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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, 1998
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.)
453 COMMERCE STREET, BURR RIDGE, ILLINOIS 60521
(Address of principal executive offices, and zip code)
Registrant's telephone number, including area code: (630) 323-1200
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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 November 13, 1998, there were outstanding 12,564,638 shares of
common stock, par value $.01, of the registrant.
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NANOPHASE TECHNOLOGIES CORPORATION
QUARTER ENDED SEPTEMBER 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I - FINANCIAL INFORMATION.................................................................................. 3
Item 1. Financial Statements............................................................................. 3
Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997........................ 3
Statements of Operations (unaudited) for the three months ended September 30, 1998
and 1997 and the nine months ended September 30, 1998 and 1997................................ 4
Statements of Cash Flows (unaudited) for the nine months ended September 30, 1998
and 1997...................................................................................... 5
Notes to Financial Statements.................................................................... 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....................................... 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
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NANOPHASE TECHNOLOGIES CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- --------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents.................................................. $ 1,098,278 $ 3,988,368
Investments................................................................ 26,504,632 26,884,852
Trade accounts receivable, less allowance for doubtful accounts
of $85,000 at September 30, 1998 and $19,276 at December 31, 1997........ 463,384 1,641,489
Inventories................................................................ 1,192,039 957,303
Prepaid expenses and other current assets.................................. 107,580 112,138
--------------- --------------
Total current assets..................................................... 29,365,913 33,584,150
Equipment and leasehold improvements, net................................ 2,481,965 2,399,893
Other assets, net........................................................ 184,632 212,526
--------------- --------------
$32,032,510 $36,196,569
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... $ 235,936 $ 930,397
Accrued expenses........................................................... 963,224 614,838
--------------- --------------
Total current liabilities................................................ 1,199,160 1,545,235
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;
12,564,638 shares issued and outstanding at September 30, 1998 and
12,277,467 shares issued and outstanding at December 31, 1997.............. 125,646 122,775
Additional paid-in capital................................................. 48,360,040 48,273,230
Accumulated deficit........................................................ (17,652,336) (13,744,671)
--------------- --------------
Total stockholders' equity................................................. 30,833,350 34,651,334
--------------- --------------
$ 32,032,510 $ 36,196,569
=============== ==============
</TABLE>
See Notes to Financial Statements.
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NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- --------------------------------
1998 1997 1998 1997
----------------- ------------- --------------- --------------
<S> <C> <C> <C> <C>
REVENUE:
Product revenue........................ $ 180,568 $ 454,024 $ 958,796 $ 877,783
Other revenue......................... -- 758,924 143,484 1,367,632
----------------- ------------- --------------- --------------
Total revenue....................... $ 180,568 $ 1,212,948 $ 1,102,280 $ 2,245,415
OPERATING EXPENSE:
Cost of revenue....................... $ 668,616 $ 1,159,207 $ 2,325,323 $ 3,321,288
Research and development expense...... 344,657 194,678 1,135,679 571,210
Selling, general and administrative
expense............................... 969,761 523,233 2,562,424 1,714,725
----------------- ------------- --------------- --------------
Total operating expense............. 1,983,034 1,877,118 6,023,426 5,607,223
----------------- ------------- --------------- --------------
Loss from operations.................... (1,802,466) (664,170) (4,921,146) (3,361,808)
Interest income......................... 381,615 25,645 1,169,481 57,392
----------------- ------------- --------------- --------------
Loss before provision for income taxes (1,420,851) (638,525) (3,751,665) (3,304,416)
Provision for income taxes.............. -- -- 156,000 --
----------------- ------------- --------------- --------------
Net loss................................ $ (1,420,851) $ (638,525) $ (3,907,665) $ (3,304,416)
================= ============= =============== ==============
Net loss per share...................... $ (0.11) n/a $ (0.32) n/a
================= ============= =============== ==============
Weighted average number of common
shares outstanding...................... 12,507,068 n/a 12,365,738 n/a
================= ============= =============== ==============
Pro forma net loss per share............ n/a $ (0.08) n/a $ (0.43)
================= ============= =============== ==============
Pro forma weighted average number of
common shares outstanding............... n/a 8,007,392 n/a 7,663,100
================= ============= =============== ==============
</TABLE>
See Notes to Financial Statements.
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NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss................................................................... $ (3,907,665) $ (3,304,416)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.......................................... 368,769 301,945
Changes in assets and liabilities related to operations:
Trade accounts receivable.............................................. 1,178,105 (1,051,705)
Inventories............................................................ (234,736) (58,610)
Prepaid expense and other assets....................................... 29,491 30,052
Accounts payable....................................................... (694,461) 534,953
Accrued liabilities.................................................... 348,386 824,140
---------------- ---------------
Net cash used in operating activities.................................. (2,912,111) (2,723,641)
INVESTING ACTIVITIES:
Acquisition of equipment and leasehold improvements.................... (447,880) (763,276)
Purchases of held-to-maturity investments.............................. (150,850,078) (7,960,981)
Maturities of held-to-maturity investments............................. 151,230,298 7,957,340
Increase in asset held in trust........................................ -- (1,151)
---------------- ---------------
Net cash used in investing activities.................................. (67,660) (768,068)
FINANCING ACTIVITIES:
Proceeds from issuance of stock, net of offering costs................. -- 3,770,882
Deferred offering costs................................................ -- (125,673)
Proceeds from exercise of stock options................................ 89,681 --
---------------- ---------------
Net cash provided by financing activities.............................. 89,681 3,645,209
(Decrease) increase in cash and cash equivalents....................... (2,890,090) 153,500
Cash and cash equivalents at beginning of period....................... 3,988,368 617,204
---------------- ---------------
Cash and cash equivalents at end of period............................. $ 1,098,278 $ 770,704
================ ===============
</TABLE>
See Notes to Financial Statements.
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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, 1998 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1998.
These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended
December 31, 1997, included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997, 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. The Company was in its development stage for
the period from inception through December 31, 1996. The Company ended its
development stage when the Company began full-scale production in early 1997.
The Company issued shares of its common stock ("Common Stock") in its initial
public offering consummated on December 2, 1997 (the "Offering").
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 foreign customers approximated $226,500 and $277,400 for
the nine months ended September 30, 1998 and 1997, respectively.
(3) INVESTMENTS
Investments consist of U.S. Treasury bills, government bonds and
commercial paper with an estimated fair value of $26,505,000 at September 30,
1998 and $26,885,000 at December 31, 1997. All investments have been classified
as held-to-maturity and mature within a twelve month period.
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
RAW MATERIALS........................................................... $ 377,503 $ 379,505
FINISHED GOODS.......................................................... 814,536 577,798
----------------- -----------------
$ 1,192,039 $ 957,303
================= =================
</TABLE>
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(5) RESEARCH AND DEVELOPMENT EXPENSE
Expenditures for research and development activities are charged to
operations as incurred by the Company. The Company has entered into certain
research and development arrangements with separate entities to further develop
end-use products utilizing nanocrystalline materials. Expenditures related to
these arrangements in the amount of $150,000 and $575,000 have been incurred by
the Company during the three and nine months, respectively, ended September 30,
1998 and are included as a charge to research and development expense in the
Statements of Operations.
(6) STOCK OPTIONS AND WARRANTS
During the three months ended September 30, 1998, options to purchase
8,731 shares of Common Stock were exercised for $10,484.
During the three months ended September 30, 1998, a stockholder which
is controlled by a director of the Company exercised warrants representing
232,491 shares of Common Stock in a cashless exchange of the warrants for
162,868 shares of Common Stock.
(7) CONTINGENT LIABILITIES
The Company, certain of its officers and directors, and the
underwriters of the Offering previously were named as defendants in five
separate complaints filed in five separate cases in federal court. In an order
entered by the Court, those cases were consolidated and a consolidated complaint
was filed on October 30, 1998. The consolidated complaint alleges that the
Company, the named officers and directors, and the underwriters of the Offering
are liable under the federal securities laws for making material misstatements
of fact and omitting and failing to state material facts in the Company's
Registration Statement and Prospectus relating to the Offering. The consolidated
complaint also alleges that the action should be maintained as (1) a plaintiff
class action on behalf of certain persons who purchased the Company's Common
Stock from November 26, 1997 through January 8, 1998, and (2) a defendant class
action against the underwriters who participated in the Offering. The
consolidated complaint seeks unquantified damages as provided for under the
federal securities laws, pre- and post-judgment interest, attorneys' fees,
expert witness fees, other costs and expenses and such other and further relief
as the Court may find proper. In addition, the consolidated complaint seeks
rescission and/or rescissory damages relating to purchases of the Common Stock,
as provided for under federal securities laws. The Company has retained counsel
for itself and the named officers and directors, and intends to defend this
litigation vigorously. In August 1998, the Company received a request for
indemnification from the underwriters of the Offering pursuant to the
underwriting agreement for the Offering. In response to such request, the
Company has agreed to be responsible for the underwriters' attorneys' fees with
respect to the litigation. Although the Company believes that the allegations of
the consolidated complaint are without merit, it is unable 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, cash flows or
financial condition.
(8) SUBSEQUENT EVENTS
On October 27, 1998, the Company announced its adoption of a
stockholder rights plan. Pursuant to the plan, preferred stock purchase rights
were distributed on November 10, 1998, at the rate of one right for each
outstanding share of Common Stock, to stockholders of record on that date.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
From its inception in November 1989 through December 31, 1996,
Nanophase Technologies Corporation (the "Company") was in the development stage.
During that period, the Company primarily focused on the development of its
manufacturing processes in order to transition from laboratory-scale to
commercial-scale production. As a result, the Company developed an operating
capacity to produce significant quantities of its nanocrystalline materials for
commercial sale. The Company was also engaged in the development of commercial
applications and formulations and the recruiting of marketing, technical and
administrative personnel. Since January 1, 1997, the Company has been engaged in
commercial production and sales of its nanocrystalline materials, and the
Company no longer considers itself in the development stage. All of the
Company's revenue since January 1, 1997 has been generated through commercial
sources. From inception through September 30, 1998, the Company was primarily
capitalized through the private offering of approximately $19,558,069 of equity
securities and its initial public offering of $28,837,936 of the Company's
common stock ("Common Stock"), each net of issuance costs. The Company has
incurred cumulative losses of $17,652,336 from inception to September 30, 1998.
RESULTS OF OPERATIONS
Revenue is recorded when the Company ships products, when specific
milestones are met regarding development arrangements or when the Company
licenses its technology and transfers proprietary information. Total revenue
decreased to $180,568 and $1,102,280 for the three and nine months,
respectively, ended September 30, 1998, compared to $1,212,948 and $2,245,415
for the same periods in 1997. The decrease in total revenue for the three month
period was primarily attributed to a reduction in product shipments and
development revenue, while the decrease in total revenue for the nine month
period was primarily attributed to a reduction in development revenue, partially
offset by increased product shipments. Revenue from product shipments decreased
to $180,568 and increased to $958,796 for the three and nine months,
respectively, ended September 30, 1998, compared to $454,024 and $877,783 for
the same periods in 1997. Other revenue decreased to $0 and $143,484 for the
three and nine months, respectively, ended September 30, 1998, compared to
$758,924 and $1,367,632 for the same periods in 1997. The majority of the
revenue generated during the three and nine months ended September 30, 1998 was
from customers in the electronics and structural ceramics and composites
markets.
Cost of revenue generally includes costs associated with commercial
production, customer development arrangements and licensing fees. Cost of
revenue decreased to $668,616 and $2,325,323 for the three and nine months,
respectively, ended September 30, 1998, compared to $1,159,207 and $3,321,288
for the same periods in 1997. These decreases in cost of revenue were generally
attributed to a reduction in product shipments, increased efficiencies in the
manufacture of the Company's products and the reduced cost of development
activities, somewhat offset by inefficiencies in the Company's coating
operations and increased net shaping costs. Cost of revenue as a percentage of
total revenue increased for the three and nine months ended September 30, 1998,
compared to the same periods in 1997, due primarily to the decrease in total
revenue and its relation to fixed costs.
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 increased to $344,657 and $1,135,679
for the three and nine months, respectively, ended September 30, 1998,
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compared to $194,678 and $571,210 for the same periods in 1997. These increases
in research and development expense were primarily attributed to increased costs
related to arrangements with outside parties to further develop end use products
utilizing nanocrystalline materials, slightly offset by reductions in internal
costs regarding the development of new formulations and product applications.
The Company expects to further increase its research and development expense for
the remainder of 1998 in connection with its plans to continue to enhance and
expand its product lines and manufacturing processes.
Selling, general and administrative expense increased to $969,761 and
$2,562,424 for the three and nine months, respectively, ended September 30,
1998, compared to $523,233 and $1,714,725 for the same periods in 1997. The
selling, general and administrative expense for the nine months ended September
30, 1997 included a one-time charge of $375,103 related to a public offering
withdrawn in May 1997. Excluding such one-time charge, selling, general and
administrative expense increased by $1,222,802 in the nine months ended
September 30, 1998, compared to the same period in 1997. The selling, general
and administrative expense increased by $446,528 in the three months ended
September 30, 1998, compared to the same period in 1997. These net increases
were primarily attributed to increased costs associated with being a public
company, costs related to ongoing investor relation programs, additional legal
expenses, salaries of additional sales personnel and increased recruiting costs.
The Company expects to further increase its selling, general and administrative
expense during the remainder of 1998 in connection with its plans to further
expand its sales force and administrative staff.
Interest income increased to $381,615 and $1,169,481 for the three and
nine months, respectively, ended September 30, 1998, compared to $25,645 and
$57,392 for the same periods in 1997. These increases were primarily due to the
investment of net proceeds from the Company's sale of equity securities pending
use of such proceeds for operating activities and expansion of its manufacturing
facility.
Income tax expense was $0 and $156,000 for the three and nine months,
respectively, ended September 30, 1998, compared to $0 for the same periods in
1997. The 1998 expense was due to the foreign taxes withheld from license fees
received from C.I. Kasei Co., Ltd. The payment of such taxes creates a foreign
tax credit which may be available to offset federal income taxes when the
Company generates taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash, cash equivalents and investments amounted to
$27,602,910 at September 30, 1998, compared to $30,873,220 at December 31, 1997.
The net cash used in the Company's operating activities was $2,912,111 for the
nine months ended September 30, 1998, compared to $2,723,641 for the same period
in 1997. The net cash used in operating activities for the nine months ended
September 30, 1998 was primarily for the further development of product
applications, the funding of research and development activities, the funding of
inventory levels and the payment of accounts payable, which was offset by the
collection of accounts receivable and an increase in accrued liabilities. Net
cash used in investing activities, including capital expenditures and purchases
of securities in which cash is invested pending its use for operating activities
and expansion of the Company's manufacturing facility offset by maturities of
such securities, amounted to $67,660 for the nine months ended September 30,
1998, compared to $768,068 for the same period in 1997. Capital expenditures,
primarily related to the further expansion of the Company's existing
manufacturing facility and the purchase of operating equipment, amounted to
$447,880 for the nine months ended September 30,
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1998, compared to $763,276 for the same period in 1997. Net cash provided by
financing activities, which related to the exercise of options for 124,303
shares of Common Stock, amounted to $89,681 for the nine months ended September
30, 1998, compared to $3,645,209, which related to the net proceeds from the
issuance of preferred stock, for the same period in 1997.
The Company believes that cash from operations and cash on hand,
together with the net proceeds of its initial public offering of Common Stock
consummated in December 1997, 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 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. There can be no assurance that such additional financing will be
available on acceptable terms or at all, and any such additional financing could
be dilutive to the Company's stockholders.
At September 30, 1998, the Company had a net operating loss
carryforward of approximately $16.9 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 2012. 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, 1998, 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 2012 if not utilized before that date.
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
The Company has identified the following areas as possibly being
affected by the Year 2000 Issue: (1) IT and non-IT systems, (2) manufacturing
applications and (3) third-party relationships. For each of these areas, the
Company is in the process of identifying and assessing specific software,
equipment and systems which are potentially susceptible to the Year 2000 Issue.
The Company expects to develop and implement corrective actions, if necessary,
to ensure that by September 30, 1999 its software, equipment and systems will
function properly with respect to dates in the year 2000 and thereafter. The
Company believes the total cost of such year 2000 compliance activities will not
be material. The Company believes that it has no material exposure to
contingencies related to the Year 2000 Issue for the products it has sold to
date.
The Company processes its transactions and applications utilizing
personal computers. In addition, the Company's telephone system, fax machines,
payroll, alarm systems and other miscellaneous systems utilize computer
equipment and software. The Company is identifying which software and equipment
needs to be upgraded. Based on its assessment to date, the Company does not
believe that significant modifications or replacements of its software or
systems will be required to be year 2000
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compliant. As of January 1, 1998, the Company only acquires software and invests
in systems which are year 2000 compliant.
The Company's manufacturing activities rely on physical-vapor-synthesis
plasma reactors comprised of modular equipment that contains embedded
technology. The Company also relies on a quality control laboratory for
production process control. The Company is identifying the particular hardware
and software systems used in such manufacturing applications to assess whether
they are year 2000 compliant. The Company believes such manufacturing
applications are year 2000 compliant.
To date, the Company does not have any direct interface between its
systems and those of any significant supplier or customer. The Company, however,
relies on third party suppliers for raw materials, utilities, cash management
services and other key supplies and services. The Company, therefore, recognizes
that it is vulnerable to third parties suppliers that fail to remediate their
own Year 2000 Issues. The Company is orally communicating with its significant
suppliers to determine their year 2000 compliance status. The Company is also
dependent upon its customers, product development partners and distributors for
sales, cash flow and product development. The Company does not currently have
any formal information concerning the year 2000 compliance status of its
customers, product development partners and distributors, but has received
indications that most of them are working on year 2000 compliance.
The Company's most reasonably likely worst case scenario with respect to
the Year 2000 Issue is that (1) its manufacturing applications may malfunction
and (2) third party suppliers of ceramic and metallic materials, cash management
services and utilities, customers, product development partners and distributors
may be unable to remediate their own Year 2000 Issues. In such scenario, the
Company could experience manufacturing interruptions, difficulties in accessing
its cash and investments, delays in distribution of its products, delays in
development of new product applications and reduced sales. This would have a
material adverse effect on the Company's operations. The Company currently has
no contingency plan in the event such most reasonably likely worst case scenario
occurs.
The Company currently believes that the Year 2000 Issue will not pose
significant operational problems for the Company. However, if all Year 2000
Issues are not properly identified or remediated on a timely basis, there can be
no assurance that the Company's results of operations or relationships with
customers and suppliers will not be materially adversely affected. There can
also be no guarantee that the systems of other companies on which the Company
relies will be timely converted or that their failure to do so would not have a
material adverse effect on the Company's operations.
LEGAL PROCEEDINGS
As disclosed in Note 7 to the Financial Statements and under Item 1.
Legal Proceedings in Part II, five separate complaints were previously filed in
five separate suits against the Company, certain of its officers and directors,
and the underwriters of the Company's initial public offering of Common Stock
(the "Offering") alleging violations of the federal securities laws. In an order
entered by the federal court, the cases were all consolidated and a consolidated
complaint was filed on October 30, 1998. The consolidated complaint seeks
unquantified damages as provided for under the federal securities laws, pre- and
post- judgment interest, attorneys' fees, expert witness fees, other costs and
expenses and such other and further relief as the Court may find proper. In
addition, the consolidated complaint seeks rescission and/or rescissory damages
relating to purchases of the Common Stock, as provided for under federal
securities laws. The consolidated complaint alleges that the action should be
maintained as (1) a plaintiff class action on behalf of certain persons who
purchased the Company's Common Stock from November 26, 1997 through January 8,
1998, and (2) a defendant class action against the underwriters who participated
in the Offering. The Company has retained counsel for itself and the named
officers and
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directors, and intends to defend this litigation vigorously. Although the
Company believes that the allegations of the consolidated complaint are without
merit, it is unable 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, cash flows or financial condition.
SAFE HARBOR PROVISION
Because the Company wants to provide investors with more meaningful and
useful information, this Quarterly Report on Form 10-Q contains, and
incorporates by reference, certain "forward-looking statements" (as such term is
defined in Section 21E of the Securities Exchange Act of 1934, as amended), that
reflect the Company's current expectations regarding the future results of
operations, performance and achievements of the Company. These forward-looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Company has tried, wherever
possible, to identify these forward-looking statements by using words such as
"anticipates," "believes," "estimates," "expects," "plans," "intends" and
similar expressions. These statements reflect the Company's current beliefs and
are based on information currently available to it. Accordingly, these
statements are subject to certain risks, uncertainties and contingencies, which
could cause the Company's actual results, performance or achievements to differ
materially from those expressed in, or implied by, such statements. These risks,
uncertainties and contingencies include, without limitation, demand for, and
acceptance of, the Company's nanocrystalline materials and product applications;
changes in development and distribution relationships; the impact of competitive
products and technologies; and the factors set forth under "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--Risk
Factors" in the Company's Annual Report on Form 10-K for the year ended December
31, 1997, as filed with the Securities and Exchange Commission. The Company
undertakes no obligation to update or revise any such forward-looking statements
that may be made to reflect events or circumstances after the date of this Form
10-Q or to reflect the occurrence of unanticipated events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1998, five separate complaints were previously
filed in five separate cases in the United States District Court for the
Northern District of Illinois, Eastern Division, each of which alleged that the
Company, certain of its officers and directors, and the underwriters of the
Company's Offering are liable under the federal securities laws for making
material misstatements of fact and omitting and failing to state material facts
necessary to make other statements of fact not misleading in the Registration
Statement and Prospectus relating to the Offering. In an order entered by the
Court, those cases were consolidated and a consolidated complaint was filed on
October 30, 1998. The consolidated complaint alleges that the action should be
maintained as (1) a plaintiff class action on behalf of certain persons who
purchased the Company's Common Stock from November 26, 1997 through January 8,
1998, excluding the defendants, members of their immediate families, any entity
in which a defendant has a controlling interest and certain others related to or
affiliated with the foregoing, and (2) a defendant class action against the
underwriters who participated in the Offering. The consolidated complaint seeks
unquantified damages as provided for under the federal securities laws, pre- and
post-judgment interest, attorneys' fees, expert witness fees, other costs and
expenses and such other and further relief as the Court may find proper. In
addition, the consolidated complaint seeks rescission and/or rescissory damages
relating to purchases of the Common Stock, as provided for under federal
securities laws. The Company has retained counsel for itself and the named
officers and directors and intends to defend the consolidated complaint
vigorously. Under the current schedule, a response to the consolidated complaint
is to be filed no later than December 14, 1998.
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. Since the Effective Date,
of its $28,837,936 of net proceeds from the Offering, the Company has used
$447,880 for capital expenditures primarily related to the further expansion of
the Company's existing manufacturing facility and the purchase of operating
equipment and $787,146 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.
Exhibit 11 - Statement Regarding Computation of Loss per Share
Exhibit 27 - Financial Data Schedule
B. REPORTS ON FORM 8-K.
The Company did not file any Current Reports on Form 8-K
during the third quarter of 1998.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NANOPHASE TECHNOLOGIES CORPORATION
Date: November 13, 1998 By: /s/ ROBERT W. CROSS
-----------------------------------------
Robert W. Cross
Chief Executive Officer (principal executive
officer) and a Director
Date: November 13, 1998 By: /s/ DENNIS J. NOWAK
------------------------------------------
Dennis J. Nowak
Vice President-Finance and Administration,
Chief Financial Officer, Treasurer and
Secretary (principal financial and chief
accounting officer)
14
<PAGE> 15
EXHIBIT INDEX
Exhibit
Number Exhibit Name
- ------- ------------
11 Statement Regarding Computation of Loss per Share
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 11
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENT REGARDING COMPUTATION OF LOSS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------- ------------------------------
1998 1997 1998 1997
---------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
HISTORICAL:
Weighted average common shares outstanding 12,507,068 77,586 12,365,738 77,586
================ ================= ============== ==============
Net loss $ (1,420,851) $ (638,525) $ (3,907,665) $ (3,304,416)
================ ================= ============== ==============
Net loss per common share $ (0.11) $ (8.23) $ (0.32) $ (42.59)
================ ================= ============== ==============
PRO FORMA:
Weighted average common shares outstanding n/a 77,586 n/a 77,586
Weighted average preferred shares outstanding n/a 7,929,806 n/a 7,585,514
---------------- ----------------- -------------- --------------
Total n/a 8,007,392 n/a 7,663,100
================ ================= ============== ==============
Net loss n/a $ (638,525) n/a $(3,304,416)
================ ================= ============== ==============
Pro forma net loss per common share n/a $ (0.08) n/a $ (0.43)
================ ================= ============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY OF FINANCIAL INFORMATION EXTRACTED FROM (A)
IDENTIFY SPECIFIC FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) IDENTIFY FILING
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,098,278
<SECURITIES> 26,504,632
<RECEIVABLES> 463,384
<ALLOWANCES> 85,000
<INVENTORY> 1,192,039
<CURRENT-ASSETS> 29,365,913
<PP&E> 3,727,978
<DEPRECIATION> 1,246,013
<TOTAL-ASSETS> 32,032,510
<CURRENT-LIABILITIES> 1,199,160
<BONDS> 0
<COMMON> 48,485,686
0
0
<OTHER-SE> (17,652,336)
<TOTAL-LIABILITY-AND-EQUITY> 32,032,510
<SALES> 958,796
<TOTAL-REVENUES> 1,102,280
<CGS> 2,325,323
<TOTAL-COSTS> 6,023,426
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,751,665)
<INCOME-TAX> 156,000
<INCOME-CONTINUING> (3,907,665)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,907,665)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
