UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 2024
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)
| Delaware | 36-3687863 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
1319 Marquette Drive, Romeoville, Illinois 60446
(Address of principal executive offices, and zip code)
Registrant’s telephone number, including area code: (630) 771-6708
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☐ | Smaller reporting company ☑ |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of May 13, 2024, there were shares outstanding of common stock, par value $.01, of the registrant.
NANOPHASE TECHNOLOGIES CORPORATION
QUARTER ENDED MARCH 31, 2022
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NANOPHASE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited Consolidated Condensed)
| (in thousands except share and per share data) | ||||||||
| ASSETS | March 31, 2024 | December 31, 2023 | ||||||
| Current assets: | ||||||||
| Cash | $ | 2,018 | $ | 1,722 | ||||
| Trade accounts receivable, less allowance for credit losses of $247 for March 31, 2024, and $225 for December 31, 2023 | 5,227 | 3,467 | ||||||
| Other receivables | 55 | — | ||||||
| Inventories, net | 13,281 | 10,031 | ||||||
| Prepaid expenses and other current assets | 1,496 | 1,082 | ||||||
| Total current assets | 22,077 | 16,302 | ||||||
| Equipment and leasehold improvements, net | 8,806 | 8,668 | ||||||
| Operating leases, right of use | 7,619 | 7,907 | ||||||
| Other assets, net | 2 | 4 | ||||||
| Total assets | $ | 38,504 | $ | 32,881 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Line of credit – accounts receivable, related party | 850 | 2,810 | ||||||
| Current portion of long-term debt, related party | — | 2,000 | ||||||
| Current portion of operating lease obligations | 1,171 | 1,297 | ||||||
| Accounts payable | 6,216 | 6,260 | ||||||
| Current portion of deferred revenue | 2,592 | 2,353 | ||||||
| Accrued expenses | 1,348 | 869 | ||||||
| Total current liabilities | 12,177 | 15,589 | ||||||
| Long-term portion of operating lease obligations | 8,936 | 9,152 | ||||||
| Long-term line of credit – inventory, related party | 5,200 | 5,000 | ||||||
| Long-term debt, related party | 1,000 | 1,000 | ||||||
| Asset retirement obligations | 240 | 238 | ||||||
| Total long-term liabilities | 15,376 | 15,390 | ||||||
| Mezzanine equity: | ||||||||
| Series X convertible preferred stock: and shares, designated, issued and outstanding and liquidation preference of $6,000 from preferred stock in Shareholders’ equity on March 31, 2024 and December 31, 2023, respectively | 6,000 | — | ||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, $ par value, shares authorized, and and shares issued and outstanding on March 31, 2024 and December 31, 2023, respectively | — | — | ||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding on March 31, 2024 and December 31, 2023, respectively | 548 | 496 | ||||||
| Additional paid-in capital | 108,173 | 106,069 | ||||||
| Accumulated deficit | (103,770 | ) | (104,663 | ) | ||||
| Total Shareholders’ equity | 4,951 | 1,902 | ||||||
| Total liabilities and shareholders’ equity | $ | 38,504 | $ | 32,881 | ||||
See Notes to Consolidated Condensed Financial Statements.
3
NANOPHASE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited Consolidated Condensed)
(in thousands except share and per share data)
| Three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| (in thousands except share and per share data) | ||||||||
| Net revenue: | ||||||||
| Product revenue | $ | 9,772 | $ | 9,336 | ||||
| Other revenue | 96 | 121 | ||||||
| Total net revenue | 9,868 | 9,457 | ||||||
| Cost of revenue | 6,288 | 7,308 | ||||||
| Gross profit | 3,580 | 2,149 | ||||||
| Operating expense: | ||||||||
| Research and development expense | 910 | 1,003 | ||||||
| Selling, general and administrative expense | 1,559 | 2,150 | ||||||
| Income (loss) from operations | 1,111 | (1,004 | ) | |||||
| Interest expense | 218 | 155 | ||||||
| Income (loss) before provision for income taxes | 893 | (1,159 | ) | |||||
| Provision for income taxes | — | — | ||||||
| Net income (loss) | $ | 893 | $ | (1,159 | ) | |||
| Net income (loss) per share-basic | $ | 0.02 | $ | (0.02 | ) | |||
| Weighted average number of basic common shares outstanding | 52,675,851 | 49,429,407 | ||||||
| Net income (loss) per share-diluted | $ | 0.02 | $ | (0.02 | ) | |||
| Weighted average number of diluted common shares outstanding | 58,035,741 | 49,429,407 | ||||||
See Notes to Consolidated Condensed Financial Statements.
4
NANOPHASE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited Consolidated Condensed)
| Preferred Stock | Common Stock | Additional Paid-in | Accumulated | |||||||||||||||||||||||||
| Description | Shares | Amount | Shares | Amount | Capital | Deficit | Total | |||||||||||||||||||||
| Balance on December 31, 2022 | — | $ | — | 49,320,680 | $ | 493 | $ | 105,226 | $ | (100,070 | ) | $ | 5,649 | |||||||||||||||
| Issuance of shares and stock option exercises | — | — | 199,891 | 2 | 99 | — | 101 | |||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 209 | — | 209 | |||||||||||||||||||||
| Cumulative effect of accounting changes related to expected credit loss | — | — | — | — | — | (203 | ) | (203 | ) | |||||||||||||||||||
| Net loss for the three months ended March 31, 2023 | — | — | — | — | — | (1,159 | ) | (1,159 | ) | |||||||||||||||||||
| Balance on March 31, 2023 | — | $ | — | 49,520,571 | 495 | 105,534 | (101,432 | ) | 4,597 | |||||||||||||||||||
| Balance on December 31, 2023 | — | $ | — | 49,627,254 | $ | 496 | $ | 106,069 | $ | (104,663 | ) | $ | 1,902 | |||||||||||||||
| Issuance of shares and stock option exercises | — | — | 5,233,730 | 52 | 1,944 | — | 1,996 | |||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 160 | — | 160 | |||||||||||||||||||||
| Net income for the three months ended March 31, 2024 | — | — | — | — | — | 893 | 893 | |||||||||||||||||||||
| Balance on March 31, 2024 | — | $ | — | 54,860,984 | 548 | 108,173 | (103,770 | ) | 4,951 | |||||||||||||||||||
See Notes to Consolidated Condensed Financial Statements.
5
NANOPHASE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited Consolidated Condensed)
| Three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| (in thousands) | ||||||||
| Operating activities: | ||||||||
| Net income (loss) | $ | 893 | $ | (1,159 | ) | |||
| Adjustments to reconcile net income to cash used in operating activities: | ||||||||
| Depreciation and amortization | 234 | 174 | ||||||
| Stock-based compensation | 160 | 209 | ||||||
| Changes in assets and liabilities related to operations: | ||||||||
| Trade accounts receivable | (1,760 | ) | 151 | |||||
| Inventories | (3,250 | ) | 721 | |||||
| Prepaid expenses and other assets | (414 | ) | (67 | ) | ||||
| Accounts payable | (330 | ) | (768 | ) | ||||
| Accrued expenses | 481 | 111 | ||||||
| Deferred revenue | 239 | (346 | ) | |||||
| Other receivables | (55 | ) | — | |||||
| Change in ROU asset and lease liability, net | (53 | ) | 192 | |||||
| Net cash used in operating activities | (3,855 | ) | (782 | ) | ||||
| Investing activities: | ||||||||
| Acquisition of equipment and leasehold improvements | (85 | ) | (21 | ) | ||||
| Net cash used in investing activities | (85 | ) | (21 | ) | ||||
| Financing activities: | ||||||||
| Proceeds from line of credit - inventory, related party | 200 | 1,000 | ||||||
| Payments to line of credit – accounts receivable, related party | (1,960 | ) | (1,390 | ) | ||||
| Payments to term loans, related party | (2,000 | ) | — | |||||
| Proceeds from issuance of mezzanine preferred stock | 6,000 | — | ||||||
| Proceeds from issuance of stock and exercise of stock options | 1,996 | 101 | ||||||
| Net cash provided by (used in) financing activities | 4,236 | (289 | ) | |||||
| Increase (decrease) increase in cash and cash equivalents | 296 | (1,092 | ) | |||||
| Cash and cash equivalents at beginning of period | 1,722 | 2,186 | ||||||
| Cash and cash equivalents at end of period | $ | 2,018 | $ | 1,094 | ||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | 160 | $ | 97 | ||||
| Supplemental non-cash investing and financing activities: | ||||||||
| Accounts payable incurred for the purchase of equipment and leasehold improvements | $ | 286 | $ | 437 | ||||
See Notes to Consolidated Condensed Financial Statements.
6
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, 2024 are not necessarily indicative of the results that may be expected for the year ending December 31, 2024.
These financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2023, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 as filed with the Securities and Exchange Commission.
(2) Description of Business
Nanophase Technologies Corporation (“Nanophase,” “Company,” “we,” “our,” or “us”) is a science-driven company which, along with its wholly owned subsidiary, Solésence, LLC (our “Solésence beauty science subsidiary”), is focused in various beauty- and life-science markets. Using consumer health as our end-goal and science and innovation to guide the path, skin health and medical diagnostics combined currently make up the majority of our business and drive our forward growth strategy. We offer engineered materials, formulation development and commercial manufacturing through an integrated family of technologies. Our expertise in materials engineering allows us to effectively coat and disperse particles on a nano and “non-nano” scale for use in a variety of skin health markets, including for use in sunscreens as active ingredients and as fully developed prestige skin care and cosmetics products, marketed and sold through our Solésence beauty science subsidiary. In terms of our life sciences focus, we have seen demand decrease for our medical diagnostics ingredients. Additionally, we continue to sell products in legacy markets, including architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, and surface finishing technologies (polishing) applications, all of which, along with medical diagnostics, fall into the advanced materials product category.
We target markets, primarily related to skin health products and ingredients, as well as diagnostic life sciences ingredients where we believe our materials and products offer practical and competitive minerals-based solutions. We traditionally work closely with current customers in these target markets to identify their material and performance requirements. We market our materials to various end-use applications manufacturers, and our Solésence® products to cosmetics and skin care brands.
Recently developed technologies have made certain new products possible and opened potential new markets. During 2015 we were granted a patent on a new type of particle surface treatment (coating) — now called Active Stress Defense ™ Technology — which became the cornerstone of our new product development in personal care, with first revenue recognized during 2016. Active Stress Defense™ now refers to a suite of three proprietary technologies — Original Active Stress Defense™, Kleair™, and Bloom™ — all three of which either utilize a unique and proprietary, mineral-based technology or work synergistically with one of our unique and proprietary, mineral-based technologies to improve performance and/or aesthetics. Our ongoing innovation efforts include new IP in areas that advance environmental protection, align with market needs, and complement our existing technologies Through the creation of our Solésence beauty science subsidiary, we utilize our technology suite to manufacture and sell fully developed solutions to targeted customers in the skin care industry, typically in prestige skin care and cosmetics markets, in addition to the ingredients we have traditionally sold in the personal care area.
Although our primary strategic focus has been the North American market, we currently sell materials to customers overseas and have been working to expand our reach within foreign markets. Our common stock trades on the OTCQB marketplace under the symbol NANX.
While product sales comprise the majority of our revenue, we also recognize revenue from other sources from time to time. These activities are not expected to drive the long-term growth of the business. For this reason, we classify such revenue as “other revenue” in our Consolidated Statements of Operations, as it does not represent revenue directly from the sale of our products.
Under SEC Release 33-10513; 34-83550, Amendments to Smaller Reporting Company Definition, the Company qualifies as a smaller reporting company and accordingly, it has scaled some of its disclosures of financial and non-financial information in this quarterly report. The Company will continue to determine whether to provide additional scaled disclosures of financial or non-financial information in future quarterly reports, annual reports and/or proxy statements if it remains a smaller reporting company under SEC rules.
7
(3) Revenues and Other Income
Revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration we expect to receive in exchange for those goods. When our ingredients and finished products are shipped, with control being transferred at the shipping point almost universally, is the point in time at which we recognize the related revenue.
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses. Customers’ deposits, deferred revenue and other receipts are deferred and recognized when the revenue is realized and earned. Cash payments to customers are classified as reductions of revenue in our statements of operations.
Contract balances at March 31, 2024, December 31, 2023, and December 31, 2022 are as follows:
| Accounts Receivable, net | Contract Assets | Contract Liabilities | |||||||||||
| Balance, December 31, 2022 | $ | 4,734 | $ | — | $ | 2,188 | |||||||
| Balance, December 31, 2023 | 3,467 | — | 2,353 | ||||||||||
| Balance, March 31, 2024 | 5,227 | — | 2,592 | ||||||||||
Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period was $679 and $1,297 for the three months ended March 31, 2024 and 2023, 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 $96 and $121 for the three months ended March 31, 2024 and 2023, respectively.
Nanophase Technologies also had $55 in Other Receivables which consisted of pending sublease rental payments.
Nanophase Technologies subleases portions of its leased facilities that are used to support operations for the lessees. Total lease payment received for the period of March 31, 2024 and 2023 was $204 and $196, respectively. The arrangement is not with a related party.
Payments received by the Company for these subleases are comprised of two components, which include base rent and Common Area Maintenance (CAM) charges. While the base rent is fixed, the CAM charges are indexed directly to the Master Lease and are expected to be adjusted periodically as actual costs are incurred. However, the executed sublease agreements specifically itemize these costs with a provision that informs the sublessee that the CAM charges will be adjusted (up or down) based on actual amounts once this information becomes known. As such, the nature of the charges is more closely representative of a fixed payment (an “in-substance fixed” charge) with the adjustments occurring simply to “true up” the listed CAM charges once actual charges from the head lessor become known. As sublessor, Nanophase Technologies has elected the practical expedient to not separate lease and nonlease components in disclosing future undiscounted cashflows and treats the combined components as a single lease component.
The one sublease arrangement that is not now month to month automatically renews following expiration of the initial term on May 31, 2025, with a one-year notice required to terminate the lease. As of the issuance of these financial statements the sublessee has not yet provided notice of their intent to renew or terminate said arrangement. The Company believes the sublease will not be renewed.
The future undiscounted lease payments associated with this arrangement are provided below, and only include the period for which enforceable rights and obligations exist as of the date of financial statement issuance. The below is taken from the December 31, 2023 Form 10-K and is still relevant at March 31, 2024.
| For the Year | |||||||||
| Months | 2024 | 2025 | |||||||
| January - May | $ | 124,015 | $ | 128,640 | |||||
| June - December | 173,621 | — | |||||||
| Total | $ | 297,636 | $ | 128,640 | |||||
8
Included in the computation of diluted earnings per share for the three months ended March 31, 2024 was a total of in potential common stock. This total was comprised of: 1) options to purchase approximately shares of common stock outstanding, and 2) preferred stock convertible into a total of shares of common stock outstanding as of March 31, 2024. Options to purchase approximately shares of common stock that were outstanding as of March 31, 2023 were not included in the computation of earnings per share for the three months ended March 31, 2023, as inclusion of these shares would have resulted in an anti-dilutive effect and were thus omitted from disclosure.
| Three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Numerator: (in Thousands) | ||||||||
| Net income (loss) | $ | 893 | $ | (1,159 | ) | |||
| Denominator: | ||||||||
| Weighted average number of basic common shares outstanding | 52,675,851 | 49,429,407 | ||||||
| Weighted average additional shares assuming conversion of in-the-money stock options to common shares | 250,000 | — | ||||||
| Weighted average additional shares assuming conversion of issued convertible preferred stock | 5,109,890 | — | ||||||
| Weighted average number of diluted common shares outstanding | 58,035,741 | 49,429,407 | ||||||
| Basic earnings per common share: | ||||||||
| Net income (loss) per share – basic | $ | 0.02 | $ | (0.02 | ) | |||
| Diluted earnings per common share: | ||||||||
| Net income (loss) per share – diluted | $ | 0.02 | $ | (0.02 | ) | |||
ASC 260-10-45-40 requires that convertible preferred stock be assumed to have been converted at the beginning of the period (or at time of issuance, if later), and the resulting common shares shall be included in the denominator. As such, the potential common shares from the instruments were included in the weighted-average common shares outstanding computation for diluted earnings per share and was applied using the “if converted” method per ASC 260-10-45-40(a).
(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, cash equivalents, accounts receivable, accounts payable and accrued expenses, along with any short-term and long-term borrowings as described in Note 6. The carrying values of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses are reasonable estimates of their fair value due to the short-term nature. The fair value of short-term and long-term debt approximates carrying value based on comparison of terms to similar debt offering in the marketplace.
There were no financial instruments adjusted to fair value on March 31, 2024 and December 31, 2023.
9
(6) Related Party Notes and Lines of Credit
Notes and lines of credit consist of the following:
| As of March 31, 2024 | As of December 31, 2023 | |||||||||||||||||||
| Rate | Available | Outstanding Balance | Available | Outstanding Balance | ||||||||||||||||
| Libertyville Bank & Trust (1) | 9.50 | % | $ | 30 | $ | — | $ | 30 | $ | — | ||||||||||
| Libertyville Bank & Trust (2) | 9.50 | % | 500 | — | 500 | — | ||||||||||||||
| Beachcorp, LLC (3) | 9.25 | % | 5,415 | 850 | 3,298 | 2,810 | ||||||||||||||
| Beachcorp, LLC (4) | 9.25 | % | 5,200 | 5,200 | 5,200 | 5,000 | ||||||||||||||
| Strandler, LLC (5) | 9.25 | % | 1,000 | 1,000 | 1,000 | 1,000 | ||||||||||||||
| Strandler, LLC (6) | 9.25 | % | — | — | 2,000 | 2,000 | ||||||||||||||
| 1) | Since July 2014, we have maintained a bank-issued letter of credit for up to $30 in borrowings, with interest at the prime rate plus 1%, to support our obligations under our Romeoville, Illinois facility lease agreement. No borrowings have been incurred under this promissory note. It is our intention to renew this note annually. Because there were no amounts outstanding on the note at any time during 2023 or 2022, we have recorded no related liability on our balance sheet. |
| 2) | On December 21, 2021, the existing credit agreement with Libertyville was converted for use to support our obligations under our newly leased manufacturing and warehouse space in Bolingbrook, Illinois. Interest on drawn balances will be at the prime rate plus 1%. This credit agreement has a maturity of December 22, 2024. We expect to renew this agreement annually, as the lease requires. This credit agreement is secured by all the unencumbered assets of the Company and has superior collateral rights to those credit facilities with Beachcorp, LLC and Strandler, LLC. |
| 3) | On 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 March 1, 2024 the company entered into a Second Amendment to the Amended and Restated Business Loan Agreement extending the maturity of the A/R Revolver Facility to October 1, 2025. |
| 4) | 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. On November 13, 2023 the Company entered into a Replacement Promissory Note with Beachcorp, LLC replacing the Inventory Facility promissory note executed on January 28, 2022. The maximum borrowing amount under the replacement Inventory Facility was increased to $5,200, with a borrowing base consisting of up to 55% of the value of qualified inventory of the Company. The interest rate for the replacement Inventory Revolver remains at the prime rate plus 0.75%. On March 1, 2024 the company entered into a Second Amendment to the Business Loan Agreement extending the maturity of the Inventory Revolver Facility to October 1, 2025. |
| 5) | 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 Term Loan to Strandler, LLC from Beachcorp, LLC. Interest on the New Term Loan is at the prime rate plus 0.75%. Strandler, LLC is also an affiliate of Bradford T. Whitmore. On March 1, 2024 the company entered into a Second Amendment to the Business Loan Agreement extending the maturity of the Term Maturity Note to October 1, 2025. |
| 6) | On November 13, 2023 the Company entered into a new Promissory Note (“Bridge Note”) with Strandler, LLC. The maximum borrowing amount under the Bridge Note is $2,000. The interest rate for the Bridge Note is at the prime rate plus 0.75%, and it matures on May 13, 2024. The Bridge Note was repaid in February 2024. |
The Company classifies the line of credit – accounts receivable as current because we are required to pay back the borrowings as cash is received from our customers. The company’s remaining debt is presented within the consolidated balance sheet as of March 31, 2024, and December 31, 2023 in accordance with the maturity dates in the financing agreements.
10
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.
Related party interest expense consists of the following:
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Interest expense, related parties | $ | 212 | $ | 150 | ||||
Accrued interest consists of the following:
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Accrued interest expense, related parties | $ | 57 | $ | 59 | ||||
Outstanding balances associated with related parties are as follows:
| Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Beachcorp, LLC | $ | 6,050 | $ | 6,893 | ||||
| Strandler, LLC | 1,000 | 1,000 | ||||||
(7) Inventories
Inventories consist of the following:
| March 31, 2024 | December 31, 2023 | |||||||
| Raw materials | $ | 11,354 | $ | 8,524 | ||||
| Finished goods | 2,690 | 2,184 | ||||||
| Inventory reserve | (763 | ) | (677 | ) | ||||
| Total Invento ries, net | 13,281 | 10,031 | ||||||
(8) Capital Stock
On March 1, 2024, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”), between the Company and Strandler, LLC (“Strandler”).
Pursuant to the Purchase Agreement, the Company issued to Strandler shares of the Company’s Series X Preferred Stock (the “Series X Preferred Stock”) at a purchase price per share of , for total consideration of $6,000,000, in a transaction exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof. The terms of the Preferred Stock are set forth in the Company’s Certificate of Designations to its Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on March 4, 2024 (the “Certificate of Designations”).
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Under the Purchase Agreement, the Company granted Strandler customary registration rights with respect to shares of the Company’s common stock, par value $ per share (the “Common Stock”), it may receive in connection with any conversion of Series X Preferred Stock into Common Stock, as described below. For so long as any amount of Preferred Stock is outstanding, the Purchase Agreement also (i) prevents the Company from paying any dividend on any shares of the Company’s capital stock (other than dividends consisting solely of Common Stock or rights to purchase Common Stock), (ii) prevents the Company from repurchasing any Common Stock, and (iii) subject to certain permitted exceptions, restricts the Company’s ability to permit any lien or other encumbrance on Company assets.
At any time and from time to time, in whole or in part, following the Company properly filing an amendment (the “Certificate Amendment”) to its Certificate of Incorporation to increase the number of authorized shares of its Common Stock from to , each share of Series X Preferred Stock is convertible, at the option of the holder, into shares of Common Stock at no additional cost. If the Company has not properly filed, upon shareholder approval, the Certificate Amendment on or before August 1, 2024, then each share of Series X Preferred Stock will be redeemable at the holder’s option, in whole or in part, without penalty or premium, at a redemption price equal to $ per share (each, a “Redemption”). If the Company fails to fully pay any Redemption within five days of receiving notice, all unpaid amounts will bear interest at a rate of 10% per annum. In addition, in the event of a Change in Control (as defined in the Certificate of Designations) of the Company, each share of the Series X Preferred Stock is redeemable at the option of the holder, without penalty or premium, at a redemption price equal to $ per share. Upon any conversion of Preferred Stock into Common Stock by Strandler, Strandler is required to hold the Common Stock received in the conversion for a period of 12 months.
Holders of Series X Preferred Stock (i) are not entitled to receive dividends, subject to customary anti-dilution protections, (ii) have no voting rights, and (iii)receive a liquidation preference of $ per share. The Series X Preferred Stock ranks senior in right of payment to all securities designated as junior securities, including Common Stock.
ASC 815-15-25-17D provides guidance for assessing host contracts in the form of preferred shares, in which 25-17D(b) states that an investor’s ability to “convert a preferred share into a fixed number of common shares generally is viewed as an equity-like characteristic”. Because conversion of the Series X shares is at the discretion of the Holder, conversion is in a fixed number of shares, dividends are not typically paid and cash settlement would only occur in the unlikely event of change in control, the host contract has the characteristics of, and is classified as, an equity instrument, and the embedded derivatives and host contract are considered clearly and closely related. As such, the embedded derivatives does not require bifurcation and the Series X preferred shares shall be reported as mezzanine equity on the balance sheet.
Issuance costs associated with issuance of the Series X Preferred Stock were immaterial.
(9) Significant Customers and Contingencies
The portion of total revenue from our significant customers are as follows for the periods ending March 31, 2024, and 2023:
| For the three months ended March 31, | |||||||||||
| Customer # | Product Category | 2024 | 2023 | ||||||||
| 1 | Solésence® | 35 | % | 5 | % | ||||||
| 2 | Personal Care Ingredients | 14 | % | 37 | % | ||||||
| 3 | Solésence® | 12 | % | 9 | % | ||||||
| 4 | Solésence® | 4 | % | 11 | % | ||||||
| Total | 65 | % | 62 | % | |||||||
Accounts receivable balances for these four customers were approximately:
| For the three months ended March 31, | |||||||||||
| Customer # | Product Category | 2024 | 2023 | ||||||||
| 1 | Solésence® | $ | 3,018 | $ | 424 | ||||||
| 2 | Personal Care Ingredients | 692 | 1,197 | ||||||||
| 3 | Solésence® | 600 | 485 | ||||||||
| 4 | Solésence® | 10 | 548 | ||||||||
| Total | $ | 4,320 | $ | 2,654 | |||||||
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We currently have exclusive supply agreements with BASF Corporation (“BASF”), that have contingencies outlined which could potentially result in 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. In the event of an equipment sale, upon incurring a triggering event, the equipment would be sold to the customer at either 115% of the equipment’s net book value or the greater of 30% of the original book value of such equipment, and any associated upgrades to it, or 115% of the equipment’s net book value, depending on the equipment and related products.
If a triggering event were to occur and BASF elected to proceed with the equipment sale mentioned above, we would lose significant revenue. 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.
(10) Business Segmentation and Geographical Distribution
Revenue from international sources approximated $288 and $1,435 for the three months ended March 31, 2024 and 2023, respectively.
Our operations comprise a single business segment and all of our long-lived assets are located within the United States. We categorize our revenue stream into three main product categories, Personal Care Ingredients, Advanced Materials and Solésence. The revenues, by category, for the three months ended March 31, 2024 and 2023 are as follows:
Three months ended March 31, | ||||||||
| Product Category | 2023 | 2023 | ||||||
| Solésence | $ | 8,104 | $ | 5,044 | ||||
| Personal Care Ingredients | 1,376 | 3,544 | ||||||
| Advanced Materials | 388 | 869 | ||||||
| Total Sales | $ | 9,868 | $ | 9,457 | ||||
(11) Subsequent Event
On April 10, 2024 the Company and BASF entered into a Settlement Agreement and General Release (the “Settlement Agreement”), providing for settlement of the New Jersey Complaint and resolution of the parties’ disputes. Under the Settlement Agreement, the Company and BASF agreed to enter into the Amendment (defined below) in exchange for (i) a mutual release of all claims related to the New Jersey Complaint and any claims based on similar facts or legal theories (collectively, the “Claims”), (ii) the filing of a Stipulation of Dismissal with the SCNJ voluntarily dismissing the New Jersey Complaint with prejudice, (iii) mutual covenants by the Company and BASF not to sue the other party for the Claims, (iv) the Company and BASF entering into the Modified Product MOU (defined below), (v) mutual indemnification as to certain claims arising out of the making, use, purchase, sale, or development of products in connection with the Modified Product MOU, and (vi) provisions regarding confidentiality of settlement terms and other customary settlement terms. The Stipulation of Dismissal was filed with the SCNJ on April 11, 2024, thereby concluding the New Jersey Complaint.
In connection with the Settlement Agreement, the Company and BASF entered into an Amendment No. 5 (the “Amendment”) to the Agreement, and a Binding Memorandum of Understanding regarding the Company using its commercially reasonable efforts to develop a modified zinc oxide product for BASF’s exclusive purchase under the Agreement (the “Modified Product MOU”). The Amendment includes provisions (a) amending the exclusivity section of the Agreement to provide that (i) BASF has the exclusive right to use zinc oxide materials that the Company develops, makes, or sells to BASF as an ingredient for uses in the Field, and (ii) the Company or its affiliates, including Solésence, can supply and sell both certain finished products containing zinc oxide for use in the Field to customers anywhere in the world and certain zinc oxide dispersions that the Company developed or develops for a particular customer, and (b) amending the provisions of the Agreement concerning order forecasting and procedures, operational planning, inventory and capacity requirements, and periodic facility shutdown arrangements, to more effective serve each party’s business needs with respect to all product that BASF purchases from the Company under the Agreement.
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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 on various beauty- and life-science markets. Our primary skin health products are fully developed prestige skin care formulations with mineral-based UV protection, marketed and sold through our Solésence beauty science subsidiary, enabled by our proprietary Active Pharmaceutical Ingredients (“APIs”) which are also marketed as APIs for sale to manufacturers of other types of skin health products, including sunscreens and daily care products. In terms of the balance of our life sciences focus, we have seen current conditions decreased demand for our medical diagnostics ingredients, which are used in testing for various viruses. Additionally, we continue to sell products in legacy markets including architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, and surface finishing technologies (polishing) applications— all of which, along with medical diagnostics, currently fall into the advanced materials product category.
Leveraging a platform of integrated patented and proprietary technologies, we create products with unique performance to enhance end-consumers’ health and well-being. We offer soup-to-nuts production, from engineered materials, formulation development, and finished product development, to commercial manufacturing and packaging capabilities. Our expertise in materials engineering allows us to effectively coat and disperse materials on a nano and “non-nano” scale for use in a variety of markets in skin health, including for use in sunscreens as APIs and as fully developed prestige skin care products, marketed and sold through our Solésence beauty science subsidiary. We believe that we have developed technological advantages with respect to our APIs sold for use as ingredients, while our Solésence beauty science technologies lead to enhanced efficacy and aesthetics in our finished products, which have received broad acceptance in the marketplace. Due to the enhanced efficacy and aesthetic qualities offered by our proprietary technology platform, Solésence finished products satisfy growing consumer demands around “clean” and inclusive beauty. Solésence beauty science also benefits from the Company’s vertical integration with each product’s key active ingredient that delivers its point-of-difference. This vertical integration helps us to improve efficiency and avoid potential major supply chain challenges while also addressing ongoing sustainability efforts.
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. However, we have seen current conditions decrease demand for our medical diagnostics ingredients, which are used in testing for various viruses. We believe that our deep expertise in materials science has created advantages that enable performance in certain tests that may not be achievable through other materials. Outside of life science, we continue to sell advanced materials for use in legacy applications, all of which, along with medical diagnostics, currently fall into the advanced materials product category.
Given our technological position, in addition to the historical market acceptance of our APIs for use in skin health products and sunscreens, rapidly growing sales for our suite of Solésence® finished products, and the expanded use of our diagnostic materials in aiding the fight to curb the spread of COVID-19 and other viruses, in 2021 we announced that we reoriented our Company strategy. We continue to see unprecedented demand in both beauty science, for our APIs and finished products. 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, primarily through Solésence, now partners with brands to develop, manufacture, and market products and ingredients that enhance lives through healthy skin. We are focusing our combined business-, ingredient-, and product-development capabilities on products with unique performance in this area. While we will continue to produce and sell materials to our other advanced materials customers, it is not our strategic focus. We may develop additional technologies, or find unique applications outside of our core markets in the future, but to maximize the use of our resources today, we plan on expanding efforts in areas where we have proven we can deliver innovation and growth.
Results of Operations
Total revenue increased to $9,868 for the three months ended March 31, 2024, compared to $9,457 for the same period in 2023. A substantial majority of our revenue was from our four largest customers for the four months ended March 31, 2024, and 2023, respectively. This reflects sales of APIs to our largest customer in skin care and sunscreen applications and , our three largest customers for our finished skin health products marketed through our Solésence subsidiary. This is the revenue breakdown, as a percentage of total revenue, from the four customers referenced above:
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| For the three months ended March 31, | ||||||||||
| Customer # | Product Category | 2024 | 2023 | |||||||
| 1 | Solésence® | 35 | % | 5 | % | |||||
| 2 | Personal Care Ingredients | 14 | % | 37 | % | |||||
| 3 | Solésence® | 12 | % | 9 | % | |||||
| 4 | Solésence® | 4 | % | 11 | % | |||||
| Total | 65 | % | 62 | % | ||||||
Product revenue, the primary component of our total revenue, increased to $9,772 for the three months ended March 31, 2024, compared to $9,336 during the same period of 2023. This increase was due to continued growth in the adoption of our Solésence® products, partially offset by a decrease in API sales to our largest customer in our personal care ingredients business and decrease in sales of our medical diagnostics materials.
Other revenue decreased to $96 for the three months ended March 31, 2024, compared to $121 for 2023. Other revenue is typically comprised primarily of developmental or licensing fees.
Cost of revenue generally includes costs associated with commercial production and customer development arrangements. Cost of revenue decreased to $6,288 for the three months ended three months ended March 31, 2024, compared to $7,308 for the same period in 2023. The decrease in cost of revenue was primarily driven by operational efficiencies in the manufacturing of our Solésence® products and partially offset by price inflation on materials. While we typically pass-through costs to our customers, we sometimes cannot pass through 100% of pricing increases on raw materials.
Our business has a certain cyclicality of demand, often based upon seasonal demands, industry launch cycles, or a confluence of both. Capacity 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 through 2024 to accommodate additional growth, and to build a better base for further growth beyond that level. The extent to which margins grow, as a percentage of total revenue, will be dependent upon revenue mix, revenue volume, our ability to cut costs and pass commodity market-driven raw materials increases on to customers, and the speed and efficiency with which we are able to scale up production for our Solésence products. We expect that, as product revenue volume increases, our fixed manufacturing costs will be more efficiently absorbed, which should lead to increased margins as we grow. We expect to continue to focus on reducing controllable variable product manufacturing costs, with potential variability related to the commodity metals markets and cost and wage inflation but may or may not realize gross margin percentage growth through 2024 and beyond, dependent upon the factors discussed above.
Research and development expense, which includes all expenses relating to the technology and advanced engineering groups, primarily consists of costs associated with the development or acquisition of new 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. This includes legal fees related to intellectual property development, protection, and maintenance. 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 decreased to $910 for the three months ended three months March 31, 2024, compared to $1,003 for the same period in 2023. The decrease is due in large part to decreased legal costs related to research and development in 2024 compared to 2023.
Selling, general and administrative expense decreased to $1,559 for the three months ended March 31, 2024, compared to $2,150 for the same period in 2023. The decrease is due in large part to decreased legal costs in 2024 compared to 2023 and increased employee related costs when compared to 2023. Total legal costs decreased approximately $505 in 2024 compared to 2023.
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Inflation
We believe inflation has had an incremental impact on our costs of operations and financial position to date. However, supplier price increases and wage and benefit inflation, both of which represent a significant component of our costs of operations, could have a material effect on our operations and financial position in 2024 if we are unable to pass through any applicable increases under our present contracts or through to our markets in general. We have begun to increase pricing where possible and continue to adjust our pricing to the extent supported by the markets we are in, and under any contract limitations we may have.
Liquidity and Capital Resources
Cash, cash proceeds and use of cash for the three months ended March 31, 2024 and 2023, and year ended December 31, 2023 were:
Three months ended March 31, 2024 | Three months ended March 31, 2023 | Year ended December 31, 2023 | ||||||||||
| Total cash | $ | 2,018 | $ | 1,094 | $ | 1,722 | ||||||
| Cash used in operating activities | (3,855 | ) | (782 | ) | (2,006 | ) | ||||||
| Net cash used in investing activities | (85 | ) | (21 | ) | (1,051 | ) | ||||||
| Net cash provided by (used in) provided by financing activities | 4,236 | (289 | ) | 2,593 | ||||||||
The net cash used during the three months ended March 31, 2024 was primarily due to increased inventory. Net cash used in investing activities was attributable to expenditures on capital equipment for all periods presented above. The Company’s loan agreements with Strandler, LLC and Beachcorp. LLC currently are set to expire on October 1, 2025.
Our actual future capital requirements in 2024 and beyond will depend on many factors, including customer acceptance of our current and potential finished Solésence products, APIs sold as ingredients in to the skin health markets, medical diagnostics ingredients, and other engineered materials, applications, and products, continued progress in research and development activities and product testing programs, the magnitude of these activities and programs, and the costs necessary to increase and expand our manufacturing capabilities and to market and sell these products and ingredients. Other important issues that will drive future capital requirements will be the development of new markets and new customers as well as the potential for significant unplanned growth with existing customers. Depending on the success of certain projects, and conditions within the markets supplying labor and materials for capital equipment, we expect that capital spending relating to currently known capital needs for 2024 will be between $3 million and $6 million, to be funded by profit from operations, our existing loans and lines of credit, and possible new debt financing. If those projects are delayed or ultimately prove unsuccessful, or if we fail to be able to support the additional cost of funding them in the near term, we expect our capital expenditures may fall below the lower end of the range. Similarly, substantial success in business development projects may cause the actual 2024 capital investment to exceed the top of this range.
Additional Consideration
We have federal net operating loss carryforwards for tax purposes of approximately $50 million on December 31, 2023. We have tax effected section 179 carryforwards of approximately $0.2 million at December 31, 2023. Because the Company may experience “ownership changes” within the meaning of the U.S. Internal Revenue Code (“IRC”) in connection with any future equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the IRC. If not utilized, $44 million of this loss carryforward will expire between 2024 and 2037. Given changes to the IRC, net operating loss carryforwards generated after January 1, 2018 do not expire, therefore, $5.6 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 $21.3 million on December 31, 2023. Due to the provisions of Illinois Public Act 102-0669 signed November 16, 2021, Illinois net loss deductions expire between 2029 and 2042.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purposes of raising capital, incurring debt or operating our business. We do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.
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Safe Harbor Provision
We want to provide investors with more meaningful and useful information. As a result, this Quarterly Report on Form 10-Q (the “Form 10-Q”) contains and incorporates by reference certain “forward-looking statements”, as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements reflect our current expectations of the future results of our operations, performance, and achievements. Forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have tried, wherever possible, to identify these statements by using words such as “anticipates”, “believes”, “estimates”, “expects”, “plans”, “intends” and similar expressions. These statements reflect management’s current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause our actual results, performance, or achievements in 2024 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 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 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 Operating Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, our Chief Executive Officer, 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.
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
On August 9, 2022, BASF Corporation (“BASF”) filed a complaint against the Company (the “New Jersey Complaint”) in the Superior Court of New Jersey (“SCNJ”) alleging that the Company breached the Zinc Oxide Supply Agreement dated as of September 16, 1999 between the Company and BASF, as assignee, as amended through January 1, 2019 (the “Agreement”). The New Jersey Complaint specifically alleged that the Company had breached the exclusivity provision of the Agreement by selling zinc oxide to entities other than BASF, including sales to the Company’s subsidiary Solésence, LLC (“Solésence”), in markets designated as being in the field of use (the “Field”) under the Agreement. In late February 2023, the Company answered the New Jersey Complaint, denying all wrongdoing and filed counterclaims, including a request for a declaration that contrary to BASF’s views, the exclusivity provision of the Agreement does not apply to all products containing zinc oxide for uses in the Field nor does the exclusivity provision prohibit the Company’s sales through Solésence of products containing zinc oxide as an ingredient.
Following certain discovery, rulings on several motions, and the parties’ extensive negotiations, the Company and BASF entered into a Settlement Agreement and General Release on April 10, 2024 (the “Settlement Agreement”), providing for settlement of the New Jersey Complaint and resolution of the parties’ disputes. Under the Settlement Agreement, the Company and BASF agreed to enter into the Amendment (defined below) in exchange for (i) a mutual release of all claims related to the New Jersey Complaint and any claims based on similar facts or legal theories (collectively, the “Claims”), (ii) the filing of a Stipulation of Dismissal with the SCNJ voluntarily dismissing the New Jersey Complaint with prejudice, (iii) mutual covenants by the Company and BASF not to sue the other party for the Claims, (iv) the Company and BASF entering into the Modified Product MOU (defined below), (v) mutual indemnification as to certain claims arising out of the making, use, purchase, sale, or development of products in connection with the Modified Product MOU, and (vi) provisions regarding confidentiality of settlement terms and other customary settlement terms. The Stipulation of Dismissal was filed with the SCNJ on April 11, 2024, thereby concluding the New Jersey Complaint.
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In connection with the Settlement Agreement, the Company and BASF entered into an Amendment No. 5 (the “Amendment”) to the Agreement, and a Binding Memorandum of Understanding regarding the Company using its commercially reasonable efforts to develop a modified zinc oxide product for BASF’s exclusive purchase under the Agreement (the “Modified Product MOU”). The Amendment includes provisions (a) amending the exclusivity section of the Agreement to provide that (i) BASF has the exclusive right to use zinc oxide materials that the Company develops, makes, or sells to BASF as an ingredient for uses in the Field, and (ii) the Company or its affiliates, including Solésence, can supply and sell both certain finished products containing zinc oxide for use in the Field to customers anywhere in the world and certain zinc oxide dispersions that the Company developed or develops for a particular customer, and (b) amending the provisions of the Agreement concerning order forecasting and procedures, operational planning, inventory and capacity requirements, and periodic facility shutdown arrangements, to more effective serve each party’s business needs with respect to all product that BASF purchases from the Company under the Agreement.
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 31.1 | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act. | |
| Exhibit 31.2 | Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act. | |
| Exhibit 32 | Certification of the Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350. | |
| Exhibit 101 | The following materials from Nanophase Technologies Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, formatted in XBRL (Extensible Business Reporting Language): (1) the Balance Sheets, (2) the Statements of Operations, (3) the Statements of Shareholders Equity, (4) the Statements of Cash Flows, and (5) the Notes to Unaudited Consolidated Condensed Financial Statements. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| NANOPHASE TECHNOLOGIES CORPORATION | ||||
| Date: | May 13, 2024 | By: | /s/ JESS A. JANKOWSKI | |
| Jess A. Jankowski | ||||
| President and Chief Executive Officer | ||||
| (principal executive officer, and principal financial officer) | ||||
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