NANOPHASE TECHNOLOGIES Corp (Form: 10-Q, Received: 11/19/2018 17:16:05)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the Quarterly Period Ended: September 30, 2018

☐	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	(I.R.S. Employer
incorporation or organization)	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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer ☐	Accelerated filer ☐
	Non-accelerated filer ☐	Smaller reporting company ☒
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 19th, 2018, there were 33,911,792 shares outstanding of common stock, par value $.01, of the registrant.

NANOPHASE TECHNOLOGIES CORPORATION

QUARTER ENDED SEPTEMBER 30, 2018

INDEX

			Page

PART I - FINANCIAL INFORMATION			3
	Item 1.	Unaudited Consolidated Condensed Financial Statements	3
		Unaudited Consolidated Condensed Balance Sheets as of September 30, 2018 and December 31, 2017	3
		Unaudited Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2018 and 2017	4
		Unaudited Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2018 and 2017	5
		Notes to Unaudited Consolidated Condensed Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15
	Item 4.	Controls and Procedures	15

PART II - OTHER INFORMATION			16
	Item 1.	Legal Proceedings	16
	Item 1A.	Risk Factors	16
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
	Item 3.	Defaults Upon Senior Securities.	16
	Item 4.	Mine Safety Disclosures.	16
	Item 5.	Other Information.	16
	Item 6.	Exhibits.	17

SIGNATURES			18

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(in thousands except share and per share data)

	September 30,			December 31,
	2018			2017
ASSETS
Current assets:
Cash and cash equivalents	$	1,034		$	1,955
Trade accounts receivable, less allowance for doubtful accounts of $5 on September 30, 2018 and December 31, 2017		1,917			1,115
Inventories, net		2,091			1,385
Prepaid expenses and other current assets		255			169
Total current assets		5,297			4,624

Equipment and leasehold improvements, net		1,761			1,624
Other assets, net		16			18
	$	7,074		$	6,266

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Line of credit	$	500		$	300
Current portion of capital lease obligations		197			143
Accounts payable		1,916			1,038
Accrued expenses		980			543
Total current liabilities		3,593			2,024

Long-term portion of capital lease obligations		496			416
Long-term deferred rent		361			410
Asset retirement obligations		189			184
Total long-term liabilities		1,046			1,010

Stockholders' equity:
Preferred stock, $.01 par value, 24,088 shares authorized and no shares issued and outstanding		—			—
Common stock, $.01 par value, 42,000,000 shares authorized; 33,911,792 shares issued and outstanding on September 30, 2018 and 33,847,793 on December 31, 2017		339			338
Additional paid-in capital		98,737			98,563
Accumulated deficit		(96,641	)		(95,669	)
Total stockholders' equity		2,435			3,232
	$	7,074		$	6,266

See Notes to Financial Statements.

NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands except share and per share data)

	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
Revenue:
Product revenue	$	3,998		$	2,524		$	10,908		$	9,525
Other revenue		24			261			128			327
Total revenue		4,022			2,785			11,036			9,852

Operating expense:
Cost of revenue		2,965			2,200			8,164			6,862
Gross profit		1,057			585			2,872			2,990

Research and development expense		416			494			1,513			1,354
Selling, general and administrative expense		765			725			2,299			2,185
Loss from operations		(124	)		(634	)		(940	)		(549	)
Interest expense		12			9			32			25
Other, net		—			—			—			—
Loss before provision for income taxes		(136	)		(643	)		(972	)		(574	)
Provision for income taxes		—			—			—			—
Net Loss	$	(136	)	$	(643	)	$	(972	)	$	(574	)

Net income/(loss) per basic shares	$	0.00		$	(0.02	)	$	(0.03	)	$	(0.02	)
Weighted average number of basic common shares outstanding		33,879,097			31,239,678			33,858,184			31,234,735
Net income/(loss) per diluted share	$	0.00		$	(0.02	)	$	(0.03	)	$	(0.02	)
Weighted average number of diluted common shares outstanding		33,879,097			31,239,678			33,858,184			31,234,735

See Notes to Financial Statements.

NANOPHASE TECHNOLOGIES CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Nine months ended September 30,
	2018			2017
Operating activities:
Net loss	$	(972	)	$	(574	)
Adjustment to reconcile net income loss to net cash used in operating activities:
Depreciation and amortization		239			267
Stock compensation expense		146			140
Changes in assets and liabilities related to operations:
Trade accounts receivable		(802	)		(1,147	)
Inventories		(706	)		(104	)
Prepaid expenses and other assets		(84	)		53
Accounts payable		872			333
Accrued expenses		386			166
Net cash used in operating activities		(921	)		(866	)

Investing activities:
Proceeds from disposal of equipment		—			136
Acquisition of equipment and leasehold improvements		(115	)		(121	)
Net cash (used in) provided by investing activities		(115	)		15

Financing activities:
Principal payments on capital leases		(114	)		(122	)
Proceeds from line of credit		1,200			250
Payments on line of credit		(1,000	)		—
Proceeds from exercise of stock options and sale of common stock		29			14
Net cash provided by financing activities		115			142

Decrease in cash and cash equivalents		(921	)		(709	)
Cash and cash equivalents at beginning of period		1,955			1,779
Cash and cash equivalents at end of period	$	1,034		$	1,070
Supplemental cash flow information:
Interest paid	$	32		$	24
Supplemental non-cash investing activities:
Accounts payable incurred for the purchase of equipment and leasehold improvements	$	6		$	9
Proceeds from capital leases	$	248		$	307

See Notes to Financial Statements.

NANOPHASE TECHNOLOGIES CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

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

(1) Basis of Presentation

The accompanying unaudited consolidated condensed interim financial statements of Nanophase Technologies Corporation (“Nanophase” or the “Company”, including “we”, “our” or “us”) along with its wholly-owned subsidiary, Solésence®, reflect all adjustments (consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of our financial position and operating results for the interim periods presented. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or any interim period.

These financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission.

(2) Description of Business

Nanophase is a leader in advanced materials technologies, with its primary strategic focus being in developing and providing engineered solutions for various applications of micromaterials (“nano” and “non-nano” in scale) for use in protecting human skin from the harmful and damaging effects of the sun. We also produce a variety of materials for use in diverse markets other than those using our materials as active ingredients for sun protection. These other markets include: industrial coatings applications, abrasion-resistant additives, medical diagnostics, and a variety of surface finishing (polishing) applications, including optics. We have expanded our offerings beyond active ingredients to include targeted full formulations of skin care products, marketed and sold by our wholly-owned subsidiary, Solésence®, LLC.

Although our primary strategic focus has been the North American market, we currently sell material to customers overseas and have been working to expand our reach within foreign markets. The Company was incorporated in Illinois on November 25, 1989 and became a Delaware corporation during 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 Statements of Operations, as it does not represent revenue directly from our materials or fully formulated products.

(3) Revenues

On January 1, 2018, we adopted Accounting Standards Updates (“ASU”) 2014-09 and 2015-14, Revenue from Contract with Customers (Topic 606) , using the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605. Based on our contract evaluation, we determined that there was no need to record any changes to our opening retained earnings due to the impact of our adoption of Topic 606. The adoption of Topic 606 did not have a material impact on our consolidated condensed financial statements.

Revenues are recognized at a point in time, typically 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.

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.

We do not disclose the value of the unsatisfied performance obligations for contracts with an original expected length of one year or less or contracts for which we recognize revenue that we have the right to invoice for goods completed.

(4) Earnings (Loss) Per Share

Earnings (Loss) Per Share is computed using the Treasury Stock Method. Options to purchase approximately 1,119,000 and 820,000 shares of common stock that were outstanding as of September 30, 2018 for the three and nine months ended September 30, 2018, respectively, were not included in the computation of diluted earnings (loss) per share, as the impact of such shares would be anti-dilutive. Options to purchase approximately 750,000 and 796,000 shares of common stock that were outstanding as of September 30, 2017 were not included in the computation of loss per share for the three and nine months ended September 30, 2017, respectively, as the impact of such shares would be anti-dilutive.

(5) Financial Instruments

We follow FASB ASC 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, along with a promissory note with no related borrowings, any borrowings on the LB&T working capital line of credit, each described in Note 6. Subsequent to September 30, 2018, the Company has secured a term loan and a revolving loan, each described in Note 6. The fair values of all financial instruments were not materially different from their carrying values. There were no financial assets or liabilities adjusted to fair value on September 30, 2018 or December 31, 2017.

(6) Notes and Lines of Credit

During July 2014, we entered into a bank-issued letter of credit and related promissory note for up to $30 in borrowings to support our obligations under our facility lease agreement. No borrowings have been incurred under this promissory note. Should any borrowings occur in the future, the interest rate would be the prime rate plus 1%, with the bank having the right to “set off” or apply unpaid balances against our checking account if we fail to meet our obligations under any borrowings under the note. It is our intention to renew this note annually, for as long as we need to pursuant to the terms of our facility lease agreement. Because there were no amounts outstanding at any time during 2018 or 2017, we have recorded no related liability on our balance sheet.

During March 2015, we entered into a Business Loan Agreement (the “Line of Credit Agreement”) with Libertyville Bank and Trust Company, a Wintrust Community Bank (“LB&T”), our primary bank. This Line of Credit Agreement was subsequently amended on April 13, 2015 and was extended on each of March 4, 2016 and February 14, 2017. Under the Line of Credit Agreement, as amended, LB&T provided a maximum of $300 or 75% of our eligible accounts receivable, whichever was less, of revolving credit, collateralized by a senior priority lien on our accounts receivable, inventory, equipment, general intangibles and fixtures. Interest on any borrowings was the prime rate at the time plus 1%. Availability to draw on the line required us to have at least $1 million in cash, including any amounts borrowed, at LB&T on the date of any advance. Advances could only occur at the beginning or end of a fiscal quarter and had to be repaid in full within five days of the advance. Borrowings on this line were $300 on December 31, 2017. These borrowings were repaid in January 2018. The Line of Credit Agreement expired on March 4, 2018.

On March 26, 2018, we executed a new Business Loan Agreement (the “New Line of Credit Agreement”), dated as of March 4, 2018, with LB&T, which replaces the Line of Credit Agreement with LB&T that expired on March 4, 2018. Under the New Line of Credit Agreement, LB&T will provide a maximum of (i) $500 or (ii) two times the sum of (a) 75% our eligible accounts receivables and (b) our cash deposited with LB&T, whichever is less, of revolving credit to us, collateralized by a senior priority lien on our accounts receivables, inventory, equipment, general intangibles and fixtures. Interest is payable monthly on any advances at a floating interest rate of the prime rate at the time plus 1%. We must have $1 million in cash, inclusive of the borrowed amount, at LB&T on the date of any advance. Advances may only occur at the beginning or end of a fiscal quarter and must be repaid in full within five business days of the advance. The New Line of Credit Agreement expires in March 2019. While the New Line of Credit Agreement is in effect, we cannot, among other things, engage in any business activities substantially different than those in which we are presently engaged, and there are limitations imposed on our ability to, among other things, incur additional indebtedness for borrowed money, including capital leases, sell, transfer, mortgage, assign, pledge, lease or grant a security interest in or encumber any of our assets, sell with recourse any of our accounts other than to LB&T, cease operations, merge, transfer, acquire or consolidate with any other entity, change our name, dissolve or transfer or sell collateral outside the ordinary course of business, pay any cash dividends, loan, invest in or advance money or assets to any other person or entity, purchase, create or acquire any interest in any other entity, or incur any obligation as a surety or guarantor other than in the ordinary course of business, in each case without LB&T’s prior written consent. We borrowed $500 on this line on September 28, 2018 and repaid it on October 1st, 2018. The amount outstanding on the loan was $300 on December 31, 2017 which was paid in full on January 9, 2018.

On November 19, 2018, we entered into a Business Loan Agreement (the “Master Agreement”) with Beachcorp, LLC. The Master Agreement relates to two loan facilities, each evidenced by a separate promissory note dated as of November 16, 2018: a term loan to the Company of up to $500 to be disbursed in a single advance (the “Term Loan”) with a fixed annual interest rate of 8.25%, payable quarterly, accruing from the date of such advance and with principal due on December 31, 2020; and an asset-based revolving loan facility for the Company of up to $2,000 (the “Revolver Facility”), with floating interest accruing at the prime rate plus 3% (8.25% minimum) per year, with a borrowing base consisting of qualified accounts receivable of the Company, and with all principal and accrued interest due March 31, 2020. The Term Loan and Revolver Facility are secured by all the unencumbered assets of the Company and subordinated to LB&T’s secured interest under the New Line of Credit Agreement. The Master Agreement substantially restricts the Company’s ability to incur additional indebtedness during the terms of both the Term Loan and the Revolver Facility. As of the date of this filing, there were no amounts borrowed on either of the loans.

(7) Inventories

Inventories consist of the following:

	September 30, 2018			December 31, 2017

Raw materials	$	1,086		$	543
Finished goods		1,026			863
		2,112			1,406
Allowance for excess inventory quantities		(21	)		(21	)
	$	2,091		$	1,385

During the three months ended March 31, 2018, $246 was reclassified from Prepaid Expenses to Raw Materials. For comparison purposes, $246 has been reclassified from Prepaid Expenses to Raw Materials as of December 31, 2017 in the table above. Our balance sheet as of December 31, 2017 has also been updated to reflect this reclassification.

(8) Share-Based Compensation

We follow FASB ASC Topic 718 , Compensation – Stock Compensation , in which compensation expense is recognized only for share-based payments expected to vest. We recognized compensation expense related to stock options of $58 and $146 for the three and nine months ended September 30, 2018, respectively, compared to $45 and $140 for the three and nine months ended September 30, 2017, respectively.

As of September 30, 2018, there was approximately $449 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under our stock option plans. That cost is expected to be recognized over a remaining weighted-average period of 2.2 years.

Stock Options and Stock Grants

During the nine months ended September 30, 2018, 63,999 shares of common stock were issued pursuant to stock option exercises for proceeds of $29,000. During the nine months ended September 30, 2017, 45,334 shares of common stock were issued pursuant to stock option exercises for proceeds of $14,000. During the nine months ended September 30, 2018, 570,500 options were granted compared to the 507,600 stock options were granted during the same period in 2017. During the nine months ended September 30, 2018, 188,504 stock options expired, and 31,601 stock options were forfeited compared to 7,000 stock options expiring and 37,568 forfeited during the same period in 2017. We had 3,428,000 stock options outstanding at a weighted average exercise price of $0.67 on September 30, 2018, compared to 3,141,000 stock options outstanding at a weighted average exercise price of $0.79 on December 31, 2017.

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

For the nine months ended	September 30, 2018	September 30, 2017
Weighted-average risk-free interest rates:	2.9%	2.1%
Dividend yield:	—	—
Weighted-average expected life of the option:	7 years	7 years
Weighted-average expected stock price volatility:	94%	94%
Weighted-average fair value of the options granted:	$0.64	$0.55

As of September 30, 2018, we did not have any unvested restricted stock or performance shares outstanding. No stock options were granted in the three-month periods end September 30, 2018 and 2017.

(9) Significant Customers and Contingencies

Revenue from our three largest customers constituted approximately 74%, 12% and 4%, respectively, of our total revenue for the three months ended September 30, 2018, and approximately 74%, 8% and 4%, respectively, of our total revenue for the nine months ended September 30, 2018. Amounts included in accounts receivable on September 30, 2018 relating to these three customers were approximately $1,170, $388 and $149, respectively. Revenue from these three customers constituted approximately 58%, 0% and 8%, respectively, of our total revenue for the three months ended September 30, 2017, and approximately 67%, 0%, and 7% of our total revenue for the nine months ended September 30, 2017. Amounts included in accounts receivable on September 30, 2017 relating to these three customers were approximately $1,196, $0 and $174 respectively. The loss of one of these significant customers, a significant decrease in revenue from one or more of these customers, or the failure to attract new customers could have a material adverse effect on our business, results of operations and financial condition.

We currently have exclusive supply agreements with BASF Corporation (“BASF”), our largest customer, that have contingencies outlined which could potentially result in the license of technology and/or the sale of production equipment from the Company to the customer intended to provide capacity sufficient to meet the customer’s production needs. This outcome may occur if we fail to meet certain performance requirements, certain other obligations and/or certain financial condition covenants. The financial condition covenants in one of our supply agreements with BASF “trigger” a technology transfer right (license and equipment sale at BASF’s option) in the event (a) that earnings for the twelve-month period ending with our most recently published quarterly financial statements are less than 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 equipment and related products.

We believe that we have sufficient cash and credit availability (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, as well as the description of our loan and credit agreements described in Note 6) to operate our business during the remainder of 2018. 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 agreements with BASF. Any such event would also likely result in the loss of many of our key staff and line employees due to economic realities. We believe that our employees are a critical component of our success and it could be difficult to replace them quickly. Upon the occurrence of any such event, we might not be able to hire and retain skilled employees given the stigma relating to such an event and its impact on us. Finally, any shortfall in capital needed to operate the business as management intends, including with respect to avoiding this triggering event as described above, may result in a curtailment of certain activities or anticipated investments.

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

(10) Business Segmentation and Geographical Distribution

Revenue from international sources approximated $152 and $335 for the three and nine months ended September 30, 2018, respectively, compared to $276 and $956 for the three and nine months ended September 30, 2017, respectively. All this revenue was product revenue.

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

(11) New Accounting Pronouncements

During February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases (Topic 842) . This standard requires the recognition of assets and liabilities arising from lease transactions on the balance sheet and the disclosure of key information about leasing arrangements. Accordingly, a lessee will recognize a lease asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease will be included in the asset. For leases with a term of 12 months or less, a lessee can make an accounting policy election by class of underlying asset to not recognize an asset and corresponding liability. Lessees will also be required to provide additional qualitative and quantitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements and provide additional information about the nature of an organization’s leasing activities. The amendments in this standard are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, which is our first quarter of 2019, with early adoption permitted. We review new accounting standards as issued. We are in the process of evaluating the impact this standard will have on our financial statements.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Nanophase is a leader in advanced materials technologies, with its primary strategic focus being in developing and providing engineered solutions for various applications of micromaterials (“nano” and “non-nano” in scale) for use in protecting human skin from the harmful and damaging effects of the sun. We also produce a variety of materials for use in diverse markets other than those using our materials as active ingredients for sun protection. These other markets include: industrial coatings applications, abrasion-resistant additives, medical diagnostics, and a variety of surface finishing (polishing) applications, including optics. Through our increasing focus on skin care ingredients, and enabled by our own patented and proprietary technologies, we have expanded our offerings beyond active ingredients to include targeted full formulations of skin care products, marketed and sold by our wholly-owned subsidiary, Solésence®, LLC.

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, and our Solésence® solutions to cosmetics and skin care brands. Recently developed technologies have made certain new products possible and opened potential new markets. For example, we have applied our expertise at producing precisely defined nanomaterials to now create and sell larger, “non-nano” 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 2018 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 sun care-related applications referenced above. For example, during 2015 we were granted a patent on a new type of particle surface treatment (coating), which became the cornerstone of our new product development in personal care, with first revenue recognized during 2016. In addition, through the creation of our Solésence®, LLC subsidiary, we use this particle surface treatment to manufacture and sell fully developed solutions to targeted customers in the cosmetics and skin care industry, in addition to the additives we have traditionally sold in to the sun care area. During the second quarter of 2018, Solésence® supported the launch of three fully developed products for its customers. We are currently focusing the greatest part of our business development efforts on building and expanding our Solésence® brand and product suite. We believe that successful introduction of our finished skin care products and materials with manufacturers may lead to follow-on orders for other finished products and materials in these applications. 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 2018 and beyond.

At the same time, we look for opportunities to partner with established entities in order to further our mutual goals. During June 2017, we entered into a series of agreements with Eminess Technologies, Inc. (“ETI”), an entity that is well established in selling materials for surface finishing (polishing) applications. We intend to continue serving this market through supplying materials, while devoting the greatest share of our business- and product-development resources to support our Solésence® brand and expand our suite of sun care-related products. These agreements are intended to accomplish both, by allowing us to maximize existing production assets and technology, while supporting strategic growth in sun care applications. ETI will sell our products, in some cases by making and selling those products themselves under an exclusive license and paying us a royalty, and in other cases through an exclusive supply arrangement with us. ETI purchased equipment from us for $36,000 and paid us a one-time fee of $250,000 for assisting ETI in its development of dispersion technology relevant to polishing solutions.

Results of Operations

Total revenue increased to $4,022,000 for the three months ended September 30, 2018, compared to $2,785,000 for the same period in 2017. Total revenue increased to $11,036,000 for the nine months ended September 30, 2018 from $9,852,000 for same period in 2017. A substantial majority of our revenue for each of the periods was from our largest customers, in particular, sales to our largest customer in personal care and sunscreen applications. Revenue from out top three customers constituted approximately 70%, 12% and 4%, respectively, of our total revenue for the three months ended September 30, 2018, and approximately 74%, 8% and 4%, respectively, of our total revenue for the nine months ended September 30, 2018. Revenue from these three customers constituted approximately 58%, 0% and 3%, respectively, of our total revenue for the three months ended September 30, 2017, and approximately 66%, 0%, and 3% of our total revenue for the nine months ended September 30, 2017. Product revenue, the primary component of our total revenue, increased to $3,998,000 for the three months ended September 30, 2018 compared to $2,524,000 for the three months ended September 30, 2017. Product revenue increased to $10,908,000 for the nine months ended September 30, 2018, compared to $9,525,000 for the same period in 2017. The increase in total revenue and in product revenue for the three months ended September 30, 2018, relative to the three months ended September 30, 2017, reflects the shutdown in July 2017 to install a new product coating blender, which adversely impacted revenue for the three months ended September 30, 2017. Because the shutdown was substantially mitigated by shifting fulfillment of customer orders to before and after the shutdown, however, it had a lesser impact on revenue for the nine months ended September 30, 2017, so that the increase in revenue for the nine months ended September 30, 2018, relative to the nine months ended September 30, 2017, results primarily from our Solésence® products launches in 2018, which represented approximately 9% of our year to date product revenue, and an increase in the demand for minerals-based sunscreen products.

Other revenue decreased to $24,000 for the three months ended September 30, 2018, compared to $261,000 for the same period in 2017. Other revenue decreased to $128,000 for the nine months ended September 30, 2018, compared to $327,000 for the same period in 2017. Other revenue is comprised primarily of shipping costs paid by customers and includes fee-based development projects completed during the first half of 2018. This also applies to the same period in 2017 when we received an intellectual property transfer fee of $250,000 from a customer.

Cost of revenue generally includes costs associated with commercial production and customer development arrangements. Cost of revenue increased to $2,965,000 for the three months ended September 30, 2018, compared to $2,200,000 for the same period in 2017. Cost of revenue increased to $8,164,000 for the first nine months of 2018, compared to $6,862,000 for the same period in 2017. The increases in cost of revenue in 2018 were primarily driven by higher wages, price inflation on materials including zinc metal, and manufacturing inefficiencies related to Solésence® product launches. While we typically pass through costs to our customers, we cannot always pass through 100% of pricing increases on raw materials, and even with pass throughs, our gross margin percentage is negatively impacted by higher material costs. We expect to continue new materials development and finished cosmetics products, primarily using our material synthesis and dispersion technologies for supplying and developing new active ingredients for sun care, as well as applying our expanding formulations expertise in developing fully formulated Solésence® products during 2018 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. In order to support future revenue projections, we believe we need a $200,000 to $300,000 capital equipment investment before the end of the year. The extent to which margins may grow, as a percentage of total revenue, will be dependent upon revenue mix, revenue volume, our ability to manage costs and pass commodity market-driven raw materials increases on to customers, and the speed and efficiency with which we are able to scale up production for our Solésence® products. We expect that product revenue volume increases will result in our fixed manufacturing costs being more efficiently absorbed, which should lead 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 realize absolute dollar gross margin growth through 2018 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 finished product formulations for our Solésence® business. As an example, we have been, and continue to be, engaged in product development work for our new fully-formulated finished skincare products marketed through Solésence® . Much of this work has led to several new products and additional potential new products. We are also engaged in a series of in-vitro, ex-vivo, and in-vivo tests to determine the productivity of our Solésence® products, as well as to provide our customers with support for consumer inquiries.

Research and development expense decreased to $416,000 and increased to $1,513,000 for the three and nine months ended September 30, 2018, respectively, compared to $494,000 and $1,354,000, respectively, for the same periods in 2017. The primary reasons for these increases were increased wages due to personnel added during 2018 and increased outside product testing and evaluation costs related to our Solésence® products. We expect quarterly research and development expense to decline during the remainder of 2018, as we expect the initial effort required to launch the Solésence® solutions to lessen, particularly with respect to external testing and validation costs.

Selling, general and administrative expense increased to $765,000 and $2,299,000 for the three and nine months ended September 30, 2018, respectively, compared to $725,000 and $2,185,000, respectively, for the same periods in 2017. The increased costs were associated with launching the Solésence® brand. We expect selling, general and administrative expense to remain at current levels during the remainder of 2018.

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 2018 and beyond if we are unable to pass through any applicable increases under our present contracts or through to our markets in general.

Liquidity and Capital Resources

Our cash and cash equivalents amounted to $1,034,000 on September 30, 2018, compared to $1,955,000 on December 31, 2017. The net cash used in our operating activities was $921,000 for the nine months ended September 30, 2018, compared to $866,000 for the same period in 2017. The net use of cash during both periods was driven primarily by a significant increase in unabsorbed manufacturing costs and an increase in accounts receivable and inventory at the end of the respective period. Net cash used in investing activities was $115,000 during the nine months ended September 30, 2018, compared to net cash provided by investing activities of $15,000 for the nine months ended September 30, 2017. We paid $114,000 for capital lease obligations during the nine months ended September 30, 2018 compared to $122,000 in the same period in 2017. Net cash provided by financing activities was $115,000 during the nine months ended September 31, 2018, compared to net cash provided by financing activities of $142,000 for the nine months ended September 30, 2017. We paid the $300,000 outstanding balance under our line of credit as of December 31, 2017 on January 9, 2018, the $200,000 outstanding balance as of March 31, 2018 on April 4, 2018, the $500,000 outstanding balance as of June 30, 2018 on July 2, 2018 and the $500,000 outstanding balance as of September 30, 2018 on October 1 ^st , 2018. Proceeds for capital leases for the nine months ended September 30, 2018 and 2017 were $248,000 and $307,000 respectively.

On November 19, 2018, we entered into a Business Loan Agreement (the “Master Agreement”) with Beachcorp, LLC. The Master Agreement relates to two loan facilities, each evidenced by a separate promissory note dated as of November 19, 2018: a term loan to the Company of up to $500,000 to be disbursed in a single advance (the “Term Loan”) with a fixed annual interest rate of 8.25%, payable quarterly, accruing from the date of such advance and with principal due on December 31, 2020; and an asset-based revolving loan facility for the Company of up to $2,000,000 (the “Revolver Facility”), with floating interest at prime rate plus 3% (8.25% minimum) per year, with a borrowing base consisting of qualified accounts receivable of the Company, and with all principal and accrued interest due March 31, 2020. The Term Loan and Revolver Facility are secured by all the unencumbered assets of the Company and subordinated to LB&T’s secured interest under the New Line of Credit Agreement. The Master Agreement substantially restricts the Company’s ability to incur additional indebtedness during the terms of both the Term Loan and the Revolver Facility. Management expects to use the funds from the Term Loan and the Revolver Facility to fund capital equipment and working capital. There are no covenants associated with this Business Loan Agreement.

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 technology and equipment to that customer at a contractually-defined price. We had approximately $1,034,000 in cash on September 30, 2018, with $500,000 in borrowings under our line of credit. This line of credit was entered into during March 2018 and it will expire in March 2019. This supply agreement and its covenants are more fully described in Note 9, and our current credit availability is more fully described in Note 6, to our Financial Statements in Part I, Item 1 of this Form 10-Q.

We believe that cash from operations, available credit and cash on hand will be adequate to fund our operations through the remainder of 2018. Given our expected growth in our Solésence ^® business, we are monitoring the temporary working capital demands that this could create, with timing being the most critical variable. Our actual future capital requirements in 2018 and beyond will depend on many factors, including customer acceptance of our current and potential advanced materials, applications and products, continued progress in research and development activities and product testing programs, the magnitude of these activities and programs, and the costs necessary to increase and expand our manufacturing capabilities and to market and sell our advanced materials, applications and products. 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 2018 will be between $200,000 and $300,000, and we could enter into one or more financing leases to finance these acquisitions, subject to the provisions of our various loan agreements. If those projects are delayed or ultimately prove unsuccessful, or if we fail to obtain financing on terms acceptable to us, we would expect our capital spending to be below the lower end of that range. Similarly, substantial success in business development projects may cause the actual capital investment for the remainder of 2018 to exceed the top of this range.

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 stockholders. Such financing could be necessitated by such things as the loss of one or more existing customers; a significant decrease in revenue from one or more of our customers; temporary working capital demands resulting from our expected growth in our Solésence ^® business that we cannot fund with existing capital; currently unknown capital requirements 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, and under such circumstances, may raise doubt as to our ability to continue as a going concern.

On September 30, 2018, we had a net operating loss carryforward of approximately $97 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 carryforward will expire at various dates between January 1, 2019 and December 31, 2037. 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 a majority of this carryforward will expire before ultimately becoming available to reduce income tax liabilities. Changes in Illinois state law that began in 2011 will impact net loss carryforward duration and utilization on the state tax level.

Off−Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purposes of raising capital, incurring debt or operating our business. We do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.

As more fully described in Note 6 to our Financial Statements, in Part I, Item I of this Form 10-Q, during 2014 we entered into a letter of credit and promissory note for up to $30,000 supporting our obligations under our facility lease agreement. No borrowings have been incurred under this promissory note.

Safe Harbor Provision

We want to provide investors with more meaningful and useful information. As a result, this Quarterly Report on Form 10-Q contains and incorporates by reference certain "forward-looking statements", as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements reflect our current expectations of the future results of our operations, performance and achievements. Forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have tried, wherever possible, to identify these statements by using words such as "anticipates", "believes", "estimates", "expects", "plans", "intends" and similar expressions. These statements reflect management's current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause our actual results, performance or achievements in 2018 and beyond to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties and factors include, without limitation: our ability to be consistently profitable despite the losses we have incurred since our incorporation; a decision by a customer to cancel a purchase order or supply agreement in light of our dependence on a limited number of key customers; the terms of our supply agreements with BASF, which could trigger a requirement to transfer technology and/or sell equipment to that customer; our potential inability to obtain working capital when needed on acceptable terms or at all; our ability to obtain materials at costs we can pass through to our customers, including Rare Earth elements, specifically cerium oxide, as well as high purity zinc; uncertain demand for, and acceptance of, our nanocrystalline materials and So lésence® products; our manufacturing capacity and product mix flexibility in light of customer demand; our limited marketing experience, including with our suite of Solésence® products; changes in development and distribution relationships; the impact of competitive products and technologies; our dependence on patents and protection of proprietary information; the resolution of litigation or other legal proceedings 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.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors

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, 2017. 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 occur, 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, 2017.

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

Form 8-K Item 1.01 Entry into a Material Definitive Agreement.

On November 19, 2018, we entered into a Business Loan Agreement (the “Master Agreement”) with Beachcorp, LLC. Beachcorp, LLC is a newly formed affiliate of Bradford T. Whitmore. As of [March 14,] 2018, Mr. Whitmore, together with his affiliates, Grace Brothers, Ltd. and Grace Investments, Ltd., beneficially owned approximately [47%] of the outstanding shares of our common stock. In addition, R. Janet Whitmore, one of our directors since 2003 and a stockholder, is the sister of Mr. Whitmore.

The Master Agreement relates to two loan facilities: a term loan to the Company of up to $500,000 to be disbursed in a single advance (the “Term Loan”) with a fixed annual interest rate of 8.25%, payable quarterly, accruing from the date of such advance and with principal due on December 31, 2020; and an asset-based revolving loan facility for the Company of up to $2,000,000 (the “Revolver Facility”), with floating interest at prime rate plus 3% (8.25% minimum) per year, with a borrowing base consisting of qualified accounts receivable of the Company, and with all principal and accrued interest due March 31, 2020. The Term Loan and Revolver Facility are secured by all the unencumbered assets of the Company and subordinated to LB&T’s secured interest under the New Line of Credit Agreement. The Master Agreement substantially restricts the Company’s ability to incur additional indebtedness during the terms of both the Term Loan and the Revolver Facility.

On November 19, 2018 and in order to evidence the Term Loan pursuant to the Master Agreement, the Company made a promissory note in the principal amount of up to $500,000 payable to the order of Beachcorp, LLC, of which the terms are consistent with the Master Agreement.

On November 19, 2018 and in order to evidence the Revolver Facility pursuant to the Master Agreement, the Company made a promissory note in the principal amount of up to $2,000,000 payable to the order of Beachcorp, LLC, of which the terms are consistent with the Master Agreement.

Form 8-K Item 2.03 Creation of a Direct Financial Obligation .

The foregoing disclosures in this Item 5 under the caption “Form 8-K Item 1.01 Entry into a Material Definitive Agreement” are incorporated by reference. As of the date of this filing, the borrowed amounts under both the Term Loan and the Revolver Facility are zero dollars.

Item 6.

Exhibits

EXHIBIT INDEX

	Exhibit 10.1	Business Loan Agreement, dated November 19, 2018, between the Company and Beachcorp, LLC.

	Exhibit 10.2	Promissory Note, dated November 19, 2018, made by the Company and payable to the order of Beachcorp, LLC to evidence a term loan in the original principal amount of up to $500,000.

	Exhibit 10.3	Promissory Note, dated November 19, 2018, made by the Company and payable to the order of Beachcorp, LLC to evidence revolving borrowings in a principal amount of up to $2,000,000.

	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, 2018, 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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NANOPHASE TECHNOLOGIES CORPORATION


Date: November 19, 2018	By:	/s/ JESS A. JANKOWSKI
			Jess A. Jankowski
			President and Chief Executive Officer

Date: November 19, 2018	By:	/s/ JAIME ESCOBAR
			Jaime Escobar
			Chief Financial Officer

Nanophase Technologies Corporation 10-Q

Exhibit 10.1

BUSINESS LOAN AGREEMENT

THIS BUSINESS LOAN AGREEMENT dated as of November 19, 2018 by and between NANOPHASE TECHNOLOGIES CORPORATION, a Delaware corporation (“Borrower”), and BEACHCORP, LLC, a Delaware limited liability company (“Lender”).

PREAMBLE

WHEREAS, Borrower desires to enter into certain secured financial transactions with Lender for the financing of its business and Lender desires to enter into said transactions as more specifically described herein.

NOW, THEREFORE, in consideration of the mutual promises contained herein, Borrower and Lender adopt the Preamble as part of this Agreement and Borrower and Lender agree to be bound legally, further agreeing to the following terms and conditions.

SECTION 1:

AGREEMENTS REGARDING THE LOANS

1.1

The Loans.

(a)

Generally. Borrower has applied to Lender for Loans and other financial accommodations and, subject to the terms and conditions hereof and the Related Documents, Lender has agreed to make Loans to Borrower for such purposes as provided for herein. Borrower understands and agrees that: (i) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in this Agreement and (ii) all such Loans shall be and shall remain subject to the terms and conditions of this Agreement.

(b)

Term Loan. Lender will make a $500,000.00 non-revolving term loan (the “Term Loan”) to Borrower. Borrower shall make quarterly payments of interest only, with the first such payment due on December 31, 2018 and then on the last day of each calendar quarter thereafter with a final payment of all principal and unpaid interest due on December 31, 2020 (the “Term Maturity Date”). The Term Loan shall be evidenced by the Term Note. The Term Loan may be prepaid at any time without penalty or fee.

(c)

Revolving Loans. Lender will make Loans on a revolving basis (individually a “Revolving Loan” and collectively the “Revolving Loans”) to Borrower until the Revolving Maturity Date in such amounts as Borrower may request in accordance with this Agreement; provided that the aggregate outstanding principal amount of Revolving Loans may not exceed at any time the lesser of (i) the $2,000,000.00 and (ii) the Borrowing Base. Each Revolving Loan shall be in the minimum amount of $10,000.00. Borrower shall pay interest on the Loans in accordance with Section 1.5 hereof, with payment thereof in arrears to be made on the last day of each calendar quarter, with the first such payment due on December 31, 2018. Each Revolving Loan shall be repaid in full on the sooner of (a) a determination that the Revolving Loans exceed the Borrowing Base, and (b) the Revolving Maturity Date. The Revolving Loans shall be evidenced by the Revolving Note. The Revolving Loans may be prepaid at any time without penalty or fee.

1.2

Borrowing Procedures. Whenever Borrower desire to incur a Revolving Loan, it shall give the Lender written or telephonic notice thereof (in the case of telephonic notice, promptly confirmed in writing to Lender), which notice must be received by the Lender prior to 11:00 a.m. (Chicago time), at least one (1) Business Day prior to the proposed date such Loan is to be incurred. Each such notice (“Notice of Borrowing”) shall be irrevocable, include a current Borrowing Base Certificate and AR Report, and shall further specify the aggregate principal amount of the Revolving Loan to be made and the date of the proposed Revolving Loan (which shall be a Business Day).

Without in any way limiting the obligation of Borrower to confirm in writing any Notice of Borrowing given by telephone, the Lender may act prior to receipt of written confirmation without liability upon the basis of such telephonic notice believed by the Lender in good faith to be from an authorized officer of Borrower entitled to give telephonic notices under this Agreement on behalf of Borrower. In each such case, the Lender's record of the terms of such telephonic notice shall be conclusive absent manifest error. No later than 5:00 p.m. (Chicago time) on the date specified in each Notice of Borrowing, the Lender will make available the amount of each Loan requested to be made on such date in the manner provided below. All amounts relating to any Loan incurred by Borrower shall be made available to Borrower in immediately available funds by depositing such funds into the Borrower’s designated account.

1.3

Fees and Expenses. Whether or not the transactions contemplated hereby shall be consummated, Borrower shall assume and pay upon demand all out-of-pocket expenses incurred by Lender in connection with the preparation of loan documents and the making of the Loan, including without limitation the following: (a) all closing costs, fees, and disbursements; (b) all fees and expenses of Lender's legal counsel; and (c) all title examination fees, appraisal fees, and filing and recording fees.

1.4

Recordkeeping. Lender shall record in its records, the date and amount of each Loan made by the Lender, and each repayment thereof. The aggregate unpaid principal amount so recorded shall be rebuttable presumptive evidence of the principal amount owing and unpaid on the Notes. The failure to so record any such amount or any error in so recording any such amount shall not, however, limit or otherwise affect the obligations of Borrower hereunder or under any Note to repay the principal amount of the Loan(s) evidenced by such Note together with all interest accruing thereon.

1.5

Interest.

(a)

Interest on Loan.

( i)

The unpaid principal amount of the Term Loan shall bear interest from the date thereof until the Term Maturity Date (whether by acceleration or otherwise) at 8.25% fixed.

(ii)

The unpaid principal amount of the aggregate outstanding balance of the Revolving Loan shall bear interest from the date of each advance thereof until the Revolving Maturity Date, at the Prime Rate plus 3.0% floating, but in no case less than 8.25%.

(b)

Default Interest. Notwithstanding the above provisions, if an Event of Default is in existence, all outstanding amounts of principal and, to the extent permitted by law, all overdue interest, in respect of each and every Loan shall bear interest, payable on demand, at the Default Rate.

(c)

Accrual and Payment of Interest. Interest shall accrue from and including the date provided in Section 1.5(a) above to, but excluding, the date of any prepayment or repayment thereof, and shall be payable in accordance with Section 1.1 and on demand after maturity or following an Event of Default. Interest is paid for the period a Loan is outstanding

(d)

Computations of Interest. All computations of interest on all Loans and other amounts owing hereunder shall be made on the actual number of days elapsed divided by 365/6 days (i.e., that is, by applying the ratio of the interest rate divided by 365 days (or 366 if applicable), multiplied by the funds advanced and outstanding, multiplied by the actual number of days the funds advanced are outstanding).

(e)

Maximum Interest Rate. In no event shall the amount of interest paid hereunder, together with all amounts reserved, charged, or taken by Lender as compensation for fees, services, or expenses incidental to the making, negotiation, or collection of the Loans evidenced hereby exceed the maximum rate of interest on the unpaid balance hereof allowable by applicable law. If any sum is collected in excess of the applicable maximum rate, the excess collected shall be applied to reduce the principal amount of the Indebtedness.

1.6

Late Charges. If any payment is ten (10) days or more late, Borrower will be charged 5.0% of the payment amount or $100.00, whichever is greater.

1.7

Mandatory Prepayments.

(a)

Sale, Casualty, or Condemnation. Borrower (or, in the case of subsection (ii) below, if the Lender is holding the proceeds of insurance or condemnation as additional collateral pursuant hereto or any Related Document, the Lender) shall make a prepayment of the Loans (first to the Term Loan and then to the Revolving Loans) upon the occurrence of any of the following, at the following times and in the following amounts:

(i)

Within ten (10) days after any sale, transfer or other disposition by Borrower of any tangible asset (other than the sales of inventory in the ordinary course of business) valued in excess of $100,000.00 (or of any value during the continuance of an Unmatured Default or Event of Default), in an amount equal to one hundred percent (100%) of the net cash proceeds of such sale, transfer or other disposition; and

(ii)

Within ten (10) days after the receipt of any insurance or condemnation proceeds (or other similar recoveries) by Borrower or by the Lender (to the extent the Lender is holding the insurance or condemnation proceeds as additional collateral pursuant hereto or any Related Document) from any casualty loss incurred by Borrower or condemnation of property valued in excess of $100,000.00 (or of any value during the continuance of an Unmatured Default or Event of Default), in an amount equal to one hundred percent (100%) of such insurance or condemnation proceeds (or other similar recoveries) net of any collection expenses; provided, that this requirement shall not apply to the extent that Lender has agreed to allow Borrower to use such proceeds for the repair or restoration of the affected property.

(b)

Overadvances. Borrower shall immediately prepay the Revolving Loans in the event that the outstanding balance of the Revolving Loans exceeds the lesser of (i) $2,000,000.00, and (ii) the Borrowing Base.

1.8

Term. This Agreement shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing or this Agreement is terminated by Lender as otherwise provided for herein.

1.9

Setoff.

(a)

Borrower agrees that, upon the occurrence and during the continuance of any Event of Default, the Lender is hereby authorized, at any time and from time to time, without notice to the Borrower, (i) to set off against and to appropriate and apply to the payment of any and all Indebtedness (whether matured or unmatured, fixed or contingent or liquidated or unliquidated) any and all amounts which the Lender is obligated to pay over to the Borrower (whether matured or unmatured, and, in the case of deposits, whether general or special, time or demand and however evidenced), and (ii) pending any such action, to the extent necessary, to deposit such amounts with the Lender as Collateral to secure such Indebtedness, and to dishonor any and all checks and other items drawn against any deposits so held, as the Lender in its sole discretion may elect.

(b)

The rights of the Lender under this Section 1.9 are in addition to all other rights and remedies which the Lender may otherwise have hereunder or in law or equity.

1.10

Application of Payments. Upon the occurrence of an Unmatured Default or Event of Default, all monies received by Lender pursuant to this Agreement shall be applied by Lender to any Indebtedness of Borrower (and in whatever order), as Lender shall determine, and the Borrower does hereby irrevocably agree that the Lender shall have the continuing exclusive right to apply and reapply any and all payments received at any time or times hereafter, whether with respect to the Collateral or otherwise, against the Borrower's Indebtedness in such manner as the Lender may deem advisable, notwithstanding any entry by the Lender upon any of its books and records. Lender shall within a reasonable time period account to Borrower for any sum remaining after the Indebtedness shall be paid in full. Upon written demand of the Borrower, the Lender shall within a reasonable time period provide a written explanation to the Borrower reasonably describing how such monies were applied and in what order. Until checks and other instruments delivered to Lender in payment or on account of Borrower's obligations and the Indebtedness are actually paid to Lender, Borrower agrees that such items constitute conditional payment only. Without limiting any of Lender's other rights provided herein, Lender may bill Borrower for accrued interest or make advances of principal hereunder for payment of accrued interest, as and when due. For purposes of this Agreement, all payments on the Loans or other amounts due under this Agreement or any Related Document shall be made in immediately available funds prior to 12:30 p.m. (Chicago time) on the day when due. If such payments or other amounts due are received by Lender on a day other than a Business Day or after 12:30 p.m. (Chicago time) on a Business Day such payments or other amounts shall be deemed to be applied by Lender on account of the Indebtedness on the next Business Day following receipt in Lender's account.

SECTION 2:

BORROWER'S REPRESENTATION AND WARRANTIES

2.1

Representations and Warranties. Borrower represents and warrants to Lender as of the date of this Agreement and as of the date of each disbursement of Loan proceeds:

(a)

Organization. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of Delaware. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all jurisdictions where it conducts business.

(b)

Authorization. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower have been duly authorized by all necessary corporate action by Borrower (as applicable); do not require the consent or approval of any other Person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (i) any provision of its articles of incorporation or organization, or bylaws or operating agreement, or any agreement or other instrument binding upon Borrower or (ii) any law, governmental regulation, court decree, or order applicable to Borrower.

(c)

Compliance with Law; Governmental Approvals and Permits. Borrower (i) is in compliance with all applicable provisions of law, and (ii) to the extent required by applicable law, has, and is current and in good standing with respect to, all governmental approvals, permits, certificates, inspections, consents and franchises necessary to continue to conduct its operations as it heretofore conducted and to own or lease and operate the property now owned or leased by it.

(d)

Solvency. Borrower has sufficient capital to carry on all operations and transactions in which it engages or is about to engage, is solvent and will continue to be solvent after the creation of the Security Interest in the Collateral in favor of Lender created by this Agreement or any Related Document and the making of the Loan pursuant hereto, and is able to pay its debts as they mature.

(e)

Financial Statements; Material Adverse Change; Projections. Except as disclosed in writing by Borrower to Lender, all financial data and other information furnished by Borrower to Lender, will be taken from the books and records of Borrower and are true, accurate and correct in all material respects. The Financials fairly present the assets, liabilities and financial condition and results of operations of Borrower described therein as of the dates thereof and were prepared on a basis consistent with the preparation of the Borrower’s financial statements for prior periods; there are no omissions or other facts or circumstances which are or may be material as of the date of the Financials, and there has been no material and adverse change in the Collateral, assets, liabilities or financial condition of Borrower since the date of the Financials; there exist no outstanding advances to any Person not reflected in the Financials; except as set forth in the Financials, there are no actions or proceedings which are pending, or, to the best of Borrower's knowledge, threatened against Borrower; to the best of Borrower’s knowledge, there are no actions or proceedings which are pending or threatened against any other Person which might result in any material adverse change in Borrower’s financial condition or materially and adversely affect its operations, its assets or the Collateral; except as stated in the Financials Borrower has no other liabilities and has not guaranteed the obligations of any other Person. Any financial projections delivered to Lender by or on behalf of Borrower were, at the time of delivery to Lender, reasonable forecasts based upon good business judgment and all facts and information known to Borrower and its consultants.

(f)

No Default. Borrower is not in default, nor, to the best of Borrower’s knowledge, is any third party in default, under or with respect to any contract, agreement, lease or other instrument to which Borrower is a party. No Unmatured Default or Event of Default has occurred and is continuing.

(g)

Legal Effect. This Agreement and all of the Related Documents constitute legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms in all applicable jurisdictions.

(h)

Properties. Except for (i) Security Interests in favor of Lender created by this Agreement or any Related Document, (ii) Security Interests, claims and other encumbrances as set forth on the attached Schedule 2.1(h), and (iii) property tax liens for taxes not presently due and payable, Borrower owns and has good title to all of Borrower's properties and assets free and clear of all Security Interests, claims and other encumbrances, and has not executed any Security Agreements or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name. Borrower has authority to encumber the Collateral in the manner and form herein provided. The Borrower shall defend and protect the Collateral against and from all claims and demands of all Persons at any time claiming any interest therein adverse to the Lender. No financing statement or other document similar in effect covering all or any part of the Collateral is on file in any recording or filing office, other than those identifying the Lender as the secured party or as set forth in Schedule 2.1(h).

(i)

Litigation and Claims. No litigation, proceeding, suit, action, or claim against Borrower is pending or threatened, and no other event has occurred which may adversely affect Borrower's financial condition, or operations of the Borrower, or properties, including the Collateral, other than litigation, proceedings, suits, actions, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing.

(j)

Tax Matters. Borrower has duly filed or properly extended all federal, state and other governmental tax returns which it is required by law to file; all taxes and other sums which may be due to the United States, any state or other governmental authority have been fully paid (including, without limitation, all reasonable estimations of penalties or late payment charges or interest).

(k)

Lien Priority. The Security Interest in favor of the Lender provided in this Agreement or any Related Document is a valid and perfected first priority security interest in the Collateral except as set forth in Schedule 2.1(h), and all filings and other actions necessary to perfect such Security Interest have been duly taken and all such filings hereof reasonably identify the Collateral. Unless otherwise disclosed to Lender in writing on the attached Schedule 2.1(h), Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of the Loan or other obligations hereunder.

(l)

Location of Borrower's Offices, Records and Collateral. All places of business, and if Borrower has more than one place of business, an indication of its chief executive office, and the office or offices where Borrower keeps its records concerning the Collateral is located at those locations set forth on the attached Schedule 2.1(l) which shall include a listing of all previous locations for the past five (5) years and a listing of any Collateral locations that are not places of business. If any change in the place or places of business of the Borrower, or its chief executive office, or the office where the Borrower keeps its records concerning the Collateral will occur, the Borrower shall provide the Lender with, at Borrower's sole cost and expense, such financing statements and other documents as the Lender shall request in connection with such change in order to maintain Lender's first priority perfected security interest in the Collateral.

(m)

Names. The Borrower’s exact legal name is as set forth in the first paragraph of this Agreement. Borrower has not used in the past five (5) years, and shall not hereafter use, any name other than the name set forth in the first paragraph of this Agreement (including, without limitation, any tradename, assumed name, any fictitious or any similar name) without first giving Lender thirty (30) days prior written notice.

(n)

Information. All information heretofore or contemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading.

(o)

Employee Benefit Plans. Each employee benefit plan as to which Borrower may have liability complies with all applicable requirements of law and regulations, and (i) no “Reportable Event” nor “Prohibited Transaction” (as defined in ERISA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing.

(p)

Representations and Warranties Concerning Accounts. With respect to the Accounts, Borrower represents and warrants to Lender that, unless Borrower otherwise notifies Lender pursuant to a writing in form and substance acceptable to Lender in its reasonable determination and prior to Lender's crediting such Account as part of the Borrowing Base that: (i) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (ii) All Account information listed on schedules or certificates delivered to Lender will be true and correct, subject to immaterial variance; (iii) Borrower has not made any agreement with any Account Debtor for any deduction from such Eligible Account, and to Borrower's knowledge, there are no setoffs, counterclaims or disputes existing or asserted with respect to such Eligible Account; (iv) to Borrower's knowledge, there are no facts, events or occurrences which in any way impair the validity or enforcement of any Eligible Account or tend to reduce the amount payable thereunder from the face amount shown on any schedule of Accounts or Borrowing Base Certificate and on all contracts, invoices and statements delivered to Lender with respect thereto; (v) Borrower has no knowledge of any fact or circumstance which would impair the validity or collectability of any Eligible Account; and (vi) to Borrower's knowledge, there are no proceedings or actions which are threatened or pending against any Account Debtor which questions the enforceability of the Account Debtor's obligations with respect to any Eligible Account.

2.2

Survival of Representations and Warranties. Borrower understands and agrees that Lender is relying upon the above representations and warranties in making the Loans to Borrower. Borrower agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until, unless otherwise specified herein, such time as Borrower's Loans and the Notes shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur.

SECTION 3:

BORROWER'S COVENANTS

3.1

Borrower's Affirmative Covenants. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will:

(a)

Notice of Material Events. Notify Lender as promptly as possible, and in any event within five (5) Business Days after the Borrower has knowledge thereof, of (i) the occurrence of any Unmatured Default or Event of Default, (ii) any action, litigation, claim, proceeding, or dispute (A) against or affecting the Collateral, (B) against or affecting Borrower seeking the payment of money by Borrower, whether in the form of damages, liens, penalties or costs, in an amount in excess of $25,000.00, or (C) in any way regarding the construction, creation, operation or use of the Collateral (regardless of the amount claimed therein), (iii) any action, litigation, claim, proceeding or dispute involving Borrower and any court, board, commission, agency or instrumentality of any federal, state or local government or any agency or subdivision thereof, which if adversely resolved could be reasonably expected to result in a material adverse effect on Borrower's business, assets, operations or financial condition, (iv) any material adverse change in Borrower's financial condition or operations, or (v) any event, occurrence or other matter which has had a materially adverse effect or which could have a materially adverse effect on any part of the Collateral.

(b)

Financial Records. Maintain its books and records in accordance with GAAP, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times.

(c)

Financial Statements and Borrowing Base Certificate. Furnish Lender with, as soon as available, but in no event later than 5:00p.m. (Chicago time) on the second Business Day of each calendar week, an AR Report for the previous week, prepared and certified as true and correct by Borrower's chief financial officer or other officer or person acceptable to Lender, together with copies of each new Account reported thereon. All financial reports required to be provided under this Agreement shall be prepared in accordance with GAAP, applied on a consistent basis, and certified by Borrower as being true and correct. In addition, in connection with each Revolving Loan advance, Borrower shall furnish Lender with a current Borrowing Base Certificate and AR Report.

(d)

Additional Information. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time.

(e)

Insurance. Maintain, or cause to be maintained, all risk casualty insurance, public liability insurance, and such other insurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender, but in all cases with respect to casualty insurance, in amounts not less than the full replacement value of the property covered. Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least thirty (30) days prior written notice to Lender. In connection with all policies covering assets in which Lender holds or is offered a Security Interest for the Loan, Borrower will provide Lender with such loss payable or other endorsements as Lender may require.

(f)

Other Agreements. Pay its indebtedness and liabilities in accordance with good business practices and otherwise comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements.

(g)

Loan Proceeds. Use all Loan proceeds solely as provided for herein.

(h)

Taxes, Charges and Liens.

(i)

Pay and discharge when due all of its indebtedness and obligations, including without limitation, all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon any portion of the transactions contemplated hereby, or on Borrower, the Collateral or Borrower’s other properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Provided, however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim (collectively the “Charges”) so long as: (A) the legality of the same shall be promptly contested in good faith by appropriate proceedings; (B) Borrower shall have deposited with Lender cash, a sufficient corporate surety bond or other security satisfactory in form and substance to Lender in an amount adequate to provide for the release of such Charge plus any interest, costs, attorneys' fees or other amounts that could accrue as a result of foreclosure or sale of the Collateral; (C) such contest operates to suspend collection of the Charge; and (D) none of the Collateral is subject to forfeiture or loss of any Security Interest (or the priority thereof) by reason of the institution or prosecution of such contest as determined by Lender. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the indebtedness and obligations, including any assessments, taxes, charges, levies, liens and claims and will authorize the appropriate obligor or governmental official to deliver to Lender at any time a written statement of any indebtedness and obligations including any Charges.

(ii)

Cause all claims for labor done and materials and services furnished in connection with the Collateral to be fully paid and discharged in a timely manner.

(i)

Performance. Perform and comply with all terms, conditions, and provisions set forth in this Agreement, the Related Documents, and in all other instruments and agreements between Borrower and Lender in a timely manner.

(j)

Reserved.

(k)

Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. In addition to any rights provided for herein, Lender shall be permitted to have a field audit performed on Borrower's books and records on an annual basis, at Borrower's sole expense.

(l)

Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure (as contemplated herein or in any of the Related Documents) the Indebtedness and to perfect all Security Interests.

(m)

Defense of Title. Forever defend the title to the Collateral against the claims of all Persons. In the event any action or proceeding is commenced that questions Borrower's title or the interest of Lender under any Security Agreement, Borrower shall defend the action at Borrower's expense. Borrower may be the nominal party in such proceeding, but Lender shall be entitled to participate in the proceeding and to be represented in the proceeding by counsel of Lender's own choice, and Borrower will deliver, or cause to be delivered, to Lender such instruments as Lender may request from time to time to permit such participation.

(n)

Collection Arrangement.

(i)

The Borrower shall direct all of its Account Debtors to make all electronic payments on the Accounts directly to a special account maintained by Borrower with Libertyville Bank (the “Collection Account”) which shall be under the control of Lender as provided for in the Blocked Account Agreement. Borrower will immediately deposit all payments made on the Accounts, and received by the Borrower, in the identical form in which such payments were made, whether by cash or check, into the Collection Account. If the Borrower, a Subsidiary or any director, officer, employee, agent or the Borrower or any Subsidiary, or any other Person acting for or in concert with the Borrower shall receive any monies, checks, notes, drafts or other payments relating to or as proceeds of Accounts or other Collateral, the Borrower and each such Person shall receive all such items in trust for, and as the sole and exclusive property of, the Lender and, immediately upon receipt thereof, shall remit the same (or cause the same to be remitted) in kind to the Collection Account. The Borrower agrees that all payments made to such Collection Account or otherwise received by Borrower, whether in respect of the Accounts or as proceeds of other Collateral or otherwise, will be applied as provided in this Agreement. The Borrower agrees to pay all fees, costs and expenses in connection with opening and maintaining the Collection Account (including, but not limited to, any fees or expenses of Lender).

(ii)

So long as no Unmatured Default or Event of Default shall have occurred hereunder and remain continuing, Borrower shall be permitted to withdraw from the Collection Account collected funds therein up to an amount equal to the amount by which the Borrowing Base exceeds the outstanding principal balance of the Revolving Loans at such time, subject to demonstration thereof by submission of a new Borrowing Base Certificate and AR Report for that purpose.

3.2

Borrower's Negative Covenants. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender, or as otherwise provided for herein:

(a)

Transfers and Liens. Except in connection with the Libertyville Loans, sell, transfer, mortgage, assign, pledge, lease, grant a Security Interest in, or create, suffer or permit any encumbrance of, any of Borrower's assets (other than the sale of inventory by Borrower in the ordinary course of business).

(b)

Continuity of Operations. (i) Engage in any business activities substantially different than those in which Borrower is presently engaged, (ii) change its name without giving Lender thirty (30) days prior written notice, (iii) change its state of organization, (iv) change its place of business, its chief executive office, or its mailing address, (v) change its organizational identification number (if it has one), or (vi) cease operations, liquidate, merge or consolidate with any other entity.

(c)

Change in Ownership; Amend Organizational Documents. Allow any change in ownership of Borrower or the classification of such ownership interests, or amend, modify or supplement Borrower’s organizational documents or agreements.

(d)

Loans , Acquisitions and Indebtedness. (i) Loan money or assets, (ii) purchase or acquire any interest in any other Person, or (iii) incur, assume or have outstanding any obligation as surety, borrower or guarantor except (A) Indebtedness owing to Lender, (B) Indebtedness or liabilities of a nature existing on the date hereof and disclosed in the Financials, including the Libertyville Loans and capitalized equipment leases, and (C) trade indebtedness incurred in the ordinary course of business and not inconsistent with prior practices.

(e)

Distributions. (i) Make any distribution to partners, shareholders or members in their capacity as such, or (ii) pay any dividends on Borrower's stock, if any, or (iii) purchase or retire any of Borrower's outstanding shares, partnership interests or membership interests or otherwise alter or amend Borrower's capital structure.

(f)

Investments. Make any investment in or extend credit to any Person, other than trade credit on customary terms.

(g)

Transactions with Affiliates. Enter into, or be a party to, any transaction or arrangement, including, without limitation, the purchase, sale, lease or exchange of property or the rendering of any service, with any of its Affiliates except after prior written notice to Lender and then only in the ordinary course of and pursuant to the reasonable requirements of Borrower's business and upon fair and reasonable terms no less favorable to the Borrower than would be obtained in a comparable arm's-length transaction with any Person or entity not its Affiliate. Notwithstanding the foregoing, so long as such Affiliate as granted a Security Interest in favor of Lender with respect to the Indebtedness of Borrower, transactions with such Affiliate shall be permitted with notice to Lender.

(h)

Salary. Increase any regular or bonus compensation to, or confer any other economic benefit on, any of the officers, directors, members, partners, or shareholders of the Borrower outside the ordinary course of business.

(i)

Security Interests. Allow any of its assets to become subject to any Security Interest other than in favor of Lender (other than the liens identified on Schedule 2.1(h)).

(j)

Contracts. Enter into any contract, license or agreement with respect to or in any way relating to the Collateral on terms other than those customarily contained in similar contracts, licenses or agreements between unrelated parties.

(k)

Libertyville Loan. Amend the material terms of the Libertyville Loans such that Borrower’s financial obligations thereunder are materially more onerous than on the date hereof, or in any way in which Borrower would be permitted to (i) draw more funds thereunder than available on the date hereof, or (ii) draw funds more frequently than on the date hereof. Borrower shall promptly provide copies of all amendments to the Libertyville Loans to Lender.

SECTION 4:

ADDITIONAL AGREEMENTS REGARDING LOANS AND COLLATERAL

4.1

Distribution of Casualty Insurance, Eminent Domain and Condemnation Proceeds.

(a)

Application of Insurance Proceeds. Borrower shall promptly notify Lender of any loss or damage to the Collateral estimated to equal or exceed $100,000.00. Lender may make proof of loss if Borrower fails to do so within fifteen (15) days of the casualty. Whether or not Lender's Collateral is impaired, Lender may, at its election, apply the proceeds to the reduction of the Indebtedness, payment of any lien affecting the Collateral, or the restoration and repair of the Collateral. If Lender elects to apply the proceeds to restoration and repair, Borrower shall repair or replace the damaged or destroyed Collateral in a manner satisfactory to Lender and in such case Lender shall, upon satisfactory proof of such expenditure and the lien free completion of such restoration or repair, pay or reimburse Borrower from the proceeds for the reasonable cost of restoration or repair if no Unmatured Default or Event of Default exists hereunder. Any proceeds which have not been disbursed within 180 days after their receipt and which Lender has not committed to the repair or restoration of the Collateral shall be applied to the Indebtedness. If Lender holds any proceeds after payment in full of the Indebtedness, such proceeds shall be paid to Borrower.

(b)

Application of Net Eminent Domain and Condemnation Proceeds. If all or any part of the Collateral is condemned by eminent domain proceedings or by any proceeding or purchase in lieu of condemnation, Lender may at its election require that all or any portion of the net proceeds of the award be applied to the Indebtedness or the repair or replacement of the Collateral. The net proceeds of the award shall mean the award after payment of all costs, expenses, and attorneys' fees incurred by Lender in connection with the condemnation or eminent domain proceeding or purchase in lieu thereof.

4.2

Right to Advance Funds. When any event occurs that Lender determines may endanger the fulfillment of any condition or covenant in this Agreement, Lender may require Borrower to furnish, within ten (10) days after delivery of a written request, adequate security to eliminate, reduce, or indemnify Lender against such event. In addition, upon such occurrence, Lender may advance funds or agree to undertake to advance funds to any party to eliminate, reduce, or indemnify Lender against, such danger. All sums paid by Lender pursuant to such agreements or undertakings shall be for Borrower's account and shall be without prejudice to Borrower's rights, if any, to receive such funds from the party to whom paid. All sums expended by Lender in the exercise of its option to protect Lender's interests shall be payable to Lender on demand together with interest from the date of the Loan at the Default Rate. In addition, any advance of funds under this Agreement including, without limitation, direct disbursements to any third party of sums due, shall be deemed to have been expended by or on behalf of Borrower and to have been secured by the Security Agreements.

SECTION 5:

CONDITIONS PRECEDENT

5.1

Delivery of Documents. In addition to any other conditions precedent set forth herein or in any Related Document, Lender's obligation to make any Loan is subject to, in addition to delivery of the executed Agreement and Notes and payment of all commitment fees and costs and expenses of Lender (including attorneys' fees), delivery of the following documents, each to be in form and substance satisfactory to Lender:

(a)

Security Agreement. The duly executed Commercial Security Agreement of Borrower (and each Grantor as applicable) dated of even date herewith, together with all documents and instruments deemed necessary by Lender to enable Lender to perfect its Security Interests in any and all of the Collateral granted therein including, but not limited to, the Control Agreement.

(b)

Blocked Account Agreement. The duly executed Blocked Account Agreement among Lender, Borrower and Libertyville Bank, together with all documents and instruments deemed necessary by Lender with respect thereto, including all account documentation related to the Collection Account.

(c)

Insurance. Evidence of all insurance required under this Agreement, issued in an amount and by a company acceptable to Lender, containing a loss payable or other endorsement satisfactory to Lender insuring Lender as loss payee, together with such other endorsements as may be required by Lender.

(d)

Organizational Documents and Agreements, Resolutions, Articles, By-Laws, etc. Certified copies of all documents, agreements or instruments pertaining to Borrower’s incorporation, organization, existence operation or governance, together with certified copies of such documents, agreements or instruments for Borrower's constituents and board of director or other appropriate resolutions, certificates of incumbency and good standing certificates for all parties, as appropriate.

(e)

Approvals and Consents. Approval of all necessary governmental or regulatory agencies which may have jurisdiction over (i) the Borrower, any of Borrower's constituents, any Grantor or any of the Collateral or (ii) Lender or its ability to enforce its rights under this Agreement or any of the Related Documents, and all necessary third party consents.

(f)

Landlord’s Agreements. Within sixty (60) days of the date hereof, the duly executed Landlord’s Agreement from each of Borrower’s landlords.

(g)

Libertyville Loans. Copies of the documents evidencing the Libertyville Loans, together with a subordination agreement acceptable to Libertyville Bank and Lender.

(h)

Other. Such other documents as the Lender may request.

5.2

Certificates; No Unmatured Defaults or Events of Default. In addition to the satisfaction of the conditions precedent set forth in Section 5.1, and any condition precedent set forth in any Related Document, Lender's obligation to make any Loan is subject to:

(a)

Certificate. Delivery of a certificate from the chief executive officer of Borrower dated the date of the requested Loan, certifying that (i) each representation and warranty contained herein or in any of the Related Documents is true and correct as if made on the date of such certificate, and (ii) no Unmatured Default or Event of Default has occurred and remains continuing hereunder or under any Related Document.

(b)

No Unmatured Defaults or Events of Default. No Unmatured Default or Event of Default having occurred and be continuing hereunder or under any Related Document.

(c)

Borrowing Base Certificate and AR Report. Lender shall have received the most recent Borrowing Base Certificate and AR Report required to be delivered pursuant to this Agreement, which, in connection with the initial Loans made hereunder at closing, shall show availability in an amount acceptable to Lender (after giving effect to the Revolving Loans to be made to Borrower at closing).

SECTION 6:

EVENTS OF DEFAULT AND REMEDIES

6.1

Events of Default. Each of the following (an “Event of Default”) shall constitute an Event of Default under this Agreement:

(a)

Default on Indebtedness. Failure of Borrower to make any payment within ten (10) days of when due hereunder, under the Note, or under any Related Document.

(b)

Other Defaults. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower or any Grantor to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower, and/or Grantor.

(c)

Default in Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or Person that may materially affect any of Borrower's or any Grantor's property or Borrower's or any Grantor's ability to repay the Loan, as applicable, or perform their respective obligations under this Agreement or any of the Related Documents. Any default or event of default under any of the Libertyville Loans.

(d)

False Statements. Any warranty, representation, or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is untrue, misleading or incorrect in any material respect, either now or at the time made or furnished or any schedule, certificate, statement, report, document, financial data, notice, or writing furnished at any time by the Borrower to the Lender is untrue, misleading or incorrect in any material respect, on the date as of which the facts set forth therein are stated or certified.

(e)

Defective Collateralization; Material Agreements. (i) This Agreement or any of the Related Documents (i) ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason or (ii) shall be, or sought to be, held invalid by any court of law, government or public ministry, shall be in default, or any Person shall seek to materially limit, modify or revoke such agreement.

(f)

Insolvency; Dissolution. Borrower shall be unable to pay its debts as they mature. The dissolution or termination of Borrower's or any Grantor's existence as a going business, insolvency, appointment of a receiver for any part of Borrower's or any Grantor's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower or any Grantor, other than an involuntary proceeding which is dismissed, stayed or indemnified against within forty-five (45) days of the commencement of such proceeding.

(g)

Creditor Proceedings. Commencement of foreclosure, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower or any creditor of any Grantor against any Collateral securing the Indebtedness, including, without limitation, a garnishment, attachment, levy, seizure, writ or distress warrant or the like (collectively, a “creditor proceeding”). However, this Event of Default shall not apply to such creditor proceeding if Section 3.1(h) applies thereto and is being contested in accordance therewith.

(h)

Judgments. A judgment or order for the payment of money in excess of One Hundred Thousand Dollars ($100,000.00) shall be rendered against Borrower or any Grantor and either (i) enforcement proceedings shall have been commenced by any creditor under such judgment or order, or (ii) a stay of such judgment or order shall not be in effect for any period of thirty (30) consecutive days or (iii) Borrower or such Grantor, as applicable, have not taken the steps provided for in Section 3.1(h).

(i)

Material Adverse Change. Lender shall have determined in good faith (which determination shall be conclusive) that (i) a material adverse change has occurred in the business, operations or financial condition of the Borrower, (ii) the prospect of payment or performance of any obligation or agreement of the Borrower hereunder or under any of the Notes is materially impaired or (iii) a material adverse change has occurred in the condition, value or operation of any of the Collateral.

6.2

Effect of an Unmatured Default or an Event of Default. If any Unmatured Default or Event of Default shall occur, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement between Lender and the Borrower immediately will terminate and with respect to an Event of Default, at Lender's option, all Loans immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in subsection 6.1(f) above, such acceleration shall be automatic and not optional. Upon the occurrence of any Event of Default and at any time thereafter, Lender may, at its option, but without any obligation to do so, and in addition to any other right Lender may have, do any one or more of the following without notice to any party: (a) institute appropriate proceedings to enforce the performance of this Agreement; (b) withhold further disbursement of any Loan hereunder or under any other agreement with Borrower; (c) expend funds necessary to remedy the Unmatured Default or Event of Default; (d) take possession of the Collateral and operate same; (e) accelerate maturity of the Notes and/or Indebtedness and demand payment of all sums due under the Notes and/or Indebtedness; (f) bring an action on the Notes and/or Indebtedness; (g) foreclose on its Security Interests in any manner available under law; and (h) exercise any other right or remedy which it has under the Notes or Related Documents, or which is otherwise available at law or in equity or by statute.

SECTION 7:

DEFINITIONS; MISCELLANEOUS PROVISIONS

7.1

Definitions. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Illinois Uniform Commercial Code to the extent the same are used or defined therein (810 ILCS 1/1 et seq. as amended from time to time, the “Uniform Commercial Code” or “UCC”). All references to dollar amounts shall mean amounts in lawful money of the United States of America.

Account Debtor. The words “Account Debtor” means the Person who is obligated on or under an Account or, if appropriate, chattel paper or general intangible, as applicable.

Accounts. The word “Accounts” means “accounts” as such term is defined in the UCC, including without limitation, all rights to payment for goods sold or leased or services rendered, whether or not earned by performance and all rights in respect of the Account Debtor, including, without limitation, all such rights in which Borrower has any right, title or interest by reason of the purchase thereof by Borrower, and including, without limitation, all such rights constituting or evidenced by any Account, chattel paper, general intangible, instrument, contract, invoice, purchase order, draft, acceptance, intercompany account, note, security agreement, or other evidence of indebtedness or security, together with (a) any collateral assigned, hypothecated or held to secure any of the foregoing and the rights under any security agreement granting a security interest in such collateral, (b) all goods, the sale of which gave rise to any of the foregoing, and (c) all powers of attorney for the execution of any evidence of indebtedness or security or other writing in connection therewith.

Affiliate. The word “Affiliate” means, with respect to any Person (the “subject”), any Person (i) which directly or indirectly controls or is controlled by, or is under common control with, the subject, (ii) which beneficially owns or holds 5% or more of the equity interest of the subject, or (iii) 5% or more of the equity interest of which is beneficially owned or held by the subject or its Affiliates. The term “control” means the possession, directly or indirectly, individually or in concert with others, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

Agreement. The word “Agreement” means this Business Loan Agreement, including the Preamble, as this Business Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Business Loan Agreement from time to time.

AR Report. The words “AR Report” means a report from Borrower setting forth the details for each of the Accounts, payments received, etc. in form and substance required by Lender. The current form of the AR Report is attached hereto as Exhibit A . Each AR Report shall be accompanied by copies of invoices for any newly reported Accounts.

Blocked Account Agreement. The words “Blocked Account Agreement” mean the Control Agreement for the Collection Account among Borrower, Lender and Libertyville Bank.

Borrower. The word “Borrower” has the meaning set forth in the initial paragraph of this Agreement.

Borrowing Base. The words “Borrowing Base” mean an amount equal to the total of (a) ONE HUNDRED PERCENT (100%) of the unpaid Net Face Amount (further net of such reserves and allowances as the Lender deems necessary in its discretion) of all Eligible Accounts owned by Borrower, plus (b) the positive collected balance in the Collection Account.

Borrowing Base Certificate. The words “Borrowing Base Certificate” mean a certificate, certified by an appropriate officer of Borrower to be true and complete, setting forth the Borrowing Base as of the date on which that certificate is prepared, and otherwise being in form and detail satisfactory to the Lender.

Business Day. The words “Business Day” mean any day of the year on which Lender is open for business in Evanston, Illinois.

Charges. The word “Charges” has the meaning set forth in Section 3.1(h).

Collateral. The word “Collateral” means and includes without limitation all property and assets granted as collateral security for any portion of the Indebtedness, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise.

Collection Account. The words “Collection Account” have the meaning set forth in Section 21(n).

Control Agreement. The words “Control Agreement” mean an Account Control Agreement among Borrower, Lender and Libertyville Bank providing Lender with springing control over a depository account maintained by Borrower at Libertyville Bank in form and substance acceptable to Lender.

Default Rate. The words “Default Rate” mean the rate of interest then applicable to the Loan plus five percent (5.0%) per annum.

Eligible Account. The words “Eligible Account” mean any duly invoiced Account of which Borrower is the sole owner and in which the Lender has an enforceable and duly perfected first priority Security Interest, except any such Account:

(i)

that is not payable in installments and that shall not have been paid in full within ninety (90) days after the date first invoiced to the Account Debtor or fifteen (15) days after its due date, which ever first elapses;

(ii)

that is payable in installments;

(iii)

if the Account Debtor thereon is then obligated to Borrower on other Accounts that are excepted under clause (i);

(iv)

if the payment of which by the Account Debtor is not, or does not remain, unconditional;

(v)

if and to the extent that the Account Debtor has asserted a defense or offset of any kind against the payment thereof;

(vi)

that according to its terms may be paid by the Account Debtor by an offset of any claim of the Account Debtor or any other Person against Borrower;

(vii)

that arises other than in the ordinary course of Borrower's business or where the product or services has not yet been delivered to the purchaser thereof;

(viii)

if the Account Debtor thereon is an Affiliate, director, officer, employee, or agent of Borrower or of any Affiliate of Borrower;

(ix)

if the Account Debtor thereon is insolvent or is the subject of any insolvency proceeding or is, at the time in question, in default in any way on an existing obligation (except any obligation classified as an Account) to Borrower;

(x)

reserved

(xi)

if the Account Debtor thereon is a resident of any jurisdiction denying creditors access to its courts in the absence of qualification to transact business therein or the filing of a so-called “notice of business activities report” or other similar filing, unless Borrower has taken all action required by the jurisdiction in question to have access to its courts, unless specifically approved by Lender;

(xii)

which is subject to any law (including, without limitation, the Assignment of Claims Act of 1940 (31 USC 3272, et seq . and 41 USC 15 et seq .), rule, regulation, order, or agreement now or hereafter in effect that restricts or requires notice of or consent to assignment, unless all such required notices shall have been given, all such required consents shall have been obtained, and all other requirements shall have been complied with so that the Lender shall have the unconditional right to enforce the Account against the Account Debtor thereon;

(xiii)

is subject to any Security Interest securing payment or performance of any obligation other than the Indebtedness owing to Lender or the Libertyville Loans;

(xiv)

that is described in any financing statement naming any Person other than the Lender or Libertyville Bank as the secured party of record;

(xv)

that is not evidenced by an invoice dated no later than thirty (30) days following the sale of product or provision of services;

(xvi)

that is not payable in United States Dollars; or

(xvii)

the Lender has determined, in good faith, that (A) the creditworthiness of the Account Debtor is not acceptable to Lender, or (B) the collection or validity of the Accounts have become impaired for any reason.

Event of Default. The words “Event of Default” have the meaning set forth in Section 6.1.

Financials. The word “Financials” means those financial statements delivered to Lender by or on behalf of the Borrower.

GAAP. The word “GAAP” means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or any successor authority) that are applicable to the circumstances as of the date of determination, but for the calculation of any financial covenant or ratio, GAAP means such principals as in effect as of the date of this Agreement.

Grantor. The word “Grantor” means, without limitation, each and all of the Persons granting a Security Interest in any Collateral for the Indebtedness, including without limitation all Borrowers granting such a Security Interest.

Indebtedness. The word “Indebtedness” means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, of any and every kind and nature, as well as all claims by Lender against Borrower, or any one or more of them relating to or arising from the transactions contemplated by this Agreement; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated whether arising by operation of law, under this Agreement, or acquired by Lender from any other source; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable.

Inventory. The word “Inventory” means all “inventory” as such term is defined in the UCC, including, without limitation, all materials, inventories, and finished goods, wherever located, whether in transit, held by others for Borrower’s account, covered by warehouse receipts, purchase orders and contracts, or in the possession of any carriers, forwarding agents, truckers, warehousemen, vendors, customers on a consignment basis or other Persons, including, without limitation, all raw materials, work in process, finished merchandise, supplies, goods, stores, incidentals, office supplies and packaging materials.

Lender. The word “Lender” has the meaning set forth in the initial paragraph of this Agreement.

Libertyville Bank. The words “Libertyville Bank” mean Libertyville Bank & Trust Company, its successors and assigns.

Libertyville Loans. The words “Libertyville Loans” mean, collectively, (a) the $500,000.00 revolving line of credit made available by Libertyville Bank to Borrower pursuant to the Business Loan Agreement (Asset Based) dated March 4, 2018 as it may be amended (as permitted hereby) or extended, (b) the $300,000.00 line of credit made available by Libertyville Bank to Borrower pursuant to the Business Loan Agreement dated February 24, 2017 as it may be amended (as permitted hereby) or extended and the (c) $30,000.00 line of credit made available by Libertyville Bank to Borrower pursuant to the Business Loan Agreement dated July 7, 2014 as it may be amended (as permitted hereby) or extended.

Loan. The word “Loan” or “Loans” means any and all loans and financial accommodations from Lender to Borrower related to or arising out of the loan transactions contemplated by this Agreement, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described on any exhibit or schedule attached to this Agreement from time to time.

Maturity Date. The words “Maturity Date” mean either the Term Maturity Date or the Revolving Maturity Date, as applicable.

Net Face Amount. The words “Net Face Amount” means the face amount of an Account less any allowances, discounts or deductions available to an Account Debtor or any other deduction that Borrower may make available, including so called 2/10 (or similar) discounts.

Notes. The word “Notes” means (a) the Term Note and (b) the Revolving Note, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for such promissory notes.

Notice of Borrowing. The words “Notice of Borrowing” have the meaning set forth in Section 1.2.

Person. The word “Person” means an individual or a corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, government (or any instrumentality, division, agency, body or political subdivision thereof) or other entity of any kind.

Related Documents. The words “Related Documents” mean and include without limitation all promissory notes, credit agreements, loan agreements, guaranties, security agreements, mortgages, deeds of trust, collateral assignments, financing statements, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness.

Revolving Loan. The words “Revolving Loan” have the meaning set forth in Section 1.1(c).

Revolving Maturity Date. The words “Revolving Maturity Date” mean March 31, 2020.

Revolving Note. The words “Revolving Note” mean the Promissory Note (Revolving Note) from Borrower to Lender dated of even date herewith in the principal amount of $2,000,000.00, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for such promissory note.

Security Agreement. The words “Security Agreement” mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest.

Security Interest. The words “Security Interest” mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest, claim or encumbrance whatsoever, whether created by law, contract, or otherwise.

Term Maturity Date. The words “Term Maturity Date” has the meaning set forth in Section 1.1(b).

Term Note. The words “Term Note” mean the Promissory Note (Term Note) from Borrower to Lender dated of even date herewith in the principal amount of $500,000.00, together with all renewals of, extensions of, modifications of, refinancings of, consolidations of, and substitutions for such promissory note.

Unmatured Default. The words “Unmatured Default” mean an event or circumstance which with the giving of notice, the passage of time, or both, would, unless cured or waived, constitute an Event of Default.

7.2

Other Terms. Any accounting term used in this Agreement shall have, unless otherwise specifically provided herein, the meaning customarily given such term in accordance with GAAP, and all financial computations hereunder shall be computed, unless otherwise specifically provided herein, in accordance with GAAP consistently applied. That certain terms or computations are explicitly modified by the phrase “in accordance with GAAP” shall in no way be construed to limit the foregoing. The words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole, including the exhibits and schedules hereto, as the same may from time to time be amended, modified or supplemented and not to any particular section, subsection or clause contained in this Agreement.

7.3

Miscellaneous Provisions. The following miscellaneous provisions are a part of this Agreement:

(a)

Interpretation; Joint and Several Obligations. To the extent that this Agreement is executed by more than one Borrower, all words used herein in the singular shall be deemed to have been used in the plural and those used in the masculine shall be deemed to have been used in the feminine where the context and construction so require. The terms “Borrower,” and “Grantor” shall mean all or any one or more of them. The phrase “to the best of Borrower’s knowledge,” or words of similar import, shall mean actual knowledge following due inquiry. Each Borrower shall be fully bound by the terms of this Agreement, the obligations hereunder being joint and several. Lender shall have the right to proceed immediately against any Borrower with respect to any breach of this Agreement by such Borrower or any other Borrower and Lender is not required to take any action or proceeding of any kind against all the Borrowers or any of the property, real or personal, of any Borrower before proceeding against such Borrower or any other Borrower.

(b)

Entire Agreement; Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment.

(c)

Applicable Law. This Agreement and all acts, agreements, certificates, assignments, transfers and transactions hereunder, and all rights of the parties hereto, shall be governed as to validity, enforcement, interpretation, construction, effect and in all other respects by the internal laws and decisions of the State of Illinois, including, but not limited to, laws regulating interest, loan charges, commitment fees and brokerage commissions (without regard to conflicts of law principles). It is acknowledged and agreed by Borrower and Lender that the loan transaction evidenced hereby bears a reasonable relationship to the State of Illinois.

(d)

Consent to Jurisdiction. To induce Lender to accept this Agreement, Borrower irrevocably agrees that, subject to Lender's election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY ARISING OUT OF OR RELATED TO THIS AGREEMENT WILL BE LITIGATED IN COURTS HAVING SITUS IN COOK or WILL COUNTY, ILLINOIS. BORROWER HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY COURT LOCATED WITHIN COOK or WILL COUNTY, ILLINOIS.

(e)

Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement.

(f)

Consent to Loan Assignment or Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more interests in the Indebtedness to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Indebtedness, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of interests, as well as all notices of any repurchase of such interests. Borrower also agrees that the purchasers of any such interests will be considered as the absolute owners of such interests in the Indebtedness and will have all the rights granted under the agreement or agreements governing the sale of such interests. Borrower agrees that either Lender or such purchaser may enforce Borrower's obligations with respect to the Indebtedness irrespective of the failure or insolvency of any holder of any interest therein. Borrower further agrees that the purchaser of any such interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender.

(g)

Costs and Expenses. Borrower agrees to pay upon demand all of Lender's out-of-pocket expenses, including attorneys' fees, incurred in connection with this Agreement or any Collateral or in connection with the Indebtedness under this Agreement. Lender may engage an agent to help collect the Indebtedness and to enforce this Agreement and the Related Documents, and Borrower will reimburse Lender therefor. This includes, subject to any limits under applicable law, Lender's attorneys' fees and legal expenses, whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law.

(h)

Advice of Counsel; Joint Interpretation. The Borrower acknowledges that it has been advised by its counsel with respect to this transaction, this Agreement, and the Related Documents, including, without limitation, all waivers contained herein and therein. The parties acknowledge that each party and its counsel have reviewed this Agreement and the Related Documents and that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement, the Related Documents, or any amendments or exhibits thereto.

(i)

Notices. Except as otherwise provided herein, whenever it is provided herein that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties by another, or whenever any of the parties desires to give or serve upon another any communication with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and shall be delivered in person (by personal delivery, delivery service or reputable overnight courier service), or telecopied and confirmed immediately in writing by a copy mailed by United States mail, postage prepaid, addressed as hereafter set forth, or mailed by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

(i)

If to Lender, at:

1603 Orrington Avenue, Suite 900

Evanston, IL 60201

Attn: Bradford T. Whitmore

Tel: 847-733-1230
Fax: 847-733-0339

(ii)

If to Borrower, at:

1319 Marquette Drive

Romeoville, IL 60446

Attn: Jess Jankowski

Tel: 630-771-6702
Fax: 630-771-0825

or at such other address as may be substituted by notice given as herein provided. The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. Every notice, demand, request, consent, approval, declaration or other communication hereunder shall be deemed to have been duly given or secured on the date on which (i) personally delivered (whether in person, by delivery service, or by reputable overnight courier service), (ii) the date of the telecopy transmission (provided the confirmation mailing was sent as provided herein), or (iii) on the date of receipt if sent by the United States mail. Failure or delay in delivering copies of any notice, demand, request, consent, approval, declaration or other communication to the Persons designed above to receive copies, if any, shall in no way adversely affect the effectiveness of such notice, demand, request, consent, approval, declaration or other communication.

(j)

Consent to Service of Documents. BORROWER HEREBY AGREES AND CONSENTS THAT, IN ADDITION TO ANY METHODS OF SERVICE OF PROCESS PROVIDED FOR UNDER APPLICABLE LAW, ALL SERVICE OF PROCESS IN ANY SUIT, ACTION OR PROCEEDING IN ANY ILLINOIS OR FEDERAL COURT INVOLVING LENDER IN ANY WAY (WHETHER FOR THIS TRANSACTION OR OTHERWISE) MAY BE MADE BY EITHER (A) CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO BORROWER AT THE ADDRESS INDICATED HEREIN, AND SERVICE SO MADE SHALL BE COMPLETE FIVE DAYS AFTER THE SAME SHALL HAVE BEEN SO MAILED OR (B) THROUGH BORROWER’S ATTORNEY, DAVID L. WEINSTEIN, AT SUCH ADDRESS AS MAY BE ON RECORD WITH THE SUPREME COURT OF ILLINOIS.

(k)

Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any Person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other Persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable.

(l)

Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word “Borrower” as used herein shall include all subsidiaries of Borrower, if any. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or Affiliate of Borrower.

(m)

Successors and Assigns. This Agreement shall be binding upon, and inure to the benefit of, the parties and their successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender.

(n)

Survival. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf.

(o)

Time is of the Essence. Time is of the essence in the performance of this Agreement.

(p)

Agency. Nothing in this Agreement shall be construed to constitute the creation of a partnership or joint venture between Lender and Borrower or any Person. Lender is not an agent or representative of Borrower. This Agreement does not create a contractual relationship with and shall not be construed to benefit or bind Lender in any way with or create any contractual duties by Lender to any contractor, subcontractor, materialman, laborer, or any other Person other than Borrower.

(q)

Merger. There shall be no merger of the interest or estate created by this Agreement or any Related Document with any other interest or estate in the Collateral at any time held by or for the benefit of Lender in any capacity, without the written consent of Lender.

(r)

Indemnity. Whether or not the transactions contemplated hereby shall be consummated, Borrower agrees to defend, protect and indemnify Lender, its participants and each of their assigns, and each of their respective directors, officers, employees, affiliates and agents (collectively, “Indemnified Persons”) from and against, and agrees to hold each such Indemnified Person harmless from, any and all losses, claims, damages, obligations, judgments, penalties, and liabilities and related costs and expenses, including, without limitation, reasonable counsel fees and expenses, incurred by such Indemnified Person arising out of any claim, action, suit, litigation, investigation or proceeding (whether or not such Indemnified Person is a party thereto), which may be imposed on, incurred by, or asserted against any Indemnified Person (whether direct, indirect or consequential and whether based on any federal or state laws or other statutory regulations, including, without limitation, securities, environmental and commercial laws and regulations, under common law or in equity, or in contract or otherwise) in any manner relating to or arising out of this Agreement, the Related Documents, or any act, event or transaction related or attendant hereto or thereto, the making and the management of the Loan or the use or intended use of the proceeds of the Loan hereunder; provided , however , that such indemnity shall not apply to any such losses, claims, damages, or liabilities or related expenses determined by a court of competent jurisdiction to have arisen from the gross negligence or willful misconduct of such Indemnified Person. The agreements of Borrower in this subsection shall be in addition to any of the Indebtedness that Borrower may otherwise have. All amounts due under this subsection shall be payable as incurred upon written demand therefor, shall be added to the Indebtedness of the Borrower and shall bear interest at the Default Rate, and shall be secured by the Collateral. To the extent that the undertaking to indemnify, pay and hold harmless set forth in this subsection may be unenforceable because it is violative of any law or public policy, the Borrower shall contribute the maximum portion which it is permitted to pay and satisfy under applicable law, to the payment and satisfaction of all matters incurred by the Indemnified Persons. The provisions of and undertakings and indemnifications set out in this Section shall survive the satisfaction and payment of the Indebtedness of the Borrower and the termination of this Agreement.

(s)

Waiver and Consents. Lender shall not be deemed to have waived any rights under this Agreement or under the Related Documents unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions.

(t)

Lender's Discretion. Whenever this Agreement requires either Lender's consent, election, approval or similar action or otherwise vests in Lender the authority to make decisions and/or determinations, such actions shall be made or withheld in Lender's sole and absolute discretion, unless specifically provided otherwise and the granting of any consent, election, approval or similar action by Lender in any instance shall not constitute continuing consent, election, approval or similar action in subsequent instances where such is required.

(u)

Payments Set Aside. To the extent that the Borrower makes a payment or payments to the Lender or the Lender enforces its Security Interest or exercises its rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

(v)

Waiver of Demand. Demand, presentment, protest and notice of nonpayment are hereby waived by the Borrower, except as otherwise expressly provided herein.

(w)

Conflict of Terms. Except as otherwise expressly provided in this Agreement and except as otherwise expressly provided in the Related Documents by specific reference to the applicable provision of this Agreement, if any provision in this Agreement is in conflict with, or inconsistent with, any provision in the Related Documents or the Commitment Letter, the provision in this Agreement shall govern and control.

(x)

Counterparts. This Agreement and all Related Documents may be executed in any number of separate counterparts, each of which shall, collectively and separately, constitute one agreement.

(y)

Waiver of Jury Trial. BORROWER AND LENDER EACH WAIVE ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS (i) UNDER THIS AGREEMENT OR ANY RELATED DOCUMENT OR UNDER ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION WITH THIS AGREEMENT OR RELATED DOCUMENT OR (ii) ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AGREEMENT, AND AGREE THAT ANY SUCH ACTION OR PROCEEDING WILL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. BORROWER AGREES THAT IT WILL NOT ASSERT ANY CLAIM AGAINST LENDER OR ANY OTHER PERSON INDEMNIFIED UNDER THIS AGREEMENT ON ANY THEORY OF LIABILITY FOR SPECIAL, INDIRECT, CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGES.

(signatures to follow)

BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS.

BORROWER:

NANOPHASE TECHNOLOGIES CORPORATION

/s/ JESS A. JANKOWSKI

Jess A. Jankowski

Chief Executive Officer

LENDER:

BEACHCORP, LLC

/s/ BRADFORD T. WHITMORE

Bradford T. Whitmore

Manager

BUSINESS LOAN AGREEMENT

LIST OF EXHIBITS AND SCHEDULES

Exhibit A	-	Form of AR Report

Schedule 2.1(h)	-	General List and Description of Security Interests, Claims and Other Encumbrances

Schedule 2.1(l)	-	Places of Business, Chief Executive Office, Location of Records and Collateral Locations

Exhibit A - Form of AR Report

Schedule 2.1(h) - General List and Description of Security Interests, Claims and Other Encumbrances

•

Liens in connection with the Libertyville Loans

•

Liens or encumbrances in connection with capitalized leases below:

Schedule 2.1(l) - Places of Business, Chief Executive Office, Location of Records and Collateral Locations

Warehouse: 1277 Naperville Drive, Romeoville IL

Landlord:	RB Properties
	6475 Joliet Road
	Suite A100
	Countryside, IL 60525
	Richard Barton
	708-582-6276
	Lease Dates:	9/1/16 - 8/31/19
	Renewal Option:	Option to renew one three year period

Romeoville: 1319 Marquette Drive, Romeoville IL

Landlord:	MLRP 1319 Marquette LLC
	RE Development Solutions, Inc.
	P.O. Box 5598
	Woodridge, IL 60517
	Ramsey Elshafei
	630-707-0209
	Lease Dates:	1/1/16 - 12/31/19
	Renewal Options:	Option to renew for one period of five years.

Burr Ridge: 453 Commerce Street, Burr Ridge IL

Landlord:	Village of Burr Ridge
	7660 County Line Road
	Burr Ridge, IL 60527
	Steven Stricker
	630-654-8181 ext. 2000
	Lease Dates:	9/15/2017-9/15/21
	Renewal Options:	Option to renew one three year period

Nanophase Technologies Corporation 10-Q

Exhibit 10.2

PROMISSORY NOTE

(Term Note)

Principal Amount: $500,000.00

Date of Note: November 19, 2018

PROMISE TO PAY. NANOPHASE TECHNOLOGIES CORPORATION, a Delaware corporation (“Borrower”), hereby promises to pay to BEACHCORP, LLC, a Delaware limited liability company (“Lender”), or order, in lawful money of the United States of America, the principal amount of FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($500,000.00) together with interest on the unpaid principal balance from the date hereof, until paid in full.

LOAN. This Note evidences Borrower’s Term Loan under the Business Loan Agreement dated as of November 19, 2018 between Borrower and Lender (as it may be amended from time to time, the “Loan Agreement”). Capitalized terms used herein, but not otherwise defined herein, shall have the meaning given them in the Loan Agreement.

PAYMENT. Borrower will repay the Loan(s) evidenced hereby in accordance with the terms of the Loan Agreement.

INTEREST.

(a)

Interest on the Loans. Borrower shall pay interest on the Loan(s) in accordance with the terms of the Loan Agreement.

(b)

EVENTS OF DEFAULT. A default in the performance of any obligation hereunder or any Event of Default under the Loan Agreement shall constitute an Event of Default hereunder.

LENDER'S RIGHTS. Upon the occurrence of an Event of Default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount, together with any Prepayment Fee which Borrower would be required to pay. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. This Note has been delivered to Lender and accepted by Lender in the State of Illinois. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction and venue of the courts having situs in Cook or Will County, the State of Illinois. LENDER AND BORROWER HEREBY WAIVE THE RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY EITHER LENDER OR BORROWER AGAINST THE OTHER. This Note shall be governed by and construed in accordance with the laws of the State of Illinois.

COLLATERAL; LOAN AGREEMENT. This Note is secured by the Collateral (as defined in the Loan Agreement). This Note is the Term Note referred to in the Loan Agreement.

SAVINGS CLAUSE. In no event shall the amount of interest or charges paid hereunder, together will all amounts reserved, charged, or taken by Lender as compensation for fees, services, or expenses incidental to making, negotiation, or collection of the loan evidenced hereby exceed the maximum rate of interest on the unpaid principal balance hereof, charges or compensation for fees, services, or expenses allowable by applicable law. If any sum is collected in excess of the applicable maximum rate or amount, the excess collected shall be applied to reduce the principal debt.

INDEMNITY. If the introduction of, or any change in, or in the interpretation of, or any change in its application to the Borrower of, any law or regulation, or compliance with any guideline from any governmental authority (whether or not having the force of law) has the effect of increasing the cost to the Lender of performing its obligations hereunder or otherwise reducing its effective return hereunder, then upon demand from time to time the Borrower shall compensate the Lender for such cost or reduction pursuant to a certificate reasonably prepared by the Lender.

GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other Person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew, extend (repeatedly and for any length of time) or modify this Loan, or release any party or guarantor or Collateral; or impair, fail to realize upon or perfect Lender's security interest in the Collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone.

LENDER'S DISCRETION. Whenever this Note requires either Lender's consent, election, approval or similar action or otherwise vests in Lender the authority to make decisions and/or determinations, such actions shall be made or withheld in Lender's sole and absolute discretion, unless specifically provided otherwise and the granting of any consent, election, approval or similar action by Lender in any instance shall not constitute continuing consent, election, approval or similar action in subsequent instances where such is required.

ILLINOIS INSURANCE NOTICE. Unless Borrower provides Lender with evidence of the insurance coverage required by the Security Agreements, Lender may purchase insurance at Borrower's expense to protect Lender's interests in the Collateral. This insurance may, but need not, protect Borrower's interests. The coverage that Lender purchases may not pay any claim that Borrower makes or any claim that is made against Borrower in connection with the Collateral. Borrower may later cancel any insurance purchased by Lender, but only after providing Lender with evidence that Borrower has obtained insurance as required by their agreement. If Lender purchases insurance for the Collateral, Borrower will be responsible for the costs of that insurance, including interest and any other charges Lender may impose in connection with the placement of the insurance, until the effective date of the cancellation or expiration of the insurance. The costs of the insurance may be added to Borrower's total outstanding balance or obligation. The costs of the insurance may be more than the cost of insurance Borrower may be able to obtain on Borrower's own.

PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE. BORROWER AGREES TO THE TERMS OF THE PROMISSORY NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE PROMISSORY NOTE.

BORROWER:

NANOPHASE TECHNOLOGIES CORPORATION

/s/ JESS A. JANKOWSKI
Jess A. Jankowski
Chief Executive Officer

Address:
1319 Marquette Drive
Romeoville, IL 60446

Nanophase Technologies Corporation 10-Q

Exhibit 10.3

PROMISSORY NOTE

(Revolving Note)

Principal Amount: $2,000,000.00

Date of Note: November 19, 2018

PROMISE TO PAY. NANOPHASE TECHNOLOGIES CORPORATION, a Delaware corporation (“Borrower”), hereby promises to pay to BEACHCORP, LLC, a Delaware limited liability company (“Lender”), or order, in lawful money of the United States of America, the principal amount of TWO MILLION AND 00/100 DOLLARS ($2,000,000.00) (or so much thereof as may be outstanding) together with interest on the unpaid principal balance from the date hereof, until paid in full.

LOAN. This Note evidences Borrower’s Revolving Loans under the Business Loan Agreement dated as of November 19, 2018 between Borrower and Lender (as it may be amended from time to time, the “Loan Agreement”). Capitalized terms used herein, but not otherwise defined herein, shall have the meaning given them in the Loan Agreement.

PAYMENT. Borrower will repay the Loan(s) evidenced hereby in accordance with the terms of the Loan Agreement.

INTEREST.

(a)

Interest on the Loans. Borrower shall pay interest on the Loan(s) in accordance with the terms of the Loan Agreement.

(b)

EVENTS OF DEFAULT. A default in the performance of any obligation hereunder or any Event of Default under the Loan Agreement shall constitute an Event of Default hereunder.

COLLATERAL; LOAN AGREEMENT. This Note is secured by the Collateral (as defined in the Loan Agreement). This Note is the Revolving Note referred to in the Loan Agreement.

BORROWER:

NANOPHASE TECHNOLOGIES CORPORATION

/s/ JESS A. JANKOWSKI
Jess A. Jankowski
Chief Executive Officer

Address:
1319 Marquette Drive
Romeoville, IL 60446

Nanophase Technologies Corporation 10-Q

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 A. 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: November 19, 2018

	/s/ JESS A. JANKOWSKI
	Jess A. Jankowski
	Chief Executive Officer

Nanophase Technologies Corporation 10-Q

Exhibit 31.2

Certification of the Chief Financial Officer

Pursuant to

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

I, Jaime Escobar, certify that:

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

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

Date: November 19, 2018

	/s/ JAIME ESCOBAR
	Jaime Escobar
	Chief Financial Officer

Nanophase Technologies Corporation 10-Q

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, 2018 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 Jaime Escobar, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge:

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

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

Date: November 19, 2018

	/s/ JESS A. JANKOWSKI
	Jess A. Jankowski
	Chief Executive Officer


	/s/ JAIME ESCOBAR
	Jaime Escobar
	Chief Financial Officer