UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended: June 30, 2022March 31, 2023

or 

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

 

For the transition period from to _______ to _______ 

 

Commission File Number: 000-22333

 

Nanophase Technologies Corporation

(Exact name of registrant as specified in its charter)

 

Delaware36-3687863
(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 Act: None

 

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

 

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

 

As of August 15, 2022,May 12, 2023, there were 49,137,03049,576,704 shares outstanding of common stock, par value $.01, of the registrant. 

 

 

 

 


NANOPHASE TECHNOLOGIES CORPORATION

 

QUARTER ENDED JUNE 30,MARCH 31, 2022

 

INDEX

 

   Page
PART I - FINANCIAL INFORMATION 
 Item 1.Unaudited Consolidated Condensed Financial Statements3
  Consolidated Balance Sheets (Unaudited Consolidated Condensed) as of June 30, 2022,March 31, 2023 and December 31, 202120223
  Consolidated Statements of Operations (Unaudited Consolidated Condensed) for the sixthree months ended June 30,March 31, 2023 and 2022 and 20214
  Consolidated Statements of Stockholders’ Equity (Unaudited Consolidated Condensed) for the three and six months ended June 30,March 31, 2023, and 2022 and 20215
  Consolidated Statements of Cash Flows (Unaudited Consolidated Condensed) for the sixthree months ended June 30,March 31, 2023 and 2022 and 20216
  Notes to Unaudited Consolidated Condensed Financial Statements7
 Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1214
 Item 3.Quantitative and Qualitative Disclosures About Market Risk1518
 Item 4.Controls and Procedures1518
  
PART II - OTHER INFORMATION1518
 Item 1.Legal Proceedings1518
 Item 1A.Risk Factors1519
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds1519
 Item 3.Defaults Upon Senior Securities1519
 Item 4.Mine Safety Disclosures1519
 Item 5.Other Information1519
 Item 6.Exhibits16Exhibits19
  
SIGNATURES1720

 2

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

NANOPHASE TECHNOLOGIES CORPORATION

 

CONSOLIDATED BALANCE SHEETS

(Unaudited Consolidated Condensed)

          
 (in thousands except share
and per share data)
  (in thousands except share
and per share data)
 
ASSETS June 30,
2022
  December 31,
2021
  March 31,
2023
  December 31,
2022
 
Current assets:                
Cash $664  $657  $1,094  $2,186 
Trade accounts receivable, less allowance for doubtful accounts of $161 for June 30, 2022, and $60 for December 31, 2021  6,537   3,937 
Trade accounts receivable, less allowance for doubtful accounts of $298 for March 31, 2023, and $139 for December 31, 2022  4,380   4,734 
Inventories, net  8,949   6,095   8,118   8,839 
Prepaid expenses and other current assets  1,201   910   933   866 
Total current assets  17,351   11,599   14,525   16,625 
                
Equipment and leasehold improvements, net  5,715   4,712   8,235   7,949 
Operating leases, right of use  11,418   12,075   8,714   8,978 
Other assets, net  7   8   4   6 
Total assets $34,491  $28,394  $31,478  $33,558 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current liabilities:                
Line of credit, related party $5,835  $1,351   6,892   7,282 
Current portion of finance lease obligations  35   105 
Current portion of operating lease obligations  1,161   589 
Accounts payable  4,368   3,566   6,032   6,363 
Current portion of long-term debt, related party  1,000    
Current portion of deferred revenue  709   783   1,807   2,167 
Accrued expenses  1,426   946   1,132   1,023 
Total current liabilities  13,534   7,340   16,863   16,835 
                
Long-term portion of finance lease obligations  1   6 
Long-term portion of operating lease obligations  11,067   11,700   9,751   9,823 
Long-term debt, related party  1,000   1,000      1,000 
Long-term portion of deferred revenue  675   661   35   21 
Asset retirement obligations  227   222   232   230 
Total long-term liabilities  12,970   13,589   10,018   11,074 
                
Contingent liabilities      
        
Shareholders’ equity:                
Preferred stock, $.01 par value, 24,088 shares authorized, and 0 shares issued and outstanding      
Common stock, $.01 par value, 60,000,000 and 55,000,000 shares authorized; 49,137,030 and 48,893,573 shares issued and outstanding on June 30, 2022 and December 31, 2021, respectively  491   489 
Preferred stock, $.01 par value, 24,088 shares authorized, and no shares issued and outstanding      
Common stock, $.01 par value, 60,000,000 shares authorized; 49,520,571 and 49,320,680 shares issued and outstanding on March 31, 2023 and December 31, 2022, respectively  495   493 
Additional paid-in capital  104,831   104,423   105,534   105,226 
Accumulated deficit  (97,335)  (97,447)  (101,432)  (100,070)
Total Shareholders’ equity  7,987   7,465   4,597   5,649 

Total liabilities and shareholders’ equity

 $34,491  $28,394  $31,478  $33,558 

 

See Notes to Consolidated Condensed Financial StatementsStatements.

3

 

NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited Consolidated Condensed)

 

(in thousands except share and per share data)

 

                  
 Three months ended
June 30,
  Six months ended
June 30,
  Three months ended March 31, 
 2022  2021  2022  2021  2023  2022 
          (in thousands except share and
per share data)
 
Revenue:                     
Product revenue $10,796  $7,025  $18,842  $14,075  $9,336  $8,046 
Other revenue  426   89   536   111   121   110 
Total revenue  11,222   7,114   19,378   14,186   9,457   8,156 
                        
Operating expense:                
Cost of revenue  8,486   4,600   14,474   9,642   7,308   5,988 
Gross profit  2,736   2,514   4,904   4,544   2,149   2,168 
                        
Operating expense:        
Research and development expense  797   536   1,463   1,035   1,003   666 
Selling, general and administrative expense  1,816   1,018   3,213   2,052   2,150   1,397 
Income from operations  123   960   228   1,457 
(Loss) income from operations  (1,004)  105 
Interest expense  73   919   116   1,058   155   43 
Other income, net           (952)
Income before provision for income taxes  50   41   112   1,351 
(Loss) income before provision for income taxes  (1,159)  62 
Provision for income taxes                  
Net income $50  $41  $112  $1,351 
                        
Net income per basic share $0.00  $0.00  $0.00  $0.03 
Net (loss) income $(1,159) $62 
        
Net (loss) income per share-basic $(0.02) $0.00 
                        
Weighted average number of basic common shares outstanding  49,045,047   44,367,496   49,014,847   41,294,394   49,429,407   48,984,312 
                        
Net income per diluted share $0.00  $0.00  $0.00  $0.03 
Net (loss) income per share-diluted $(0.02) $0.00 
                        
Weighted average number of diluted common shares outstanding  51,008,047   46,362,496   50,990,847   43,078,394   49,429,407   51,064,312 

See Notes to Consolidated Condensed Financial StatementsStatements.

4

 

 

NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited Consolidated Condensed)

 

                                
 Preferred Stock  Common Stock  Additional
Paid-in
 Accumulated     Preferred Stock  Common Stock  Additional      
Description Shares Amount Shares Amount Capital Deficit Total  Shares  Amount  Shares  Amount  Paid-in
Capital
  Accumulated
Deficit
  Total 
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                 1,310   1,310 
Balance on March 31, 2021    $   38,221,292  $382  $102,159  $(98,457) $4,084 
                            
Stock option exercises        143,500   2   76      78 
Exercise of conversion rights – convertible loan, related party        10,095,555   101   1,918      2,019 
Stock-based compensation              53      53 
Net income for the three months ended June 30, 2021                 41   41 
Balance on June 30, 2021    $   48,460,347  $485  $104,206  $(98,416) $6,275 
                            
Balance on December 31, 2021    $   48,893,573  $489  $104,423  $(97,447) $7,465     $   48,893,573  $489  $104,423  $(97,447) $7,465 
Issuance of shares and stock option exercises        133,168   1   72      73         133,168   1   72      73 
Stock-based compensation              148      148               148      148 
Net income for the three months ended March 31, 2022                 62   62                  62   62 
Balance on March 31, 2022    $   49,026,741  $490  $104,643  $(97,385) $7,748     $   49,026,741  $490   104,643  $(97,385) $7,748 
                                                        
Balance on December 31, 2022    $   49,320,680  $493  $105,226  $(100,070) $5,649 
Issuance of shares and stock option exercises        110,289   1   33      34         199,891   2   99      101 
Stock-based compensation              155      155               209      209 
Net income for the three months ended June 30, 2022                 50   50 
Balance on June 30, 2022    $   49,137,030  $491  $104,831  $(97,335) $7,987 
Cumulative effect of accounting changes related to expected credit loss                 (203)  (203)
Net loss for the three months ended March 31, 2023                 (1,159)  (1,159)
Balance on March 31, 2023    $   49,520,571  $495  $105,534  $(101,432) $4,597 

 

See Notes to Consolidated Condensed Financial Statements.

 5

NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited Consolidated Condensed)

         
  Six months ended June 30, 
  2022  2021 
  (in thousands) 
Operating activities:        
Net income $112  $1,351 
Adjustments to reconcile net income to cash (used in) provided by operating activities:        
Depreciation and amortization  271   210 
Share-based compensation  303   95 
Gain on PPP loan forgiveness     (952)
Amortization of operating lease, right of use asset  657   42 
Amortization of debt discount     903 
Changes in assets and liabilities related to operations:        
Trade accounts receivable  (2,600)  (464)
Inventories  (2,854)  (1,281)
Prepaid expenses and other assets  (290)  (114)
Accounts payable  661   239 
Accrued expenses  480   489 
Deferred revenue  (60)  30 
Operating lease obligations  (61)  (60)
Net cash (used in) provided by operating activities  (3,381)  488 
         
Investing activities:        
Acquisition of equipment and leasehold improvements  (1,128)  (508)
Net cash used in investing activities  (1,128)  (508)
         
Financing activities:        
Principal payments on finance leases  (75)  (93)
Proceeds from line of credit, bank     500 
Payments to the line of credit, bank     (1,000)
Proceeds from line of credit, related party  18,675   11,975 
Payments to line of credit, related party  (14,191)  (11,820)
Proceeds from term loan, related party     500 
Payments from exercise of stock options  107   78 
Net cash provided by financing activities  4,516   140 
Increase in cash and cash equivalents  7   120 
Cash and cash equivalents at beginning of period  657   957 
Cash and cash equivalents at end of period $664  $1,077 
         
Supplemental cash flow information:        
Interest paid $87  $106 
         
Supplemental non-cash investing and financing activities:        
Accounts payable incurred for the purchase of equipment and leasehold improvements $141  $258 
Conversion of $2M convertible loan, related party $  $2,000 
Interest paid via stock issuance, convertible loan, related party $  $19 

See Notes to Consolidated Condensed Financial Statements.

 

 6

 


NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF CASH FLOWS

(Unaudited Consolidated Condensed)

       
  Three months ended March 31, 
  2023  2022 
  (in thousands) 
Operating activities:        
Net (loss) income $(1,159) $62 
Adjustments to reconcile net income to cash used in operating activities:        
Depreciation and amortization  174   136 
Stock-based compensation  209   148 
Changes in assets and liabilities related to operations:        
Trade accounts receivable  151   (1,337)
Inventories  721   (2,464)
Prepaid expenses and other assets  (67)  (94)
Accounts payable  (768)  1,347 
Accrued expenses  111   15 
Deferred revenue  (346)  65 
Change in ROU asset and lease liability, net  192   347 
Net cash used in operating activities  (782)  (1,775)
         
Investing activities:        
Acquisition of equipment and leasehold improvements  (21)  (378)
Net cash used in investing activities  (21)  (378)
         
Financing activities:        
Principal payments on finance leases     (38)
Proceeds from line of credit, related party  7,150   8,125 
Payments to line of credit, related party  (7,540)  (5,767)
Proceeds from exercise of stock options  101   73 
Net cash (used in) provided by financing activities  (289)  2,393 
Increase in cash and cash equivalents  (1,092)  240 
Cash and cash equivalents at beginning of period  2,186   657 
Cash and cash equivalents at end of period $1,094  $897 
         
Supplemental cash flow information:        
Interest paid $97  $27 
         
Supplemental non-cash investing and financing activities:        
Accounts payable incurred for the purchase of equipment and leasehold improvements $437  $40 
         

See Notes to Consolidated Condensed Financial Statements.

NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO CONSOLIDATED 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 statement of our financial position and operating results for the interim periods presented. All statements include the results from both Nanophase and our wholly-owned subsidiary, Solésence, LLC (“Solésence,” or our “Solésence® subsidiary”). Operating results for the sixthree months ended June 30, 2022March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.2023.

These financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2021,2022, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20212022 as filed with the Securities and Exchange Commission.

(2) Description of Business

Nanophase Technologies Corporation (“Nanophase,” “Company,” “we,” “our,” or “us”) is a science-driven company which, along with its wholly owned subsidiary, Solésence, LLC (our “Solésence beauty science subsidiary”), is focused in various beauty- and life-science markets. Using consumer health as our end-goal and science and innovation to guide the path, 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 materials engineering allows us to effectively coat and disperse particles on a nano and “non-nano” scale for use in a variety of skin health markets, including for use in sunscreens as active ingredients and as fully developed prestige skin care and cosmetics products, marketed and sold through our Solésence beauty science subsidiary. In terms of our life sciences focus, we have seen demand significantly decrease for our medical diagnostics ingredients during 2022.ingredients. Additionally, we continue to sell products in legacy markets, including 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, as well as 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. We market our materials to various end-use applications manufacturers, and our Solésence® products to cosmetics and skin care brands.

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. Active Stress Defense™ now refers to a suite of three proprietary technologies — Original Active Stress Defense™, Kleair™, and Bloom™ — all three of which either utilize a unique and proprietary, mineral-based technology or work synergistically with one of our unique and proprietary, mineral-based technologies to improve performance and/or aesthetics. Our ongoing innovation efforts include new IP in areas that advance environmental protection, align with market needs, and complement our existing technologies Through the creation of our Solésence beauty science subsidiary, we utilize our technology suite to manufacture and sell fully developed solutions to targeted customers in the skin care industry, typically in prestige skin care and cosmetics markets, 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 materials 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. 


(3) Revenues

Revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration we expect to receive in exchange for those goods. When our ingredients and finished products are shipped, with control being transferred at the shipping point almost universally, is the point in time at which we recognize the related revenue.

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses. Customers’ deposits, deferred revenue and other receipts are deferred and recognized when the revenue is realized and earned. Cash payments to customers are classified as reductions of revenue in our statements of operations.

Contract balances at June 30,March 31, 2023, December 31, 2022, and December 31, 2021 and December 31, 2020 are as follows:

 

   Accounts Receivable  Contract Assets  Contract    Liabilities 
Balance, December 31, 2020  $2,932  $179  $411 
Balance, December 31, 2021   3,937   179   1,444 
Balance, June 30, 2022   6,537   179   1,384 
  

Accounts
Receivable, net

of Unbilled

  Contract
Assets
  Contract
Liabilities
 
Balance, December 31, 2021 $3,937  $179  $1,444 
Balance, December 31, 2022  4,734      2,188 
Balance, March 31, 2023  4,380      1,842 

 

 7

The contract asset balance at June 30, 2022, December 31, 2021, and December 31, 2020 consists of $179 of contract assets reported within prepaid expenses and other current assets.

Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period was $891,297 and $145123, for the three months ended June 30,March 31, 2023 and 2022, and 2021, respectively, and $212 and $221 for the six months ended June 30, 2022 and 2021, respectively.

Other revenue may include revenue from technology license fees and paid development projects. Technology license fees and paid development projects are recognized over time when the obligations under the agreed upon contractual arrangements are performed on our part.  Other revenue recognized over time was $76121 and $89110, for the three months ended June 30,March 31, 2023 and 2022, and 2021, respectively, and $186 and $111 for the six months ended June 30, 2022 and 2021, respectively. Other revenue recognized at a point in time was $350 and $0, for the three months ended June 30, 2022 and 2021, respectively, and $350 and $0 for the six months ended June 30, 2022 and 2021 respectively.

(4) Earnings Per Share

Options to purchase approximately 1,963,000 and 1,976,0001,164,000 shares of common stock that were outstanding as of June 30,March 31, 2023 were not included in the computation of earnings per share for the three months ended March 31, 2023, as inclusion of these shares would have resulted in an anti-dilutive effect and were thus omitted from disclosure.  Options to purchase approximately 2,080,000 shares of common stock that were outstanding as of March 31, 2022 were included in the computation of earnings per share for the three months and six months ended June 30, 2022, respectively. Options to purchase approximately 1,995,000 and 1,784,000 shares of common stock that were outstanding as of June 30, 2021 were included in the computation of earnings per share for the three months and six months ended June 30, 2021, respectively.March 31, 2022.

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,
 
  2023  2022 
Numerator: (in Thousands)      
Net (loss) income $(1,159) $62 
         
Denominator:        
Weighted average number of basic common shares outstanding  49,429,407   48,984,312 
Weighted average additional shares assuming conversion of in-the-money stock options to common shares     2,080,000 
Weighted average number of diluted common shares outstanding  49,429,407   51,064,312 
         
Basic earnings per common share:        
Net (loss) income per share – basic $(0.02) $0.00 
Diluted earnings per common share:        
Net (loss) income per share – diluted $(0.02) $0.00 

                 
  Three months ended June 30,  Six months ended June 30, 
  2022  2021  2022  2021 
                 
Numerator: (in Thousands)                
Net income $50  $41  $112  $1,351 
                 
Denominator:                
Weighted average number of basic shares outstanding  49,045,047   44,367,496   49,014,847   41,294,394 
Weighted average additional shares assuming conversion of in-the-money stock options to common shares  1,963,000   1,995,000   1,976,000   1,784,000 
Weighted average number of diluted common shares outstanding  51,008,047   46,362,496   50,990,847   43,078,394 
                 
Basic earnings per common share:                
Net income per share – basic $0.00  $0.00  $0.00  $0.03 
Diluted earnings per common share:                
Net income per share – diluted $0.00  $0.00  $0.00  $0.03 

(5) Financial Instruments

We follow 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, any cash equivalents, accounts receivable, accounts payable and accrued expenses, along with any short termshort-term and long-term borrowings as described in Note 6. The carrying values of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses are reasonable estimates of their fair value due to the short-term nature. The fair value of short-term and long-term debt approximates carrying value based on comparison of terms to similar debt offering in the marketplace.

There were 0no financial instruments adjusted to fair value on June 30, 2022 andMarch 31, 2023, or December 31, 2021.2022.

(6) Notes and Lines of Credit

 Notes and lines of credit consist of the following:

      
    As of June 30, 2022  As of December 31, 2021 
  Rate Total Borrowing Capacity  Outstanding Borrowed Balance  Total Borrowing Capacity  Outstanding Borrowed Balance 
Strandler, LLC (1) 4.00% $  $1,000   n/a   n/a 
Beachcorp, LLC (1) 5.25%  n/a   n/a  $1,000  $1,000 
Beachcorp, LLC (2) 5.50%  5,938   3,835   3,753   3,365 
Beachcorp, LLC (3) 5.50%  3,780   2,000   n/a   n/a 

 

Related party interest summary:

                 
  Three months ended June 30,  Six months ended June 30, 
  2022  2021  2022  2021 
                 
Interest expense, related parties $68  $911  $107  $1,042 
Accrued interest expense, related parties  29   17   29   17 

 8

     As of March 31, 2023  As of December 31, 2022 
  Rate  Available  Outstanding
Balance
  Available  Outstanding
Balance
 
Libertyville Bank & Trust (1)  9.00%  30          
Libertyville Bank & Trust (2)  9.00%  500          
Strandler, LLC (3)(4)  8.75%  1,000   1,000   1,000   1,000 
Beachcorp, LLC (3)(5)  8.75%  4,614   2,893   4,392   4,282 
Beachcorp, LLC (3)(6)  8.75%  4,000   4,000   4,000   3,000 

 

1)Since July 2014, we have maintained a bank-issued letter of credit for up to $1)30 in borrowings, with interest at the prime rate plus 1%, to support our obligations under our Romeoville, Illinois facility lease agreement. No borrowings have been incurred under this promissory note. It is our intention to renew this note annually. Because there were no amounts outstanding on the note at any time during 2023 or 2022, we have recorded no related liability on our balance sheet.

2)The Company maintains a credit agreement with Libertyville which most recently served the primary purpose of insuring that it met its cash balance requirements at quarter end relating to a contract with the Company’s largest customer. Interest on drawn balances was at the prime rate plus 1%. On December 21, 2021, the existing credit agreement with Libertyville was converted for use to support our obligations under our newly leased manufacturing and warehouse space in Bolingbrook, Illinois. Interest on drawn balances will be at the prime rate plus 1%. This credit agreement has a maturity of December 22, 2023. We expect to renew this agreement annually, as the lease requires. This credit agreement is secured by all the unencumbered assets of the Company, and has superior collateral rights to those credit facilities with Beachcorp, LLC and Strandler, LLC.

3)On November 16, 2018, we entered into a Business Loan Agreement (the “Master Agreement”) with Beachcorp, LLC. The Master Agreement relates to two loan facilities, each evidenced by a separate promissory note 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, and with principal due on December 31, 2020; and an asset-based revolving loan facility for the Company of up to $2,000 (the “A/R Revolver Facility”), with floating interest accruing at the prime rate plus 3% (8.25% minimum) per year, with a borrowing base consisting of qualified accounts receivable of the Company, and a maturity of March 31, 2020, as amended. On March 23, 2020, the Company and Beachcorp, LLC executed the First Amendment to our Master Agreement that extended the maturities of both the Term Loan and the A/R Revolver Facility to March 31, 2021. Effective September 8, 2020, the Company and Beachcorp, LLC executed the Second Amendment to our Master Agreement that expanded the limit on the A/R 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 expanded the limit on the A/R Revolver Facility from $2,750 to $4,000 and extended the maturities of both the Term Loan and the A/R Revolver Facility to March 31, 2022. Effective April 21, 2021 the Company and Beachcorp, LLC executed the Fourth Amendment to our Master Agreement that expanded the limit on the A/R Revolver Facility from $4,000 to $6,000, changed the interest rate to fully floating and reduced the rate to the prime rate plus 2%, also extending the maturity of the A/R Revolver Facility to March 31, 2023. This amendment also increased the amount of the Term Loan from $500 to $1,000, changed the interest rate to fully floating and reduced the rate to the prime rate plus 2%. The maturity of the Term Loan remained March 31, 2022. The Term Loan and A/R Revolver Facility are secured by all the unencumbered assets of the Company and subordinated to Libertyville’s secured interest under the New Business Loan Credit Agreement. The Master Agreement substantially restricts the Company’s ability to incur additional indebtedness during the terms of both the Term Loan and the A/R Revolver Facility.

4)On January 28, 2022 the Company entered into an additional Business Loan Agreement (the “New Term Loan Agreement”) with Strandler, LLC, which effectively transferred or assigned the previously existing Term Loan to Strandler, LLC from Beachcorp, LLC. Interest on the New Term Loan is at the prime rate plus 0.75%, and it matures on March 31, 2024. Strandler, LLC is also an affiliate of Bradford T. Whitmore.

2)5)On January 28, 2022 the Company entered into an Amended and Restated Business Loan Agreement (the “A&R Loan Agreement”), which amends and restates the Master Agreement between the Company and Beachcorp, LLC, and a new promissory note in order to evidence the A/R Revolver facility, including an amendment to expand the limit on the A/R Revolver Facility from $6,000to $8,000, reduce the interest rate to the prime rate plus 0.75%, and extend the maturity of the A/R Revolver facilityFacility to March 31, 2024.

3)6)On January 28, 2022 in connection withthe Company entered into the A&R Loan Agreement the Company entered intoand a new revolving loan agreement (“Inventory Facility”) with Beachcorp, LLC, and a new promissory note in order to evidence the Inventory Revolver facility, allowingFacility. The maximum borrowing of up toamount under the Inventory Facility is $4,000, at an amount equivalentwith a borrowing base consisting of up to 50% of eligiblethe value of qualified inventory as defined.of the Company. The interest rate onfor the Inventory Revolver is set toat the prime rate plus 0.75%. The Inventory Revolver facility, and it matures on March 31, 2024.

Beachcorp, LLC and Strandler, LLC are affiliates of Mr. Bradford T. Whitmore, who beneficially owns a majority of the Company’s common stock and is the brother of Ms. R. Janet Whitmore, a director of the Company and the chair of the Company’s board of directors. The A/R Revolver Facility, the Inventory Facility and the New Term Loan are all secured by all the unencumbered assets of the Company and subordinated to the Company’s letters of credit facility with Libertyville Bank & Trust. 

Since July 2014, we have maintained a bank-issued letterOn May 1, 2023 the Company entered into another promissory note (the “Non-Revolving Note - TI Agreement”) with Beachcorp, LLC in the amount of credit$1,750,000 with an interest rate of the prime rate plus 0.75%. The note matures on September 30, 2023. This loan is for up to $30 in borrowings to support our obligations under our Romeoville, Illinois facility lease agreement. No borrowings have been incurred under this promissory note. On December 21, 2021, Libertyville issued a letter of credit for up to $500 in borrowings to support our obligations under our newly leased manufacturing and warehouse space in Bolingbrook, Illinois. For both letters of credit, interest on drawn balances will bework being done at the prime rate plus 1%. We expectBolingbrook facility which is expected to renew these agreements annually,be reimbursed from the landlord as part of the respective leases require.lease agreement.

Related party interest summary:

        
  Three Months Ended March 31, 
  2023  2022 
Interest expense, related parties $150  $39 
Accrued interest expense, related parties  59  $16 

(7) Inventories

Inventories consist of the following:

 June 30,
2022
  December 31,
2021
  March 31,
2023
  December 31,
2022
 
          
Raw materials $6,579  $4,796  $5,637  $6,797 
Finished goods 2,370  1,299   2,481   2,041 
Total inventories, net $8,949  $6,095 
Total Inventories, net  8,118   8,839 

 

At March 31, 2023 and December 31, 2022, the Company applied a $500 reserve against reported inventory to account for excess and obsolete inventory.

 

(8) LeasesLease Commitments

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. During the first seven months of the termSince inception of our newlynewest leased building, we have subleased a portion of the unused floorspace on a temporary basis. This sublease has convertedmay convert to a month-to-month lease as of June 30, 2022.upon expiration.


As of June 30, 2022,March 31, 2023, the ROU asset had a balance of $11,4188,714, which is included in the “Operating lease right-of-use assets” line item of these consolidated financial statements and current and non-current lease liabilities related to the ROU asset of $1,1610 and $11,0679,751, respectively. The $0 in current lease liability stems from expected payments from the lessor of the Bolingbrook facility reimbursing the Company for tenant improvement allowances in the amount of $1,716 over the next twelve months. Because the expected cash payments over the next twelve months resulted in an amount exceeding a current liability, the current operating lease liability line item on the balance sheet reported $0, with the balance exceeding the current liability netted against the noncurrent portion for a total operating lease liability at March 31, 2023 of $9,751. As a result, the total lease liability was reduced by the expected payment, the net effect of reimbursements received, and cash paid for leases over the next twelve months resulting in net lease payments of $347. As of December 31, 2021,2022, the ROU asset had a balance of $12,0758,978 which is included in the “Operating lease right-of-use assets” line item of these consolidated financial statements and current and non-current lease liabilities related to the ROU asset of $5890 and $11,7009,823, respectively. The discount$0 in current lease liability stems from expected payments from the lessor of the Bolingbrook facility reimbursing the Company for tenant improvement allowances in the amount of $1,957 over the next twelve months. As a result, the total lease liability was reduced by the expected payment, the net effect of reimbursements received, and cash paid for leases over the next twelve months, resulting in net lease payments of $97.

Discount rates used for leases accounted for under ASC 842 are based on an interest rate yield curve developed for the leases in the Company’s portfolio.

The office leases contain variable lease payments which consist primarily of rent escalations based on an established index or rate and taxes, insurance, and common area or other maintenance costs, which are paid based on actual costs incurred by the lessor. The Company has elected to utilize the available practical expedient to combine lease and non-lease components for building leases. 

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

                 
  Three months ended June 30,  Six months ended June 30, 
  2022  2021  2022  2021 
Components of lease cost                
Finance lease cost components:                
Amortization of finance lease assets $11  $14  $22  $28 
Interest on finance lease liabilities  1   5   3   11 
Total finance lease costs $12  $19  $25  $39 
Operating lease cost components:                
Operating lease cost 375   146  738  290 
Variable lease cost  160   29   332   60 
Short-term lease cost  29   11   50   21 
Sublease income  (184)     (367)   
Total operating lease costs  380   186   753   371 
Total lease cost $392  $205  $778  $410 

 9

 

  Three Months Ended
March 31, 2023
  Three Months Ended
March 31, 2022
 
Components of lease cost        
Finance lease cost components:        
Amortization of finance lease assets $  $11 
Interest on finance lease liabilities     2 
Total finance lease costs     13 
Operating lease cost components:        
Operating lease cost  469   363 
Variable lease cost  146   172 
Short-term lease cost  48   21 
Sublease income  (196)  (183)
Total operating lease costs  467   373 
Total lease cost $467  $386 

Supplemental cash flow information related to leases is as follows for the sixthree months ended June 30, 2022March 31, 2023 and 2021:2022:

  2022  2021 
Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash outflow from operating leases $474  $368 
         
Weighted-average remaining lease term-finance leases (in years)  .3   1.1 
Weighted-average remaining lease term-operating leases (in years)  9.1   2.9 
Weighted-average discount rate-finance leases  7.6%  9.3%
Weighted-average discount rate-operating leases  7.6%  13.4%

The future maturities of the Company’s finance and operating leases as of June 30, 2022 are as follows:

  Finance Leases  Operating Leases  Total 
2022 $31  $982  $1,013 
2023  6   2,099   2,105 
2024  0   2,025   2,025 
2025  0   1,470   1,470 
2026  0   1,468   1,468 
Thereafter  0   8,668   8,668 
Total payments $37  $16,712  $16,749 
Less amounts representing interest  (1)  (4,484)  (4,485)
Total minimum payments required $    36  $12,228  $12,264 

  2023  2022 
Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash outflow from operating leases $263  $190 
         
Weighted-average remaining lease term-finance leases (in years)     0.6 
Weighted-average remaining lease term-operating leases (in years)  8.0   9.3 
Weighted-average discount rate-finance leases     7.6%
Weighted-average discount rate-operating leases  7.05%  7.5%

The future maturities of the Company’s finance and operating leases as of June 30, 2021 wereMarch 31, 2023 are as follows:

    
2023 $(172)
2024  2,029 
2025  1,473 
2026  1,471 
2027  1,510 
Thereafter  7,162 
Total payments $13,473 
Less amounts representing interest  (3,722)
Total minimum payments required $9,751 

(9) Stock-Based Compensation

  Finance Leases  Operating Leases  Total 
2021 $96  $374  $470 
2022  109   761   870 
2023  5   747   752 
2024  0   636   636 
2025  0   42   42 
Thereafter  0   2   2 
Total payments $210  $2,562  $2,772 
Less amounts representing interest  (12)  (540)  (552)
Total minimum payments required $198  $2,022  $2,220 

We follow ASC Topic 718, Stock-Based Payments, in which compensation expense is recognized only for stock-based payments expected to vest.

        
  

Three months ended

March 31,

 
  2023  2022 
Stock-based compensation expense $209  $148 
Remaining unrecognized compensation expense $1,577     
Remaining weighted average-period, expense recognition (years)  2.1     

The following table summarizes the option activity for our employees and directors during the three months ended March 31, 2023:

Schedule of option activity

     Weighted 
     Average 
     Exercise Price 
Options Shares  per Share 
Outstanding on January 1, 2023  3,443,661  $1.33 
         
Granted    $ 
Exercised  (199,891)    
Forfeited or expired  (18,000)    
         
Outstanding on March 31, 2022  3,225,770  $1.37 


(9)(10) Significant Customers and Contingencies

We had five significant customers for the three and six months ended June 30, 2022 and 2021, respectively. Revenue from these five customers constituted the following percentages of total revenue:

 

The portion of total revenue from our significant customers are as follows for the periods ending March 31, 2023, and 2022:

   For the three months ended 
   Three months ended
June 30,
  Six months ended
June 30,
    March 31, 
Customer # Product Category 2022 2021 2022 2021   Product Category 2023  2022 
1  Personal Care Ingredients  29%  25%  29%  22%  Personal Care Ingredients  37%  29%
2  Solésence®  15%  17%  16%  17%  Solésence®  11%  18%
3  Solésence®  14%  15%  14%  13%  Solésence®  5%  13%
4  Solésence®  4%  10%  6%  13%  Solésence®  9%  9%
5  Advanced Materials (Medical Diagnostics customer)  0%  8%  0%  16%
  Total  62%  75%  65%  81%  Total  62%  69%

 

 10

Accounts receivable balances for these fivefour customers were approximately:

   June 30,
  June 30,    For the three months ended
March 31,
 
Customer #  Product Category 2022  2021    Product Category 2023  2022 
1  Personal Care Ingredients $1,737  $609   Personal Care Ingredients $1,197  $1,489 
2  Solésence®  798   422   Solésence®  548   880 
3  Solésence®  1,470   1,048   Solésence®  424   1,050 
4  Solésence®  3   194   Solésence®  485   371 
5  Advanced Materials (Medical Diagnostics customer)  5   106 
  Total $4,013  $2,379   Total $2,654  $3,790 

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

If a triggering event were to occur and BASF elected to proceed with the license and related equipment sale mentioned above, we would receive royalty payments from this customer for products sold using our technology; however, we would lose both significant revenue and the ability to generate significant revenue to replace that which was lost in the near term. Replacement of necessary equipment that could be purchased and removed by the customer pursuant to this triggering event could take in excess of twelve months. Any additional capital outlays required to rebuild capacity would probably be greater than the proceeds from the purchase of the assets as dictated by our agreement with the customer. Similar consequences would occur if we were determined to have materially breached certain other provisions of the supply agreement with BASF. Any such event would also likely result in the loss of many of our key staff and line employees due to economic realities. We believe that our employees are a critical component of our success, and it could be difficult to replace them quickly. Given the occurrence of any such event, we might not be able to hire and retain skilled employees given the stigma relating to such an event and its impact on us.

(10)(11) Business Segmentation and Geographical Distribution

Revenue from international sources approximated $4351,435 and $49055 for the three and six months ended June 30,March 31, 2023 and 2022, respectively, compared to $1,138 and $2,423 for the three and six months ended June 30, 2021, 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 stream into three main product categories, Personal Care Ingredients, Advanced Materials and Solésence. The revenues, by category, for the three and six months ended June 30,March 31, 2023 and 2022 and 2021 are as follows:

  

Three months ended

March 31,

 
Product Category 2023  2022 
Solésence $5,044  $5,560 
Personal Care Ingredients  3,544   2,382 
Advanced Materials  869   214 
Total Sales $9,457  $8,156 

(12)Commitments and Contingencies

On August 9, 2022, BASF filed a complaint against Nanophase in New Jersey state court (the “New Jersey Complaint”), alleging that Nanophase had breached the 1999 Zinc Oxide Supply Agreement (the “Agreement”). BASF alleges several issues, the one having the biggest potential impact on Nanophase being a claim that our sales through Solésence violate the exclusivity provision of the Agreement. BASF seeks an unspecified amount of damages, a permanent injunction enjoining sales to any party (other than BASF) of a broad range of zinc oxide products that BASF contends are within the scope of the exclusivity provision, counsel fees and litigation expenses. On September 7, 2022, Nanophase filed a Complaint for Declaratory Judgement in Illinois state court (the “Illinois Complaint”), asking for a declaration that contrary to BASF’s allegation, the exclusivity provision of the Agreement does not apply to all products containing zinc oxide as an ingredient for uses designated under the Agreement, nor does the exclusivity provision prohibit Nanophase’s sales of Solésence products containing zinc oxide as an ingredient. Both companies filed Motions to Dismiss (MTD) the other’s respective complaint. Nanophase’s MTD BASF’s New Jersey Complaint was denied on procedural grounds on February 10, 2023, with the New Jersey court superficially noting that it did not consider whether BASF could prove its claims. On February 28, 2023, Nanophase filed its answer to BASF’s New Jersey Complaint, denying all wrongdoing and, as mandated by New Jersey procedural requirements, counterclaims including a request for a declaration similar to that Nanophase sought in its Illinois Complaint. On March 16, 2023, the Illinois court granted BASF’s MTD Nanophase’s Illinois Complaint, finding it duplicative of the New Jersey litigation. Discovery in that litigation is ongoing. Management believes at this time that the allegations of BASF’s complaint are without merit and are unsupported by the terms of the Agreement and governing law. Per ASC 450 for the period ending March 31, 2023, an estimated contingent loss was not recorded, and an estimated range of loss is not disclosed as the outcome is not probable at this time and nor is a range of loss estimable.

(13)Accounting Standards Adopted During 2023

On January 1, 2023, the Company adopted ASU 2016-13Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which updates the manner in which entities assess expected losses from financial instruments exposed to credit risk. While this update has a greater impact on issuers with loans, notes, and credit card receivables, the scope of Topic 326 extends to both financial assets measured at amortized cost as well as available-for-sale debt securities. As such, trade receivables are subject to the Topic’s provisions, requiring entities to consider past events, current conditions, and reasonable and supportable forecasts in determining the amount of expected loss over the life of the respective financial instrument. Nanophase uses the loss-rate method in developing its allowance for credit losses, which involves identifying pools of assets with similar risk characteristics, reviewing historical losses within the last three years, and consideration of reasonable and supportable forecasts. Changes in estimates, developing trends, and other new information can have a material impact on future evaluations.

 

This differs from prior allocation methodologies in that in addition to solely considering an aging schedule for amounts to reserve, management must now also consider current events as well as the future macroeconomic environment when making such loss assessments. On January 1, 2023, the Company applied the accounting change retrospectively with an opening adjustment to retained earnings in the amount of $203.

  Three months ended June 30,  Six months ended June 30, 
Product Category 2022  2021  2022  2021 
Solésence $7,099  $4,499  $12,659  $8,797 
Personal Care Ingredients  3,305   1,780   5,687   3,176 
Advanced Materials  818   835   1,032   2,213 
Total Sales $11,222  $7,114  $19,378  $14,186 

 11

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

Overview

Nanophase is a health-oriented, science-driven company, which, along with its wholly owned subsidiary, Solésence, LLC (our “Solésence beauty science subsidiary”), is focused inon various beauty- and life-science markets. Our primary skin health products are fully developed prestige skin care formulations with mineral-based UV protection, marketed and sold through our Solésence beauty science 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 increasedecreased demand for our medical diagnostics ingredients, which are used in testing for various viruses, most notably COVID-19. Additionally, we continue to sell products in legacy markets including 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 end-consumers’ health and well-being. We offer soup-to-nuts production, from engineered materials, formulation development, and finished product development, to commercial manufacturing and packaging capabilities. Our expertise in materials engineering allows us to effectively coat and disperse materials on a nano and “non-nano” scale for use in a variety of markets in skin health, including for use in sunscreens as 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 and aesthetics in our finished products, which have received broad acceptance in the marketplace. Due to the enhanced efficacy and aesthetic qualities offered by our proprietary technology platform, Solésence finished products satisfy growing consumer demands around “clean” and inclusive beauty. Solésence beauty science also benefits from the Company’s vertical integration with each product’s key active ingredient that delivers its point-of-difference. This vertical integration helps us to improve efficiency and avoid potential major supply chain challenges while also addressing ongoing sustainability efforts. 

We do not anticipate any supply disruptions directly related to the Russian invasion of Ukraine as we do not knowingly source any materials directly from either country.

Since mid-2020, we have seen significantly increases in 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. After a historic peak in volume during 2020, we saw reduced demand for these materials in 2021. It is difficult to predict whether the increased demand forThrough our medical diagnosticdiagnostics materials, used inwe have been able to support efforts to curb the COVID-19 testing will expand from 2021 levels over the next few years. Our expectation is that we may establish a new sales volume “floor” over the next few years as we continue through the unprecedented period of testing utilization and awareness of the way viruses impact all of us.pandemic. 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 sunscreens, rapidly growing sales for our suite of Solésence® finished products, and the expanded use of our diagnostic materials in aiding the fight to curb the spread of COVID-19 and other viruses, in 2021 we announced that we reoriented our Company strategy. We continue to see unprecedented demand in both beauty science, for our APIs and finished products, and life science areas. The markets for both have shown an appetite for what we are producing, and management believes that this growth is happening now due to a confluence of our technology, market conditions that favor what we produce, and our expanded expertise in these areas.  

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

Results of Operations

Total revenue increased to $11,222$9,457 for the three months ended June 30, 2022,March 31, 2023, compared to $7,114$8,156 for the same period in 2021. Total revenue increased to $19,378 for the six months ended June 30, 2022, compared to $14,186 for the same period in 2021.2022. A substantial majority of our revenue was from our four- and fivefour largest customers for the three-three months ended March 31, 2023, and six-month periods ended June, 2022, and 2021, respectively. This reflects sales of APIs to our largest customer in skin care and sunscreen applications, our three largest customers for our finished skin health products marketed through our Solésence subsidiary, and, duringThis is the three- and six months ended June 30, 2021,revenue breakdown, as a medical diagnostics customer.  Please see Note 10 in the Financial Statements, “Business Segmentation and Geographical Distribution,” for a breakdownpercentage of total revenue, from the four customers discussed above.referenced above:

     For the three months ended
        March 31
 
Customer #  Product Category 2023  2022 
1  Personal Care Ingredients  37%  29%
2  Solésence®  11%  18%
3  Solésence®  5%  13%
4  Solésence®  9%  9%
   Total  62%  69%

Product revenue, the primary component of our total revenue, increased to $10,796$9,336 for the three months ended June 30, 2022,March 31, 2023, compared to $7,025$8,046 during the same period of 2021, and increased to $18,842 for the six months ended June 30, 2022, compared to $14,075 during the same period of 2021.This2022. This increase was due to continued growth in the adoption of our Solésence® products, along with an increase in API sales to our largest customer in our personal care ingredients business. We saw little revenue froma significant three-month decrease in our medical diagnostics materials in 2022.  materials.  

Other revenue increased to $426 and $536$121 for the three- and six-month periodsthree months ended June 30, 2022,March 31, 2023, compared to $89 and $111$110 for the same periods in 2021, respectively.2022. Other revenue is typically comprised primarily of developmental or licensing fees. 

 12

 

Cost of revenue generally includes costs associated with commercial production and customer development arrangements.  Cost of revenue increased to $8,486$7,308 for the three months ended June 30, 2022,three months ended March 31, 2023, compared to $4,600$5,988 for the same period in 2021, and increased to $14,474 for the six months ended June 30, 2022, compared to $9,642 for the same period in 2021.2022.  The increase in cost of revenue was primarily driven by increased volume and price inflation on materials and manufacturing inefficiencies related to growing Solésence® demand. We are also using overtime to keep up with demand during a period where we have had difficulty hiring additional experienced labor. We have also been unable to complete a series of capital and engineering projects to increase efficiencies and reduce unit costs due to the near complete absorption of our internal engineering resources in addressing current demand. Additionally, during the second half of 2021, we added personnel in the supply chain function and incurred costs to rent temporary warehouse space, which represent and ongoing expense through June of 2022.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. In total, these factors have resulted in a significant reduction in our gross margin percentage. We believe this to be temporary, in light of current circumstances which we believe we will be able to address effectively during the balance of 2022.

 

Our business has a certain cyclicality of demand, often based upon seasonal demands, industry launch cycles, or a confluence of both. Our lack of burst capacity has created strains, in terms of people and costs, when new product launches occur at the same time that we are experiencing demand from previously launched products. Since late 2020, the Company has found itself in a situation where our ability to produce and ship materials has been exceeded by customer demand. It is a key area of focus to increase throughput first, followed quickly by increased cost efficiency once we can achieve greater scale. Our planning has had us adding to our current fixed manufacturing cost structure inthrough early 20222023 to accommodate additional growth, and to build a better base for further growth beyond that level. The extent to which margins grow, as a percentage of total revenue, will be dependent upon revenue mix, revenue volume, our ability 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 products. We expect that, as product revenue volume increases, our fixed manufacturing costs will be more efficiently absorbed, which should lead to increased margins as we grow. While additional production capacity is our most critical operational issue today, 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 significant percentage growth in our gross margins through 2022,the first half of 2023, depending upon the factors discussed above.

Research and development expense, which includes all expenses relating to the technology and advanced engineering groups, primarily consists of costs associated with the development or acquisition of new finished product formulations for skin care, new product applications for our skin care ingredients, advancement of our medical diagnostics ingredient knowledge, and the cost of enhancing our manufacturing processes. As an example, we are currently focusing the bulk of our resources on developing new product formulations, and related new technologies, as we expand marketing and sales efforts relating to our Solésence products. This work has led to several new products and additional potential new products. Our efforts in research and development, cosmetic formulating, process engineering and advanced engineering groups are focused in three major areas: 1) application development for our products; 2) creating or obtaining additional core materials technologies and/or materials that have the capability to serve multiple skin health-related markets; and 3) continuing to improve our core technologies to improve manufacturing operations and reduce costs.

Research and development expense increased to $797$1,003 for the three months ended June 30, 2022,three months March 31, 2023, compared to $536$666 for the same period in 2021. For the six months ended June 30, 2022 research and development expense increased to $1,463, compared to $1,035 for the same period in 2021.2022. Most of this increase was due to expanded staffing to aid in supporting new product development for current and future customers. Management expects research and development expense to increase at a slower rate during the balance of 20222023 to support continued revenue- and customer-expansion.

Selling, general and administrative expense increased to $1,816$2,150 for the three months ended June 30, 2022,March 31, 2023, compared to $1,018$1,397 for the same period in 2021. For the six months ended June 30, 2022, selling, general and administrative expense2022.  The increase is due in large part to increased to $3,213,legal costs in 2023 compared to $2,052 for the same period in 2021. We have added2022 and increased employee related costs when compared to our Sales, Marketing, and Business Development team during 2021, and more significantly during the first half of 2022. This was done to ready the Company to support expanded, and expected expanding, sales with a higher degree of customer service. We have also augmented our sales operations function, marketing, and new business development to stimulate additional growth. Additionally, compensation expense has also increased generally, beginning in the second half of 2021 through the current period due to wage inflation. We expect this trend to moderate to an extent in 2022. We also saw many of our business insurance costs increase during April, 2022, when several coverages were renewed. We recognized $104 in bad debt expense during the second quarter of 2022, which has been a relatively rare occurrence in the past. Much of this has been a function of our expansion, along with market conditions. Lastly, in June we accrued for a one-time consulting expense of approximately $180 relating to our application for an Employee Retention Credit. This expense, once paid, will be recoverable ratably to the extent any portion of the requested credit is disallowed. Management expects to receive this credit within approximately five months, but has elected not to reflect any of this gain in our financial statements until it is realized.

Inflation

We believe inflation has not had a material effectan incremental impact on our costs of operations orand financial position to date. However, supplier price increases and wage and benefit inflation, both of which represent a significant component of our costs of operations, will likelycould have a material effect on our operations and financial position in 2022 and beyond2023 if we are unable to pass through any applicable increases under our present contracts or through to our markets in general. We are in the process of adjustinghave begun to increase pricing where possible and continue to adjust our pricing to the extent supported by the markets we are in, and under the contractsany contract limitations we may have.


Liquidity and Capital Resources

Cash, cash proceeds and use of cash for the three months ended June 30,March 2023 and 2022, 2021, and year ended December 31, 20212022 were:

  

Six months ended
 June 30, 2022

  

Six months ended 
June 30, 2021 

  

Year ended
December 31, 2021 

 
Total cash $664  $1,077  $657 
Cash (used in) provided by operating activities  (3,381)  488   2,321 
Net cash used in investing activities  (1,128)  (508)  (1,874)
Net cash provided by financing activities  4,516   140   (747)

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Three months ended

March 31, 2023

  

Three months ended

March 31, 2022

  

Year ended

December 31, 2022

 
Total cash $1,094  $897  $2,186 
Cash used in operating activities  (782)  (1,775)  (1,650)
Net cash used in investing activities  (21)  (378)  (2,823)
Net cash (used in) provided by financing activities  (289)  2,393   6,002 

The net cash used during the sixthree months ended June 30, 2022March 31, 2023 was primarily a due to net loss for the expansion of accounts receivable, a function of our growth, and inventories. Management has followed a strategy thus far in 2022 to ameliorate supply chain risk to a degree by ordering raw materials and components further in advance than we typically have in the lessen the impact of delays and shortages brought on by competition for limited resources as the global economy responds both to additional demand and shipping difficulties created by several factors, including a shortage of labor in the United States. It is our expectation that this will not continue indefinitely, and that our cash position will benefit when a more “normal” supply chain situation returns.quarter. Net cash used in investing activities was attributable to expenditures on capital equipment for all periods presented above.

On January 28, 2022, the Company and Beachcorp, LLC, and Strandler, LLC entered in to an Amended and Restated Master Agreement (“Agreement”). Both entities are managed by Bradford T. Whitmore, who is a significant shareholder in Nanophase and, as such, these loans are classified as related party transactions. Under this Agreement, and amendedThe Company’s loan agreements governed by this Agreement, the Company now has a $1,000 term loan with Strandler, LLC which was fully drawn in January 2022, with the proceeds usedand Beachcorp. LLC currently are set to retire the previously existing $1,000 term loan with Beachcorp. The new term loan expiresexpire on March 31, 2024, and has2024. If we are unable to refinance or extend the maturity dates, it would have a fixed interest rate of 4.00%, representing the Prime rate plus 0.75% as of the new Agreement date. Under this Agreement, the Company amended its existing accounts receivable-based revolving loan (“A/R Revolver”) to carry a floating interest rate of Prime plus 0.75%, with an increased borrowing cap of $8,000, and an expiration of March 31, 2024. The Company drew funds from the A/R Facility in January of 2022. Further under this Agreement, the Company entered into an additional revolving loan agreement basedsignificant impact on the Company’s inventory balances (the “Inventory Facility”). The Company drew funds from the Inventory Facility in Mayability of 2022. This facility will allow the Company to borrow up to $4,000 in total, based on the terms of the loan. All borrowing will be atcontinue as a floating rate of Prime plus 0.75%, with a March 31, 2024 expiration. We also maintain letters of credit through Libertyville Bank & Trust. These credit facilities are more fully described in Note 6 to our Financial Statements in Part I, Item 1 of this Form 10-Q.   going concern.  

 Our actual future capital requirements in 20222023 and beyond will depend on many factors, including customer acceptance of our current and potential finished Solésence  products, APIs sold as ingredients in to the skin health markets, medical diagnostics ingredients, and other engineered materials, applications, and products, continued progress in research and development activities and product testing programs, the magnitude of these activities and programs, and the costs necessary to increase and expand our manufacturing capabilities and to market and sell these products and 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, and conditions within the markets supplying labor and materials for capital equipment, we expect that capital spending relating to currently known capital needs for 20222023 will be between $3 million and $6 million, to be funded by profit from operations, our existing loans and lines of credit, and possible new debt financing. If those projects are delayed or ultimately prove unsuccessful, or if we fail to be able to support the additional cost of funding them in the near term, we expect our capital expenditures may fall below the lower end of the range. Similarly, substantial success in business development projects may cause the actual 20222023 capital investment to exceed the top of this range.

Additional Consideration

We have federal net operating loss carryforwards for tax purposes of approximately $62$56 million on December 31, 2021.2022. Because the Company may experience “ownership changes” within the meaning of the U.S. Internal Revenue Code (“IRC”) in connection with any future equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the IRC. If not utilized, $57$51 million of this loss carryforward will expire between 20222023 and 2037. Given changes to the IRC, net operating loss carryforwards generated after January 1, 2018 do not expire, therefore, $5 million in net operating losses generated since January 1, 2018 do not expire. We have Illinois net loss deduction carryforwards for tax purposes of approximately $21 million on December 31, 2021.2022. Due to the provisions of Illinois Public Act 102-0669 signed November 16, 2021, Illinois net loss deductions expire between 2029 and 2039.

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.

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”, “believes”, “estimates”, “expects”, “plans”, “intends” and similar expressions. These statements reflect management’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 20222023 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 Solésence products, and 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 products; changes in development and distribution relationships; the impact of competitive products and technologies; our dependence on patents and protection of proprietary information; our ability to maintain an appropriate electronic trading venue for our securities; the impact of any potential new governmental regulations, especially any new governmental regulations focusing on the processing, handling, storage or sale of nanomaterials, that could be difficult to respond to or costly to comply with; business interruptions due to unexpected events or public health crises, including viral pandemics such as COVID-19; and the resolution of litigation or other legal proceedings in which we may become involved. 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.

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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, Chief Financial Officer, and Chief FinancialOperating 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, other than the previously identified material weakness discussed below, our Chief Executive Officer, and Chief Financial Officer (which roles are currently filled by the same person), and Chief Operating Officer have concluded that our disclosure controls and procedures were effective at reaching that level of reasonable assurance. Management identified a material weakness in the way the Company tracked and accounted for its inventory at December 31, 2021, as disclosed in our 10-K, filed on March 31, 2022. Controls were not effectively designed, documented, and maintained to verify that the existence of all inventories subject to physical inventory counts were correctly counted, and our process for compiling and communicating inventory data to ensure accurate reporting in our financial statements was not effective, including inadequate verification for completeness and accuracy of key reports used to review and monitor inventory balances. A consequence of this was that the process of conducting a full physical inventory required an inordinate amount of time to establish an accurate valuation. We are in the process of remediating this control issue, and believe that, while incomplete, we have made progress since March 31, 2022. Notwithstanding such material weakness in internal control over inventory, our management concluded that our consolidated financial statements in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”).

Internal control over financial reporting

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

PART II – OTHER INFORMATION

Item 1.  Legal Proceedings

WeOn August 31, 2022, counsel for Nanophase Technologies Corporation (“Nanophase”) received a letter from lawyers representing BASF Corporation (“BASF”) stating that BASF had filed a complaint against Nanophase in the Superior Court of New Jersey (“SCNJ”) on August 9, 2022 (the “New Jersey Complaint”) and that Nanophase’s registered agent for service of process had been served with the New Jersey Complaint on August 11, 2022. The August 31, 2022 letter from BASF’s lawyers was Nanophase’s first notice of the New Jersey Complaint.

The New Jersey Complaint claims that Nanophase breached the Zinc Oxide Supply Agreement dated as of September 16, 1999 between Nanophase and BASF, as assignee, as amended through January 1, 2019 (the “Agreement”). The New Jersey Complaint specifically alleges that Nanophase breached the exclusivity provision of the Agreement by selling zinc oxide to entities other than BASF, including sales to Nanophase’s subsidiary Solésence, LLC (“Solésence”), in markets designated as being in the field of use (the “Field”) under the Agreement. The New Jersey Complaint also relatedly alleges that Nanophase breached the capacity and inventory provisions of the Agreement. In addition, the New Jersey Complaint alleges claims for unjust enrichment and violation of the duty of good faith and fair dealing. The New Jersey Complaint seeks an unspecified amount of damages, a permanent injunction, counsel fees, and litigation expenses. The New Jersey Complaint is not seeking termination of the Agreement.

Management believes that the allegations of BASF’s New Jersey Complaint are without merit and are unsupported by the terms of the Agreement and governing law. On September 8, 2022, Nanophase filed a Motion to Dismiss (“MTD”) the New Jersey Complaint with the SCNJ, arguing that BASF’s claims in its New Jersey Complaint are not supported by the terms of the Agreement. Following completion of briefing and a partyhearing on the MTD, the SCNJ denied Nanophase’s MTD on February 10, 2023, finding that under the “liberality” standards of New Jersey procedure, the allegations of BASF’s complaint were “sufficient to any pending legal proceedings or claimssurvive” the MTD. The SCNJ specifically noted that it did not consider whether BASF could prove its claims. Thereafter, on February 28, 2023, Nanophase answered BASF’s New Jersey Complaint, denying all wrongdoing and, as mandated by New Jersey procedural requirements, certain counterclaims including a request for a declaration that contrary to BASF’s views, the exclusivity provision of the Agreement does not apply to all products containing zinc oxide as an ingredient for uses designated under the Agreement nor does the exclusivity provision prohibit Nanophase’s sales of Solésence products containing zinc oxide as an ingredient. On September 7, 2022, Nanophase filed a Complaint for Declaratory Judgment against BASF in the Circuit Court of Cook County, Illinois (the “Illinois Complaint”). The Illinois Complaint asked the court for a declaration similar to that subsequently sought in Nansphase’s counterclaim in the New Jersey litigation. On November 3, 2022, BASF moved to dismiss Nanophase’s Illinois Complaint, arguing that it duplicates the New Jersey litigation. Following briefing and a hearing, the Illinois court granted BASF’s motion on procedural grounds on March 16, 2023. Discovery in the New Jersey litigation is ongoing.


Given our view, we believe will resulthave decided that it is not appropriate to record a contingent liability relating to these actions at this time.

Nanophase intends to continue negotiating with BASF in a material adverse effect on our business, financial condition, or operating results. good faith to resolve these issues. In the event that an acceptable solution is not reached, and litigation proceeds, the ultimate resolution cannot now be determined with certainty.

Item 1A. Risk Factors

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.     

Item 5. Other Information

None.  

 

None.  

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Item 6. Exhibits

Exhibit 31.1Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.
Exhibit 31.2Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.
Exhibit 32Certification of the Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350.
Exhibit 101The following materials from Nanophase Technologies Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022,March 31, 2023, formatted in XBRL (Extensible Business Reporting Language): (1) the Balance Sheets, (2) the Statements of Operations, (3) the Statements of Shareholders Equity, (4) the Statements of Cash Flows, and (5) the Notes to Unaudited Consolidated Condensed Financial Statements.

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SIGNATURES

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

NANOPHASE TECHNOLOGIES CORPORATION
Date: August 15, 2022May 12, 2023By:/s/ JESS A. JANKOWSKI
Jess A. Jankowski
President and Chief Executive Officer
(principal executive officer, and principal financial officer)

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