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, 2004
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 incorporation or organization) |
(I.R.S. Employer 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 ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act Yes ¨ No x
As of May 13, 2004, there were outstanding 17,371,814 shares of Common Stock, par value $.01, of the registrant.
NANOPHASE TECHNOLOGIES CORPORATION
QUARTER ENDED MARCH 31, 2004
INDEX
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PART I - FINANCIAL INFORMATION
NANOPHASE TECHNOLOGIES CORPORATION
BALANCE SHEETS
(Unaudited)
| March 31, 2004 |
December 31, 2003 |
|||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 607,704 | $ | 399,999 | ||||
| Investments |
14,163,741 | 4,562,364 | ||||||
| Trade accounts receivable, less allowance for doubtful accounts of $25,000 at March 31, 2004 and December 31, 2003 |
934,153 | 1,244,490 | ||||||
| Other receivable |
24,214 | 24,214 | ||||||
| Inventories, net |
717,244 | 682,999 | ||||||
| Prepaid expenses and other current assets |
502,124 | 659,778 | ||||||
| Total current assets |
16,949,180 | 7,573,844 | ||||||
| Equipment and leasehold improvements, net |
7,868,778 | 8,192,995 | ||||||
| Other assets, net |
480,520 | 475,980 | ||||||
| $ | 25,298,478 | $ | 16,242,819 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Current portion of long-term debts |
$ | 945,715 | $ | 1,034,379 | ||||
| Current portion of capital lease obligations |
33,255 | 43,609 | ||||||
| Accounts payable |
685,659 | 438,304 | ||||||
| Accrued expenses |
855,881 | 743,771 | ||||||
| Total current liabilities |
2,520,510 | 2,260,063 | ||||||
| Long-term debt, less current maturities |
111,649 | 251,843 | ||||||
| Long-term portion of capital lease obligations, less current maturities |
6,321 | 11,826 | ||||||
| 117,970 | 263,669 | |||||||
| 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; 17,371,814 and 15,902,674 shares issued and outstanding at March 31, 2004 and December 31, 2003, respectively |
173,718 | 159,027 | ||||||
| Additional paid-in capital |
69,693,919 | 59,297,135 | ||||||
| Accumulated deficit |
(47,207,639 | ) | (45,737,075 | ) | ||||
| Total stockholders’ equity |
22,659,998 | 13,719,087 | ||||||
| $ | 25,298,478 | $ | 16,242,819 | |||||
See Notes to Financial Statements.
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NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| Revenue: |
||||||||
| Product revenue |
$ | 1,066,138 | $ | 1,350,338 | ||||
| Other revenue |
227,221 | 313,744 | ||||||
| Total revenue |
1,293,359 | 1,664,082 | ||||||
| Operating expense: |
||||||||
| Cost of revenue |
1,213,110 | 1,546,722 | ||||||
| Research and development expense |
474,885 | 461,537 | ||||||
| Selling, general and administrative expense |
1,058,944 | 1,076,709 | ||||||
| Total operating expense |
2,746,939 | 3,084,968 | ||||||
| Loss from operations |
(1,453,580 | ) | (1,420,886 | ) | ||||
| Interest income |
14,661 | 22,064 | ||||||
| Interest expense |
(24,838 | ) | (30,395 | ) | ||||
| Other, net |
693 | — | ||||||
| Loss before provision for income taxes |
(1,463,064 | ) | (1,429,217 | ) | ||||
| Provision for income taxes |
(7,500 | ) | (7,500 | ) | ||||
| Net loss |
$ | (1,470,564 | ) | $ | (1,436,717 | ) | ||
| Net loss per share-basic and diluted |
$ | (0.09 | ) | $ | (0.09 | ) | ||
| Weighted average number of common shares outstanding |
16,209,660 | 15,161,686 | ||||||
See Notes to Financial Statements.
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NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
| Three months 2004 |
Three months 2003 |
|||||||
| Operating activities: |
||||||||
| Net loss |
$ | (1,470,564 | ) | $ | (1,436,717 | ) | ||
| Adjustments to reconcile net loss to net cash (used in) operating activities: |
||||||||
| Depreciation and amortization |
353,799 | 359,364 | ||||||
| Stock compensation expense |
— | 11,128 | ||||||
| Allowance for excess inventory quantities |
(1,543 | ) | (1,933 | ) | ||||
| Changes in assets and liabilities related to operations: |
||||||||
| Trade accounts receivable |
235,615 | (241,381 | ) | |||||
| Other receivable |
— | (4,060 | ) | |||||
| Inventories |
(32,702 | ) | 293,313 | |||||
| Prepaid expenses and other assets |
140,398 | 157,901 | ||||||
| Accounts payable |
247,355 | 249,662 | ||||||
| Accrued liabilities |
108,787 | (257,982 | ) | |||||
| Net cash (used in) operating activities |
(418,855 | ) | (870,705 | ) | ||||
| Investing activities: |
||||||||
| Acquisition of equipment and leasehold improvements |
(13,543 | ) | (95,311 | ) | ||||
| Payment of accounts payables incurred for the purchase of equip. and leasehold improvements |
— | (200,362 | ) | |||||
| Purchases of held-to-maturity investments |
(19,111,855 | ) | (15,844,782 | ) | ||||
| Maturities of held-to-maturity investments |
9,510,478 | 17,023,972 | ||||||
| Net cash (used in) provided by investing activities |
(9,614,920 | ) | 883,517 | |||||
| Financing activities: |
||||||||
| Principal payment on debt obligations, including capital leases |
(169,995 | ) | (176,571 | ) | ||||
| Proceeds from borrowings |
— | 74,266 | ||||||
| Proceeds from sale of common stock, net, and exercise of stock options |
10,411,475 | — | ||||||
| Net cash provided by (used in) financing activities |
10,241,480 | (102,305 | ) | |||||
| Increase (Decrease) in cash and cash equivalents |
207,705 | (89,493 | ) | |||||
| Cash and cash equivalents at beginning of period |
399,999 | 445,684 | ||||||
| Cash and cash equivalents at end of period |
$ | 607,704 | $ | 356,191 | ||||
| Supplemental cash flow information: |
||||||||
| Interest paid |
$ | 24,838 | $ | 30,395 | ||||
| Supplemental non-cash investing and financing activities: |
||||||||
| Accounts receivable paid through offset of long-term debt |
$ | 74,722 | $ | 78,473 | ||||
| Capital lease obligations incurred for use of equipment |
$ | — | $ | 65,007 | ||||
| Accounts payable incurred for the purchase of equipment and leasehold improvements |
$ | — | $ | 24,776 | ||||
| Accrual related to asset retirement obligation |
$ | — | $ | 82,000 | ||||
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 (“Nanophase” or 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, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004.
These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2003, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, 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.
Nanophase Technologies is a nanocrystalline materials developer and commercial manufacturer with an integrated family of nanomaterial technologies. Nanophase produces engineered nanomaterials for use in a variety of diverse markets: personal care, sunscreens, abrasion-resistant applications, environmental catalysts, antimicrobial products and a variety of polishing applications, including semiconductors, hard disk drives and optics. New markets and applications also are being developed. The Company targets markets in which it feels practical solutions may be found using nanoengineered products. The Company works with leaders in these target markets to identify their material and performance requirements.
The Company also recognizes regular revenue from a technology license and revenue from the occasional sale of production equipment to its technology licensee. Neither of these activities are expected to drive the long-term growth of the business.
The Company’s typical credit terms are thirty days from shipment and invoicing.
Revenue from international sources approximated $110,000 and $318,000 for the three months ended March 31, 2004 and 2003, respectively.
The Company’s operations comprise a single business segment and all of the Company’s long-lived assets are located within the United States.
(3) Investments
Investments are classified by the Company at the time of purchase for appropriate designation and such designation is 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
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premiums and accretion of discounts. Such adjustments for amortization and accretion are included in interest income. The Company’s investments are held by its investment bank who is a member of all major stock exchanges and the Securities Investor Protection Corporation (SIPC). Securities and cash held in custody by the Company’s investment bank are afforded unlimited protection through SIPC and a commercial insurer, however, it does not protect against losses from the rise and fall in market value of investments.
(4) Inventories
Inventories consist of the following:
| March 31, 2004 |
December 31, 2003 |
|||||||
| Raw materials |
$ | 371,732 | $ | 393,995 | ||||
| Finished goods |
955,150 | 900,185 | ||||||
| 1,326,882 | 1,294,180 | |||||||
| Allowance for excess inventory quantities |
(609,638 | ) | (611,181 | ) | ||||
| $ | 717,244 | $ | 682,999 | |||||
(5) Employee Stock Options and Warrants
During the three months ended March 31, 2004, 212,859 shares of Common Stock were issued pursuant to option exercises and no shares were issued in the form of annual restricted stock grants to the Company’s outside directors, compared to no shares of Common Stock being issued pursuant to option exercises and 24,350 shares being issued in the form of annual restricted stock grants to the Company’s outside directors, in the same period in 2003. During the three months ended March 31, 2004 there were 453,001 warrants outstanding, with none being converted and no warrants were outstanding during the same period in 2003.
As permitted by Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (SFAS No. 123), the Company accounts for stock options granted to employees in accordance with APB Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). As long as the exercise price of the options granted equals the estimated fair value of the underlying stock on the measurement date, no compensation expense is recognized by the Company for these options. SFAS No. 123 established an alternative fair value method of accounting for stock-based compensation plans. As required by SFAS No. 123 for companies using APB No. 25 for financial reporting purposes, the Company makes pro forma disclosures regarding the impact on net loss of using the fair value method of SFAS No. 123.
Pro forma information regarding net income is required by SFAS No. 123, which also requires that the information be determined as if the Company had accounted for the employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for the three months ended March 31, 2004 and 2003. No options were granted for the three months ended March 31, 2004.
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The Black-Scholes option pricing model:
| March 31, 2004 |
March 31, 2003 |
||||||
| U.S. Government zero coupon 7-year bond interest rates: |
3.31 | % | 3.34 | % | |||
| Dividend yield: |
0.00 | % | 0.00 | % | |||
| Weighted-average expected life of the option: |
7 years | 7 years | |||||
| Volatility factors: |
106.92 | % | 59.25 | % | |||
| Weighted-average fair value of the options granted: |
|||||||