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Summary of Significant Accounting Policies | 12 Months Ended
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Dec. 31, 2023
Accounting Policies [Abstract] |
Summary of Significant Accounting Policies |
(2) | Summary of Significant Accounting Policies
Use of Estimates and Risks and Uncertainties The preparation of financial statements requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain assumptions are also necessary to assess the impact of risks and uncertainties on the financial statements, such as cash flow projections, availability of capital if needed to support the ongoing operations of the business, and our expected compliance with contractual commitments. These risks and uncertainties are further discussed in Note 12. Any changes in these assumptions or business plans could have a material impact on the financial statements. Cash The Cash balance on December 31, 2023 consists of funds borrowed from our Revolving Line of Credit, which is facilitated by Beachcorp, LLC. Our ability to access cash from our credit facilities depends on carrying an Accounts Receivable or Inventory balance greater than the outstanding loan balances in the Revolving Lines of Credit. As part of the agreement, we are required to have a bank account in place to act as a depository account for our customers. This account is referred to as the Control Account. Furthermore, there is an Account Control Agreement in place which provides Beachcorp, LLC the ability to exercise control over the account via approval of requested transfers. According to our agreements with Beachcorp, LLC, Nanophase is to be the party initiating any transfers, whether to Nanophase or to Beachcorp, LLC, and approval to access any monies within this account can only be withheld by Beachcorp, LLC if the borrowing base falls below the Company’s qualified receivables, or if we are in arrears with respect to interest payments due Beachcorp, LLC. The failure of Nanophase to remedy the previously mentioned conditions could lead to Beachcorp, LLC gaining the right, through a “springing” feature administered by Libertyville Bank and Trust, a Wintrust Community Bank (“Libertyville”), to transfer funds to itself without direct approval from Nanophase. Cash is held at a federally insured institution, but our cash balances at times exceed insured limits. The Company has not experienced any losses related to these statutory limits. Trade Accounts Receivable Trade accounts receivable are carried at original invoice amount less an estimate made for credit losses based on a review of all outstanding amounts on a monthly basis. We determine the allowance for credit losses by identifying troubled accounts and by using historical experience applied to an aging of accounts. Trade accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded when received. Our typical credit terms are between thirty and sixty days from shipment and invoicing. On January 1, 2023, the Company adopted ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which updates the manner in which entities assess expected losses from financial instruments exposed to credit risk. While this update has a greater impact on issuers with loans, notes, and credit card receivables, the scope of Topic 326 extends to both financial assets measured at amortized cost as well as available-for-sale debt securities. As such, trade receivables are subject to the Topic’s provisions, requiring entities to consider past events, current conditions, and reasonable and supportable forecasts in determining the amount of expected loss over the life of the respective financial instrument. Nanophase uses the loss-rate method in developing its allowance for credit losses, which involves identifying pools of assets with similar risk characteristics, reviewing historical losses within the last three years, and consideration of reasonable and supportable forecasts. Changes in estimates, developing trends, and other new information can have a material impact on future evaluations. This differs from prior allocation methodologies in that in addition to solely considering an aging schedule for amounts to reserve, management must now also consider current events as well as the future macroeconomic environment when making such loss assessments. On January 1, 2023, the Company applied the accounting change retrospectively with an opening adjustment to retained earnings in the amount of $203. Allowance for Credit Losses
|  | 2023 |  |  | 2022 |
Balance, beginning |  | $ | 139 |  |  | $ | 0 |
Change in credit loss |  |  | 86 |  |  |  | 139 |
Balance, ending |  | $ | 225 |  |  | $ | 139 |
Inventories Inventories are stated at the lower of cost, maintained on an average cost basis, or net realizable value. We have recorded allowances to reduce inventory relating to excess quantities of certain materials. Write-downs of inventories establish a new cost basis, which is not increased for future increases in market value of inventories or changes in estimated excess quantities. Equipment and Leasehold Improvements Equipment is stated at cost and is being depreciated over its estimated useful life (3-20 years) using the straight-line method. Leasehold improvements are stated at cost and are being amortized using the straight-line method over the shorter of the useful life of the asset or the term of the lease (3-7 years). Depreciation expense for leased assets is included with depreciation expense for owned assets. From time to time we have self-constructed assets. These assets are stated at cost plus the capitalization of labor and are depreciated over an estimated useful life (7-10 years) using the straight-line method. Long Lived Assets We review long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. We conduct long-lived asset impairment analyses in accordance with ASC 360-10-15, Impairment or Disposal of Long-Lived Assets. ASC 360-10-15 requires us to group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals. Based upon our analysis, there were no impairment charges recognized in either period presented. Deferred Revenue The Company records a contract liability for development projects due to the contractual billing of these projects not always aligning with revenue recognition. In addition, it is now the Company’s policy to frequently require deposits relating to the production of our Solésence products. Of the total $2,353 in deferred revenue reported in 2023, 97% related to prepayments received from certain customers per Company policy, and the remaining 3% related to prepayments from a product development agreement with a personal care ingredient customer. Asset Retirement Obligations In connection with our leased facilities, we are required to remove certain leasehold improvements upon termination of our occupancy. We follow the provisions of the FASB issued ASC 410-20, Asset Retirement Obligations, under which we recognize a liability for the fair value of these asset retirement obligations. The fair value of that liability is measured based on an expected cash flow approach and accretion expense is recognized each period to recognize increases to the fair value of the liability due to the passage of time. Increases to the fair value of the liability, except for accretion, are added to the carrying value of the long-lived asset. Those increases are then reported in amortization expense over the estimated useful life of the long-lived asset. Activity in the asset retirement obligation account for the years ended December 31, is as follows:
|  | 2023 |  |  | 2022 |
Balance, beginning |  | $ | 230 |  |  | $ | 222 |
Accretion of liability due to passage of time |  |  | 8 |  |  |  | 8 |
Amortization of asset due to passage of time |  |  | — |  |  |  | — |
Balance, ending |  | $ | 238 |  |  | $ | 230 |
Financial Instruments We follow ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. Our financial instruments include cash, cash equivalents, accounts receivable, accounts payable and accrued expenses, along with any short-term and long-term borrowings as described in Note 3. The carrying values of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses are reasonable estimates of their fair value due to the short-term nature. The fair value of short-term and long-term debt approximates carrying value based on comparison of terms to similar debt offering in the marketplace. There were no financial instruments adjusted to fair value on December 31, 2023 and 2022. Product Revenue Revenues are recognized when control of the promised goods is transferred to customers, in an amount that reflects the consideration we expect to receive in exchange for those goods. When our ingredients and finished products are shipped, with control being transferred at the shipping point, is the point in time at which we recognize the related revenue. We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses. Customers’ deposits, deferred revenue and other receipts are deferred and recognized when the revenue is realized and earned. Cash payments to customers are classified as reductions of revenue in our statements of operations. For select customers the Company may pay volume rebates which are variable in nature due the amount the select customer will take. In 2023 no volume rebates were recorded because the customers did not meet required volumes. In 2022 the company recorded $557 in volume rebates as a reduction in revenue. As part of the sales process, it is common for the Company to receive customer deposits. These deposits are typically held for less than a year and do not result in a financing component to the sales. The customer deposits are recognized as revenue when the Company ships the finished goods to the customer. Contract balances for the years ended December 31, 2023, 2022, and 2021 are as follows:
|  | Accounts Receivable |  |  | Contract Assets |  |  | Contract Liabilities |
2021 |  | $ | 3,937 |  |  | $ | 179 |  |  | $ | 1,444 |
2022 |  |  | 4,734 |  |  |  | — |  |  |  | 2,188 |
2023 |  |  | 3,467 |  |  |  | — |  |  |  | 2,353 |
Revenue recognized in the reporting period that was included in the contract liability balance at the beginning of the period was $2,084 and $667 for the years ended December 31, 2023, and 2022, respectively. Other Revenue Other revenue may include revenue from technology license fees and paid development projects. Technology license fees and paid development projects are recognized over time when the obligations under the agreed upon contractual arrangements are performed on our part. Revenue recognized over time was $656 and $217 for the years ended December 31, 2023 and 2022, respectively. Research and Development Expenses Research and development expenses are recognized as expense when incurred. Income Taxes We account for income taxes using the asset-and-liability approach. As such, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets and liabilities are calculated using the enacted tax rates and laws that are expected to be in effect when the anticipated reversal of these differences is scheduled to occur. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some or all of the deferred tax assets will not be realized. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured, as described above, is reflected as a liability for uncertain tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. We have not recorded a reserve for any tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. We file tax returns in all appropriate jurisdictions, which includes a federal tax return and Illinois state tax return. When and if applicable, potential interest and penalty costs are accrued as incurred, with expenses recognized in selling, general and administrative expenses in the statements of operations. As of December 31, 2023, and 2022, we had no liability for unrecognized tax benefits. Earnings Per Share Options to purchase approximately 889,000 shares of common stock that were outstanding as of December 31, 2023 were not included in the computation of earnings per share for the year ended December 31, 2023, as they would have been anti-dilutive owing to the loss reported for the period. Options to purchase approximately 2,051,000 shares of common stock that were outstanding as of December 31, 2022 were not included in the computation of earnings per share for the year ended December 31, 2022. Earnings applicable to common stock and common stock shares used in the calculation of basic and diluted earnings per share are as follows:
|  | Years Ended December 31, |
|  | 2023 |  |  | 2022 |
Numerator: (in Thousands) |  |  |  |  |  |
Net loss |  | $ | (4,390 | ) |  | $ | (2,623 | )
Denominator: |  |  |  |  |  |  |  |
Weighted average number of basic common shares outstanding |  |  | 49,556,305 |  |  |  | 49,117,000 |
Weighted average additional shares assuming conversion of in-the-money stock options to common shares |  |  | — |  |  |  | — |
Weighted average number of diluted common shares outstanding |  |  | 49,556,305 |  |  |  | 49,117,000 |
Basic earnings per common share: |  |  |  |  |  |  |  |
Net loss per share – basic |  | $ | (0.09 | ) |  | $ | (0.05 | )
Diluted earnings per common share: |  |  |  |  |  |  |  |
Net loss per share – diluted |  | $ | (0.09 | ) |  | $ | (0.05 | )
Recently Adopted Pronouncements In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” which replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost. On January 1, 2023, the Company adopted ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” which updates the manner in which entities assess expected losses from financial instruments exposed to credit risk. While this update has a greater impact on issuers with loans, notes, and credit card receivables, the scope of Topic 326 extends to both financial assets measured at amortized cost as well as available-for-sale debt securities. As such, trade receivables are subject to the Topic’s provisions, requiring entities to consider past events, current conditions, and reasonable and supportable forecasts in determining the amount of expected loss over the life of the respective financial instrument. Nanophase uses the loss-rate method in developing its allowance for credit losses, which involves identifying pools of assets with similar risk characteristics, reviewing historical losses within the last three years, and consideration of reasonable and supportable forecasts. Changes in estimates, developing trends, and other new information can have a material impact on future evaluations. This differs from prior allocation methodologies in that in addition to solely considering an aging schedule for amounts to reserve, management must now also consider current events as well as the future macroeconomic environment when making such loss assessments. On January 1, 2023, the Company applied the accounting change retrospectively with an opening adjustment to retained earnings in the amount of $203. Recently Issued Pronouncements On December 14, 2023 the FASB issued a final standard on improvements to income tax disclosures. The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. ASU 2023-09, Improvements to Income Tax Disclosures, applies to all entities subject to income taxes. This new requirement will be effective for Nanophase Technologies for annual periods beginning December 31, 2025. The Company is currently evaluating the impact of the adoption of this standard on the consolidated financial statements.

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