SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2001
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
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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 9, 2001, there were outstanding 13,625,329 shares of Common
Stock, par value $.01, of the registrant.
NANOPHASE TECHNOLOGIES CORPORATION
QUARTER ENDED MARCH 31, 2001
INDEX
Page
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PART I - FINANCIAL INFORMATION.................................................................... 3
Item 1. Financial Statements.................................................................... 3
Balance Sheets as of March 31, 2001 (unaudited) and December 31, 2000................... 3
Statements of Operations (unaudited) for the three months ended March 31, 2001
and 2000............................................................................... 4
Statements of Cash Flows (unaudited) for the three months ended March 31, 2001
and 2000............................................................................... 5
Notes to Financial Statements (unaudited)............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 10
PART II - OTHER INFORMATION....................................................................... 11
Item 1. Legal Proceedings....................................................................... 11
Item 2. Changes in Securities and Use of Proceeds............................................... 11
Item 6 Exhibits and Reports on Form 8-K........................................................ 11
SIGNATURES........................................................................................ 12
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NANOPHASE TECHNOLOGIES CORPORATION
BALANCE SHEETS
March 31, December 31,
ASSETS 2001 2000
---------------- -----------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 523,056 $ 473,036
Investments 14,355,522 16,831,721
Trade accounts receivable, less allowance for doubtful accounts
of $81,450 at March 31, 2001 and December 31, 2000 1,276,467 1,238,334
Other receivable, net 174,080 144,818
Inventories, net 1,409,927 892,674
Prepaid expenses and other current assets 724,973 770,200
---------------- -----------------
Total current assets 18,464,025 20,350,783
Equipment and leasehold improvements, net 4,038,739 3,266,245
Other assets, net 227,106 213,135
---------------- -----------------
$ 22,729,870 $ 23,830,163
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 291,444 $ 285,316
Accounts payable 932,233 824,338
Accrued expenses 819,837 884,780
---------------- -----------------
Total current liabilities 2,043,514 1,994,434
Long-term debt 752,784 827,984
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; 13,621,549
and 13,593,914 shares issued and outstanding at March 31, 2001 and
December 31, 2000, respectively 136,215 135,939
Additional paid-in capital 49,930,585 49,885,751
Accumulated deficit (30,133,228) (29,013,945)
---------------- -----------------
Total stockholders' equity 19,933,572 21,007,745
---------------- -----------------
$ 22,729,870 $ 23,830,163
================ =================
See Notes to Financial Statements.
3
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
-----------------------------
March 31,
2001 2000
------------ ------------
Revenue:
Product revenue $ 980,174 $ 487,171
Other revenue 91,750 131,750
------------ ------------
Total revenue 1,071,924 618,921
Operating expense:
Cost of revenue 850,373 818,753
Research and development expense 437,670 589,662
Selling, general and administrative expense 1,135,953 928,290
------------ ------------
Total operating expense 2,423,996 2,336,705
------------ ------------
Loss from operations (1,352,072) (1,717,784)
Interest income 232,789 283,225
------------ ------------
Loss before provision for income taxes (1,119,283) (1,434,559)
Provision for income taxes - -
------------ ------------
Net loss $ (1,119,283) $ (1,434,559)
============ ============
Net loss per share - basic and diluted $ (0.08) $ (0.11)
============ ============
Weighted average number of common
shares outstanding 13,613,190 13,008,964
============ ============
See Notes to Financial Statements.
4
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
March 31,
2001 2000
-------------- --------------
Operating Activities:
Net loss $ (1,119,283) $ (1,434,559)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 180,642 179,754
Allowance for excess inventory quantities (1,612) (48,243)
Provision for asset write-down 14,086 -
Changes in assets and liabilities
related to operations:
Trade accounts receivable (38,133) (310,623)
Other receivable (29,262) (241,170)
Inventories (515,641) (172,013)
Prepaid expenses and other assets 29,838 (17,877)
Accounts payable 107,895 36,654
Accrued liabilities (64,943) 53,101
-------------- --------------
Net cash used in operating activities (1,436,413) (1,954,976)
Investing Activities:
Acquisition of equipment and
leasehold improvements (965,804) (53,972)
Purchases of held-to-maturity
investments (23,351,733) (35,378,736)
Maturities of held-to-maturity
investments 25,827,932 36,600,277
-------------- --------------
Net cash provided by investing activities 1,510,395 1,167,569
Financing Activities:
Principal payment on debt obligation (69,072) -
Proceeds from sale of common stock 45,110 972,482
-------------- --------------
Net cash (used in) provided by financing
activities (23,962) 972,482
-------------- --------------
Increase in cash and cash
equivalents 50,020 185,075
Cash and cash equivalents at
beginning of period 473,036 624,509
-------------- --------------
Cash and cash equivalents at end
of period $ 523,056 $ 809,584
============== ==============
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, 2001 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2001.
These financial statements should be read in conjunction with the Company's
audited financial statements and notes thereto for the year ended December 31,
2000, included in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000, 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 $506,000 and $137,400 for
the three months ended March 31, 2001 and 2000, 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. 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, 2001 December 31, 2000
-------------- -----------------
Raw materials.................................................. $ 282,753 $ 328,786
Finished goods................................................. 1,217,149 655,475
-------------- -----------------
1,499,902 984,261
Allowance for excess inventory quantities...................... (89,975) (91,587)
-------------- -----------------
$ 1,409,927 $ 892,674
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6
(5) Stock Options and Warrants
During the three months ended March 31, 2001, 27,635 shares of Common Stock
were issued pursuant to option exercises, compared to 312,656 shares of Common
Stock in the same period in 2000. In the same three-month period in 2000,
372,579 shares of Common Stock were issued pursuant to warrant exercises.
(6) 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. The consolidated complaint alleged 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 unquantified damages, pre- and
post-judgment interest, attorneys' and expert witness fees. In October 1999,
the Court granted in part and denied in part defendants' motions to dismiss the
consolidated complaint. In its ruling, the Court in part found 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 is not an admission of liability by any party. Because the settlement
has been funded by the Company's directors and officers liability insurance, the
settlement payment has not had a material adverse effect on the Company's
financial condition or results of operations. The Court ordered final approval
of the settlement and dismissed the consolidated complaint with prejudice as to
all defendants on March 27, 2001.
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 are 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 alleges 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 seeks
unquantified damages, pre- and post-judgment interest, attorneys' and expert
witness fees. In March 1999, the preferred stockholders' complaint was
reassigned to the judge hearing the consolidated complaint described above. All
defendants subsequently filed a joint motion to dismiss the preferred
stockholders' complaint. In August 2000, the Court denied that motion, finding
that the preferred stockholders' allegations were pleaded sufficiently to permit
their claims to proceed. Each defendant's respective answer to the preferred
stockholders' complaint was filed in September 2000. Discovery currently is
pending.
Pursuant to the underwriting agreement for the Offering, the Company has
agreed to pay the underwriters' attorneys' fees in all the above-described
litigation. The Company and the defendant directors and officers each have
retained counsel and intend to defend vigorously against the preferred
stockholders' complaint. Although the Company believes that the allegations of
that 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.
7
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, 2001, 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 $30,133,228 from inception through March 31, 2001.
Results of Operations
Revenue is recorded from products when title transfers, other revenue is
recorded when specific milestones are met regarding development arrangements or
when the Company licenses its technology and transfers proprietary information.
Total revenue increased to $1,071,924 for the three months ended March 31, 2001,
compared to $618,921 for the same period in 2000. The increase in total revenue
was primarily attributed to an increase in product revenue. Product revenue
increased to $980,174 for the three months ended March 31, 2001, compared to
$487,171 for the same period in 2000. Other revenue decreased to $91,750 for the
three-month period ended March 31, 2001, compared to $131,750 for the same
period in 2000. The majority of the revenue generated during the three months
ended March 31, 2001 was from customers in the healthcare and catalyst markets.
Cost of revenue generally includes costs associated with commercial
production, customer development arrangements, the transfer of technology, and
licensing fees. Cost of revenue increased to $850,373 for the three months ended
March 31, 2001, compared to $818,753 for the same period in 2000. The increase
in cost of revenue was generally attributed to increased product sales, somewhat
offset by a favorable product mix and efficiencies in the manufacture of the
Company's products. Cost of revenue as a percentage of total revenue decreased
for the three months ended March 31, 2001, compared to the same period in 2000,
due primarily to the increase in total revenue and enhanced by a favorable
product mix and efficiencies in the manufacture of the Company's products.
Research and development expense 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 decreased to $437,670 for the three
months ended March 31, 2001, compared to $589,662 for the same period in 2000.
The decrease in research and development expense was largely attributed to more
research personnel being hired in this period in 2000, to whom the Company paid
negotiated bonuses and recruiting and relocation costs, than for the same period
in 2001. The Company expects to increase its research and development expense
for the remainder of 2001 in connection with its plans to continue to enhance
and expand its product lines, technologies and manufacturing processes.
Selling, general and administrative expense increased to $1,135,953 for the
three-month period ended March 31, 2001, compared to $928,290 for the same
period in 2000. The net increase was primarily attributed to rent and associated
expenses relating to the Company's new facility, insurance, and increased
printing costs. These increases were somewhat offset by reductions in legal
expenses and expenditures for marketing and promotional materials.
8
Interest income decreased to $232,789 for the three-month period ended
March 31, 2001, compared to $283,225 for the same period in 2000. This decrease
was primarily due to a reduction in funds available for investment, somewhat
offset by an increase in investment yields.
Liquidity and Capital Resources
The Company's cash, cash equivalents and investments amounted to
$14,878,578 at March 31, 2001, compared to $17,304,757 at December 31, 2000. The
net cash used in the Company's operating activities was $1,436,413 for the three
months ended March 31, 2001, compared to $1,954,976 for the same period in 2000.
The net cash used in operating activities for the three-month period ended March
31, 2001 was primarily for the further development of product applications, the
funding of research and development activities and sales efforts, and the
funding of inventory levels, partially offset by an increase in accounts
payable. Net cash provided by investing activities through maturities of
securities previously purchased, offset by capital expenditures and purchases of
securities in which cash is invested pending its use for operating activities
and expansion of the Company's manufacturing facilities, amounted to $1,510,395
for the three months ended March 31, 2001, compared to $1,167,569 of net cash
provided by investing activities for the same period in 2000. Capital
expenditures, primarily related to the expansion of the Company's existing
manufacturing facilities and the purchase of operating equipment, amounted to
$965,804 for the three months ended March 31, 2001, compared to $53,972 for the
same period in 2000. Net cash used in financing activities, which related to
principal payments on a debt obligation, somewhat offset by the issuance of
shares of Common Stock pursuant to the exercise of options, amounted to $23,962
for the three-month period ended March 31, 2001, compared to net cash provided
by financing activities of $972,482 for the same period in 2000.
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 interest income thereon, will be adequate to
fund the Company's current operating plans. 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 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. Depending on future requirements, the
Company may seek additional funding through public or private financing,
collaborative relationships, government contracts or additional licensing
agreements. 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, 2001, the Company had a net operating loss carryforward of
approximately $33.2 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 2015. 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, 2001, the Company also had a foreign
tax credit carryforward of $156,000, which could be used as an offsetting tax
credit to reduce U.S. income taxes. The foreign tax credit will expire in 2013
if not utilized before that date.
Legal Proceedings
See Note 6 to the Financial Statements for additional information.
9
Safe Harbor Provision
Because the Company wants to provide investors with more meaningful and
useful information, the Quarterly Report on Form 10-Q contains certain "forward-
looking statements" (as such term is 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 are subject to certain risks,
uncertainties, and factors which could cause the Company's actual results,
performance, and achievements in 2001 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. 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 is exposed to interest rate risk on its investment portfolio. A
1% fluctuation in interest rate would result in a change in the portfolio
earnings of approximately $140,000 per year.
10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 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 $3,765,000
for capital expenditures primarily related to the further expansion of the
Company's existing manufacturing facility and the purchase of operating
equipment and $10,194,000 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 2001.
11
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, 2001 By: /s/ JOSEPH E. CROSS
--------------------------------
Joseph E. Cross
President, Chief Executive Officer
(principal executive officer) and a
Director
Date: May 14, 2001 By: /s/ JESS JANKOWSKI
-------------------------------
Jess Jankowski
Acting Chief Financial Officer, Corporate
Controller, Treasurer and Secretary
(principal financial and chief accounting
officer)
12