be necessitated by such things as the lossrequired to delay, scale-back or eliminate some of oneour manufacturing and marketing operations or more significant customers or a significant decline in revenue from those customers, currently unknown capital requirements, new regulatory requirements, thewe may need to meet cash requirements under our BASF agreement to avoid a triggering event, the continuing costs associated with launching Solésence™, or otherobtain funds through arrangements on less favorable terms. Such circumstances not currently anticipated by us. The failure to obtain sufficient capital may impair or curtail our business plans and under such circumstances may raise doubt regardingas to our ability to continue as a going concern. If we obtain funding on unfavorable terms, we may be required to relinquish rights to some of our intellectual property.

(9)(12) Business Segmentation and Geographical Distribution

Revenue from international sources approximated $276$1,285 and $956$304 for the three and nine months ended September 30, 2017, respectively, compared to $143March 31, 2021 and $618 for the same periods in 2016.2020, respectively. All of this revenue was product revenue.

Our operations comprise a single business segment and all of our long-lived assets are located within the United States.

(10) Recently Adopted We categorize our revenue streams into three main product categories, Personal Care Ingredients, Advanced Materials and New Accounting Pronouncements

During May 2014, the FASB issued Accounting Standards Update (“ASU��) No. 2014-09 (“ASU 2014-09”),Revenue from Contracts with Customers, and several related updates including ASU No. 2016-08 and ASU No. 2016-10, which supersede nearly all existing revenue recognition guidance under U.S. generally accepted accounting principles.Solésence®. The new standard requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. Additionally, the guidance requires certain disclosures designed to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which is our first quarter of 2018. The new standard allows application either retrospectively to each prior reporting period presented or retrospectively as a cumulative-effect adjustment as of the date of adoption. We are completing the evaluation of the impact of ASU 2014-09, and at this time do not believe it will have a material impact on our financial position, results of operations, or cash flows, though it is expected to impact our related disclosures.

During February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”),Leases (Topic 842). This standard requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly, a lessee will recognize a lease asset for its right to use the underlying asset and a lease liabilityrevenues for the corresponding lease obligation. Both the assetthree months ended March 31, 2021 and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease2020, respectively, by category, are as either a finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. For leases with a term of 12 months or less, a lessee can make an accounting policy election by class of underlying asset to not recognize an asset and corresponding liability. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements and provide additional information about the nature of an organization’s leasing activities. The amendments in this standard are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, which is our first quarter of 2019, with early adoption permitted. We are currently evaluating the impact its adoption will have on the presentation of our financial statements and related disclosures.follows:

During March 2016, the FASB issued ASU No. 2016-09,Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718,Compensation - Stock Compensation. The objective of this update is part of the FASB’s Simplification Initiative as it applies to several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The update became effective for fiscal years beginning after December 15, 2016 and interim periods within that reporting period, or January 1, 2017 for us. The adoption did not have a material impact on the presentation of our financial statements, financial position, results of operations, cash flows and related disclosures.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Nanophase is an advanced materialsa skin health focused company whose primary products are fully developed prestige skin care formulations, marketed and applications developersold through our Solésence subsidiary, enabled by our proprietary Active Pharmaceutical Ingredients (“APIs”) which are also marketed as APIs for sale to manufacturers of other types of skin health products, including sunscreens and commercial manufacturer with an integrated familydaily care products.  In terms of materials technologies. We produce engineered nano and sub-micron materialsthe balance of our life sciences focus, we have seen current conditions significantly increase demand for useour medical diagnostics ingredients, which are used in a variety of diverse markets: personal care including sunscreens,testing for various viruses, most notably COVID-19.  Additionally, we continue to sell products in markets for architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, medical diagnostics, energy (including solar control), and a variety of surface finishing technologies (polishing) applications,applications— all of which, along with medical diagnostics, currently fall into the advanced materials product category.

Leveraging a platform of integrated patented and proprietary technologies, we create products with unique performance to enhance consumers’ health and well-being. We offer soup-to-nuts production, from engineered materials, formulation development, and finished product development to commercial manufacturing and packaging capabilities. Our expertise in materials engineering allows us to effectively coat and disperse materials on a nano and “non-nano” scale for use in a variety of markets in skin health, including optics. We recently expanded our offerings beyond active ingredients to include targeted full formulations offor use in sunscreens as Active Pharmaceutical Ingredients (“APIs”) and as fully developed prestige skin care products, marketed and sold bythrough our wholly-owned subsidiary, Solésence ™ LLC (“Solésence“™), which was created during the fall of 2016. The core of these solutions is a new surface coating technique for the particles that we believe will provide enhanced value to the marketplace. We target markets in which we believe practical solutions may be found using our products. We work closely with current and potential customers in these target markets to identify their material and performance requirements and market our materials to various end-use applications manufacturers. Recently developed technologies have made certain new products possible and opened potential new markets. For example, we have applied our skills at producing precisely defined nanomaterials to now create and sell larger, sub-micron material products. Our focus is on customer need where we believe we have an advantage, as opposed to finding uses for one particular technology. We expect growth in end-user (manufacturing customers, including customers of our customers) adoption in 2017 and beyond. Our initiatives in targeted market areas are progressing at differing rates of speed, but we have been broadly moving through testing and development cycles, and in a number of cases believe we are approaching first revenue or next stage revenue with particular customers in the industries referenced above.beauty science subsidiary. We believe that successful introductionwe have developed technological advantages with respect to our APIs sold for use as ingredients, while our Solésence beauty science technologies lead to enhanced efficacy in our finished products.

We have seen current conditions significantly increase demand for our medical diagnostics materials. Polymerase Chain Reaction (“PCR”) testing for various viruses, most notably SARS-CoV-2 (“COVID-19”), has become a critical use of our technology in the life science space. While we cannot predict whether the increased demand for our medical diagnostic materials used in COVID-19 testing will continue, we believe that our deep expertise in materials science has created advantages that enable performance in certain tests that may not be achievable through other materials. Outside of life science, we continue to sell advanced materials for use in legacy applications, all of which, along with manufacturers may leadmedical diagnostics, currently fall into the advanced materials product category.

Given our technological position, in addition to follow-on ordersthe historical market acceptance of our APIs for otheruse in skin health products and sunscreens, rapidly growing sales for our suite of Solésence® finished products, and growing use of our diagnostic materials in their applications.

Ataiding the same time,fight to curb the spread of COVID-19 and other viruses, we lookhave reoriented our Company strategy. We are seeing unprecedented demand in both beauty science and life science areas. The markets for opportunitiesboth have shown an appetite for what we are producing, and management believes that this growth is happening now due to partner with established entitiesa confluence of our technology, market conditions that favor what we produce, and our expanded expertise in order to further our mutual goals. During June 2017, we entered into a series of agreements with Eminess Technologies, Inc. (“ETI”), an entity that is well established in selling materials for surface finishing (polishing) applications. We intend to continue serving this market while devoting significant assets behind the launch of Solésence™. These agreements are intended to accomplish both. ETI will sell our products, in some cases by making and selling those products themselves under an exclusive license and paying us a royalty, and in other cases through an exclusive supply arrangement with us. ETI purchased equipment from us for $36,000 and paid us a one-time fee of $250,000 for assisting ETI in its development of dispersion technology relevant to polishing solutions.these areas. 

Nanophase, and Solésence, is now focusing our combined business-, ingredient-, and product-development capabilities on products with unique performance that enhance consumers’ wellbeing through beauty science and life science applications — in skin health and medical diagnostics, respectively. While we will continue to produce and sell materials to our other advanced materials customers, it is not our strategic focus. We may develop additional technologies, or find unique applications outside of our core markets in the future,  but to maximize the use of our resources today, we plan on expanding efforts in areas where we have proven we can deliver innovation and growth.

Results of Operations

Total revenue increased to $2,785,000$7,072,000 for the three months ended September 30, 2017,March 31, 2021, compared to $2,521,000$4,039,000 for the same period in 2016. Total revenue increased to $9,852,000 for the nine months ended September 30, 2017, compared to $8,415,000 for the same period of 2016. 2020.

A substantial majority of our revenue for both periods was from our five largest customercustomers, in personal care and sunscreen applications. The increase during the first nine months of 2017 was primarily dueparticular, sales to increased order flow from that customer as well as our largest customer in coatings applications. The increase during the three months ended September 30, 2017 was primarily due to the increase in “other revenue” associated with the ETI payments noted aboveskin care and discussed below, as well as order increases fromsunscreen applications, medical diagnostics, and now finished skin health products marketed through our largest customer in coatings applications, and new revenue flow from a new customer in personal care applications.Solésence subsidiary. Product revenue, the primary component of our total revenue, increased to $2,524,000$7,050,000 three months ended March 31, 2021, compared to $3,961,000 during the same period of 2020. This increase was due to continued growth in the adoption of our Solésence® products and our medical diagnostics materials, offset by a decrease in revenue from our largest customer in our personal care ingredients business. 

Current Significant Customers

Other revenue decreased to $22,000 for the three months ended September 30, 2017,March 31, 2021, compared to $2,510,000$78,000 for the same period in 2016. Product revenue increased to $9,525,000 for the nine months ended September 30, 2017, compared to $8,377,000 for the same period in 2016. Revenue from our top three customers was approximately 58%, 8% and 4%, respectively, during the three months ended September 30, 2017, compared to 65%, 4% and 5%, respectively, for the same customers during the same period in 2016. Revenue from our top three customers was approximately 67%, 7% and 4%, respectively, during the nine months ended September 30, 2017, compared to 69%, 3% and 6%, respectively, for the same customers during the same period in 2016.

March 31, 2020. Other revenue was $261,000 and $327,000 for the three and nine months ended September 30, 2017, compared to $11,000 and $38,000 for the same periods in 2016. This is typically comprised primarily of shipping costs paid by customers, as well as non-recurring project-based fees paid by customers. Duringdevelopmental or licensing fees. For the three and nine months ended September 30, 2017,March 31, 2020, other revenue included $250,000$65,000 to development fees recognized for the Company’s work on behalf of non-recurring technology development revenue received from ETI pursuanta customer relating to our agreement with ETI.new personal care ingredients.

Cost of revenue generally includes costs associated with commercial production and customer development arrangements. Cost of revenue increased to $2,200,000$5,042,000 for the three months ended September 30, 2017,March 31, 2021, compared to $1,841,000$3,005,000 for the same period in 2016. Cost of revenue increased to $6,862,000 for the nine months ended September 30, 2017, compared to $5,766,000 for the same period in 2016.2020. The increasesincrease in cost of revenue werewas primarily driven by the increase in revenueincreased volume and impacted by the higher cost of zinc in the marketplaceprice inflation on materials and manufacturing inefficiencies pertainingrelated to new products associated with Solésence ™.sence® product launches. While we typically pass through costs to our customers, we sometimes cannot pass through 100% of pricing increases on raw materials, and even with pass throughs, our gross margin percentage is negatively impacted by higher material costs. We expect to continue new nanomaterialadvanced material development primarily usingrelating to personal care ingredients and for our NanoArc® synthesisformulated Solésence® products during 2021 and dispersion technologies, for targeted applications and new markets beyond 2017. beyond.

At current revenue levels we have generated a positive gross margin, though margins have beencan be impeded by the cyclicality of our demand, often leading to the Company not having enough revenue to efficiently absorb manufacturing overhead that is required to work with current customers and expected future customers. Another issue relating to demand cyclicality is that we have seen our lack of burst capacity creating strains, in terms of people and costs, when new product launches occur at the same time demand from previously launched products comes to play. We believe that our current fixed manufacturing cost structure is sufficient to support higher levels of production.revenue volume on a level basis, and are currently working to expand burst capacity to allow us to utilize our resources more efficiently. The extent to which margins may grow, as a percentage of total revenue, will be dependent upon revenue mix, revenue volume, and our ability to managecontinue to cut costs and pass commodity market-driven raw materials increases on to customers.customers, and the speed and efficiency with which we are able to scale up production for our Solésence products. We expect that, as product revenue volume increases, would result in our fixed manufacturing costs beingwill be more efficiently absorbed, leadingwhich should lead to increased margins.margins as we grow. We expect to continue to focus on reducing controllable variable product manufacturing costs, with potential variability related to the commodity metals markets, but may or may not realize absolute dollar gross margin growth through 2021 and beyond, 2017, dependent upon the factors discussed above.

Research and development expense, which includes all expenses relating to the technology and advanced engineering groups, primarily consists of costs associated with the development or acquisition of new finished product formulations for skin care, new product applications and coating formulationsfor our skin care ingredients, advancement of our medical diagnostics ingredient knowledge,  and the cost of enhancing our manufacturing processes. As an example, we have been,are currently focusing the bulk of our resources on developing new product formulations, and continuerelated new technologies, as we expand marketing and sales efforts relating to be, engaged in research to enhance our ability to disperse material in a variety of organic and inorganic media for use as coatings and polishing materials. Much of thisSolésence products. This work has led to several new products and additional potential new products.

Having demonstrated Our efforts in research and development, cosmetic formulating, process engineering and advanced engineering groups are focused in three major areas: 1) application development for our products; 2) creating or obtaining additional core materials technologies and/or materials that have the capability to produce pilot quantities of mixed-metal oxides in a single crystal phase, we do not expect development of further variations on these materialsserve multiple skin health-related markets; and 3) continuing to present material technological challenges. Many of these materials exhibit performance characteristics that can enable themimprove our core technologies to serve in various catalytic applications. We are now working on several related commercial opportunities using the same materials. We expect that this technique should enable us to scale to large quantity commercial volumes. We also have an ongoing advanced engineering effort that is primarily focused on the development of new nanomaterials as well as the refinement of existing nanomaterials, as dictated by our customer-driven marketing strategy. We are not certain when or if any significant revenue will be generated from the production of the materials described above.improve manufacturing operations and reduce costs.

Research and development expense increased, as planned, to $494,000 and $1,354,000$499,000 for the three and nine months ended September 30, 2017,March 31, 2021, compared to $386,000 and $1,060,000$372,000 for the same periodsperiod in 2016. We added personnel during 20162020. The primary reasons for this increase were related to increases in staffing and 2017compensation, offset by reductions in professional fees and have increased outside product testing and evaluation during 2017costs related to our Solésence™sence® products. We expect quarterly research and development expense to decline by approximately 10% duringremain at, or slightly above, current levels, for the fourth quarterbalance of 2017 as we expect the initial effort required to launch the Solésence ™ solutions to lessen, particularly with respect to reduced external testing and validation costs.2021.

Selling, general and administrative expense increased, as planned, to $725,000 and $2,185,000$1,034,000 for the three and nine month periodsmonths ended September 30, 2017,March 31, 2021, compared to $716,000 and $2,151,000$705,000 for the same periodsperiod in 2016. Increased costs associated with launching the Solésence ™ brand were largely offset by the reduction2020. Much of certain administrative costs including professional service fees.this was attributed to increases in staffing and compensation. We expect selling, general, and administrative expense to remain at current levels duringfor the fourth quarterbalance of 2017.2021.

Interest expense was $139,000 for the three months ended March 31, 2021, compared to $124,000 for the same period in 2020. This primarily includes interest on our revolving line of credit for working capital funding, cash, and discount-related interest expense on our $2,000,000 Convertible Note, along with finance leases and term loans supporting some of our equipment.

Inflation

We believe inflation has not had a material effect on our operations or financial position. However, supplier price increases and wage and benefit inflation, both of which represent a significant component of our costs of operations, may have a material effect on our operations and financial position in 20172021 and beyond if we are unable to pass through any applicable increases under our present contracts or through to our markets in general.

Liquidity and Capital Resources

Our cash and cash equivalents and short-term investments amounted to $1,070,000$1,819,000 on September 30, 2017,March 31, 2021, compared to $1,779,000$957,000 on December 31, 20162020 and $1,718,000$951,000 on September 30, 2016.March 31, 2020. The net cash used in our operating activities was $866,000$137,000 for the ninethree months ended September 30, 2017,March 31, 2021, compared to $354,000$1,180,000 for the same period in 2016.2020. The net use of cash during both periods was driven primarily by a significant increase in accounts receivable at the end of the period related to significant customer shipments during September of each year.period. Net cash provided byused in investing activities was $15,000$166,000 during the ninethree months ended September 30, 2017,March 31, 2021, compared to net cash used by investing activities of $139,000$181,000 for the ninethree months ended September 30, 2016. We received $136,000 during 2017 related to the sale of fixed assets that we no longer utilize.March 31, 2020. Capital expenditures amounted to $121,000$166,000 and $102,000$181,000 for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020, respectively. Net cash provided by financing activities was $142,000$1,165,000 during the ninethree months ended September 30, 2017,March 31, 2021, compared to $936,000$1,118,000 for the ninethree months ended March 31, 2020. On March 23, 2020, the Company and Beachcorp, LLC executed the First Amendment to our Master Agreement that extends the maturities of both the Term Loan and the Revolver Facility to March 31, 2021. Effective September 30, 2016. We paid off a financing lease in8, 2020, the Company and Beachcorp, LLC executed the Second Amendment to our Master Agreement that expands the limit on the Revolver Facility from $2,000,000 to $2,750,000.  On December 23, 2020, the Company and Beachcorp, LLC executed the Third Amendment to our Master Agreement that expands the limit on the Revolver Facility from $2,750,000 to $4,000,000 and extends the maturities of both the Term Loan and the Revolver Facility to March 31, 2022. On April 21, 2021, the Company and Beachcorp, LLC executed the Fourth Amendment to our Master Agreement that expands the limit on the Revolver Facility from $4,000,000 to $6,000,000, extends its maturity to March 31, 2023, and reduces interest on outstanding borrowings from the prime rate plus 3%, with an 8.25% minimum floor, to the prime rate plus 2%, with no minimum rate floor. Additionally, the Fourth Amendment increased the amount of $60,000the Term Loan from $500,000 to $1,000,000, and its fixed interest rate was reduced from 8.25% per year to 5.25% per year. The maturity date of the Term Loan remains March 31, 2022.

We paid $46,000 for principal on finance lease obligations during 2017the three months ended March 31, 2021 compared to $58,000 in the same period in 2020. The balance of the line of credit with Libertyville was $500,000 for both March 31, 2021 and December 31, 2020. In each instance, the line of credit was repaid during the month following the end of the reporting period. This line of credit expired on April 4, 2021. Management expects this line of credit to be renewed in May 2021. During the three months ending March 31, 2021, we drew $6,500,000, of which $5,289,000 was repaid under the Master Agreement. The net borrowings for the three months ended March 31, 2021 was $1,211,000. During the three months ending March 31, 2020, we drew $3,260,000, of which $2,084,000 was repaid under the Master Agreement. The net borrowings for the three months ended March 31, 2020 was $1,176,000. Accretion related to certain fixed assetsthe Secured Convertible Promissory Note to Bradford T. Whitmore was $67,000 for both March 31, 2021 and 2020. The balance of this long-term convertible loan was $1,164,000 and $1,097,000 at March 31, 2021, and at December 31, 2020, respectively. Mr. Whitmore chose to exercise his conversion rights effective May 7, 2021, requesting that any accrued interest be paid him in the form of shares, as allowed in the Convertible Note. This will result in the accelerated recognition of the discount on the Convertible Note, to be recognized as interest expense in the second quarter of 2021.

On April 17, 2020, we sold,received a loan of $952,000 from Libertyville under the Paycheck Protection Program (“PPP”).  Under the PPP, the Company may apply for forgiveness of the amount due on the loan in an amount equal to the sum of the following costs incurred during the 24-week period beginning on the date of the first disbursement of the Loan: (a) payroll costs, (b) any payment of interest on a covered obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), (c) any payment on a covered rent obligation, and had borrowings under our Line(d) any covered utility payment, calculated in accordance with the terms of Credit of $250,000 on September 30, 2017, which was subsequently repaid on October 3, 2017. On February 10, 2016, we sold 2.6 million shares of our common stock to our largest stockholder for $988,000 in proceeds. We usedthe CARES Act. Although management believes that the Company expended the proceeds fromof the salePPP loan principally for forgivable purposes under the CARES Act, no assurance can be provided that the Company will obtain forgiveness of sharesthe PPP loan in whole or in part.  The Company applied for working capital and general corporate purposes. We entered into new capital (financing) leases during 2017, including one for $175,000PPP forgiveness during the first quarter of 2017, another lease for $52,000 during the second quarter of 2017 and another for $60,000 during the third quarter of 2017. These leases will be repaid over five years pursuant to their terms. We had no new capital leases during the first nine months of 2016.2021. 

Our supply agreements with our largest customer, BASF, contain certain financial covenants which could potentially impact our liquidity. The most restrictive financial covenants under these agreements require that we maintain a minimum of $1 million$1,000,000 in certain current assets; which may be composed of no less than $500,000 cash, cash equivalents, and certain investments, no more than a combined $500,000 of certain related inventory, of which no more than $250,000 can be raw material, and certain receivables, and that we not have the acceleration of any debt maturity having a principal amount of more than $10 million, in order to avoid triggering the customer’s potential right to transfer certain technology and equipment to that customer at a contractually definedcontractually-defined price.  We had approximately $1.1 million$1,819,000 in cash and cash equivalents on September 30, 2017,March 31, 2021, with $250,000 in outstanding$500,000 borrowings on our Line of Credit, subsequently repaid on October 3, 2017.Credit. This supply agreement and its covenants are more fully described in Note 8,11, and our line of credit is more fully described in Note 5,7, to our Financial Statements in Part I, Item 1 of this Form 10-Q.

We believe that cash from operations and cash cash equivalents andon hand, in addition to unused borrowing capacity, willwhich has recently been increased (see Note 7 to the Financial Statements), may not be adequate to fund our operating plans through 2017. 2021.  We are working to reduce these risks, but some of this is dependent on several things over which we have limited control. We have seen an increase in sales of our Solésence products through 2020, which we expect to continue in 2021. If that does continue, we will require additional investment in working capital.  Given these issues, and other commercial realities, we are monitoring the additional working capital demands that this could create as we continue to execute on our Solésence growth strategy. The timing of cash flows is critical. If cash generated from operations is not materially consistent with our plans, we believe that we may need to seek additional funding to address working capital demands. This uncertainty has caused us to be unable to assert that, for the next twelve months, we have enough current cash and guaranteed access to financing to fund operations, and to continue with our current growth strategy in terms of investment in capital equipment and in operating expenses related to Solésence, without securing additional financing. We believe that we will be able to secure additional financing if needed, but we do not have any additional financing commitments in place as of today. However, we may not be able to secure additional financing in a timely manner under commercially reasonable terms, or at all. If we are unable to secure additional financing, the operations of the Company might need to be curtailed to a certain degree, and we would need to delay capital expenditures related to our Solésence growth strategy, which could impede growth later in 2021 and 2022.

Our actual future capital requirements in 20172021 and beyond will depend however, on many factors, including customer acceptance of our current and potential nanomaterialsfinished Solésence products, APIs sold as ingredients in to the skin health markets, medical diagnostics ingredients, and productother engineered materials, applications, and products, continued progress in research and development activities and product testing programs, the magnitude of these activities and programs, and the costs necessary to increase and expand our manufacturing capabilities and to market and sell our materialsthese products and product applications.ingredients. Other important issues that will drive future capital requirements will be the development of new markets and new customers as well as the potential for significant unplanned growth with existing customers. Depending on the success of certain projects, we expect that capital spending relating to currently known capital needs forduring the remainderbalance of 20172021 will be between $30,000$1,400,000 and $80,000.$2,000,000, to be funded by profit from operations, and our existing loans and lines of credit. If those projects are delayed or ultimately prove unsuccessful, or if we fail to obtain financing on terms acceptablebe able to us,support the additional cost of funding them in the near term, we would expect our capital spending to beexpenditures may fall below the lower end of the range. Similarly, substantial success in business development projects may cause the actual 2021 capital investment to exceed the top of this range.

In the likely event that range. If certain projects are successful, the total capital spending may end up higher than that range for the remainder of 2017.

Should events arise that make it appropriate for uswe will need to seek additional financing, such additional financing may not be available on acceptable terms or even at all, and any such additional financing could be dilutive to our stockholders.shareholders. Such financing could be necessitated by such things as:as the loss of one or morean existing customers orcustomer; a significant decrease in revenue from thoseone or more of our customers; temporary working capital demands resulting from our expected growth in our Solésence business that we cannot fund with existing capital; currently unknown capital requirements in light ofconsidering the factors described above; new regulatory requirements that are outside our control; the need to meet previously discussed cash requirements to avoid a triggering event under our BASF agreements; the continuing costs surrounding the launch of Solésence™,agreement; or various other circumstances coming to pass that we currently do not anticipate. The failure to obtainhave access to sufficient capital to fund our business plans may result in a curtailment or other change in those plans, and under such circumstances, may raisethis raises doubt as to our ability to continue as a going concern.concern under U.S. GAAP.

On September 30, 2017,December 31, 2020, we had a net operating loss carryforward of approximately $82$67 million for income tax purposes. Because wethe Company may have experienced "ownership changes"“ownership changes” within the meaning of the U.S. Internal Revenue Code (“IRC”) in connection with ourits various prior equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the Internal Revenue Code.IRC. If not utilized, the$63 million of this loss carryforward will expire at various dates between 2021 and 2037. Given changes to the IRC, net operating loss carryforwards generated after January 1, 2018 and December 31, 2036. As a result of the annual limitation and uncertainty as to the amount of future taxable income that will be earned prior to the expiration of the carryforward, we have concluded that it is likely that some portion of this carryforward willdo not expire, before ultimately becoming available to reduce income tax liabilities. Changestherefore, $5 million in Illinois state law that began in 2011 will impact net loss carryforward duration and utilization on the state tax level.operating losses generated since January 1, 2018 do not expire.

Off−Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purposes of raising capital, incurring debt or operating our business. We do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.

As more fully described in Note 57 to our Financial Statements, in Part I, Item I of this Form 10-Q, during 2014 we entered into a letter of credit and promissory note for up to $30,000 supporting our obligations under our facility lease agreement. No borrowings have been incurred under this promissory note.

Safe Harbor Provision

We want to provide investors with more meaningful and useful information. As a result, this Quarterly Report on Form 10-Q (the "Form 10-Q") contains and incorporates by reference certain "forward-looking statements", as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements reflect our current expectations of the future results of our operations, performance, and achievements. Forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have tried, wherever possible, to identify these statements by using words such as "anticipates"“anticipates”, "believes"“believes”, "estimates"“estimates”, "expects"“expects”, "plans"“plans”, "intends"“intends” and similar expressions. These statements reflect management'smanagement’s current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause our actual results, performance, or achievements in 20172021 and beyond to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties and factors include, without limitation: our ability to be consistently profitable despite the losses we have incurred since our incorporation; a decision by a customer to cancel a purchase order or supply agreement in light of our dependence on a limited number of key customers; the terms of our supply agreements with BASF which could trigger a requirement to transfer technology and/or sell equipment to that customer; our potential inability to obtain working capital when needed on acceptable terms or at all; our ability to obtain materials at costs we can pass through to our customers, including Rare Earth elements, specifically cerium oxide, as well as high purity zinc; uncertain demand for, and acceptance of, our nanocrystallineSolésence products, and our advanced materials; our manufacturing capacity and product mix flexibility in light of customer demand; our limited marketing experience, now particularly relevant toincluding with our launchsuite of our new Solésence ™ products; changes in development and distribution relationships; the impact of competitive products and technologies; our dependence on patents and protection of proprietary information; our ability to maintain an appropriate electronic trading venue for our securities; the impact of any potential new governmental regulations, especially any new governmental regulations focusing on the processing, handling, storage or sale of nanomaterials, that could be difficult to respond to or costly to comply with; business interruptions due to unexpected events or public health crises, including viral pandemics such as COVID-19; and the resolution of litigation or other legal proceedings in which we may become involved; our ability to maintain an appropriate electronic trading venue for our securities; and the impact of any potential new governmental regulations that could be difficult to respond to or costly to comply with.involved. In addition, our forward-looking statements could be affected by general industry and market conditions and growth rates. Readers of this Quarterly Report on Form 10-Q should not place undue reliance on any forward-looking statements. Except as required by federal securities laws, we undertake no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.

Not required for a smaller reporting company.

Item 4. 

Controls and Procedures

Disclosure controls

We are responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (b) accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosures. It should be noted that in designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and that our management necessarily was required to apply its judgment regarding the design of our disclosure controls and procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision (and with the participation) of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at reaching that level of reasonable assurance.

Internal control over financial reporting

We implemented a new enterprise resource planning (“ERP”) system across the organization during April 2017 and discontinued the use of our prior ERP system. We expect the new ERP system to improve the efficiency of our business transaction processes and relevant analytics. We have considered changes associated with this conversion in the design of our internal control over financial reporting and testing for the effectiveness of our internal control over financial reporting. We have concluded that the implementation of the new ERP has not materially impacted the effectiveness of our internal control over financial reporting.

The Company’s management, including the CEO (who is also currently acting as both the Company’s principal executive officer and CFO,the Company’s principal financial officer), confirm that there was no change in the Company’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.  

Legal Proceedings

We are not a party to any pending legal proceedings or claims that we believe will result in a material adverse effect on our business, financial condition, or operating results.

Item 1A. Risk Factors

Risk Factors

In addition to the information set forth in this Quarterly Report on Form 10-Q and before deciding to invest in, or retain, shares of our common stock, you also should carefully review and consider the information contained in our other reports and periodic filings that we make with the Securities and Exchange Commission, including, without limitation, the information contained under the caption Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-KNot required for the year ended December 31, 2016. Those risk factors could materially affect our business, financial condition and results of operations. Additional risks and uncertainties that we do not currently know about, we currently believe are immaterial or we have not predicted may also harm our business operations or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition, results of operations, cash flows or stock price could be materially adversely affected. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.a smaller reporting company.

None.Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None.

Not applicable.

Item 5. Other Information

Other Information

On November 8, 2017, Frank J. Cesario, our Chief Financial Officer, resigned from his position effective November 17, 2017. Mr. Cesario’s decision to resign was not related to any disagreement between him and the Company relating to our financial reporting, operations, policies or practices. We are currently seeking a replacement.None.

Exhibit 31.1

Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.Item 6. Exhibits

Exhibit 31.2

Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.

Exhibit 32

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

Exhibit 101

The following materials from Nanophase Technologies Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (1) the Balance Sheets, (2) the Statements of Operations, (3) the Statements of Cash Flows, and (4) the Notes to Unaudited Financial Statements.