(in thousands, except share and per share data or as otherwise noted herein)

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 ~~six~~three and nine months ended ~~June~~September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

These financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2020, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the Securities and Exchange Commission.

We believe that cash from operations and cash on hand, in addition to ~~unused~~existing borrowing capacity, which has recently been increased ~~(see Note 7)~~, may not be adequate to fund our operating plans through the next twelve months. See Note 7 for a discussion of both expanded capacity and available capacity at September 30, 2021. We are working to reduce these risks and the results of the Company in this regard have improved markedly, but some of this is dependent on several things over which we have limited control. The significant revenue growth that we have experienced has required additional investment in both working capital and capital equipment. This has constrained liquidity and made cash management a top priority. To support our growth and reduce costs, we also intend to invest in additional capital equipment through 2021 and in 2022. Given these issues, and other commercial realities, we are monitoring the additional working capital demands that this could create as we continue to execute on our Solésence growth strategy. The timing of cash flows is critical. If cash generated from operations is not materially consistent with our plans, we believe that we may need to seek additional funding to address working capital demands. This uncertainty has caused us to be unable to assert that, for the next twelve months, we have enough current cash and guaranteed access to financing to fund operations, and to continue with our current growth strategy in terms of investment in capital equipment and in operating expenses related to Solésence, without securing additional financing.

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

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

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 subsidiary”), is focused in various beauty- and life-science markets. Skin health and medical diagnostics combined currently make up the great majority of our business and drive our forward growth strategy. We offer engineered materials, formulation development and commercial manufacturing through an integrated family of technologies. Our expertise in materials engineering allows us to effectively coat and disperse particles on a nano and “non-nano” scale for use in a variety of markets in skin care, including for use in sunscreens as active ingredients and as fully developed prestige skin care products, marketed and sold through our Solésence subsidiary. In terms of our life sciences focus, we have seen conditions since early 2020 lead to a significant increase in demand for our medical diagnostics ingredients. We believe that the advent of the SARS-CoV-2 (“COVID-19”) Pandemic has driven significantly ~~increase~~increased demand for our medical diagnostics materials during 2020 and ~~2021.~~the first half of 2021, after which demand has lessened. It is our expectation that future demand may not reach the same volumes, but should remain greater than historic demand experienced prior to 2020. Additionally, we continue to sell products in markets for 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, and 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 and market our materials to various end-use applications manufacturers, and our Solésence® products to cosmetics and skin care brands. Over the past few years, we have expanded our marketing efforts for our Solésence products and have seen customers responding to our successful products being sold into their markets. Recently developed technologies have made certain new products possible and opened potential new markets. During 2015 we were granted a patent on a new type of particle surface treatment (coating) — now called Active Stress Defense ™ Technology — which became the cornerstone of our new product development in personal care, with first revenue recognized during 2016. In addition, through the creation of our Solésence subsidiary, we utilize this particle surface treatment to manufacture and sell fully developed solutions to targeted customers in the skin care industry, 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.

Revenues are generally recognized at a point in time, typically when control of the promised goods is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods.

~~Options to purchase approximately~~ ~~1,995,000~~ ~~and~~ ~~1,784,000~~ shares of common stock that were outstanding as of June 30, 2021 were included in the computation of earnings per share for the three months and six months ended June 30, 2021, respectively. Options to purchase approximately ~~65,000~~ ~~and~~ ~~50,000~~ ~~shares of common stock that were outstanding as of June 30, 2020 were included in the computation of earnings per share for the three months and six months ended June 30, 2020, respectively.~~

Earnings applicable to common stock and common stock shares used in the calculation of basic and diluted earnings per share are as follows:

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

Our financial instruments include cash, any cash equivalents, accounts receivable, accounts payable and accrued expenses, along with the promissory note with no related borrowings described in Note 7, any borrowings on the working capital line of credit from Libertyville Bank and Trust, and any borrowings on the working capital line of credit and the term loan from Beachcorp, LLC, described in Note 7 below. The fair values of all financial instruments were not materially different from their carrying values.

There were no financial instruments adjusted to fair value on ~~June~~September 30, 2021 and December 31, 2020.

During July 2014 we entered into a bank-issued letter of credit and related promissory note for up to $30 in borrowings to support our obligations under our facility lease agreement. No borrowings have been incurred under this promissory note. Should any borrowings occur in the future, the interest rate would be the prime rate plus 1%, with the bank having the right to “set off” or apply unpaid balances against our checking account if we fail to meet our obligations under any borrowings under the note. It is our intention to renew this note annually, for as long as we need to do so pursuant to the terms of our facility lease agreement. Because there were no amounts outstanding on the note at any time during 2021 or 2020, we have recorded no related liability on our consolidated balance sheet.

We have a Business Loan Agreement with Libertyville Bank and Trust Company, a Wintrust Community Bank (“Libertyville”). Under the Business Loan Agreement, Libertyville will provide a maximum of (i) $500 or (ii) 2 times the sum of (a) 75% our eligible accounts receivables and (b) our cash deposited with Libertyville, whichever is less, of revolving credit to us, collateralized by a senior priority lien on our accounts receivable, inventory, equipment, general intangibles, and fixtures. Interest is payable monthly on any advances at a floating interest rate of the prime rate at the time plus 1%. We must have $500 in cash, inclusive of the borrowed amount, at Libertyville on the date of any advance. Advances may only occur at the beginning or end of a fiscal quarter and must be repaid in full within five business days of the advance. There were no amounts due under the Business Loan Agreement as of ~~June~~September 30, 2021.

On November 16, 2018, we entered into a Business Loan Agreement (the “Master Agreement”) with Beachcorp, LLC. Beachcorp, LLC is managed by Bradford T. Whitmore, who, together with his affiliate Grace Investments, Ltd., beneficially owned approximately 62% of the outstanding shares of our common stock as of ~~June~~September 30, 2021. At inception, the Master Agreement related to two loan facilities, each evidenced by a separate promissory note dated November 16, 2018: a term loan to the Company of $500 which was disbursed in a single advance (the “Term Loan”) with a fixed annual interest rate of 8.25%, payable quarterly, accruing from the date of such advance and with principal initially due on December 31, 2020; and an asset-based revolving loan facility for the Company of up to $2,000 (the “Revolver Facility”), with floating interest accrued at the prime rate plus 3% (8.25% minimum) per year, with a borrowing base consisting of qualified accounts receivable of the Company, and with all principal and accrued interest due March 31, 2020. On March 23, 2020, the Company and Beachcorp, LLC executed the First Amendment to our Master Agreement that extended the maturities of both the Term Loan and the Revolver Facility to March 31, 2021. Effective September 8, 2020, the Company and Beachcorp, LLC executed the Second Amendment to our Master Agreement that expanded the limit on the Revolver Facility from $2,000 to $2,750. On December 23, 2020, the Company and Beachcorp, LLC executed the Third Amendment to our Master Agreement that expanded the limit on the Revolver Facility from $2,750 to $4,000 and extended the maturities of both the Term Loan and the Revolver Facility to March 31, 2022. On April 21, 2021, the Company and Beachcorp, LLC executed the Fourth Amendment to our Master Agreement that expanded the limit on the Revolver Facility from $4,000 to $6,000, extended its maturity to March 31, 2023, and reduced interest on outstanding borrowings from the prime rate plus 3%, with an 8.25% minimum floor, to the prime rate plus 2%, with no minimum rate floor. Additionally, the Fourth Amendment increased the amount of the Term Loan from $500 to $1,000, and its fixed interest rate was reduced from 8.25% per year to 5.25% per year. The maturity date of the Term Loan remains March 31, 2022. The Term Loan and Revolver Facility are secured by all the unencumbered assets of the Company and subordinated to Libertyville’s secured interest under the Business Loan Agreement. The Master Agreement substantially restricts the Company’s ability to incur additional indebtedness during the terms of both the Term Loan and the Revolver Facility.

On November 20, 2019, we entered into a 2% Secured Convertible Promissory Note with Bradford T. Whitmore in the principal amount of $2,000 (the “Convertible Note”). The principal amount was payable in a single payment on May 15, 2024 (the “Maturity Date”). The principal amount of the Convertible Note accrued interest at the rate of 2.0% per year, which interest was payable semi-annually on the 15th day of May and November, commencing on May 15, 2020. The principal amount and, at the holder’s option, accrued interest under the Convertible Note was convertible at the holder’s option into additional shares of the Company’s common stock in whole or in part and from time to time up to the Maturity Date at a conversion price of $0.20 per share. The convertible note contained a beneficial conversion feature since the Company’s stock was trading at $0.32 per share on the date the Company entered into the agreement. The intrinsic value of the beneficial conversion feature was $1.2 million on November 20, 2019 and was recorded as a discount on the convertible note. The discount was to be accreted to the convertible note over the life of the note using the straight-line method. The offset to these discounts was interest expense. Mr. Whitmore chose to exercise his conversion rights effective May 7, 2021, requesting that any accrued interest be paid him in the form of shares, as allowed in the Convertible Note. In addition to the 10,000,000 shares issued upon conversion, the Company issued 95,555 shares of additional stock to Mr. Whitmore in lieu of cash for the $19 in accrued interest owed at May 7, 2021. For the three and ~~six~~nine months ended ~~June~~September 30, 2021, the Company accreted interest of $~~836~~0 and $903, respectively, with the acceleration of the balance of the convertible discount being recorded in May, 2021. ~~For the three and six months ended June 30, 2020, the Company accreted $~~67 ~~and $134, respectively.~~ The balance on the convertible note was $0 and $~~1097~~1,097, at ~~June~~September 30, 2021 and December 31, 2020, respectively. At December 31, 2020, the balance shown was net of discounts of $903.

On ~~June~~September 30, 2021, the balance on the term loan was $1,000, and the balance on the Revolver Facility was $~~2,310~~3,740. On September 30, 2021 borrowings were within the credit agreement limit with an additional $721 available. In the ~~six~~nine months ended ~~June~~September 30, 2021, and 2020, there was $~~107~~156 and $69334, respectively, in interest expense relating to these credit facilities held by Beachcorp, LLC. The accrued interest expense balance on these related party credit facilities amounted to $17, and $20, at ~~June~~September 30, 2021 and December 31, 2020, respectively. The obligations under the Convertible Note were secured by a security interest in all of the Company’s personal property pursuant to a Commercial Security Agreement among Mr. Whitmore, the Company and Solésence, LLC, the Company’s sole subsidiary. Given that Beachcorp, LLC is an affiliate of Mr. Whitmore, this amounts to all of this interest being owed to a related party. ~~On June 30, 2021 borrowings were within the credit agreement limit with an additional $890~~ available. The balance of borrowing base, loan amount, and any excess payments required over the available borrowing base will change as frequently as daily, given the operational nature of the elements of the Revolver Facility.

On April 17, 2020, we entered into a Promissory Note (the “PPP Note”), dated as of April 16, 2020, in favor of Libertyville in the principal amount of $952 for our loan under the Paycheck Protection Program (“PPP”). The Company was allowed to apply for forgiveness of the amount due on the PPP Note in an amount equal to the sum of the following costs incurred during the 24-week period beginning on the date of the first disbursement of the loan: (a) payroll costs, (b) any payment of interest on a covered obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), (c) any payment on a covered rent obligation, and (d) any covered utility payment, calculated in accordance with the terms of the CARES Act. The principal amount of the PPP Note would have accrued interest at the rate of 1.00% per year. Management applied for loan forgiveness in February 2021 and received notice of PPP Loan forgiveness in June, ~~2021.~~ 2021. The date that the loan was officially forgiven by the Small Business Administration was February 12, 2021, although it wasn’t communicated as such directly to management. On ~~June~~September 30, 2021, the balance under the PPP note was $0.

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.

As of ~~June~~September 30, 2021, the operating lease right-of-use “ROU” asset had a balance of $~~1,785~~1,679 which is included in the “Operating lease right-of-use assets” line item of these condensed consolidated financial statements and current and non-current lease liabilities related to the ROU asset of $~~499~~521 and $~~1,523~~1,385, respectively. As of December 31, 2020, the ROU asset had a balance of $1,827 which is included in the “Operating lease right-of-use assets” line item of these condensed consolidated financial statements and current and non-current lease liabilities related to the ROU asset of $431 and $1,651 respectively. These are included in the “Current portion of operating lease obligations” and “Long-term operating lease obligations, net of current portion” line items of these condensed consolidated financial statements. The discount rates used for leases accounted for under ASC 842 are based on an interest rate yield curve developed for the leases in the Company’s portfolio.

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

Supplemental cash flow information related to leases is as follows for the ~~six months~~nine-month period ended ~~June~~September 30:

	2021			2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflow from operating leases	$	554		$	518

Weighted-average remaining lease term-finance leases (in years)		0.9			1.9
Weighted-average remaining lease term-operating leases (in years)		3.2			3.4
Weighted-average discount rate-finance leases		9.3	%		9.3	%
Weighted-average discount rate-operating leases		14.1	%		14.3	%

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

	Finance Leases			Operating Leases			Total			Finance Leases			Operating Leases			Total
2021	$	96		$	374		$	470		$	47		$	187		$	234
2022		109			761			870			109			761			870
2023		5			747			752			6			747			753
2024		—			636			636			—			636			636
2025		—			42			42			—			43			43
2026 and thereafter		—			2			2			—			2			2
Total payments	$	210		$	2,562		$	2,772		$	162		$	2,376		$	2,538
Less amounts representing interest		(12	)		(540	)		(552	)		(8	)		(470	)		(478	)
Total minimum payments required:	$	198		$	2,022		$	2,220		$	154		$	1,906		$	2,060

The future maturities of the Company’s finance and operating leases as of ~~June~~September 30, 2020 is as follows:

	Finance Leases			Operating Leases			Total
2020	$	63		$	172		$	235
2021		196			701			897
2022		109			720			829
2023		5			705			710
2024		—			595			595
2025 and thereafter		—			1			1
Total payments	$	373		$	2,894		$	3,267
Less amounts representing interest		(39	)		(717	)		(756	)
Total minimum payments required:	$	334		$	2,177		$	2,511

Finance Leases Operating Leases Total
2020 $ 119 $ 344 $ 463
2021 196 701 897
2022 109 720 829
2023 5 705 710
2024 — 595 595
2025 and thereafter — 1 1
Total payments $ 429 $ 3,066 $ 3,495
Less amounts representing interest (39 ) (798 ) (837 )
Total minimum payments required: $ 390 $ 2,268 $ 2,658

(10) Share-Based Compensation

We follow FASB ASC Topic 718, Compensation – Stock Compensation, in which compensation expense is recognized only for share-based payments expected to vest. We recognized compensation expense related to stock options of $5329 and $95124 for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, compared to $4748 and $99147 for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively.

As of ~~June~~September 30, 2021, there was approximately $~~152~~146 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under our stock option plans. That cost is expected to be recognized over a remaining weighted-average period of ~~1.7~~1.6 years.

Quantitative information regarding the Stock Options and Stock ~~Grants~~Grants:

~~During the six months ended June 30, 2021,~~ ~~143,500~~ ~~stock options were exercised, while~~ 0 ~~stock options were exercised for the same period in 2020. During the six months ended June 30, 2021,~~ 0 ~~stock options were granted, compared to~~ ~~535,000~~ ~~stock options granted during the same period in 2020. During the six months ended June 30, 2021,~~ ~~220,800~~ ~~stock options expired compared to~~ ~~438,840~~ ~~for the same period in 2020. For the six months ended June 30, 2021,~~ ~~32,500~~ ~~stock options were forfeited compared to~~ ~~173,634~~ ~~stock options being forfeited for the same period in 2020. We had~~ ~~3,049,150~~ ~~stock options outstanding at a weighted average exercise price of $0.53~~ ~~on June 30, 2021, compared to~~ ~~3,636,000~~ ~~stock options outstanding at a weighted average exercise price of $0.57~~ ~~on June 30, 2020.~~


	Nine Months Ended September 30,
	2021		2020
Stock options granted		10,000		535,000
Stock options exercised		367,000		78,277
Proceeds to Nanophase from exercises	$	152	$	23
Stock options forfeited		34,500		202,134
Stock option expirations		220,800		460,640
Stock options outstanding		2,833,650		3,507,073
Weighted average exercise price per share	$	0.55	$	0.58

The following table illustrates the various assumptions used to calculate the Black-Scholes option pricing model for stock options granted during the ~~three month~~three-month and ~~six-month~~nine-month periods presented:

~~For the three months ended~~	~~June 30, 2021~~	~~June 30, 2020~~
~~Weighted-average risk-free interest rates~~	~~n/a~~	~~n/a~~
~~Dividend yield~~	~~n/a~~	~~n/a~~
~~Weighted-average expected life of the option~~	~~n/a~~	~~n/a~~
~~Weighted-average expected stock price volatility~~	~~n/a~~	~~n/a~~
~~Weighted-average fair value of the options granted~~	~~n/a~~	~~n/a~~

For the three months ended	September 30, 2021			September 30, 2020
Weighted-average risk-free interest rates		1.0	%		n/a
Dividend yield		0.00	%		n/a
Weighted-average expected life of the option		7 years			n/a
Weighted-average expected stock price volatility		65	%		n/a
Weighted-average fair value of the options granted	$	2.45			n/a

~~For the six months ended~~	~~June 30, 2021~~	~~June 30, 2020~~
~~Weighted-average risk-free interest rates~~	~~n/a~~	~~0.5~~%
~~Dividend yield~~	-	-
~~Weighted-average expected life of the option~~	~~n/a~~	~~4.5~~ ~~years~~
~~Weighted-average expected stock price volatility~~	~~n/a~~	94%
~~Weighted-average fair value of the options granted~~	~~n/a~~	~~n/a~~

For the nine months ended	September 30, 2021			September 30, 2020
Weighted-average risk-free interest rates		1.0	%		0.5	%
Dividend yield		0.00	%		0.00	%
Weighted-average expected life of the option		7 years			7 years
Weighted-average expected stock price volatility		65	%		94	%
Weighted-average fair value of the options granted	$	2.45		$	0.36

As of ~~June~~September 30, 2021, we did not have any unvested restricted stock or performance shares outstanding.

(11) Significant Customers and Contingencies

~~Revenue from~~We had five significant customers ~~constituted approximately~~ 25%, 17%, 15%, 10~~%, and~~ 8~~%, respectively, of our total revenue~~ for the ~~three months ended June~~three- and nine-month periods ending September 30, 2021. ~~For the six months ended June 30, 2021, revenue from the same five customers was approximately~~

		For the three months ended				For the nine months ended
		September 30				September 30
Customer #	Product Category	2021		2020		2021		2020
1	Personal Care Ingredients	27	%	18	%	24	%	32	%
2	Solésence®	21	%	16	%	16	%	14	%
3	Solésence®	17	%	16	%	17	%	13	%
4	Solésence®	7	%	0	%	13	%	0	%
5	Medical Diagnostics	5	%	30	%	10	%	20	%
	Total	77	%	80	%	80	%	79	%

22%, 17%, 13%, 13~~% and~~ 16~~%, respectively. Amounts included in accounts~~Accounts receivable ~~on June 30, 2021 relating to~~balances for these five customers were ~~approximately $609~~approximately:~~, $422, $1,048, $194~~ ~~and $106, respectively. Revenue from these five customers constituted approximately~~ 32%, 7%, 13%, 26~~% and~~ 0~~%, respectively, of our total revenue for the three months ended June 30, 2020. For the six months ended June 30, 2020, revenue from the same five customers was approximately~~ 39%, 11%, 14%, 16~~% and~~ 0~~%, respectively. Amounts included in accounts receivable on June 30, 2020 relating to these five customers were approximately $366, $~~26~~, $479, $811~~ ~~and $~~0~~, respectively.~~

	For the nine months ended September 30
Product Category	2021		2020
Personal Care Ingredients	$	817	$	328
Solésence®		1,604		420
Solésence®		470		291
Solésence®		314		-0-
Medical Diagnostics		382		901
Total	$	3,587	$	1,940

The loss of one of these significant customers, a significant decrease in revenue from one or more of these customers, or the failure to attract new customers could have a material adverse effect on our business, results of operations and financial condition.

We currently have exclusive supply agreements with BASF Corporation (“BASF”), our largest customer, that have contingencies outlined which could potentially result in the license of technology and/or the sale of production equipment from the Company to the customer intended to provide capacity sufficient to meet the customer’s production needs. This outcome may occur if we fail to meet certain performance requirements, certain other obligations and/or certain financial condition covenants. The financial condition covenants in one of our supply agreements with BASF “trigger” a technology transfer right (license and equipment sale at BASF’s option) in the event (a) that earnings for the twelve-month period ending with our most recently published quarterly financial statements are less than 0 and a minimum of $1 million in total of certain assets of which at least $500 must be in cash, cash equivalents and certain investments, with the balance being composed of certain inventory and receivables, is not maintained or (b) of an acceleration of any debt maturity having a principal amount of more than $10 million. There are certain minimum finished goods inventory requirements, including certain finished goods inventory levels as “safety stock,”, in order to maintain the $500 non-cash component discussed above. Should our safety stock fall below the prescribed amount of material, the quarter-end cash requirement would revert to $1,000 in cash, cash equivalents, and certain investments. The safety stock requirement may be adjusted upon mutual agreement.

These financial condition covenants, and the related “trigger,” ceased to remain in effect when the Company achieved six consecutive quarters of operating income which in the aggregate exceeds $1.5 million, calculated in accordance with GAAP, applied on a consistent basis. From the six-quarter period of April 1, 2020 through September 30, 2021, the Company had cumulative net income in the amount of $3.9 million, which management believes permanently relieves the previously discussed financial covenants and the related “trigger.”

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

We believe that we should have sufficient cash and credit availability (See the description of the Business Loan Agreement with Libertyville and the Master Agreement with Beachcorp, LLC in Note 7) to operate our business during 2021, but this is dependent on several things over which we have limited control. If a triggering event were to occur and BASF elected to proceed with the license and related equipment sale mentioned above, we would receive royalty payments from this customer for products sold using our technology; however, we would lose both significant revenue and the ability to generate significant revenue to replace that which was lost in the near term. Replacement of necessary equipment that could be purchased and removed by the customer pursuant to this triggering event could take in excess of twelve months. Any additional capital outlays required to rebuild capacity would probably be greater than the proceeds from the purchase of the assets as dictated by our agreement with the customer. Similar consequences would occur if we were determined to have materially breached certain other provisions of the supply agreement with BASF. Any such event would also likely result in the loss of many of our key staff and line employees due to economic realities. We believe that our employees are a critical component of our success, and it could be difficult to replace them quickly. Given the occurrence of any such event, we might not be able to hire and retain skilled employees given the stigma relating to such an event and its impact on us. Finally, any shortfall in capital needed to operate the business as management intends, including with respect to avoiding this triggering event as described above, may result in a curtailment of certain activities or anticipated investments.

We expect to expend resources on research, development, and product testing, and in expanding current capacity or capability for new business. In addition, we may incur significant costs in preparing, filing, prosecuting, maintaining, and enforcing our patents and other proprietary rights. We may need additional financing if we were to lose an existing customer or suffer a significant decrease in revenue from one or more of our customers or because of currently unknown capital requirements, new regulatory requirements, or the need to meet the cash requirements discussed above to avoid a triggering event under our BASF agreement. Given our expected growth in our Solésence® business, we may also have temporary working capital demands that we cannot fund with existing capital, while remaining in compliance with the covenants included in our BASF agreement described above. If necessary, we may seek funding through public or private financing and through contracts with governmental entities or other companies. Additional financing may not be available on acceptable terms or at all, and any such additional financing could be dilutive to our shareholders. If we are unable to obtain adequate funds, we may be required to delay, scale-back or eliminate some of our manufacturing and marketing operations or we may need to obtain funds through arrangements on less favorable terms. Such circumstances could raise doubt as to our ability to continue as a going concern. If we obtain funding on unfavorable terms, we may be required to relinquish rights to some of our intellectual property.

(12) Business Segmentation and Geographical Distribution

Revenue from international sources approximated $~~1,138~~585 and $~~2,423~~3,008 for the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively, compared to $~~1,201~~1,242 and $~~1,505~~2,747 for the three and ~~six~~nine months ended ~~June~~September 30, 2020, respectively. All of this revenue was product revenue.

Our Operations comprise a single business segment and all 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 for the three months and ~~six~~nine months ended ~~June~~September 30, 2021 and 2020, by category, are as ~~follows~~follows::

	For the three months ended June 30				For the six months ended June 30				For the three months ended September 30				For the nine months ended September 30
Product Category		2021		2020		2021		2020	2021		2020		2021		2020
Personal Care Ingredients	$	1,780	$	1,505	$	3,176	$	3,437	$	2,171	$	753	$	5,347	$	4,190
Advanced Materials		835		1,512		2,213		2,096		1,182		1,582		3,394		3,678
Solésence^®		4,499		1,318		8,797		2,841		4,571		1,553		13,369		4,394
Total Revenue	$	7,114	$	4,335	$	14,186	$	8,374	$	7,924	$	3,888	$	22,110	$	12,262

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

Overview

Nanophase is a skin health focused company whose primary products are fully developed prestige skin care formulations, marketed and sold through our Solésence 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 conditions since early 2020 lead to a significant increase in 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 markets for architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, and surface finishing technologies (polishing) applications— all of which, along with medical diagnostics, currently fall into the advanced materials product category.

Leveraging a platform of integrated patented and proprietary technologies, we create products with unique performance to enhance consumers’ 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 in our finished products.

We believe that the advent of the SARS-CoV-2 (“COVID-19”) Pandemic has driven significantly ~~increase~~increased demand for our medical diagnostics materials during 2020 and ~~2021.~~the first half of 2021, after which demand has lessened. It is our expectation that future demand may not reach the same volumes, but should remain greater than historic demand experienced prior to 2020. Polymerase Chain Reaction (“PCR”) testing for various viruses, most notably “COVID-19,” has become a critical use of our technology in the life science space. While it is difficult to predict to what extent the increased demand for our medical diagnostic materials used in COVID-19 testing will continue, 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 growing use of our diagnostic materials in aiding the fight to curb the spread of COVID-19 and other viruses, we have reoriented our Company strategy. We are seeing 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 ~~$7,114~~$7,924 for the three months ended ~~June~~September 30, 2021, compared to ~~$4,335~~$3,888 for the same period in 2020. Total revenue increased to ~~$14,186~~$22,110 for the ~~six~~nine months ended ~~June~~September 30, 2021 from ~~$8,374~~$12,262 for the same period in 2020. A substantial majority of our revenue for both periods was from our five largest customers, ~~in particular,~~reflecting sales of APIs to our largest customer in skin care and sunscreen applications, ~~medical diagnostics,~~ ~~and now~~our three largest customers for our finished skin health products marketed through our Solésence ~~subsidiary.~~subsidiary, and a medical diagnostics customer. This is the revenue breakdown, as a percentage of total revenue, from the five customers referenced:

		For the three months ended September 30				For the nine months ended September 30
Customer #	Product Category	2021		2020		2021		2020
1	Personal Care Ingredients	27	%	18	%	24	%	32	%
2	Solésence®	21	%	16	%	17	%	13	%
3	Solésence®	17	%	16	%	16	%	14	%
4	Solésence®	7	%	0	%	13	%	0	%
5	Medical Diagnostics	5	%	30	%	10	%	20	%
	Total	77	%	80	%	80	%	79	%

Product revenue, the primary component of our total revenue, increased to $~~7,025~~ $7,896 for the three months ended ~~June~~September 30, 2021,, compared to ~~$4,141~~$3,827 during the same period of 2020. Product revenue increased to ~~$14,075~~$21,971 for the ~~six~~nine months ended ~~June~~September 30, 2021 from ~~$8,102~~$11,929 for the same period in 2020. This increase was due to continued growth in the adoption of our Solé~~sence~~®sence® products,, along with ~~a small~~an increase in ~~our~~ API sales to our largest customer in our personal care ingredients business,, and a significant three-month decrease ~~and~~leading to a modest ~~six-month increase~~nine-month decrease in our medical diagnostics materials.

Other revenue decreased to ~~$89~~$28 and ~~$111~~$139 for the three- and ~~six-month~~nine-month periods ended ~~June~~September 30, 2021, compared to ~~$194~~$61 and ~~$272~~$333 for the same periods in 2020, 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 ~~$4,600~~$4,946 for the three months ended ~~June~~September 30, 2021, compared to ~~$2,625~~$2,201 for the same period in 2020. Cost of revenue increased to ~~$9,642~~$14,588 for the ~~six~~nine months ended ~~June~~September 30, 2021, compared to ~~$5,630~~$7,832 for the same period in 2020. The increase in cost of revenue was primarily driven by increased volume and price inflation on materials and manufacturing inefficiencies related to Solésence® product launches. Additionally, during the third quarter of 2021, we have added personnel in the supply chain function and incurred costs to rent temporary warehouse space. While we typically ~~pass through~~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. We expect to continue new advanced material development relating to personal care ingredients and for our formulated Solésence® products during 2021 and beyond.

At current revenue levels we have generated a positive gross margin, though margins can be impeded by the cyclicality of our demand, often leading to the Company not having enough revenue to efficiently absorb manufacturing overhead that is required to work with current customers and expected future customers. Another issue relating to demand cyclicality is that we have seen our lack of burst capacity creating 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. We believe that our current fixed manufacturing cost structure is sufficient to support higher levels of revenue volume, but will need to be enhanced moving in to 2022 to accommodate what we expect to be additional growth. 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 absolute dollar gross margin growth through 2021 and beyond, dependent upon the factors discussed above.

Research and development expense, which includes all expenses relating to the technology and advanced engineering groups, primarily consists of costs associated with the development or acquisition of new finished product formulations for skin care, new product applications for our skin care ingredients, advancement of our medical diagnostics ingredient knowledge, and the cost of enhancing our manufacturing processes. 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 ~~$536~~$635 for the three months ended ~~June~~September 30, 2021,, compared to ~~$357~~$405 for the same period in 2020. For the ~~six~~nine months ended ~~June~~September 30, 2021, research and development expense increased to ~~$1,035,~~$1,670, compared to ~~$729~~$1,134 for the same period in 2020. Management expects research and development expense to ~~grow incrementally~~increase during the balance of ~~2021.~~2021, with enhancements in product development investment planned for 2022.

Selling, general and administrative expense increased to ~~$1,017~~$942 for the three months ended ~~June~~September 30, 2021, compared to ~~$699~~$730 for the same period in 2020. For the ~~six~~nine months ended ~~June~~September 30, 2021, selling, general and administrative expense increased to ~~$2,051,~~$2,994, compared to ~~$1,404~~$2,133 for the same period in 2020.

~~For both the three-~~ We have added to our Sales, Marketing, and ~~six-month periods~~Business Development team in 2021, ~~compensation~~with a few more staff additions planned through early-mid-2022. Compensation expense ~~was~~has also been up generally ~~due to a reorganization of some of the functions~~ in 2021, and we expect this ~~area and the addition of resources required~~trend to continue to execute on our growth plan. Marketing expenses were up primarily due to tradeshow deposits and additional market research expenses. Travel and entertainment expenses have been down as a product of the ongoing Covid-19 pandemic and its impact on air travel, live trade shows, and in-person meetings, which we expect to change, assuming the travel environment stabilizes.in 2022.

The Company recognized $952 in other income relating to the forgiveness of its Paycheck Protection Program (“PPP”) Loan by the SBA in the ~~six~~nine months ended ~~June~~September 30, 2021. The Company applied for PPP Loan forgiveness in February 2021, due to management’s belief that the Company expended the proceeds of the PPP loan for forgivable purposes under the CARES Act. The loan was legally forgiven in February 2021, although the Company did not directly receive notice of PPP Loan forgiveness until June 2021.

Inflation

We believe inflation has not had a material effect on our operations or financial position. However, supplier price increases and wage and benefit inflation, both of which represent a significant component of our costs of operations, may have a material effect on our operations and financial position in 2021 and beyond if we are unable to pass through any applicable increases under our present contracts or through to our markets in general.

Liquidity and Capital Resources

Our cash and cash equivalents amounted to ~~$1,077~~$1,380 on ~~June~~September 30, 2021, compared to $957 on December 31, 2020 and ~~$1,773~~$1,134 on ~~June~~September 30, 2020. The net cash provided by our operating activities was ~~$488~~$269 for the ~~six~~nine months ended ~~June~~September 30, 2021, compared to ~~$1,246~~$1,732 of net cash used in our operating activities for the same period in 2020. The net cash provided during the ~~six~~nine months ended ~~June~~September 30, 2021 was primarily a function of increased profits, ~~and an increase in account payable, somewhat~~ offset by the expansion of inventories. Management has adopted a ~~large increase~~strategy in ~~inventory~~2021 to ameliorate supply chain risk to a degree by ordering raw materials and ~~an increase~~components further in ~~accounts receivable. Cash used during~~advance than we typically have in the ~~six months ended June 30, 2020 was driven primarily~~lessen the impact of delays and shortages brought on by competition for limited resources as the global economy gears up for post COVID-19 demand. It is our expectation that this will not continue indefinitely, and that our cash position will benefit when a ~~significant increase in accounts receivable at the end of the period.~~ more “normal” supply chain situation returns.

Net cash used in investing activities, which was attributable to expenditures on capital equipment for both periods, was ~~$508~~$1,445 during ~~six~~nine months ended ~~June~~September 30, 2021, compared to ~~$276~~$448 for the ~~six~~nine months ended ~~June~~September 30, 2020.

Net cash provided by financing activities was ~~$140~~$1,599 during the ~~six~~nine months ended ~~June~~September 30, 2021, compared to ~~$2,101~~$2,120 for the ~~six~~nine months ended ~~June~~September 30, 2020. On March 23, 2020, the Company and Beachcorp, LLC executed the First Amendment to our Master Agreement that extends the maturities of both the Term Loan and the Revolver Facility to March 31, 2021. Effective September 8, 2020, the Company and Beachcorp, LLC executed the Second Amendment to our Master Agreement that expands the limit on the Revolver Facility from $2,000 to $2,750. On December 23, 2020, the Company and Beachcorp, LLC executed the Third Amendment to our Master Agreement that expands the limit on the Revolver Facility from $2,750 to $4,000 and extends the maturities of both the Term Loan and the Revolver Facility to March 31, 2022. On April 21, 2021, the Company and Beachcorp, LLC executed the Fourth Amendment to our Master Agreement that expands the limit on the Revolver Facility from $4,000 to $6,000, extends its maturity to March 31, 2023, and reduces interest on outstanding borrowings from the prime rate plus 3%, with an 8.25% minimum floor, to the prime rate plus 2%, with no minimum rate floor. Additionally, the Fourth Amendment increased the amount of the Term Loan from $500 to $1,000, and its fixed interest rate was reduced from 8.25% per year to 5.25% per year. The maturity date of the Term Loan remains March 31, 2022.

We paid ~~$93~~$139 for principal on finance lease obligations during the ~~six~~nine months ended ~~June~~September 30, 2021 compared to ~~$116~~$172 in the same period in 2020. The balance of the line of credit with Libertyville was $0 at ~~June~~September 30, 2021, compared to $500 at December 31, 2020. When money is borrowed, the line of credit is repaid during the month following the end of the reporting period. This line of credit expired on April 4, 2021 and was extended to April 4, 2022 in May 2021, with an effective date of April 4, 2021. During the ~~six~~nine months ending ~~June~~September 30, 2021, we drew ~~$11,975,~~$19,525, of which ~~$11,820~~$17,939 was repaid under the Master Agreement. The net borrowings for the ~~six~~nine months ended ~~June~~September 30, 2021 were ~~$155.~~$1,585. During the ~~six~~nine months ending ~~June~~September 30, 2020, we drew ~~$6,860,~~$10,390, of which ~~$5,595~~$9,073 was repaid under the Master Agreement. The net borrowings for the ~~six~~nine months ~~ending June~~ended September 30, 2020 were ~~$1,265.~~$1,317. Accretion related to the Secured Convertible Promissory Note to Bradford T. Whitmore was $836 and ~~$134~~$200 for the ~~six~~nine months ending ~~June~~September 30, 2021 and 2020, respectively. The balance of this long-term convertible loan was $0 and $1,097 at ~~June~~September 30, 2021, and at December 31, 2020, respectively. Mr. Whitmore chose to exercise his conversion rights effective May 7, 2021, requesting that any accrued interest be paid him in the form of shares, as allowed in the Convertible Note. This exercise resulted in the accelerated recognition of the remaining discount on the Convertible Note, all of which was recognized as interest expense in the second quarter of 2021.

On April 17, 2020, we received a loan of ~~$952~~$952 from Libertyville under the Paycheck Protection Program (“PPP”). Under the PPP, the Company applied for forgiveness of the amount due on the loan in an amount equal to the sum of the following costs incurred during the 24-week period beginning on the date of the first disbursement of the Loan: (a) payroll costs, (b) any payment of interest on a covered obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), (c) any payment on a covered rent obligation, and (d) any covered utility payment, calculated in accordance with the terms of the CARES Act. The Company applied for PPP Loan forgiveness in February 2021, compelled by its belief that it expended the proceeds of the PPP loan for forgivable purposes under the CARES Act. The loan was legally forgiven in February 2021, although the Company received notice of PPP Loan forgiveness in June 2021.

Our supply agreements with our largest customer, BASF, contain certain financial covenants which could potentially impact our liquidity. ~~The~~Historically, the most restrictive financial covenants under these agreements ~~require~~required that we ~~maintain~~maintained a minimum of $1,000 in certain current assets; which may have been be composed of no less than $500 cash, cash equivalents, and certain investments, no more than a combined $500 of certain related inventory, of which no more than $250 can be raw material, and certain ~~receivables, and~~receivables. These covenants also dictated that we not have the acceleration of any debt maturity having a principal amount of more than $10 ~~million,~~million. Both covenants were consistently met by the Company in order to avoid triggering the customer’s potential right to transfer certain technology and equipment to that customer at a contractually-defined price. These financial condition covenants, and the related “trigger,” ceased to remain in effect when the Company achieved six consecutive quarters of operating income which in the aggregate exceeds $1.5 million, calculated in accordance with GAAP, applied on a consistent basis. From the six-quarter period of April 1, 2020 through September 30, 2021, the Company had cumulative net operating income in the amount of $3.9 million, which management believes permanently relieves the previously discussed financial covenants and the related “trigger.” We had approximately ~~$1,077~~$1,380 in cash on ~~June~~September 30, 2021. This supply agreement and its covenants are more fully described in Note 11, and our credit facilities are more fully described in Note 7, to our Financial Statements in Part I, Item 1 of this Form 10-Q.

We believe that cash from operations and cash on hand, in addition to unused borrowing capacity, which has recently been increased (see Note 7 to the Financial Statements), may not be adequate to fund our operating plans through ~~2021.~~2022, particularly when considering management’s inventory and expansion strategy. We are working to reduce these risks, but some of this is dependent on several things over which we have limited control. We have seen an increase in sales of our Solésence products through 2020, and the first ~~half~~nine months of 2021, which we expect to continue in to 2022. If that does continue, we will require additional investment in working capital. Given these issues, and other commercial realities, we are monitoring the additional working capital demands that this could create as we continue to execute on our Solésence growth strategy. The timing of cash flows is critical. If cash generated from operations is not materially consistent with our plans, we believe that we may need to seek additional funding to address working capital demands. This uncertainty has caused us to be unable to assert that, for the next twelve months, we have enough current cash and guaranteed access to financing to fund operations, and to continue with our current growth strategy in terms of investment in capital equipment and in operating expenses related to Solésence, without securing additional financing. We believe that we will be able to secure additional financing if needed, but we do not have any additional financing commitments in place as of today. However, we may not be able to secure additional financing in a timely manner under commercially reasonable terms, or at all. If we are unable to secure additional financing, the operations of the Company might need to be curtailed to a certain degree, and we would need to delay capital expenditures related to our Solésence growth strategy, which could impede growth ~~later in~~through the end of 2021 and 2022.

Our actual future capital requirements in 2021 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, we expect that capital spending relating to currently known capital needs during the balance of 2021 will be between $900 and ~~$1,600.~~$1,400. 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 spending may fall below the lower end of the range. Similarly, substantial success in business development projects may cause the actual ~~2021~~ capital investment for the balance of 2021 to exceed the top of this range.

In the likely event that we will need to seek additional financing, such additional financing may not be available on acceptable terms or even at all, and any such additional financing could be dilutive to our shareholders. Such financing could be necessitated by such things as the loss of an existing customer; a significant decrease in revenue from one or more of our customers; temporary working capital demands resulting from our expected growth in our Solésence business that we cannot fund with existing capital; currently unknown capital requirements considering the factors described above; new regulatory requirements that are outside our control; the need to meet previously discussed cash requirements to avoid a triggering event under our BASF agreement; or various other circumstances coming to pass that we currently do not anticipate. The failure to have access to sufficient capital to fund our business plans may result in a curtailment or other change in those plans, and under such circumstances, this raises doubt as to our ability to continue as a going concern under U.S. GAAP.

On December 31, 2020, we had a net operating loss carryforward of approximately $67 million for income tax purposes. Because the Company may have experienced “ownership changes” within the meaning of the U.S. Internal Revenue Code (“IRC”) in connection with its various prior equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the IRC. If not utilized, approximately $62 million of the carryforward will expire between 2021 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 will not expire.

~~Off–Balance~~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.

As more fully described in Note 7 to our Financial Statements, in Part I, Item I of this Form 10-Q, during 2014 we entered into a letter of credit and promissory note for up to $30 supporting our obligations under our facility lease agreement. No borrowings have been incurred under this promissory note.

Safe Harbor Provision

We want to provide investors with more meaningful and useful information. As a result, this Quarterly Report on Form 10-Q (the ~~"Form 10-Q"~~“Form 10-Q”) contains and incorporates by reference certain ~~"forward-looking statements"~~“forward-looking statements”, as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements reflect our current expectations of the future results of our operations, performance, and achievements. Forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have tried, wherever possible, to identify these statements by using words such as “anticipates”, “believes”, “estimates”, “expects”, “plans”, “intends” and similar expressions. These statements reflect management’s current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause our actual results, performance, or achievements in 2021 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.

~~Ite~~mItem 3. Quantitative ~~and~~and Qualitative Disclosures About Market Risk

Not required for a smaller reporting company.

ItemItem 4. Controls and ~~Procedures~~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, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at reaching that level of reasonable assurance.

Internal control over financial reporting

The Company’s management, including the CEO (who is also currently acting as both the Company’s principal executive officer and the Company’s principal financial officer), confirm that there was no change in the Company’s internal control, other than pursuing affirmative confirmation of future singular transactions, similar to the PPP Loan forgiveness, 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.

PPART II ~~ART II~~ – OTHER INFORMATION

~~Ite~~mItem 1. Legal ~~Proceedings~~Proceedings

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

Item 1A. Risk Factors

~~Item 1A. Risk Factors~~

Not required for a smaller reporting company.

~~Ite~~Item 2. Unregister~~m 2. Unregistered~~ed Sales of Equity Securities and Use of Proceeds

None

~~Ite~~mItem 3. Defaults Upon Senior Securities

None.

Item 4. Mine ~~Safety~~Safety Disclosures

Not applicable.

~~Ite~~mItem 5. Other ~~Information~~Information

None.

~~Ite~~Item 6. Exh~~m 6. Exhibits~~ibits

Exhibit 31.1

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

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

Large accelerated filer ☐	Accelerated filer ☐

Non-accelerated filer ☐	Smaller reporting company ☑

	Emerging growth company ☐