10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

    x     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: September 30, 2012

or

    ¨     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from        to        

Commission File Number: 000-22333

Nanophase Technologies Corporation

(Exact name of registrant as specified in its charter)

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

1319 Marquette Drive, Romeoville, Illinois 60446

(Address of principal executive offices, and zip code)

Registrant’s telephone number, including area code: (630) 771-6708

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer, large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller Reporting Company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the

Exchange Act).    Yes   ¨    No  x

As of November 5, 2012, there were 28,458,162 shares outstanding of common stock, par value $.01, of the registrant.

NANOPHASE TECHNOLOGIES CORPORATION

QUARTER ENDED SEPTEMBER 30, 2012

INDEX

		Page
PART I - FINANCIAL INFORMATION			3
Item 1.	Financial Statements		3
	Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011		3
	Unaudited Statements of Operations for the three months ended September 30, 2012 and 2011 and the nine months ended September 30, 2012 and 2011		4
	Unaudited Statements of Cash Flows for the nine months ended September 30, 2012 and 2011		5
	Notes to Unaudited Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		13
Item 4.	Controls and Procedures		13
PART II - OTHER INFORMATION			14
Item 1.	Legal Proceedings		14
Item 1A.	Risk Factors		14
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		14
Item 3.	Defaults Upon Senior Securities		14
Item 4.	Mine Safety Disclosures		14
Item 5.	Other Information		14
Item 6.	Exhibits		14
SIGNATURES			15

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

NANOPHASE TECHNOLOGIES CORPORATION

BALANCE SHEETS

	September 30,
	2012 (Unaudited)			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	4,565,558		$	2,693,623
Investments		30,000			30,000
Trade accounts receivable, less allowance for doubtful accounts of $6,000 on September 30, 2012 and December 31, 2011		869,660			878,600
Other receivables		—			13,712
Inventories, net		1,291,989			1,338,210
Prepaid expenses and other current assets		268,346			391,466
Total current assets		7,025,553			5,345,611
Equipment and leasehold improvements, net		3,218,327			3,713,082
Other assets, net		30,453			32,318
	$	10,274,333		$	9,091,011
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of capital lease obligations	$	33,961		$	—
Deferred other revenue		67,998			—
Accounts payable		605,474			319,706
Accrued expenses		561,235			383,425
Accrued discount liability		34,888			116,103
Total current liabilities		1,303,556			819,234
Long-term portion of capital lease obligations		71,602			—
Long-term deferred rent		636,122			647,404
Asset retirement obligations		152,554			148,515
Total long-term liabilities		860,278			795,919
Contingent liabilities		—			—
Stockholders’ equity:
Preferred stock, $.01 par value, 24,088 shares authorized and no shares issued and outstanding		—			—
Common stock, $.01 par value, 35,000,000 shares authorized; 28,458,162 and 21,208,162 shares issued and outstanding on September 30, 2012 and December 31, 2011, respectively		284,582			212,082
Additional paid-in capital		95,444,015			93,070,979
Accumulated deficit		(87,618,098	)		(85,807,203	)
Total stockholders’ equity		8,110,499			7,475,858
	$	10,274,333		$	9,091,011

See Notes to Financial Statements.

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NANOPHASE TECHNOLOGIES CORPORATION

STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Revenue:
Product revenue, net	$	2,028,529		$	2,164,697		$	7,061,504		$	7,706,487
Other revenue		72,435			78,217			231,591			245,321
Net revenue		2,100,964			2,242,914			7,293,095			7,951,808
Operating expense:
Cost of revenue		1,571,575			1,894,001			5,349,594			5,699,089
Gross profit		529,389			348,913			1,943,501			2,252,719
Research and development expense		396,503			421,597			1,210,168			1,282,618
Selling, general and administrative expense		789,169			935,857			2,546,334			3,063,446
Loss from operations		(656,283	)		(1,008,541	)		(1,813,001	)		(2,093,345	)
Interest income		—			591			—			3,929
Interest expense		(2,056	)		(1,965	)		(5,093	)		(3,763	)
Other, net		—			—			7,199			(43	)
Loss before provision for income taxes		(658,339	)		(1,009,915	)		(1,810,895	)		(2,093,222	)
Provision for income taxes		—			—			—			—
Net loss	$	(658,339	)	$	(1,009,915	)	$	(1,810,895	)	$	(2,093,222	)
Net loss per share - basic and diluted	$	(0.02	)	$	(0.05	)	$	(0.08	)	$	(0.10	)
Weighted average number of basic and diluted common shares outstanding		26,960,880			21,207,597			23,139,731			21,205,320

See Notes to Financial Statements.

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NANOPHASE TECHNOLOGIES CORPORATION

STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended September 30,
	2012			2011
Operating activities:
Net loss	$	(1,810,895	)	$	(2,093,222	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		749,666			845,207
Stock compensation expense		222,673			251,518
Changes in assets and liabilities related to operations:
Trade accounts receivable		8,940			(327,069	)
Other receivables		13,712			(76,860	)
Inventories		46,221			140,859
Prepaid expenses and other current assets		123,120			(73,283	)
Accounts payable		289,032			(334,392	)
Accrued expenses		87,742			(650,307	)
Deferred other revenue		67,998			—
Net cash used in operating activities		(201,791	)		(2,317,549	)
Investing activities:
Acquisition of equipment and leasehold improvements		(116,969	)		(61,221	)
Payment of accounts payable incurred for the purchase of equipment and leasehold improvements		(14,941	)		(52,444	)
Net cash used in investing activities		(131,910	)		(113,665	)
Financing activities:
Principal payments on capital leases		(14,796	)		(748	)
Proceeds from stockholder rights offering, net of costs		2,220,432			—
Proceeds from exercise of stock options		—			4,080
Net cash provided by financing activities		2,205,636			3,332
Increase (decrease) in cash and cash equivalents		1,871,935			(2,427,882	)
Cash and cash equivalents at beginning of period		2,693,623			5,744,322
Cash and cash equivalents at end of period	$	4,565,558		$	3,316,440
Supplemental cash flow information:
Interest paid	$	5,093		$	3,763
Supplemental non-cash investing activities:
Accounts payable incurred for the purchase of equipment and leasehold improvements	$	11,677		$	18,261
Capital lease obligations incurred in the purchase of equipment	$	120,359		$	—

See Notes to Financial Statements.

5

NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of Presentation

The accompanying unaudited interim financial statements of Nanophase Technologies Corporation (“Nanophase” or the “Company”, including “we” or “us”) reflect all adjustments (consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the financial position and operating results of the Company for the interim periods presented. Operating results for the three and nine month periods ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission.

(2) Description of Business

Nanophase is a nanomaterials and applications developer and commercial manufacturer with an integrated family of nanomaterial technologies. Nanophase produces engineered nanomaterial for use in a variety of diverse existing and developing markets: personal care including sunscreens, architectural coatings, architectural window cleaning and restoration, industrial coating ingredients, abrasion-resistant additives, plastics additives, medical diagnostics and a variety of polishing applications, including semiconductors and optics. We target markets in which we believe practical solutions may be found using nanoengineered products. We work closely with current and potential customers in these target markets to identify their material and performance requirements and market our materials to various end-use applications manufacturers. Recently developed technologies have made certain new products possible and opened potential new markets. Although the Company’s primary strategic focus has been the North American market, it currently sells material to customers overseas and has been working to expand its reach within foreign markets.

The Company was incorporated in Illinois in November 1989, and became a Delaware corporation in November 1997. The Company’s common stock trades on the OTCQB marketplace under the symbol NANX.

While product sales comprise the majority of our revenue, we also recognize revenue in connection with a technology license and 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 Statement of Operations, as it does not represent revenue directly from our nanocrystalline materials.

(3) Financial Instruments

We follow the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.

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The Company’s financial instruments include cash, accounts receivable, accounts payable and accrued expenses. The fair values of all financial instruments were not materially different from their carrying values.

There were no financial assets or liabilities adjusted to fair value on September 30, 2012 and December 31, 2011.

(4) Investments

Investments on September 30, 2012 and December 31, 2011 were comprised of certificates of deposit in the amount of $30,000, pledged as collateral for the Company’s rent and restricted as to withdrawal or usage.

(5) Inventories

Inventories consist of the following:

	September 30, 2012			December 31, 2011
Raw materials	$	320,485		$	490,729
Finished goods		1,031,670			907,647
		1,352,155			1,398,376
Allowance for excess inventory quantities		(60,166	)		(60,166	)
	$	1,291,989		$	1,338,210

(6) Share-Based Compensation

The Company follows FASB ASC Topic 718, Share-Based Payments, in which compensation expense is recognized only for share-based payments expected to vest. The Company recognized compensation expense related to stock options of $62,203 and $225,104 for the three and nine month periods ended September 30, 2012, compared to $102,153 and $305,216 for the same periods in 2011.

As of September 30, 2012, there was approximately $370,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Company’s stock option plans. That cost is expected to be recognized over a remaining weighted-average period of 1.8 years.

Stock Options and Stock Grants

During the nine months ended September 30, 2012, no stock options were exercised. During the nine months ended September 30, 2011, proceeds of $4,080 were received, and 4,000 shares of common stock were issued, pursuant to stock option exercises. During the nine months ended September 30, 2012, 547,000 stock options were granted compared to 524,500 stock options granted during the same period in 2011. During the nine months ended September 30, 2012, 168,732 stock options were forfeited, compared to 126,067 stock options forfeited during the same period in 2011.

Stock Appreciation Rights

During 2010 and 2009, the Company granted its outside directors stock appreciation rights (SAR’s) totaling 106,750 shares under the Company’s Amended and Restated 2006 Stock Appreciation Rights Plan. These awards are accounted for as liability awards, included in accrued expenses as of September 30, 2012 and 2011, and adjusted to fair value each reporting period. The fair value of the liability for the 87,500 shares that were outstanding on September 30, 2012 was $8,442, compared to $10,873 on December 31, 2011.

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As of September 30, 2012, the Company does not have any unvested restricted stock or performance shares outstanding.

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

For the nine months ended	September 30, 2012			September 30, 2011
Weighted-average risk-free interest rates:		1.10	%		2.51	%
Dividend yield:		—			—
Weighted-average expected life of the option:		7 Years			7 Years
Weighted-average expected stock price volatility:		85.33	%		74.21	%
Weighted-average fair value of the options granted:	$	0.23		$	0.89

(7) Significant Customers and Contingencies

Sales to three customers constituted approximately 62%, 9% and 7%, respectively, of our total revenue for the three months ended September 30, 2012, and 68%, 9% and 4%, respectively, of our total revenue for the nine months ended September 30, 2012. Amounts included in accounts receivable on September 30, 2012 relating to these three customers were approximately $602,000, $0 and $88,000, respectively. Revenue from these three customers constituted approximately 53%, 22% and 8%, respectively, of our total revenue for the three months ended September 30, 2011, as compared to 55%, 22% and 6%, respectively, of our total revenue for the nine months ended September 30, 2011. Amounts included in accounts receivable on September 30, 2011 relating to these three customers were approximately $286,000, $249,000 and $98,000, respectively.

We currently have supply agreements with BASF Corporation (“BASF”), our largest customer, that have contingencies outlined which could potentially result in the license of technology and/or sale of production equipment, from the Company to the customer, providing capacity sufficient to meet the customer’s production needs, if triggered by our failure 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, optionally, an equipment sale) in the event (a) that earnings for our twelve month period ending with our most recently published quarterly financial statements are less than zero and our cash, cash equivalents and certain investments are less than $2,000,000, or (b) of an acceleration of any debt maturity having a principal amount of more than $10,000,000. 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.

We believe that we have sufficient cash (See Liquidity and Capital Resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations for a further discussion) to operate our business during 2012. We also expect a favorable fluctuation in working capital, particularly as the price of one of our raw materials, cerium oxide, has declined in 2012 from historic highs experienced during 2011. On July 20, 2012, we completed a fully subscribed stockholder rights offering, pursuant to which our existing stockholders exercising their basic and oversubscription rights purchased a total of 7,250,000 shares of our common stock, which was the maximum number of shares offered in the rights offering, at a price of $0.33 per full share. We received approximately $2.2 million in proceeds from the rights offering, net of costs. If a triggering event were to occur and BASF elected to proceed with the license and related equipment sale mentioned above, the Company would receive royalty payments from this customer for products sold using the Company’s 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

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required to rebuild capacity would probably be greater than the proceeds from the purchase of the assets as dictated by our agreement with BASF. 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 quickly replace and train them. Upon 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. 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.

(8) Business Segmentation and Geographical Distribution

Revenue from international sources approximated $187,000 and $466,000 for the three and nine months ended September 30, 2012 compared to $106,000 and $460,000 for the same periods in 2011. As part of our revenue from international sources, we recognized approximately $111,000 and $226,000, respectively, in product revenue from several German companies during the three and nine months ended September 30, 2012, compared to $23,000 and $215,000, respectively, during the three and nine months ended September 30, 2011. We also recognized approximately $68,000 and $211,000, respectively, in other revenue from a technology license fee from our Japanese licensee during the three and nine months ended September 30, 2012, compared to $75,000 and $225,000, respectively, for the same periods in 2011. The Company entered into multiple agreements with this Japanese licensee during 2012. During January 2012, the Company and the Japanese licensee entered into a mutual cooperation agreement, which confirmed their intent to allow their existing agreements to terminate, in accordance with their terms, as of March 31, 2013. The parties also agreed that, as of April 1, 2013, the territorial restrictions and royalty payments set forth in the existing agreements would no longer be in effect. On March 31, 2012, the Company assigned the Japanese trademark for “NanoTek” to the Japanese licensee in exchange for $5,000. In addition, the Japanese licensee paid the Company $279,000 during April 2012 as prepayment for the final minimum royalty of $300,000, due under the existing terms in April 2013, which represented a 7% discount for early payment. The Company recorded the royalty prepayment as deferred other revenue as of March 31, 2012, and will recognize it ratably over the remaining contract term. The balance of deferred other revenue on September 30, 2012 was $67,998.

The Company’s operations comprise a single business segment and all of our long-lived assets are located within the United States.

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

Overview

Nanophase is a nanomaterials and applications developer and commercial manufacturer with an integrated family of nanomaterial technologies. Nanophase produces engineered nanomaterials for use in a variety of diverse markets: personal care including sunscreens, architectural coatings, industrial coating ingredients, architectural window cleaning and restoration, abrasion-resistant additives, plastics additives, medical diagnostics and a variety of polishing applications, including semiconductors and optics. We target markets in which we feel practical solutions may be found using nanoengineered products. We work closely with current and potential customers in these target markets to identify their material and performance requirements and market our materials to various end-use applications manufacturers. Recently developed technologies have made certain new products possible and opened potential new markets. We expect growth in end-user (manufacturing customers, including customers of Nanophase’s customers) adoption in 2012 and beyond and revenue growth relative to these new markets to follow thereafter. We further expect that we will attract additional customers to help us achieve growth in certain markets in 2012 and beyond. Our initiatives in targeted market areas are progressing at differing rates of speed, but we have been broadly moving through testing and development cycles, and in a number of cases believe we are approaching first revenue or next stage revenue with particular customers in the industries referenced above. During 2011, for example, we launched our line of abrasion-resistant

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additives and have been engaged in a large volume of related activities. Abrasion-resistant and polishing applications tend to have shorter testing cycles than other applications such as exterior coatings. During 2012, our largest customer launched a new personal care product featuring our material. In addition, we had early stage commercial success in other diverse markets. We further believe that successful introduction of our materials with manufacturers will more likely lead to follow-on orders for other materials in their applications. Although our primary strategic focus has been the North American market, we currently sell material to customers overseas and have been working to expand our reach within foreign markets.

Results of Operations

Total revenue decreased to $2,100,964 and $7,293,095 for the three and nine months ended September 30, 2012, compared to $2,242,914 and $7,951,808 for the same periods in 2011. A substantial majority of the revenue for the three and nine month periods ended September 30, 2012 was from our largest customers, in particular sales to our largest customer in personal care and sunscreen applications. Revenue from our top three customers was approximately 62%, 9% and 7%, respectively, during the three months ended September 30, 2012, as compared to 68%, 9% and 4%, respectively, for the nine months ended September 30, 2012. Revenue from these three customers constituted approximately 53%, 22% and 8%, respectively, of the Company’s total revenue for the three months ended September 30, 2011 as compared to 55%, 22% and 6%, respectively, of our total revenue for the nine months ended September 30, 2011. Product revenue decreased to $2,028,529 and $7,061,504 for the three and nine months ended September 30, 2012, compared to $2,164,697 and $7,706,487 for the same periods in 2011, as a larger percentage of our sales to our largest customers occurred during the first nine months of 2011, while sales to such customers are expected to occur more proportionately throughout the entire 2012 fiscal year.

Other revenue decreased to $72,435 and $231,591 for the three and nine months ended September 30, 2012, compared to $78,217 and $245,321 for the same periods in 2011.

We use certain elements classified as “Rare Earth” elements in some of our processes, specifically cerium oxide in polishing applications. On a worldwide basis, the vast majority of these elements are currently supplied from China. Due to export limitations imposed by China during the summer of 2010, the supply of all Rare Earth elements was drastically reduced during the second half of 2010 and through 2011, as compared to prior periods. This created significant issues with availability of acceptable materials and, if available, resulted in a substantial increase in cost. Beginning late 2011 and continuing into 2012, alternative supplies have come online and the cost has reduced sharply from the peak, but the materials still cost several times what they did two years ago. We have inventory in-house and purchase orders for 2012 fulfillment related to this line of business, but the long-term success of this area will be directly impacted by the supply and cost of Rare Earth elements, specifically cerium oxide.

Cost of revenue generally includes costs associated with commercial production and customer development arrangements. Cost of revenue decreased to $1,571,575 and $5,349,594 for the three and nine months ended September 30, 2012, compared to $1,894,001 and $5,699,089 for the same periods in 2011. The decrease in cost of revenue in both periods was generally attributed to decreased revenue volume. We expect to continue new nanomaterial development, primarily using our NanoArc^® synthesis and dispersion technologies, for targeted applications and new markets through 2012 and beyond. At current revenue levels we have generated a positive gross margin. Our margins have been impeded by not having enough revenue to absorb the manufacturing overhead that is required to work with current customers and expected future customers. We believe that our current fixed manufacturing cost structure is sufficient to support significantly higher levels of production. The extent to which our margins grow, as a percentage of total revenue, will be dependent upon revenue mix, revenue volume, our ability to continue to cut costs and pass commodity market-driven raw materials increases onto customers. To the extent product revenue volume increases, this should result in more of our fixed manufacturing costs being absorbed, leading to increased margins. We expect to continue to focus on reducing controllable variable product manufacturing costs through 2012 and beyond, with potential offsetting increases in the commodity metals markets, but may or may not continue to realize absolute dollar gross margin growth through 2012 and beyond, dependent upon the factors discussed above.

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Research and development expense, which includes all expenses relating to the technology and advanced engineering groups, primarily consists of costs associated with our development or acquisition of new product applications and coating formulations and the cost of enhancing our manufacturing processes. As an example, we have been, and continue to be, engaged in research to enhance our ability to disperse material in a variety of organic and inorganic media for use as coatings and polishing materials, as well as polishing products. Much of this work has led to several new products and additional potential new products.

Having demonstrated the capability to produce pilot quantities of mixed-metal oxides in a single crystal phase, we do not expect development of further variations on these materials to present material technological challenges. Many of these materials exhibit performance characteristics that can enable them to serve in various catalytic applications. We are now working on several related commercial opportunities using the same materials. We expect that this technique should enable us to scale to large quantity commercial volumes once application viability and firm demand are established. We also have an ongoing advanced engineering effort that is primarily focused on the development of new nanomaterials as well as the refinement of existing nanomaterials, as dictated by our customer-driven marketing strategy. We are not certain when or if any significant revenue will be generated from the production of the materials described above.

Research and development expense decreased to $396,503 and $1,210,168 for the three and nine months ended September 30, 2012, compared to $421,597 and $1,282,618 for the same periods in 2011. The net changes in research and development expense were largely attributed to a 2011 ramp in new material development that was not repeated during 2012. We do not expect research and development expense to increase significantly during the fourth quarter of 2012.

Selling, general and administrative expense decreased to $789,169 and $2,546,334 for the three and nine months ended September 30, 2012, compared to $935,857 and $3,063,446 for the same periods in 2011. The net decreases were primarily attributed to lower costs for salaries, travel, consultant fees, stock compensation expense non-cash charges related to outstanding equity compensation, legal fees, as well as reduced exhibition and trade show costs, as the product launch at the European Coatings Show in 2011 was not repeated in 2012.

Interest income decreased to $0 for the three and nine months ended September 30, 2012, compared to $591 and $3,929 for the same periods in 2011. The decrease was due to the lack of investment yields in excess of bank related fees.

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 2012 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, cash equivalents and short-term investments amounted to $4,595,558 on September 30, 2012, compared to $2,723,623 on December 31, 2011 and $3,346,440 on September 30, 2011. The net cash used in our operating activities was $201,791 for the nine months ended September 30, 2012, compared to $2,317,549 for the same period in 2011. Approximately $1.4 million was used during the nine months ended September 30, 2011 for required working capital investments, largely the result of the increase in the cost of cerium oxide and the impact that had throughout our manufacturing and sales processes. In addition, cost reductions described above yielded improved cash flow from our operating activities during 2012, as did other favorable working capital fluctuations during 2012. Net cash used in

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investing activities amounted to $131,910 for the nine months ended September 30, 2012, compared to $113,665 for the same period in 2011. Capital expenditures amounted to $237,328 (including $120,359 in capital leases) and $61,221 for the nine months ended September 30, 2012 and 2011, respectively. Net cash provided by financing activities increased to $2,205,636 during the first nine months of 2012 compared to $3,332 for the same period in 2011, primarily due to the net proceeds received from the stockholder rights offering discussed below.

On July 20, 2012, we completed a fully subscribed stockholder rights offering and received gross proceeds of approximately $2.4 million. Net proceeds from the rights offering were approximately $2.2 million after legal, accounting and other costs. We intend to use the remaining proceeds from the rights offering to fund expected growth in new markets, as well as to provide for expanded working capital needs expected to arise as sales volume grows. These additional funds will also enhance our ability to maintain the minimum liquidity required under our supply agreement with BASF, as described below.

Our supply agreements with our largest customer, BASF, contain certain financial covenants which could potentially impact our liquidity. The most restrictive financial covenants under these agreements require that we maintain a minimum of $2 million in cash, cash equivalents and certain investments, and that we not have the acceleration of any debt maturity having a principal amount of more than $10 million, in order to avoid triggering the customer’s potential right to transfer certain technology and equipment to that customer at a contractually defined price. We had approximately $4.6 million in cash, cash equivalents and short-term investments on September 30, 2012, with no debt. This supply agreement and its covenants are more fully described in Note 7 to the Company’s Financial Statements.

We believe that cash from operations and cash and cash equivalents will be adequate to fund our operating plans through 2012 and into 2013. Our actual future capital requirements in 2012 and beyond will depend, however, on many factors, including customer acceptance of our current and potential nanomaterials and product applications, 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 our materials and product applications. 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. If certain projects are successful, we expect that capital spending relating to currently known capital needs for the remainder of 2012 will be approximately $100,000. If those projects are delayed or ultimately prove unsuccessful, we would expect our capital requirements to be lower.

Should events arise that make it appropriate for us 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 a financing could be necessitated by such things as the loss of existing customers; currently unknown capital requirements in light of 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.

On September 30, 2012, we had a net operating loss carryforward of approximately $79.9 million for income tax purposes. Because we may have experienced “ownership changes” within the meaning of the U.S. Internal Revenue Code in connection with our various prior equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the Internal Revenue Code. A layer of our carryforward expired in 2011 and another will expire in 2012. If not utilized, the remaining carryforward will expire at various dates between January 1, 2013 and December 31, 2032. As a result of the annual limitation and uncertainty as to the amount of future taxable income that will be earned prior to the expiration of the carryforward, we have concluded that it is likely that some portion of this carryforward will expire before ultimately becoming available to reduce income tax liabilities. During 2011, the state of Illinois suspended the utilization of NOL carryforwards for four years, extending their duration by an equivalent number of years.

12

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 future reporting periods to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties and factors include, without limitation: our ability to become profitable despite the losses we have incurred since our incorporation; our dependence on our principal customers and the terms of our supply agreement 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; uncertain demand for, and acceptance of, our nanocrystalline materials; our limited manufacturing capacity and product mix flexibility in light of customer demand; our limited marketing experience; changes in development and distribution relationships; the impact of competitive products and technologies; our dependence on patents and protection of proprietary information; the resolution of litigation in which we may become involved; our ability to maintain an appropriate electronic trading venue; and the impact of any potential new governmental regulations that could be difficult to respond to or costly to comply with. 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, the Company undertakes 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

13

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 and CFO, 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

None.

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 Chief 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 Chief 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, 2012, formatted in XBRL (Extensible Business Reporting Language): (1) the Balance Sheets, (2) the Statements of Operations, (3) the Statements of Cash Flows, and (4) the Notes to Unaudited Financial Statements.

14

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, 2012	By:	/s/ JESS A. JANKOWSKI
		Jess A. Jankowski
		President, Chief Executive Officer (principal executive officer) and a Director
Date: November 14, 2012	By:	/s/ FRANK J. CESARIO
		Frank J. Cesario
		Chief Financial Officer (principal financial and chief accounting officer)

15

EX-31.1

Exhibit 31.1

Certification of the Chief Executive Officer

Pursuant to

Rules 13a-14(a) and 15d-14(a) under the Exchange Act

I, Jess Jankowski, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nanophase Technologies Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of then end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2012

/s/ JESS A. JANKOWSKI

Jess A. Jankowski

Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of the Chief Financial Officer

Pursuant to

Rules 13a-14(a) and 15d-14(a) under the Exchange Act

I, Frank Cesario, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Nanophase Technologies Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) or the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of then end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 14, 2012

/s/ FRANK J. CESARIO

Frank J. Cesario

Chief Financial Officer

EX-32

Exhibit 32

Certification Pursuant to 18 U.S.C. Section 1350

(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)

In connection with this quarterly report of Nanophase Technologies Corporation (the “Company”) on Form 10-Q for the quarter ending September 30, 2012 as filed with the United States Securities and Exchange Commission on the date hereof (the “Report”), we, Jess A. Jankowski, Chief Executive Officer of the Company, and Frank J. Cesario, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: November 14, 2012

/s/ Jess A. Jankowski

Jess A. Jankowski

Chief Executive Officer

/s/ Frank J. Cesario

Frank J. Cesario

Chief Financial Officer

XML

Investments

9 Months Ended

Sep. 30, 2012

Investments [Abstract]

Investments

(4) Investments

Investments on September 30, 2012 and December 31, 2011 were comprised of certificates of deposit in the amount of $30,000, pledged as collateral for the Company’s rent and restricted as to withdrawal or usage.

XML

Financial Instruments

9 Months Ended

Sep. 30, 2012

Financial Instruments [Abstract]

Financial Instruments

(3) Financial Instruments

We follow the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.

The Company’s financial instruments include cash, accounts receivable, accounts payable and accrued expenses. The fair values of all financial instruments were not materially different from their carrying values.

There were no financial assets or liabilities adjusted to fair value on September 30, 2012 and December 31, 2011.

XML

Balance Sheets (USD $)	Sep. 30, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 4,565,558	$ 2,693,623
Investments	30,000	30,000
Trade accounts receivable, less allowance for doubtful accounts of $6,000 on September 30, 2012 and December 31, 2011	869,660	878,600
Other receivables		13,712
Inventories, net	1,291,989	1,338,210
Prepaid expenses and other current assets	268,346	391,466
Total current assets	7,025,553	5,345,611
Equipment and leasehold improvements, net	3,218,327	3,713,082
Other assets, net	30,453	32,318
Total assets	10,274,333	9,091,011
Current liabilities:
Current portion of capital lease obligations	33,961
Deferred other revenue	67,998
Accounts payable	605,474	319,706
Accrued expenses	561,235	383,425
Accrued discount liability	34,888	116,103
Total current liabilities	1,303,556	819,234
Long-term portion of capital lease obligations	71,602
Long-term deferred rent	636,122	647,404
Asset retirement obligations	152,554	148,515
Total long-term liabilities	860,278	795,919
Contingent liabilities
Stockholders' equity:
Preferred stock, $.01 par value, 24,088 shares authorized and no shares issued and outstanding
Common stock, $.01 par value, 35,000,000 shares authorized; and 28,458,162 and 21,208,162 shares issued and outstanding on September 30, 2012 and December 31, 2011, respectively	284,582	212,082
Additional paid-in capital	95,444,015	93,070,979
Accumulated deficit	(87,618,098)	(85,807,203)
Total stockholders' equity	8,110,499	7,475,858
Total liabilities and stockholders' equity	$ 10,274,333	$ 9,091,011

XML

Basis of Presentation

9 Months Ended

Sep. 30, 2012

Basis of Presentation [Abstract]

Basis of Presentation

(1) Basis of Presentation

The accompanying unaudited interim financial statements of Nanophase Technologies Corporation (“Nanophase” or the “Company”, including “we” or “us”) reflect all adjustments (consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the financial position and operating results of the Company for the interim periods presented. Operating results for the three and nine month periods ended September 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission.

XML

Significant Customers and Contingencies (Details) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012 Customer	Sep. 30, 2011	Jul. 20, 2012	Dec. 31, 2011
Significant Customers and Contingencies (Textual) [Abstract]
Accounts receivable	$ 869,660		$ 869,660			$ 878,600
Maximum earnings from recently published quarterly financial statements	(658,339)	(1,009,915)	(1,810,895)	(2,093,222)
Significant Customers and Contingencies (Additional Textual) [Abstract]
Number of customers			3
Right share offering price per share					$ 0.33
Proceeds from a stockholder rights			2,200,000
Rights [Member]
Significant Customers and Contingencies (Textual) [Abstract]
Subscribed stockholder rights offering, Shares purchased			7,250,000
Customers One [Member]
Significant Customers and Contingencies (Textual) [Abstract]
Accounts receivable	602,000	286,000	602,000	286,000
Percentage of sales	62.00%	53.00%	68.00%	55.00%
Customers Two [Member]
Significant Customers and Contingencies (Textual) [Abstract]
Accounts receivable	0	249,000	0	249,000
Percentage of sales	9.00%	22.00%	9.00%	22.00%
Customers Three [Member]
Significant Customers and Contingencies (Textual) [Abstract]
Accounts receivable	88,000	98,000	88,000	98,000
Percentage of sales	7.00%	8.00%	4.00%	6.00%
BASF [Member]
Significant Customers and Contingencies (Textual) [Abstract]
Net book value equipment			115.00%
Supply agreements with BASF Corporation			The financial condition covenants in one of our supply agreements with BASF would “trigger” a technology transfer right (license and, optionally, an equipment sale) in the event (a) that earnings of our twelve month period ending with its most recently published quarterly financial statements are less than zero and our cash, cash equivalents and certain investments are less than $2,000,000, or (b) of an acceleration of any debt maturity having a principal amount of more than $10,000,000
BASF [Member] | Maximum [Member]
Significant Customers and Contingencies (Textual) [Abstract]
Maximum earnings from recently published quarterly financial statements			0
Cash, cash equivalents and investments, maximum	2,000,000		2,000,000
BASF [Member] | Minimum [Member]
Significant Customers and Contingencies (Textual) [Abstract]
Original book value of equipment, Minimum			30.00%
Principal amount of debt on maturity, minimum	$ 10,000,000		$ 10,000,000
Replacement of equipment period, minimum			12 months

XML

Description of Business

9 Months Ended

Sep. 30, 2012

Description of Business [Abstract]

Description of Business

(2) Description of Business

Nanophase is a nanomaterials and applications developer and commercial manufacturer with an integrated family of nanomaterial technologies. Nanophase produces engineered nanomaterial for use in a variety of diverse existing and developing markets: personal care including sunscreens, architectural coatings, architectural window cleaning and restoration, industrial coating ingredients, abrasion-resistant additives, plastics additives, medical diagnostics and a variety of polishing applications, including semiconductors and optics. We target markets in which we believe practical solutions may be found using nanoengineered products. We work closely with current and potential customers in these target markets to identify their material and performance requirements and market our materials to various end-use applications manufacturers. Recently developed technologies have made certain new products possible and opened potential new markets. Although the Company’s primary strategic focus has been the North American market, it currently sells material to customers overseas and has been working to expand its reach within foreign markets.

The Company was incorporated in Illinois in November 1989, and became a Delaware corporation in November 1997. The Company’s common stock trades on the OTCQB marketplace under the symbol NANX.

While product sales comprise the majority of our revenue, we also recognize revenue in connection with a technology license and 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 Statement of Operations, as it does not represent revenue directly from our nanocrystalline materials.

XML

Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Balance Sheets [Abstract]
Trade accounts receivable, less allowance for doubtful accounts	$ 6,000	$ 6,000
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	24,088	24,088
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	35,000,000	35,000,000
Common stock, shares issued	28,458,162	28,458,162
Common stock, shares outstanding	21,208,162	21,208,162

XML

Financial Instruments (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Financial Instruments (Textual) [Abstract]
Financial assets or liabilities adjusted to fair value	$ 0	$ 0

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2012	Nov. 05, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	NANOPHASE TECHNOLOGIES CORPORATION
Entity Central Index Key	0000883107
Document Type	10-Q
Document Period End Date	Sep. 30, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q3
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		28,458,162

XML

Investments (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Investments (Textual) [Abstract]
Certificates of deposit	$ 30,000	$ 30,000

XML

Statements of Operations (Unaudited) (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011
Revenue:
Product revenue, net	$ 2,028,529	$ 2,164,697	$ 7,061,504	$ 7,706,487
Other revenue	72,435	78,217	231,591	245,321
Net revenue	2,100,964	2,242,914	7,293,095	7,951,808
Operating expense:
Cost of revenue	1,571,575	1,894,001	5,349,594	5,699,089
Gross profit	529,389	348,913	1,943,501	2,252,719
Research and development expense	396,503	421,597	1,210,168	1,282,618
Selling, general and administrative expense	789,169	935,857	2,546,334	3,063,446
Loss from operations	(656,283)	(1,008,541)	(1,813,001)	(2,093,345)
Interest income		591		3,929
Interest expense	(2,056)	(1,965)	(5,093)	(3,763)
Other, net			7,199	(43)
Loss before provision for income taxes	(658,339)	(1,009,915)	(1,810,895)	(2,093,222)
Provisions for income taxes
Net loss	$ (658,339)	$ (1,009,915)	$ (1,810,895)	$ (2,093,222)
Net loss per share - basic and diluted	$ (0.02)	$ (0.05)	$ (0.08)	$ (0.10)
Weighted average number of basic and diluted common shares outstanding	26,960,880	21,207,597	23,139,731	21,205,320

XML

Significant Customers and Contingencies

9 Months Ended

Sep. 30, 2012

Significant Customers and Contingencies [Abstract]

Significant Customers and Contingencies

(7) Significant Customers and Contingencies

Sales to three customers constituted approximately 62%, 9% and 7%, respectively, of our total revenue for the three months ended September 30, 2012, and 68%, 9% and 4%, respectively, of our total revenue for the nine months ended September 30, 2012. Amounts included in accounts receivable on September 30, 2012 relating to these three customers were approximately $602,000, $0 and $88,000, respectively. Revenue from these three customers constituted approximately 53%, 22% and 8%, respectively, of our total revenue for the three months ended September 30, 2011, as compared to 55%, 22% and 6%, respectively, of our total revenue for the nine months ended September 30, 2011. Amounts included in accounts receivable on September 30, 2011 relating to these three customers were approximately $286,000, $249,000 and $98,000, respectively.

We currently have supply agreements with BASF Corporation (“BASF”), our largest customer, that have contingencies outlined which could potentially result in the license of technology and/or sale of production equipment, from the Company to the customer, providing capacity sufficient to meet the customer’s production needs, if triggered by our failure 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, optionally, an equipment sale) in the event (a) that earnings for our twelve month period ending with our most recently published quarterly financial statements are less than zero and our cash, cash equivalents and certain investments are less than $2,000,000, or (b) of an acceleration of any debt maturity having a principal amount of more than $10,000,000. 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.

We believe that we have sufficient cash (See Liquidity and Capital Resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations for a further discussion) to operate our business during 2012. We also expect a favorable fluctuation in working capital, particularly as the price of one of our raw materials, cerium oxide, has declined in 2012 from historic highs experienced during 2011. On July 20, 2012, we completed a fully subscribed stockholder rights offering, pursuant to which our existing stockholders exercising their basic and oversubscription rights purchased a total of 7,250,000 shares of our common stock, which was the maximum number of shares offered in the rights offering, at a price of $0.33 per full share. We received approximately $2.2 million in proceeds from the rights offering, net of costs. If a triggering event were to occur and BASF elected to proceed with the license and related equipment sale mentioned above, the Company would receive royalty payments from this customer for products sold using the Company’s 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 BASF. 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 quickly replace and train them. Upon 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. 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.

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Share-Based Compensation

9 Months Ended

Sep. 30, 2012

Share-Based Compensation [Abstract]

Share-Based Compensation

(6) Share-Based Compensation

The Company follows FASB ASC Topic 718, Share-Based Payments, in which compensation expense is recognized only for share-based payments expected to vest. The Company recognized compensation expense related to stock options of $62,203 and $225,104 for the three and nine month periods ended September 30, 2012, compared to $102,153 and $305,216 for the same periods in 2011.

As of September 30, 2012, there was approximately $370,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Company’s stock option plans. That cost is expected to be recognized over a remaining weighted-average period of 1.8 years.

Stock Options and Stock Grants

During the nine months ended September 30, 2012, no stock options were exercised. During the nine months ended September 30, 2011, proceeds of $4,080 were received, and 4,000 shares of common stock were issued, pursuant to stock option exercises. During the nine months ended September 30, 2012, 547,000 stock options were granted compared to 524,500 stock options granted during the same period in 2011. During the nine months ended September 30, 2012, 168,732 stock options were forfeited, compared to 126,067 stock options forfeited during the same period in 2011.

Stock Appreciation Rights

During 2010 and 2009, the Company granted its outside directors stock appreciation rights (SAR’s) totaling 106,750 shares under the Company’s Amended and Restated 2006 Stock Appreciation Rights Plan. These awards are accounted for as liability awards, included in accrued expenses as of September 30, 2012 and 2011, and adjusted to fair value each reporting period. The fair value of the liability for the 87,500 shares that were outstanding on September 30, 2012 was $8,442, compared to $10,873 on December 31, 2011.

As of September 30, 2012, the Company does not have any unvested restricted stock or performance shares outstanding.

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

For the nine months ended	September 30, 2012			September 30, 2011
Weighted-average risk-free interest rates:		1.10	%		2.51	%
Dividend yield:		—			—
Weighted-average expected life of the option:		7 Years			7 Years
Weighted-average expected stock price volatility:		85.33	%		74.21	%
Weighted-average fair value of the options granted:	$	0.23		$	0.89

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Business Segmentation and Geographical Distribution (Details) (USD $)	3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended		3 Months Ended		9 Months Ended		1 Months Ended	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012 Product [Member]	Sep. 30, 2011 Product [Member]	Sep. 30, 2012 Product [Member]	Sep. 30, 2011 Product [Member]	Sep. 30, 2012 Service Agreements [Member]	Sep. 30, 2011 Service Agreements [Member]	Sep. 30, 2012 Service Agreements [Member]	Sep. 30, 2011 Service Agreements [Member]	Apr. 30, 2012 Royalty Arrangement [Member]	Sep. 30, 2012 Royalty Arrangement [Member]	Mar. 31, 2012 Royalty Arrangement [Member]
Business Segmentation and Geographical Distribution (Textual) [Abstract]
Revenue from international sources	$ 187,000	$ 106,000	$ 466,000	$ 460,000	$ 111,000	$ 23,000	$ 226,000	$ 215,000	$ 68,000	$ 75,000	$ 211,000	$ 225,000
Agreement initialization date														2012-01
Agreement expiration date														Mar. 31, 2013
Initial Revenue Received															5,000
Prepayment of Received													279,000
Discount on Early Payment														7.00%
Final minimum royalty on maturity														300,000
Deferred other revenue			$ 67,998

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Inventories (Details) (USD $)	Sep. 30, 2012	Dec. 31, 2011
Summary of inventories
Raw materials	$ 320,485	$ 490,729
Finished goods	1,031,670	907,647
Inventory gross, Total	1,352,155	1,398,376
Allowance for excess inventory quantities	(60,166)	(60,166)
Inventories net, Total	$ 1,291,989	$ 1,338,210

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Inventories (Tables)

9 Months Ended

Sep. 30, 2012

Inventories [Abstract]

Summary of inventories

Inventories consist of the following:

	September 30, 2012			December 31, 2011
Raw materials	$	320,485		$	490,729
Finished goods		1,031,670			907,647
		1,352,155			1,398,376
Allowance for excess inventory quantities		(60,166	)		(60,166	)
	$	1,291,989		$	1,338,210

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Business Segmentation and Geographical Distribution

9 Months Ended

Sep. 30, 2012

Business Segmentation and Geographical Distribution [Abstract]

Business Segmentation and Geographical Distribution

(8) Business Segmentation and Geographical Distribution

Revenue from international sources approximated $187,000 and $466,000 for the three and nine months ended September 30, 2012 compared to $106,000 and $460,000 for the same periods in 2011. As part of our revenue from international sources, we recognized approximately $111,000 and $226,000, respectively, in product revenue from several German companies during the three and nine months ended September 30, 2012, compared to $23,000 and $215,000, respectively, during the three and nine months ended September 30, 2011. We also recognized approximately $68,000 and $211,000, respectively, in other revenue from a technology license fee from our Japanese licensee during the three and nine months ended September 30, 2012, compared to $75,000 and $225,000, respectively, for the same periods in 2011. The Company entered into multiple agreements with this Japanese licensee during 2012. During January 2012, the Company and the Japanese licensee entered into a mutual cooperation agreement, which confirmed their intent to allow their existing agreements to terminate, in accordance with their terms, as of March 31, 2013. The parties also agreed that, as of April 1, 2013, the territorial restrictions and royalty payments set forth in the existing agreements would no longer be in effect. On March 31, 2012, the Company assigned the Japanese trademark for “NanoTek” to the Japanese licensee in exchange for $5,000. In addition, the Japanese licensee paid the Company $279,000 during April 2012 as prepayment for the final minimum royalty of $300,000, due under the existing terms in April 2013, which represented a 7% discount for early payment. The Company recorded the royalty prepayment as deferred other revenue as of March 31, 2012, and will recognize it ratably over the remaining contract term. The balance of deferred other revenue on September 30, 2012 was $67,998.

The Company’s operations comprise a single business segment and all of our long-lived assets are located within the United States.

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Financial Instruments (Policies)

9 Months Ended

Sep. 30, 2012

Financial Instruments [Abstract]

Fair Value Measurements and Disclosures

We follow the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.

Share-Based Payments

The Company follows FASB ASC Topic 718, Share-Based Payments, in which compensation expense is recognized only for share-based payments expected to vest. The Company recognized compensation expense related to stock options of $62,203 and $225,104 for the three and nine month periods ended September 30, 2012, compared to $102,153 and $305,216 for the same periods in 2011.

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Share-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2012

Share-Based Compensation [Abstract]

Assumptions used to calculate the Black-Scholes option pricing model for stock options granted

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

For the nine months ended	September 30, 2012			September 30, 2011
Weighted-average risk-free interest rates:		1.10	%		2.51	%
Dividend yield:		—			—
Weighted-average expected life of the option:		7 Years			7 Years
Weighted-average expected stock price volatility:		85.33	%		74.21	%
Weighted-average fair value of the options granted:	$	0.23		$	0.89

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Share-Based Compensation (Details Textual) (USD $)	3 Months Ended		9 Months Ended			12 Months Ended
	Sep. 30, 2012	Sep. 30, 2011	Sep. 30, 2012	Sep. 30, 2011	Dec. 31, 2011	Dec. 31, 2010 Stock Appreciation Rights (SARs) [Member]	Dec. 31, 2009 Stock Appreciation Rights (SARs) [Member]	Sep. 30, 2012 Stock Appreciation Rights (SARs) [Member]	Dec. 31, 2011 Stock Appreciation Rights (SARs) [Member]	Sep. 30, 2012 Restricted Stock [Member]	Sep. 30, 2012 Performance Shares [Member]
Share-Based Compensation (Textual) [Abstract]
Stock appreciation rights (SARs) granted						106,750	106,750
Fair value of the liability outstanding shares								87,500	87,500
Fair value of the liability								$ 8,442	$ 10,873
Shares outstanding	21,208,162		21,208,162		21,208,162					0	0
Share-Based Compensation (Additional Textual) [Abstract]
Share-based compensation expense	62,203	102,153	225,104	305,216
Total unrecognized compensation cost related to nonvested share-based compensation arrangements granted	370,000		370,000
Weighted-average period over which unrecognized compensation is expected to be recognized			1 year 9 months 18 days
Common stock issued pursuant to option exercises			0	4,000
Stock options granted			547,000	524,500
Stock options forfeited			168,732	126,067
Proceeds from exercise of stock options				$ 4,080

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Statements of Cash Flows (Unaudited) (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Operating activities:
Net loss	$ (1,810,895)	$ (2,093,222)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	749,666	845,207
Stock compensation expense	222,673	251,518
Changes in assets and liabilities related to operations:
Trade accounts receivable	8,940	(327,069)
Other receivables	13,712	(76,860)
Inventories	46,221	140,859
Prepaid expenses and other current assets	123,120	(73,283)
Accounts payable	289,032	(334,392)
Accrued expenses	87,742	(650,307)
Deferred other revenue	67,998
Net cash used in operating activities	(201,791)	(2,317,549)
Investing activities:
Acquisition of equipment and leasehold improvements	(116,969)	(61,221)
Payment of accounts payable incurred for the purchase of equipment and leasehold improvements	(14,941)	(52,444)
Net cash used in investing activities	(131,910)	(113,665)
Financing activities:
Principal payments on capital leases	(14,796)	(748)
Proceeds from stockholder rights offering, net of costs	2,220,432
Proceeds from exercise of stock options		4,080
Net cash provided by financing activities	2,205,636	3,332
Increase (decrease) in cash and cash equivalents	1,871,935	(2,427,882)
Cash and cash equivalents at beginning of period	2,693,623	5,744,322
Cash and cash equivalents at end of period	4,565,558	3,316,440
Supplemental cash flow information:
Interest paid	5,093	3,763
Supplemental non-cash investing activities:
Accounts payable incurred for the purchase of equipment and leasehold improvements	11,677	18,261
Capital lease obligation in the purchase of equipment	$ 120,359

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Inventories

9 Months Ended

Sep. 30, 2012

Inventories [Abstract]

Inventories

(5) Inventories

Inventories consist of the following:

	September 30, 2012			December 31, 2011
Raw materials	$	320,485		$	490,729
Finished goods		1,031,670			907,647
		1,352,155			1,398,376
Allowance for excess inventory quantities		(60,166	)		(60,166	)
	$	1,291,989		$	1,338,210

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Share-Based Compensation (Details) (USD $)	9 Months Ended
	Sep. 30, 2012	Sep. 30, 2011
Assumptions used to calculate the Black-Scholes option pricing model for stock options granted
Weighted-average risk-free interest rates:	1.10%	2.51%
Dividend yield:
Weighted-average expected life of the option:	7 years	7 years
Weighted-average expected stock price volatility:	85.33%	74.21%
Weighted-average fair value of the options granted:	$ 0.23	$ 0.89