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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: September 30, 2002
Commission File Number: 0-22333
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 X No
As of November 13, 2002, there were outstanding 15,106,032 shares of common stock, par value $.01, of the registrant.
NANOPHASE TECHNOLOGIES CORPORATION
QUARTER ENDED September 30, 2002
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Page
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| PART I |
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FINANCIAL INFORMATION |
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3 |
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| Item 1. |
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Financial Statements |
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3 |
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3 |
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| Item 2. |
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10 |
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| Item 3. |
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14 |
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| Item 4. |
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14 |
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| PART II |
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OTHER INFORMATION |
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14 |
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| Item 1. |
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14 |
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| Item 2. |
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14 |
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| Item 6. |
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16 |
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16 |
2
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
NANOPHASE TECHNOLOGIES CORPORATION
(Unaudited)
| |
|
September 30, 2002
|
|
|
December 31, 2001
|
|
| ASSETS |
|
|
|
|
|
|
|
|
| |
| Current assets: |
|
|
|
|
|
|
|
|
| Cash and cash equivalents |
|
$ |
396,444 |
|
|
$ |
582,579 |
|
| Investments |
|
|
8,972,777 |
|
|
|
6,842,956 |
|
| Trade accounts receivable, less allowance for doubtful accounts |
|
|
|
|
|
|
|
|
| of $25,000 at September 30, 2002 and December 31, 2001 |
|
|
607,818 |
|
|
|
1,112,952 |
|
| Other receivable, net |
|
|
14,475 |
|
|
|
67,449 |
|
| Inventories, net |
|
|
1,081,195 |
|
|
|
956,268 |
|
| Prepaid expenses and other current assets |
|
|
180,458 |
|
|
|
381,696 |
|
| |
|
|
|
|
|
|
|
|
| Total current assets |
|
|
11,253,167 |
|
|
|
9,943,900 |
|
| Equipment and leasehold improvements, net |
|
|
9,284,904 |
|
|
|
8,914,745 |
|
| Other assets, net |
|
|
358,240 |
|
|
|
325,743 |
|
| |
|
|
|
|
|
|
|
|
| |
|
$ |
20,896,311 |
|
|
$ |
19,184,388 |
|
| |
|
|
|
|
|
|
|
|
| |
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
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|
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|
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| Current liabilities: |
|
|
|
|
|
|
|
|
| Current portion of long-term debt |
|
$ |
661,788 |
|
|
$ |
714,135 |
|
| Current portion of capital lease obligations |
|
|
65,212 |
|
|
|
48,352 |
|
| Accounts payable |
|
|
490,187 |
|
|
|
1,233,466 |
|
| Accrued expenses |
|
|
945,865 |
|
|
|
732,427 |
|
| |
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
2,163,052 |
|
|
|
2,728,380 |
|
| Long-term debt, less current maturities |
|
|
441,192 |
|
|
|
758,490 |
|
| Long-term portion of capital lease obligations, less current maturities |
|
|
69,556 |
|
|
|
53,900 |
|
| |
|
|
|
|
|
|
|
|
| Total long-term debt |
|
|
510,748 |
|
|
|
812,390 |
|
| |
| Contingent liabilities: |
|
|
— |
|
|
|
— |
|
| |
| Stockholders’ equity: |
|
|
|
|
|
|
|
|
| Preferred stock, $.01 par value, 24,088 shares authorized and
no shares issued and outstanding |
|
|
— |
|
|
|
— |
|
| Common stock, $.01 par value, 25,000,000 shares authorized;
15,106,032 and 13,705,931 shares issued and outstanding
at
September 30, 2002 and December 31, 2001, respectively |
|
|
151,060 |
|
|
|
137,059 |
|
| Additional paid-in capital |
|
|
56,568,815 |
|
|
|
50,260,747 |
|
| Accumulated deficit |
|
|
(38,497,364 |
) |
|
|
(34,754,188 |
) |
| |
|
|
|
|
|
|
|
|
| Total stockholders’ equity |
|
|
18,222,511 |
|
|
|
15,643,618 |
|
| |
|
|
|
|
|
|
|
|
| |
|
$ |
20,896,311 |
|
|
$ |
19,184,388 |
|
| |
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
3
NANOPHASE TECHNOLOGIES CORPORATION
(Unaudited)
| |
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
| |
|
2002
|
|
|
2001
|
|
|
2002
|
|
|
2001
|
|
| Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Product revenue, net |
|
$ |
1,173,373 |
|
|
$ |
549,805 |
|
|
$ |
4,003,147 |
|
|
$ |
2,487,293 |
|
| Other revenue |
|
|
80,037 |
|
|
|
129,740 |
|
|
|
319,791 |
|
|
|
313,555 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total revenue |
|
|
1,253,410 |
|
|
|
679,545 |
|
|
|
4,322,938 |
|
|
|
2,800,848 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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| Operating expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost of revenue |
|
|
1,084,863 |
|
|
|
1,142,835 |
|
|
|
3,781,583 |
|
|
|
2,999,957 |
|
| Research and development expense |
|
|
292,237 |
|
|
|
340,035 |
|
|
|
1,295,962 |
|
|
|
1,140,224 |
|
| Selling, general and administrative expense |
|
|
896,903 |
|
|
|
738,015 |
|
|
|
2,988,221 |
|
|
|
2,964,963 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total operating expense |
|
|
2,274,003 |
|
|
|
2,220,885 |
|
|
|
8,065,766 |
|
|
|
7,105,144 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss from operations |
|
|
(1,020,593 |
) |
|
|
(1,541,340 |
) |
|
|
(3,742,828 |
) |
|
|
(4,304,296 |
) |
| Interest income |
|
|
51,959 |
|
|
|
112,870 |
|
|
|
113,136 |
|
|
|
529,486 |
|
| Interest expense |
|
|
(29,971 |
) |
|
|
(9,242 |
) |
|
|
(86,253 |
) |
|
|
(26,905 |
) |
| Other, net |
|
|
4,570 |
|
|
|
— |
|
|
|
11,992 |
|
|
|
(12,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loss before provision for income taxes |
|
|
(994,035 |
) |
|
|
(1,437,712 |
) |
|
|
(3,703,953 |
) |
|
|
(3,813,715 |
) |
| Provisions for income taxes |
|
|
(1,750 |
) |
|
|
— |
|
|
|
(39,223 |
) |
|
|
(30,000 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(995,785 |
) |
|
$ |
(1,437,712 |
) |
|
$ |
(3,743,176 |
) |
|
$ |
(3,843,715 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Net loss per share—basic and diluted |
|
$ |
(0.07 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.26 |
) |
|
$ |
(0.28 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Weighted average number of common shares outstanding |
|
|
15,106,032 |
|
|
|
13,703,921 |
|
|
|
14,359,928 |
|
|
|
13,653,960 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
4
NANOPHASE TECHNOLOGIES CORPORATION
(Unaudited)
| |
|
Nine months ending September 30,
|
|
| |
|
2002
|
|
|
2001
|
|
| Operating activities: |
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(3,743,176 |
) |
|
$ |
(3,843,715 |
) |
| Adjustment to reconcile net loss to net cash (used in) operating activities: |
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
|
875,775 |
|
|
|
540,299 |
|
| Allowance for excess inventory quantities |
|
|
(23,459 |
) |
|
|
23,182 |
|
| Provision for asset write-down |
|
|
— |
|
|
|
14,086 |
|
| Accounts receivable paid through offset of long-term debt |
|
|
(190,916 |
) |
|
|
— |
|
| Changes in assets and liabilities related to operations: |
|
|
|
|
|
|
|
|
| Trade accounts receivable |
|
|
505,134 |
|
|
|
277,172 |
|
| Other receivable |
|
|
52,974 |
|
|
|
46,132 |
|
| Inventories |
|
|
(101,468 |
) |
|
|
(1,162,688 |
) |
| Prepaid expenses and other assets |
|
|
157,696 |
|
|
|
41,728 |
|
| Accounts payable |
|
|
(86,941 |
) |
|
|
199,571 |
|
| Accrued liabilities |
|
|
213,438 |
|
|
|
10,485 |
|
| |
|
|
|
|
|
|
|
|
| Net cash (used in) operating activities |
|
|
(2,340,943 |
) |
|
|
(3,853,748 |
) |
| |
| Investing activities: |
|
|
|
|
|
|
|
|
| Acquisition of equipment and leasehold improvements |
|
|
(992,396 |
) |
|
|
(5,442,595 |
) |
| Payment of accounts payables incurred for the purchase of equipment and
leasehold improvements |
|
|
(833,824 |
) |
|
|
— |
|
| Purchases of held-to-maturity investments |
|
|
(86,288,489 |
) |
|
|
(52,962,100 |
) |
| Maturities of held-to maturity investments |
|
|
84,158,668 |
|
|
|
61,515,211 |
|
| |
|
|
|
|
|
|
|
|
| Net cash (used in) provided by investing activities |
|
|
(3,956,041 |
) |
|
|
3,110,516 |
|
| |
| Financing activities: |
|
|
|
|
|
|
|
|
| Principal payment on debt obligation, including capital leases |
|
|
(211,220 |
) |
|
|
(236,477 |
) |
| Proceeds from borrowing |
|
|
— |
|
|
|
782,333 |
|
| Proceeds from sale of common stock, net, and exercise of stock options |
|
|
6,322,069 |
|
|
|
376,116 |
|
| |
|
|
|
|
|
|
|
|
| Net cash provided by financing activities |
|
|
6,110,849 |
|
|
|
921,972 |
|
| |
|
|
|
|
|
|
|
|
| (Decrease) increase in cash and cash equivalents |
|
|
(186,135 |
) |
|
|
178,740 |
|
| Cash and cash equivalents at beginning of period |
|
|
582,579 |
|
|
|
473,036 |
|
| |
|
|
|
|
|
|
|
|
| Cash and cash equivalents at end of period |
|
$ |
396,444 |
|
|
$ |
651,776 |
|
| |
|
|
|
|
|
|
|
|
| |
| Supplemental cash flow information: |
|
|
|
|
|
|
|
|
| Interest paid |
|
$ |
86,253 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
| Income taxes paid |
|
$ |
39,223 |
|
|
$ |
30,000 |
|
| |
|
|
|
|
|
|
|
|
| |
| Supplemental non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
| Capital lease obligations incurred for use of equipment |
|
$ |
65,007 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
| Accounts payable incurred for the purchase of equipment and
leasehold improvements |
|
$ |
177,486 |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
See Notes to Financial Statements.
5
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) |
|
Basis of Presentation |
The accompanying unaudited interim financial statements of Nanophase Technologies Corporation (the “Company”) reflect all adjustments (consisting of normal recurring adjustments) which, in the opinion of
management, are necessary for a fair presentation of the financial position and operating results of the Company for the interim periods presented. Operating results for the three and nine month periods ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the year ended December 31, 2002.
These financial statements
should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2001, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, as filed with
the Securities and Exchange Commission.
(2) |
|
Description of Business |
The Company was incorporated on November 30, 1989, for the purpose of developing nanocrystalline materials for commercial production and sale in domestic and international markets.
In the course of its corporate development, the Company has experienced net losses and negative cash flows from operations. Historically,
the Company has funded its operations primarily through the issuance of equity securities.
Revenue from
international sources approximated $473,000 and $381,000 for the nine months ended September 30, 2002 and 2001, respectively.
Investments are classified by the Company at the time of purchase for appropriate designation and such designations are reevaluated as of each balance sheet date. The Company’s policy is to classify money market funds and
certificates of deposit as investments. Investments are classified as held-to maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to maturity securities are stated at amortized cost and are adjusted
to maturity for the amortization of premiums and accretion of discounts. Such adjustments for amortization and accretion are included in interest income. At September 30, 2002 the Company’s investments were approximately $8,973,000 of which
$8,776,000 are classified as short-term commercial paper and $188,000 were certificates of deposit. Investments held in short-term commercial paper have maturity days of less than ninety days and certificates of deposit have maturities ranging from
1 to 5 months.
Inventories consist of the following:
| |
|
September 30, 2002
|
|
|
December 31, 2001
|
|
| Raw materials |
|
$ |
559,232 |
|
|
$ |
429,393 |
|
| Finished goods |
|
|
1,129,507 |
|
|
|
1,157,877 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
1,688,739 |
|
|
|
1,587,270 |
|
| Allowance for excess inventory quantities |
|
|
(607,544 |
) |
|
|
(631,002 |
) |
| |
|
|
|
|
|
|
|
|
| |
|
$ |
1,081,195 |
|
|
$ |
956,268 |
|
| |
|
|
|
|
|
|
|
|
In 2002, the allowance for excess inventory quantities for the
three and six months ended were $656,021 and $672,075, respectively.
6
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS – (Continued)
(Unaudited)
(5) |
|
Stock Options and Warrants |
During the nine months ended September 30, 2002, no shares of Common Stock were issued pursuant to exercises of stock options, compared to 105,212 shares of Common Stock in the same period in 2001. In
the same nine-month period in 2002 and 2001 no warrants were converted.
(6) |
|
Significant Customers and Contingencies |
Revenue from the Company’s largest customer constituted approximately 70 and 71% of the Company’s total revenue for the three- and nine-month periods ending September 30, 2002. Amounts
included in accounts receivable relating to this particular customer were approximately $ 234,000 at September 30, 2002. The Company currently has a supply agreement with its largest customer that has contingencies outlined in it which could
potentially result in the license of technology and/or, as provided for in that supply agreement, the sale of production equipment, providing capacity sufficient to meet the customer’s production needs, from the Company to the customer, if
triggered by the Company’s failure to meet certain performance requirements and/or certain financial condition covenants. The financial condition covenants included in the Company’s supply agreement with the aforementioned customer
“triggers” a technology transfer (license or, optionally, an equipment sale) in the event (a) that earnings of the Company for a twelve month period ending with its most recently published quarterly financial statements are less than zero
and its cash, cash equivalents and liquid investments are less than $4,000,000, (b) of an acceleration of any debt maturity having a principal amount of more than $10,000,000 or (c) the Company’s insolvency, as further defined within the
agreement. In the event of an equipment sale relating to a triggering event, the equipment would be sold to the customer at 115% of the equipment’s net book value. The Company believes that it has complied with all contractual requirements and
that it has not had a “triggering event”. The Company further believes that the proceeds of the May 29, 2002 private placement provide sufficient cash balances to avoid the first triggering event referenced above for at least the next
twelve months. If a triggering event were to occur and our largest customer elected to proceed with the transfer and related sale mentioned above, the Company would receive royalty payments from its customer for products sold using our technology;
however, the Company 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 would 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 the Company’s agreement with
the customer. This shortfall might put the Company in a position where it would be
7
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS – (Continued)
(Unaudited)
difficult to secure additional funding given an already tenuous cash position. Such an event would also result in the loss of many of the Company’s key staff and line employees due to economic
realities. The Company believes that its employees are a critical component of its success and would be difficult to replace and train quickly. Given the occurrence of such an event, the Company might not be able to hire and retain skilled employees
given the stigma relating to such an event and its impact on the Company. The Company would effectively reduce its size and staffing to a point where it could remain a going concern. Such a change would make it unlikely that, without unforeseen
funding, the Company could continue to grow at anything other than an incremental rate.
(7) |
|
Contingent Liabilities |
In 1998, Harbour Court LPI, a small stockholder of the Company, sued the Company, certain of its current and former officers and the underwriters of the Company’s initial public offering of common stock (the
“IPO”) in the United States District Court for the Northern District of Illinois. The complaint alleged that defendants had violated the federal Securities Exchange Act of 1934 by making supposedly fraudulent material misstatements of fact
and omitting to state material facts necessary to make other statements of fact not misleading in connection with soliciting consents to the IPO from certain of the Company’s preferred stockholders. These supposed misrepresentations concerned
purported mischaracterization of revenues that the Company received from its then-largest customer. The complaint further alleged that the action should be maintained as a plaintiff class action on behalf of certain former preferred stockholders
whose shares of preferred stock were converted into common stock on or about the date of the IPO. The complaint sought unquantified compensatory damages, interest, and attorneys’ fees. In September 2000, each defendant answered the complaint,
denying all wrongdoing.
Following certain discovery, the Company agreed to settle all claims against all
defendants in the preferred stockholders’ complaint for $800,000, plus up to an additional $50,000 for the cost of settlement notices and administration. The settlement did not admit liability by any party. The Court ordered final approval of
the settlement in January 2002 and concurrently dismissed with prejudice the preferred shareholders’ complaint. Because the settlement was funded by the Company’s directors and officers liability insurance, the settlement payment did not
have a material adverse effect on the Company’s financial position or results of operations.
In November
2001, George Tatz, a purchaser of 200 shares of the Company’s common stock, sued the Company and Joseph Cross, its President and CEO, in the United States District Court for the Northern District of Illinois. The complaint alleged that
defendants violated the federal Securities Exchange Act of 1934 by making supposedly fraudulent material misstatements of fact and omitting to state material facts necessary to prevent other statements from being misleading in connection with the
Company’s public disclosures, including certain press releases, concerning the Company’s dealings with Celox, a British customer. The complaint further alleged that the action should be maintained as a plaintiff class action on behalf of
certain persons who purchased shares of the Company’s common stock from April 5, 2001 through October 24, 2001. The complaint sought relief including unquantified compensatory damages, attorneys’ and expert witness’ fees. In March
2002, plaintiff filed an amended complaint, alleging that the Company and four of its officers (Joseph Cross; Daniel Bilicki, its vice president of sales and marketing; Jess Jankowski, its acting chief financial officer; and Gina Kritchevsky, its
chief technology officer) are liable under the federal Securities Exchange Act of 1934 for making supposedly fraudulent material misstatements and omissions of fact in connection with the Company’s press releases, publicly-filed reports and
other public disclosures concerning the Company’s relationship with Celox and the Company’s purportedly improper booking, and later reversal, of revenue from a one-
8
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS – (Continued)
(Unaudited)
time sale to that customer. The amended complaint alleges the same putative class and seeks the same relief as in plaintiff’s initial complaint. Defendants moved to dismiss the amended complaint
in April 2002. On October 9, 2002, the court denied defendants’ motion, finding that plaintiff’s 40-page amended complaint asserted sufficient allegations to permit the case to proceed. Defendants anticipate answering the amended complaint
by November 12, 2002. Although the Company believes that the allegations of the amended complaint are without merit, it is not feasible to predict at this time the ultimate outcome of this litigation or whether its resolution could have a material
adverse effect on the Company’s results of operations or financial condition.
(8) |
|
Recent Accounting Pronouncements |
SFAS No. 143, Accounting for Asset Retirement Obligations, addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. The statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period it is incurred if a reasonable estimate of fair value can be made. The associated retirement costs are
capitalized as a component of the carrying amount of the long-lived asset and allocated to expense over the useful life of the asset. The statement is effective for financial statements issued for fiscal years beginning after June 15, 2002.
Management does not believe the adoption of the statement will have a material impact on the Company’s consolidated financial statements.
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, establishes accounting and reporting standards for the impairment or disposal of long-lived assets. This statement
supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed. SFAS No. 144 provides one accounting model to be used for long-lived assets to be disposed of by sale, whether previously held for
use or newly acquired and broadens the presentation of discontinued operations to include more disposal transactions. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001.
The Company adopted the statement as of January 1, 2002 and the implementation of this standard did not have a material impact on the Company’s consolidated financial statements.
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Since January 1, 1997, Nanophase Technologies Corporation (the “Company”) has been engaged in the
commercial production and sale of its nanocrystalline materials. All of the Company’s revenue since January 1, 1997 has been generated through commercial sources. From its inception in November 1989 through September 30, 2002, the Company was
primarily capitalized through the private offering of approximately $25,758,000 of equity securities and its initial public offering of approximately $28,838,000 of the Company’s common stock (the “Common Stock”), each net of issuance
costs. The Company has incurred cumulative losses of $38,497,364 from inception through September 30, 2002.
Results of Operations
Total revenue increased to $1,253,410 and $4,322,938 for the three and nine months, respectively, ended
September 30, 2002, compared to $679,545 and $2,800,848 for the same periods in 2001. Product revenue increased to $1,173,373 for the three months ended September 30, 2002, compared to $549,805 for the same period in 2001. Product revenue increased
to $4,003,147 for the nine months ended September 30, 2002, compared to $2,487,293 for the same period in 2001. Increases in total product revenue were mainly attributed to growth with existing customers and, to a lesser extent, to additional
customers. Revenue growth was magnified somewhat in the third quarter 2002 to third quarter 2001 comparison due to a reversal of a sale of $400,680 in September of 2001 that was originally recorded in the first quarter of 2001. The original sale was
appropriately recorded in accordance with generally accepted accounting principles for such transactions; however, the products were never shipped to the customer and the amount billed to the customer was never collected. In the opinion of
management, it is unlikely that this transaction will ever be completed. The Company is currently involved in litigation with this customer to force them to honor their legal obligations. Given the apparent current financial condition of this
customer, it is unlikely that the outcome of this litigation will result in material payment to Nanophase. Accordingly, management decided to reverse the revenue recorded in the first quarter of 2001. Other revenue decreased to $80,037 for the three
months ended September 30, 2002, compared to $129,740 for the same period in 2001. Other revenue increased to $319,791 for the nine months ended September 30, 2002 compared to $313,555 for the same period in 2001. The majority of the revenue
generated during the three and nine months ended September 30, 2002 was from customers in the healthcare, wear-resistant materials, Chemical Mechanical Planarization (CMP) and catalyst markets. Revenue from the Company’s largest customer
constituted approximately 70% and 71% of the Company’s total revenue for the three-and nine- month periods ended September 30, 2002. For the three-and nine-month periods ended September 30, 2001, the same customer accounted for approximately
80% and 76% of the Company’s total revenue, respectively.
Cost of revenue generally includes costs
associated with commercial production and customer development arrangements. Cost of revenue decreased to $1,084,863 for the three months ended September 30, 2002, compared to $1,142,835 for the same period in 2001. Total cost of revenue increased
to $3,781,583 for the nine months ended September 30, 2002, compared to $2,999,957 for the same period in 2001. The increase in total cost of revenue was generally attributed to increased product sales volume and increased depreciation expense
resulting from the completion, and placement in service at the beginning of the current year and throughout the current year of the majority of the Company’s build out of its manufacturing and powder coating facilities, somewhat offset by
efficiencies in the manufacture of the Company’s products. Cost of revenue as a percentage of total revenue decreased from 168% and
10
107% for the three-and nine-month periods ended September 30, 2001, compared to 87% for the same periods in 2002. Improvements to gross profit are primarily due to increased revenues, continued
gains in operating efficiencies, and nonrecurring other revenue in the amount of $65,000 received in the second quarter, enhanced to an extent, when comparing the three months ended September 30, 2002 to the same period in 2001, by the effects of
the reversal of the previously discussed first quarter sale in the third quarter of 2001. For the nine-month period ended September 30, 2002, the Company realized approximately $10,000, or 6% of gross margin on total revenue, as a result of sales of
inventoried material that had been previously reduced by an allowance for excess inventory quantities (as discussed in Note 4 to the financial statements). The Company expects to remain operating at a positive annual gross profit margin for the
foreseeable future.
Research and development expense, which includes all expenses relating to the technology and
advanced engineering groups, primarily consists of costs associated with the Company’s development or acquisition of new product applications and coating formulations and the cost of enhancing the Company’s manufacturing processes. The
Company is currently engaged in research to enhance its ability to disperse its materials in a variety of organic and inorganic media for use as coatings and polishing materials. A recent technical success was related to the Company’s ability
to engineer some of its nanomaterials to remain relatively uniformly dispersed in liquid systems over extended periods of time. The Company’s recent announcement regarding its new CMP partner came about as a direct result of this successful
research and subsequent application development. The Company also has an ongoing advanced engineering effort that is primarily focused on the development of new nanomaterials as well as the refinement of existing nanomaterials. Research and
development expense decreased to $292,237 for the three months ended September 30, 2002, compared to $340,035 for the same period in 2001. Research and development expense increased to $1,295,962 for the nine months ended September 30, 2002,
compared to $1,140,224 for the same period in 2001. The increase in research and development expense was primarily due to no salary expenses being capitalized for construction projects during the first six months of 2002, compared to approximately
$330,000 of specific salaries being capitalized in the first nine months of 2001, increased depreciation on assets completed and placed in service during the nine months ended September 30, 2002, and increased spending on engineering equipment,
partially offset by a reduction in outside testing expenses. Beginning in the third quarter of 2002, the Company is currently capitalizing salary expenses on new construction projects.
Selling, general and administrative expense increased to $896,903 and $2,988,221 for the three- and nine-month periods, respectively, ended September 30, 2002, compared to
$738,015 and $2,964,963 for the same periods in 2001. The net increase was primarily attributed to salary expenses relating to the hiring of a company executive and legal costs. These increases were partially offset by reductions in telephone, bad
debt expense, partially a result of the reversal of revenue as discussed above, for a portion of which an allowance had previously been recorded, investor relations, consultants, and travel expenditures.
Interest income decreased to $51,959 and $113,136 for the three- and nine-month periods, respectively, ended September 30, 2002, compared
to $112,870 and $529,486 for the same periods in 2001. This decrease was primarily due to a reduction in funds available for investment and, to a lesser extent, reduced investment yields.
Nanophase has been consistently expanding both its marketing and business development efforts and our production efficiency in order to address the issues of our dependence
upon a limited amount of customers, enhancement of gross profit and operating cash flows, and the achievement of profitability. We currently have customers that may grow to the point where they generate significant revenues and
11
margins as relationships expand. Our largest customer currently accounts for the majority of revenues. We view this customer as a single “leg” of the business and plan on adding more
customers of similar magnitude in the forseeable future. Given the unique nature of our products, and the fact that markets for them are not yet fully developed, it is difficult to accurately predict when additional large customers will materialize.
Our business is currently operating at a positive gross profit and we expect to remain at a positive annual gross profit level for the foreseeable future. We also expect additional volume of revenue to have a positive impact on gross profit as we
continue to make gains in operating efficiencies. The extent of the growth in revenue volume, and the related gross profit that this revenue generates, will be the main drivers in generating positive operating cash flows and, ultimately, net income.
In this paragraph, the term “gross profit” is intended to be equivalent to the term “gross margin.” Both of these terms refer to the amount that, assuming positive gross profit, total revenue exceeds total cost of revenue.
Liquidity and Capital Resources
The Company’s cash, cash equivalents and investments amounted to $9,369,221 at September 30, 2002, compared to $7,425,535 at December 31, 2001. The net cash used in the Company’s operating
activities was $2,340,943 for the nine months ended September 30, 2002, compared to $3,853,748 for the same period in 2001. Net cash used in investing activities, which is due to maturities of securities offset somewhat by capital expenditures
and purchases of securities, amounted to $3,956,041 for the nine months ended September 30, 2002 compared to $3,110,516 of net cash provided by investing activities for the same period in 2001. Capital expenditures, primarily related to the build
out of the Company’s new pilot manufacturing and powder blending facilities within its Romeoville, Illinois facility and further expansion of the Company’s existing manufacturing facility in Burr Ridge, Illinois and the purchase of related
operating equipment, amounted to $1,234,889, including $177,486 in non-cash items incurred for accounts payable relating to capital expenditures and $65,007 in capital lease obligations incurred for use of equipment, for the nine months ended
September 30, 2002, compared to $5,442,595 for the same period in 2001. Net cash provided by financing activities, is primarily due to the Company securing financing through a private placement in 2002 only, and to a lesser extent by the issuance of
shares of common stock pursuant to the exercise of options in 2001 only, partially offset by principal payments on debt and capital lease obligations and accounts payable incurred for the purchase of equipment and leasehold improvements, amounting
to $6,110,849 for the nine-month period ended September 30, 2002, compared to $921,972 for the same period in 2001.
On May 29, 2002, the Company secured equity funding through a private placement offering. The Company issued 1.37 million shares of additional common stock at $5.00 per share and received gross proceeds of $6.85 million. Net proceeds
were approximately $6.2 million after commissions, legal, accounting, and other costs. The Company intends to use the proceeds to fund expected growth in new markets as well as to provide for expanded working capital needs expected to arise as sales
volume grows. Management expects that the proceeds received from the private placement offering should be sufficient to enable the Company to avoid a “triggering event” for at least the next twelve months relating to the customer supply
agreement, as more fully described in Note 6 of the Company’s financial statements.
The Company believes
that cash from operations and cash on hand, together with the remaining net proceeds from the Company’s initial public offering of Common Stock (“the Offering”), and with its most recent funding received through a private placement
offering, and interest income thereon, will be adequate to fund the Company’s operating plans for the next twelve months. The Company’s actual future capital requirements will depend, however, on many factors, including customer acceptance
of the Company’s current and potential nanocrystalline materials and product applications, continued progress in the Company’s research and development activities and product testing programs, the magnitude of
12
these activities and programs, and the costs necessary to increase and expand the Company’s manufacturing capabilities and to market and sell the Company’s materials and product
applications. Other important issues that will drive future capital requirements will be the development of new markets and new customers as well as the potential for significant unplanned growth with the Company’s existing customers.
The Company expects capital spending for the remainder of the year to be approximately $600,000 which includes
capitalized labor.
At September 30, 2002, the Company had a net operating loss carryforward of approximately
$43.5 million for income tax purposes. Because the Company may have experienced “ownership changes” within the meaning of the U.S. Internal Revenue Code in connection with its 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 expires at various dates between 2005 and 2021. As a result of the annual limitation, a portion of this carryforward may
expire before ultimately becoming available to reduce income tax liabilities. At September 30, 2002, the Company also had a foreign tax credit carryforward of $216,000, which could be used as an offsetting tax credit to reduce U.S. income taxes. The
foreign tax credit will expire at various dates between 2017 and 2022 if not utilized before that date.
Should
events arise that make it appropriate for the Company to seek additional financing, it should be noted that additional financing may not be available on acceptable terms or at all, and any such additional financing could be dilutive to the
Company’s stockholders. Such a financing could be necessitated by such things as; the loss of existing customers; currently unknown capital requirements which may be needed to retain existing business or remain competitive in the seeking of new
business; new regulatory requirements that are outside the Company’s control; or various other circumstances coming to pass that are currently not anticipated by the Company.
Legal Proceedings
See Note 7 to the Financial Statements
for additional information.
Safe Harbor Provision
Nanophase Technologies Corporation wants to provide investors with more meaningful and useful information. As a result, this Quarterly Report on Form 10-Q (the “Form
10Q”) contains and incorporates by reference certain “forward-looking statements”, as defined in Section 21E of the Securities Exchange Act of 1934, as amended. Statements contained in this Quarterly Report on Form 10-Q that are not
historical facts are forward-looking statements that are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect the Company’s current expectations regarding its future
results of operations, performance, and achievements and are based on information currently available to the Company. The Company has tried, wherever possible, to identify these forward-looking statements by using words such as “intends,”
“believes,” “estimates,” “expects,” “plans,” 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 factors which could cause the Company’s actual results, performance, and
13
achievements in 2002 and beyond to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties, and factors include, without limitation: uncertain demand
for, and acceptance of, the Company’s nanocrystalline materials; the Company’s dependence on a limited number of key customers; the Company’s limited manufacturing capacity and experience; the Company’s limited marketing
experience; changes in development and distribution relationships; the impact of competitive products and technologies; the Company’s dependence on patents and protection of proprietary information; the resolution of litigation the Company is
involved in; and other risks set forth in the Company’s previous filings with the Securities and Exchange Commission. Readers of this Quarterly Report on Form 10-Q should not place undue reliance on any forward-looking statements. Except as
required by federal securities laws, the Company undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
The Company does not have any
material market risk sensitive instruments.
Item 4.
Controls and Procedures
Within 90 days prior to the filing date of this report, the
Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Acting Chief Financial Officer, of the effectiveness of the Company’s
disclosure controls and procedures pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Company’s Chief Executive Officer and Acting Chief Financial Officer concluded that the
Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company’s periodic filings with the Securities and Exchange Commission. There have been no
significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to the date of the evaluation referred to above.
PART II – OTHER INFORMATION
Item 1.
Legal Proceedings
See Note 7 to the Financial Statements for additional
information.
Item 2.
Changes in Securities and Use of Proceeds
On November 26, 1997 (the “Effective
Date”), the Company’s Registration Statement on Form S-1 (File No. 333-36937) relating to the Offering was declared effective by the Securities and Exchange Commission. On May 29, 2002, the Company issued 1,370,000 shares of common stock
in a private placement offering, taken collectively with the Company’s November 26, 1997 Offering as “the Offerings.” Since the Effective Date, of its $35,033,231 of net proceeds from the Offerings, the Company has used approximately
$10,204,000 for capital expenditures primarily related to the further expansion of the Company’s existing manufacturing facility and the purchase of operating equipment and approximately $15,460,000 for working capital and other general
corporate purposes. The remainder of the net proceeds has been invested by the Company, pending its use, in short-term, investment grade, interest-bearing obligations.
14
On May 29, 2002, the Company sold, in a private placement, 1.37 million shares of
common stock at $5.00 per share and received gross proceeds of $6.85 million. Net proceeds were approximately $6.2 million after commissions, legal, accounting, and other costs. The Company intends to use the proceeds to fund expected growth in new
markets as well as to provide for expanded working capital needs expected to arise as sales volume grows.
Item
6.
Exhibits and Reports on Form 8-K
None.
The Company did not file any Current Reports on Form 8-K during the third quarter of 2002.
15
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.
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NANOPHASE TECHNOLOGIES CORPORATION |
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| Date: November 13, 2002 |
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By: |
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/s/ JOSEPH E. CROSS
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Joseph E. Cross President, Chief Executive Officer (principalexecutive officer) and a Director |
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| Date: November 13, 2002 |
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By: |
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/s/ JESS A. JANKOWSKI
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Jess A. Jankowski Acting Chief Financial Officer, Vice President— Corporate Controller, Secretary, and Treasurer
(principal financial and accounting officer) |
Certification of the Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
I, Joseph Cross, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nanophase Technologies Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly
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 quarterly report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others within those entities, particularly during the period in which
this quarterly report is being prepared;
(b) evaluated the effectiveness
of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
16
5. The registrant’s other certifying officers and I
have disclosed, based on our most recent evaluation, 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 in the design or operation of internal controls which could
adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal controls; and
6. The registrant’s
other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
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| /s/ JOSEPH E. CROSS
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| Joseph E. Cross Chief Executive Officer |
Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with this quarterly report on Form 10-Q (the “Report”) of Nanophase Technologies Corporation (the “Company”), I, Joseph Cross, Chief Executive Officer of the Company, certify, pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
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 13, 2002
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| /s/ JOSEPH E. CROSS
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| Joseph E. Cross Chief Executive Officer |
Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Jess Jankowski, certify that:
1. I have reviewed this quarterly report
on Form 10-Q of Nanophase Technologies Corporation;
2. Based on my knowledge, this
quarterly 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 quarterly report;
3. Based on my knowledge, the financial
statements, and other financial information included in this quarterly 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
quarterly report;
4. The registrant’s other certifying officers and I
are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to
us by others within those entities, particularly during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation
Date”); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, 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 in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not
material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
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| /s/ JESS A. JANKOWSKI
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| Jess A. Jankowski Acting Chief Financial Officer |
Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with this quarterly report on Form 10-Q (the “Report”) of Nanophase Technologies Corporation (the “Company”), I, Jess Jankowski, Acting Chief Financial Officer of the Company, certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
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 13, 2002
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| /s/ JESS A. JANKOWSKI
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| Jess A. Jankowski Acting Chief Financial Officer |