NANOPHASE TECHNOLOGIES Corp

Previous wording

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.

Current wording

Polymerase Chain Reaction (“PCR”) testing for various viruses, most notably SARS-CoV-2 (“COVID-19”), has become a important 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.

Previous wording

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.

Current wording

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. Regardless of the demand decrease for our medical diagnostic ingredients we continue to see unprecedented demand in 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.

Previous wording

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:

Current wording

Total revenue increased to $13,046 for the three months ended June 30, 2024, compared to $11,872 for the same period in 2023. Total revenue increased to $22,914 for the six months ended June 30, 2023, compared to $21,329 for the same period in 2023. A substantial majority of our revenue was from our four largest customers for the three- and six-month periods ended June 30, 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:

Previous wording

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.

Current wording

Product revenue, the primary component of our total revenue, increased to $12,923 for the three months ended June 30, 2024, compared to $11,844 during the same period of 2023, and increased to $22,694 for the six months ended June 30, 2024, compared to $21,180 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. We saw little revenue from medical diagnostics materials in 2024 and 2023.

Previous wording

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.

Current wording

Other revenue increased to $123 and $220 for the three- and six-month periods ended June 30, 2024, compared to $28 and $149 for the same periods in 2023, respectively. Other revenue is typically comprised primarily of developmental or licensing fees.

Previous wording

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.

Current wording

Cost of revenue generally includes costs associated with commercial production and customer development arrangements. Cost of revenue increased to $9,306 for the three months ended June 30, 2024, compared to $8,197 for the same period in 2023, and increased to $15,594 for the six months ended June 30, 2024, compared to $15,505 for the same period in 2023. The increase for the three months in the cost of revenue was driven by higher demand and manufacturing inefficiencies. The increase for the six months in cost of revenue was primarily driven by increased volume and manufacturing inefficiencies related to Solésence® product launches. While we typically pass-through costs to our customers, we sometimes cannot pass through 100% of pricing increases on raw materials, and even with pass throughs, our gross margin percentage is negatively impacted by higher material costs.

Previous wording

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.

Current wording

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

Previous wording

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.

Current wording

Research and development expense decreased to $864 for the three months ended June 30, 2024, compared to $991 for the same period in 2023. For the six months ended June 30, 2024 research and development expense decreased to $1,776 compared to $1,994 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.

Previous wording

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.

Current wording

Selling, general and administrative expense decreased to $1,829 for the three months ended June 30, 2024, compared to $2,105 for the same period in 2023. For the six months ended June 30, 2024, selling, general and administrative expense decreased to $3,388, compared to $4,255 for the same period in 2023. The decrease is due in large part to decreased legal costs in 2024 compared to 2023.

Previous wording

Cash, cash proceeds and use of cash for the three months ended March 31, 2024 and 2023, and year ended December 31, 2023 were:

Current wording

Cash, cash proceeds and use of cash for the six months ended June 30, 2024, 2023, and year ended December 31, 2023 were:

Previous wording

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.

Current wording

The net cash used during the six months ended June 30, 2024 was primarily due to increased inventory and changes in the accounts receivable and accounts payable balances. Net cash used in investing activities was attributable to expenditures on capital equipment for all periods presented above. The net cash provided by financing activities was attributable to the issuance of preferred stock subsequently converted to common stock. The Company’s loan agreements with Strandler, LLC and Beachcorp. LLC currently are set to expire on October 1, 2025.

Previous wording

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.

Current wording

We had federal net operating loss carryforwards for tax purposes of approximately $50 million, and 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 had 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.

Previous wording

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 s…

Excerpt shortened here; the source contains the full paragraph.

Current wording

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 to 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 federa…

Excerpt shortened here; the source contains the full paragraph.