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: June 30, 2014

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 definitions 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 August 8, 2014, there were 28,481,496 shares outstanding of common stock, par value $.01, of the registrant.

NANOPHASE TECHNOLOGIES CORPORATION

QUARTER ENDED JUNE 30, 2014

INDEX

			Page
PART I - FINANCIAL INFORMATION				3
	Item 1.	Financial Statements		3
		Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013		3
		Unaudited Statements of Operations for the three months ended June 30, 2014 and 2013 and the six months ended June 30, 2014 and 2013		4
		Unaudited Statements of Cash Flows for the six months ended June 30, 2014 and 2013		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		15
SIGNATURES				16

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

NANOPHASE TECHNOLOGIES CORPORATION

BALANCE SHEETS

	(in thousands except share and per share data)
	June 30,
	2014 (Unaudited)			December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	2,408		$	3,276
Investments		30			30
Trade accounts receivable, less allowance for doubtful accounts of $6 on June 30, 2014 and December 31, 2013		988			52
Other receivables		—			1
Inventories, net		854			976
Prepaid expenses and other current assets		252			202
Total current assets		4,532			4,537
Equipment and leasehold improvements, net		2,224			2,464
Other assets, net		26			27
	$	6,782		$	7,028
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of capital lease obligations	$	26		$	31
Accounts payable		641			503
Accrued expenses		345			323
Total current liabilities		1,012			857
Long-term portion of capital lease obligations		—			10
Long-term deferred rent		627			633
Asset retirement obligations		163			160
Total long-term liabilities		790			803
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; 28,481,496 shares issued and outstanding on June 30, 2014 and December 31, 2013		285			285
Additional paid-in capital		95,872			95,761
Accumulated deficit		(91,177	)		(90,678	)
Total stockholders’ equity		4,980			5,368
	$	6,782		$	7,028

See Notes to Financial Statements.

3

NANOPHASE TECHNOLOGIES CORPORATION

STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands except share and per share data)

	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
Revenue:
Product revenue, net	$	2,848		$	2,677		$	5,423		$	5,653
Other revenue		30			6			39			9
Net revenue		2,878			2,683			5,462			5,662
Operating expense:
Cost of revenue		1,846			1,834			3,723			3,907
Gross profit		1,032			849			1,739			1,755
Research and development expense		336			453			673			882
Selling, general and administrative expense		765			857			1,563			1,818
Loss from operations		(69	)		(461	)		(497	)		(945	)
Interest income		—			—			1			1
Interest expense		(1	)		(2	)		(3	)		(9	)
Other, net		—			11			—			17
Loss before provision for income taxes		(70	)		(452	)		(499	)		(936	)
Provisions for income taxes		—			—			—			—
Net loss	$	(70	)	$	(452	)	$	(499	)	$	(936	)
Net loss per share – basic and diluted	$	(0.00	)	$	(0.02	)	$	(0.02	)	$	(0.03	)
Weighted average number of basic and diluted common shares outstanding		28,481,496			28,468,162			28,481,496			28,467,444

See Notes to Financial Statements.

4

NANOPHASE TECHNOLOGIES CORPORATION

STATEMENTS OF CASH FLOWS

(Unaudited)

	(in thousands) Six months ended June 30,
	2014			2013
Operating activities:
Net loss	$	(499	)	$	(936	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		371			451
Gain on disposal of equipment		—			(17	)
Stock compensation expense		107			149
Allowance for excess inventory quantities		—			47
Changes in assets and liabilities related to operations:
Trade accounts receivable		(936	)		(567	)
Other accounts receivable		1			25
Inventories		122			188
Prepaid expenses and other assets		(50	)		(41	)
Accounts payable		125			(171	)
Accrued expenses		20			10
Net cash used in operating activities		(739	)		(862	)
Investing activities:
Proceeds from disposal of equipment		—			17
Acquisition of equipment and leasehold improvements		(102	)		(59	)
Payment of accounts payable incurred for the purchase of equipment and leasehold improvements		(12	)		(20	)
Net cash used in investing activities		(114	)		(62	)
Financing activities:
Principal payments on capital leases		(15	)		(42	)
Proceeds from exercise of stock options		—			3
Net cash used in financing activities		(15	)		(39	)
Decrease in cash and cash equivalents		(868	)		(963	)
Cash and cash equivalents at beginning of period		3,276			4,124
Cash and cash equivalents at end of period	$	2,408		$	3,161
Supplemental cash flow information:
Interest paid	$	3		$	9
Supplemental non-cash investing activities:
Accounts payable incurred for the purchase of equipment and leasehold improvements	$	25		$	42

See Notes to Financial Statements.

5

NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

(1) Basis of Presentation

The accompanying unaudited interim financial statements of Nanophase Technologies Corporation (“Nanophase” or the “Company”, including “we”, “our” 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 six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

These financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2013, included in our Annual Report on Form 10-K for the year ended December 31, 2013, 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 and related technologies. We produce engineered nano and sub-micron materials for use in a variety of diverse existing and developing markets: personal care including sunscreens, architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, medical diagnostics, energy and a variety of surface finishing technologies (polishing) applications. We target markets in which we believe practical solutions may be found using our 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 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 in foreign markets.

The Company was incorporated in Illinois on November 25, 1989, and became a Delaware corporation in November 1997. 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 Statement of Operations, as it does not represent revenue directly from our nanocrystalline materials.

The presentation of certain prior year disclosures has been modified to conform to current year presentation, as financial data is now presented in thousands of dollars rather than in dollars.

(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.

6

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

(4) Investments

Investments on June 30, 2014 and December 31, 2013 were comprised of certificates of deposit in the amount of $30, pledged as collateral for our rent and restricted as to withdrawal or usage.

(5) Inventories

Inventories consist of the following:

	June 30, 2014			December 31, 2013
Raw materials	$	214		$	132
Finished goods		692			896
		906			1,028
Allowance for excess inventory quantities		(52	)		(52	)
	$	854		$	976

(6) Share-Based Compensation

We follow FASB ASC Topic 718, Share-Based Payments, in which compensation expense is recognized only for share-based payments expected to vest. We recognized compensation expense related to stock options of $53 and $111 for the three and six month periods ended June 30, 2014, respectively, compared to $70 and $139 for the same periods in 2013.

As of June 30, 2014, there was approximately $349 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under our stock option plans. That cost is expected to be recognized over a remaining weighted-average period of 2.2 years.

Stock Options and Stock Grants

During the six months ended June 30, 2014, no stock options were exercised. During the six months ended June 30, 2013, 10,000 shares of common stock were issued pursuant to stock option exercises with proceeds of $3 realized. During the six months ended June 30, 2014, 568,000 stock options were granted compared to 553,000 during the same period in 2013. During the six months ended June 30, 2014, 22,000 stock options were forfeited compared to 91,133 stock options forfeited during the same period in 2013.

Stock Appreciation Rights

Prior to 2011, we granted outside directors stock appreciation rights (SARs). The change in fair value of the awards granted during prior years is included in non-cash compensation expense for the three and six months ended June 30, 2014 and 2013. The SARs granted vested immediately and are payable upon the directors’ removal or resignation from the position of director. These awards are accounted for as liability awards, included in accrued expenses as of June 30, 2014 and 2013, and adjusted to fair value each reporting period. The fair value of the liability on June 30, 2014 was $4 compared to $8 on December 31, 2013.

7

As of June 30, 2014, we did 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 three months ended	June 30, 2014		June 30, 2013
Weighted-average risk-free interest rates:		—		1.47	%
Dividend yield:		—		—
Weighted-average expected life of the option:		—		7 Years
Weighted-average expected stock price volatility:		—		95.16	%
Weighted-average fair value of the options granted:		—	$	0.47

For the six months ended	June 30, 2014			June 30, 2013
Weighted-average risk-free interest rates:		2.01	%		1.34	%
Dividend yield:		—			—
Weighted-average expected life of the option:		7 Years			7 Years
Weighted-average expected stock price volatility:		95.16	%		92.37	%
Weighted-average fair value of the options granted:	$	0.42		$	0.33

(7) Significant Customers and Contingencies

Sales to three customers constituted approximately 68%, 10% and 6%, respectively, of our total revenue for the three months ended June 30, 2014, and 74%, 5% and 6%, respectively, of our total revenue for the six months ended June 30, 2014. Amounts included in accounts receivable on June 30, 2014 relating to these three customers were approximately $632, $0 and $171, respectively. Revenue from these three customers constituted approximately 62%, 11% and 9%, respectively, of the Company’s total revenue for the three months ended June 30, 2013 and 71%, 5% and 8%, respectively, for the six months ended June 30, 2013. Amounts included in accounts receivable on June 30, 2013 relating to these three customers were approximately $845, $284 and $243, respectively. The loss of one of these significant 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 covenants. The most restrictive financial 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 zero and our cash, cash equivalents and certain investments are less than $1 million, or (b) of an acceleration of any debt maturity having a principal amount of more than $10 million. Our supply agreements with BASF also “trigger” a technology transfer right in the event of our insolvency, as further defined within the agreements. In the event of an equipment sale, upon incurring a triggering event, the equipment would be sold to the customer at either 115% of the equipment’s net book value or the greater of 30% of the original book value of such equipment, and any associated upgrades to it, or 115% of the equipment’s net book value, depending on the contract and related equipment.

8

We believe that we have sufficient cash (See Liquidity and Capital Resources in Management’s Discussion and Analysis in Part I, Item 2 of this Form 10-Q for a further discussion) to operate our business throughout 2014. 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 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.

(8) Business Segmentation and Geographical Distribution

Revenue from international sources approximated $398 and $509 for the three and six months ended June 30, 2014, respectively, compared to $379 and $457 for the same periods in 2013. All of this revenue was product revenue.

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

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

Overview

Nanophase is an advanced materials and applications developer and commercial manufacturer with an integrated family of materials technologies. We produce engineered nano and sub-micron materials for use in a variety of diverse markets: personal care including sunscreens, architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, medical diagnostics, energy, and a variety of surface finishing technologies (polishing) applications, including optics. We target markets in which we feel practical solutions may be found using our 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. For example, we have applied our skills at producing precisely defined nanomaterials to now create and sell larger, sub-micron material products. Our focus is on customer need where we believe we have an advantage, as opposed to finding uses for one particular technology. We expect growth in end-user (manufacturing customers, including customers of our customers) adoption in 2014 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. For example, we recently developed new solutions in the surface finishing technologies (polishing) and energy-management areas, with commercial order flow accelerating in the former and significant commercial testing happening in the latter. We expect that we will both work more deeply with current customers and attract additional customers, which should help us achieve growth in these markets in 2014 and beyond.

9

Results of Operations

Total revenue increased to $2,878,000 for the three months ended June 30, 2014, compared to $2,683,000 for the same period in 2013. Total revenue decreased to $5,462,000 for the six months ended June 30, 2014, compared to $5,662,000 for the same period in 2013. Product revenue, the primary component of our total revenue, increased to $2,848,000 for the three months ended June 30, 2014, compared to $2,677,000 for the same period in 2013. Orders from our largest customer in personal care and sunscreen applications were more strongly weighted towards the first quarter during 2013, while 2014 was more balanced between the first and second quarters. As a result, there was a year-over-year increase in the second quarter of 2014, with a smaller year-over-year increase in the first six months of 2014 from this customer. We also experienced increased order flow from heightened initiatives in surface finishing technologies (polishing). Product revenue decreased to $5,423,000 for the six months ended June 30, 2014, compared to $5,653,000 for the same period in 2013. One large coatings customer had a product ramp during 2013 that was not repeated during 2014, and another is managing its supply chain more aggressively in 2014.

A substantial majority of our revenue for the three and six month periods ended June 30, 2014 and 2013 was from our largest customer in personal care and sunscreen applications. Revenue from our top three customers was approximately 68%, 10% and 6%, respectively, during the three months ended June 30, 2014, and 74%, 5% and 6%, respectively, for the six months ended June 30, 2014. Revenue from these three customers constituted approximately 62%, 11% and 9%, respectively, of our total revenue for the three months ended June 30, 2013 and 71%, 5%, and 8%, respectively, for the six months ended June 30, 2013.

Other revenue increased to $30,000 and $39,000 for the three and six months ended June 30, 2014, compared to $6,000 and $9,000 for the same periods in 2013, primarily due to a specific fee-based development project that was completed during 2014. We do not anticipate this to be recurring.

Cost of revenue generally includes costs associated with commercial production. Cost of revenue increased to $1,846,000 for the three months ended June 30, 2014, compared to $1,834,000 for the same period in 2013. Cost of revenue decreased to $3,723,000 for the six months ended June 30, 2014, compared to $3,907,000 for the same period in 2013, primarily due to decreased revenue volume year over year, and net efficiencies. We expect to continue new nanomaterial development, primarily using our NanoArc^® synthesis and dispersion technologies, for targeted applications and new markets during 2014 and beyond. At current revenue levels we have generated a positive gross margin, though margins have been impeded by not having enough revenue to efficiently absorb 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 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 on to customers. As product revenue volume increases, this should result in our fixed manufacturing costs being more efficiently absorbed, leading to increased margins. 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 continue to realize absolute dollar gross margin growth through 2014 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 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, including window cleaning and polishing products. Much of this work has led to several new products and additional potential new products.

10

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 $336,000 and $673,000 for the three and six months ended June 30, 2014, respectively, compared to $453,000 and $882,000 for the same periods in 2013. The decreases were primarily attributed to reduced product development costs (salaries and materials) as we have transferred projects from development into commercial operations. We expect research and development expense to increase slightly from the current rate during the remainder of 2014.

Selling, general and administrative expense decreased to $765,000 and $1,563,000 for the three and six months ended June 30, 2014, respectively, compared to $857,000 and $1,818,000 for the same periods in 2013. The net decreases were primarily attributed to decreased salary and personnel costs, offset in part by increases in consulting fees and marketing expenses, all related to our stronger focus on a few, well-qualified initiatives. We expect total expense in this area to increase slightly, but not significantly, during the remainder of 2014 as we continue commercial activities in recently launched initiatives.

Interest income relates to bank yields on excess funds, while interest expense relates to capital leases. Neither was significant during the reported periods.

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 2014 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 $2,438,000 on June 30, 2014, compared to $3,306,000 on December 31, 2013 and $3,191,000 on June 30, 2013. The net cash used in our operating activities was $739,000 for the six months ended June 30, 2014, compared to $862,000 for the same period in 2013, primarily due to working capital fluctuations of approximately $0.6 million during the first six months of 2014 and $0.5 million during the first six months of 2013. Net cash used in investing activities amounted to $114,000 for the six months ended June 30, 2014, compared to $62,000 for the same period in 2013. Capital expenditures, including those under capital leases amounted to $102,000 and $59,000 for the six months ended June 30, 2014 and 2013, respectively. Net cash used in financing activities was $15,000 for the six months ended June 30, 2014 compared to $39,000 for the same period in 2013, as we paid off a capital lease during 2013.

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 $1 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

11

technology and equipment to that customer at a contractually defined price. We had approximately $2.4 million in cash, cash equivalents and short-term investments on June 30, 2014, with no debt. This supply agreement and its covenants 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, cash equivalents and investments on hand will be adequate to fund our operating plans through the remainder of 2014. Our actual future capital requirements in 2014 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. Depending on the success of certain projects, we expect that capital spending relating to currently known capital needs for the remainder of 2014 will be between $250,000 and $300,000, as we intend to purchase additional capital equipment to facilitate further growth in surface finishing technologies (polishing). 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 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 June 30, 2014, we had a net operating loss carryforward of approximately $79 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. If not utilized, the remaining carryforward will expire at various dates between January 1, 2018 and December 31, 2033. 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.

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

12

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 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; 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 for our securities; 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, we undertake no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not required for a smaller reporting company.

Item 4. Controls and Procedures

Disclosure controls

We are responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (b) accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosures. It should be noted that in designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and that our management necessarily was required to apply its judgment regarding the design of our disclosure controls and procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision (and with the participation) of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, 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.

13

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

In addition to the information set forth in this Quarterly Report on Form 10-Q and before deciding to invest in, or retain, shares of our common stock, you also should carefully review and consider the information contained in our other reports and periodic filings that we make with the Securities and Exchange Commission, including, without limitation, the information contained under the caption Part I, Item 1A “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2013. Those risk factors could materially affect our business, financial condition and results of operations. Additional risks and uncertainties that we do not currently know about, we currently believe are immaterial or we have not predicted may also harm our business operations or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition, results of operations, cash flows or stock price could be materially adversely affected. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.

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.

14

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 June 30, 2014, 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.

15

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: August 12, 2014		By:	/s/ JESS A. JANKOWSKI
			Jess A. Jankowski
			President and Chief Executive Officer
Date: August 12, 2014		By:	/s/ FRANK J. CESARIO
			Frank J. Cesario
			Chief Financial Officer

16

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 the 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: August 12, 2014

/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)) 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 the 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: August 12, 2014

/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 June 30, 2014 as filed with the 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: August 12, 2014

/s/ Jess A. Jankowski

Jess A. Jankowski

Chief Executive Officer

/s/ Frank J. Cesario

Frank J. Cesario

Chief Financial Officer

XML

Investments

6 Months Ended

Jun. 30, 2014

Investments Debt And Equity Securities [Abstract]

Investments

(4) Investments

Investments on June 30, 2014 and December 31, 2013 were comprised of certificates of deposit in the amount of $30, pledged as collateral for our rent and restricted as to withdrawal or usage.

XML

Financial Instruments

6 Months Ended

Jun. 30, 2014

Fair Value Disclosures [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.

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

XML

BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Current assets:
Cash and cash equivalents	$ 2,408	$ 3,276
Investments	30	30
Trade accounts receivable, less allowance for doubtful accounts of $6 on June 30, 2014 and December 31, 2013	988	52
Other receivables		1
Inventories, net	854	976
Prepaid expenses and other current assets	252	202
Total current assets	4,532	4,537
Equipment and leasehold improvements, net	2,224	2,464
Other assets, net	26	27
Total assets	6,782	7,028
Current liabilities:
Current portion of capital lease obligations	26	31
Accounts payable	641	503
Accrued expenses	345	323
Total current liabilities	1,012	857
Long-term portion of capital lease obligations		10
Long-term deferred rent	627	633
Asset retirement obligations	163	160
Total long-term liabilities	790	803
Stockholders' equity:
Preferred stock, $.01 par value, 24,088 shares authorized and no shares issued and outstanding	0	0
Common stock, $.01 par value, 35,000,000 shares authorized; 28,481,496 shares issued and outstanding on June 30, 2014 and December 31, 2013	285	285
Additional paid-in capital	95,872	95,761
Accumulated deficit	(91,177)	(90,678)
Total stockholders' equity	4,980	5,368
Total liabilities and stockholders' equity	$ 6,782	$ 7,028

XML

Basis of Presentation

6 Months Ended

Jun. 30, 2014

Accounting Policies [Abstract]

Basis of Presentation

(1) Basis of Presentation

The accompanying unaudited interim financial statements of Nanophase Technologies Corporation (“Nanophase” or the “Company”, including “we”, “our” 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 six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.

These financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2013, included in our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission.

XML

Business Segmentation and Geographical Distribution - Additional Information (Detail) (Non-Domestic Revenue [Member], USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Non-Domestic Revenue [Member]
Revenue from External Customer [Line Items]
Revenue from international sources	$ 398	$ 379	$ 509	$ 457

XML

Description of Business

6 Months Ended

Jun. 30, 2014

Accounting Policies [Abstract]

Description of Business

(2) Description of Business

Nanophase is a nanomaterials and applications developer and commercial manufacturer with an integrated family of nanomaterial and related technologies. We produce engineered nano and sub-micron materials for use in a variety of diverse existing and developing markets: personal care including sunscreens, architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, medical diagnostics, energy and a variety of surface finishing technologies (polishing) applications. We target markets in which we believe practical solutions may be found using our 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 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 in foreign markets.

The Company was incorporated in Illinois on November 25, 1989, and became a Delaware corporation in November 1997. 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 Statement of Operations, as it does not represent revenue directly from our nanocrystalline materials.

The presentation of certain prior year disclosures has been modified to conform to current year presentation, as financial data is now presented in thousands of dollars rather than in dollars.

XML

BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Statement Of Financial Position [Abstract]
Trade accounts receivable, less allowance for doubtful accounts	$ 6	$ 6
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	28,481,496	28,481,496
Common stock, shares outstanding	28,481,496	28,481,496

XML

Investments - Additional Information (Detail) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Investments All Other Investments [Abstract]
Certificates of deposit	$ 30	$ 30

XML

Document and Entity Information	6 Months Ended
	Jun. 30, 2014	Aug. 08, 2014
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2014
Document Fiscal Year Focus	2014
Document Fiscal Period Focus	Q2
Trading Symbol	NANX
Entity Registrant Name	NANOPHASE TECHNOLOGIES CORPORATION
Entity Central Index Key	0000883107
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		28,481,496

XML

Inventories - Summary of Inventories (Detail) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2014	Dec. 31, 2013
Inventory Disclosure [Abstract]
Raw materials	$ 214	$ 132
Finished goods	692	896
Inventory gross, Total	906	1,028
Allowance for excess inventory quantities	(52)	(52)
Inventories net, Total	$ 854	$ 976

XML

STATEMENTS OF OPERATIONS (Unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Revenue:
Product revenue, net	$ 2,848	$ 2,677	$ 5,423	$ 5,653
Other revenue	30	6	39	9
Net revenue	2,878	2,683	5,462	5,662
Operating expense:
Cost of revenue	1,846	1,834	3,723	3,907
Gross profit	1,032	849	1,739	1,755
Research and development expense	336	453	673	882
Selling, general and administrative expense	765	857	1,563	1,818
Loss from operations	(69)	(461)	(497)	(945)
Interest income			1	1
Interest expense	(1)	(2)	(3)	(9)
Other, net		11		17
Loss before provision for income taxes	(70)	(452)	(499)	(936)
Provisions for income taxes	0		0
Net loss	$ (70)	$ (452)	$ (499)	$ (936)
Net loss per share - basic and diluted	$ 0.00	$ (0.02)	$ (0.02)	$ (0.03)
Weighted average number of basic and diluted common shares outstanding	28,481,496	28,468,162	28,481,496	28,467,444

XML

Significant Customers and Contingencies

6 Months Ended

Jun. 30, 2014

Text Block [Abstract]

Significant Customers and Contingencies

(7) Significant Customers and Contingencies

Sales to three customers constituted approximately 68%, 10% and 6%, respectively, of our total revenue for the three months ended June 30, 2014, and 74%, 5% and 6%, respectively, of our total revenue for the six months ended June 30, 2014. Amounts included in accounts receivable on June 30, 2014 relating to these three customers were approximately $632, $0 and $171, respectively. Revenue from these three customers constituted approximately 62%, 11% and 9%, respectively, of the Company’s total revenue for the three months ended June 30, 2013 and 71%, 5% and 8%, respectively, for the six months ended June 30, 2013. Amounts included in accounts receivable on June 30, 2013 relating to these three customers were approximately $845, $284 and $243, respectively. The loss of one of these significant 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 covenants. The most restrictive financial 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 of the 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 $1 million, or (b) of an acceleration of any debt maturity having a principal amount of more than $10 million. Our supply agreements with BASF also “trigger” a technology transfer right in the event of our insolvency, as further defined within the agreements. In the event of an equipment sale, upon incurring a triggering event, the equipment would be sold to the customer at either 115% of the equipment’s net book value or the greater of 30% of the original book value of such equipment, and any associated upgrades to it, or 115% of the equipment’s net book value, depending on the contract and related equipment.

We believe that we have sufficient cash (See Liquidity and Capital Resources in Management’s Discussion and Analysis in Part I, Item 2 of this Form 10-Q for a further discussion) to operate our business throughout 2014. 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 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.

XML

Share-Based Compensation

6 Months Ended

Jun. 30, 2014

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Share-Based Compensation

(6) Share-Based Compensation

We follow FASB ASC Topic 718, Share-Based Payments, in which compensation expense is recognized only for share-based payments expected to vest. We recognized compensation expense related to stock options of $53 and $111 for the three and six month periods ended June 30, 2014, respectively, compared to $70 and $139 for the same periods in 2013.

As of June 30, 2014, there was approximately $349 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under our stock option plans. That cost is expected to be recognized over a remaining weighted-average period of 2.2 years.

Stock Options and Stock Grants

During the six months ended June 30, 2014, no stock options were exercised. During the six months ended June 30, 2013, 10,000 shares were issued pursuant to stock option exercises with proceeds of $3 realized. During the six months ended June 30, 2014, 568,000 stock options were granted compared to 553,000 for the same period in 2013. During the six months ended June 30, 2014, 22,000 stock options were forfeited compared to 91,133 stock options forfeited during the same period in 2013.

Stock Appreciation Rights

Prior to 2011, we granted outside directors stock appreciation rights (SARs). The change in fair value of the awards granted during prior years is included in non-cash compensation expense for the three and six months ended June 30, 2014 and 2013. The SARs granted vested immediately and are payable upon the directors’ removal or resignation from the position of director. These awards are accounted for as liability awards, included in accrued expenses as of June 30, 2014 and 2013, and adjusted to fair value each reporting period. The fair value of the liability on June 30, 2014 was $4 compared to $8 on December 31, 2013.

As of June 30, 2014, we did 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 three months ended	June 30, 2014	June 30, 2013
Weighted-average risk-free interest rates:	—	1.47%
Dividend yield:	—	—
Weighted-average expected life of the option:	—	7 Years
Weighted-average expected stock price volatility:	—	95.16%
Weighted-average fair value of the options granted:	—	$0.47

For the six months ended	June 30, 2014	June 30, 2012
Weighted-average risk-free interest rates:	2.01%	1.34%
Dividend yield:	—	—
Weighted-average expected life of the option:	7 Years	7 Years
Weighted-average expected stock price volatility:	95.16%	92.37%
Weighted-average fair value of the options granted:	$0.42	$0.33

XML

Share-Based Compensation - Additional Information (Detail) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013	Dec. 31, 2013
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Share-based compensation expense	$ 53	$ 70	$ 111	$ 139
Total unrecognized compensation cost related to nonvested share-based compensation arrangements granted	349		349
Weighted-average period over which unrecognized compensation is expected to be recognized			2 years 2 months 12 days
Proceeds from exercise of stock options				3
Common stock issued pursuant to option exercises			0	10,000
Stock options granted			568,000	553,000
Stock options forfeited			22,000	91,133
Common stock, shares outstanding	28,481,496		28,481,496		28,481,496
Stock Appreciation Rights (SARs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Fair value of the liability	$ 4		$ 4		$ 8
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common stock, shares outstanding	0		0
Performance Shares [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common stock, shares outstanding	0		0

XML

Inventories (Tables)

6 Months Ended

Jun. 30, 2014

Inventory Disclosure [Abstract]

Summary of Inventories

Inventories consist of the following:

	June 30, 2014			December 31, 2013
Raw materials	$	214		$	132
Finished goods		692			896
		906			1,028
Allowance for excess inventory quantities		(52	)		(52	)
	$	854		$	976

XML

Business Segmentation and Geographical Distribution

6 Months Ended

Jun. 30, 2014

Segment Reporting [Abstract]

Business Segmentation and Geographical Distribution

(8) Business Segmentation and Geographical Distribution

Revenue from international sources approximated $398 and $509 for the three and six months ended June 30, 2014, respectively, compared to $379 and $457 for the same periods in 2013. All of this revenue was product revenue.

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

XML

Financial Instruments (Policies)

6 Months Ended

Jun. 30, 2014

Fair Value Disclosures [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

We follow FASB ASC Topic 718, Share-Based Payments, in which compensation expense is recognized only for share-based payments expected to vest. We recognized compensation expense related to stock options of $53 and $111 for the three and six month periods ended June 30, 2014, respectively, compared to $70 and $139 for the same periods in 2013.

XML

Share-Based Compensation (Tables)

6 Months Ended

Jun. 30, 2014

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Schedule of Assumptions Used to Calculate 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 three months ended	June 30, 2014	June 30, 2013
Weighted-average risk-free interest rates:	—	1.47%
Dividend yield:	—	—
Weighted-average expected life of the option:	—	7 Years
Weighted-average expected stock price volatility:	—	95.16%
Weighted-average fair value of the options granted:	—	$0.47

For the six months ended	June 30, 2014	June 30, 2012
Weighted-average risk-free interest rates:	2.01%	1.34%
Dividend yield:	—	—
Weighted-average expected life of the option:	7 Years	7 Years
Weighted-average expected stock price volatility:	95.16%	92.37%
Weighted-average fair value of the options granted:	$0.42	$0.33

XML

Significant Customers and Contingencies - Additional Information (Detail) (USD $)	3 Months Ended				3 Months Ended		6 Months Ended				3 Months Ended		6 Months Ended				3 Months Ended		6 Months Ended				6 Months Ended
	Jun. 30, 2014 Customer	Dec. 31, 2013	Jun. 30, 2014 Customers One [Member]	Jun. 30, 2013 Customers One [Member]	Jun. 30, 2014 Customers One [Member] Sales [Member]	Jun. 30, 2013 Customers One [Member] Sales [Member]	Jun. 30, 2014 Customers One [Member] Sales [Member]	Jun. 30, 2013 Customers One [Member] Sales [Member]	Jun. 30, 2014 Customers Two [Member]	Jun. 30, 2013 Customers Two [Member]	Jun. 30, 2014 Customers Two [Member] Sales [Member]	Jun. 30, 2013 Customers Two [Member] Sales [Member]	Jun. 30, 2014 Customers Two [Member] Sales [Member]	Jun. 30, 2013 Customers Two [Member] Sales [Member]	Jun. 30, 2014 Customers Three [Member]	Jun. 30, 2013 Customers Three [Member]	Jun. 30, 2014 Customers Three [Member] Sales [Member]	Jun. 30, 2013 Customers Three [Member] Sales [Member]	Jun. 30, 2014 Customers Three [Member] Sales [Member]	Jun. 30, 2013 Customers Three [Member] Sales [Member]	Jun. 30, 2014 BASF [Member]	Jun. 30, 2014 BASF [Member] Maximum [Member]	Jun. 30, 2014 BASF [Member] Minimum [Member]
Revenue, Major Customer [Line Items]
Number of major customers	3
Revenue from top customers					68.00%	62.00%	74.00%	71.00%			10.00%	11.00%	5.00%	5.00%			6.00%	9.00%	6.00%	8.00%
Accounts receivable	$ 988,000	$ 52,000	$ 632,000	$ 845,000					$ 0	$ 284,000					$ 171,000	$ 243,000
Supply agreements with BASF Corporation																					The most restrictive financial 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 of the 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 $1 million, or (b) of an acceleration of any debt maturity having a principal amount of more than $10 million.
Cash, cash equivalents and investments, maximum																						1,000,000
Minimum contractual covenant - net earnings previous twelve months																					0
Principal amount of debt on maturity, minimum																							$ 10,000,000
Net book value equipment																					115.00%
Original book value of equipment, Minimum																							30.00%

XML

STATEMENTS OF CASH FLOWS (Unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013
Operating activities:
Net loss	$ (499)	$ (936)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	371	451
Gain on disposal of equipment		(17)
Stock compensation expense	107	149
Allowance for excess inventory quantities		47
Changes in assets and liabilities related to operations:
Trade accounts receivable	(936)	(567)
Other accounts receivable	1	25
Inventories	122	188
Prepaid expenses and other assets	(50)	(41)
Accounts payable	125	(171)
Accrued expenses	44	10
Net cash used in operating activities	(739)	(862)
Investing activities:
Proceeds from disposal of equipment		17
Acquisition of equipment and leasehold improvements	(102)	(59)
Payment of accounts payable incurred for the purchase of equipment and leasehold improvements	(12)	(20)
Net cash used in investing activities	(114)	(62)
Financing activities:
Principal payments on capital leases	(15)	(42)
Proceeds from exercise of stock options		3
Net cash used in financing activities	(15)	(39)
Decrease in cash and cash equivalents	(868)	(963)
Cash and cash equivalents at beginning of period	3,276	4,124
Cash and cash equivalents at end of period	2,408	3,161
Supplemental cash flow information:
Interest paid	3	9
Supplemental non-cash investing activities:
Accounts payable incurred for the purchase of equipment and leasehold improvements	$ 25	$ 42

XML

Inventories

6 Months Ended

Jun. 30, 2014

Inventory Disclosure [Abstract]

Inventories

(5) Inventories

Inventories consist of the following:

	June 30, 2014			December 31, 2013
Raw materials	$	214		$	132
Finished goods		692			896
		906			1,028
Allowance for excess inventory quantities		(52	)		(52	)
	$	854		$	976

XML

Share-Based Compensation - Schedule of Assumptions Used to Calculate Black-Scholes Option Pricing Model for Stock Options Granted (Detail) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2014	Jun. 30, 2013	Jun. 30, 2014	Jun. 30, 2013
Share Based Compensation Arrangement By Share Based Payment Award Fair Value Assumptions And Methodology [Abstract]
Weighted-average risk-free interest rates		1.47%	2.01%	1.34%
Dividend yield
Weighted-average expected life of the option		7 years	7 years	7 years
Weighted-average expected stock price volatility		95.16%	95.16%	92.37%
Weighted-average fair value of the options granted		$ 0.47	$ 0.42	$ 0.33