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: March 31, 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 May 13, 2002, there were outstanding 13,735,912 shares of Common
Stock, par value $.01, of the registrant.
NANOPHASE TECHNOLOGIES CORPORATION
QUARTER ENDED MARCH 31, 2002
INDEX
Page
----
PART I - FINANCIAL INFORMATION ................................................ 3
Item 1. Financial Statements .............................................. 3
Unaudited Balance Sheets as of March 31, 2002 and December 31,
2001 .............................................................. 3
Unaudited Statements of Operations for the three months ended
March 31, 2002 and 2001 ........................................... 4
Unaudited Statements of Cash Flows for the three months ended
March 31, 2002 and 2001 ........................................... 5
Notes to unaudited Financial Statements ........................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 12
PART II - OTHER INFORMATION ................................................... 13
Item 1. Legal Proceedings ................................................. 13
Item 2. Changes in Securities and Use of Proceeds ......................... 13
Item 6. Exhibits and Reports on Form 8-K .................................. 13
SIGNATURES .................................................................... 14
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NANOPHASE TECHNOLOGIES CORPORATION
BALANCE SHEETS
(Unaudited)
March 31, December 31,
ASSETS 2002 2001
------------ ------------
Current assets:
Cash and cash equivalents $ 287,964 $ 582,579
Investments 5,185,304 6,842,956
Trade accounts receivable, less
allowance for doubtful accounts
of $25,000 at March 31, 2002 and
December 31, 2001 1,144,315 1,112,952
Other receivable, net 70,737 67,449
Inventories, net 802,103 956,268
Prepaid expenses and other current assets 381,452 381,696
------------ ------------
Total current assets 7,871,875 9,943,900
Equipment and leasehold improvements, net 8,971,733 8,914,745
Other assets, net 347,175 325,743
------------ ------------
$ 17,190,783 $ 19,184,388
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 637,503 $ 714,135
Current portion of capital lease obligations 48,652 48,352
Accounts payable 646,913 1,233,466
Accrued expenses 852,046 732,427
------------ ------------
Total current liabilities 2,185,114 2,728,380
------------ ------------
Long-term debt, less current maturities 708,159 758,490
Long-term portion of capital lease obligations,
less current maturities 50,814 53,900
------------ ------------
758,973 812,390
------------ ------------
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; 13,726,356 and 13,705,931
shares issued and outstanding at March 31,
2002 and December 31, 2001, respectively 137,264 137,059
Additional paid-in capital 50,358,315 50,260,747
Accumulated deficit (36,248,883) (34,754,188)
------------ ------------
Total stockholders' equity 14,246,696 15,643,618
------------ ------------
$ 17,190,783 $ 19,184,388
============ ============
See Notes to Financial Statements
3
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
March 31,
2002 2001
------------ ------------
Revenue:
Product revenue $ 1,313,577 $ 980,174
Other revenue 94,106 91,750
------------ ------------
Total revenue 1,407,683 1,071,924
------------ ------------
Operating expense:
Cost of revenue 1,295,024 850,373
Research and development expense 523,685 437,670
Selling, general and administrative expense 1,085,215 1,135,953
------------ ------------
Total operating expense 2,903,924 2,423,996
------------ ------------
Loss from operations (1,496,241) (1,352,072)
Interest income 28,136 251,180
Interest expense (27,490) (9,391)
Other, net 900 (9,000)
------------ ------------
Loss before provision for income taxes (1,494,695) (1,119,283)
Provision for income taxes -- --
------------ ------------
Net loss $ (1,494,695) $ (1,119,283)
============ ============
Net loss per share - basic and diluted $ (0.11) $ (0.08)
============ ============
Weighted average number of common
shares outstanding 13,725,801 13,613,190
============ ============
See Notes to Financial Statements.
4
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
March 31,
2002 2001
------------- -------------
Operating activities:
Net loss $ (1,494,695) $ (1,119,283)
Adjustments to reconcile net loss to
net cash (used in) operating activities:
Depreciation and amortization 266,315 180,642
Allowance for excess inventory quantities 41,072 (1,612)
Provision for asset write-down -- 14,086
Changes in assets and liabilities related to operations:
Trade accounts receivable (31,363) (38,133)
Other receivable (3,288) (29,262)
Inventories 113,093 (515,641)
Prepaid expenses and other assets (25,405) 29,838
Accounts payable 101,013 107,895
Accrued liabilities 119,619 (64,943)
------------ ------------
Net cash (used in) operating activities (913,639) (1,436,413)
------------ ------------
Investing activities:
Acquisition of equipment and leasehold improvements (172,828) (965,804)
Purchases of held-to-maturity investments (28,551,400) (23,351,733)
Maturities of held-to-maturity investments 30,209,052 25,827,932
------------ ------------
Net cash provided by investing activities 1,484,824 1,510,395
------------ ------------
Financing activities:
Principal payment on debt obligation, including capital leases (129,749) (69,072)
Proceeds from sale of common stock 97,773 45,110
Payment of accounts payable incurred for the purchase
of equipment and leasehold improvements (833,824) --
------------ ------------
Net cash (used in) financing activities (865,800) (23,962)
------------ ------------
(Decrease) increase in cash and cash equivalents (294,615) 50,020
Cash and cash equivalents at beginning of period 582,579 473,036
------------ ------------
Cash and cash equivalents at end of period $ 287,964 $ 523,056
============ ============
Supplemental cash flow information:
Interest paid $ 27,490 $ 9,391
============ ============
Supplemental non-cash investing activities:
Accounts payable incurred for the purchase of
equipment and leasehold improvements $ 146,258 $ --
============ ============
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
months ended March 31, 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 $172,000 and $506,000 for
the three months ended March 31, 2002 and 2001, respectively.
(3) Investments
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
costs 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.
(4) Inventories
Inventories consist of the following:
March 31, 2002 December 31, 2001
-------------- -----------------
Raw materials ................................ $ 437,139 $ 429,393
Finished goods ............................... 1,037,039 1,157,877
----------- -----------
1,474,178 1,587,270
Allowance for excess inventory quantities .... (672,075) (631,002)
----------- -----------
$ 802,103 $ 956,268
=========== ===========
6
(5) Stock Options and Warrants
During the three months ended March 31, 2002, 20,425 shares of Common Stock
were issued pursuant to option exercises, compared to 27,635 shares of Common
Stock in the same period in 2001. In the same three-month period in 2002 and
2001 no warrants were converted.
(6) Significant Customers and Contingencies
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 the supply agreement with the Company's
customer, 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, upon incurring a triggering event,
the equipment would be sold to the customer at 115% of the equipment's
depreciated cost. The Company believes that it has complied with all contractual
requirements and that it has not had a "triggering event".
7
(7) Contingent Liabilities
Five separate complaints were filed in the United States District Court for
the Northern District of Illinois, each alleging that the Company, certain of
its officers and directors, and the underwriters of the Company's initial public
offering of Common Stock (the "Offering") were liable under the federal
Securities Act of 1933 for making supposedly negligent or reckless material
misstatements or omissions of fact in the Registration Statement and Prospectus
relating to the Offering. A consolidated complaint was filed in those cases in
October 1998, alleging that the action should be maintained as (i) a plaintiff
class action on behalf of certain persons who purchased the Common Stock from
November 26, 1997 through January 8, 1998, and (ii) a defendant class action
against the underwriters who participated in the Offering. The consolidated
complaint sought relief including unquantified damages, interest, and attorneys'
fees. In October 1999, the Court granted in part and denied in part defendants'
motions to dismiss the consolidated complaint, finding in part that plaintiffs
who did not purchase their Common Stock during the Offering could not sue under
Section 12(a)(2) of the Securities Act of 1933. Each defendant's respective
answer to the remaining claims in the consolidated complaint was filed
in November 1999. Following certain discovery, the Company agreed to settle all
claims against all defendants in the consolidated complaint for $4,025,000. The
settlement did not admit liability by any party. 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 condition or results of operations. In March 2001, the Court ordered
final approval of the settlement and dismissed the consolidated complaint with
prejudice as to all defendants. The above-described settlement did not resolve
a separate complaint filed in the Northern District of Illinois in November
1998, alleging that the Company, certain of its officers and directors, and the
underwriters of the Company's Offering were liable under the federal Securities
Exchange Act of 1934 for making supposedly fraudulent material misstatements and
omissions of fact in connection with the solicitation of consents to proceed
with the Offering from certain of the Company's preferred stockholders. The
complaint 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
Offering. The complaint sought relief including unquantified damages, interest,
and attorneys' fees. Each defendant's respective answer to the preferred
stockholders' complaint was filed in September 2000.
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. 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. On January 10, 2002, the
Court ordered final approval of the settlement and dismissed the preferred
stockholders' complaint with prejudice as to all defendants.
In November 2001, a separate complaint was filed in the United States
District Court for the Northern District of Illinois, alleging that the Company
and one of its officers are liable under the federal Securities Exchange Act of
1934. The complaint asserts that defendants made supposedly fraudulent material
misstatements of fact and omitted to state material facts necessary to make
other statements of fact not misleading in connection with the Company's public
disclosures, including certain press releases, concerning the Company's dealings
with a certain British customer. The complaint alleges 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 seeks relief
8
including unquantified compensatory damages, and attorneys' and expert witness'
fees. Defendants filed a motion to dismiss the complaint in December 2001.
Rather than respond to that motion, plaintiff filed an amended complaint on
March 8, 2002. The amended complaint alleges that the Company and four of its
officers 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 dealings with the British customer and
revenue reported under a purchase order with that customer. The amended
complaint alleges the same putative class, and seeks the same relief, as in
plaintiff's initial complaint. Defendants filed a motion to dismiss the amended
complaint on April 12, 2002. Although the Company believes that the allegations
of the amended complaint are without merit, it is not feasible for the Company
to predict at this time the outcome of this litigation or whether its resolution
could have a material adverse effect on the Company's results of operations or
financial condition.
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 March
31, 2002, the Company has been primarily capitalized through the private
offering of approximately $19,558,000 of equity securities and its initial
public offering of $28,838,000 of the Company's common stock (the "Common
Stock"), each net of issuance costs. The Company has incurred cumulative losses
of $36,248,883 from inception through March 31, 2002.
Results of Operations
Total revenue increased to $1,407,683 for the three months ended March 31,
2002, compared to $1,071,924 for the same period in 2001. The increase in total
revenue was primarily attributed to an increase in product revenue. Product
revenue increased to $1,313,577 for the three months ended March 31, 2002,
compared to $980,174 for the same period in 2001. Other revenue increased to
$94,106 for the three-month period ended March 31, 2002, compared to $91,750 for
the same period in 2001. The majority of the revenue generated during the three
months ended March 31, 2002 was from customers in the healthcare, catalyst and
wear-resistant materials markets.
Cost of revenue generally includes costs associated with commercial
production and customer development arrangements . Cost of revenue increased to
$1,295,024 for the three months ended March 31, 2002, compared to $850,373 for
the same period in 2001. The increase in cost of revenue was generally
attributed to the completion, and placement in service at the beginning of the
year of the Company's build out of its manufacturing and powder coating
facilities, resulting in an increase in depreciation expense and increased
product sales, somewhat offset by efficiencies in the manufacture of the
Company's products. Cost of revenue as a percentage of total revenue increased
from 75% for the three months ended March 31, 2001 to 92% for the three months
ended March 31, 2002, compared to the same period in 2001, due primarily to a
less favorable product mix in the current quarter and the effects of the
previously discussed completion, and additional depreciation expense recorded by
the placement in service of much of the Company's build out of its manufacturing
and powder coating facilities.
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. Research and development expense increased to $523,685
for the three months ended March 31, 2002, compared to $437,670 for the same
period in 2001. The increase in research and development expense was primarily
attributed to increased salary expense, depreciation on assets completed and
placed in service in January of 2002, and materials and supplies cost.
Selling, general and administrative expense decreased to $1,085,215 for the
three-month period ended March 31, 2002, compared to $1,135,953 for the same
period in 2001. The net decrease was primarily attributed to reduced costs of
travel, telephone, consultants, and investor relations costs. These decreases
were somewhat offset by increases in salaries and legal expenses.
10
Interest income decreased to $28,136 for the three-month period ended March
31, 2002, compared to $251,180 for the same period in 2001. This decrease was
primarily due to a reduction in funds available for investment and, to a lesser
extent, reduced investment yields.
Liquidity and Capital Resources
The Company's cash, cash equivalents and investments amounted to $5,473,268
at March 31, 2002, compared to $7,425,535 at December 31, 2001. The net cash
used in the Company's operating activities was $913,639 for the three months
ended March 31, 2002, compared to $1,436,413 for the same period in 2001. Net
cash provided by investing activities, which is due to maturities of securities
offset somewhat by capital expenditures and purchases of securities, amounted to
$1,484,824 and $1,510,395 for the three months ended March 31, 2002 and 2001,
respectively. Capital expenditures, primarily related to the continued build out
of the Company's pilot plant manufacturing facility within its Romeoville,
Illinois facility and further expansion of the Company's existing manufacturing
facilities and the purchase of related operating equipment, amounted to $172,828
and $965,804 for the three months ended March 31, 2002 and 2001, respectively.
Net cash used in financing activities, which related to principal payments on
debt and capital lease obligations and accounts payable incurred for the
purchase of equipment and leasehold improvements, somewhat offset by the
issuance of shares of Common Stock pursuant to the exercise of options, amounted
to $865,800 for the three-month period ended March 31, 2002, compared to $23,962
for the same period in 2001.
The Company's actual future capital requirements will depend 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 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.
Additionally, the Company's capital requirements could be affected by a
supply agreement with its largest customer that contains, among other things,
certain financial condition covenants, that if violated could "trigger" this
customer's ability to require the Company to license certain technology to this
customer and/or sell certain equipment to this customer, as more fully described
in Note 6 of the Company's financial statements. The Company believes that no
"triggering event" has occurred. However, if a triggering event does occur, and
the customer elects to force a technology license or sale of equipment, this
would significantly change the financial outlook for the Company.
The Company intends to secure additional future funding through public or
private financing, collaborative relationships, government contracts or
additional licensing agreements. The Company intends to raise capital 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
this capital should be sufficient to enable the Company to avoid a "triggering
event" relating to the customer supply agreement discussed in the preceding
paragraph. 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.
At March 31, 2002, the Company had a net operating loss carryforward of
approximately $41.3 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
11
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 March 31, 2002, the Company also had a foreign tax
credit carryforward of $186,000, 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 2021 if not utilized before that date.
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 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. 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 contingencies that
could cause the Company's actual results, performance, and 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.
12
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 Company's initial
public offering of common stock (the "Offering") was declared effective by the
Securities and Exchange Commission. Since the Effective Date, of its $28,837,936
of net proceeds from the Offering, the Company has used approximately $9,557,000
for capital expenditures primarily related to the further expansion of the
Company's existing manufacturing facility and the purchase of operating
equipment and $13,808,000 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.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits.
None.
B. Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K
during the first quarter of 2002.
13
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: May 14, 2002 By: /s/ JOSEPH E. CROSS
------------------------------------
Joseph E. Cross
President, Chief Executive Officer
(principal executive officer)
and a Director
Date: May 14, 2002 By: /s/ JESS JANKOWSKI
------------------------------------
Jess Jankowski
Acting Chief Financial Officer, Vice
President, Corporate Controller,
Treasurer and Secretary (principal
financial and chief accounting
officer)
14