UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

Form 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended: September 30, 20192020 

or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of the
Securities Exchange Act of 1934

 

For the transition period from             to             

 

Commission File Number: 000-22333

 

Nanophase Technologies Corporation

(Exact name of registrant as specified in its charter)

 

Delaware

36-3687863

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

1319 Marquette Drive, Romeoville, Illinois 60446

 (Address(Address of principal executive offices, and zip code)

 

Registrant’s telephone number, including area code: (630) 771-6708

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common StockNANXOTCQB

  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑     No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☑      No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☑

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐     No ☑

 

As of November 14, 2019,16, 2020, there were 38,136,79238,215,792 shares outstanding of common stock, par value $.01, of the registrant.

 

 

 

NANOPHASE TECHNOLOGIES CORPORATION

 

QUARTER ENDED SEPTEMBER 30, 20192020 

 

INDEX

 

  

Page

   
PART I - FINANCIAL INFORMATION 1
Item 1.Unaudited Consolidated Condensed Financial Statements 1
Balance Sheets (Unaudited Consolidated Condensed) as of September 30, 20192020 and December 31, 20182019 1
Statements of Operations (Unaudited Consolidated Condensed) for the three and nine months ended September 30, 20192020 and 20182019 2
Statements of StockholdersStockholders' Equity (Unaudited Consolidated Condensed) for the three and nine months ended September 30, 20192020 and 20182019 3
Statements of Cash Flows (Unaudited Consolidated Condensed) for the nine months ended September 30, 20192020 and 20182019 4
Notes to Unaudited Consolidated Condensed Financial Statements 5
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations 1415
Item 3.Quantitative and Qualitative Disclosures About Market Risk 1920
Item 4.Controls and Procedures 1921
   
PART II - OTHER INFORMATION 1921
Item 1.Legal Proceedings 1921
Item 1A.Risk Factors 2021
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3.Defaults Upon Senior Securities.Securities 2221
Item 4.Mine Safety Disclosures.Disclosures 2221
Item 5.Other Information.Information 2221
Item 6.Exhibits.Exhibits 22
   
SIGNATURES 23

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited Consolidated Condensed)

(in thousands except share and per share data)

  September 30, 2020  December 31, 2019 
 (Unaudited)  (Unaudited) 
ASSETS      
       
Current assets:        
Cash $1,134  $1,194 
Trade accounts receivable, less allowance for doubtful accounts of $9 on September 30, 2020 and on December 31, 2019, respectively  2,451   970 
Inventories, net  3,584   2,554 
Prepaid expenses and other current assets  599   267 
Total current assets  7,768   4,985 
Equipment and leasehold improvements, net  2,650   2,255 
Operating leases, right-of-use  1,917   2,119 
Other assets, net  11   13 
   TOTAL ASSETS $12,346  $9,372 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
         
Current liabilities:        
Line of credit, bank $500  $500 
Line of credit, related party  1,541   224 
Current portion of long-term debt, related party  500   500 
Current portion of finance lease obligations  186   218 
Current portion of operating lease obligations  411   357 
Accounts payable  1,668   1,748 
Current portion of deferred revenue  309   482 
Accrued expenses  647   380 
Total current liabilities  5,762   4,409 
         
Long-term portion of finance lease obligations  148   288 
Long-term portion of operating lease obligations  1,766   2,035 
Long-term convertible loan, related party  1,030   830 
PPP Loan SBA  952    
Long-term portion of deferred revenue     93 
Asset retirement obligations  212   206 
Total long-term liabilities  4,108   3,452 
         
Contingent liabilities:      
         
Stockholders' equity:        
Preferred stock, $.01 par value, 24,088 shares authorized and no shares issued and outstanding      
Common stock, $.01 par value, 55,000,000 shares authorized; 38,215,069 and 38,136,792 shares issued and outstanding on September 30, 2020 and December 31, 2019, respectively  382   381 
Additional paid-in capital  102,055   101,886 
Accumulated deficit  (99,961)  (100,756)
Total stockholders' equity  2,476   1,511 
   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,346  $9,372 

See Notes to Consolidated Condensed Financial Statements.


NANOPHASE TECHNOLOGIES CORPORATION 

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited Consolidated Condensed)

             
  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2020  2019  2020  2019 
Revenue:            
  Product revenue $3,827  $3,043  $11,929  $9,797 
  Other revenue  61   26   333   321 
    Total revenue  3,888   3,069   12,262   10,118 
                 
Operating expense:                
  Cost of good revenue  2,201  2,506  7,832   7,839 
    Gross profit  1,687   563   4,430   2,279 
                 
  Research and development expense  405   488   1,134   1,450 
  Selling, general and administrative expense  730   890   2,133   2,711 
Income/(loss) from operations  552   (815)  1,163   (1,882)
                 
Interest expense  122   47   368   140 
Income/(loss) before provision for income taxes $430  $(862) $795  $(2,022)
Provision for income taxes            
Net income/(loss) $430  $(862) $795  $(2,022)
                 
Net income/(loss) per basic shares $0.01  $(0.02) $0.02  $(0.06)
Weighted average number of basic common shares outstanding  38,141,741   38,136,792   38,138,453   36,077,257 
Net income/(loss) per diluted share $0.01  $(0.02) $0.02  $(0.06)
Weighted average number of diluted common shares outstanding  38,432,741   38,136,792   38,228,453   36,077,257 

See Notes to Consolidated Condensed Financial Statements.


NANOPHASE TECHNOLOGIES CORPORATION 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited Consolidated Condensed)

(In thousands except share data)

  Preferred Stock  Common Stock  Additional  Accumulated    
Description Shares  Amount  Shares  Amount  Paid-in-Capital  Deficit  Total 
Balance on December 31, 2018   $  33,911,792  $339  $98,795  $(97,750) $1,384 
Stock-based compensation              57      57 
Net loss                 (513)  (513)
Balance on March 31, 2019    $   33,911,792  $339  $98,852  $(98,263) $928 
Stock option exercises        36,000      16      16 
Stock-based compensation              58      58 
Issuance of Common Stock        4,189,000   42   1,634      1,676 
Net loss                 (647)  (647)
Balance on June 30, 2019    $   38,136,792  $381  $100,560  $(98,910) $2,031 
Stock-based compensation              64      64 
Net loss                 (862)  (862)
Balance on September 30, 2019    $   38,136,792  $381  $100,624  $(99,772) $1,233 
                             
Balance on December 31, 2019    $   38,136,792  $381  $101,886  $(100,756) $1,511 
Stock-based compensation              52      52 
Net loss                 (167)  (167)
Balance on March 31, 2020    $   38,136,792  $381  $101,938  $(100,923) $1,396 
Stock-based compensation              47      47 
Net income                 532   532 
Balance on June 30, 2020    $   38,136,792  $381  $101,985  $(100,391) $1,975 
Stock option exercises        78,277   1   22      23 
Stock-based compensation              48      48 
Net income                 430   430 
Balance on September 30, 2020    $   38,215,069  $382  $102,055  $(99,961) $2,476 

See Notes to Consolidated Condensed Financial Statements.


NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited Consolidated Condensed)

  Nine months ended 
  September 30, 
  2020  2019 
Operating Activities:        
Net income (loss) $795  $(2,022)
 Adjustements to reconcile net loss to cash used in operating activities:        
  Depreciation and amortization  265   234 
  Loss on disposal of equipment and leasehold improvements     16 
  Share-based compensation  147   179 
  Amortization of debt discount  200    
         
Changes in assets and liabilities related to operations:        
  Trade accounts receivable  (1,481)  (544)
  Inventories  (1,030)  98 
  Prepaid expenses and other assets  (332)  (12)
  Accounts payable  (284)  (632)
  Accrued expenses  267   (19)
  Deferred revenue  (266)  594 
  Other long-term assets and liabilities  (13)  (53)
Net cash used in operating activities  (1,732)  (2,161)
         
Investing activities:        
Acquisition of equipment and leasehold improvements  (448)  (523)
Net cash used in investing activities  (448)  (523)
         
Financing activities:        
Principal payments on finance leases  (172)  (162)
Proceeds from line of credit, bank  1,500   1,000 
Payments to the line of credit, bank  (1,500)  (500)
Proceeds from the line of credit, related party  10,390   8,166 
Payments to the line of credit, related party  (9,073)  (7,895)
Proceeds from PPP / SBA Loan  952    
Proceeds from issuance of common stock     1,676 
Proceeds from stock option exercises  23   16 
Net cash provided by financing activities  2,120   2,301 
         
Increase (decrease) in cash and cash equivalents  (60)  (383)
Cash and cash equivalents at beginning of period  1,194   1,345 
Cash and cash equivalents at end of period $1,134  $962 
         
Supplemental cash flow information:        
Interest paid $152  $126 
         
Supplemental non-cash investing and finacing activities:        
Accounts payable incurred for the purchase of equipment and leasehold improvements $204  $18 

See Notes to Consolidated Condensed Financial Statements.


NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited Consolidated Condensed)

(in thousands, except share and per share data)

 September 30,
2019
  December 31,
2018
 
       
ASSETS      
Current assets:        
Cash and cash equivalents $962  $1,345 
Trade accounts receivable, less allowance for doubtful accounts of $9,000 on September 30, 2019 and on December 31, 2018  1,373   829 
Inventories, net  2,144   2,242 
Prepaid expenses and other current assets  285   273 
Total current assets  4,764   4,689 
         
Equipment and leasehold improvements, net  2,164   1,865 
Operating lease right-of-use assets  2,198    
Other assets, net  13   15 
TOTAL ASSETS $9,139  $6,569 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Line of credit, related party $1,103  $832 
Line of credit, bank  500    
Current portion of finance lease obligations  228   218 
Current portion of operating lease obligations  361    
Accounts payable  994   1,608 
Accrued expenses  960   979 
Deferred revenue  469    
Total current liabilities  4,615   3,637 
         
Long-term portion of finance lease obligations  334   506 
Long-term portion of operating lease obligations  2,128    
Long-term debt - Beachcorp  500   500 
Long-term deferred rent     344 
Long-term deferred revenue  125    
Asset retirement obligations  204   198 
Total long-term liabilities  3,291   1,548 
         
Stockholders’ equity:        
Preferred stock, $.01 par value, 24,088 shares authorized and no shares issued and outstanding      
Common stock, $.01 par value, 42,000,000 shares authorized; 38,136,792 and 33,911,792 shares issued and outstanding on September 30, 2019 and December 31, 2018 respectively  381   339 
Additional paid-in capital  100,624   98,795 
Accumulated deficit  (99,772)  (97,750)
Total stockholders’ equity  1,233   1,384 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $9,139  $6,569 

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)

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

3,043

 

 

$

3,998

 

 

$

9,797

 

 

$

10,908

 

Other revenue

 

 

26

 

 

 

24

 

 

 

321

 

 

 

128

 

Total revenue

 

 

3,069

 

 

 

4,022

 

 

 

10,118

 

 

 

11,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of good sold

 

 

2,506

 

 

 

2,965

 

 

 

7,839

 

 

 

8,164

 

Gross profit

 

 

563

 

 

 

1,057

 

 

 

2,279

 

 

 

2,872

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expense

 

 

488

 

 

 

416

 

 

 

1,450

 

 

 

1,513

 

Selling, general and administrative expense

 

 

890

 

 

 

765

 

 

 

2,711

 

 

 

2,299

 

Loss from operations

 

 

(815

)

 

 

(124

)

 

 

(1,882

)

 

 

(940

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

47

 

 

 

12

 

 

 

140

 

 

 

32

 

Loss before provision for income taxes

 

 

(862

)

 

 

(136

)

 

 

(2,022

)

 

 

(972

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(862

)

 

$

(136

)

 

$

(2,022

)

 

$

(972

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per basic share

 

$

(0.02

)

 

$

(0.00

)

 

$

(0.06

)

 

$

(0.03

)

Weighted average number of basic common shares outstanding

 

 

38,136,792

 

 

 

33,879,097

 

 

 

36,077,257

 

 

 

33,858,184

 

Net loss per diluted share

 

$

(0.02

)

 

$

(0.00

)

 

$

(0.06

)

 

$

(0.03

)

Weighted average number of diluted common shares outstanding

 

 

38,136,792

 

 

 

33,879,097

 

 

 

36,077,257

 

 

 

33,858,184

 

See Notes to Consolidated Condensed Financial Statements. 


NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(Unaudited Consolidated Condensed)

(In thousands except share data)

  Preferred Stock  Common Stock  Additional  Accumulated    
Description Shares  Amount  Shares  Amount  Paid-in-Capital  Deficit  Total 
Balance on December 31, 2017    $   33,847,793  $338  $98,563  $(95,669) $3,232 
Stock-based compensation              43      43 
(Net loss)                 (924)  (924)
Balance on March 31, 2018    $   33,847,793  $338  $98,606  $(96,593) $2,351 
Stock-based compensation              45      45 
Net income                 88   88 
Balance on June 30, 2018    $   33,847,793  $338  $98,651  $(96,505) $2,484 
Stock option exercises        63,999   1   28      29 
Stock-based compensation              58      58 
(Net loss)                 (136)  (136)
Balance on September 30, 2018    $   33,911,792  $339  $98,737  $(98,910) $2,435 
                             
Balance on December 31, 2018    $   33,911,792  $339  $98,795  $(97,750) $1,384 
Stock-based compensation              57      57 
(Net loss)                 (513)  (513)
Balance on March 31, 2019    $   33,911,792  $339  $98,852  $(98,263) $928 
Stock option exercises        36,000      16      16 
Stock-based compensation              58      58 
Issuance of Common Stock        4,189,000   42   1,634      1,676 
(Net loss)                 (647)  (647)
Balance on June 30, 2019    $   38,136,792  $381  $100,560  $(98,910) $2,031 
Stock-based compensation              64      64 
(Net loss)                 (862)  (862)
Balance on September 30, 2019    $   38,136,792  $381  $100,624  $(99,772) $1,233 

See Notes to Consolidated Condensed Financial Statements.


NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited Consolidated Condensed)

  Nine Months Ended
September 30,
 
  2019  2018 
  (in thousands) 
Operating activities:        
Net loss $(2,022) $(972)
Adjustments to reconcile net loss to cash used in operating activities:        
Depreciation and amortization  234   239 
Loss on disposal of equipment and leasehold improvements  16    
Share-based compensation  179   146 
         
Changes in assets and liabilities related to operations:        
Trade accounts receivable  (544)  (802)
Inventories  98   (706)
Prepaid expenses and other assets  (12)  (84)
Accounts payable  (632)  872 
Accrued expenses  (19)  386 
Deferred revenue  594    
Other long-term assets and liabilities  (53)   
Net cash used in operating activities  (2,161)  (921)
         
Investing activities:        
Acquisition of equipment and leasehold improvements  (523)  (115)
Net cash used in investing activities  (523)  (115)
         
Financing activities:        
Principal payment on finance leases  (162)  (114)
Proceeds from line of credit, bank  1,000   1,200 
Payments to the line of credit, bank  (500)  (1,000)
Proceeds from line of credit, related party  8,166    
Payments to line of credit, related party  (7,895)   
Proceeds from issuance of common stock  1,676    
Proceeds from stock option exercises  16   29 
Net cash provided by financing activities  2,301   115 
Decrease in cash and cash equivalents  (383)  (921)
Cash and cash equivalents at beginning of period  1,345   1,955 
Cash and cash equivalents at end of period $962  $1,034 
         
Supplemental cash flow information:        
Interest paid $126  $32 
         
Supplemental non-cash investing and financing activities:        
Accounts payable incurred for the purchase of equipment and leasehold improvements $18  $6 
Non-cash purchases of property and equipment $  $248 

See Notes to Consolidated Condensed Financial Statements.


NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(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”, “Company”, “we”, “our”, or “us”) reflect all adjustments (consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of our financial position and operating results for the interim periods presented. All statements include the results from both Nanophase and our wholly-ownedwholly owned subsidiary, Solesence,Solésence, LLC (“Solésence,sence®,” or our “Solésence®sence® subsidiary”). Operating results for the three and nine months ended September 30, 20192020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.   2020.

 

These financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2018,2019, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018,2019, as filed with the Securities and Exchange Commission.

 

(2)         Going Concern / Liquidity

 

We believe that cash from operations and cash on hand, cash from our May 13, 2019 and November 13, 2019 financings, in addition to unused borrowing capacity, shouldmay not be adequate to fund our operating plans through 2019,September 30, 2021. We are working to reduce these risks, but some of this is dependent on several things, oversome of which we have limited control. Our largest customer consistingmade up 63% of 64%our 2019 revenue and has seen a significant reduction in orders placed to us in 2020. We have also seen a rapid increase in sales of revenue for the nine-months ended September 30, 2019, had a revenue decreaseour Solésence® products, adding working capital pressure in terms of 20% from the same time last year. This decline hasadditional inventory and accounts receivable. Both of these issues have limited our flexibility and required us to make cash management a top priority. TheAfter April 17, 2020, some of this pressure was mitigated due to our receipt of a $952 loan under the Paycheck Protection Program (the “PPP”), as discussed more fully below. We also have a $500 term loan, and revolving credit facility with a maximum credit limit of $2,750, both described more fully below, with principal due on March 31, 2021. In the event that we are unable to either extend the maturity, or potentially refinance this loan, we may have difficulty funding ongoing operations. Notwithstanding the fact that visibility into the ongoing impact of the various reactions and policies relating to, the Covid-19 pandemic is limited, it is currently management’s belief that we will continue to achieve strong growth in our Solésence® business increased 56% forsence® sales through 2020. Given these issues, and other commercial realities, we are monitoring the nine months ended September 30, 2019 compared to the same time last year. Weadditional working capital demands that this could create as we continue to viewexecute on our Solésence® as a critical strategic undertakingsence® growth strategy. It is also management’s belief that the Covid-19 pandemic, related governmental reaction, and may require additional investment in working capital. Our current planresulting economic slow-down has, and is expected to continue, to investaffect certain consumer behaviors and markets has had a negative impact on its Personal Care Ingredients customers during 2020, with a current lack of visibility as to how far this impact may extend in Solésence®-related operating expensesto 2021. Management believes the outlook after the fourth quarter is uncertain, but a continuation of the Covid-19 pandemic and capital equipment. Givenrelated reactions and policies going forward would be expected to maintain a degree of negative impact on the decline related toCompany and its businesses. While customer demand over the next several months is currently known, Management believes the negative impacts late in the fourth quarter and, if applicable, thereafter, are not currently quantifiable. The timing of cash flows is critical. If cash generated from operations is not materially consistent with our largest customer, as well as our investment in Solésence®, it is possibleplans, we believe that we may need to seek additional funding to address working capital demands withindemands. The trading volume of our stock has been low enough that we expect it would be difficult to sell enough shares, assuming our shareholders would approve the authorization of additional shares, to generate additional capital via the OTC market. These uncertainties have caused us to be unable to assert that, for the next twelve months.months, we have enough current cash, guaranteed access to financing to fund operations, or access to cash in the equity markets to continue with our current growth strategy in terms of investment in capital equipment and in operating expenses related to Solésence®.


On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (SARS-CoV-2) to be a global pandemic (COVID-19), which continues to spread throughout the United States and around the world. On April 23, 2020, the Governor of the State of Illinois extended his order that all non-essential businesses cease all activities within the State of Illinois except for certain minimum basic operations through May 30, 2020, and such executive order has been temporarily lifted. Given the uncertain progress toward combatting the SARS-CoV-2 virus, we expect there to be further disruptions in the local, national, and global economies. During these disruptions, we are doing everything we can to allow as many of our employees as possible to shelter-in-place. Relative to any further executive orders in Illinois, management believes that Nanophase Technologies and its Solésence® subsidiary qualify as essential businesses as defined, due to our product offerings supporting healthcare, and critical manufacturing and chemical products within sectors that have been designated as critical infrastructure, the continued operation of which is vital for national public health, economic security, and safety.

The Company believes that its customers and suppliers may have similar disruptions, which may lead to greater reductions in their normal operations as a result of responses to the coronavirus pandemic in Illinois and in other jurisdictions in the United States and worldwide.  Currently, the Company is consequently aware of changes in its business as a result of the coronavirus pandemic, but uncertain of the impacts of those changes on its consolidated statements of position, operations or cash flows.  As of the date of this filing, we are reasonably confident in customer demand through 2020 and in to the first quarter of 2021. Demand for the second quarter of 2021, and the subsequent quarter, is not yet clear to management. We believe thatthe resulting cessations, reductions, and disruptions in its customers’ and suppliers’ operations could be temporary; however, the Company’s management also believes the duration and, hence, the potential impact of such cessations, reductions, and disruptions is currently unknowable.  As a result, although we will be able to secure additional financing, butbelieve we do not have any financing commitments in place. However, we may not be able to secure additional financing in a timely manner under commercially reasonable terms, or at all. Ifacceptable visibility through the first quarter of 2021, conditions are fluid and our estimates regarding the first quarter and beyond could prove inaccurate. Moreover, we are unable to secure additional financing, we would need to reevaluateclearly estimate the Company’s strategy, includingpotential impact on our Solésence® growth strategy, and lower investment and expenses accordingly. This could impede growth in 2020 and beyond. business for the balance of the year as of the date of this filing.

 

These circumstances raise significant 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 unaudited condensed 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.

 

(3) Summary of Significant Accounting Policies

Recently Adopted Financial Accounting Standards


On January 1, 2019,April 17, 2020, the Company adopted Accounting Standards Updatereceived funding in the form of a loan under the “PPP,” under Division A, Title I of Coronavirus Aid, Relief, and Economic Security Act (“ASU”CARES Act”) No. 2016-02, Leases, ASU No. 2018-10, Codification Improvements to Topic 842 (Leases) and ASU No. 2018-11, Targeted Improvements to Topic 842 (Leases).  The guidance is intended to increase transparency and comparability among companies for leasing transactions, including a requirement for companies that lease assets to recognize on their balance sheets the assets and liabilities for the rights and obligations created by those leases. The guidance also provides for disclosures that allow the users of financial statements to assess, in the amount timing,of $952 which helped us to continue to pay our people, rent and uncertaintyutilities during the second quarter. Under the PPP, the Company may apply for forgiveness of cash flows arising from leases.

The Company adopted the guidanceamount due on January 1, 2019 using the modified retrospective method without restatementloan in an amount equal to the sum of comparative periods. As such, periods prior tothe following costs incurred during the 24-week period beginning on the date of adoption are presentedthe 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 ASC 840 - Leases.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 utilized the available practical expedient that allowed for the Companywill be required to not reassess whether existing contracts contain a leasepay any unforgiven principle and interest under the new definitionPPP note in eighteen equal monthly installments, with the first payment being due on a date yet to be determined. The Company is in the process of a lease, lease classificationapplying for existing leasesloan forgiveness and whether previously capitalized initial direct costs would qualify for capitalization underdoes not expect resolution until the new guidance.first quarter of 2021.


(3) Description of Business

 

The adoption of this guidance had a material impact on the Consolidated Condensed Balance Sheet as of September 30, 2019 due to the recognition of equal right-of-use assets and lease liabilities for the Company’s portfolio of operating leases. The right-of-use asset balance was then adjusted by the reclassification of pre-existing accrued rent balances from other line items within the Consolidated Condensed Balance Sheet. The adoption had an immaterial impact to the Consolidated Condensed Statement of Cash Flows and to the Consolidated Condensed Statement of Operations for the three and nine months ended September 30, 2019. The adoption had no impact to the Consolidated Condensed Statement of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2019. Additional information and disclosures required by the new standard are contained in Note 10, Leases.

(4) Description of Business

Nanophase Technologies Corporation (“Nanophase,” “Company,” “we,” “our,” or “us”) is a skinscientifically-driven company which, along with its wholly-owned subsidiary, Solésence, LLC (our “Solésence® subsidiary”), is focused in various beauty- and sun care focused company that offerslife-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, formulation development and commercial manufacturing withthrough an integrated family of technologies. We look at our productsOur expertise in three major product categories; Personal Care Ingredients,material engineering allows us to effectively coat and disperse particles on a nano and “non-nano” scale for use in a variety of markets in skin care, including for use in sunscreens as active ingredients; Solésence, including full formulations ofingredients and as fully developed prestige skin care products, marketed and sold bythrough our wholly-owned subsidiary, Solesence, LLC (“Solésence,” or our “Solésence® subsidiary”); and Advanced Materials, includingsubsidiary. 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 Covd-19, has become a critical use of our technology. Additionally, we continue to sell products in markets for architectural andcoatings, industrial coating applications, abrasion-resistant additives, plastics additives, medical diagnostics, and a variety of surface finishing technologies (polishing). applications— all of which, along with medical diagnostics, fall into the 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, 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. TheDuring 2015 we were granted a patent granted in 2015, foron a new type of particle surface treatment (coating) — now called Active Stress Defense™Defense ™ Technology — which became the cornerstone of our new product development in personal care.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. We are currently in the process of expanding our patented technologies relating to Solesence applications. 

 

Although our primary strategic focus has been the North American market, we currently sell material to customers overseas and have been working to expand our reach within foreign markets. The Company was incorporated in Illinois on November 25, 1989 and became a Delaware corporation during November 1997. Our common stock trades on the OTCQB marketplace under the symbol NANX.

 

While product sales comprise the 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 Condensed Statements of Operations, as it does not represent revenue directly from the sale of our products.


(5)

(4) Revenues

 

Revenues are 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.

 

CustomersDeferred revenue includes customer deposits deferred revenue and other receipts that are deferred and recognized when the revenue is realized and earned. Cash payments to customers are classified as reductions of revenue in the Company’s Consolidated Condensed Statement of Operations. Customer deposits, $344$309 as of September 30, 2019,2020, have been classified as deferred revenue. At December 31, 2018,2019, customer deposits were immaterial.amounted to $575.


 

On July 31, 2019, we entered into a Joint Development Agreement (“JDA”), with an initial term of ten years, with Sumitomo Corporation of Americas (“SCOA”) to jointly develop certain coated materials for the use in the personal care market. In return for the Company’s exclusive efforts on SCOA’s behalf, SCOA has agreed to paypaid a commitment fee of $250 and will pay two subsequent payments, of $125 each.each, for the development of products. The two subsequent payments are contingent upon the achievement of certain performance obligations as defined in the agreement.

We began recognizing revenue from the commitment fee in November 2019 and will continue to do so as we fulfill our contractual performance obligations. In the case of the SCOA JDA, the Company is recognizing revenue over time using an input method. If the Company elects to terminate the agreement within the terms allowed and prior to achieving the initial performance obligations, the original $250 must be refunded.

As of September 30, 2019,2020, the Company has not yet started fulfillingrecognized $250 in cumulative revenue from the SCOA JDA, of which $47 and $229 was recognized in the three and nine months ended September, 30 of 2020. The Company has recognized this revenue proportionally, based upon its performance obligations, and as such, the $250 received is recorded as deferred revenue, split between current and long-term, based on the Company’s estimate of the period over which the performance obligation willis expected to be completed. Revenue will be recognized proportionally to the Company’s completion of the performance obligations.

 

(6)(5) Earnings Per Share

 

Earnings (Loss) per share is computed using the Treasury Stock Method. Options to purchase approximately 165,000 and 497,000 shares of common stock that were outstanding as of September 30, 2019 for the three and nine months ended September 30, 2019, respectively, were not included in the computation of diluted earnings (loss) per share, as the impact of such shares would be anti-dilutive. Options to purchase approximately 1,119,000 and 820,000 shares of common stock that were outstanding as of September 30, 2018 were not included in the computation of loss per share for the three and nine months ended September 30, 2018,2019, respectively, as the impact of such shares would be anti-dilutive.

 

(7)(6) Financial Instruments

 

We follow the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 and cash equivalents, accounts receivable, accounts payable and accrued expenses, along with the promissory note with no related borrowings described in Note 8,7, and any borrowings on the working capital line of credit from Libertyville Bank and Trust and any borrowings under the Master Agreement from Beachcorp, LLC described below in Note 8.7. The fair values of all financial instruments were not materially different from their carrying values. There were no financial assets or liabilities adjusted to fair value on September 30, 20192020 or December 31, 2018.2019.


(8)

(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. This note was renewed through July 1, 2020.2021. Because there were no amounts outstanding on the note at any time during 20192020 or 2018,2019, we have recorded no related liability on our balance sheet.

 


On March 22, 2019, we executed a New Business Loan Agreement, dated as of March 4, 2019 (the “Loan Agreement”), with Libertyville Bank and Trust Company, a Wintrust Community Bank (“Libertyville”), our primary bank, the maturity of which replaces the Linewas extended until April 20, 2021 pursuant to an amended and restated Promissory Note executed on June 25, 2020, and dated as of Credit Agreement with Libertyville having a maturity date of March 4, 2019. The New Business Loan Agreement matures on MarchApril 4, 2020. Under the New Business Loan Agreement, Libertyville will provideprovided a maximum of (i) $500 or (ii) two times the sum of (a) 75% our eligible accounts 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 iswas payable monthly on any advances at a floating interest rate of the prime rate at the time plus 1%. We mustare required to have $500 in cash, inclusive of the borrowed amount, at Libertyville on the date of any advance. Advances maycould only occur at the beginning or end of a fiscal quarter and mustwere required to be repaid in full within five business days of the advance. As ofWe borrowed $500 on September 29, 2020 and repaid it on October 2, 2020. We borrowed $500 on June 29, 2020 and repaid it on July 1, 2020. We borrowed $500 on March 30, 2019, the outstanding balance2020 and repaid it on this loan was $500. There was no outstanding balanceApril 2, 2020. We borrowed $500 on this loan at December 31, 2018.2019 and repaid it on January 2, 2020.

 

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 affiliates Grace Brothers, Ltd. and Grace Investments, Ltd., beneficially owned approximately 53%63% of the outstanding shares of our common stock as of May 13, 2019, pursuant to our 2019 financing.September 30, 2020. The Master Agreement relates to two loan facilities, each evidenced by separate promissory notes, each dated November 16, 2018: a term loan to the Company of up to $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 with principal due on December 31, 2020; and an asset-based revolving loan facility for the Company of up to $2,000 (the “Revolver Facility”), 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 initially to be due 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. On September 8, 2020, the Company executed an updated Promissory Note to, and a Second Amendment to the Business Loan Agreement with Beachcorp, LLC, expanding the capacity of the Revolver Facility from $2,000 to $2,750. 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 New 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 September 30, 2019,2020, the balance on the term loan was $500 and the balance on the Revolver Facility was $1,103. For$1,541. There was $34 in related interest expense during the three monthsquarter ended September 30, 2020, of which $12 was accrued and nine months$22 paid by the end of the quarter. There was $47 in related interest expense during the quarter ended September 30, 2019, interest expense was $47 and $140, respectively, compared to the same periods in 2018 of $12 and $32, respectively. For the nine months ended September 30, 2019, $14which $9 was accrued and $126 paid.$18 paid by the end of the quarter. As Beachcorp, LLC is an affiliate of one of our shareholders, $91 isMr. Whitmore, this amounts to interest withto be paid to a related party, of which $77 was paid and $14 was owed. There was a one-time amendment to the credit agreement allowing a 30 day extended Account Receivable eligibility for one of our largest customers. With this amendment,party. On September 30, 2019 borrowings were within2020, the amended credit agreement line, with an additional $233 available.Company had $734 in excess borrowing capacity over the $1,541 balance on the Revolver Facility. 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.


(9)

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 offset to these discounts will be interest expense. For the three and nine months ended September 30, 2020, the Company accreted $67 and $200, respectively. The balance on the convertible note was $1,030 and $830, net of discounts of $1,103 and $1,170 at September 30, 2020 and December 31, 2019, respectively.

On September 30, 2020, the balance on the term loan was $500, the balance on the Revolver Facility was $1,541, the balance on the Convertible Note was $2,000. In the nine months ended September 30, 2020, there was $334 in interest expense relating to these credit facilities held by Beachcorp, LLC. The accrued interest expense balance on these related party credit facilities amounted to $27, and $10, at September 30, 2020 and December 31, 2019, 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 April 17, 2020, we entered into a Promissory Note, dated as of April 16, 2020, in favor of Libertyville in the principal amount of $952 for our loan 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 (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 principle and interest under the PPP note in eighteen equal monthly installments, with the first payment being due on November 17, 2020 and continuing on the same day of each subsequent month until April 17, 2022. On September 30, 2020, the balance under the PPP note was $952.

(8) Inventories

 

Inventories consist of the following:

 

 

September 30,
2019

 

 

December 31,
2018

 

 September 30,
2020
  December 31,
2019
 

Raw materials

 

$

1,151

 

 

$

1,086

 

 $2,187  $1,425 

Finished goods

 

 

1,050

 

 

 

1,243

 

  1,427   1,170 

 

 

2,201

 

 

 

2,329

 

  3,614   2,595 

Allowance for excess inventory quantities

 

 

(57

)

 

 

(87

)

  (30)  (41)

 

$

2,144

 

 

$

2,242

 

 $3,584  $2,554 

 

(10)(9) Leases

 

The Company’sCompany's operating lease portfolio is comprised of operating leases for office, warehouse space and equipment. Certain of the Company’sCompany's leases include one or more options to renew or terminate the lease at the Company’sCompany'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.

 


The adoption of Topic 842 resulted in the Company recognizing operating lease liabilities totaling $2,556 with a corresponding right-of-use (“ROU”) asset of $2,212 based on the present value of the minimum rental payments of such leases. The variance between the ROU asset balance and the lease liability is deferred rent liability that existed prior to the adoption of the ASC 842 and was offset against the ROU asset balance during the adoption.

As of September 30, 2019,2020, the ROUoperating lease right-of-use “ROU” asset had a balance of $2,198$1,917 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 $361$411 and $2,128 respectively,$1,766 respectively. As of December 31, 2019, the ROU asset had a balance of $2,119 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 $357 and $2,035 respectively. These are included in the “Current portion of operating lease obligations” and “Long-term portion of operating lease obligations”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. The Company has elected to utilize the available practical expedient to not separate lease and non-lease components.


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

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30, 2019

 

 

Nine Months Ended
September 30, 2019

 

Components of lease cost

 

 

 

 

 

 

 

 

Finance lease cost components:

 

 

 

 

 

 

 

 

Amortization of finance lease assets

 

$

18

 

 

$

52

 

Interest on finance lease liabilities

 

 

14

 

 

 

44

 

Total finance lease costs

 

 

32

 

 

 

96

 

Operating lease cost components:

 

 

 

 

 

 

 

 

Operating lease cost

 

 

129

 

 

 

375

 

Variable lease cost

 

 

27

 

 

 

81

 

Short-term lease cost

 

 

16

 

 

 

68

 

Total operating lease costs

 

 

172

 

 

 

524

 

 

 

 

 

 

 

 

 

 

Total lease cost

 

$

204

 

 

$

620

 

  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
  2020  2019  2020  2019 
Components of lease cost            
Finance lease cost components:                
 Amortization of finance lease assets $17  $18  $54  $52 
      Interest on finance lease liabilities  9   14   30   44 
     Total finance lease costs $26  $32  $84  $96 
Operating lease cost components:                
    Operating lease cost $140  $129  $425  $375 
    Variable lease cost  27   27   81   81 
    Short-term lease cost  10   16   12   68 
      Total operating lease costs $177  $172  $518  $524 
 Total lease cost $203  $204  $602  $620 


 

Supplemental cash flow information related to leases is as follows for the nine months ended September 30, 2019:ended:

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash outflow from operating leases

 

$

509

 

Right-of-use assets obtained in exchange for lease obligations:

 

 

 

 

Operating leases

 

$

205

 

 

 

 

 

 

Weighted-average remaining lease term-finance leases (in years)

 

 

2.2

 

Weighted-average remaining lease term-operating leases (in years)

 

 

3.3

 

Weighted-average discount rate-finance leases

 

 

9.1

%

Weighted-average discount rate-operating leases

 

 

14.4

%

  September 30, 2020 September 30, 2019
Cash paid for amounts included in the measurement of liabilities:       
           Operating cash outflow from operating leases $518  $509 
Right-of-use assets obtained in exchange for lease obligations:        
           Operating leases $  $205 
 Weighted-average remaining lease term-finance leases (in years)  1.9   2.2 
 Weighted-average remaining lease term-operating leases (in years)  3.4   3.3 
 Weighted-average discount rate-finance leases  9.3%  9.1%
 Weighted-average discount rate-operating leases  14.3%  14.4%

 

The future maturities of the Company’s finance and operating leases as of September 30, 20192020 is as follows:

 

 

 

 

Finance

 

 

Operating

 

 

 

 

 

 

 

Leases

 

 

Leases

 

 

Total

 

2019

 

 

$

69

 

 

$

184

 

 

$

253

 

2020

 

 

 

255

 

 

 

676

 

 

 

931

 

2021

 

 

 

196

 

 

 

687

 

 

 

883

 

2022

 

 

 

109

 

 

 

705

 

 

 

814

 

2023

 

 

 

5

 

 

 

690

 

 

 

695

 

2024 and thereafter

 

 

 

 

 

 

580

 

 

 

580

 

Total payments

 

 

$

634

 

 

$

3,522

 

 

$

4,156

 

Less amounts representing interest

 

 

 

(72

)

 

 

(1,033

)

 

 

(1,105

)

Present value of lease obligations

 

 

$

562

 

 

$

2,489

 

 

$

3,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

   Finance
Leases
  Operating
Leases
  Total 
2020  $63  $172  $235 
2021   196   701   897 
2022   109   720   829 
2023   5   705   710 
2024      595   595 
2025 and thereafter      1   1 
Total payments  $373  $2,894  $3,267 
Less amounts representing interest   (39)  (717)  (756)
Total minimum payments required:  $334  $2,177  $2,511 

 

(11)(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 $48 and $147 for the three and nine months ended September 30, 2020, respectively, compared to $64 and $179 for the three and nine months ended September 30, 2019, respectively, compared to $58 and $146 for the three and nine months ended September 30, 2018, respectively.

 

As of September 30, 2019,2020, there was approximately $422$290 of total unrecognized compensation cost related to non-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 1.8 years.

 

Stock Options and Stock Grants

 

During the nine months ended September 30, 2020, 78,277 stock options were exercised for $23. During the nine months ended September 30, 2019, 36,000 stock options were exercised for $16.  During the nine months ended September 30, 2018, 63,999 shares of common stock were issued pursuant to stock option exercises for proceeds of $29.  During the nine months ended September 30, 2019, 547,5002020, 535,000 stock options were granted, compared to 570,500547,500 stock options granted during the same period in 2018.2019. During the nine months ended September 30, 2019, 130,5002020, 460,640 stock options expired compared to 188,504130,500 for the same period in 2018.2019. For the nine months ended September 30, 2019, 48,6002020, 202,134 stock options were forfeited compared to 31,60148,600 for the same period in 2018.2019. We had 3,507,073 stock options outstanding at a weighted average exercise price of $0.58 on September 30, 2020, compared to 3,747,400 stock options outstanding at a weighted average exercise price of $0.64 on September 30, 2019, compared to 3,415,000 stock options outstanding at a weighted average exercise price of $0.67 on December 31, 2018.2019.


 

No stock options were granted in the three-month periods ending September 30, 20192020 and 2018.2019.

 

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

 

For the nine months ended

 

September 30, 2019

 

 

September 30, 2018

 

 September 30,
2020
 September 30,
2019

Weighted-average risk-free interest rates

 

 

2.3

%

 

 

2.9

%

  0.5%  2.3%

Dividend yield

 

 

0.00

%

 

 

0.00

%

  0.00%  0.00%

Weighted-average expected life of the option

 

 

7 years

 

 

 

7 years

 

  7 years   7 years 

Weighted-average expected stock price volatility

 

 

94

%

 

 

94

%

  94%  94%

Weighted-average fair value of the options granted

 

$

0.64

 

 

$

0.64

 

 $0.36  $0.41 

 

As of September 30, 2019,2020, we did not have any unvested restricted stock or performance shares outstanding.

 

(12)(11) Significant Customers and Contingencies

 

Revenue from threefour customers constituted approximately 75%30%, 5%18%, 16% and 4%16%, respectively, of our total revenue for the three months ended September 30, 2020. For the nine months ended September 30, 2020, revenue from the same four customers was approximately 20%, 32%, 13% and 14%, respectively. Amounts included in accounts receivable on September 30, 2020 relating to these four customers were approximately $901, $328, $291 and $420, respectively. Revenue from these four customers constituted approximately 0%, 75%, 0% and 4%, respectively, for the three months ended September 30, 2019. For the nine months ended September 30, 2019, revenue from the same threefour customers was approximately 4%, 64%, 3%0%, and 9%, respectively. Amounts included in accounts receivable on September 30, 2019 relating to these threefour customers were approximately $0, $1,042, $116$0 and $122, respectively.  Revenue from these three customers constituted approximately 73%, 4% and 12%, respectively, for the three months ended September 30, 2018. For the nine months ended September 30, 2018, revenue from the same three customers was approximately 73%, 3% and 8%, respectively. Amounts included in accounts receivable on September 30, 2018 relating to these three customers were approximately $1,171, $120 and $388, 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-month period ending with our most recently published quarterly financial statements are less than zero and a minimum of $1 million in total of certain assets of which at least $500 must be in cash, cash equivalents and certain investments, with the balance being composed of certain inventory and receivables, is not maintained 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 2019 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. As of September 30, 2019, safety stock did not meet the prescribed amount of material. However, cash, cash equivalents, and eligible accounts receivable exceeded the minimum $1,000 required as of September 30, 2019. The safety stock requirement may be adjusted upon mutual agreement.


 

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.

 

Current cash and credit availability should be sufficient (see the description of our New Line of Credit Agreement with Libertyville and the Master Agreement with Beachcorp, LLC (described in Note 8) to operate our business through the balance of 2019. 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 many 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.


We 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 growth in our Solésence®sence® business, we may also have temporary working capital demands that we cannot fund with existing capital, while remaining in compliance with the covenants included in our BASF agreement described above. If necessary, we 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 at all, and any such additional financing could be dilutive to our shareholders. If we are unable to obtain adequate funds, we may be required to delay, scale-back or eliminate some of our manufacturing and marketing operations or we may need to obtain funds through arrangements on less favorable terms. Such circumstances could raise doubt as 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.

 

On July 31, 2019, we entered into a Joint Development Agreement, with an initial term of ten years, with Sumitomo Corporation of Americas (“SCOA”) to jointly develop certain coated materials for the use in the personal care market. In return for the Company’s exclusive efforts on SCOA’s behalf, SCOA has agreed to pay a commitment fee of $250 and two subsequent payments, of $125 each. The two subsequent payments are contingent upon the achievement of certain performance obligations as defined in the agreement.

If the Company elects to terminate the agreement within the terms allowed and prior to achieving the initial performance obligations, the original $250 must be refunded. As of September 30, 2019, the Company has not yet started fulfilling its performance obligations, and as such, the $250 received is recorded as deferred revenue, split between current and long-term, based on the Company’s estimate of the period over which the performance obligation will be completed. Revenue will be recognized proportionally to the Company’s completion of the performance obligations.

(13)(12) Business Segmentation and Geographical Distribution

 

Revenue from international sources approximated $34$1,242 and $2,747 for the three and nine months ended September 30, 2020, respectively, compared to $33 and $734 for the three and nine months ended September 30, 2019, respectively, compared to $152 and $335 for the three and nine months ended September 30, 2018, respectively. All of this revenue was product revenue.

 

Our operations comprise a single business segment and all our long-lived assets are located within the United States. We categorize our revenue stream into three main product categories, Personal Care Ingredients, Advanced Materials and Solésence®sence®. The revenues for the three months and nine months ended September 30, 20192020 and 2018,2019, by category, are as follows:

 

 

 

For the Three Months Ended
September 30,

 

 

For the Nine Months Ended
September 30,

 

Product Category

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Personal Care Ingredients

 

$

2,304

 

 

$

2,982

 

 

$

6,464

 

 

$

8,210

 

Advanced Materials

 

 

388

 

 

 

483

 

 

 

1,988

 

 

 

1,757

 

Solésence®

 

 

377

 

 

 

557

 

 

 

1,666

 

 

 

1,069

 

Total Sales

 

$

3,069

 

 

$

4,022

 

 

$

10,118

 

 

$

11,036

 

(14) Subsequent Events

On November 13, 2019, we entered into a Securities Purchase Agreement (the “SPA”) with Mr. Whitmore pursuant to which he agreed to purchase a Convertible Note from the Company for $2,000,000 and otherwise including representations, warranties and covenants which are customary for similar transactions.  The transactions contemplated by the SPA are expected to close on November 20, 2019.

  For the three months ended September 30,  For the nine months ended September 30, 
Product Category 2020  2019  2020  2019 
Personal Care Ingredients $753  $2,304  $4,190  $6,464 
Advanced Materials  1,582   388   3,678   1,988 
Solésence®  1,553   377   4,394   1,666 
Total Sales $3,888  $3,069  $12,262  $10,118 

 


Pursuant to the SPA, the Company has agreed to issue a 2% Secured Convertible Promissory Note in the original principal amount of $2,000,000 (the “Convertible Note”), the principal amount of which is payable to the order of Mr. Whitmore and his registered assigns and successors in a single payment on May 15, 2024 (the “Maturity Date”). 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.

Pursuant to the Convertible Note, we have agreed to reserve sufficient shares of our common stock for the conversion of the Convertible Note. Our Board of Directors has proposed, and has summited to our stockholders for adoption at our 2019 annual meeting, an amendment to our certificate of incorporation to increase the number of authorized shares of common stock (the “Certificate Amendment”). If the Certificate Amendment is adopted by our stockholders and filed with the Delaware Secretary of State, we will be able to reserve a sufficient number of shares for the conversion of the Convertible Note. If the Certificate Amendment is not so filed on or before December 31, 2019, an amount equal to 105% of the outstanding principal amount of the Convertible Note (plus all accrued and unpaid interest, if any) will be immediately due and payable.

If there is a change in control transaction, Mr. Whitmore shall have the right to require the Company or its successor to the Convertible Note, in whole or in part, at a redemption price equal to 105% of the outstanding Principal Amount (plus any accrued interest or applicable late charges) being redeemed.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollars are presented in thousands except per share data or unless otherwise stated)

 

Overview

 

Nanophase is an advanceda scientifically 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 materials technologies. We produce engineeredOur expertise in material engineering allows us to effectively coat and disperse particles on a nano and “non-nano” materialsscale for use in a variety of diverse markets: personalmarkets in skin care, including for use in sunscreens as active ingredients and inas fully formulated cosmeticsdeveloped prestige skin care products, marketed and sold through our Solésence® subsidiary. In terms of our own design,life sciences focus, we have seen current conditions significantly increase demand for our medical diagnostics ingredients, as testing for various viruses, most notably Covd-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. Finally, we have expanded our offerings beyond active ingredients to include targeted full formulationsapplications— all of skin care products, marketed and sold by our wholly-owned subsidiary, Solesence, LLC (“Solésence,” or our “Solésence® subsidiary”).which, along with medical diagnostics, fall into the 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, and our Solésence® solutionssence® 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. For example, we have applied our skills at producing precisely defined nanomaterials to now create and sell larger, “non-nano” 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 2019 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. For example, duringDuring 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®sence® subsidiary, we useutilize this particle surface treatment to manufacture and sell fully developed solutions to targeted customers in the cosmetics and skin care industry, in addition to the additivesingredients we have traditionally sold in the personal care area. During 2015


With the current circumstances of, and 2016 we developedthe impact of the various reactions and began to sell solutions in the energy management (particularly solar control) industry. We believe that the products that we have designed for this industry remain valuablepolicies relating to, the market, although we areCovid-19 pandemic, it is currently focusing the greatest part of our business development efforts on building and expanding our Solésence® brand and product suite. We believe that successful introduction of our finished skin care products and materials with manufacturers may lead to follow-on orders for other finished products and materials in their applications. We expectmanagement’s belief that we will both work more deeply with current customers and attract additional customers, which should help uscontinue to achieve growth in theseSolésence® sales through 2020. We are also expecting additional Solésence growth in 2021, but management believes the outlook in to 2021 remains uncertain, with a continuation of the Covid-19 pandemic and related reactions and policies having the potential to limit new product sales growth, and having further potential negative impact on the Company, its customers, and the markets it serves.

It is also management’s belief that the Covid-19 pandemic, related governmental reaction, and resulting economic slow-down has, and is expected to continue, to affect certain consumer behaviors and markets. This has had a negative impact on our Personal Care Ingredients business during 2020, and could continue to some extent in 2019to 2021. Management believes the negative impacts in the fourth quarter and, beyond.if applicable, thereafter, are not currently quantifiable.


Results of Operations

 

Total revenue decreasedincreased to $3,069$3,888 for the three months ended September 30, 2019,2020, compared to $4,022$3,069 for the same period in 2018.2019. Total revenue decreasedincreased to $10,118$12,262 for the nine months ended September 30, 20192020 from $11,036$10,118 for the same period 2018.in 2019. A substantial majority of our revenue for both periods was from our largest customers, in particular, sales to our largest customer in personal care and sunscreen applications. Revenue from our top threefour customers wasconstituted approximately 75%30%, 5%18%, 16% and 4%16%, respectively, of our total revenue for the three months ended September 30, 2020, and approximately 20%, 32%, 13% and 14%, respectively, for the nine months ended September 30, 2020. Revenue from these four customers constituted approximately 0%, 75%, 0% and 4%, respectively, for the three months ended September 30, 2019 and approximately 4%, 64%, 3%0% and 9%, respectively, for the nine months ended September 30, 2019. Revenue from these three customers constituted approximately 73%, 4% and 12%, respectively for the three months ended September 30, 2018 and approximately 73%, 3% and 8%, respectively, for the nine months ended September 30, 2018. Product revenue, the primary component of our total revenue, decreasedincreased to $3,043$3,827 for the three months ended September 30, 2019,2020, compared to $3,998$3,043 for the same period in 2018.2019. The decreaseincrease was primarily due to reduced order flow from several of our larger customers, including our largest customer in personal care.sales to Roche Laboratories for Covid19 testing kits. Product revenue decreasedincreased to $9,797$11,929 for the nine months ended September 30, 2019,2020, compared to $10,908$9,797 for the same period in 2018.2019. Solésence®sence® product revenue increased approximately 56%164% for the nine months ended September 30, 20192020 compared to the same period for 2018.2019. The total decreaseincrease in product revenue is attributed to order flow fromincreased sales of our Solésence products and ingredients sold to Roche Diagnostics, offset by significantly reduced sales of sunscreen actives into our Personal Care Ingredients markets through our largest personal care customer.

 

Other revenue increased to $26$61 for the three months ended September 30, 2019,2020, compared to $24$26 for the same period in 2018.2019. Other revenue increased to $321$333 for the nine months ended September 30, 2019,2020, compared to $128$321 for the same period in 2018.2019. Other revenue is typically comprised of royalties and shipping costs paid by customers. Shipping revenue in 2020 is included in product revenue. For the nine months ended September 30, 2019, other revenue included a unique bulk buyout of $211 in Q1 of 2019.

 

Cost of revenue generally includes costs associated with commercial production and customer development arrangements. Cost of revenue decreased to $2,506$2,201 for the three months ended September 30, 2019,2020, compared to $2,965$2,506 for the same period in 2018.2019. Cost of revenue decreased to $7,839$7,832 for the nine months ended September 30, 2019,2020, compared to $8,164$7,839 for the same period in 2018.2019. The decrease in cost of revenue was primarily driven by decreased volumemanufacturing efficiencies related to Solésence® products coupled with lower managerial payroll offset by price inflation on materials and manufacturing inefficiencies related to Solésence® product launches.materials. While we typically pass through costs to our customers, we sometimes cannot pass through 100% of pricing increases on raw materials. Evenmaterials, and even with pass throughs, our gross margin percentage is negatively impacted by higher material costs.


We expect to continue new advanced material development relating to personal care ingredients, medical diagnostic materials, and for our formulated Solésence®sence® products during 2019through 2020 and beyond. At current revenue levels we have generated a positive gross margin, though margins have been impededare greatly impacted by not having enough revenue to efficiently absorbvolume, with higher volumes generally allowing for better absorption of manufacturing overhead. We believe that our current fixed manufacturing cost structure is sufficient to support higher levels of revenue volume. The extent to which margins may grow, as a percentage of total revenue, will be dependent upon revenue mix, revenue volume, our ability to manage costs and pass commodity market-driven raw materials increases on to customers, and the speed and efficiency with which we are able to scale up production for our Solésence®sence® products. We expect that product revenue volume increases wouldwill result in our fixed manufacturing costs being more efficiently absorbed, which should lead to increased margins. 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 20192020 and beyond, 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 product applications, and finished product formulations for our Solésence®sence® business. As an example, we have been, and continue to be, engaged in product development work for our new fully-formulatedfully formulated finished skincare products marketed through Solésence®sence®. Much of this work has led to several new products and additional potential new products. We are also engagedengage in a series of in-vitro, ex-vivo, and in-vivo tests to determine the efficacy of our Solésence®sence® products, as well as to provide our customers with support for a consumer claims set. We are not certain when or if any significant revenue will be generated from the production of the materials described above.

 

Research and development expense increaseddecreased to $488$405 for the three months ended September 30, 2019,2020, compared to $416$488 for the same period in 2018.2019. For the nine months ended September 30, 20192020 research and development expense decreased to $1,450,$1,134 compared to $1,513$1,450 for the same period in 2018. 2019.

The primarymain reasons for this decrease were timing related towas a reduction in total staffing (not filling empty positions during the ongoing Covid-19 pandemic) and a reduction on outside product testing and evaluation costs related toincurred as our Solésence® products.  We expect quarterlysence® products have entered the market and the current testing requirements are lower than they were during our startup phase. Legal expenses pertaining to intellectual property, also part of research and development expense, to increase duringwere up for the remainder of 2019.nine-month period.

 

Selling, general and administrative expense increaseddecreased to $890$730 for the three months ended September 30, 2019,2020, compared to $765$890 for the same period in 2018.2019. For the nine months ended September 30, 2019,2020, selling, general and administrative expense increaseddecreased to $2,711,$2,133 compared to $2,299$2,711 for the same period in 2018. Expenses associated with launching the Solésence® brand contributed to the increase. We expect selling, general and administrative expense to remain at current levels during the remainder of 2019.

 

For both the three- and nine-month periods in 2020, compensation expense was down due to a reorganization of some of the functions in this area, consulting expenses were lower due, to a great extent the initial Solésence® launch work has been completed, and travel and entertainment expenses were down as a product of the ongoing Covid-19 pandemic and its impact on air travel, live trade shows, and in-person meetings.

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 20192020 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 amounted to $1,134 on September 30, 2020, compared to $1,194 on December 31, 2019 and $962 on September 30, 2019, compared to $1,345 on December 31, 2018 and $1,034 on September 30, 2018.2019. The net cash used in our operating activities was $2,161$1,732 for the nine months ended September 30, 2019,2020, compared to $921$2,161 for the same period in 2018.2019. The net use of cash during the period ended September 30, 2019both periods was driven primarily by ana significant increase in accounts receivable coupled withbetween the beginning and end of each period. In 2019, we also had a decrease in accounts payables, comparednet loss of $2,022, which contributed further to the same period in 2018 which had significant increases in accounts receivable and inventory with a decrease in accounts payable.use of cash during the nine months ended September 30, 2019. Net cash used in investing activities, specifically capital expenditures, was $523$448 during the nine months ended September 30, 2019,2020, compared to $115$523 for the nine months ended September 30, 2018.2019. Net cash provided by financing activities was $2,120 and $2,301 during the nine months ended September 30, 2020, and 2019, compared to $115 net cash provided for the same time period for 2018.respectively. We paid $162$172 for capital lease obligations during the nine months ended September 30, 20192020 compared to $114$162 in the same period in 2018.  2019.

On March 22, 2019June 25, 2020 we enteredexecuted a Newnew promissory note with Libertyville to extend the maturity under our Business Loan agreement with Libertyville for $500 which replaced the expiring prior year agreement.Agreement until April 4, 2021. We paid the outstanding balance for the prior agreement of $300, on$500 in January 9, 20182020 and had borrowings under our line of credit with Libertyville of $200$500 on MarchJune 30, 2018,2020, and September 30, 2020, which waswere subsequently repaid on April 4, 2018.  Under the new agreement, we borrowed $500 on March 30, 2019, which was subsequently repaid on April 3, 2019in July, 2020 and we borrowed $500 on September 28, 2019 which was subsequently repaid on October 2, 2019. During the nine months ending September 30, 2019, we drew 19 times from the Master Agreement with Beachcorp, LLC totaling $8,166 with repayment of $7,895. The net borrowings for the nine months ended September 30, 2019 was $271. 2020, respectively.

On May 13, 2019, we sold approximately 4.2 million shares of our unregistered common stock to our largest investor for approximately $1,700 in proceeds. No selling commission or other remuneration was paid in connection with this transaction. We have used the proceeds for general corporate purposes.


In November 2019, we entered in to a 2% Convertible Promissory Note in the original principal amount of $2,000.  This note matures on May 15, 2024 and is payable to our investor at that time in cash, or through conversion of the rights to purchase up to 10,000,000 unregistered shares of the Company’s common stock at $0.20 per share.  The conversion can be done in full or in part and may be undertaken prior to the note’s maturity date. 

On April 17, 2020, we received a loan of $952 from Libertyville under the 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 (d) any covered utility payment, calculated in accordance with the terms of the CARES Act. Although management believes that the Company expended the proceeds of the PPP loan principally for forgivable purposes under the CARES Act, no assurance can be provided that the Company will obtain forgiveness of the PPP loan in whole or in part.

The Master Agreement substantially restricts the Company’s ability to incur additional indebtedness during the terms of the Term Loan, the Revolver Facility, and the Convertible Promissory Note. On September 30, 2020, the balances on the Term Loan and the Convertible Promissory Note were $500 and $2,000, respectively, the balance on the Revolver Facility was $1,541 and the balance of the PPP loan was $952.

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 in total of certain assets of which at least $500 must be in cash, cash equivalents, and certain investments, with the balance being composed of certain inventory and 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-defined price. We had approximately $962$1,134 in cash and approximately $122 in BASF Accounts Receivables over 30 days, totaling $1,084, on September 30, 2019. During March 2019, we entered into a new line of credit, which expires in April 2020. This supply agreement and its covenants are more fully described in Note 12,11, and our line of credit isfacilities are more fully described in Note 8,7, to our Financial Statements in Part I, Item 1 of this Form 10-Q.

 


We believe that cash from operations proceeds from our May 13, 2019 and November 13, 2019 equity financing, and cash on hand, in addition to unused borrowing capacity, should be adequate to fund our operating plans through 2019.2020. Given our expected growth in our Solésence® business, we are monitoring the temporary working capital demands that this could create, with timing being the most critical variable. Our actual future capital requirements in 20192020 and beyond will depend on many factors, including customer acceptance of our current and potential advanced materials, applications and product, 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 advanced materials, applications and products. products, and the impacts of the Covid-19 pandemic and related reactions and policies if those impacts do not substantially improve in 2021 and continuing thereafter.

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 for the remainder of 20192020 will be between $60$250 and $100, $500, and we could enter into one or more financing leases to finance these acquisitions, subject to the provisions of our new Line of CreditLoan Agreement with Libertyville and our Master Agreement relating to our business loans with Beachcorp, LLC. If the Company’s demand from customers is significantly lower than expected prior to the commencement of the Covid-19 Pandemic, if those projects are delayed or ultimately prove unsuccessful, or if we fail to obtain financing on terms acceptable to us, we would expect our capital spending to be below the lower end of that range. Similarly, substantial success in business development projects may cause the actual capital investment for the remainder of 20192020 to exceed the top of this rangerange.

 

Events mayShould events arise that requiremake it appropriate for us to seek additional financing. Financingfinancing, 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. Such financing could be necessitated by such things as the loss of one or more existing customers; a significant decrease in revenue from one 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 of 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 agreement,agreement; the continuation of the Covid-19 pandemic and related reactions and policies after the fourth quarter of 2020; or various other circumstances coming to pass that we currently do not anticipate. The failure to have 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 raise doubt as to our ability to continue as a going concern.


On September 30, 2019,2020, we had a net operating loss carryforward of approximately $79$77 million for income tax purposes. Because we may have experienced “ownership changes”"ownership changes" within the meaning of the U.S. Internal Revenue Code in connection with our various prior equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the Internal Revenue Code. If not utilized, the carryforward will expire at various dates. $77 million will expiredates between January 1, 20192020 and December 31, 2037, while $2 million does not expire.2036. Under recent changes in the Internal Revenue Code, losses incurred after January 1, 2018 carry forward indefinitely. 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 a substantial portion of this carryforward will expire before ultimately becoming available to reduce income tax liabilities. Changes in Illinois state law that began in 2011 will impact net loss carryforward duration and utilization on the state tax level.

 


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 87 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 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”"Form 10-Q") contains and incorporates by reference certain “forward-looking statements”"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 20192020 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 nanocrystalline materials and Solésence®Solésence® products; our manufacturing capacity and product mix flexibility in light of customer demand; our limited marketing experience, including with our suite of Solésence®sence® products; changes in development and distribution relationships; the impact of competitive products and technologies; our dependence on patents and protection of proprietary information; 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.with; and the development and continuation of the ongoing Covid-19 pandemic and related reactions and policies. 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required for a smaller reporting company.

 


Item3.Quantitative and Qualitative Disclosures About Market Risk

Not required for a smaller reporting company.

Item 4.Controls and Procedures

 

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 (principal executive officer, and principal financial officer),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

 

The Company’s management, including the CEO (who is also currently acting as both the Company’s principal executive officer and 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

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

 

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, 2018. 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.

In addition to the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, investors should consider the following risk factors:

Our Ability to Continue as a Going Concern is in Doubt Absent Obtaining Adequate New Financingsmaller reporting company.

Cash from operations, cash on hand, cash from our May 13, 2019 and November 13, 2019 financing, in addition to unused borrowing capacity, should be adequate to fund our operating plans through 2019. Our largest customer, consisting of 64% of revenue for the nine-months ended September 30, 2019, had a revenue decrease of 20% from the same time last year. This decline has limited our flexibility and required us to make cash management a top priority. The growth in our Solésence® business increased 56% for the nine-months ended September 30, 2019 compared to the same time last year. We continue to view Solésence® as a critical strategic undertaking and may require additional investment in working capital. Our current plan is to continue to invest in Solésence®-related operating expenses and capital equipment. Given the decline related to our largest customer, as well as our growth strategy for Solésence®, we may need to seek additional funding to address working capital demands within the next twelve months. We believe that we will be able to secure additional financing, 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, we would need to reevaluate the Company’s strategy, including our Solésence® growth strategy, and lower investment and expenses accordingly. This could impede growth in 2020 and beyond. 

These circumstances raise significant doubt as to the Company’s ability to operate as a going concern for the next 12 months, and inability to fund our ongoing cash obligations may result in our ceasing to operate, which would result in liquidation of our assets.  In a liquidation of the Company, if we are unable to continue as a going concern, the value realized on our assets would likely be less than our outstanding obligations and, consequently, our stockholders would lose their entire investment.

A Majority of our Common Stock is Controlled by a Single Stockholder

Together with his affiliates Grace Brothers, Ltd. and Grace Investments, Ltd., Bradford T. Whitmore beneficially owned 53% of our common stock as of May 13, 2019.  Therefore, Mr. Whitmore has the legal power, regardless of the votes of our other stockholders, to elect all the members of the Company’s board of directors.  Consequently, our board of directors and management may be strongly influenced by our controlling stockholder, and the interests of our current controlling stockholder may conflict with the interests of other stockholders.

Pursuant to the General Corporation Law of the State of Delaware and our Bylaws, our controlling stockholder is empowered to elect the majority of our board of directors, exercise overall control over our management, determine our policies, sell or, in any other manner, transfer shares representing control over the Company held by him and determine the result of any deliberation of our stockholders, including transactions with related parties, corporate reorganizations, sale of all or substantially all the assets, or delisting our shares from the OTCQB marketplace, as well as to determine the distribution and payment of any future dividends. Our controlling stockholder may have an interest in acquisitions, disposal of assets and partnerships, may seek funding or may take other decisions that could conflict with the interests of other stockholders and which may not result in any improvement in our operating results.


Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

On November 13, 2019, we entered into aItem 2. Unregistered Sales of Equity Securities Purchase Agreement (the “SPA”) with Bradford T. Whitmore pursuant to which he agreed to purchase a Convertible Note (see below) from the Company for $2,000,000 and otherwise including representations, warranties and covenants which are customary for similar transactions. The transactions contemplated by the SPA are expected to close on November 20, 2019. Together with his affiliates Grace Brothers, Ltd. and Grace Investments, Ltd., Mr. Whitmore beneficially owned approximately 53%Use of our common stock as of November 13, 2019. Through his affiliate Beachcorp, LLC, Mr. Whitmore is also a substantial lender to the Company under the Business Loan Agreement, dated November 16, 2018 (see Note 8 to our financial statements in Part I of this Quarterly Report on Form 10-Q). The Company did not engage an underwriter for this transaction, and no selling commission or other remuneration was paid in connection with this transaction. We expect to use the proceeds for general corporate purposes.Proceeds

Pursuant to the SPA, the Company has agreed to issue a 2% Secured Convertible Promissory Note in the original principal amount of $2,000,000 (the “Convertible Note”), the principal amount of which is payable to the order of Mr. Whitmore and his registered assigns and successors 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. Assuming the Convertible Note had been converted effective on November 14, 2019, the $2,000,000 principal amount of the Convertible Note would convert into 10,000,000 shares of the Company’s common stock, and such hypothetical conversion of the Convertible Note would have increased Mr. Whitmore’s direct and indirect beneficial ownership to approximately 63% of the Company’s common stock assuming that he directed that all of the shares issued upon such conversion should be issued to him personally.

The obligations under the Convertible Note will be 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.

Pursuant to the Convertible Note, we have agreed to reserve sufficient shares of our common stock for the conversion of the Convertible Note. Our Board of Directors has proposed, and has summited to our stockholders for adoption at our 2019 annual meeting, an amendment to our certificate of incorporation to increase the number of authorized shares of common stock (the “Certificate Amendment”). If the Certificate Amendment is adopted by our stockholders and filed with the Delaware Secretary of State, we will be able to reserve a sufficient number of shares for the conversion of the Convertible Note. If the Certificate Amendment is not filed on or before December 31, 2019, an amount equal to 105% of the outstanding principal amount of the Convertible Note (plus all accrued and unpaid interest, if any) will be immediately due and payable.

 

If there is a change in control transaction, Mr. Whitmore shall have the right to require the Company or its successor to redeem the Convertible Note, in whole or in part, at a redemption price equal to 105% of the outstanding Principal Amount (plus any accrued interest or applicable late charges) being redeemed.None

The SPA also amended the Common Stock Purchase Agreement, dated May 13, 2019, between the Company and Mr. Whitmore to add the shares of common stock issuable upon conversion of the Convertible Note to the registration rights granted therein. The Company did not engage an underwriter for this transaction, and no selling commission or other remuneration was paid in connection with this transaction. We expect to use the proceeds for working capital and general corporate purposes. The sale of the Convertible Note to Mr. Whitmore will be exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506(b) of Regulation D promulgated under the Securities Act because Mr. Whitmore has a preexisting relationship with the Company as its largest stockholder, Mr. Whitmore represented to the Company that he has assets or income sufficient to qualify as an accredited investor, as defined under Regulation D, and the Company did not engage in any general solicitation or general advertising in offering such securities.


The complete text of the SPA is filed as Exhibit 4.1 to this Quarterly Report on Form 10-Q, and this summary is qualified in its entirety by reference to such Exhibit 4.1.

Item 3.Defaults Upon Senior Securities

Item 3. Defaults Upon Senior Securities

 

None.

Item 4.Mine Safety Disclosures

Item 4. Mine Safety Disclosures

 

Not applicable.

Item 5.Other Information

Item 5. Other Information

 

None.


Item 6.

Exhibits

 

Exhibit 4.110.1Securities PurchaseSecond Amendment to Business Loan Agreement, dated November 13, 2019,September 16, 2020, between Nanophase Technologies Corporationthe Company and Bradford T. Whitmore.

Beachcorp, LLC, incorporated by reference to Exhibit 4.210.1 of the Current Report on Form 8-K filed September 22, 2020.
Commercial Security Agreement is dated as of November 20, 2019, between Nanophase Technologies Corporation, Solesence, LLC and Bradford T. Whitmore.

Exhibit 4.32% Second Secured Convertible Note dated November 20, 2019, made by the Nanophase Technologies Corporation and payable to the order of Bradford T. Whitmore

Exhibit 31.1Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.

Exhibit 31.2Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.

Exhibit 32Certification of the Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350.

Exhibit 101The following materials from Nanophase Technologies Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019,2020, formatted in XBRL (Extensible Business Reporting Language): (1) the Balance Sheets, (2) the Statements of Operations, (3) the Statements of StockholdersShareholders Equity, (4) the Statements of Cash Flows, and (5) the Notes to Unaudited Consolidated Condensed Financial Statements.Statements


SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

NANOPHASE TECHNOLOGIES CORPORATION

Date: November 14, 2019

16, 2020

By:

/s/  JESS A. JANKOWSKI

Jess A. Jankowski

President and Chief Executive Officer

(principal executive officer, and principal

financial officer)

 

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