UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q/A10-Q

Amendment No. 1

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

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: March 31, 20212022

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, Illinois60446

(Address of principal executive offices, and zip code)

Registrant’s telephone number, including area code: (630) (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 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 May 17, 2021,16, 2022, there were 48,336,87749,026,741 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 MARCH 31, 20212022

INDEX

Page
PART I - FINANCIAL INFORMATION4
Item 1.Unaudited Consolidated Condensed Financial Statements43
Consolidated Balance Sheets (Unaudited Consolidated Condensed) as of March 31, 20212022 and December 31, 2020202143
Consolidated Statements of Operations (Unaudited Consolidated Condensed) for the three months ended March 31, 20212022 and 2020202154
Consolidated Statements of Shareholders'Stockholders’ Equity (Unaudited Consolidated Condensed) for the three months ended March 31, 20212022, and 2020202165
Consolidated Statements of Cash Flows (Unaudited Consolidated Condensed) for the three months ended March 31, 20212022 and 2020202176
Notes to Unaudited Consolidated Condensed Financial Statements87
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations1814
Item 3.Quantitative and Qualitative Disclosures About Market Risk2417
Item 4.Controls and Procedures2417
PART II - OTHER INFORMATION2517
Item 1.Legal Proceedings2517
Item 1A.Risk Factors2517
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds2517
Item 3.Defaults Upon Senior Securities2517
Item 4.Mine Safety Disclosures2517
Item 5.Other Information2517
Item 6.Exhibits2617
SIGNATURES2718


PART I - FINANCIAL INFORMATION

Item 1.  Financial StatementStatements

NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited Consolidated Condensed)

       
  (in thousands except share
and per share data)
 
ASSETS March 31,
2022
  December 31,
2021
 
Current assets:        
Cash $897  $657 
Trade accounts receivable, less allowance for doubtful accounts of $80 for March 31, 2022, and $60 for December 31, 2021  5,274   3,937 
Inventories, net  8,559   6,095 
Prepaid expenses and other current assets  1,005   910 
Total current assets  15,735   11,599 
         
Equipment and leasehold improvements, net  4,997   4,712 
Operating leases, right of use  11,718   12,075 
Other assets, net  7   8 
Total assets $32,457  $28,394 
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current liabilities:        
Line of credit, related party  3,709   1,351 
Current portion of finance lease obligations  70   105 
Current portion of operating lease obligations  890   589 
Accounts payable  4,953   3,566 
Current portion of deferred revenue  848   783 
Accrued expenses  961   946 
Total current liabilities  11,431   7,340 
         
Long-term portion of finance lease obligations  4   6 
Long-term portion of operating lease obligations  11,389   11,700 
Long-term debt, related party  1,000   1,000 
Long-term portion of deferred revenue  661   661 
Asset retirement obligations  224   222 
Total long-term liabilities  13,278   13,589 
         
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 shares authorized; 49,026,741 and 48,893,573 shares issued and outstanding on March 31, 2022 and December 31, 2021, respectively  490   489 
Additional paid-in capital  104,643   104,423 
Accumulated deficit  (97,385)  (97,447)
Total Shareholders’ equity  7,748   7,465 

Total liabilities and shareholders’ equity

 $32,457  $28,394 

See Notes to Consolidated Condensed Financial Statements.


NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited Consolidated Condensed)

(in thousands except share and per share data)

         
  Three months ended March 31, 
  2022  2021 
  (in thousands except share and
per share data)
 
Revenue:      
Product revenue $8,046  $7,050 
Other revenue  110   22 
Total revenue  8,156   7,072 
         
Cost of revenue  5,988   5,042 
Gross profit  2,168   2,030 
         
Operating expense:        
Research and development expense  666   499 
Selling, general and administrative expense  1,397   1,034 
Income from operations  105   497 
Interest expense  43   139 
Other income, net     (952)
Income before provision for income taxes  62   1,310 
Provision for income taxes      
         
Net income $62  $1,310 
         
Net income per share-basic $0.00  $0.03 
         
Weighted average number of basic common shares outstanding  48,984,312   38,221,292 
         
Net income per share-diluted $0.00  $0.03 
         
Weighted average number of diluted common shares outstanding  51,064,312   39,811,292 

 

  March 31,  December 31, 
ASSETS 2021 (as restated)  2020 
Current assets:        
Cash $1,819  $957 
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  5,001   4,340 
Prepaid expenses and other current assets  653   606 
Total current assets  11,301   8,835 
Equipment and leasehold improvements, net  3,004   2,868 
Operating leases, right of use  1,886   1,827 
Other assets, net  10   10 
 Total assets $16,201  $13,540 
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current liabilities:        
Line of credit, bank $500  $500 
Line of credit, related party  3,365   2,155 
Current portion of long-term debt, related party  500   500 
Current portion of finance lease obligations  168   177 
Current portion of operating lease obligations  477   431 
Accounts payable  2,448   2,126 
Deferred revenue  495   411 
Accrued expenses  1,055   484 
Total current liabilities  9,008   6,784 
         
Long-term portion of finance lease obligations  73   110 
Long-term portion of operating lease obligations  1,656   1,651 
Long-term convertible loan, related party  1,164   1,097 
PPP Loan (SBA)     952 
Asset retirement obligations  216   214 
Total long-term liabilities  3,109   4,024 
         
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  102,159   102,117 
Accumulated deficit  (98,457)  (99,767)
Total Shareholders’ equity  4,084   2,732 
  $16,201  $13,540 

See Notes to Consolidated Condensed Financial Statements.


NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONSSHAREHOLDERS’ EQUITY

(Unaudited Consolidated Condensed)

                        
  Preferred Stock  Common Stock  Additional       
              Paid-in  Accumulated    
Description Shares  Amount  Shares  Amount  Capital  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 
                             
Balance on December 31, 2021    $   48,893,573  $489  $104,423  $(97,447) $7,465 
Issuance of shares and stock option exercises        133,168   1   72      73 
Stock-based compensation              148      148 
Net income for the three months ended March 31, 2022                 62   62 
Balance on March 31, 2022    $   49,026,741  $490   104,643  $(97,385) $7,748 

 

(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.

5

 


NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYCASH FLOWS

(Unaudited Consolidated Condensed)

       
  Three months ended March 31, 
  2022  2021 
  (in thousands) 
Operating activities:        
Net income $62  $1,310 
Adjustments to reconcile net income to cash used in operating activities:        
Depreciation and amortization  136   101 
Share-based compensation  148   42 
Gain on PPP loan forgiveness     (952)
Amortization of debt discount     67 
Changes in assets and liabilities related to operations:        
Trade accounts receivable  (1,337)  (896)
Inventories  (2,464)  (661)
Prepaid expenses and other assets  (94)  (47)
Accounts payable  1,347   253 
Accrued expenses  15   571 
Deferred revenue  65   84 
Other long-term assets and liabilities  347   (9)
Net cash used in operating activities  (1,775)  (137)
         
Investing activities:        
Acquisition of equipment and leasehold improvements  (378)  (166)
Net cash used in investing activities  (378)  (166)
         
Financing activities:        
Principal payments on finance leases  (38)  (46)
Proceeds from line of credit, bank     500 
Payments to the line of credit, bank     (500)
Proceeds from line of credit, related party  8,125   6,500 
         
Payments to line of credit, related party  (5,767)  (5,289)
Payments from exercise of stock options  73    
Net cash provided by financing activities  2,393   1,165 
Increase in cash and cash equivalents  240   862 
Cash and cash equivalents at beginning of period  657   957 
Cash and cash equivalents at end of period $897  $1,819 
         
Supplemental cash flow information:        
Interest paid $27  $51 
         
Supplemental non-cash investing and financing activities:        
Accounts payable incurred for the purchase of equipment and leasehold improvements $40  $69 

 

(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.

6

 


NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited Consolidated Condensed)

  Three months ended March 31, 
  2021 (as restated)  2020 
  (in thousands) 
Operating activities:        
Net Income (loss) $1,310  $(167)
Adjustments to reconcile net income (loss) to cash used in operating activities:        
Depreciation and amortization  101   86 
Amortization of debt discount  67   67 
Share-based compensation  42   52 
Gain from PPP loan forgiveness  (952)   
 Changes in assets and liabilities related to operations:        
Trade accounts receivable  (896)  (1,284)
Inventories  (661)  170 
Prepaid expenses and other assets  (47)  8 
Accounts payable  253   (35)
Accrued expenses  571   133 
Deferred revenue  84   (207)
Other long-term assets and liabilities  (9)  (3)
Net cash used in operating activities  (137)  (1,180)
         
Investing activities:        
Acquisition of equipment and leasehold improvements  (166)  (181)
Net cash used in investing activities  (166)  (181)
         
Financing activities:        
Principal payments on finance leases  (46)  (58)
Proceeds from line of credit, bank  500   500 
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  1,165   1,118 
Increase (decrease) in cash and cash equivalents  862   (243)
Cash and cash equivalents at beginning of period  957   1,194 
Cash and cash equivalents at end of period $1,819  $951 

Supplemental cash flow information:

        
Interest paid $51  $57 
         
Supplemental non-cash investing and financing activities:        
Accounts payable incurred for the purchase of equipment and leasehold improvements $69  $77 

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 three months ended March 31, 20212022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.2022.

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, 2020,2021, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20202021 as filed with the Securities and Exchange Commission.


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

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

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

(3) (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.  SkinUsing 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 markets in skin care,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 current conditions significantly increase demand for our medical diagnostics ingredients, as testing for various viruses, most notably COVID-19, has become a critical use of our technology. Additionally, we continue to sell products in legacy markets, forincluding architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, and surface finishing technologies (polishing) applications—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, andas 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 andrequirements. We 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, throughActive 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 this particle surface treatmentour 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.

(4) (3) 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 expectswe expect to be entitled toreceive 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.

7

Contract balances at March 31, 2022 and December 31, 2021 are as follows:

   Accounts Receivable  Contract Assets  Contract    Liabilities 
Balance, December 31, 2021        $3,937  $179  $1,444 
Balance, March 31, 2022   5,274   229   1,509 

 

(5) The contract asset balance at March 31, 2022 consists of $50 of unbilled receivables and $179 of other contract assets reported within prepaid expenses and other current assets. The contract asset balance at December 31, 2021 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 $123 and $142 for the three months ended March 31, 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 $110 and $22 for the three months ended March 31, 2022 and 2021, respectively.

(4) Earnings Per Share

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 ended March 31, 2022.  Options to purchase approximately 1,590,000 shares of common stock that were outstanding as of March 31, 2021 were included in the computation of earnings per share for the three months ended March 31, 2021.  Options to purchase approximately 1,000 shares of common stock that were outstanding as of March 31, 2020 were not included in the computation of earnings per share for three months ended March 31, 2020, as the impact of such shares are 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,  Three months ended March 31, 
 2021
(as restated)
 2020  2022  

2021

 
Numerator: (in Thousands)          
Net income (loss) $1,310  $(167)
Net income $62  $1,310 
                
Denominator:                
Weighted average number of basic common shares outstanding  38,221,292   38,136,792   48,984,312   38,221,292 
Weighted average additional shares assuming conversion of in-the-money stock options to common shares  1,590,000      2,080,000   1,590,000 
Weighted average number of diluted common shares outstanding  39,811,292   38,136,792   51,064,312   39,811,292 
                
Basic earnings per common share:                
Net income (loss) per share – basic $0.03  $(0.00)
Net income per share – basic $0.00  $0.03 
Diluted earnings per common share:                
Net income (loss) per share – diluted $0.03  $(0.00)
Net income per share – diluted $0.00  $0.03 

 

(6) Financial Instruments

 

(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 the promissory note with no relatedany short term and long-term borrowings as described in Note 7, any borrowings on the working capital line of credit from Libertyville Bank and Trust, and any borrowings on the working capital line of credit, along with the term loan from Beachcorp, LLC, and the promissory note payable associated with the convertible loan described in Note 7 below. The fair values of all financial instruments were not materially different from their carrying values.

6. There were no0 financial instruments adjusted to fair value on March 31, 20212022 and December 31, 2020.2021.

(6) Notes and Lines of Credit

Notes and lines of credit consist of the following:

 

    As of March 31, 2022 As of December 31, 2021
  Rate Available Outstanding Balance Available Outstanding Balance
Strandler, LLC (1)  4.00%  1,000   1,000   n/a   n/a 
Beachcorp, LLC (1)  5.25%  n/a   n/a   1,000   1,000 
Beachcorp, LLC (2)  4.00%  4,972   3,709   3,753   3,365 

(7) Notes and Line of Credit

 


DuringRelated party interest summary:

         
  Three Months Ended March 31, 
  2022  2021 
Interest expense, related parties $39  $131 
Accrued interest expense, related parties  16  $36 

1)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)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 $6,000 to $8,000, reduce the interest rate to the prime rate plus 0.75%, and extend the maturity of the A/R Revolver Facility to March 31, 2024.

On January 28, 2022 the Company entered into the A&R Loan Agreement and a new revolving loan agreement (“Inventory Facility”) with Beachcorp, LLC, and a new promissory note in order to evidence the Inventory Facility. The maximum borrowing amount under the Inventory Facility is $4,000, with a borrowing base consisting of up to 50% of the value of qualified inventory of the Company. The interest rate for the Inventory Revolver is at the prime rate plus 0.75%, and it matures on March 31, 2024. The Company is finalizing the documentation for this loan and, as such, has yet to draw any funds from it.

9

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 credit facility with Libertyville Bank & Trust. 

Since July 2014, we entered intohave maintained a bank-issued letter of credit and related promissory note 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. Should anyOn December 21, 2021, Libertyville issued a letter of credit for up to $500 in borrowings occurto support our obligations under our newly leased manufacturing and warehouse space in the future, theBolingbrook, Illinois. For both letters of credit, interest rate wouldon drawn balances will be at 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. We expect to renew this notethese agreements annually, for as long as we need to do so pursuant to the termsrespective leases require. These letters of our facility lease agreement. Because there were no amounts outstanding on the note at any time during 2021 or 2020, we have recorded no related liability on our consolidated balance sheet.

We have a Business Loan Agreement with Libertyville Bank and Trust Company, a Wintrust Community Bank (“Libertyville”). Under the Business Loan Agreement, Libertyville will provide 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 is payable monthly on any advances at a floating interest rate of the prime rate at the time plus 1%. We must have $500 in cash, inclusive of the borrowed amount, at Libertyville on the date of any advance. Advances may only occur at the beginning or end of a fiscal quarter and must be repaid in full within five business days of the advance. Amounts due under the Business Loan Agreement were paid in full on April 4, 2021, as required.  It is management’s expectation that the Business Loan Agreement will be renewed in May 2021.


On November 16, 2018, we entered into a Business Loan Agreement (the “Master Agreement”) with Beachcorp, LLC. Beachcorp, LLC is managed by Bradford T. Whitmore, who, together with his affiliate Grace Investments, Ltd., beneficially owned approximately 63% of the outstanding shares of our common stock as of March 31, 2021. The 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, 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 due March 31, 2020, as amended. On March 23, 2020, the Company and Beachcorp, LLC executed the First Amendment to our Master Agreement that extends the maturities of both the Term Loan and the Revolver Facility to March 31, 2021. Effective September 8, 2020, the Company and Beachcorp, LLC executed the Second Amendment to our Master Agreement that expands the limit on the Revolver Facility from $2,000 to $2,750.  On December 23, 2020, the Company and Beachcorp, LLC executed the Third Amendment to our Master Agreement that expands the limit on the Revolver Facility from $2,750 to $4,000 and extends the maturities of both the Term Loan and the Revolver Facility to March 31, 2022. On April 21, 2021, the Company and Beachcorp, LLC executed the Fourth Amendment to our Master Agreement that expands the limit on the Revolver Facility from $4,000 to $6,000, extends its maturity to March 31, 2023, and reduces interest on outstanding borrowings from the prime rate plus 3%, with an 8.25% minimum floor, to the prime rate plus 2%, with no minimum rate floor. Additionally, the Fourth Amendment increased the amount of the Term Loan from $500 to $1,000, and its fixed interest rate was reduced from 8.25% per year to 5.25% per year. The maturity date of the Term Loan remains March 31, 2022. The Term Loan and Revolver Facility are secured by all the unencumbered assets of the Company, and subordinatedhave superior collateral rights to Libertyville’s secured interest under the Business Loan Agreement. The Master Agreement substantially restricts the Company’s ability to incur additional indebtedness during the terms of both the Term Loan and the Revolver Facility.

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


On April 17, 2020, we entered into a Promissory Note (the “PPP Note”), dated as of April 16, 2020, in favor of Libertyville in the principal amount of $952 for our loan under the Paycheck Protection Program (“PPP”).  The Company 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 March 31, 2021, the balance on the term loan was $500, the balance on the Revolver Facility was $3,365, and the balance on the Convertible Note was $2,000. For the three months ended March 31, 2021, and 2020, there was $131 and $111, respectively, in interest expense relating to thesethose credit facilities held bywith Beachcorp, LLC and Bradford T. Whitmore. The accrued interest expenseStrandler, LLC. Because there were no amounts outstanding on either letter of credit at any time during 2022 or 2021, we have recorded no related liability on our balance on these related party credit facilities amounted to $36, and $20, at March 31, 2021 and December 31, 2020, respectively. The obligations under the Convertible Note are secured by a security interest in all of the Company’s personal property pursuant to a Commercial Security Agreement among Mr. Whitmore, the Company and Solésence, LLC, the Company’s sole subsidiary. Given that Beachcorp, LLC is an affiliate of Mr. Whitmore, this amounts to all of this interest being owed to a related party. On March 31, 2021 borrowings were within the credit agreement limit with an additional $388 available. The balance of borrowing base, loan amount, and any excess payments required over the available borrowing base will change as frequently as daily, given the operational nature of the elements of the Revolver Facility.sheet.

(8) (7) Inventories

Inventories consist of the following:

  March 31, 2021  December 31, 2020 
       
Raw materials $3,883  $2,825 
Finished goods  1,148   1,545 
   5,031   4,370 
Allowance for excess inventory quantities  (30)  (30)
  $5,001  $4,340 

  March 31,
2022
  December 31,
2021
 
       
Raw materials $6,385  $4,819 
Finished goods  2,374   1,682 
Inventories, gross  8,759   6,501 
Allowance for excess inventory quantities  (200)  (406)
Inventories, net $8,559  $6,095 

 

(9) Leases

 

(8) Leases

The Company'sCompany’s operating lease portfolio is comprised of operating leases for office, warehouse space and equipment. Certain of the Company'sCompany’s leases include one or more options to renew or terminate the lease at the Company'sCompany’s discretion. The Company regularly evaluates the renewal and termination options and when they are reasonably certain of exercise, includes the renewal or termination option in our lease term. During the first seven months of the term of our newly leased building, we have subleased a portion of the unused floorspace on a temporary basis. This sublease may convert to a month-to-month lease upon expiration.

As of March 31, 2021,2022, the operating lease right-of-use “ROU”ROU asset had a balance of $1,886$11,718, which is included in the “Operating lease right-of-use assets” line item of these condensed consolidated financial statements and current and non-current lease liabilities related to the ROU asset of $477$890 and $1,656,$11,389, respectively.  As of December 31, 2020,2021, the ROU asset had a balance of $1,827$12,075 which is included in the “Operating lease right-of-use assets” line item of these condensed consolidated financial statements andstatements. The Company has reclassified a portion of the current ROU liability to non-current as of December 31, 2021, to be consistent with the classifications adopted for the quarter ended March 31, 2022. This reclassification resulted in current and non-current lease liabilities related to the ROU asset of $431 $589 and $1,651, respectively.$11,700, respectively, as of December 31, 2021.  These amounts are included in the “Current portion of operating lease obligations” and “Long-term portion of operating lease obligations, net of current portion”obligations” 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. Additionally, the Company subleases space within its Bolingbrook, IL facility for which the term ends June 30, 2022. As of the date of filing the tenant has neither renewed the sublease nor expressed an intent to do so.

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

  Three Months Ended March 31, 2022  Three Months Ended March 31, 2021 
Components of lease cost        
Finance lease cost components:        
Amortization of finance lease assets $11  $14 
Interest on finance lease liabilities  2   6 
Total finance lease costs  13   20 
Operating lease cost components:        
Operating lease cost  363   144 
Variable lease cost  172   31 
Short-term lease cost  21   10 
Sublease income  (183)   
Total operating lease costs  373   185 
Total lease cost $386  $205 

 

  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 periodthree months ended March 31:31, 2022 and 2021:

  2022  2021 
Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash outflow from operating leases $190  $183 
         
Weighted-average remaining lease term-finance leases (in years)  0.6   1.3 
Weighted-average remaining lease term-operating leases (in years)  9.3   3.1 
Weighted-average discount rate-finance leases  7.6%  10.1%
Weighted-average discount rate-operating leases  7.5%  14.2%

The future maturities of the Company’s finance and operating leases as of March 31, 2022 are as follows:

   Finance
Leases
  Operating
Leases
  Total 
2022  $70  $1,267  $1,337 
2023   6   2,099   2,105 
2024   0   2,025   2,025 
2025      1,470   1,470 
2026      1,468   1,468 
Thereafter      8,668   8,668 
Total payments  $76  $16,997  $17,073 
Less amounts representing interest   (2)  (4,719)  (4,721)
Total minimum payments required  $74  $12,278  $12,352 

 

 

  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%


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 March 31, 2020 were as follows:

 Finance Leases  Operating Leases  Total   Finance
Leases
 Operating
Leases
 Total 
2020 $189  $506  $695 
2021  196   687   883   $144  $559  $703 
2022  109   705   814    109   761   870 
2023  5   690   695    5   747   752 
2024     580   580       636   636 
2025 and thereafter         
2025      42   42 
Thereafter      2   2 
Total payments $499  $3,168  $3,667   $258  $2,747  $3,005 
Less amounts representing interest  (51)  (862)  (913)   (17)  (614)  (631)
Total minimum payments required: $448  $2,306  $2,754 
Total minimum payments required  $241  $2,133  $2,374 

 


(10) Share-Based Compensation

 

(9) Share-Based Compensation

We followFASB ASC Topic 718,, Compensation – Stock Compensation, Share-Based Payments, in which compensation expense is recognized only for share-based payments expected to vest. We recognized compensation expense related to stock options of $42 and $52 for each of the three-month periods ended March 31, 2021 and 2020, respectively.

         
  

Three months ended

March 31,

 
  2022  2021 
Share-based compensation expense $148  $42 
Remaining unrecognized compensation expense $1,567     
Remaining weighted average-period, expense recognition (years)  2.7     

 

As of March 31, 2021, there was approximately $206 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted underThe following table summarizes the option activity for our stock option plans. That cost is expected to be recognized over a remaining weighted-average period of 1.7 years.

Stock Optionsemployees and Stock Grants

No stock options were exerciseddirectors during the three months ended March 31, 2021, or March 31, 2020. No stock options were granted during the three months ended March 31, 2021, or March 31, 2020. During the three months ended March 31, 2021, 35,000 stock options expired, and no stock options were forfeited, compared to 241,000 stock options which expired, and 140,000 stock options which were forfeited during the same period in 2020. We had 3,411,000 stock options outstanding at a weighted average exercise price of $0.57 on March 31, 2021, compared to 3,332,000 stock options outstanding at a weighted average exercise price of $0.63 on March 31, 2020.2022:

     Weighted 
     Average 
    Exercise Price 
Options Shares  per Share 
Outstanding on January 1, 2022  3,193,216  $1.18 
         
Granted  80,000  $3.65 
Exercised  (120,516)    
Forfeited or expired  (12,000)    
         
Outstanding on March 31, 2022  3,140,700  $1.26 


 

(11) (10) Significant Customers and Contingencies

Revenue from fiveOur significant customers constituted approximately 24%, 20%, 17%, 15% and 10%, respectively, of our total revenueare as follows for the three months endedperiods ending March 31, 2021. Amounts included in accounts2022, and 2021:

            
     For the three months ended March 31, 
Customer #  Product Category 2022  2021 
1  Personal Care Ingredients  29%  20%
2  Solésence®  18%  17%
3  Solésence®  13%  10%
4  Solésence®  9%  24%
5  Advanced Materials (Medical Diagnostics customer)    15%
   Total  69%  86%


Accounts receivable on March 31, 2021 relating tobalances for these five customers were approximately $837, $812, $476, $855, and $390, respectively. Revenue from these five customers constituted approximately 0%, 46%, 15%, 4% and 15%, respectively, of our total revenue for the three months ended March 31, 2020. Amounts included in accounts receivable on March 31, 2020 relating to these five customers were approximately $0, $896, $31, $180, and $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.approximately:

     For the three months ended March 31, 
Customer #  Product Category 2022  2021 
1  Personal Care Ingredients $1,489  $812 
2  Solésence®  880   476 
3  Solésence®  1,050   875 
4  Solésence®  371   837 
5  Advanced Materials (Medical Diagnostics customer)     855 
   Total $3,790  $3,855 

 

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 our cash, cash equivalents and certain investments are 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 new amendment to the supply agreement. This agreement also requires Nanophase to maintain certain finished goods inventory levels as “safety stock,” beginning in the first quarter of 2019, and increasing through the third quarter of 2019 to a negotiated level based on agreed demand metrics, in order to maintain the $500 non-cash component discussed above. After September 30, 2019, should our safety stock fall below the prescribed amount of material, the quarter-end cash requirement would revert to $1,000 in cash, cash equivalents, and certain investments. The safety stock requirement may be adjusted upon mutual agreement. The Company met its safety stock requirements at March 31, 2021.

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%115% of the equipment’s net book value or the greater of 30%30% of the original book value of such equipment, and any associated upgrades to it.it, or 115% of the equipment’s net book value, depending on the equipment and related products.


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 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 somemany of our key staff and line employees due to economic realities. We believe that our employees are a critical component of our success, and it could be difficult to replace them quickly. Given the occurrence of any such event, we might not be able to hire and retain skilled employees given the stigma relating to such an event and its impact on us. Finally, any shortfall in capital needed to operate the business as management intends, including with respect to avoiding this triggering event as described above, may result in a curtailment of certain activities or anticipated investments.

12

 

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 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. 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 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) (11) Business Segmentation and Geographical Distribution

Revenue from international sources approximated $1,285$55   and $304 $1,285 for the three months ended March 31, 2022 and 2021, and 2020, respectively. All 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 streamsstream into three main product categories, Personal Care Ingredients, Advanced Materials and Solésence®. sence. The revenues, by category, for the three months ended March 31, 20212022 and 2020, respectively, by category,2021 are as follows:

  

Three months ended

March 31,

 
Product Category 2022  2021 
Solésence $5,560  $4,299 
Personal Care Ingredients  2,382   1,395 
Advanced Materials  214   1,378 
Total Sales $8,156  $7,072 

 

Product Category 2021  2020 
Personal Care Ingredients $1,395  $1,932 
Advanced Materials  1,378   584 
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 health-oriented, 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. Our primary skin health focused company whose primary 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 increase 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 forincluding 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’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 Active Pharmaceutical Ingredients (“APIs”)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.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.  

 

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

We have seen currentrecent 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 cannotsaw reduced demand for these materials in 2021, it is difficult to predict whether the increased demand for our medical diagnostic materials used in 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 wethrough the unprecedented period of testing utilization and awareness of the way viruses impact all of us. 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 growingthe expanded use of our diagnostic materials in aiding the fight to curb the spread of COVID-19 and other viruses, in 2021 we haveannounced that we reoriented our Company strategy. We are seeingcontinue to see unprecedented demand in both beauty science 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, and Solésence, is now focusing our combined business-, ingredient-, and product-development capabilities on products with unique performance that enhance consumers’ wellbeing through beauty science and life science applications — in skin health and medical diagnostics, respectively. While we will continue to produce and sell materials to our other advanced materials customers, it is not our strategic focus. We may develop additional technologies, or find unique applications outside of our core markets in the future, but to maximize the use of our resources today, we plan on expanding efforts in areas where we have proven we can deliver innovation and growth.

Results of Operations

Total revenue increased to $7,072,000$8,156 for the three months ended March 31, 2021,2022, compared to $4,039,000$7,072 for the same period in 2020.

2021. A substantial majority of our revenue for both periods was from our four- and five largest customers in particular,for the three months ended March 31, 2022, and 2021, respectively. This reflects sales of APIs to our largest customer in skin care and sunscreen applications, medical diagnostics, and nowour three largest customers for our finished skin health products marketed through our Solésence subsidiary. subsidiary, and, during the three months ended March 31, 2021, a medical diagnostics customer. This is the revenue breakdown, as a percentage of total revenue, from the five customers referenced:

     For the three months ended March 31 
Customer #  Product Category 2022  2021 
1  Personal Care Ingredients  29%  20%
2  Solésence®  18%  17%
3  Solésence®  13%  10%
4  Solésence®  9%  24%
5  Medical Diagnostics  0%  15%
            
   Total  69%  86%

Product revenue, the primary component of our total revenue, increased to $7,050,000$8,046 for the three months ended March 31, 2021,2022, compared to $3,961,000$7,050 during the same period of 2020.2021. This increase was due to continued growth in the adoption of our Solésence® products, and our medical diagnostics materials, offset by a decreasealong with an increase in revenue fromAPI sales to our largest customer in our personal care ingredients business. We saw a significant three-month decrease in our medical diagnostics materials.  

14

 

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 decreasedincreased to $22,000$110 for the three months ended March 31, 2021,2022, compared to $78,000$22 for the three months ended March 31, 2020.2021. Other revenue is typically comprised primarily of developmental or licensing fees. For the three months ended March 31, 2020, other revenue included $65,000 to development fees recognized for the Company’s work on behalf of a customer relating to new personal care ingredients.


Cost of revenue generally includes costs associated with commercial production and customer development arrangements.  Cost of revenue increased to $5,042,000$5,988 for the three months ended three months ended March 31, 2021,2022, compared to $3,005,000$5,042 for the same period in 2020.2021.  The increase in cost of revenue was primarily driven by increased volume and price inflation on materials and manufacturing inefficiencies related to Solésence® product launches. Additionally, during the second half of 2021, we added personnel in the supply chain function and incurred costs to rent temporary warehouse space.  While we typically pass throughpass-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 and for our formulated Solésence® products during 2021 and beyond.

At current revenue levels we have generatedOur business has a positive gross margin, though margins can be impeded by thecertain 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 ourbased upon seasonal demands, industry launch cycles, or a confluence of both. Our lack of burst capacity creatinghas 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 comesproducts. Since late 2020, the Company has found itself in a situation where our ability to play. We believe thatproduce 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 is sufficientin early 2022 to support higher levels of revenue volume onaccommodate additional growth, and to build a level basis, and are currently working to expand burst capacity to allow us to utilize our resources more efficiently.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 continue 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. WeWhile 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 absolute dollarsignificant percentage growth in our gross margin growthmargins through 2021 and beyond, dependent2022, 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 as planned, to $499,000$666 for the three months ended three months March 31, 2022, compared to $499 for the same period in 2021. 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 2022 to support continued revenue- and customer-expansion.

Selling, general and administrative expense increased to $1,397 for the three months ended March 31, 2021,2022, compared to $372,000$1,034 for the same period in 2020. 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 related2021.  We have added to our Solésence® products.Sales, Marketing, and Business Development team during 2021, and during the first quarter 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 quarterly research and development expensethis trend to remain at, or slightly above, current levels, for the balance of 2021.moderate to an extent in 2022.

Selling, general and administrative expense increased, as planned, to $1,034,000 for the three months ended March 31, 2021, compared to $705,000 for the same period in 2020. Much of this was attributed to increases in staffing and compensation. We expect selling, general, and administrative expense to remain at current levels for the balance of 2021.Inflation


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

The Company recognized $952,000 in other income relating to the forgiveness of its Paycheck Protection Program (“PPP”) Loan by the SBA in the three months ended March 31, 2021. The Company applied for PPP Loan forgiveness in February 2021, due to management’s belief that the Company expended the proceeds of the PPP loan for forgivable purposes under the CARES Act. The loan was legally forgiven in February 2021, although the Company did not directly receive notice of PPP Loan forgiveness until June 2021.

Inflation

We believe inflation has not had a material effect on our operations or financial position.position to date. However, supplier price increases and wage and benefit inflation, both of which represent a significant component of our costs of operations, maywill likely have a material effect on our operations and financial position in 20212022 and beyond 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 adjusting our pricing to the extent supported by the markets we are in and under the contracts we may have.

Liquidity and Capital Resources

OurCash, cash proceeds and use of cash equivalents amounted to $1,819,000 on March 31, 2021, compared to $957,000 on December 31, 2020 and $951,000 on March 31, 2020. The net cash used in our operating activities was $137,000 for the three months ended March 2022, 2021, and year ended December 31, 2021 compared to $1,180,000 for the same period in 2020. were:

  

Three months ended

March 31, 2022

  

Three months ended

March 31, 2021

  

Year ended

December 31, 2021

 
Total cash $897  $1,819  $657 
Cash provided by (used in) operating activities  (1,775)  (137)  2,321 
Net cash used in investing activities  (378)  (166)  (1,874)
Net cash provided by (used in) financing activities  (2,393)  1,165   (747)

The net usecash used during the three months ended March 31, 2022 was primarily a due to the expansion of inventories. Management continues to follow a strategy 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 during both periods was driven primarily byposition will benefit when a significant increase in accounts receivable at the end of the period.more “normal” supply chain situation returns. Net cash used in investing activities was $166,000 during the three months ended March 31, 2021, comparedattributable to $181,000expenditures on capital equipment for the three months ended 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 $1,165,000 during the three months ended March 31, 2021, compared to $1,118,000 for the three months ended March 31, 2020. all periods presented above.  

15

On March 23, 2020,January 28, 2022, the Company and Beachcorp, LLC, executed the First Amendmentand Strandler, LLC entered in to ouran Amended and Restated Master Agreement that extends(“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 amended agreements governed by this Agreement, the maturities of bothCompany now has a $1,000 term loan with Strandler, LLC, which was fully drawn in January 2022, with the Term Loan andproceeds used to retire the Revolver Facility topreviously existing $1,000 term loan with Beachcorp. The new term loan expires on March 31, 2021. Effective September 8, 2020,2024, and has 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 Beachcorp, LLC executedan expiration of March 31, 2024. The Company drew funds from the Second Amendment to our MasterA/R Facility in January of 2022. Further under this Agreement, that expands the limitCompany entered into an additional revolving loan agreement based 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 limitCompany’s inventory balances (the “Inventory Facility”). No funds were drawn on the Revolver Facility from $2,750,000 to $4,000,000 and extends the maturities of both the Term Loan and the Revolver Facilitythis facility prior to March 31, 2022. On April 21, 2021, theThe Company and Beachcorp, LLC executed the Fourth Amendmentwill have access of up to our Master Agreement that expands the limit on the Revolver Facility from $4,000,000 to $6,000,000, extends its maturity to$4,000 of additional funding, borrowed at a floating rate of Prime plus 0.75%, with a 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 $46,000 for principal on finance lease obligations during the three months ended March 31, 2021 compared to $58,000 in the same period in 2020. The balance of the line of credit with Libertyville was $500,000 for both March 31, 2021 and December 31, 2020. In each instance, the line of credit was repaid during the month following the end of the reporting period. This line of credit expired on April 4, 2021. Management expects this line of credit to be renewed in May 2021. During the three months ending March 31, 2021, we drew $6,500,000, of which $5,289,000 was repaid under the Master Agreement. The net borrowings for the three months ended March 31, 2021 was $1,211,000. During the three months ending March 31, 2020, we drew $3,260,000, of which $2,084,000 was repaid under the Master Agreement. The net borrowings for the three months ended March 31, 2020 was $1,176,000. Accretion related to the Secured Convertible Promissory Note to Bradford T. Whitmore was $67,000 for both March 31, 2021 and 2020. The balance of this long-term convertible loan was $1,164,000 and $1,097,000 at March 31, 2021, and at December 31, 2020, respectively. Mr. Whitmore chose to exercise his conversion rights effective May 7, 2021, requesting that any accrued interest be paid him in the form of shares, as allowed in the Convertible Note. This will result in the accelerated recognition of the discount on the Convertible Note, to be recognized as interest expense in the second quarter of 2021.


On April 17, 2020, we received a loan of $952,000 from Libertyville under the Paycheck Protection Program (“PPP”).  Under the PPP, the Company applied 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. The Company applied for PPP Loan forgiveness in February 2021, compelled by its belief that it expended the proceeds of the PPP loan for forgivable purposes under the CARES Act. The loan was legally forgiven in February 2021, although the Company received notice of PPP Loan forgiveness in 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 $1,000,000 in certain current assets; which may be composed of no less than $500,000 cash, cash equivalents, and certain investments, no more than a combined $500,000 of certain related inventory, of which no more than $250,000 can be raw material, and certain receivables, and that we not have the acceleration of any debt maturity having a principal amount of more than $10 million, in order to avoid triggering the customer’s potential right to transfer certain technology and equipment to that customer at a contractually-defined price.  We had approximately $1,819,000 in cash on March 31, 2021, with $500,000 borrowings on our Line of Credit. This supply agreement and its covenants2024 expiration. These loans are more fully described in Note 11, and our line of credit is more fully described in Note 7,6 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, which has recently been increased (see Note 7 to the Financial Statements), may not be adequate to fund our operating plans through 2021.  We are working to reduce these risks, but some of this is dependent on several things over which we have limited control. We have seen an increase in sales of our Solésence products through 2020, which we expect to continue in 2021. If that does continue, we will require additional investment in working capital.  Given these issues, and other commercial realities, we are monitoring the additional working capital demands that this could create as we continue to execute on our Solésence growth strategy. The timing of cash flows is critical. If cash generated from operations is not materially consistent with our plans, we believe that we may need to seek additional funding to address working capital demands. This uncertainty has caused us to be unable to assert that, for the next twelve months, we have enough current cash and guaranteed access to financing to fund operations, and to continue with our current growth strategy in terms of investment in capital equipment and in operating expenses related to Solésence, without securing additional financing. We believe that we will be able to secure additional financing if needed, but we do not have any additional financing commitments in place as of today. However, we may not be able to secure additional financing in a timely manner under commercially reasonable terms, or at all. If we are unable to secure additional financing, the operations of the Company might need to be curtailed to a certain degree, and we would need to delay capital expenditures related to our Solésence growth strategy, which could impede growth later in 2021 and 2022.


Our actual future capital requirements in 20212022 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 during the balance of 2021for 2022 will be between $1,400,000$3.5 million and $2,000,000,$7 million, to be funded by profit from operations, and our existing loans and lines of credit.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 20212022 capital investment to exceed the top of this range.

In the likely event that we 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 shareholders. Such financing could be necessitated by such things as the loss of an existing 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 considering 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; or various other circumstances coming to pass that we currently do not anticipate. The failure toWe 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, this raises doubt as to our ability to continue as a going concern under U.S. GAAP.

On December 31, 2020, we had afederal net operating loss carryforwardcarryforwards for tax purposes of approximately $67$62 million for income tax purposes.on December 31, 2021. Because the Company may have experiencedexperience “ownership changes” within the meaning of the U.S. Internal Revenue Code (“IRC”) in connection with its various priorany future equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the IRC. If not utilized, $63$57 million of this loss carryforward will expire between 20212022 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. Due to the provisions of Illinois Public Act 102-0669 signed November 16, 2021, Illinois net loss deductions expire between 2029 and 2039.

Off−BalanceOff-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 $30,000 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"“Form 10-Q”) contains and incorporates by reference certain "forward-looking statements"“forward-looking statements”, as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements reflect our current expectations of the future results of our operations, performance, and achievements. Forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have tried, wherever possible, to identify these statements by using words such as “anticipates”, “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 20212022 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, and the re-evaluation as of the date hereof, 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, with the exceptionas a result of the recognitionmaterial weakness, as of the PPP loan forgivenessend of the period covered by the SBA. Viewing this asQuarterly Report on Form 10-Q, our Disclosure Controls were not effective. Management identified a material weakness in the way the Company tracked and accounted for its disclosure controls,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 still in the process of remediating this control issue. Notwithstanding such material weakness in internal control over inventory, our management will now pursue affirmative confirmationconcluded 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 any future such transactions prior to filing.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

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

Item 1A. Risk Factors

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.  


Item 6.Exhibits

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

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 March 31, 2021,2022, 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.

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

NANOPHASE TECHNOLOGIES CORPORATION
Date: AugustMay 16, 20212022By:By:/s/ JESS A. JANKOWSKI
Jess A. Jankowski
President and Chief Executive Officer (principal
(principal executive officer, and principal financial officer)

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