SEC Info - Nanophase Technologies Corp.

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		Alternative Formats (Word, et al.) Consolidated Balance Sheets (Unaudited Consolidated Condensed) as of September 30, 2022, and December 31, 2021 Consolidated Statements of Cash Flows (Unaudited Consolidated Condensed) for the nine months ended September 30, 2022, and 2021 Consolidated Statements of Operations (Unaudited Consolidated Condensed) for the three and nine months ended September 30, 2022, and 2021 Consolidated Statements of Stockholders' Equity (Unaudited Consolidated Condensed) for the three and nine months ended September 30, 2022, and 2021 Controls and Procedures Defaults Upon Senior Securities Exhibits Financial Information Financial Statements Item 1 Item 1A Item 2 Item 3 Item 4 Item 5 Item 6 Legal Proceedings Management's Discussion and Analysis of Financial Condition and Results of Operations Mine Safety Disclosures Notes to Unaudited Consolidated Condensed Financial Statements Other Information Part I -- Financial Information Part Ii -- Other Information Quantitative and Qualitative Disclosures About Market Risk Risk Factors Signatures Unregistered Sales of Equity Securities and Use of Proceeds
1	1st Page – Filing Submission
"	Part I -- Financial Information
"	Item 1
"	Financial Statements
"	Consolidated Balance Sheets (Unaudited Consolidated Condensed) as of September 30, 2022, and December 31, 2021
"	Consolidated Statements of Operations (Unaudited Consolidated Condensed) for the three and nine months ended September 30, 2022, and 2021
"	Consolidated Statements of Stockholders' Equity (Unaudited Consolidated Condensed) for the three and nine months ended September 30, 2022, and 2021
"	Consolidated Statements of Cash Flows (Unaudited Consolidated Condensed) for the nine months ended September 30, 2022, and 2021
"	Notes to Unaudited Consolidated Condensed Financial Statements
"	Item 2
"	Management's Discussion and Analysis of Financial Condition and Results of Operations
"	Item 3
"	Quantitative and Qualitative Disclosures About Market Risk
"	Item 4
"	Controls and Procedures
"	Part Ii -- Other Information
"	Legal Proceedings
"	Item 1A
"	Risk Factors
"	Unregistered Sales of Equity Securities and Use of Proceeds
"	Defaults Upon Senior Securities
"	Mine Safety Disclosures
"	Item 5
"	Item 6
"	Exhibits
"	Signatures

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form i 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: i September 30, 2022

i ☐ 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: i 000-22333

i Nanophase Technologies Corporation

(Exact name of registrant as specified in its charter)

i Delaware	i 36-3687863
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

i 1319 Marquette Drive, i Romeoville, i Illinois i 60446

(Address of principal executive offices, and zip code)

Registrant’s telephone number, including area code: ( i 630) i 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. i 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). i 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 ☐

i Non-accelerated filer ☐	Smaller reporting company i ☑

	Emerging growth company i ☐

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 ☐ i No ☑

As of November 14, 2022, there were i 49,232,163 shares outstanding of common stock, par value $.01, of the registrant.

NANOPHASE TECHNOLOGIES CORPORATION

QUARTER ENDED SEPTEMBER 30, 2022

INDEX

			Page
PART I - FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
		Consolidated Balance Sheets (Unaudited Consolidated Condensed) as of September 30, 2022, and December 31, 2021	3
		Consolidated Statements of Operations (Unaudited Consolidated Condensed) for the three and nine months ended September 30, 2022, and 2021	4
		Consolidated Statements of Stockholders’ Equity (Unaudited Consolidated Condensed) for the three and nine months ended September 30, 2022, and 2021	5
		Consolidated Statements of Cash Flows (Unaudited Consolidated Condensed) for the nine months ended September 30, 2022, and 2021	6
		Notes to Unaudited Consolidated Condensed Financial Statements	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15
	Item 4.	Controls and Procedures	15

PART II - OTHER INFORMATION			15
	Item 1.	Legal Proceedings	15
	Item 1A.	Risk Factors	15
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
	Item 3.	Defaults Upon Senior Securities	15
	Item 4.	Mine Safety Disclosures	15
	Item 5.	Other Information	15
	Item 6.	Exhibits	16

SIGNATURES			17

C: 2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited Consolidated Condensed)


	(in thousands except share and per share data)
ASSETS	September 30, 2022			December 31, 2021
Current assets:
Cash	$	i 510		$	i 657
Trade accounts receivable, less allowance for doubtful accounts of $ i 301 for September 30, 2022, and $ i 60 for December 31, 2021		i 5,368			i 3,937
Inventories, net		i 9,596			i 6,095
Prepaid expenses and other current assets		i 979			i 910
Total current assets		i 16,453			i 11,599

Equipment and leasehold improvements, net		i 6,535			i 4,712
Operating leases, right of use		i 11,056			i 12,075
Other assets, net		i 6			i 8
Total assets	$	i 34,050		$	i 28,394
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Line of credit, related party	$	i 5,358		$	i 1,351
Current portion of finance lease obligations		i 11			i 105
Current portion of operating lease obligations		i 1,182			i 589
Accounts payable		i 5,396			i 3,566
Current portion of deferred revenue		i 800			i 783
Accrued expenses		i 1,347			i 946
Total current liabilities		i 14,094			i 7,340

Long-term portion of finance lease obligations		—			i 6
Long-term portion of operating lease obligations		i 10,740			i 11,700
Long-term debt, related party		i 1,000			i 1,000
Long-term portion of deferred revenue		i 569			i 661
Asset retirement obligations		i 228			i 222
Total long-term liabilities		i 12,537			i 13,589

Contingent liabilities		—			—

Shareholders’ equity:
Preferred stock, $ i i .01 / par value, i i 24,088 / shares authorized, and i i i i no / / / shares issued and outstanding		—			—
Common stock, $ i i .01 / par value, i 60,000,000 and i 55,000,000 shares authorized; i i 49,216,180 / and i i 48,893,573 / shares issued and outstanding on September 30, 2022 and December 31, 2021, respectively		i 492			i 489
Additional paid-in capital		i 105,012			i 104,423
Accumulated deficit		( i 98,085	)		( i 97,447	)
Total Shareholders’ equity		i 7,419			i 7,465
Total liabilities and shareholders’ equity	$	i 34,050		$	i 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
September 30,

Nine months ended
September 30,

2022

2021

2022

2021

Revenue:

Product revenue

i 9,673

i 7,896

i 28,515

i 21,971

Other revenue

i 5

i 28

i 541

i 139

Total revenue

i 9,678

i 7,924

i 29,056

i 22,110

Operating expense:

Cost of revenue

i 7,185

i 4,946

i 21,659

i 14,588

Gross profit

i 2,493

i 2,978

i 7,397

i 7,522

Research and development expense

i 848

i 635

i 2,310

i 1,670

Selling, general and administrative expense

i 2,279

i 942

i 5,493

i 2,994

(Loss) income from operations

( i 634

)

i 1,401

( i 406

)

i 2,858

Interest expense

i 116

i 38

i 232

i 1,096

Other income, net

—

( i 952

)

(Loss) income before provision for income taxes

( i 750

)

i 1,363

( i 638

)

i 2,714

Provision for income taxes

—

Net (loss) income

( i 750

)

i 1,363

( i 638

)

i 2,714

Net (loss) income per basic share

( i 0.02)

i 0.03

( i 0.01)

i 0.06

Weighted average number of basic common shares outstanding

i 49,174,673

i 48,566,431

i 49,068,709

i 43,756,300

Net (loss) income per diluted share

( i 0.02)

i 0.03

( i 0.01)

i 0.06

Weighted average number of diluted common shares outstanding

i 49,174,673

i 50,728,431

i 49,068,709

i 45,726,300

See Notes to Consolidated Condensed Financial Statements

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, 2020

—

i 38,221,292

i 382

i 102,117

( i 99,767

)

i 2,732

Stock-based compensation

—

i 42

—

i 42

Net income for the three months ended March 31, 2021

—

i 1,310

Balance on March 31, 2021

—

i 38,221,292

i 382

i 102,159

( i 98,457

)

i 4,084

Stock option exercises

—

i 143,500

i 2

i 76

—

i 78

Exercise of conversion rights – convertible loan, related party

—

i 10,095,555

i 101

i 1,918

—

i 2,019

Stock-based compensation

—

i 53

—

i 53

Net income for the three months ended June 30, 2021

—

i 41

Balance on June 30, 2021

—

i 48,460,347

i 485

i 104,206

( i 98,416

)

i 6,275

Issuance of shares and stock option exercises

—

i 265,126

i 2

i 72

—

i 74

Stock-based compensation

—

i 29

—

i 29

Net income for the three months ended September 30, 2021

—

i 1,363

Balance on September 30, 2021

—

i 48,725,473

i 487

i 104,307

( i 97,053)

i 7,741

Balance on December 31, 2021

—

i 48,893,573

i 489

i 104,423

( i 97,447

)

i 7,465

Issuance of shares and stock option exercises

—

i 133,168

i 1

i 72

—

i 73

Stock-based compensation

—

i 148

—

i 148

Net income for the three months ended March 31, 2022

—

i 62

Balance on March 31, 2022

—

i 49,026,741

i 490

i 104,643

( i 97,385

)

i 7,748

Issuance of shares and stock option exercises

—

i 110,289

i 1

i 33

—

i 34

Stock-based compensation

—

i 155

—

i 155

Net income for the three months ended June 30, 2022

—

i 50

Balance on June 30, 2022

—

i 49,137,030

i 491

i 104,831

( i 97,335

)

i i 7,987 /

Issuance of shares and stock option exercises

—

i 79,150

i 1

i 31

—

i 32

Stock-based compensation

—

i 150

—

i 150

Net loss for the three months ended September 30, 2022

—

( i 750

)

( i 750

)

Balance on September 30, 2022

—

i 49,216,180

i 492

i 105,012

( i 98,085)

i i 7,419 /

See Notes to Consolidated Condensed Financial Statements.

NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited Consolidated Condensed)


	Nine months ended September 30,
	2022			2021
	(in thousands)
Operating activities:
Net (loss) income	$	( i 638	)	$	i 2,714
Adjustments to reconcile net (loss) income to cash (used in) provided by operating activities:
Depreciation and amortization		i 413			i 328
Share-based compensation		i 453			i 124
Gain on PPP loan forgiveness		—			( i 952	)
Amortization of operating lease, right of use asset		i 946			i 306
Amortization of debt discount		—			i 903
Changes in assets and liabilities related to operations:
Trade accounts receivable		( i 1,431	)		( i 1,791	)
Inventories		( i 3,501	)		( i 1,988	)
Prepaid expenses and other assets		( i 69	)		( i 91	)
Accounts payable		i 1,398			i 282
Accrued expenses		i 401			i 791
Deferred revenue		( i 75)			( i 23	)
Operating lease obligations		( i 294	)		( i 334	)
Net cash (used in) provided by operating activities		( i 2,397	)		i 269

Investing activities:
Acquisition of equipment and leasehold improvements		( i 1,798	)		( i 1,445	)
Net cash used in investing activities		( i 1,798	)		( i 1,445	)

Financing activities:
Principal payments on finance leases		( i 100	)		( i 139	)
Proceeds from line of credit, bank		—			i 500
Payments to the line of credit, bank		—			( i 1,000	)
Proceeds from line of credit, related party		i 25,075			i 19,525
Payments to line of credit, related party		( i 21,068)			( i 17,939	)
Proceeds from term loan, related party		—			i 500

Proceeds from exercise of stock options		i 141			i 152
Net cash provided by financing activities		i 4,048			i 1,599
(Decrease) Increase in cash and cash equivalents		( i 147	)		i 423
Cash and cash equivalents at beginning of period		i 657			i 957
Cash and cash equivalents at end of period	$	i 510		$	i 1,380

Supplemental cash flow information:
Interest paid	$	i 232		$	i 178

Supplemental non-cash investing and financing activities:
Accounts payable incurred for the purchase of equipment and leasehold improvements	$	i 432		$	i 28
Conversion of $2M convertible loan, related party	$	—		$	i 2,000
Interest paid via stock issuance, convertible loan, related party	$	—		$	i 19
Early termination of operating lease	$	i 73			—

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 nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

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

Certain balances on the September 30, 2021 statement of cash flows have been reclassified to conform to September 30, 2022 presentation. The disaggregation on the statement of cash flows had no impact on net income or balance sheet.

(2) Description of Business

Nanophase Technologies Corporation (“Nanophase,” “Company,” “we,” “our,” or “us”) is a science-driven company which, along with its wholly owned subsidiary, Solésence, LLC (our “Solésence beauty science subsidiary”), is focused in various beauty- and life-science markets.  Using consumer health as our end-goal and science and innovation to guide the path, skin health and medical diagnostics combined currently make up the great majority of our business and drive our forward growth strategy.  We offer engineered materials, formulation development and commercial manufacturing through an integrated family of technologies. Our expertise in materials engineering allows us to effectively coat and disperse particles on a nano and “non-nano” scale for use in a variety of skin health markets, including for use in sunscreens as active ingredients and as fully developed prestige skin care and cosmetics products, marketed and sold through our Solésence beauty science subsidiary.  In terms of our life sciences focus, we have seen demand significantly decrease for our medical diagnostics ingredients during 2022. Additionally, we continue to sell products in legacy markets, including architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, and surface finishing technologies (polishing) applications, all of which, along with medical diagnostics, fall into the advanced materials product category. 

 We target markets, primarily related to skin health products and ingredients, as well as diagnostic life sciences ingredients where we believe our materials and products offer practical and competitive minerals-based solutions. We traditionally work closely with current customers in these target markets to identify their material and performance requirements. We market our materials to various end-use applications manufacturers, and our Solésence® products to cosmetics and skin care brands.

Recently developed technologies have made certain new products possible and opened potential new markets. During 2015 we were granted a patent on a new type of particle surface treatment (coating) — now called Active Stress Defense ™ Technology — which became the cornerstone of our new product development in personal care, with first revenue recognized during 2016. Active Stress Defense™ now refers to a suite of three proprietary technologies — Original Active Stress Defense™, Kleair™, and Bloom™ — all three of which either utilize a unique and proprietary, mineral-based technology or work synergistically with one of our unique and proprietary, mineral-based technologies to improve performance and/or aesthetics. Our ongoing innovation efforts include new IP in areas that advance environmental protection, align with market needs, and complement our existing technologies Through the creation of our Solésence beauty science subsidiary, we utilize our technology suite to manufacture and sell fully developed solutions to targeted customers in the skin care industry, typically in prestige skin care and cosmetics markets, in addition to the ingredients we have traditionally sold in the personal care area.

Although our primary strategic focus has been the North American market, we currently sell materials to customers overseas and have been working to expand our reach within foreign markets. Our common stock trades on the OTCQB marketplace under the symbol NANX. 

While product sales comprise the majority of our revenue, we also recognize revenue from other sources from time to time. These activities are not expected to drive the long-term growth of the business. For this reason, we classify such revenue as “other revenue” in our Consolidated Statements of Operations, as it does not represent revenue directly from the sale of our products.

(3) Revenues

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

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

Contract balances at September 30, 2022, December 31, 2021, and December 31, 2020 are as follows:

Accounts
Receivable

Contract
Assets

Contract
Liabilities

Balance, December 31, 2020

i 2,932

i 179

i 411

Balance, December 31, 2021

i 3,937

i 179

i 1,444

Balance, September 30, 2022

i 5,368

i 179

i 1,369

The contract asset balance at September 30, 2022, December 31, 2021, and December 31, 2020 consists of $ i i i 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 $ i 295 and $ i 20, for the three months ended September 30, 2022 and 2021, respectively, and $ i 507 and $ i 264 for the nine months ended September 30, 2022 and 2021, respectively.

Other revenue may include revenue from technology license fees and paid development projects. Technology license fees and paid development projects are recognized over time when the obligations under the agreed upon contractual arrangements are performed on our part. Other revenue recognized over time was $ i 5 and $ i 28, for the three months ended September 30, 2022 and 2021, respectively, and $ i 191 and $ i 139 for the nine months ended September 30, 2022 and 2021, respectively. There was no other revenue recognized at a point in time for the three months ended September 30, 2022 and 2021. Other revenue recognized at a point in time was $ i 350 and $ i 0 for the nine months ended September 30, 2022 and 2021 respectively.

(4) Earnings Per Share

Options to purchase approximately i 1,871,000 and i 1,901,000 shares of common stock that were outstanding as of September 30, 2022 but were not included in the computation of earnings per share for the three months and nine months ended September 30, 2022, respectively as it would be been anti-dilutive due to the losses. Options to purchase approximately i 2,162,000 and i 1,970,000 shares of common stock that were outstanding as of September 30, 2021 were included in the computation of earnings per share for the three months and nine months ended September 30, 2021, respectively.

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
September 30,

Nine months ended
September 30,

2022

2021

2022

2021

Numerator: (in Thousands)

Net (loss) income

( i 750

)

i 1,363

( i 638

)

i 2,714

Denominator:

Weighted average number of basic shares outstanding

i 49,174,673

i 48,566,431

i 49,068,709

i 43,756,300

Weighted average additional shares assuming conversion of in-the-money stock options to common shares

i 0

i 2,162,000

i 0

i 1,970,000

Weighted average number of diluted common shares outstanding

i 49,174,673

i 50,728,431

i 49,068,709

i 45,726,300

Basic earnings per common share:

Net (loss) income per share – basic

( i 0.02)

i 0.03

( i 0.01)

i 0.06

Diluted earnings per common share:

Net (loss) income per share – diluted

( i 0.02)

i 0.03

( i 0.01)

i 0.06

(5) Financial Instruments

We follow ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.

Our financial instruments include cash, any cash equivalents, accounts receivable, accounts payable and accrued expenses, along with any short term and long-term borrowings as described in Note 6. There were no financial instruments adjusted to fair value on September 30, 2022 and December 31, 2021.

(6) Notes and Lines of Credit

Notes and lines of credit consist of the following:

As of September 30, 2022

As of December 31, 2021

Rate

Total Borrowing Capacity

Outstanding Borrowed Balance

Total Borrowing Capacity

Outstanding Borrowed Balance

i Strandler, LLC ⁽¹⁾

i 4.00%

i 1,000

n/a

i Beachcorp, LLC ⁽¹⁾

i 5.25%

n/a

i 1,000

i Beachcorp, LLC ⁽²⁾

i 5.50%

i 4,561

i 3,358

i 3,753

i 3,365

i Beachcorp, LLC ⁽³⁾

i 5.50%

i 4,000

i 3,000

n/a

Related party interest summary:

Three months ended
September 30,

Nine months ended
September 30,

2022

2021

2022

2021

Interest expense, related parties

i 111

i 49

i 218

i 1,091

Accrued interest expense, related parties

i 39

i 17

i 39

i 17

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 i 0.75%, and it matures on i March 31, 2024. Strandler, LLC is also an affiliate of Bradford T. Whitmore.

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

On January 28, 2022, in connection with the A&R Loan Agreement, the Company entered into a new promissory note in order to evidence the Inventory Revolver facility, allowing borrowing of up to $ i 4,000, at an amount equivalent to i 50% of eligible inventory, as defined. The interest rate on the Inventory Revolver is set to the prime rate plus i 0.75%. The Inventory Revolver facility matures i March 31, 2024.

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

Since July 2014, we have maintained a bank-issued letter of credit for up to $ i 30 in borrowings to support our obligations under our Romeoville, Illinois facility lease agreement. No borrowings have been incurred under this promissory note. On December 21, 2021, Libertyville issued a letter of credit for up to $ i 500 in borrowings to support our obligations under our newly leased manufacturing and warehouse space in Bolingbrook, Illinois. For both letters of credit, interest on drawn balances will be at the prime rate plus i 1%.

/ i

(7) Inventories

Inventories consist of the following:

	September 30, 2022		December 31, 2021

Raw materials	$	i 6,940	$	i 4,796
Finished goods		i 2,656		i 1,299
Total inventories, net	$	i 9,596	$	i 6,095

(8) Leases

The Company’s operating lease portfolio is comprised of operating leases for office, warehouse space and equipment. Certain of the Company’s leases include one or more options to renew or terminate the lease at the Company’s discretion. The Company regularly evaluates the renewal and termination options and when they are reasonably certain of exercise, includes the renewal or termination option in our lease term. 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 has converted to a month-to-month lease as of June 30, 2022.

As of September 30, 2022, the ROU asset had a balance of $ i 11,056, which is included in the “Operating lease right-of-use assets” line item of these consolidated financial statements and current and non-current lease liabilities related to the ROU asset of $ i 1,182 and $ i 10,740, respectively. As of December 31, 2021, the ROU asset had a balance of $ i 12,075 which is included in the “Operating lease right-of-use assets” line item of these consolidated financial statements and current and non-current lease liabilities related to the ROU asset of $ i 589 and $ i 11,700, respectively. The discount rates used for leases accounted for under ASC 842 are based on an interest rate yield curve developed for the leases in the Company’s portfolio.

The office leases contain variable lease payments which consist primarily of rent escalations based on an established index or rate and taxes, insurance, and common area or other maintenance costs, which are paid based on actual costs incurred by the lessor.

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

Three months ended
September 30,

Nine months ended
September 30,

2022

2021

2022

2021

Components of lease cost

Finance lease cost components:

Amortization of finance lease assets

i 8

i 13

i 30

i 41

Interest on finance lease liabilities

i 1

i 4

i 15

Total finance lease costs

i 9

i 17

i 34

i 56

Operating lease cost components:

Operating lease cost

i 377

i 144

i 1,115

i 434

Variable lease cost

i 152

i 31

i 484

i 91

Short-term lease cost

i 33

i 11

i 83

i 32

Sublease income

( i 125

)

—

( i 492

)

—

Total operating lease costs

i 437

i 186

i 1,190

i 557

Total lease cost

i 446

i 203

i 1,224

i 613

Supplemental cash flow information related to leases is as follows for the nine months ended September 30, 2022 and 2021:

	2022			2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow from operating leases	$	i 468		$	i 554

Weighted-average remaining lease term-finance leases (in years)		i 0.2			i 0.9
Weighted-average remaining lease term-operating leases (in years)		i 9.0			i 3.2
Weighted-average discount rate-finance leases		i 7.6	%		i 9.3	%
Weighted-average discount rate-operating leases		i 7.5	%		i 14.1	%

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

Finance
Leases

Operating
Leases

Total

2022

i 6

i 490

i 496

2023

i 6

i 2,050

i 2,056

2024

i —

i 2,025

2025

i —

i 1,470

2026

i —

i 1,468

Thereafter

i —

i 8,668

Total payments

i 12

i 16,171

i 16,183

Less amounts representing interest

( i 1

)

( i 4,249

)

( i 4,250

)

Total minimum payments required

i 11

i 11,922

i 11,933

The future maturities of the Company’s finance and operating leases as of September 30, 2021 were as follows:

Finance
Leases

Operating
Leases

Total

2021

i 47

i 187

i 234

2022

i 109

i 761

i 870

2023

i 6

i 747

i 753

2024

i —

i 636

2025

i —

i 43

Thereafter

i —

i 2

Total payments

i 162

i 2,376

i 2,538

Less amounts representing interest

( i 8

)

( i 470

)

( i 478

)

Total minimum payments required

i 154

i 1,906

i 2,060

(9) Significant Customers and Contingencies

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

		Three months ended September 30,						Nine months ended September 30,
Customer #	Product Category	2022			2021			2022			2021
1	Personal Care Ingredients		i 30	%		i 27	%		i 30	%		i 24	%
2	Solésence^®		i 19	%		i 21	%		i 16	%		i 16	%
3	Solésence^®		i 18	%		i 17	%		i 17	%		i 17	%
4	Solésence^®		i 6	%		i 7	%		i 6	%		i 13	%
5	Advanced Materials (Medical Diagnostics customer)		i 4	%		i 5	%		i 1	%		i 10	%
	Total		i 77	%		i 77	%		i 70	%		i 80	%

For the nine months ended September 30, accounts receivable balances for these five customers were approximately:

		September 30,		September 30,
Customer #	Product Category	2022		2021
1	Personal Care Ingredients	$	i 943	$	i 817
2	Solésence^®		i 1,717		i 1,604
3	Solésence^®		i 439		i 470
4	Solésence^®		i 189		i 314
5	Advanced Materials (Medical Diagnostics customer)		i 248		i 382
	Total	$	i 3,536	$	i 3,587

We currently have exclusive supply agreements with BASF Corporation (“BASF”), our largest customer, that have contingencies outlined which could potentially result in the license of technology and/or the sale of production equipment from the Company to the customer intended to provide capacity sufficient to meet the customer’s production needs. This outcome may occur if we fail to meet certain performance requirements. Our supply agreements with BASF also “trigger” a technology transfer right in the event of our insolvency, as further defined within the agreements. In the event of an equipment sale, upon incurring a triggering event, the equipment would be sold to the customer at either i 115% of the equipment’s net book value or the greater of i 30% of the original book value of such equipment, and any associated upgrades to it, or i 115% of the equipment’s net book value, depending on the equipment and related products.

If a triggering event were to occur and BASF elected to proceed with the license and related equipment sale mentioned above, we would receive royalty payments from this customer for products sold using our technology; however, we would lose both significant revenue and the ability to generate significant revenue to replace that which was lost in the near term. Replacement of necessary equipment that could be purchased and removed by the customer pursuant to this triggering event could take in excess of twelve months. Any additional capital outlays required to rebuild capacity would probably be greater than the proceeds from the purchase of the assets as dictated by our agreement with the customer. Similar consequences would occur if we were determined to have materially breached certain other provisions of the supply agreement with BASF. Any such event would also likely result in the loss of many of our key staff and line employees due to economic realities. We believe that our employees are a critical component of our success, and it could be difficult to replace them quickly.

(10) Business Segmentation and Geographical Distribution

Revenue from international sources approximated $ i 495 and $ i 955 for the three and nine months ended September 30, 2022, respectively, compared to $ i 585 and $ i 3,008 for the three and nine months ended September 30, 2021, respectively. All of this revenue was product revenue.

Our operations comprise a single business segment and all of our long-lived assets are located within the United States. We categorize our revenue stream into three main product categories, Personal Care Ingredients, Advanced Materials and Solésence. The revenues, by category, for the three and nine months ended September 30, 2022 and 2021 are as follows:

Three months ended
September 30,

Nine months ended
September 30,

Product Category

2022

2021

2022

2021

Solésence

i 5,932

i 4,571

i 18,591

i 13,369

Personal Care Ingredients

i 2,903

i 2,171

i 8,589

i 5,347

Advanced Materials

i 843

i 1,182

i 1,876

i 3,394

Total Sales

i 9,678

i 7,924

i 29,056

i 22,110

 (11) General Loss Contingencies

On August 9, 2022, BASF filed a complaint against Nanophase in New Jersey state court, alleging that Nanophase had breached the Zinc Oxide Supply Agreement (the “Agreement”). BASF alleges several issues, the one having the biggest potential impact on Nanophase being a claim that our sales through Solésence violate the exclusivity provision of the Agreement. BASF seeks an unspecified amount of damages, a permanent injunction enjoining sales to any party (other than BASF) of a broad range of zinc oxide products that BASF contends are within the scope of the exclusivity provision, counsel fees and litigation expenses. On September 7, 2022, Nanophase filed a Complaint for Declaratory Judgement in Illinois state court, asking for a declaration that contrary to BASF’s allegation, the exclusivity provision of the Agreement does not apply to all products containing zinc oxide as an ingredient for uses designated under the Agreement, nor does the exclusivity provision prohibit Nanophase’s sales of Solésence products containing zinc oxide as an ingredient. Both companies have filed Motions to Dismiss (MTD) the other’s respective complaint. Nanophase’s MTD of BASF’s New Jersey complaint currently is the first scheduled hearing expected to be in March 2023. Management believes at this time that the allegations of BASF’s complaint are without merit and are unsupported by the terms of the Agreement and governing law. For the period ending September 30, 2022, an estimated contingent loss was not recorded, and an estimated range of loss is not available.

(12) Cyber Theft Event

Nanophase was a victim of a cyber theft event in September and October. This resulted in a loss of $ i 188 recognized in the third quarter and a $ i 472 loss being recognized subsequent to quarter end.

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 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 including architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, and surface finishing technologies (polishing) applications— all of which, along with medical diagnostics, currently fall into the advanced materials product category.

Leveraging a platform of integrated patented and proprietary technologies, we create products with unique performance to enhance end-consumers’ health and well-being. We offer soup-to-nuts production, from engineered materials, formulation development, and finished product development, to commercial manufacturing and packaging capabilities. Our expertise in materials engineering allows us to effectively coat and disperse materials on a nano and “non-nano” scale for use in a variety of markets in skin health, including for use in sunscreens as APIs and as fully developed prestige skin care products, marketed and sold through our Solésence beauty science subsidiary. We believe that we have developed technological advantages with respect to our APIs sold for use as ingredients, while our Solésence beauty science technologies lead to enhanced efficacy and aesthetics in our finished products, which have received broad acceptance in the marketplace. Due to the enhanced efficacy and aesthetic qualities offered by our proprietary technology platform, Solésence finished products satisfy growing consumer demands around “clean” and inclusive beauty. Solésence beauty science also benefits from the Company’s vertical integration with each product’s key active ingredient that delivers its point-of-difference. This vertical integration helps us to improve efficiency and avoid potential major supply chain challenges while also addressing ongoing sustainability efforts. 

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

Since mid-2020, we have seen significantly increases in demand for our medical diagnostics materials. Polymerase Chain Reaction (“PCR”) testing for various viruses, most notably SARS-CoV-2 (“COVID-19”), has become a critical use of our technology in the life science space. After a historic peak in volume during 2020, we saw reduced demand for these materials in 2021. It is difficult to predict whether the increased demand 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 through 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 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 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, are 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 $9,678 for the three months ended September 30, 2022, compared to $7,924 for the same period in 2021. Total revenue increased to $29,056 for the nine months ended September 30, 2022, compared to $22,110 for the same period in 2021. A substantial majority of our revenue was from our four- and five largest customers for the three- and nine-month periods ended September, 2022, and 2021, respectively. This reflects sales of APIs to our largest customer in skin care and sunscreen applications, our three largest customers for our finished skin health products marketed through our Solésence subsidiary, and, during the three- and nine months ended September 30, 2021, a medical diagnostics customer. Please see Note 10 in the Financial Statements, “Business Segmentation and Geographical Distribution,” for a breakdown of revenue from the customers discussed above.

Product revenue, the primary component of our total revenue, increased to $9,673 for the three months ended September 30, 2022, compared to $7,896 during the same period of 2021, and increased to $28,515 for the nine months ended September 30, 2022, compared to $21,971 during the same period of 2021.This increase was due to continued growth in the adoption of our Solésence® products, along with an increase in API sales to our largest customer in our personal care ingredients business. We saw little revenue from medical diagnostics materials in 2022.

Other revenue decreased to $5 and increased to $541 for the three- and nine-month periods ended September 30, 2022, compared to $28 and $139 for the same periods in 2021, respectively. 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 increased to $7,185 for the three months ended September 30, 2022, compared to $4,946 for the same period in 2021, and increased to $21,659 for the nine months ended September 30, 2022, compared to $14,558 for the same period in 2021. The increase in cost of revenue was primarily driven by increased volume and price inflation on materials and manufacturing inefficiencies related to growing Solésence® demand. We are also using overtime to keep up with demand during a period where we have had difficulty hiring additional experienced labor. We have also been unable to complete a series of capital and engineering projects to increase efficiencies and reduce unit costs due to the near complete absorption of our internal engineering resources in addressing current demand. Additionally, during the second half of 2021, we added personnel in the supply chain function and incurred costs to rent temporary warehouse space, which represents an ongoing expense in to the third quarter of 2022. To a lesser extent, costs have increased as we have added resources, both consultative and permanent as we address inventory and supply chain control. Lastly, while we typically pass-through costs to our customers, we sometimes cannot pass through 100% of pricing increases on raw materials, and even with pass-throughs, our gross margin percentage is negatively impacted by higher material costs. In total, these factors have resulted in a significant reduction in our gross margin percentage. We believe this to be temporary, in light of current circumstances which we believe we will be able to address effectively during the balance of 2022 and during the first half of 2023.

Our business has a certain cyclicality of demand, often based upon seasonal demands, industry launch cycles, or a confluence of both. Our lack of burst capacity has created strains, in terms of people and costs, when new product launches occur at the same time that we are experiencing demand from previously launched products. Since late 2020, the Company has found itself in a situation where our ability to produce and ship materials has been exceeded by customer demand. It is a key area of focus to increase throughput first, followed quickly by increased cost efficiency once we can achieve greater scale. Our planning has had us adding to our current fixed manufacturing cost structure in early 2022 to accommodate additional growth, and to build a better base for further growth beyond that level. The extent to which margins grow, as a percentage of total revenue, will be dependent upon revenue mix, revenue volume, our ability to cut costs and pass commodity market-driven raw materials increases on to customers, and the speed and efficiency with which we are able to scale up production for our Solésence products. We expect that, as product revenue volume increases, our fixed manufacturing costs will be more efficiently absorbed, which should lead to increased margins as we grow. While additional production capacity is our most critical operational issue today, we expect to continue to focus on reducing controllable variable product manufacturing costs, with potential variability related to the commodity metals markets, but may or may not realize significant percentage growth in our gross margins through 2022, and in to the first half of 2023, depending upon the factors discussed above.

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

Research and development expense increased to $848 for the three months ended September 30, 2022, compared to $635 for the same period in 2021. For the nine months ended September 30, 2022 research and development expense increased to $2,310, compared to $1,670 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 $2,279 for the three months ended September 30, 2022, compared to $942 for the same period in 2021. For the nine months ended September 30, 2022, selling, general and administrative expense increased to $5,493, compared to $2,994 for the same period in 2021. We have added to our Sales, Marketing, and Business Development team during 2021, and more significantly during the first half of 2022. This was done to ready the Company to support expanded, and expected expanding, sales with a higher degree of customer service. We have also augmented our sales operations function, marketing, and new business development to stimulate additional growth. Additionally, compensation expense has also increased generally, beginning in the second half of 2021 through the current period due to wage inflation. We expect this trend to moderate to an extent in 2022. We also saw many of our business insurance costs increase during April, 2022, when several coverages were renewed. We recognized $230 in bad debt expense during the third quarter of 2022, which has been a relatively rare occurrence in the past. Much of this has been a function of our expansion, along with market conditions. Lastly, in June we accrued for a one-time consulting expense of approximately $180 relating to our application for an Employee Retention Credit. This expense, once paid, will be recoverable ratably to the extent any portion of the requested credit is disallowed. Management expects to receive this credit in the fourth quarter of 2022 or first quarter of 2023, but has elected not to reflect any of this gain in our financial statements until it is realized.

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, will likely have a material effect on our operations and financial position in 2022 and 2023 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 during 2022 to date, and are in the process of continuing 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 September 30, 2022, 2021, and year ended December 31, 2021 were:

	Nine months ended September 30, 2022			Nine months ended September 30, 2021			Year ended December 31, 2021
Total cash	$	510		$	1,380		$	657
Cash (used in) provided by operating activities		(2,397	)		269			2,321
Net cash (used in) investing activities		(1,798	)		(1,445	)		(1,874	)
Net cash (used in) provided by financing activities		4,048			1,599			(747	)

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

On January 28, 2022, the Company and Beachcorp, LLC, and Strandler, LLC entered in to an Amended and Restated Master Agreement (“Agreement”). Both entities are managed by Bradford T. Whitmore, who is a significant shareholder in Nanophase and, as such, these loans are classified as related party transactions. Under this Agreement, and amended agreements governed by this Agreement, the Company now has a $1,000 term loan with Strandler, LLC, which was fully drawn in January 2022, with the proceeds used to retire the previously existing $1,000 term loan with Beachcorp. The new term loan expires on March 31, 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 an expiration of March 31, 2024. The Company drew funds from the A/R Facility in January of 2022. Further under this Agreement, the Company entered into an additional revolving loan agreement based on the Company’s inventory balances (the “Inventory Facility”). The Company drew funds from the Inventory Facility in May of 2022. This facility will allow the Company to borrow up to $4,000 in total, based on the terms of the loan. All borrowing will be at a floating rate of Prime plus 0.75%, with a March 31, 2024 expiration. We also maintain letters of credit through Libertyville Bank & Trust. These credit facilities are more fully described in Note 6 to our Financial Statements in Part I, Item 1 of this Form 10-Q.

Our actual future capital requirements in 2022 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 2022 and 2023 will be between $4 million and $14 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 2022 and 2023 capital investment to exceed the top of this range.

We had federal net operating loss carryforwards for tax purposes of approximately $62 million on December 31, 2021. Because the Company may experience “ownership changes” within the meaning of the U.S. Internal Revenue Code (“IRC”) in connection with any future equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the IRC. If not utilized, $57 million of this loss carryforward will expire between 2022 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-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purposes of raising capital, incurring debt or operating our business. We do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.

Safe Harbor Provision

We want to provide investors with more meaningful and useful information. As a result, this Quarterly Report on Form 10-Q (the “Form 10-Q”) contains and incorporates by reference certain “forward-looking statements”, as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements reflect our current expectations of the future results of our operations, performance, and achievements. Forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have tried, wherever possible, to identify these statements by using words such as “anticipates”, “believes”, “estimates”, “expects”, “plans”, “intends” and similar expressions. These statements reflect management’s current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause our actual results, performance, or achievements in 2022 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required for a smaller reporting company.

Item 4. Controls and Procedures

Disclosure controls

We are responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (b) accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosures. It should be noted that in designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and that our management necessarily was required to apply its judgment regarding the design of our disclosure controls and procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision (and with the participation) of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, other than the previously identified material weakness discussed below, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at reaching that level of reasonable assurance. Management identified a material weakness in the way the Company tracked and accounted for its inventory at December 31, 2021, as disclosed in our 10-K, filed on March 31, 2022. Controls were not effectively designed, documented, and maintained to verify that the existence of all inventories subject to physical inventory counts were correctly counted, and our process for compiling and communicating inventory data to ensure accurate reporting in our financial statements was not effective, including inadequate verification for completeness and accuracy of key reports used to review and monitor inventory balances. A consequence of this was that the process of conducting a full physical inventory required an inordinate amount of time to establish an accurate valuation. We are in the process of remediating this control issue, and believe that, while incomplete, we have made significant progress since March 31, 2022. Notwithstanding such material weakness in internal control over inventory, our management concluded that our consolidated financial statements in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”).

Internal control over financial reporting

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

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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.

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

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

Management believes that the allegations of BASF’s New Jersey Complaint are without merit and are unsupported by the terms of the Agreement and governing law. On September 8, 2022, Nanophase filed a Motion to Dismiss (“MTD”) the New Jersey Complaint with the SCNJ, arguing that BASF’s claims in its New Jersey Complaint are not supported by the terms of the Agreement. All briefing on the MTD was completed on October 8, 2022. Our expectation, presuming a negotiated commercial situation is not reached beforehand, is that the SCNJ will hold a hearing on the MTD in March 2023.

On September 7, 2022, Nanophase filed a Complaint for Declaratory Judgment against BASF in the Circuit Court of Cook County, Illinois (the “Illinois Complaint”). The Illinois Complaint asks the court to declare that contrary to BASF’s views, the exclusivity provision of the Agreement does not apply to all products containing zinc oxide as an ingredient for uses designated under the Agreement nor does the exclusivity provision prohibit Nanophase’s sales of Solésence products containing zinc oxide as an ingredient.

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

Nanophase intends to continue negotiating with BASF in good faith to resolve these issues. In the event that an acceptable solution is not reached, and litigation proceeds, the ultimate resolution cannot now be determined with certainty. However, management believes that Nanophase will ultimately prevail under the terms of the Agreement and governing law.

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 September 30, 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

Date: November 14, 2022		By:	/s/ JESS A. JANKOWSKI
			Jess A. Jankowski
			President and Chief Executive Officer
			(principal executive officer, and principal financial officer)

This ‘10-Q’ Filing	Date	Other Filings

	3/31/24
	12/31/22
Filed on:	11/14/22
	10/8/22
For Period end:	9/30/22
	9/8/22	8-K
	9/7/22	8-K
	8/31/22
	8/11/22
	8/9/22
	6/30/22	10-Q, NT 10-Q
	3/31/22	10-K, 10-Q, 8-K
	1/28/22
	12/31/21	10-K
	12/21/21	3, 4
	11/16/21
	9/30/21	10-Q
	6/30/21	10-Q
	3/31/21	10-Q, 10-Q/A
	12/31/20	10-K
	1/1/19
	1/1/18
	9/16/99
		List all Filings

Nanophase Technologies Corp. – ‘10-Q’ for 9/30/22

On: Monday, 11/14/22, at 4:12pm ET · For: 9/30/22 · Accession #: 1387131-22-11376 · File #: 0-22333

Previous ‘10-Q’: ‘10-Q’ on 8/16/22 for 6/30/22 · Next: ‘10-Q’ on 5/12/23 for 3/31/23 · Latest: ‘10-Q’ on 11/14/23 for 9/30/23

Quarterly Report — Form 10-Q

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‘10-Q’ — Quarterly Report

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Dates Referenced Herein and Documents Incorporated by Reference

Nanophase Technologies Corp. – ‘10-Q’ for 9/30/22

On: Monday, 11/14/22, at 4:12pm ET · For: 9/30/22 · Accession #: 1387131-22-11376 · File #: 0-22333

Previous ‘10-Q’: ‘10-Q’ on 8/16/22 for 6/30/22 · Next: ‘10-Q’ on 5/12/23 for 3/31/23 · Latest: ‘10-Q’ on 11/14/23 for 9/30/23

Quarterly Report — Form 10-QFiling Table of Contents

‘10-Q’ — Quarterly ReportDocument Table of Contents

This is an HTML Document rendered as filed. [ Alternative Formats ]

Dates Referenced Herein and Documents Incorporated by Reference

Quarterly Report — Form 10-Q

Filing Table of Contents

‘10-Q’ — Quarterly Report

Document Table of Contents