UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q10-Q/A
Amendment No. 1
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 2020 March 31, 2021
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 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: None
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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 and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 emergingemerging growth company,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 ☐ o No ☑
As of November 16, 2020,May 17, 2021, there were 38,215,79248,336,877 shares outstanding of common stock, par value $.01, of the registrant.
EXPLANATORY NOTE – RESTATEMENT OF FINANCIAL INFORMATION
Nanophase Technologies Corporation (“the Company”) is filing this Amendment No. 1 on Form 10-Q/A (the “Amended Filing”) to amend and restate its quarterly report on Form 10-Q for the quarter ended March 31, 2021, originally filed with the U.S. Securities and Exchange Commission (the “SEC”) on May 17, 2021 (the “Original Filing”). In filing this amendment, the Company restates its previously issued unaudited consolidated condensed financial statements and related disclosures for the period ended March 31, 2021 to include forgiveness of the Company’s PPP Loan.
Background and Effects of the Restatement
Subsequent to the issuance of the Original Filing, the Company determined that its PPP Loan should be reclassified to income (the “PPP Loan Forgiveness”). As previously disclosed in the Original Filing, the Company applied for forgiveness of the PPP Loan in February 2021. While the Company did not receive notice of forgiveness (which was approved in February 2021) until June 2021, when reviewing and re-evaluating the Company’s situation of forgiveness, management determined an adjustment for forgiveness is required. As a result, in this Amended Filing, the forgiveness of the balance of the PPP Loan was recognized and reclassified to other income for the three months ended March 31, 2021.
Management evaluated the materiality of the error from a quantitative and qualitative perspective and concluded that this adjustment was material to the Company’s presentation and disclosures of liabilities on its condensed consolidated balance sheet, interest expense and income on its results of operations, net income on the statement of shareholders’ equity and income on the statements of cash flows. The Company has effected the adjustment in this Amended Filing.
Disclosure Controls and Procedures
Management has reassessed its evaluation of the effectiveness of its Disclosure Controls and Procedures as of March 31, 2021, and has concluded that there was a material weakness in the Company’s management review controls related to the financial reporting for the forgiveness of the PPP Loan. For a description of the material weakness in our internal controls over financial reporting and our plan to remediate the material weakness, see Part II – Item 4. Controls and Procedures of this Amended Filing.
Items Amended in This Filing
This Amended Filing amends and restates the following items of the Company’s Original Filing as of, and for the quarter ended March 31, 2021:
Part I –
Item 1. Financial Statements
● | Unaudited consolidated condensed balance sheet as of March 31, 2021 |
● | Unaudited consolidated condensed statement of operations for the three months ended March 31, 2021 |
● | Unaudited consolidated condensed statement of shareholders’ equity as of March 31, 2021 | |
● | Unaudited consolidated condensed statement of cash flows for the three months ended March 31, 2021 | |
● | Note 1 – Basis of Presentation Note 5 – Earnings Per Share | |
● | Note 7 – Notes and Line of Credit |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations; Liquidity and Capital Resources
Item 4. Controls and Procedures
Part II –
Item 6. Exhibits
In accordance with applicable SEC rules, this Amended Filing includes certifications as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) from the Company’s Principal Executive Officer and Principal Financial Officer dated as of the date of this Amended Filing.
Except for the items noted above, no other information included in the Original Filing is being amended by this Amended Filing. The Amended Filing speaks as of the date of the Original Filing and the Company has not updated the Original Filing to reflect events occurring subsequent to the date of the Original Filing. Accordingly, this Amended Filing should be read in conjunction with the Company’s filings made with the SEC subsequent to the date of the Original Filing.
NANOPHASE TECHNOLOGIES CORPORATION
QUARTER ENDED SEPTEMBER 30, 2020 MARCH 31, 2021
INDEX
PART I - FINANCIAL INFORMATION
NANOPHASE TECHNOLOGIES CORPORATION Statement
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) | March 31, | December 31, | |||||||||||||
ASSETS | 2021 (as restated) | 2020 | ||||||||||||||
Current assets: | ||||||||||||||||
Cash | $ | 1,134 | $ | 1,194 | $ | 1,819 | $ | 957 | ||||||||
Trade accounts receivable, less allowance for doubtful accounts of $9 on September 30, 2020 and on December 31, 2019, respectively | 2,451 | 970 | ||||||||||||||
Trade accounts receivable, less allowance for doubtful accounts of $9 for both March 31, 2021 and December 31, 2020 | 3,828 | 2,932 | ||||||||||||||
Inventories, net | 3,584 | 2,554 | 5,001 | 4,340 | ||||||||||||
Prepaid expenses and other current assets | 599 | 267 | 653 | 606 | ||||||||||||
Total current assets | 7,768 | 4,985 | 11,301 | 8,835 | ||||||||||||
Equipment and leasehold improvements, net | 2,650 | 2,255 | 3,004 | 2,868 | ||||||||||||
Operating leases, right-of-use | 1,917 | 2,119 | ||||||||||||||
Operating leases, right of use | 1,886 | 1,827 | ||||||||||||||
Other assets, net | 11 | 13 | 10 | 10 | ||||||||||||
TOTAL ASSETS | $ | 12,346 | $ | 9,372 | ||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||||||||||
Total assets | $ | 16,201 | $ | 13,540 | ||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Line of credit, bank | $ | 500 | $ | 500 | $ | 500 | $ | 500 | ||||||||
Line of credit, related party | 1,541 | 224 | 3,365 | 2,155 | ||||||||||||
Current portion of long-term debt, related party | 500 | 500 | 500 | 500 | ||||||||||||
Current portion of finance lease obligations | 186 | 218 | 168 | 177 | ||||||||||||
Current portion of operating lease obligations | 411 | 357 | 477 | 431 | ||||||||||||
Accounts payable | 1,668 | 1,748 | 2,448 | 2,126 | ||||||||||||
Current portion of deferred revenue | 309 | 482 | ||||||||||||||
Deferred revenue | 495 | 411 | ||||||||||||||
Accrued expenses | 647 | 380 | 1,055 | 484 | ||||||||||||
Total current liabilities | 5,762 | 4,409 | 9,008 | 6,784 | ||||||||||||
Long-term portion of finance lease obligations | 148 | 288 | 73 | 110 | ||||||||||||
Long-term portion of operating lease obligations | 1,766 | 2,035 | 1,656 | 1,651 | ||||||||||||
Long-term convertible loan, related party | 1,030 | 830 | 1,164 | 1,097 | ||||||||||||
PPP Loan SBA | 952 | — | ||||||||||||||
Long-term portion of deferred revenue | — | 93 | ||||||||||||||
PPP Loan (SBA) | — | 952 | ||||||||||||||
Asset retirement obligations | 212 | 206 | 216 | 214 | ||||||||||||
Total long-term liabilities | 4,108 | 3,452 | 3,109 | 4,024 | ||||||||||||
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 | ||||||||||||||
Contingent liabilities | — | — | ||||||||||||||
Shareholders’ 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; 38,221,292 shares issued and outstanding on March 31, 2021 and December 31, 2020, respectively | 382 | 382 | ||||||||||||||
Additional paid-in capital | 102,055 | 101,886 | 102,159 | 102,117 | ||||||||||||
Accumulated deficit | (99,961 | ) | (100,756 | ) | (98,457 | ) | (99,767 | ) | ||||||||
Total stockholders' equity | 2,476 | 1,511 | ||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 12,346 | $ | 9,372 | ||||||||||||
Total Shareholders’ equity | 4,084 | 2,732 | ||||||||||||||
$ | 16,201 | $ | 13,540 |
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 |
(in thousands except share and per share data)
Three months ended March 31, | ||||||||
2021 (as restated) | 2020 | |||||||
Revenue: | ||||||||
Product revenue | $ | 7,050 | $ | 3,961 | ||||
Other revenue | 22 | 78 | ||||||
Total revenue | 7,072 | 4,039 | ||||||
Cost of revenue | 5,042 | 3,005 | ||||||
Gross profit | 2,030 | 1,034 | ||||||
Operating expense: | ||||||||
Research and development expense | 499 | 372 | ||||||
Selling, general and administrative expense | 1,034 | 705 | ||||||
Income (loss) from operations | 497 | (43 | ) | |||||
Interest expense | 139 | 124 | ||||||
Other income, net | (952 | ) | — | |||||
Income (loss) before provision for income taxes | 1,310 | (167 | ) | |||||
Provisions for income taxes | — | — | ||||||
Net Income (loss) | $ | 1,310 | $ | (167 | ) | |||
Net income (loss) per share – basic | $ | 0.03 | $ | (0.00 | ) | |||
Weighted average number of basic shares outstanding | 38,221,292 | 38,136,792 | ||||||
Net income (loss) per share – diluted | $ | 0.03 | $ | (0.00 | ) | |||
Weighted average number of diluted shares outstanding | 39,811,292 | 38,136,792 |
See Notes to Consolidated Condensed Financial Statements.
NANOPHASE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited Consolidated Condensed)
(in thousands except share data)
Preferred | Common | Additional Paid-in | Accumulated | |||||||||||||||||||||||||
Description | Shares | Amount | Shares | Amount | Capital | Deficit | Total | |||||||||||||||||||||
Balance on December 31, 2019 | — | $ | — | 38,136,792 | $ | 381 | $ | 101,886 | $ | (100,756 | ) | $ | 1,511 | |||||||||||||||
Stock-based compensation | — | — | — | — | 52 | — | 52 | |||||||||||||||||||||
Net loss for the three months ended March 31, 2020 | — | — | — | — | — | (167 | ) | (167 | ) | |||||||||||||||||||
Balance on March 31, 2020 | — | $ | — | 38,136,792 | $ | 381 | $ | 101,938 | $ | (100,923 | ) | $ | 1,396 | |||||||||||||||
Balance on December 31, 2020 | — | $ | — | 38,221,292 | $ | 382 | $ | 102,117 | $ | (99,767 | ) | $ | 2,732 | |||||||||||||||
Stock-based compensation | — | — | — | — | 42 | — | 42 | |||||||||||||||||||||
Net Income for the three months ended March 31, 2021 (as restated) | — | — | — | — | — | 1,310 | 1,310 | |||||||||||||||||||||
Balance on March 31, 2021 (as restated) | — | $ | — | 38,221,292 | $ | 382 | $ | 102,159 | $ | (98,457 | ) | $ | 4,084 |
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 |
6
See Notes to Consolidated Condensed Financial Statements.
NANOPHASE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited Consolidated Condensed)
Nine months ended | Three months ended March 31, | |||||||||||||||
September 30, | 2021 (as restated) | 2020 | ||||||||||||||
2020 | 2019 | (in thousands) | ||||||||||||||
Operating Activities: | ||||||||||||||||
Net income (loss) | $ | 795 | $ | (2,022 | ) | |||||||||||
Adjustements to reconcile net loss to cash used in operating activities: | ||||||||||||||||
Operating activities: | ||||||||||||||||
Net Income (loss) | $ | 1,310 | $ | (167 | ) | |||||||||||
Adjustments to reconcile net income (loss) to cash used in operating activities: | ||||||||||||||||
Depreciation and amortization | 265 | 234 | 101 | 86 | ||||||||||||
Loss on disposal of equipment and leasehold improvements | — | 16 | ||||||||||||||
Amortization of debt discount | 67 | 67 | ||||||||||||||
Share-based compensation | 147 | 179 | 42 | 52 | ||||||||||||
Amortization of debt discount | 200 | — | ||||||||||||||
Gain from PPP loan forgiveness | (952 | ) | — | |||||||||||||
Changes in assets and liabilities related to operations: | ||||||||||||||||
Trade accounts receivable | (1,481 | ) | (544 | ) | (896 | ) | (1,284 | ) | ||||||||
Inventories | (1,030 | ) | 98 | (661 | ) | 170 | ||||||||||
Prepaid expenses and other assets | (332 | ) | (12 | ) | (47 | ) | 8 | |||||||||
Accounts payable | (284 | ) | (632 | ) | 253 | (35 | ) | |||||||||
Accrued expenses | 267 | (19 | ) | 571 | 133 | |||||||||||
Deferred revenue | (266 | ) | 594 | 84 | (207 | ) | ||||||||||
Other long-term assets and liabilities | (13 | ) | (53 | ) | (9 | ) | (3 | ) | ||||||||
Net cash used in operating activities | (1,732 | ) | (2,161 | ) | (137 | ) | (1,180 | ) | ||||||||
Investing activities: | ||||||||||||||||
Acquisition of equipment and leasehold improvements | (448 | ) | (523 | ) | (166 | ) | (181 | ) | ||||||||
Net cash used in investing activities | (448 | ) | (523 | ) | (166 | ) | (181 | ) | ||||||||
Financing activities: | ||||||||||||||||
Principal payments on finance leases | (172 | ) | (162 | ) | (46 | ) | (58 | ) | ||||||||
Proceeds from line of credit, bank | 1,500 | 1,000 | 500 | 500 | ||||||||||||
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 | ||||||||||||||
Payments to line of credit, bank | (500 | ) | (500 | ) | ||||||||||||
Proceeds from line of credit, related party | 6,500 | 3,260 | ||||||||||||||
Payments to line of credit, related party | (5,289 | ) | (2,084 | ) | ||||||||||||
Net cash provided by financing activities | 2,120 | 2,301 | 1,165 | 1,118 | ||||||||||||
Increase (decrease) in cash and cash equivalents | (60 | ) | (383 | ) | 862 | (243 | ) | |||||||||
Cash and cash equivalents at beginning of period | 1,194 | 1,345 | 957 | 1,194 | ||||||||||||
Cash and cash equivalents at end of period | $ | 1,134 | $ | 962 | $ | 1,819 | $ | 951 | ||||||||
Supplemental cash flow information: | ||||||||||||||||
Interest paid | $ | 152 | $ | 126 | $ | 51 | $ | 57 | ||||||||
Supplemental non-cash investing and finacing activities: | ||||||||||||||||
Supplemental non-cash investing and financing activities: | ||||||||||||||||
Accounts payable incurred for the purchase of equipment and leasehold improvements | $ | 204 | $ | 18 | $ | 69 | $ | 77 |
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 presentationstatement 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, Solésence, LLC (“Solésence®,sence,” or our “Solésence® subsidiary”). Operating results for the three and nine months ended September 30, 2020March 31, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.2021.
During the quarter ending June 30, 2021, an error was detected in the timing of the recognition of the forgiveness of the Company’s PPP loan. In June of 2021, management was made aware that the PPP loan had been forgiven, effective February 2021. “Other income, net” was presumed to be zero for the quarter ending March 31, 2021, absent direct communication from the Company’s bank, or the SBA, regarding the timing of forgiveness. Management agreed that the PPP loan had been legally forgiven in the first quarter. This error resulted in the incorrect presentation of the PPP Loan (SBA) and the accumulated deficit on the Company’s balance sheet, and other income on the Company’s Statements of Operations, as well as the related items on the Statements of Shareholders’ Equity and Statements of Cash Flows.
We evaluated the restatement in accordance with Accounting Standards Codification (ASC) 250, Accounting Changes and Error Corrections, and evaluated the materiality of the restatement on our first quarter 2021 financial statements, in accordance with the Securities and Exchange Commission Staff Accounting Bulletin No. 108, Quantifying Financial Statement Errors. We concluded that the changes to the financial statements were material to the first quarter 2021 financial statements, while having no impact on the six-month results. Our conclusion was that we should restate our first quarter 2021 financial statements to reflect changes to that quarter’s net income, balance sheet categories, and the related items on the Statements of Shareholders’ Equity and the Statements of Cash Flows.
Balance Sheets | As Previously Reported Three Months Ended March 31, 2021 | Correction | As Restated | |||||||||
PPP Loan (SBA) | $ | 952 | $ | (952 | ) | $ | — | |||||
Total long-term liabilities liabilities - current | 4,061 | (952 | ) | 3,109 | ||||||||
Accumulated deficit | (99,409 | ) | 952 | (98,457 | ) | |||||||
Total Shareholder’s equity | 3,132 | 952 | 4,084 | |||||||||
Statements of Operations | ||||||||||||
Other income, net | $ | — | $ | 952 | $ | 952 | ||||||
Net income | 358 | 952 | 1,310 | |||||||||
Net income per share (basic and diluted) | $ | 0.01 | $ | 0.02 | $ | 0.03 | ||||||
Statements of Shareholders’ Equity | ||||||||||||
Net income for the three months ended March 31, 2021 | $ | 358 | $ | 952 | $ | 1,310 | ||||||
Total Accumulated deficit on March 31, 2021 | (99,409 | ) | 952 | (98,457 | ) | |||||||
Balance on March 31, 2021 | 3,132 | 952 | 4,084 | |||||||||
Statements of Cash Flows | ||||||||||||
Net income(loss) | $ | 358 | $ | 952 | $ | 1,310 | ||||||
Other income, PPP loan forgiveness | — | (952 | ) | (952 | ) |
These financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2019,2020, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020 as filed with the Securities and Exchange Commission.
(2) Going Concern / Liquidity
(2) | Going Concern / Liquidity |
We believe that cash from operations and cash on hand, in addition to unused borrowing capacity,which has recently been increased (see Note 7), may not be adequate to fund our operating plans through September 30, 2021.the next twelve months. We are working to reduce these risks and the results of the Company in this regard have improved markedly, but some of this is dependent on several things some ofover which we have limited control. Our largest customer made up 63% of our 2019The significant revenue andgrowth that we have experienced has seen a significant reductionrequired additional investment in orders placed to us in 2020. We have also seen a rapid increase in sales of our Solésence® products, addingboth working capital pressure in terms of additional inventory and accounts receivable. Both of these issues have limited our flexibilitycapital equipment. This has constrained liquidity and required us to makemade cash management a top priority. After April 17, 2020, some of this pressure was mitigated dueGenerally, our growth has required significant additional investment in working capital. To support our growth and reduce costs, we also intend 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,invest in additional capital equipment through 2021 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 Solésence® sales through 2020.2022. Given these issues, and other commercial realities, we are monitoring the additional working capital demands that this could create as we continue to execute on our Solésence®sence growth strategy. 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 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 to 2021. Management believes the outlook after the fourth quarter is uncertain, but a continuation of the Covid-19 pandemic and related reactions and policies going forward would be expected to maintain a degree of negative impact on the Company 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 plans, we believe that we may need to seek additional funding to address working capital demands. The trading volume of our stockThis uncertainty 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, we have enough current cash and guaranteed access to financing to fund operations, or access to cash in the equity marketsand 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 the 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 believe we have acceptable 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 clearly estimate the potential impact on our business for the balance of the year as of the date of this filing.sence, without securing additional financing.
These circumstances raise significantsubstantial 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.
On April 17, 2020,We believe that we will be able to secure additional financing if needed, but we do not have any additional financing commitments in place as of today. However, we may not be able to secure additional financing in a timely manner under commercially reasonable terms, or at all. If we are unable to secure additional financing, the operations of the Company received funding in the form of a loan under the “PPP,” under Division A, Title I of Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), in the amount of $952 which helped us to continue to pay our people, rent and utilities during the second quarter. 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 a date yetmight need to be determined. The Company iscurtailed to a certain degree, and we would need to delay capital expenditures related to our Solésence growth strategy, which could impede growth, and impact cost savings anticipated in the process of applying for loan forgiveness2021 and does not expect resolution until the first quarter of 2021.2022.
(3) Description of Business
Nanophase Technologies Corporation (“Nanophase,” “Company,” “we,” “our,” or “us”) is a scientifically-drivenscience-driven company which, along with its wholly-ownedwholly 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, formulation development and commercial manufacturing through an integrated family of technologies. Our expertise in materialmaterials 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 and as fully developed prestige skin care products, marketed and sold through our Solésence® subsidiary. In terms of our life sciences focus, we have seen current conditions significantly increase demand for our medical diagnostics ingredients, as testing for various viruses, most notably Covd-19,COVID-19, has become a critical use of our technology. Additionally, we continue to sell products in markets for architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, and surface finishing technologies (polishing) applications— all of which, along with medical diagnostics, fall into the advanced materials product category.
We target markets, primarily related to skin health products and ingredients, and diagnostic life sciences ingredients where we believe our materials and products offer practical and competitive minerals-based solutions. We traditionally work closely with current 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®sence® products to cosmetics and skin care brands. Over the past few years, we have expanded our marketing efforts for our Solésence products and are seeing more customers responding to our successful products being sold into their markets. Recently developed technologies have made certain new products possible and opened potential new markets. During 2015 we were granted a patent on a new type of particle surface treatment (coating) — now called Active Stress Defense ™ Technology — which became the cornerstone of our new product development in personal care, with first revenue recognized during 2016. In addition, through the creation of our Solésence® subsidiary, we utilize this particle surface treatment to manufacture and sell fully developed solutions to targeted customers in the skin care industry, in addition to the ingredients we have traditionally sold in the personal care area.
Although our primary strategic focus has been the North American market, we currently sell materialmaterials to customers overseas and have been working to expand our reach within foreign markets. 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 Statements of Operations, as it does not represent revenue directly from the sale of our products.
(4) Revenues
Revenues are generally recognized at a point in time, typically when control of the promised goods is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods.
Deferred revenue includes customer deposits and other receipts that are 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, $309 as of September 30, 2020, have been classified as deferred revenue. At December 31, 2019, customer deposits 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 paid a commitment fee of $250 and will pay two subsequent payments, of $125 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, 2020, the Company has recognized $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 estimate of the period over which the performance obligation is expected to be completed.
(5) Earnings Per Share
Options to purchase approximately 165,000 and 497,0001,590,000 shares of common stock that were outstanding as of September 30, 2019March 31, 2021 were included in the computation of earnings per share for the three months ended March 31, 2021. Options to purchase approximately 1,000 shares of common stock that were outstanding as of March 31, 2020 were not included in the computation of lossearnings per share for the three and nine months ended September 30, 2019, respectively,March 31, 2020, as the impact of such shares would beare anti-dilutive.
Earnings applicable to common stock and common stock shares used in the calculation of basic and diluted earnings per share are as follows:
Three Months Ended March 31, | ||||||||
2021 (as restated) | 2020 | |||||||
Numerator: (in Thousands) | ||||||||
Net income (loss) | $ | 1,310 | $ | (167 | ) | |||
Denominator: | ||||||||
Weighted average number of basic common shares outstanding | 38,221,292 | 38,136,792 | ||||||
Weighted average additional shares assuming conversion of in-the-money stock options to common shares | 1,590,000 | — | ||||||
Weighted average number of diluted common shares outstanding | 39,811,292 | 38,136,792 | ||||||
Basic earnings per common share: | ||||||||
Net income (loss) per share – basic | $ | 0.03 | $ | (0.00 | ) | |||
Diluted earnings per common share: | ||||||||
Net income (loss) per share – diluted | $ | 0.03 | $ | (0.00 | ) |
(6) Financial Instruments
We follow the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.
Our financial instruments include cash, andany cash equivalents, accounts receivable, accounts payable and accrued expenses, along with the promissory note with no related borrowings described in Note 7, and any borrowings on the working capital line of credit from Libertyville Bank and Trust, and any borrowings underon the Master Agreementworking capital line of credit, along with the term loan from Beachcorp, LLC, and the promissory note payable associated with the convertible loan described below in Note 7.7 below. The fair values of all financial instruments were not materially different from their carrying values.
There were no financial assets or liabilitiesinstruments adjusted to fair value on September 30, 2020 orMarch 31, 2021 and December 31, 2019.2020.
(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, 2021. Because there were no amounts outstanding on the note at any time during 20202021 or 2019,2020, we have recorded no related liability on our consolidated balance sheet.
On March 22, 2019, we executedWe have a 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,. Under the maturity of which was extended until April 20, 2021 pursuant to an amended and restated Promissory Note executed on June 25, 2020, and dated as of April 4, 2020. Under theBusiness Loan Agreement, Libertyville will providedprovide 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 wasis payable monthly on any advances at a floating interest rate of the prime rate at the time plus 1%. We are required tomust have $500 in cash, inclusive of the borrowed amount, at Libertyville on the date of any advance. Advances couldmay only occur at the beginning or end of a fiscal quarter and were required tomust be repaid in full within five business days of the advance. We 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, 2020 and repaid itAmounts due under the Business Loan Agreement were paid in full on April 2, 2020. We borrowed $500 on December 31, 2019 and repaid it on January 2, 2020.4, 2021, as required. It is management’s expectation that the Business Loan Agreement will be renewed in May 2021.
On November 16, 2018, we entered into a Business Loan Agreement (the “Master Agreement”) with Beachcorp, LLC. Beachcorp, LLC is managed by Bradford T. Whitmore, who, together with his affiliates Grace Brothers, Ltd. andaffiliate Grace Investments, Ltd., beneficially owned approximately 63% of the outstanding shares of our common stock as of September 30, 2020.March 31, 2021. The Master Agreement relates to two loan facilities, each evidenced by a separate promissory notes, eachnote dated as of 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”), and to extend the maturity date, with floating interest accruing at the prime rate plus 3% (8.25% minimum) per year, with a borrowing base consisting of qualified accounts receivable of the Company, and with all principal and accrued interest initially to be due March 31, 2020.2020, as amended. On March 23, 2020, the Company and Beachcorp, LLC executed the First Amendment to our Master Agreement that extends the maturities of both the Term Loan and the Revolver Facility to March 31, 2021. OnEffective September 8, 2020, the Company and Beachcorp, LLC executed an updated Promissory Note to, and athe Second Amendment to our Master Agreement that expands the Business Loan Agreement with Beachcorp, LLC, expanding the capacity oflimit on the Revolver Facility from $2,000 to $2,750. On December 23, 2020, the Company and Beachcorp, LLC executed the Third Amendment to our Master Agreement that expands the limit on the Revolver Facility from $2,750 to $4,000 and extends the maturities of both the Term Loan and the Revolver Facility to March 31, 2022. On April 21, 2021, the Company and Beachcorp, LLC executed the Fourth Amendment to our Master Agreement that expands the limit on the Revolver Facility from $4,000 to $6,000, extends its maturity to March 31, 2023, and reduces interest on outstanding borrowings from the prime rate plus 3%, with an 8.25% minimum floor, to the prime rate plus 2%, with no minimum rate floor. Additionally, the Fourth Amendment increased the amount of the Term Loan from $500 to $1,000, and its fixed interest rate was reduced from 8.25% per year to 5.25% per year. The maturity date of the Term Loan remains March 31, 2022. The Term Loan and Revolver Facility are secured by all the unencumbered assets of the Company and subordinated to Libertyville’s secured interest under the 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, 2020, the balance on the term loan was $500 and the balance on the Revolver Facility was $1,541. There was $34 in related interest expense during the quarter ended September 30, 2020, of which $12 was accrued and $22 paid by the end of the quarter. There was $47 in related interest expense during the quarter ended September 30, 2019, of which $9 was accrued and $18 paid by the end of the quarter. As Beachcorp, LLC is an affiliate of Mr. Whitmore, this amounts to interest to be paid to a related party. On September 30, 2020, the 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.
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,$1,164, net of discountsa discount of $1,103$836 at March 31, 2021, and $1,170$1,097, net of a discount of $903 at September 30, 2020 and December 31, 2019, respectively.2020. Mr. Whitmore chose to exercise his conversion rights effective May 7, 2021, requesting that any accrued interest be paid him in the form of shares, as allowed in the Convertible Note. This will result in the accelerated recognition of the discount on the Convertible Note, to be recognized as interest expense in the second quarter of 2021.
On April 17, 2020, we entered into a Promissory Note (the “PPP Note”), dated as of April 16, 2020, in favor of Libertyville in the principal amount of $952 for our loan under the Paycheck Protection Program (“PPP”). The Company was allowed to apply for forgiveness of the amount due on the PPP Note in an amount equal to the sum of the following costs incurred during the 24-week period beginning on the date of the first disbursement of the loan: (a) payroll costs, (b) any payment of interest on a covered obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), (c) any payment on a covered rent obligation, and (d) any covered utility payment, calculated in accordance with the terms of the CARES Act. The principal amount of the PPP Note would have accrued interest at the rate of 1.00% per year. Management applied for loan forgiveness in February 2021 and received notice of PPP Loan forgiveness in June, 2021. The date that the loan was officially forgiven by the Small Business Administration was February 12, 2021, although it wasn’t communicated as such directly to management. On March 31, 2021, the balance under the PPP note was $0.
On September 30, 2020,March 31, 2021, the balance on the term loan was $500, the balance on the Revolver Facility was $1,541,$3,365, and the balance on the Convertible Note was $2,000. InFor the ninethree months ended September 30,March 31, 2021, and 2020, there was $334$131 and $111, respectively, in interest expense relating to these credit facilities held by Beachcorp, LLC.LLC and Bradford T. Whitmore. The accrued interest expense balance on these related party credit facilities amounted to $27,$36, and $10,$20, at September 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. The obligations under the Convertible Note are secured by a security interest in all of the Company’s personal property pursuant to a Commercial Security Agreement among Mr. Whitmore, the Company and Solésence, LLC, the Company’s sole subsidiary. Given that Beachcorp, LLC is an affiliate of Mr. Whitmore, this amounts to all of this interest being owed to a related party.
On April 17, 2020, we entered into a Promissory Note, datedMarch 31, 2021 borrowings were within the credit agreement limit with an additional $388 available. The balance of borrowing base, loan amount, and any excess payments required over the available borrowing base will change as of April 16, 2020, in favor of Libertyville infrequently as daily, given the principal amount of $952 for our loan under the PPP. The Company may apply for forgivenessoperational nature of the amount due on the loan in an amount equal to the sumelements 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.Revolver Facility.
(8) Inventories
Inventories consist of the following:
March 31, 2021 | December 31, 2020 | |||||||||||||||
September 30, 2020 | December 31, 2019 | |||||||||||||||
Raw materials | $ | 2,187 | $ | 1,425 | $ | 3,883 | $ | 2,825 | ||||||||
Finished goods | 1,427 | 1,170 | 1,148 | 1,545 | ||||||||||||
3,614 | 2,595 | 5,031 | 4,370 | |||||||||||||
Allowance for excess inventory quantities | (30 | ) | (41 | ) | (30 | ) | (30 | ) | ||||||||
$ | 3,584 | $ | 2,554 | $ | 5,001 | $ | 4,340 |
(9) Leases
The Company's operating lease portfolio is comprised of operating leases for office, warehouse space and equipment. Certain of the Company's leases include one or more options to renew or terminate the lease at the Company's discretion. The Company regularly evaluates the renewal and termination options and when they are reasonably certain of exercise, includes the renewal or termination option in our lease term.
As of September 30, 2020,March 31, 2021, the operating lease right-of-use “ROU” asset had a balance of $1,917$1,886 which is included in the “Operating lease right-of-use assets” line item of these condensed consolidated financial statements and current and non-current lease liabilities related to the ROU asset of $411$477 and $1,766$1,656, respectively. As of December 31, 2019,2020, the ROU asset had a balance of $2,119$1,827 which is included in the “Operating lease right-of-use assets” line item of these condensed consolidated financial statements and current and non-current lease liabilities related to the ROU asset of $357$431 and $2,035$1,651, respectively. These are included in the “Current portion of operating lease obligations” and “Long-term operating lease obligations, net of current portion” line items of these condensed consolidated financial statements. The discount rates used for leases accounted for under ASC 842 are based on an interest rate yield curve developed for the leases in the Company’s portfolio.
The office leases contain variable lease payments which consist primarily of rent escalations based on an established index or rate and taxes, insurance, and common area or other maintenance costs, which are paid based on actual costs incurred by the lessor.
Quantitative information regarding the Company’s leases is as follows:
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 |
Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |||||||
Components of lease cost | ||||||||
Finance lease cost components: | ||||||||
Amortization of finance lease assets | $ | 14 | $ | 17 | ||||
Interest on finance lease liabilities | 6 | 11 | ||||||
Total finance lease costs | 20 | 28 | ||||||
Operating lease cost components: | ||||||||
Operating lease cost | 144 | 140 | ||||||
Variable lease cost | 31 | 27 | ||||||
Short-term lease cost | 10 | 2 | ||||||
Total operating lease costs | 185 | 169 | ||||||
Total lease cost | $ | 205 | $ | 197 |
Supplemental cash flow information related to leases is as follows for the nine months ended:period ended March 31:
2021 | 2020 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash outflow from operating leases | $ | 183 | $ | 171 | ||||
Weighted-average remaining lease term-finance leases (in years) | 1.3 | 1.7 | ||||||
Weighted-average remaining lease term-operating leases (in years) | 3.1 | 2.7 | ||||||
Weighted-average discount rate-finance leases | 10.1 | % | 9.3 | % | ||||
Weighted-average discount rate-operating leases | 14.2 | % | 14.6 | % |
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 March 31, 2021 is as follows:
Finance Leases | Operating Leases | Total | ||||||||||
2021 | $ | 144 | $ | 559 | $ | 703 | ||||||
2022 | 109 | 761 | 870 | |||||||||
2023 | 5 | 747 | 752 | |||||||||
2024 | — | 636 | 636 | |||||||||
2025 | — | 42 | 42 | |||||||||
2026 and thereafter | — | 2 | 2 | |||||||||
Total payments | $ | 258 | $ | 2,747 | $ | 3,005 | ||||||
Less amounts representing interest | (17 | ) | (614 | ) | (631 | ) | ||||||
Total minimum payments required: | $ | 241 | $ | 2,133 | $ | 2,374 |
The future maturities of the Company’s finance and operating leases as of September 30,March 31, 2020 iswere as follows:
Finance Leases | Operating Leases | Total | Finance Leases | Operating Leases | Total | ||||||||||||||||||||
2020 | $ | 63 | $ | 172 | $ | 235 | $ | 189 | $ | 506 | $ | 695 | |||||||||||||
2021 | 196 | 701 | 897 | 196 | 687 | 883 | |||||||||||||||||||
2022 | 109 | 720 | 829 | 109 | 705 | 814 | |||||||||||||||||||
2023 | 5 | 705 | 710 | 5 | 690 | 695 | |||||||||||||||||||
2024 | — | 595 | 595 | — | 580 | 580 | |||||||||||||||||||
2025 and thereafter | — | 1 | 1 | — | — | — | |||||||||||||||||||
Total payments | $ | 373 | $ | 2,894 | $ | 3,267 | $ | 499 | $ | 3,168 | $ | 3,667 | |||||||||||||
Less amounts representing interest | (39 | ) | (717 | ) | (756 | ) | (51 | ) | (862 | ) | (913 | ) | |||||||||||||
Total minimum payments required: | $ | 334 | $ | 2,177 | $ | 2,511 | $ | 448 | $ | 2,306 | $ | 2,754 |
(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$42 and $147$52 for each of the threethree-month periods ended March 31, 2021 and nine months ended September 30, 2020, respectively, compared to $64 and $179 for the three and nine months ended September 30, 2019, respectively.
As of September 30, 2020,March 31, 2021, there was approximately $290$206 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 1.81.7 years.
Stock Options and Stock Grants
During the nine months ended September 30, 2020, 78,277No stock options were exercised for $23. Duringduring the ninethree months ended September 30, 2019, 36,000 stock options were exercised for $16. During the nine months ended September 30, 2020, 535,000March 31, 2021, or March 31, 2020. No stock options were granted compared to 547,500 stock options granted during the same period in 2019. three months ended March 31, 2021, or March 31, 2020. During the ninethree months ended September 30, 2020, 460,640March 31, 2021, 35,000 stock options expired, compared to 130,500 for the same period in 2019. For the nine months ended September 30, 2020, 202,134and no stock options were forfeited, compared to 48,600 for241,000 stock options which expired, and 140,000 stock options which were forfeited during the same period in 2019.2020. We had 3,507,0733,411,000 stock options outstanding at a weighted average exercise price of $0.58$0.57 on September 30, 2020,March 31, 2021, compared to 3,747,4003,332,000 stock options outstanding at a weighted average exercise price of $0.64$0.63 on September 30, 2019.
No stock options were granted in the three-month periods ending September 30, 2020 and 2019.
The following table illustrates the various assumptions used to calculate the Black-Scholes option pricing model for stock options granted during the nine months periods presented:
For the nine months ended | September 30, 2020 | September 30, 2019 | ||||||
Weighted-average risk-free interest rates | 0.5 | % | 2.3 | % | ||||
Dividend yield | 0.00 | % | 0.00 | % | ||||
Weighted-average expected life of the option | 7 years | 7 years | ||||||
Weighted-average expected stock price volatility | 94 | % | 94 | % | ||||
Weighted-average fair value of the options granted | $ | 0.36 | $ | 0.41 |
As of September 30, 2020, we did not have any unvested restricted stock or performance shares outstanding.March 31, 2020.
(11) Significant Customers and Contingencies
Revenue from fourfive customers constituted approximately 30%24%, 18%20%, 16%17%, 15% and 16%10%, 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.March 31, 2021. Amounts included in accounts receivable on September 30, 2020March 31, 2021 relating to these fourfive customers were approximately $901, $328, $291$837, $812, $476, $855, and $420,$390, respectively. Revenue from these fourfive customers constituted approximately 0%, 75%46%, 0%15%, 4% and 4%15%, respectively, of our total revenue for the three months ended September 30, 2019. For the nine months ended September 30, 2019, revenue from the same four customers was approximately 4%, 64%, 0%, and 9%, respectively.March 31, 2020. Amounts included in accounts receivable on September 30, 2019March 31, 2020 relating to these fourfive customers were approximately $0, $1,042, $0$896, $31, $180, and $122,$593, respectively. The loss of one of these significant customers, a significant decrease in revenue from one or more of these customers, or the failure to attract new customers could have a material adverse effect on our business, results of operations and financial condition.
We currently have exclusive supply agreements with BASF Corporation (“BASF”), our largest customer, that have contingencies outlined which could potentially result in the license of technology and/or the sale of production equipment from the Company to the customer intended to provide capacity sufficient to meet the customer’s production needs. This outcome may occur if we fail to meet certain performance requirements, certain other obligations and/or certain financial condition covenants. The financial condition covenants in one of our supply agreements with BASF “trigger” a technology transfer right (license and equipment sale at BASF’s option) in the event (a) that earnings for the twelve-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 inour cash, cash equivalents and certain investments with the balance being composed of certain inventory and receivables, is not maintainedare less than $500, or (b) of an acceleration of any debt maturity having a principal amount of more than $10 million. There are certain minimum finished goods inventory requirements with the 2019new amendment to the supply agreement. This agreement also requires Nanophase to maintain certain finished goods inventory levels as “safety stock,” beginning in the first quarter of 2019, and increasing through the third quarter of 2019 to a negotiated level based on agreed demand metrics, in order to maintain the $500 non-cash component discussed above. After September 30, 2019, should our safety stock fall below the prescribed amount of material, the quarter-end cash requirement would revert to $1,000 in cash, cash equivalents, and certain investments. The safety stock requirement may be adjusted upon mutual agreement. The Company met its safety stock requirements at March 31, 2021.
Our supply agreements with BASF also “trigger” a technology transfer right in the event of our insolvency, as further defined within the agreements. In the event of an equipment sale, upon incurring a triggering event, the equipment would be sold to the customer at either 115% of the equipment’s net book value, or the greater of 30% of the original book value of such equipment, and any associated upgrades to it, or 115%it.
We believe that cash from operations and cash on hand, in addition to unused borrowing capacity, may not be adequate to fund our operating plans through 2021. If a triggering event were to occur and BASF elected to proceed with the license and related equipment sale mentioned above, we would receive royalty payments from this customer for products sold using our technology; however, we would lose both significant revenue and the ability to generate significant revenue to replace that which was lost in the near term. Replacement of necessary equipment that could be purchased and removed by the customer pursuant to this triggering event could take in excess of twelve months. Any additional capital outlays required to rebuild capacity would probably be greater than the proceeds from the purchase of the equipment’s net book value, dependingassets 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 some 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 equipment and related products.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 continuing 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 expect our single biggest financing need in 2021, as it was in 2020, will relate to the funding of our working capital, which has grown significantly to support the growth of our business. In the likely event that we will need to seek additional financing, 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.
(12) Business Segmentation and Geographical Distribution
Revenue from international sources approximated $1,242$1,285 and $2,747$304 for the three and nine months ended September 30,March 31, 2021 and 2020, respectively, compared to $33 and $734 for the three and nine months ended September 30, 2019, respectively. All of this revenue was product revenue.
Our operations comprise a single business segment and all of our long-lived assets are located within the United States. We categorize our revenue streamstreams into three main product categories, Personal Care Ingredients, Advanced Materials and Solésence®. The revenues for the three months ended March 31, 2021 and nine months ended September 30, 2020, and 2019,respectively, by category, are as follows:
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||||||||||
Product Category | 2020 | 2019 | 2020 | 2019 | 2021 | 2020 | ||||||||||||||||||
Personal Care Ingredients | $ | 753 | $ | 2,304 | $ | 4,190 | $ | 6,464 | $ | 1,395 | $ | 1,932 | ||||||||||||
Advanced Materials | 1,582 | 388 | 3,678 | 1,988 | 1,378 | 584 | ||||||||||||||||||
Solésence® | 1,553 | 377 | 4,394 | 1,666 | ||||||||||||||||||||
Total Sales | $ | 3,888 | $ | 3,069 | $ | 12,262 | $ | 10,118 | ||||||||||||||||
Solésence® | 4,299 | 1,523 | ||||||||||||||||||||||
Total Revenue | $ | 7,072 | $ | 4,039 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Nanophase is a scientifically drivenskin health focused 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, formulation development and commercial manufacturing through an integrated family of technologies. Our expertise in 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 and aswhose primary products are fully developed prestige skin care products,formulations, marketed and sold through our Solésence® subsidiary. subsidiary, enabled by our proprietary Active Pharmaceutical Ingredients (“APIs”) which are also marketed as APIs for sale to manufacturers of other types of skin health products, including sunscreens and daily care products. In terms of the balance of our life sciences focus, we have seen current conditions significantly increase demand for our medical diagnostics ingredients, aswhich are used in testing for various viruses, most notably Covd-19, has become a critical use of our technology.COVID-19. Additionally, we continue to sell products in markets for architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, and surface finishing technologies (polishing) applications— all of which, along with medical diagnostics, currently fall into the advanced materials product category.
Leveraging a platform of integrated patented and proprietary technologies, we create products with unique performance to enhance consumers’ health and well-being. We targetoffer soup-to-nuts production, from engineered materials, formulation development, and finished product development to commercial manufacturing and packaging capabilities. Our expertise in materials engineering allows us to effectively coat and disperse materials on a nano and “non-nano” scale for use in a variety of markets primarily relatedin skin health, including for use in sunscreens as Active Pharmaceutical Ingredients (“APIs”) and as fully developed prestige skin care products, marketed and sold through our Solésence beauty science subsidiary. We believe that we have developed technological advantages with respect to our APIs sold for use as ingredients, while our Solésence beauty science technologies lead to enhanced efficacy in our finished products.
We have seen current conditions significantly increase demand for our medical diagnostics materials. Polymerase Chain Reaction (“PCR”) testing for various viruses, most notably SARS-CoV-2 (“COVID-19”), has become a critical use of our technology in the life science space. While we cannot predict whether the increased demand for our medical diagnostic materials used in COVID-19 testing will continue, we believe that our deep expertise in materials science has created advantages that enable performance in certain tests that may not be achievable through other materials. Outside of life science, we continue to sell advanced materials for use in legacy applications, all of which, along with medical diagnostics, currently fall into the advanced materials product category.
Given our technological position, in addition to the historical market acceptance of our APIs for use in skin health products and ingredients,sunscreens, rapidly growing sales for our suite of Solésence® finished products, and growing use of our diagnostic materials in aiding the fight to curb the spread of COVID-19 and other viruses, we have reoriented our Company strategy. We are seeing unprecedented demand in both beauty science and life sciences ingredients wherescience areas. The markets for both have shown an appetite for what we believeare producing, and management believes that this growth is happening now due to a confluence of our materialstechnology, market conditions that favor what we produce, and products offer practical and competitive minerals-based solutions. We traditionally work closely with current customersour expanded expertise 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. During 2015 we were granted a patent on a new type of particle surface treatment (coating) — now called Active Stress Defense ™ Technology — which became the cornerstone of our new product development in personal care, with first revenue recognized during 2016. In addition, through the creation of our Solésence® subsidiary, we utilize this particle surface treatment to manufacture and sell fully developed solutions to targeted customers in the skin care industry, in addition to the ingredients we have traditionally sold in the personal care area.areas.
With the current circumstances of,Nanophase, and the impact of the various reactionsSolésence, is now focusing our combined business-, ingredient-, and policies relating to, the Covid-19 pandemic, it is currently management’s beliefproduct-development capabilities on products with unique performance that enhance consumers’ wellbeing through beauty science and life science applications — in skin health and medical diagnostics, respectively. While we will continue to achieve growth in Solésence® sales through 2020.produce and sell materials to our other advanced materials customers, it is not our strategic focus. We are also expectingmay develop additional Solésence growth in 2021, but management believes the outlook in to 2021 remains uncertain, with a continuationtechnologies, or find unique applications outside 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 theour core 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 to 2021. Management believes the negative impacts in the fourth quarterfuture, but to maximize the use of our resources today, we plan on expanding efforts in areas where we have proven we can deliver innovation and if applicable, thereafter, are not currently quantifiable.growth.
Results of Operations
Total revenue increased to $3,888$7,072,000 for the three months ended September 30, 2020,March 31, 2021, compared to $3,069$4,039,000 for the same period in 2019. Total revenue increased to $12,262 for the nine months ended September 30, 2020 from $10,118 for the same period in 2019. 2020.
A substantial majority of our revenue for both periods was from our five largest customers, in particular, sales to our largest customer in personalskin care and sunscreen applications. Revenue fromapplications, medical diagnostics, and now finished skin health products marketed through our top four customers constituted approximately 30%, 18%, 16% and 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%, 0% and 9%, respectively, for the nine months ended September 30, 2019.Solésence subsidiary. Product revenue, the primary component of our total revenue, increased to $3,827$7,050,000 three months ended March 31, 2021, compared to $3,961,000 during the same period of 2020. This increase was due to continued growth in the adoption of our Solésence® products and our medical diagnostics materials, offset by a decrease in revenue from our largest customer in our personal care ingredients business.
Current Significant Customers
Three months ended March 31, | ||||||||
2021 | 2020 | |||||||
Largest Personal Care Customer | 20 | % | 46 | % | ||||
Medical Diagnostics Customer | 15 | % | 4 | % | ||||
Solésence Customer – 3 | 24 | % | 0 | % | ||||
Solésence Customer – 2 | 17 | % | 15 | % | ||||
Solésence Customer – 1 | 10 | % | 15 | % | ||||
Significant Customer Total | 86 | % | 80 | % |
Other revenue decreased to $22,000 for the three months ended September 30, 2020,March 31, 2021, compared to $3,043 for the same period in 2019. The increase was primarily due to sales to Roche Laboratories for Covid19 testing kits. Product revenue increased to $11,929 for the nine months ended September 30, 2020, compared to $9,797 for the same period in 2019. Solésence® product revenue increased approximately 164% for the nine months ended September 30, 2020 compared to the same period for 2019. The total increase in product revenue is attributed to increased 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 customer.
Other revenue increased to $61$78,000 for the three months ended September 30, 2020, compared to $26 for the same period in 2019. Other revenue increased to $333 for the nine months ended September 30, 2020, compared to $321 for the same period in 2019.March 31, 2020. Other revenue is typically comprised primarily of royalties and shipping costs paid by customers. Shipping revenue in 2020 is included in product revenue.developmental or licensing fees. For the ninethree months ended September 30, 2019,March 31, 2020, other revenue included $65,000 to development fees recognized for the Company’s work on behalf of a unique bulk buyout of $211 in Q1 of 2019.customer relating to new personal care ingredients.
Cost of revenue generally includes costs associated with commercial production and customer development arrangements. Cost of revenue decreasedincreased to $2,201$5,042,000 for the three months ended September 30, 2020,March 31, 2021, compared to $2,506$3,005,000 for the same period in 2019. Cost of revenue decreased to $7,832 for the nine months ended September 30, 2020, compared to $7,839 for the same period in 2019.2020. The decreaseincrease in cost of revenue was primarily driven by manufacturing efficiencies related to Solésence® products coupled with lower managerial payroll offset byincreased volume and price inflation on materials.materials and manufacturing inefficiencies related to Solésence® product launches. While we typically pass through costs to our customers, we sometimes cannot pass through 100% of pricing increases on raw materials, and even with pass throughs, our gross margin percentage is negatively impacted by higher material costs.
We expect to continue new advanced material development relating to personal care ingredients medical diagnostic materials, and for our formulated Solésence® products through 2020during 2021 and beyond.
At current revenue levels we have generated a positive gross margin, though margins are greatly impactedcan be impeded by the cyclicality of our demand, often leading to the Company not having enough revenue to efficiently absorb manufacturing overhead that is required to work with current customers and expected future customers. Another issue relating to demand cyclicality is that we have seen our lack of burst capacity creating strains, in terms of people and costs, when new product launches occur at the same time demand from previously launched products comes to play. We believe that our current fixed manufacturing cost structure is sufficient to support higher levels of revenue volume with higher volumes generally allowing for better absorption of manufacturing overhead.on a level basis, and are currently working to expand burst capacity to allow us to utilize our resources more efficiently. The extent to which margins may grow, as a percentage of total revenue, will be dependent upon revenue mix, revenue volume, our ability to managecontinue to cut 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, as product revenue volume increases, will result in our fixed manufacturing costs beingwill be more efficiently absorbed, which should lead to increased margins.margins as we grow. We expect to continue to focus on reducing controllable variable product manufacturing costs, with potential variability related to the commodity metals markets, but may or may not realize absolute dollar gross margin growth through 20202021 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 skin care, new product applications for our Solésence® business.skin care ingredients, advancement of our medical diagnostics ingredient knowledge, and the cost of enhancing our manufacturing processes. As an example, we have been,are currently focusing the bulk of our resources on developing new product formulations, and continuerelated new technologies, as we expand marketing and sales efforts relating to be, engaged in product development work for our new fully formulated finished skincare products marketed through Solésence®. Much of thissence products. This work has led to several new products and additional potential new products. We also engageOur efforts in in-vitro, ex-vivo,research and in-vivo testsdevelopment, cosmetic formulating, process engineering and advanced engineering groups are focused in three major areas: 1) application development for our products; 2) creating or obtaining additional core materials technologies and/or materials that have the capability to determine the efficacy ofserve multiple skin health-related markets; and 3) continuing to improve our Solésence® products, as well ascore technologies 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.improve manufacturing operations and reduce costs.
Research and development expense decreasedincreased, as planned, to $405$499,000 for the three months ended September 30, 2020,March 31, 2021, compared to $488$372,000 for the same period in 2019. For the nine months ended September 30, 20202020. The primary reasons for this increase were related to increases in staffing and compensation, offset by reductions in professional fees and outside product testing and evaluation costs related to our Solésence® products. We expect quarterly research and development expense decreased to $1,134 compared to $1,450remain at, or slightly above, current levels, for the same period in 2019.
The main reasons for this decrease was a reduction in total staffing (not filling empty positions during the ongoing Covid-19 pandemic) and a reduction on outside testing costs incurred as our Solésence® 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 partbalance of research and development expense, were up for the nine-month period.2021.
Selling, general and administrative expense decreasedincreased, as planned, to $730$1,034,000 for the three months ended September 30, 2020,March 31, 2021, compared to $890$705,000 for the same period in 2019. For the nine months ended September 30, 2020,2020. Much of this was attributed to increases in staffing and compensation. We expect selling, general, and administrative expense decreased to $2,133remain at current levels for the balance of 2021.
Interest expense was $139,000 for the three months ended March 31, 2021, compared to $2,711$124,000 for the same period in 2019.2020. This primarily includes interest on our revolving line of credit for working capital funding, cash, and discount-related interest expense on our $2,000,000 Convertible Note, along with finance leases and term loans supporting some of our equipment.
For bothThe Company recognized $952,000 in other income relating to the three- and nine-month periodsforgiveness of its Paycheck Protection Program (“PPP”) Loan by the SBA in 2020, compensation expense was downthe three months ended March 31, 2021. The Company applied for PPP Loan forgiveness in February 2021, due to a reorganization of somemanagement’s belief that the Company expended the proceeds of the functionsPPP loan for forgivable purposes under the CARES Act. The loan was legally forgiven in this area, consulting expenses were lower due, to a great extentFebruary 2021, although the initial Solésence® launch work has been completed, and travel and entertainment expenses were down as a productCompany did not directly receive notice of the ongoing Covid-19 pandemic and its impact on air travel, live trade shows, and in-person meetings.PPP Loan forgiveness until June 2021.
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 20202021 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$1,819,000 on September 30, 2020,March 31, 2021, compared to $1,194$957,000 on December 31, 20192020 and $962$951,000 on September 30, 2019.March 31, 2020. The net cash used in our operating activities was $1,732$137,000 for the ninethree months ended September 30, 2020,March 31, 2021, compared to $2,161$1,180,000 for the same period in 2019.2020. The net use of cash during both periods was driven primarily by a significant increase in accounts receivable betweenat the beginning and end of eachthe period. In 2019, we also had a net loss of $2,022, which contributed further to the use of cash during the nine months ended September 30, 2019. Net cash used in investing activities specifically capital expenditures, was $448$166,000 during the ninethree months ended September 30, 2020,March 31, 2021, compared to $523$181,000 for the ninethree months ended September 30, 2019.March 31, 2020. Capital expenditures amounted to $166,000 and $181,000 for the three months ended March 31, 2021 and 2020, respectively. Net cash provided by financing activities was $2,120 and $2,301$1,165,000 during the ninethree months ended March 31, 2021, compared to $1,118,000 for the three months ended March 31, 2020. On March 23, 2020, the Company and Beachcorp, LLC executed the First Amendment to our Master Agreement that extends the maturities of both the Term Loan and the Revolver Facility to March 31, 2021. Effective September 30,8, 2020, the Company and 2019, respectively. Beachcorp, LLC executed the Second Amendment to our Master Agreement that expands the limit on the Revolver Facility from $2,000,000 to $2,750,000. On December 23, 2020, the Company and Beachcorp, LLC executed the Third Amendment to our Master Agreement that expands the limit on the Revolver Facility from $2,750,000 to $4,000,000 and extends the maturities of both the Term Loan and the Revolver Facility to March 31, 2022. On April 21, 2021, the Company and Beachcorp, LLC executed the Fourth Amendment to our Master Agreement that expands the limit on the Revolver Facility from $4,000,000 to $6,000,000, extends its maturity to March 31, 2023, and reduces interest on outstanding borrowings from the prime rate plus 3%, with an 8.25% minimum floor, to the prime rate plus 2%, with no minimum rate floor. Additionally, the Fourth Amendment increased the amount of the Term Loan from $500,000 to $1,000,000, and its fixed interest rate was reduced from 8.25% per year to 5.25% per year. The maturity date of the Term Loan remains March 31, 2022.
We paid $172$46,000 for capitalprincipal on finance lease obligations during the ninethree months ended September 30, 2020March 31, 2021 compared to $162$58,000 in the same period in 2019.
On June 25, 2020 we executed a new promissory note with Libertyville to extend the maturity under our Business Loan Agreement until April 4, 2021. We paid the outstanding2020. The balance of $500 in January 2020 and had borrowings under ourthe line of credit with Libertyville was $500,000 for both March 31, 2021 and December 31, 2020. In each instance, the line of $500credit was repaid during the month following the end of the reporting period. This line of credit expired on June 30,April 4, 2021. Management expects this line of credit to be renewed in May 2021. During the three months ending March 31, 2021, we drew $6,500,000, of which $5,289,000 was repaid under the Master Agreement. The net borrowings for the three months ended March 31, 2021 was $1,211,000. During the three months ending March 31, 2020, and September 30,we drew $3,260,000, of which $2,084,000 was repaid under the Master Agreement. The net borrowings for the three months ended March 31, 2020 which were subsequently repaid in July, 2020 and October 2020, respectively.
On May 13, 2019, we sold approximately 4.2 million shares of our unregistered common stockwas $1,176,000. Accretion related 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%Secured Convertible Promissory Note to Bradford T. Whitmore was $67,000 for both March 31, 2021 and 2020. The balance of this long-term convertible loan was $1,164,000 and $1,097,000 at March 31, 2021, and at December 31, 2020, respectively. Mr. Whitmore chose to exercise his conversion rights effective May 7, 2021, requesting that any accrued interest be paid him in the original principal amountform of $2,000.shares, as allowed in the Convertible Note. This note matures on May 15, 2024 and is payable to our investor at that timewill result in cash, or through conversionthe accelerated recognition of the rightsdiscount on the Convertible Note, to purchase up to 10,000,000 unregistered sharesbe recognized as interest expense in the second quarter 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. 2021.
On April 17, 2020, we received a loan of $952$952,000 from Libertyville under the PPP.Paycheck Protection Program (“PPP”). Under the PPP, the Company may applyapplied 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 believesThe Company applied for PPP Loan forgiveness in February 2021, compelled by its belief that the Companyit expended the proceeds of the PPP loan principally for forgivable purposes under the CARES Act, no assurance can be provided thatAct. The loan was legally forgiven in February 2021, although the Company will obtainreceived notice of PPP Loan 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.June 2021.
Our supply agreements with our largest customer, BASF, contain certain financial covenants which could potentially impact our liquidity. The most restrictive financial covenants under these agreements require that we maintain a minimum of $1 million$1,000,000 in totalcertain current assets; which may be composed of certain assets of which at least $500 must be inno less than $500,000 cash, cash equivalents, and certain investments, with the balance being composedno more than a combined $500,000 of certain related inventory, of which no more than $250,000 can be raw material, and certain receivables, and that we not have the acceleration of any debt maturity having a principal amount of more than $10 million, in order to avoid triggering the customer’s potential right to transfer certain technology and equipment to that customer at a contractually-defined price. We had approximately $1,134$1,819,000 in cash on September 30, 2020.March 31, 2021, with $500,000 borrowings on our Line of Credit. This supply agreement and its covenants are more fully described in Note 11, and our line of credit facilities areis more fully described in Note 7, to our Financial Statements in Part I, Item 1 of this Form 10-Q.
We believe that cash from operations and cash on hand, in addition to unused borrowing capacity, shouldwhich has recently been increased (see Note 7 to the Financial Statements), may not be adequate to fund our operating plans through 2020. Given our expected growth2021. We are working to reduce these risks, but some of this is dependent on several things over which we have limited control. We have seen an increase in sales of our Solésence® business, products through 2020, which we expect to continue in 2021. If that does continue, we will require additional investment in working capital. Given these issues, and other commercial realities, we are monitoring the temporaryadditional working capital demands that this could create as we continue to execute on our Solésence growth strategy. The timing of cash flows is critical. If cash generated from operations is not materially consistent with timing beingour plans, we believe that we may need to seek additional funding to address working capital demands. This uncertainty has caused us to be unable to assert that, for the most critical variable. next twelve months, we have enough current cash and guaranteed access to financing to fund operations, and to continue with our current growth strategy in terms of investment in capital equipment and in operating expenses related to Solésence, without securing additional financing. We believe that we will be able to secure additional financing if needed, but we do not have any additional financing commitments in place as of today. However, we may not be able to secure additional financing in a timely manner under commercially reasonable terms, or at all. If we are unable to secure additional financing, the operations of the Company might need to be curtailed to a certain degree, and we would need to delay capital expenditures related to our Solésence growth strategy, which could impede growth later in 2021 and 2022.
Our actual future capital requirements in 20202021 and beyond will depend on many factors, including customer acceptance of our current and potential advancedfinished Solésence products, APIs sold as ingredients in to the skin health markets, medical diagnostics ingredients, and other engineered materials, applications, and product,products, continued progress in research and development activities and product testing programs, the magnitude of these activities and programs, and the costs necessary to increase and expand our manufacturing capabilities and to market and sell our advanced materials, applications andthese 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.
ingredients. Other important issues that will drive future capital requirements will be the development of new markets and new customers as well as the potential for significant unplanned growth with existing customers. Depending on the success of certain projects, we expect that capital spending relating to currently known capital needs forduring the remainderbalance of 20202021 will be between $250$1,400,000 and $500, and we could enter into one or more financing leases$2,000,000, to finance these acquisitions, subject to the provisions of our Loan Agreement with Libertyvillebe funded by profit from operations, and our Master Agreement relating to our businessexisting loans with Beachcorp, LLC.and lines of credit. 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 acceptablebe able to us,support the additional cost of funding them in the near term, we would expect our capital spending to beexpenditures may fall below the lower end of thatthe range. Similarly, substantial success in business development projects may cause the actual 2021 capital investment for the remainder of 2020 to exceed the top of this range.
Should events ariseIn the likely event that make it appropriate for uswe will need to seek additional financing, such additional financing may not be available on acceptable terms or even at all, and any such additional financing could be dilutive to our stockholders.shareholders. Such financing could be necessitated by such things as the loss of one or morean existing customers;customer; 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 ofconsidering the factors described above; new regulatory requirements that are outside our control; the need to meet previously discussed cash requirements to avoid a triggering event under our BASF 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 raisethis raises doubt as to our ability to continue as a going concern.concern under U.S. GAAP.
On September 30,December 31, 2020, we had a net operating loss carryforward of approximately $77$67 million for income tax purposes. Because wethe Company may have experienced "ownership changes"“ownership changes” within the meaning of the U.S. Internal Revenue Code (“IRC”) in connection with ourits various prior equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the Internal Revenue Code.IRC. If not utilized, the$63 million of this loss carryforward will expire at various dates between January 1, 20202021 and December 31, 2036. Under recent2037. Given changes into the Internal Revenue Code, losses incurredIRC, net operating loss carryforwards generated 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 willdo not expire, before ultimately becoming available to reduce income tax liabilities. Changestherefore, $5 million in Illinois state law that began in 2011 will impact net loss carryforward duration and utilization on the state tax level.operating losses generated since January 1, 2018 do not expire.
Off−Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purposes of raising capital, incurring debt or operating our business. We do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.
As more fully described in Note 7 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$30,000 supporting our obligations under our facility lease agreement. No borrowings have been incurred under this promissory note.
Safe Harbor Provision
We want to provide investors with more meaningful and useful information. As a result, this Quarterly Report on Form 10-Q (the "Form 10-Q") contains and incorporates by reference certain "forward-looking statements", as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements reflect our current expectations of the future results of our operations, performance, and achievements. Forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have tried, wherever possible, to identify these statements by using words such as "anticipates"“anticipates”, "believes"“believes”, "estimates"“estimates”, "expects"“expects”, "plans"“plans”, "intends"“intends” and similar expressions. These statements reflect management'smanagement’s current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause our actual results, performance, or achievements in 20202021 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 materialsSolésence products, and Solésence® products;our advanced materials; 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; the impact of any potential new governmental regulations, especially any new governmental regulations focusing on the processing, handling, storage or sale of nanomaterials, that could be difficult to respond to or costly to comply with; business interruptions due to unexpected events or public health crises, including viral pandemics such as COVID-19; and the development and continuationresolution of the ongoing Covid-19 pandemic and related reactions and policies.litigation or other legal proceedings in which we may become involved. In addition, our forward-looking statements could be affected by general industry and market conditions and growth rates. Readers of this Quarterly Report on Form 10-Q should not place undue reliance on any forward-looking statements. Except as required by federal securities laws, we undertake no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Not required for a smaller reporting company.
Item 4. Controls and Procedures
Disclosure controls
We are responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (b) accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosures. It should be noted that in designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and that our management necessarily was required to apply its judgment regarding the design of our disclosure controls and procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision (and with the participation) of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation and the re-evaluation as of the date hereof, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at reaching that level of reasonable assurance.assurance, with the exception of the recognition of the PPP loan forgiveness by the SBA. Viewing this as a material weakness in its disclosure controls, management will now pursue affirmative confirmation of any future such transactions prior to filing.
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.
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.
Not required for a smaller reporting company.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3.Defaults Upon Senior Securities
None.
Item 4.Mine Safety Disclosures
Not applicable.
None.
Exhibit 31.2 | Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act. |
Exhibit 32 | Certification of the Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350. |
Exhibit 101 | The following materials from Nanophase Technologies Corporation’s Quarterly Report on Form 10-Q for the quarter ended |
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: | 2021 | By: | /s/ JESS A. JANKOWSKI |
Jess A. Jankowski | |||
President and Chief Executive Officer | |||