UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: March 31, 2019
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) of the Securities Exchange Act of 1934
For the transition period from _______ to________
Commission File Number: 000-22333
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “accelerated filer”, “large accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Non-accelerated filer ☐ | Smaller reporting company ☑ | |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock | NANX | OTCQB |
As of May 15, 2019, there were 38,000,792 shares outstanding of common stock, par value $.01, of the registrant.
NANOPHASE TECHNOLOGIES CORPORATION
QUARTER ENDED MARCH 31, 2019
INDEX
2
PART I - FINANCIAL INFORMATION
| Item 1. | Financial Statements |
NANOPHASE TECHNOLOGIES CORPORATION
(Unaudited Consolidated Condensed)
| (in thousands except share and per share data) | ||||||||
| March 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 632 | $ | 1,345 | ||||
| Trade accounts receivable, less allowance for doubtful accounts of $9 on March 31, 2019 and December 31, 2018, respectively | 2,105 | 829 | ||||||
| Inventories, net | 2,228 | 2,242 | ||||||
| Prepaid expenses and other current assets | 409 | 273 | ||||||
| Total current assets | 5,374 | 4,689 | ||||||
| Equipment and leasehold improvements, net | 2,055 | 1,865 | ||||||
| Operating lease right-of-use assets | 2,122 | — | ||||||
| Other assets, net | 14 | 15 | ||||||
| $ | 9,565 | $ | 6,569 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Line of credit, related party | $ | 1,448 | $ | 832 | ||||
| Line of credit, bank | 500 | — | ||||||
| Current portion of finance lease obligations | 223 | 218 | ||||||
| Current portion of operating lease obligations | 331 | — | ||||||
| Accounts payable | 1,781 | 1,608 | ||||||
| Accrued expenses | 1,088 | 979 | ||||||
| Total current liabilities | 5,371 | 3,637 | ||||||
| Long-term portion of finance lease obligations | 449 | 506 | ||||||
| Long-term portion of operating lease obligations | 2,117 | — | ||||||
| Long-term loan, related party | 500 | 500 | ||||||
| Long-term deferred rent | — | 344 | ||||||
| Asset retirement obligations | 200 | 198 | ||||||
| Total long-term liabilities | 3,266 | 1,548 | ||||||
| Contingent Liabilities: | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $.01 par value, 24,088 shares authorized and no shares issued and outstanding | — | — | ||||||
| Common stock, $.01 par value, 42,000,000 shares authorized; | ||||||||
| 33,911,792 shares issued and outstanding on | ||||||||
| March 31, 2019 and December 31, 2018, respectively | 339 | 339 | ||||||
| Additional paid-in capital | 98,852 | 98,795 | ||||||
| Accumulated deficit | (98,263 | ) | (97,750 | ) | ||||
| Total stockholders’ equity | 928 | 1,384 | ||||||
| $ | 9,565 | $ | 6,569 | |||||
See Notes to Consolidated Financial Statements.
3
NANOPHASE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited Consolidated Condensed)
(in thousands except share and per share data)
| Three months ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| Revenue: | ||||||||
| Product revenue | $ | 3,497 | $ | 2,867 | ||||
| Other revenue | 258 | 31 | ||||||
| Total revenue | 3,755 | 2,898 | ||||||
| Operating expense: | ||||||||
| Cost of revenue | 2,871 | 2,488 | ||||||
| Gross profit | 884 | 410 | ||||||
| Research and development expense | 477 | 558 | ||||||
| Selling, general and administrative expense | 877 | 765 | ||||||
| Loss from operations | (470 | ) | (913 | ) | ||||
| Interest expense | 43 | 11 | ||||||
| Loss before provision for income taxes | (513 | ) | (924 | ) | ||||
| Provisions for income taxes | — | — | ||||||
| Net loss | $ | (513 | ) | $ | (924 | ) | ||
| Net loss per share – basic and diluted | $ | (0.02 | ) | $ | (0.03 | ) | ||
| Weighted average number of basic and diluted common shares outstanding | 33,911,792 | 33,847,793 | ||||||
See Notes to Consolidated Financial Statements.
4
NANOPHASE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Unaudited Consolidated Condensed)
(in thousands except share data)
| Additional | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Paid-in | Accumulated | |||||||||||||||||||||||||
| Description | Shares | Amount | Shares | Amount |
Capital |
Deficit | Total | |||||||||||||||||||||
| Balance on December 31, 2017 | — | $ | — | 33,847,793 | $ | 338 | $ | 98,563 | $ | (95,669 | ) | $ | 3,232 | |||||||||||||||
| Stock option exercises | — | — | — | — | — | — | — | |||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 43 | — | 43 | |||||||||||||||||||||
| Net loss for the three months ended March 31, 2018 | — | — | — | — | — | (924 | ) | (924 | ) | |||||||||||||||||||
| Balance on March 31, 2018 | — | $ | — | 33,847,793 | $ | 338 | $ | 98,606 | $ | (96,593 | ) | $ | 2,351 | |||||||||||||||
| Balance on December 31, 2018 | — | $ | — | 33,911,792 | $ | 339 | $ | 98,795 | $ | (97,750 | ) | $ | 1,384 | |||||||||||||||
| Stock option exercises | — | — | — | — | — | — | — | |||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 57 | — | 57 | |||||||||||||||||||||
| Net loss for the three months ended March 31, 2019 | — | — | — | — | — | (513 | ) | (513 | ) | |||||||||||||||||||
| Balance on March 31, 2019 | — | $ | — | 33,911,792 | $ | 339 | $ | 98,852 | $ | (98,263 | ) | $ | 928 | |||||||||||||||
See Notes to Consolidated Financial Statements.
5
NANOPHASE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited Consolidated Condensed)
| Three months ended March 31, | ||||||||
| 2019 | 2018 | |||||||
| (in thousands) | ||||||||
| Operating activities: | ||||||||
| Net loss | $ | (513 | ) | $ | (924 | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities: | ||||||||
| Depreciation and amortization | 77 | 85 | ||||||
| Loss on disposal of equipment and leasehold improvements | 16 | |||||||
| Share-based compensation | 57 | 43 | ||||||
| Changes in assets and liabilities related to operations: | ||||||||
| Trade accounts receivable | (1,276 | ) | (262 | ) | ||||
| Inventories | 14 | 165 | ||||||
| Prepaid expenses and other assets | (136 | ) | (61 | ) | ||||
| Accounts payable | 133 | 142 | ||||||
| Accrued expenses | 109 | 194 | ||||||
| Other long-term assets and liabilities | (18 | ) | — | |||||
| Net cash used in operating activities | (1,537 | ) | (618 | ) | ||||
| Investing activities: | ||||||||
| Acquisition of equipment and leasehold improvements | (240 | ) | (5 | ) | ||||
| Net cash used in investing activities | (240 | ) | (5 | ) | ||||
| Financing activities: | ||||||||
| Principal payment on finance leases | (52 | ) | (42 | ) | ||||
| Proceeds from line of credit, bank | 500 | 200 | ||||||
| Payments to the line of credit, bank | — | (300 | ) | |||||
| Proceeds from line of credit, related party | 2,936 | — | ||||||
| Payments to line of credit, related party | (2,320 | ) | — | |||||
| Net cash provided by financing activities | 1,064 | (142 | ) | |||||
| Decrease in cash and cash equivalents | (713 | ) | (765 | ) | ||||
| Cash and cash equivalents at beginning of period | 1,345 | 1,955 | ||||||
| Cash and cash equivalents at end of period | $ | 632 | $ | 1,190 | ||||
| Supplemental cash flow information: | ||||||||
| Interest paid | $ | 30 | $ | 11 | ||||
| Supplemental non-cash investing and financing activities: | ||||||||
| Accounts payable incurred for the purchase of equipment and leasehold improvements | $ | 40 | $ | 30 | ||||
See Notes to Consolidated Financial Statements.
6
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited Consolidated Condensed)
(in thousands, except share and per share data or as otherwise noted herein)
(1) Basis of Presentation
The accompanying unaudited consolidated condensed interim financial statements of Nanophase Technologies Corporation (“Nanophase”, “Company”, “we”, “our”, or “us”) reflect all adjustments (consisting of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of our financial position and operating results for the interim periods presented. All statements include the results from both Nanophase and our wholly-owned subsidiary, Solésence, LLC( “Solésence,” or our “Solésence ® subsidiary”). Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
These financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission.
(2) Going Concern / Liquidity
We believe that cash from operations, cash on hand, cash from our May 13, 2019 financing (see note 14), in addition to unused borrowing capacity, should be adequate to fund our operating plans through 2019, but this is dependent on several things over which we have limited control. Our largest customer made up 74% of our 2018 revenue, and expects a material reduction in orders from us in 2019, which has limited our flexibility and required us to make cash management a top priority. We also expect growth in our Solésence ® business, which we view as a critical strategic undertaking, and may require additional investment in working capital. Our current plan is to continue to invest in Solésence ® -related operating expenses and capital equipment. Given the uncertainties relating to our largest customer, as well as our growth strategy for Solésence ® , it is possible that we may need to seek additional funding to address working capital demands within the next twelve months. We believe that we will be able to secure additional financing if needed, but we do not have any additional financing commitments in place as of today. However, we may not be able to secure additional financing in a timely manner under commercially reasonable terms, or at all. If we are unable to secure additional financing, we would need to delay capital expenditures related to our Solésence ® growth strategy, which could impede growth in 2019 and 2020.
These circumstances raise significant doubt as to the Company’s ability to operate as a going concern under U.S. GAAP. The accompanying financial statements have been prepared on a going concern basis in accordance with U.S. GAAP. As such, no adjustments have been made to the unaudited condensed consolidated financial statements for the recoverability of assets and classification of liabilities that might be necessary should the Company be unable to continue operating as a going concern.
(3) Summary of Significant Accounting Policies
Recently Adopted Financial Accounting Standards
On January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases, ASU No. 2018-10, Codification Improvements to Topic 842 (Leases) and ASU No. 2018-11, Targeted Improvements to Topic 842 (Leases). The guidance is intended to increase transparency and comparability among companies for leasing transactions, including a requirement for companies that lease assets to recognize on their balance sheets the assets and liabilities for the rights and obligations created by those leases. The guidance also provides for disclosures that allow the users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
7
The Company adopted the guidance on January 1, 2019 using the modified retrospective method without restatement of comparative periods. As such, periods prior to the date of adoption are presented in accordance with ASC 840 - Leases. The Company utilized the available practical expedient that allowed for the Company to not reassess whether existing contracts contain a lease under the new definition of a lease, lease classification for existing leases and whether previously capitalized initial direct costs would qualify for capitalization under the new guidance.
The adoption of this guidance had a material impact on the Consolidated Condensed Balance Sheet as of March 31, 2019 due to the recognition of equal right-of-use assets and lease liabilities for the Company’s portfolio of operating leases. The right-of-use asset balance was then adjusted by the reclassification of pre-existing accrued rent balances from other line items within the Consolidated Condensed Balance Sheet. The adoption had an immaterial impact to the Consolidated Condensed Statement of Cash Flows and to the Consolidated Condensed Statement of Operations for the three months ended March 31, 2019. The adoption had no impact to the Consolidated Condensed Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2019. Additional information and disclosures required by the new standard are contained in Note 10, Leases.
(4) Description of Business
Nanophase is a skin and sun care focused company that offers engineered materials, formulation development and commercial manufacturing with an integrated family of technologies. We look at our products in three major product categories; Personal Care Ingredients, including sunscreens as active ingredients; Solésence, including full formulations of skin care products, marketed and sold by our wholly-owned subsidiary, Solésence, LLC (“Solésence,” or our “Solésence ® subsidiary”); and Advanced Materials, including architectural and industrial coating applications, abrasion-resistant additives, plastics additives, medical diagnostics, and a variety of surface finishing technologies (polishing).
We target markets in which we believe practical solutions may be found using our products. We work closely with current and potential customers in these target markets to identify their material and performance requirements and market our materials to various end-use applications manufacturers, and our Solésence ® products to cosmetics and skin care brands. Recently developed technologies have made certain new products possible and opened potential new markets. During 2015 we were granted a patent on a new type of particle surface treatment (coating) — now called Active Stress Defense™ Technology — which became the cornerstone of our new product development in personal care, with first revenue recognized during 2016. In addition, through the creation of our Solésence ® subsidiary, we utilize this particle surface treatment to manufacture and sell fully developed solutions to targeted customers in the skin care industry, in addition to the ingredients we have traditionally sold in the personal care area.
Although our primary strategic focus has been the North American market, we currently sell material to customers overseas and have been working to expand our reach within foreign markets. The Company was incorporated in Illinois on November 25, 1989, and became a Delaware corporation during November 1997. Our common stock trades on the OTCQB marketplace under the symbol NANX.
While product sales comprise the majority of our revenue, we also recognize revenue from other sources from time to time. These activities are not expected to drive the long-term growth of the business. For this reason, we classify such revenue as “other revenue” in our Consolidated Condensed Statements of Operations, as it does not represent revenue directly from the sale of our products.
8
(5) Revenues
Revenues are recognized at a point in time, typically when control of the promised goods is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods.
The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses. Customers deposits, deferred revenue and other receipts are deferred and recognized when the revenue is realized and earned. Cash payments to customers are classified as reductions of revenue in the Company’s Consolidated Condensed Statement of Operations.
The Company does not disclose the value of the unsatisfied performance obligations for contracts with an original expected length of one year or less and contracts for which the Company recognizes revenue which the Company has the right to invoice for goods completed.
(6) Earnings Per Share
Earnings (loss) per share is computed using the Treasury Stock Method. Options to purchase approximately 766,000 shares of common stock that were outstanding as of March 31, 2019 were not included in the computation of earnings (loss) per share for the three-month period ended March 31, 2019, as the impact of such shares would be anti-dilutive. Options to purchase approximately 205,000 shares of common stock that were outstanding as of March 31, 2018 were not included in the computation of earnings (loss) per share for the three-month period ended March 31, 2018, as the impact of such shares would be anti-dilutive.
(7) Financial Instruments
We follow the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures , which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, along with the promissory note with no related borrowings described in Note 8, and any borrowings on the working capital line of credit from Libertyville Bank and Trust and any borrowings under the Master Agreement from Beachcorp, LLC described below in Note 8. The fair values of all financial instruments were not materially different from their carrying values. There were no financial assets or liabilities adjusted to fair value on March 31, 2019 or December 31, 2018.
(8) Notes and Line of Credit
During July 2014 we entered into a bank-issued letter of credit and related promissory note for up to $30 in borrowings to support our obligations under our facility lease agreement. No borrowings have been incurred under this promissory note. Should any borrowings occur in the future, the interest rate would be the prime rate plus 1%, with the bank having the right to “set off” or apply unpaid balances against our checking account if we fail to meet our obligations under any borrowings under the note. It is our intention to renew this note annually, for as long as we need to do so pursuant to the terms of our facility lease agreement. This note currently expires on July 1, 2019 and will then auto-renew through July 1, 2020. Because there were no amounts outstanding on the note at any time during 2019 or 2018, we have recorded no related liability on our balance sheet.
9
On March 22, 2019, we executed a New Business Loan Agreement, dated as of March 4, 2019, with Libertyville Bank and Trust Company, a Wintrust Community Bank (“Libertyville”), our primary bank, which replaces the Line of Credit Agreement with Libertyville having a maturity date of March 4, 2019. Under the New Business Loan Agreement, Libertyville will provide a maximum of (i) $500 or (ii) two times the sum of (a) 75% our eligible accounts receivables and (b) our cash deposited with Libertyville, whichever is less, of revolving credit to us, collateralized by a senior priority lien on our accounts receivable, inventory, equipment, general intangibles and fixtures. Interest is payable monthly on any advances at a floating interest rate of the prime rate at the time plus 1%. We must have $500 in cash, inclusive of the borrowed amount, at Libertyville on the date of any advance. Advances may only occur at the beginning or end of a fiscal quarter and must be repaid in full within five business days of the advance. Amounts due under the Line of Credit Agreement must be paid in full on April 4, 2020. We borrowed $500 on March 29, 2019, and repaid it on April 3, 2019. There was no outstanding balance on this loan at December 31, 2018.
On November 16, 2018, we entered into a Business Loan Agreement (the “Master Agreement”) with Beachcorp, LLC. Beachcorp, LLC is managed by Bradford T. Whitmore, who, together with his affiliates Grace Brothers, Ltd. and Grace Investments, Ltd., beneficially owned approximately 47% of the outstanding shares of our common stock as of March 31, 2019, and owned approximately 53% of our common stock as of May 13, 2019, pursuant to our recent financing (see Note 14). The Master Agreement relates to two loan facilities, each evidenced by separate promissory notes, each dated November 16, 2018: a term loan to the Company of up to $500 to be disbursed in a single advance (the “Term Loan”) with a fixed annual interest rate of 8.25%, payable quarterly, accruing from the date of such advance and with principal due on December 31, 2020; and an asset-based revolving loan facility for the Company of up to $2,000 (the “Revolver Facility”), with floating interest accruing at the prime rate plus 3% (8.25% minimum) per year, with a borrowing base consisting of qualified accounts receivable of the Company, and with all principal and accrued interest due March 31, 2020. The Term Loan and Revolver Facility are secured by all the unencumbered assets of the Company and subordinated to Libertyville’s secured interest under the New Business Loan Agreement. The Master Agreement substantially restricts the Company’s ability to incur additional indebtedness during the terms of both the Term Loan and the Revolver Facility. On March 31, 2019, the balance on the term loan was $500 and the balance on the Revolver Facility was $1,448. There was $26 in 2019 interest expense, of which $13 was accrued and $13 paid by the end of the quarter. As Beachcorp, LLC is an affiliate of one of our shareholders, this amounts to interest to be paid to a related party. On March 31, 2019 borrowings were within the credit agreement limit with an additional $391 available. The balance of borrowing base, loan amount, and any excess payments required over the available borrowing base will change as frequently as daily, given the operational nature of the elements of the Revolver Facility.
(9) Inventories
Inventories consist of the following:
| March 31, 2019 | December 31, 2018 | |||||||
| Raw materials | $ | 1,250 | $ | 1,086 | ||||
| Finished goods | 1,057 | 1,243 | ||||||
| 2,307 | 2,329 | |||||||
| Allowance for excess inventory quantities | (79 | ) | (87 | ) | ||||
| $ | 2,228 | $ | 2,242 | |||||
10
(10) Leases
The Company’s operating lease portfolio is comprised of operating leases for office, warehouse space and equipment. Certain of the Company’s leases include one or more options to renew or terminate the lease at the Company’s discretion. The Company regularly evaluates the renewal and termination options and when they are reasonably certain of exercise, includes the renewal or termination option in our lease term.
The adoption of Topic 842 resulted in the Company recognizing operating lease liabilities totaling $2,556 with a corresponding right of-use (‘ROU”) asset of $2,212 based on the present value of the minimum rental payments of such leases. The variance between the ROU asset balance and the lease liability is deferred rent liability that existed prior to the adoption of the ASC 842 and was offset against the ROU asset balance during the adoption. As of March 31, 2019, the ROU asset had a balance of $2,122 which is included in the “Operating lease right-of-use assets” line item of these condensed consolidated financial statements and current and non-current lease liabilities related to the ROU asset of $331 and $2,117 respectively, and are included in the “Current portion of operating lease obligations” and “Long-term portion of operating lease obligations” line items of these condensed consolidated financial statements. The discount rates used for leases accounted for under ASC842 are based on an interest rate yield curve developed for the leases in the Company’s portfolio.
The office leases contain variable lease payments which consist primarily of rent escalations based on an established index or rate and taxes, insurance, and common area or other maintenance costs, which are paid based on actual costs incurred by the lessor. The Company has elected to utilize the available practical expedient to not separate lease and non-lease components.
Quantitative information regarding the Company’s leases is as follows:
|
Three Months Ended
March 31, 2019 |
||||
| Components of lease cost | ||||
| Finance lease cost components: | ||||
| Amortization of finance lease assets | $ | 17 | ||
| Interest on fiance lease liabilities | 16 | |||
| Total finance lease costs | 33 | |||
| Operating lease cost components: | ||||
| Operating lease cost | 123 | |||
| Variable lease cost | 27 | |||
| Short-term lease cost | 22 | |||
| Total operating lease costs | 172 | |||
| Total lease cost | $ | 205 | ||
11
Supplemental cash flow information related to leases is as follows for the period ended March 31, 2019:
The future maturities of the Company’s finance and operating leases as of March 31, 2019 is as follows:
| Finance | Operating | ||||||||||||
| Leases | Leases | Total | |||||||||||
| 2019 | $ | 206 | $ | 506 | $ | 712 | |||||||
| 2020 | 255 | 616 | 871 | ||||||||||
| 2021 | 196 | 618 | 814 | ||||||||||
| 2022 | 109 | 632 | 741 | ||||||||||
| 2023 | 5 | 642 | 647 | ||||||||||
| 2024 and thereafter | — | 580 | 580 | ||||||||||
| Total payments | $ | 771 | $ | 3,594 | $ | 4,365 | |||||||
| Less amounts representing interest | (99 | ) | (1,146 | ) | (1,245 | ) | |||||||
| Total minimum payments required: | $ | 672 | $ | 2,448 | $ | 3,120 | |||||||
(11) Share-Based Compensation
We follow FASB ASC Topic 718, Compensation – Stock Compensation , in which compensation expense is recognized only for share-based payments expected to vest. We recognized compensation expense related to stock options of $57 and $43 for each of the three-month periods ended March 31, 2019 and 2018, respectively.
As of March 31, 2019, there was approximately $334 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under our stock option plans. That cost is expected to be recognized over a remaining weighted-average period of 1.9 years.
Stock Options and Stock Grants
No stock options were exercised during the three months ended March 31, 2019, or March 31, 2018. During the three months ended March 31, 2019, 8,000 stock options were granted, compared to 36,000 stock options granted during the same period in 2018. During the three months ended March 31, 2019, 4,000 stock options expired, and 11,000 stock options were forfeited compared to no stock options being forfeited and 101,000 stock options expiring during the same period in 2018. We had 3,408,000 stock options outstanding at a weighted average exercise price of $0.67 on March 31, 2019, compared to 3,415,000 stock options outstanding at a weighted average exercise price of $0.67 on December 31, 2018.
12
The following table illustrates the various assumptions used to calculate the Black-Scholes option pricing model for stock options granted during the three-month periods presented:
| March 31, 2019 | March 31, 2018 | |||||||
| Weighted-average risk-free interest rates: | 2.5 | % | 2.7 | % | ||||
| Dividend yield: | — | — | ||||||
| Weighted-average expected life of the option: | 7 years | 7 years | ||||||
| Weighted-average expected stock price volatility: | 94 | % | 94 | % | ||||
| Weighted-average fair value of the options granted: | $ | 0.75 | $ | 0.36 | ||||
As of March 31, 2019, we did not have any unvested restricted stock or performance shares outstanding.
(12) Significant Customers and Contingencies
Revenue from three customers constituted approximately 54%, 19% and 9%, respectively, of our total revenue for the three months ended March 31, 2019. Amounts included in accounts receivable on March 31, 2019 relating to these three customers were approximately $631, $673 and $325, respectively. Revenue from these three customers constituted approximately 78%, 0% and 0%, respectively, of our total revenue for the three months ended March 31, 2018. Amounts included in accounts receivable on March 31, 2018 relating to these three customers were approximately $1,089, $0 and $0, respectively. The loss of one of these significant customers, a significant decrease in revenue from one or more of these customers, or the failure to attract new customers could have a material adverse effect on our business, results of operations and financial condition.
We currently have exclusive supply agreements with BASF Corporation (“BASF”), our largest customer, that have contingencies outlined which could potentially result in the license of technology and/or the sale of production equipment from the Company to the customer intended to provide capacity sufficient to meet the customer’s production needs. This outcome may occur if we fail to meet certain performance requirements, certain other obligations and/or certain financial condition covenants. The financial condition covenants in one of our supply agreements with BASF “trigger” a technology transfer right (license and equipment sale at BASF’s option) in the event (a) that earnings for the twelve-month period ending with our most recently published quarterly financial statements are less than zero and our cash, cash equivalents and certain investments are less than $500,000, or (b) of an acceleration of any debt maturity having a principal amount of more than $10 million. There are certain minimum finished goods inventory requirements with the 2019 amendment to the supply agreement. This agreement also requires Nanophase to maintain certain finished goods inventory levels as “safety stock,” beginning in the first quarter of 2019, and increasing through the third quarter of 2019 to a negotiated level based on agreed demand metrics, in order to maintain the $500,000 non-cash component discussed above. After September 30, 2019, should our safety stock fall below the prescribed amount of material, the quarter-end cash requirement would revert to $1,000,000 in cash, cash equivalents, and certain investments. The safety stock requirement may be adjusted upon mutual agreement.
Our supply agreements with BASF also “trigger” a technology transfer right in the event of our insolvency, as further defined within the agreements. In the event of an equipment sale, upon incurring a triggering event, the equipment would be sold to the customer at either 115% of the equipment’s net book value or the greater of 30% of the original book value of such equipment, and any associated upgrades to it, or 115% of the equipment’s net book value, depending on the equipment and related products.
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We believe that we should have sufficient cash and credit availability (See the description of our New Line of Credit Agreement with Libertyville and the Master Agreement with Beachcorp, LLC (described in Note 8) to operate our business during 2019, but this is dependent on several things over which we have limited control. If a triggering event were to occur and BASF elected to proceed with the license and related equipment sale mentioned above, we would receive royalty payments from this customer for products sold using our technology; however, we would lose both significant revenue and the ability to generate significant revenue to replace that which was lost in the near term. Replacement of necessary equipment that could be purchased and removed by the customer pursuant to this triggering event could take in excess of twelve months. Any additional capital outlays required to rebuild capacity would probably be greater than the proceeds from the purchase of the assets as dictated by our agreement with the customer. Similar consequences would occur if we were determined to have materially breached certain other provisions of the supply agreement with BASF. Any such event would also likely result in the loss of many of our key staff and line employees due to economic realities. We believe that our employees are a critical component of our success and it could be difficult to replace them quickly. Given the occurrence of any such event, we might not be able to hire and retain skilled employees given the stigma relating to such an event and its impact on us. Finally, any shortfall in capital needed to operate the business as management intends, including with respect to avoiding this triggering event as described above, may result in a curtailment of certain activities or anticipated investments.
We expect to expend resources on research, development and product testing, and in expanding current capacity or capability for new business. In addition, we may incur significant costs in preparing, filing, prosecuting, maintaining and enforcing our patents and other proprietary rights. We may need additional financing if we were to lose an existing customer or suffer a significant decrease in revenue from one or more of our customers or because of currently unknown capital requirements, new regulatory requirements or the need to meet the cash requirements discussed above to avoid a triggering event under our BASF agreement. Given our expected growth in our Solésence® business, we may also have temporary working capital demands that we cannot fund with existing capital, while remaining in compliance with the covenants included in our BASF agreement described above. If necessary, we may seek funding through public or private financing and through contracts with governmental entities or other companies. Additional financing may not be available on acceptable terms or at all, and any such additional financing could be dilutive to our shareholders. If we are unable to obtain adequate funds, we may be required to delay, scale-back or eliminate some of our manufacturing and marketing operations or we may need to obtain funds through arrangements on less favorable terms. Such circumstances could raise doubt as to our ability to continue as a going concern. If we obtain funding on unfavorable terms, we may be required to relinquish rights to some of our intellectual property.
(13) Business Segmentation and Geographical Distribution
Revenue from international sources approximated $457 and $18 for the three months ended March 31, 2019 and 2018, respectively. All this revenue was product revenue.
Our Operations comprise a single business segment and all of our long-lived assets are located within the United States. We categorize our revenue stream into three main product categories, Personal Care Ingredients, Advanced Materials and Solésence ® . The revenues for the three months ended March 31, 2019 and 2018, respectively, by category, are as follows:
| Product Category | 2019 | 2018 | ||||||
| Personal Care Ingredients | $ | 2,009 | $ | 2,305 | ||||
| Advanced Materials | 850 | 532 | ||||||
| Solésence ® | 896 | 61 | ||||||
| Total Sales | $ | 3,755 | $ | 2,898 | ||||
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(14) Subsequent Events
On May 13, 2019, we sold approximately 4.2 million shares of our common stock to our largest investor for approximately $1,700 in proceeds. No selling commission or other remuneration was paid in connection with this transaction. We have used, and expect to continue to use, the proceeds for general corporate purposes.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview
Nanophase is an advanced materials and applications developer and commercial manufacturer with an integrated family of materials technologies. We produce engineered nano and “non-nano” materials for use in a variety of diverse markets: personal care including sunscreens as active ingredients and in fully formulated cosmetics of our own design, architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, medical diagnostics, energy (including solar control) and a variety of surface finishing technologies (polishing) applications, including optics. Finally, we have expanded our offerings beyond active ingredients to include targeted full formulations of skin care products, marketed and sold by our wholly-owned subsidiary, Solésence ® , LLC.
We target markets in which we believe practical solutions may be found using our products. We work closely with current and potential customers in these target markets to identify their material and performance requirements and market our materials to various end-use applications manufacturers, and our Solésence ® solutions to cosmetics and skin care brands. Recently developed technologies have made certain new products possible and opened potential new markets. For example, we have applied our skills at producing precisely defined nanomaterials to now create and sell larger, “non-nano” material products. Our focus is on customer need where we believe we have an advantage, as opposed to finding uses for one particular technology. We expect growth in end-user (manufacturing customers, including customers of our customers) adoption in 2019 and beyond. Our initiatives in targeted market areas are progressing at differing rates of speed, but we have been broadly moving through testing and development cycles, and in a number of cases believe we are approaching first revenue or next stage revenue with particular customers in the industries referenced above. For example, during 2015 we were granted a patent on a new type of particle surface treatment (coating), which became the cornerstone of our new product development in personal care, with first revenue recognized during 2016. In addition, through the creation of our Solésence ® , LLC subsidiary, we use this particle surface treatment to manufacture and sell fully developed solutions to targeted customers in the cosmetics and skin care industry, in addition to the additives we have traditionally sold in the personal care area. During 2015 and 2016 we developed and began to sell solutions in the energy management (particularly solar control) industry. We believe that the products that we have designed for this industry remain valuable to the market, although we are currently focusing the greatest part of our business development efforts on building and expanding our Solésence ® brand and product suite. We believe that successful introduction of our finished skin care products and materials with manufacturers may lead to follow-on orders for other finished products and materials in their applications. We expect that we will both work more deeply with current customers and attract additional customers, which should help us achieve growth in these markets in 2019 and beyond.
Results of Operations
Total revenue increased to $3,755,000 for the three months ended March 31, 2019, compared to $2,898,000 for the same period in 2018. A substantial majority of our revenue for both periods was from our largest customers, in particular, sales to our largest customer in personal care and sunscreen applications. Revenue from our top three customers was approximately 54%, 19% and 9%, respectively, of our total revenue for the three months ended March 31, 2019, compared to 78%, 0% and 0%, respectively, for the same customers during the same period in 2018. Product revenue, the primary component of our total revenue, increased to $3,497,000 for the three months ended March 31, 2019, compared to $2,867,000 for the same period in 2018. The increase was primarily due to increased order flow from several of our larger customers, including our largest customer in personal care and sunscreen applications.
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Other revenue increased to $258,000 for the three months ended March 31, 2019, compared to $31,000 for the same period in 2018. Other revenue is typically comprised primarily of shipping costs paid by customers. For the three months ended March 31, 2019, other revenue included $211,000 for a one-time buy out of bulk material and customer samples.
Cost of revenue generally includes costs associated with commercial production and customer development arrangements. Cost of revenue increased to $2,871,000 for the three months ended March 31, 2019, compared to $2,488,000 for the same period in 2018. The increase in cost of revenue was primarily driven by increased volume and price inflation on materials and manufacturing inefficiencies related to Solésence ® product launches. While we typically pass through costs to our customers, we sometimes cannot pass through 100% of pricing increases on raw materials, and even with pass throughs, our gross margin percentage is negatively impacted by higher material costs. We expect to continue new advanced material development relating to personal care ingredients and for our formulated Solésence ® products during 2019 and beyond. At current revenue levels we have generated a positive gross margin, though margins have been impeded by not having enough revenue to efficiently absorb manufacturing overhead that is required to work with current customers and expected future customers. We believe that our current fixed manufacturing cost structure is sufficient to support higher levels of revenue volume. The extent to which margins may grow, as a percentage of total revenue, will be dependent upon revenue mix, revenue volume, our ability to manage costs and pass commodity market-driven raw materials increases on to customers, and the speed and efficiency with which we are able to scale up production for our Solésence ® products. We expect that product revenue volume increases would result in our fixed manufacturing costs being more efficiently absorbed, which should lead to increased margins. We expect to continue to focus on reducing controllable variable product manufacturing costs, with potential variability related to the commodity metals markets, but may or may not realize absolute dollar gross margin growth through 2019 and beyond, dependent upon the factors discussed above.
Research and development expense, which includes all expenses relating to the technology and advanced engineering groups, primarily consists of costs associated with the development or acquisition of new product applications, and finished product formulations for our Solésence ® business. As an example, we have been, and continue to be, engaged in product development work for our new fully-formulated finished skincare products marketed through Solésence ® . Much of this work has led to several new products and additional potential new products. We are also engaged in a series of in-vitro, ex-vivo, and in-vivo tests to determine the productiveness of our Solésence ® products, as well as to provide our customers with support for a consumer claims set. We are not certain when or if any significant revenue will be generated from the production of the materials described above.
Research
and development expense decreased to $477,000 for the three months ended March 31, 2019, compared to $558,000 for the same period
in 2018. The primary reasons for this decrease were timing related to outside product testing and evaluation costs related to
our
Solésence
®
products. We expect quarterly research and development
expense to increase during the remainder of 2019
.
Selling, general and administrative expense increased to $877,000 for the three months ended March 31, 2019, compared to $765,000 for the same period in 2018. Much of this was attributed to increased costs associated with launching the Solésence ® brand. We expect selling, general and administrative expense to remain at current levels during the remainder of 2019.
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Inflation
We believe inflation has not had a material effect on our operations or financial position. However, supplier price increases and wage and benefit inflation, both of which represent a significant component of our costs of operations, may have a material effect on our operations and financial position in 2019 and beyond if we are unable to pass through any applicable increases under our present contracts or through to our markets in general.
Liquidity and Capital Resources
Our cash and cash equivalents amounted to $632,000 on March 31, 2019, compared to $1,345,000 on December 31, 2018 and $1,190,000 on March 31, 2019. The net cash used in our operating activities was $1,537,000 for the three months ended March 31, 2019, compared to $618,000 for the same period in 2018. The net use of cash during both periods was driven primarily by a significant increase in accounts receivable at the end of the period. Net cash used in investing activities was $240,000 during the three months ended March 31, 2019, compared to $5,000 for the three months ended March 31, 2018. Capital expenditures amounted to $240,000 and $5,000 for the three months ended March 31, 2019 and 2018, respectively. Net cash provided by financing activities was $1,064,000 during the three months ended March 31, 2019, compared to $142,000 net cash used for the three months ended March 31, 2018. We paid $52,000 for capital lease obligations during three months ended March 31, 2019 compared to $42,000 in the same period in 2018. On March 22, 2019 we entered a New Business Loan agreement with Libertyville for $500,000 which replaced the expiring prior year agreement. We paid the outstanding balance for the prior agreement of $300,0000, on January 9, 2018 and had borrowings under our line of credit of $200,000 on March 30, 2018, which was subsequently repaid on April 4, 2018. Under the new agreement, we borrowed $500,000 on March 30, 2019, which was subsequently repaid on April 3, 2019. During the three months ending March 31, 2019, we drew six times from the Master Agreement totaling $2,936,000 with repayment of $2,320,000. The net borrowings for the three months ended March 31, 2019 was $616,000. On May 13, 2019, we sold approximately 4.2 million shares of our common stock to our largest investor for approximately $1.7 million in proceeds. No selling commission or other remuneration was paid in connection with this transaction. We expect to use the proceeds for general corporate purposes.
Our supply agreements with our largest customer, BASF, contain certain financial covenants which could potentially impact our liquidity. The most restrictive financial covenants under these agreements require that we maintain a minimum of $1 million in total of at least $500,000 in cash, cash equivalents, and certain investments, with the balance being composed of certain inventory and receivables, and that we not have the acceleration of any debt maturity having a principal amount of more than $10 million, in order to avoid triggering the customer’s potential right to transfer certain technology and equipment to that customer at a contractually-defined price. We had approximately $632,000 in cash on March 31, 2019, with $500,000 borrowings on our Line of Credit. During March 2019, we entered into a new line of credit, which expires in April 2020. This supply agreement and its covenants are more fully described in Note 12, and our line of credit is more fully described in Note 8, to our Financial Statements in Part I, Item 1 of this Form 10-Q.
We believe that cash from operations, proceeds from our recent equity financing, and cash on hand, in addition to unused borrowing capacity will be adequate to fund our operating plans through 2019. Given our expected growth in our Solésence ® business, we are monitoring the temporary working capital demands that this could create, with timing being the most critical variable. Our actual future capital requirements in 2019 and beyond will depend on many factors, including customer acceptance of our current and potential advanced materials, applications and product, continued progress in research and development activities and product testing programs, the magnitude of these activities and programs, and the costs necessary to increase and expand our manufacturing capabilities and to market and sell our advanced materials, applications and products. 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 existing customers. Depending on the success of certain projects, we expect that capital spending relating to currently known capital needs for the remainder of 2019 will be between $700,000 and $900,000, and we could enter into one or more financing leases to finance these acquisitions, subject to the provisions of our new Line of Credit Agreement with Libertyville and our Master Agreement relating to our business loans with Beachcorp, LLC. If those projects are delayed or ultimately prove unsuccessful, or if we fail to obtain financing on terms acceptable to us, we would expect our capital spending to be below the lower end of that range. Similarly, substantial success in business development projects may cause the actual capital investment for the remainder of 2019 to exceed the top of this range.
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Should events arise that make it appropriate for us to seek additional financing, such additional financing may not be available on acceptable terms or even at all, and any such additional financing could be dilutive to our stockholders. Such financing could be necessitated by such things as the loss of one or more existing customers; a significant decrease in revenue from one or more of our customers; temporary working capital demands resulting from our expected growth in our Solésence ® business that we cannot fund with existing capital; currently unknown capital requirements in light of the factors described above; new regulatory requirements that are outside our control; the need to meet previously discussed cash requirements to avoid a triggering event under our BASF agreement, or various other circumstances coming to pass that we currently do not anticipate. The failure to have access to sufficient capital to fund our business plans may result in a curtailment or other change in those plans, and under such circumstances, may raise doubt as to our ability to continue as a going concern.
On March 31, 2019, we had a net operating loss carryforward of approximately $96 million for income tax purposes. Because we may have experienced “ownership changes” within the meaning of the U.S. Internal Revenue Code in connection with our 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 will expire at various dates between January 1, 2019 and December 31, 2036. Under recent changes in the Internal Revenue Code, losses incurred after January 1, 2018 carry forward indefinitely. As a result of the annual limitation and uncertainty as to the amount of future taxable income that will be earned prior to the expiration of the carryforward, we have concluded that it is likely that a substantial portion of this carryforward will expire before ultimately becoming available to reduce income tax liabilities. Changes in Illinois state law that began in 2011 will impact net loss carryforward duration and utilization on the state tax level.
Off−Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purposes of raising capital, incurring debt or operating our business. We do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.
As more fully described in Note 8 to our Financial Statements, in Part I, Item I of this Form 10-Q, during 2014 we entered into a letter of credit and promissory note for up to $30,000 supporting our obligations under our facility lease agreement. No borrowings have been incurred under this promissory note.
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Safe Harbor Provision
We want 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 (the “Exchange Act”). These statements reflect our current expectations of the future results of our operations, performance and achievements. Forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have tried, wherever possible, to identify these statements by using words such as “anticipates”, “believes”, “estimates”, “expects”, “plans”, “intends” 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 our actual results, performance or achievements in 2018 and beyond to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties and factors include, without limitation: our ability to be consistently profitable despite the losses we have incurred since our incorporation; a decision by a customer to cancel a purchase order or supply agreement in light of our dependence on a limited number of key customers; the terms of our supply agreements with BASF, which could trigger a requirement to transfer technology and/or sell equipment to that customer; our potential inability to obtain working capital when needed on acceptable terms or at all; our ability to obtain materials at costs we can pass through to our customers, including Rare Earth elements, specifically cerium oxide, as well as high purity zinc; uncertain demand for, and acceptance of, our nanocrystalline materials and So lésence ® products; our manufacturing capacity and product mix flexibility in light of customer demand; our limited marketing experience, including with our suite of Solésence ® products; changes in development and distribution relationships; the impact of competitive products and technologies; our dependence on patents and protection of proprietary information; the resolution of litigation or other legal proceedings in which we may become involved; our ability to maintain an appropriate electronic trading venue for our securities; and the impact of any potential new governmental regulations that could be difficult to respond to or costly to comply with. In addition, our forward-looking statements could be affected by general industry and market conditions and growth rates. 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, we undertake 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 |
Not required for a smaller reporting company.
| Item 4. | Controls and Procedures |
Disclosure controls
We are responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Exchange Act is: (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and (b) accumulated and communicated to our management, including our principal executive and principal financial officers, to allow timely decisions regarding required disclosures. It should be noted that in designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and that our management necessarily was required to apply its judgment regarding the design of our disclosure controls and procedures. As of the end of the period covered by this report, we conducted an evaluation, under the supervision (and with the participation) of our management, including our Chief Executive Officer (principal executive officer, and principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, our Chief Executive Officer concluded that our disclosure controls and procedures were effective at reaching that level of reasonable assurance.
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Internal control over financial reporting
The Company’s management, including the CEO (who is also currently acting as both the Company’s principal executive officer and the Company’s principal financial officer), confirm that there was no change in the Company’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
| Item 1. | Legal Proceedings |
We are not a party to any pending legal proceedings or claims that we believe will result in a material adverse effect on our business, financial condition, or operating results.
In addition to the information set forth in this Quarterly Report on Form 10-Q and before deciding to invest in, or retain, shares of our common stock, you also should carefully review and consider the information contained in our other reports and periodic filings that we make with the Securities and Exchange Commission, including, without limitation, the information contained under the caption Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018. Those risk factors could materially affect our business, financial condition and results of operations. Additional risks and uncertainties that we do not currently know about, we currently believe are immaterial or we have not predicted may also harm our business operations or adversely affect us. If any of these risks or uncertainties actually occurs, our business, financial condition, results of operations, cash flows or stock price could be materially adversely affected.
In addition to the risk factors previously disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, investors should consider the following risk factors:
Our Ability to Continue as a Going Concern is in Doubt Absent Obtaining Adequate New Financing
We incurred a net loss of approximately $513 thousand in the first quarter of 2019, approximately $2.1 million in fiscal year 2018 and $0.8 million in fiscal year 2017. We anticipate that we will continue to lose money for the foreseeable future. We believe that cash from operations, cash on hand, cash from our May 13, 2019 financing, in addition to unused borrowing capacity, should be adequate to fund our operating plans through 2019, but this is dependent on several things over which we have limited control. Our largest customer made up 74% of our 2018 revenue, and expects a material reduction in orders from us in 2019, which has limited our flexibility and required us to make cash management a top priority. We also expect growth in our Solésence ® business, which we view as a critical strategic undertaking, and may require additional investment in working capital. Our current plan is to continue to invest in Solésence ® -related operating expenses and capital equipment. Given the uncertainties relating to our largest customer, as well as our growth strategy for Solésence ® , it is possible that we may need to seek additional funding to address working capital demands within the next twelve months. We believe that we will be able to secure additional financing if needed, but we do not have any additional financing commitments in place as of today. However, we may not be able to secure additional financing in a timely manner under commercially reasonable terms, or at all. If we are unable to secure additional financing, we would need to delay capital expenditures related to our Solésence® growth strategy, which could impede growth in 2019 and 2020.
These circumstances raise significant doubt as to the Company’s ability to operate as a going concern for the next 12 months, and inability to fund our ongoing cash obligations may result in our ceasing to operate, which would result in liquidation of our assets. In a liquidation of the Company if we are unable to continue as a going concern, the value realized on our assets would likely be less than our outstanding obligations and, consequently, our stockholders would lose their entire investment.
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A Majority of our Common Stock is Controlled by a Single Stockholder
Together with his affiliates Grace Brothers, Ltd. and Grace Investments, Ltd., Bradford T. Whitmore beneficially owned 53% of our common stock as of May 13, 2019. Therefore, Mr. Whitmore has the legal power, regardless of the votes of our other stockholders, to elect all the members of the Company’s board of directors. Consequently, our board of directors and management may be strongly influenced by our controlling shareholders, and the interests of our current controlling shareholder may conflict with the interests of other stockholders.
Pursuant to the General Corporation Law of the State of Delaware and our Bylaws, our controlling shareholder is empowered to elect the majority of our board of directors, exercise overall control over our management, determine our policies, sell or, in any other manner, transfer shares representing control over the Company held by them and determine the result of any deliberation of our stockholders, including transactions with related parties, corporate reorganizations, sale of all or substantially all the assets, or delisting our shares from the OTCQB marketplace, as well as to determine the distribution and payment of any future dividends. Our controlling stockholder may have an interest in acquisitions, disposal of assets and partnerships, may seek funding or take other decisions that could conflict with the interests of other stockholders and which may not result in any improvement in our operating results.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
On May 13, 2019, we sold 4,189,000 shares of our common stock, $0.01 par value per share (“Common Stock”) to Bradford T. Whitmore for an aggregate purchase price of $1,676,600, representing a price of $0.40 per share of Common Stock. Together with his affiliates Grace Brothers, Ltd. and Grace Investments, Ltd., Mr. Whitmore beneficially owned approximately 47% of the outstanding shares of our common stock as of March 31, 2019, and owned approximately 53% of our common stock as of May 13, 2019. Through his affiliate Beachcorp, LLC, Mr. Whitmore is also a substantial lender to the Company under the Business Loan Agreement, dated November 16, 2018 (see Note 8 to our financial statements in Part I of this Quarterly Report on Form 10-Q). The Company did not engage an underwriter for this transaction, and no selling commission or other remuneration was paid in connection with this transaction. We have used, and expect to continue to use, the proceeds for general corporate purposes. The sale of Common Stock to Mr. Whitmore was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506(b) of Regulation D promulgated under the Securities Act because Mr. Whitmore has a preexisting relationship with the Company as its largest shareholder, Mr. Whitmore represented to the Company that he has assets or income sufficient to qualify as an accredited investor, as defined under Regulation D, and the Company did not engage in any general solicitation or general advertising in offering such securities.
In connection with the sale of Common Stock, the Company entered into a Common Stock Purchase Agreement, dated May 13, 2019, with Mr. Whitmore, providing for the unregistered sale to Mr. Whitmore of the number shares of Common Stock stated above for the consideration stated above and otherwise including representations, warranties and registration rights which are customary for similar private placements. The complete text of the Common Stock Purchase Agreement, dated May 13, 2019, between the Company and Mr. Whitmore is filed as Exhibit 4.1 to this Quarterly Report on Form 10-Q, and this summary is qualified in its entirety by reference to such Exhibit 4.1.
| Item 3. | Defaults Upon Senior Securities |
None.
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| Item 4. | Mine Safety Disclosures |
Not applicable.
| Item 5. | Other Information |
None.
| Item 6. | Exhibits |
| Exhibit 4.1 | Common Stock Purchase Agreement, dated May 13, 2019, between the Company and Bradford T. Whitmore. | |
| Exhibit 10.1* | Amendment No. 4 to Zinc Oxide Supply Agreement, dated as of January 1, 2019 and entered into on March 11, 2019, between the Company and BASF Corporation. | |
| Exhibit 31.1 | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act. | |
| Exhibit 31.2 | Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act. | |
| Exhibit 32 | Certification of the Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350. | |
| Exhibit 101 | The following materials from Nanophase Technologies Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted in XBRL (Extensible Business Reporting Language): (1) the Balance Sheets, (2) the Statements of Operations, (3) the Statements of Stockholders Equity, (4) the Statements of Cash Flows, and (5) the Notes to Unaudited Consolidated Condensed Financial Statements. |
* Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
22
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 15, 2019 | By: /s/ JESS A. JANKOWSKI | ||
| Jess A. Jankowski | |||
| President and Chief Executive Officer | |||
| (principal executive officer, and principal financial officer) | |||
23
Nanophase Technologies Corporation 10-Q
Exhibit 4.1
NANOPHASE TECHNOLOGIES CORPORATION
COMMON STOCK PURCHASE AGREEMENT
This Common Stock Purchase Agreement (this “ Agreement ”) is made as of May 13, 2019 by and between Nanophase Technologies Corporation , a Delaware corporation with its principal office at 1319 Marquette Drive, Romeoville, Illinois 60446 (the “ Company ”), and Bradford T. Whitmore (the “ Purchaser ”).
Recitals
A.
The Company has authorized the sale and issuance of up to 4,189,000 shares (the “ Shares ”) of the common stock of the Company, $0.01 par value per share (the “ Common Stock ”), to an investor in a private placement (the “ Offering ”).
B.
Under Section 4(a)(2) of the Securities Act of 1933 (the “Securities Act”) and Rule 506(b) promulgated thereunder, the Company desires to sell to the Purchaser and the Purchaser desires to purchase from the Company 4,189,000 shares of Common Stock on the terms and subject to the conditions set forth in this Agreement.
Terms and Conditions
The parties agree as follows:
1.
Purchase of the Shares.
1.1
Agreement to Sell and Purchase. At the Closing (as hereinafter defined), the Company shall issue and sell to the Purchaser, and Purchaser shall purchase from the Company 4,189,000 shares of Common Stock for an aggregate purchase price of $1,675,600 (the “ Purchase Price ”). The purchase price for each Share purchased hereunder is $0.40.
1.2
Closing; Closing Date. The parties shall complete the sale and purchase of the Shares (the “ Closing ”) at 9:00 a.m. (Chicago time) on the date hereof (the “ Closing Date ”), remotely by.pdf or other electronic transmission of documents or at such other time and place as the Company and Purchaser may agree.
1.3
Delivery of the Shares. At the Closing, subject to the terms and conditions hereof, the Company will deliver to the Purchaser a stock certificate or certificates in such denominations and registered in such names as the Purchaser may designate by notice to the Company, representing the Shares, dated as of the Closing Date (each a “ Certificate ”), against payment of the purchase price therefor by cash in the form of wire transfer, unless other means of payment is agreed upon by the Purchaser and the Company.
2.
Representations and Warranties of the Company. The Company hereby represents and warrants to the Purchaser:
2.1
Authorization. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization, execution and delivery of this Agreement has been taken. The Company has the requisite corporate power to enter into this Agreement and carry out and perform its obligations under the terms of this Agreement. The Company has the requisite corporate power to issue and sell the Shares. This Agreement has been duly authorized, executed and delivered by the Company and, upon due execution and delivery by the Purchaser, this Agreement will be a valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as rights to indemnity hereunder may be limited by federal or state securities laws and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally or by equitable principles.
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2.2
Organization, Good Standing and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as now conducted.
2.3
SEC Filings ; Financial Statements. As used herein, the “ Company SEC Documents ” means all reports, schedules, forms, statements and other documents filed or furnished, as applicable, by the Company under the Securities Exchange Act of 1934 (the “ Exchange Act ”), including pursuant to Section 13(a) or 15(d) thereof, including the exhibits thereto and documents incorporated by reference therein. As of their respective filing dates, the Company SEC Documents since December 31, 2018 complied in all material respects with the requirements of the Securities Act and the Exchange Act and the rules and regulations of the Securities and Exchange Commission (the “ SEC ”) promulgated thereunder, and none of these Company SEC Documents, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made not misleading. The Company SEC Documents include all filings on Form 8-K which may have been required by reason of events occurring after December 31, 2018. The financial statements contained in the Company SEC Documents since December 31, 2018: (i) complied in all material respects with applicable accounting requirements and the published rules and regulations of the SEC applicable thereto; (ii) were prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods covered, except as may be indicated in the notes to such financial statements and (in the case of unaudited consolidated condensed statements) as permitted by Form 10-Q of the SEC, and except that unaudited consolidated condensed financial statements may not contain footnotes and are subject to year-end audit adjustments; and (iii) fairly present the financial position of the Company as of the respective dates thereof and the results of operations, cash flows and the changes in stockholders’ equity of the Company for the periods covered thereby.
2.4
Valid Issuance of Shares. The Shares are duly authorized and, when issued, sold and delivered and paid for in accordance with the terms hereof, will be duly and validly authorized and issued, fully paid and non-assessable, free from all taxes, liens, claims, encumbrances and charges with respect to the issue thereof; provided, however, that the Shares may be subject to restrictions on transfer under state and/or federal securities laws or as otherwise set forth herein. The issuance, sale and delivery of the Shares in accordance with the terms hereof will not be subject to preemptive rights of stockholders of the Company.
3.
Representations and Warranties of the Purchaser. The Purchaser represents and warrants to the Company as follows:
3.1
Legal Power. The Purchaser has the requisite authority to enter into this Agreement and to carry out and perform his obligations under the terms of this Agreement. All action on the Purchaser’s part required for the lawful execution and delivery of this Agreement have been or will be effectively taken prior to the Closing.
3.2
Due Execution. This Agreement has been duly authorized, executed and delivered by the Purchaser, and, upon due execution and delivery by the Company, this Agreement will be a valid and binding agreement of the Purchaser, except as rights to indemnity hereunder may be limited by federal or state securities laws and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally or by equitable principles.
3.3
Investment Representations. In connection with the sale and issuance of the Shares, the Purchaser makes the following representations:
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(a)
Investment for Own Account. The Purchaser is acquiring the Shares for his own account, not as nominee or agent, and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the Securities Act; provided, however, that by making the representations herein, the Purchaser does not agree to hold any of the Shares for any minimum or specific term and reserves the right to dispose of the securities at any time in accordance with or pursuant to a registration statement or an exemption from the registration requirements of the Securities Act.
(b)
Transfer Restrictions; Legends. The Purchaser understands that (i) the Shares have not been registered under the Securities Act; (ii) the Shares are being offered and sold pursuant to an exemption from registration, based in part upon the Company’s reliance upon the statements and representations made by the Purchaser in this Agreement, and that the Shares must be held by the Purchaser indefinitely, and that the Purchaser must, therefore, bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Securities Act or is exempt from such registration; (iii) each Certificate representing the Shares will be endorsed with the following legend until the earlier of (1) such date as the Shares have been registered for resale by the Purchaser or (2) the date the Shares are eligible for sale under Rule 144 under the Securities Act:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ SECURITIES ACT ”), OR UNDER THE SECURITIES LAWS OF ANY STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. UNLESS SOLD PURSUANT TO EITHER AN EFFECTIVE REGISTRATION STATEMENT OR RULE 144 UNDER THE SECURITIES ACT, THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
(iv) the Company will instruct any transfer agent not to register the transfer of the Shares (or any portion thereof) until the applicable date set forth in clause (iii) above unless (A) the conditions specified in the foregoing legends are satisfied, (B) if the opinion of counsel referred to above is to the further affect that such legend is not required in order to establish compliance with any provisions of the Securities Act or this Agreement, (C) if the Purchaser provides the Company with reasonable assurance, such as through a representation letter, that the Shares may be sold pursuant to Rule 144 under the Securities Act, or (D) other reasonably satisfactory assurances of such nature are given to the Company. If so required by the Company’s transfer agent, the Company shall cause its counsel to issue and deliver a legal opinion to the transfer agent to affect the removal of the restrictive legend contemplated by this Agreement.
Purchaser may from time to time pledge, and/or grant a security interest in some or all of the Shares pursuant to a bona fide margin agreement in connection with a bona fide margin account and, if required under the terms of such agreement or account, the Purchaser may transfer pledged or secured Shares to the pledgees or secured parties. Such a pledge or transfer is not subject to approval or consent of the Company and no legal opinion of legal counsel to the pledgee, secured party or pledgor is required in connection with the pledge, but such legal opinion may be required in connection with a subsequent transfer following default by the Purchaser to the transferee of the pledge. No notice is required of such pledge. At the Purchaser’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Shares may reasonably request in connection with a pledge or transfer of the Shares.
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Certificates evidencing the Shares will not contain any legend (including the legend set forth in this Section): (i) upon the effectiveness of a registration statement (including the Registration Statement (as defined below)) covering the resale of the Shares, or (ii) following a sale of such Shares pursuant to Rule 144, or (iii) while such Shares are eligible for sale under Rule 144, if such Shares have been held for one year or more pursuant to the requirements of Rule 144, or (iv) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the Staff of the SEC). Following such time as restrictive legends are not required to be placed on certificates representing Shares, the Company will, no later than three business days following the delivery by the Purchaser to the Company or the Company’s transfer agent of a certificate representing Shares containing a restrictive legend and such other documentation and representations as the Company, its legal counsel or transfer agent may reasonably request to confirm compliance with the preceding sentence as applicable (provided, however, that neither the Company nor its legal counsel will require a legal opinion in connection with any sale pursuant to Rule 144), deliver or cause to be delivered to the Purchaser a certificate representing such Shares that is free from all restrictive and other legends. The Company shall cause its counsel to issue a legal opinion to the Company’s transfer agent promptly after the effective date of a registration statement covering the Shares if required by the Company’s transfer agent to affect the removal of the legend hereunder. The Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Section. Certificates for Shares subject to legend removal hereunder shall be transmitted by the transfer agent of the Company to the Purchaser by crediting the account of the Purchaser’s prime broker with the Depository Trust Company system. The Company will pay all fees and expenses of its transfer agent and the Depository Trust Company in connection with the removal of legends pursuant to this Section 3.3(b).
Removal of the restrictive legend from certificates representing Shares as set forth in this Section 3.3(b) is predicated upon the Company’s reliance that the Purchaser will sell any Shares pursuant to either the registration requirements of the Securities Act, including any applicable prospectus delivery requirements, or an exemption therefrom.
(c)
Financial Sophistication; Due Diligence. The Purchaser has such knowledge and experience in financial or business matters that he is capable of evaluating the merits and risks of the investment in connection with the transactions contemplated in this Agreement. The Purchaser has, in connection with his decision to purchase the Shares, relied only upon the representations and warranties contained herein and the information contained in the Company SEC Documents. Further, the Purchaser has had such opportunity to obtain additional information and to ask questions of, and receive answers from, the Company, concerning the terms and conditions of the investment and the business and affairs of the Company, as the Purchaser considers necessary in order to form an investment decision.
(d)
Accredited Investor Status. The Purchaser is an “accredited investor” as such term is defined in Rule 501(a) of the rules and regulations promulgated under the Securities Act.
(e)
General Solicitation. The Purchaser is not purchasing the Shares as a result of any advertisement, article, notice or other communication regarding the Shares published in any newspaper, magazine or similar media or broadcast over the television or radio or presented at any seminar or any other general solicitation or general advertisement. Prior to the time that the Purchaser was first contacted by the Company the Purchaser had a pre-existing and substantial relationship with the Company.
3.4
No Investment, Tax or Legal Advice . The Purchaser understands that nothing in the Company SEC Documents, this Agreement, or any other materials presented to the Purchaser in connection with the purchase and sale of the Shares constitutes legal, tax or investment advice. The Purchaser has consulted such legal, tax and investment advisors as he, in his sole discretion, has deemed necessary or appropriate in connection with his purchase of Shares.
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3.5
Additional Acknowledgement. The Purchaser acknowledges that he has independently evaluated the merits of the transactions contemplated by this Agreement, that he has independently determined to enter into the transactions contemplated hereby, and that he is not relying on any advice from or evaluation by any other person.
3.6
No Short Position. As of the date hereof, and as of the date of the public announcement of the Offering, the Purchaser does not and will not (between the date hereof and the date of the public announcement of the Offering) engage in any short sale of the Company’s voting stock or any other type of hedging transaction involving the Company’s securities (including, without limitation, depositing shares of the Company’s securities with a brokerage firm where such securities are made available by the broker to other customers of the firm for purposes of hedging or short selling the Company’s securities).
4.
Reporting Status. With a view to making available to the Purchaser the benefits of certain rules and regulations of the SEC which may permit the sale of the Shares to the public without registration, the Company agrees to use its reasonable efforts to file with the SEC, in a timely manner all reports and other documents required of the Company under the Exchange Act. The Company will otherwise take such further action as the Purchaser may reasonably request, all to the extent required from time to time to enable the Purchaser to sell the Shares without registration under the Securities Act or any successor rule or regulation adopted by the SEC.
5.
Registration Rights.
5.1
Demand Registration.
(a)
Requests for Registration. At any time after four years after the date of this Agreement, the Purchaser may demand that the Company register all or part of the Registrable Securities (as defined below) under the Securities Act (a “ Demand Registration ”) on Forms S-1 or S-3 (or similar forms then in effect) (each, a “ Registration Statement ”) promulgated by the SEC under the Securities Act. Within ten days after receipt of a demand, the Company shall notify in writing all holders of Registrable Securities of the demand. Any holder who wants to include his, her, or its Registrable Securities in the Demand Registration must notify the Company within ten business days of receiving the notice of the Demand Registration. Except as provided in this Section 5, the Company shall include in all Demand Registrations all Registrable Securities for which the Company receives timely written demands for inclusion. All demands made pursuant to this Section 5.1(a) must specify the number of Registrable Securities to be registered (which may not be less than one third of the Registrable Securities) and the intended method of disposing of the Registrable Securities. The Company shall prepare and file with (or confidentially submit to) the SEC a Registration Statement covering all of the Registrable Securities that the holders thereof have requested to be included pursuant to such Demand Registration within 90 days after the date on which the initial request is given and will use its commercially reasonable efforts to cause such Registration Statement to be declared effective by the SEC as soon as practicable thereafter, subject to compliance with review by the SEC. Once a Registration Statement is declared effective by the SEC, the Company shall maintain its effectiveness for at least one hundred 120 days (or such shorter period as will terminate when all Registrable Securities covered by such Registration Statement have been sold or withdrawn). The Company shall not be obligated to affect, or to take any action to affect, a registration pursuant to any demand notice in accordance with this Section 5.1(a) after the Company has filed with the SEC three Registration Statements (counting for these purposes only registrations which have been declared or ordered effective). For purposes of this Agreement, the term “ Registrable Securities ” means (i) the Shares, and (ii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, any Shares.
(b)
Selection of Underwriters. The Company shall select the investment bankers and managers that will administer the offering as long as the investment bankers and the managers are reasonably satisfactory to the holders of a majority of the Registrable Securities requested to be included in a Demand Registration. The Company shall enter into a customary underwriting agreement with those investment bankers and managers.
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(c)
Delay in Filing. The Company may delay the filing of the Registration Statement in connection with a Demand Registration for a period of not more than 120 days upon the advice of the investment bankers and managers that will administer the offering that a delay is necessary or appropriate under the circumstances to prevent a material adverse effect on the Company. The Company may not use this right to delay more than once during the term of this Agreement.
(d)
Priority on Demand Registration. If the managing underwriters give the Company and the holders of the Registrable Securities being registered a written opinion that the number of Registrable Securities requested to be included exceeds the number of securities that can be sold, the Company will include in the registration only the number of Registrable Securities that the underwriters believe can be sold. The number of securities registered shall be allocated pro rata among the holders of Registrable Securities on the basis of the total number of Registrable Securities requested to be included in the registration.
5.2
Piggyback Registration .
(a)
If at any time the Company proposes to prepare and file a Registration Statement or post-effective amendments thereto covering the sale for cash of shares of Common Stock, including shares of Common Stock held by stockholders of the Company (in any such case, other than in connection with a merger, acquisition, pursuant to Form S-8 or successor form, or on any form which does not include substantially the same information as would be required to be included in a Registration Statement covering the sale of Registrable Securities), it will give written notice of its intention to do so (“ Notice ”), at least 30 days prior to the filing of each such Registration Statement, to the Purchaser. Upon the written request of the Purchaser, made within 20 days after the Notice is given, that the Company include any or all of the Purchaser’s Registrable Securities in the proposed Registration Statement, the Company shall use its best efforts to affect the registration under the Securities Act of the Registrable Securities which it has been so requested to register (the “ Piggyback Registration ”).
(b)
Notwithstanding the provisions of this Section 5.2, the Company may at any time after it has given written notice pursuant to this Section 5.2 (irrespective of whether any written request for inclusion of Registrable Securities shall have already been made) to elect not to file any such proposed Registration Statement, or to withdraw the same after the filing but prior to the effective date thereof, without incurring any liability to the Purchaser.
(c)
If any Piggyback Registration is an underwritten offering, the Company shall select the investment bankers and managers that will administer the offering, as long as the investment bankers and managers are reasonably satisfactory to the holders of a majority of the Registrable Securities. The Company shall enter into a customary underwriting agreement with the investment bankers and managers.
5.3
Registration Procedures.
(a )
Whenever the Purchaser requests the registration of any Registrable Securities under this Agreement, the Company shall use its reasonable best efforts to register and permit the sale of the Registrable Securities in accordance with the intended method of disposition, and to affect such registration and any related qualification or compliance with respect to all Registrable Securities held by the Purchaser. If the Company is not eligible to use Form S-3 at the time of filing, and the Company subsequently becomes eligible to use Form S-3, the Company shall file, as promptly as reasonably practicable, a new Registration Statement on Form S-3 covering the resale of the Registrable Securities and replace the Registration Statement on Form S-1 with the new Registration Statement on Form S-3 upon the effectiveness of the new Registration Statement on Form S-3.
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(b)
The Company shall use its best efforts to:
(i) prepare and file with the SEC such amendments and supplements to the Registration Statement and the Prospectus used in connection therewith as may be necessary or advisable to keep the Registration Statement current and effective for the Registrable Securities held by the Purchaser for a period ending on the earlier of (i) the date on which all Registrable Securities may be sold pursuant to Rule 144 under the Securities Act or any successor rule (“ Rule 144 ”) during any three-month period without the requirement for the Company to be in compliance with the current public information required under Rule 144(c)(1), or (ii) such time as all Registrable Securities have been sold pursuant to a registration statement or Rule 144. The Company shall notify the Purchaser promptly upon the Registration Statement and each post-effective amendment thereto, being declared effective by the SEC and advise the Purchaser that the form of Prospectus contained in the Registration Statement or post-effective amendment thereto, as the case may be, at the time of effectiveness meets the requirements of Section 10(a) of the Securities Act or that it intends to file a Prospectus pursuant to Rule 424(b) under the Securities Act that meets the requirements of Section 10(a) of the Securities Act;
(ii)
furnish to the Purchaser with respect to the Registrable Securities registered under the Registration Statement such number of copies of the Registration Statement and the Prospectus (including supplemental prospectuses) filed with the SEC in conformance with the requirements of the Securities Act and other such documents as the Purchaser may reasonably request, in order to facilitate the public sale or other disposition of all or any of the Registrable Securities by the Purchaser;
(iii) make any necessary Blue Sky filings;
(iv) pay the expenses incurred by the Company and the Purchaser in complying with Section 5, including, all registration and filing fees, FINRA fees, exchange listing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding attorneys’ fees of the Purchaser and any and all underwriting discounts and selling commissions applicable to the sale of Registrable Securities by the Purchaser);
(v) advise the Purchaser, promptly after it shall receive notice or obtain knowledge of the issuance of any stop order by the SEC delaying or suspending the effectiveness of the Registration Statement or of the initiation of any proceeding for that purpose; and it will promptly use its reasonable best efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued; and
(vi)
with a view to making available to the Purchaser the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit the Purchaser to sell Registrable Securities to the public without registration, the Company covenants and agrees to: (i) make and keep public information available, as such term is understood and defined in Rule 144, until the earlier of (A) such date as all of the Registrable Securities qualify to be resold immediately pursuant to Rule 144 or any other rule of similar effect during any three-month period without the requirement for the Company to be in compliance with the current public information required under Rule 144(c)(1) or (B) such date as all of the Registrable Securities shall have been resold pursuant to Rule 144 (and may be further resold without restriction); (ii) file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and under the Exchange Act; and (iii) furnish to the Purchaser upon request, as long as the Purchaser owns any Registrable Securities, (A) a written statement by the Company as to whether it has complied with the reporting requirements of the Securities Act and the Exchange Act, (B) a copy of the Company’s most recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q, and (C) such other information as may be reasonably requested in order to avail the Purchaser of any rule or regulation of the SEC that permits the selling of any such Registrable Securities without registration.
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The Company understands that the Purchaser disclaims being an underwriter, but acknowledges that a determination by the SEC that the Purchaser is deemed an underwriter does not relieve the Company of any obligations it has hereunder.
5.4
Transfer of Shares After Registration; Suspension.
(a)
Except if Section 5.4(b) applies, the Company shall: (i) if deemed necessary or advisable by the Company, prepare and file from time to time with the SEC a post-effective amendment to the Registration Statement or a supplement to the related Prospectus or a supplement or amendment to any document incorporated therein by reference or file any other required document so that such Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and so that, as thereafter delivered to purchasers of the Registrable Securities being sold thereunder, such Prospectus will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) provide the Purchaser copies of any documents filed pursuant to Section 5.4(a)(i); and (iii) upon request, inform the Purchaser if he so requests that the Company has complied with its obligations in Section 5.4(b)(i) (or that, if the Company has filed a post-effective amendment to the Registration Statement which has not yet been declared effective, the Company will notify the Purchaser to that effect, will use its reasonable best efforts to secure the effectiveness of such post-effective amendment as promptly as possible and will promptly notify the Purchaser pursuant to Section 5.4(b)(i) when the amendment has become effective).
(b)
If: (i) of any request by the SEC or any other federal or state governmental authority during the period of effectiveness of the Registration Statement for amendments or supplements to the Registration Statement or related Prospectus or for additional information; (ii) of the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (iii) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation of any proceeding for such purpose; or (iv) of any event or circumstance which necessitates the making of any changes in the Registration Statement or Prospectus, or any document incorporated or deemed to be incorporated therein by reference, so that, in the case of the Registration Statement, it will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and that in the case of the Prospectus, it will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; then the Company shall promptly deliver a certificate in writing to the Purchaser (the “ Suspension Notice ”) to the effect of the foregoing and, upon receipt of such Suspension Notice, the Purchaser will refrain from selling any Registrable Securities pursuant to the Registration Statement (a “ Suspension ”) until the Purchaser is advised in writing by the Company that the current Prospectus may be used, and has received copies from the Company of any additional or supplemental filings that are incorporated or deemed incorporated by reference in any such Prospectus. If any Suspension occurs, the Company will use its reasonable best efforts to cause the use of the Prospectus so suspended to be resumed as soon as reasonably practicable after delivery of a Suspension Notice to the Purchaser. In addition to and without limiting any other remedies (including, without limitation, at law or at equity) available to the Company and the Purchaser, each of the Company and the Purchaser is entitled to specific performance if the other party fails to comply with the provisions of this Section 5.4(b).
(c)
Notwithstanding the foregoing paragraphs of this Section 5.4, the Company shall use its reasonable best efforts to ensure that (i) a Suspension shall not exceed 30 days individually, (ii) Suspensions covering no more than 45 days, in the aggregate, shall occur during any twelve month period and (iii) each Suspension must be separated by a period of at least 30 days from a prior Suspension (each Suspension that satisfies the foregoing criteria being referred to herein as a “ Qualifying Suspension ”).
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(d)
The Company shall, immediately following the Registration Statement being declared effective, cause its counsel to issue a legal opinion to the Company’s transfer agent to affect the removal of the restrictive legend contemplated by this Agreement. The Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in this Agreement. Certificates for Registrable Securities subject to legend removal hereunder shall be transmitted by the transfer agent of the Company to the Purchaser by crediting the account of the Purchaser’s prime broker with the Depository Trust Company system.
5.5
Indemnification. For the purpose of this Section 5.5:
(a)
the term “ Registration Statement ” includes any final Prospectus, exhibit, supplement or amendment included in or relating to, and any document incorporated by reference in, the Registration Statement (or deemed to be a part thereof) referred to in Section 5.1; and
(b)
the term “ untrue statement ” means any untrue statement or alleged untrue statement of a material fact, or any omission or alleged omission to state in the Registration Statement a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
(c)
The Company shall indemnify and hold harmless the Purchaser from and against any losses, claims, damages or liabilities to which the Purchaser may become subject (under the Securities Act or otherwise) insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon (i) any untrue statement of a material fact contained in the Registration Statement, (ii) any inaccuracy in the representations and warranties of the Company contained in this Agreement or the failure of the Company to perform its obligations hereunder or (iii) any failure by the Company to fulfill any undertaking included in the Registration Statement, and the Company will reimburse the Purchaser for any reasonable legal expense or other actual accountable out-of-pocket expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim; provided, however, that the Company shall not be liable in any such case to the extent that such loss, claim, damage or liability arises out of, or is based upon, an untrue statement made in such Registration Statement in reliance upon and in conformity with written information furnished to the Company by or on behalf of the Purchaser specifically for use in preparation of the Registration Statement or the failure of the Purchaser to comply with his covenants and agreements contained herein or any statement or omission in any Prospectus that is corrected in any subsequent Prospectus that was delivered to the Purchaser prior to the pertinent sale or sales by the Purchaser.
(d)
The Purchaser shall indemnify and hold harmless the Company (and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act, each officer of the Company who signs the Registration Statement and each director of the Company) from and against any losses, claims, damages or liabilities to which the Company (or any such officer, director or controlling person) may become subject (under the Securities Act or otherwise), insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of, or are based upon, (i) any failure by the Purchaser to comply with the covenants and agreements contained in this Section 5 or (ii) any untrue statement of a material fact contained in the Registration Statement if, and only if, such untrue statement was made in reliance upon and in conformity with written information furnished by or on behalf of the Purchaser specifically for use in preparation of the Registration Statement, and the Purchaser will reimburse the Company (or such officer, director or controlling person, as the case may be), for any reasonable legal expense or other reasonable actual accountable out-of-pocket expenses reasonably incurred in investigating, defending or preparing to defend any such action, proceeding or claim. The obligation to indemnify is limited to the net amount of the proceeds received by the Purchaser from the sale of the Registrable Securities pursuant to the Registration Statement.
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(e)
Promptly after receipt by any indemnified person of a notice of a claim or the beginning of any action in respect of which indemnity is to be sought against an indemnifying person pursuant to this Section 5.5, such indemnified person shall notify the indemnifying person in writing of such claim or of the commencement of such action, but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party under this Section 5.5 (except to the extent that such omission materially and adversely affects the indemnifying party’s ability to defend such action) or from any liability otherwise than under this Section 5.5. Subject to the provisions hereinafter stated, in case any such action is brought against an indemnified person, the indemnifying person is entitled to participate therein, and, to the extent that it elects by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, is entitled to assume the defense thereof, with counsel reasonably satisfactory to such indemnified person. After notice from the indemnifying person to such indemnified person of his or its election to assume the defense thereof (unless it has failed to assume the defense thereof and appoint counsel reasonably satisfactory to the indemnified party), such indemnifying person is not liable to such indemnified person for any legal expenses subsequently incurred by such indemnified person in connection with the defense thereof; provided, however, that if there exists a conflict of interest that would make it inappropriate, in the reasonable opinion of counsel to the indemnified person, for the same counsel to represent both the indemnified person and such indemnifying person or any affiliate or associate thereof, the indemnified person is entitled to retain his or its own counsel (who shall not be the same as the opining counsel) at the expense of such indemnifying person; provided, however, that no indemnifying person is responsible for the fees and expenses of more than one separate counsel (together with appropriate local counsel) for all indemnified parties. In no event is any indemnifying person liable in respect of any amounts paid in settlement of any action unless the indemnifying person has approved the terms of such settlement; provided that such consent may not be unreasonably withheld. No indemnifying person shall, without the prior written consent of the indemnified person, affect any settlement of any pending or threatened proceeding in respect of which any indemnified person is or could reasonably have been a party and indemnification could have been sought hereunder by such indemnified person, unless such settlement includes an unconditional release of such indemnified person from all liability on claims that are the subject matter of such proceeding.
(f)
If the indemnification provided for in this Section 5.5 is unavailable to or insufficient to hold harmless an indemnified party under subsection (c) or (d) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and the Purchaser on the other in connection with the statements or omissions or other matters which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative fault is determined by reference to, among other things, in the case of an untrue statement, whether the untrue statement relates to information supplied by the Company on the one hand or the Purchaser on the other and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement. The Company and the Purchaser agree that it would not be just and equitable if contribution pursuant to this subsection (f) were determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to above in this subsection (f). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (f) is deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (f), the Purchaser is not required to contribute any amount in excess of the amount by which the net amount received by that the Purchaser from the sale of the Registrable Securities to which such loss relates exceeds the amount of any damages which the Purchaser has otherwise been required to pay to the Company by reason of such untrue statement. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) is entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
| Page 10 |
(g)
The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 5.5, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 5.5 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement as required by the Securities Act and the Exchange Act.
(h)
The obligations of the Company and of the Purchaser under this Section 5.5 survive completion of any offering of Registrable Securities in such Registration Statement for a period of two years from the effective date of the Registration Statement. No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation.
5.6
Termination of Conditions and Obligations. The conditions precedent imposed by Section 3 or this Section 5 upon the transferability of the Registrable Securities cease and terminate as to any particular number of the Registrable Securities when such Registrable Securities have been effectively registered under the Securities Act and sold or otherwise disposed of in accordance with the intended method of disposition set forth in the Registration Statement covering such Registrable Securities or at such time as an opinion of counsel satisfactory to the Company has been rendered to the effect that such conditions are not necessary in order to comply with the Securities Act. The Company shall request an opinion of counsel promptly upon receipt of a request therefor from the Purchaser.
5.7
Information Available. So long as the Registration Statement is effective covering the resale of Registrable Securities owned by the Purchaser, the Company will furnish (or, to the extent such information is available electronically through the Company’s filings with the SEC, the Company will make available via the SEC’s EDGAR system or any successor thereto) to the Purchaser:
(a)
as soon as practicable after it is available, one copy of (i) its Annual Report to Stockholders (which Annual Report shall contain financial statements audited in accordance with generally accepted accounting principles by a national firm of certified public accountants) and (ii) if not included in substance in the Annual Report to Stockholders, its Annual Report on Form 10-K (the foregoing, in each case, excluding exhibits);
(b)
upon the request of the Purchaser, all exhibits excluded by the parenthetical to subparagraph (a)(ii) of this Section 5.7 as filed with the SEC and all other information that is made available to stockholders; and
(c)
upon the reasonable request of the Purchaser, an adequate number of copies of the Prospectuses to supply to any other party requiring such Prospectuses; and the Company, upon the reasonable request of the Purchaser, will meet with the Purchaser or a representative thereof at the Company’s headquarters during the Company’s normal business hours to discuss all information relevant for disclosure in the Registration Statement covering the Registrable Securities and will otherwise reasonably cooperate with the Purchaser conducting an investigation for the purpose of reducing or eliminating the Purchaser’s exposure to liability under the Securities Act, including the reasonable production of information at the Company’s headquarters; provided, that the Company is not required to disclose any confidential information to or meet at its headquarters with the Purchaser until and unless the Purchaser has entered into a confidentiality agreement in form and substance reasonably satisfactory to the Company with the Company with respect thereto.
| Page 11 |
5.8
Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 5 may be assigned by the Purchaser to a party that acquires, other than pursuant to the Registration Statement or Rule 144, any of the Registrable Securities originally issued or issuable to the Purchaser as contemplated by this Agreement, or to any affiliate of the Purchaser that acquires any Registrable Securities. Any such permitted assignee has all the rights of the Purchaser under this Section 5 with respect to the Registrable Securities transferred.
5.9
Selling Stockholder Questionnaire. The Purchaser agrees to furnish to the Company a completed questionnaire in the form attached to this Agreement as Exhibit A (a “Selling Stockholder Questionnaire”). The Company is not required to include the Registrable Securities of the Purchaser in a Registration Statement and is not be required to pay any liquidated or other damages hereunder to the Purchaser if he fails to furnish to the Company a fully completed Selling Stockholder Questionnaire at least three business days prior to the filing of the Registration Statement.
6.
Miscellaneous.
6.1
Governing Law. This Agreement is governed by and construed in accordance with the laws of the State of Illinois, without regard to the choice of law provisions thereof, and the federal laws of the United States.
6.2
Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof inure to the benefit of, and are binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. Notwithstanding the foregoing, the Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Purchaser, and the Purchaser may not assign this Agreement or any rights or obligations hereunder without the assignee agreeing to be bound by the terms hereof applicable to the Purchaser and make the representations required of the Purchaser hereunder .
6.3
Entire Agreement. This Agreement and the exhibits hereto, and the other documents delivered pursuant hereto, constitute the full and entire understanding and agreement among the parties with regard to the subjects hereof and no party is liable or bound to any other party in any manner by any representations, warranties, covenants, or agreements except as specifically set forth herein or therein. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto and their respective successors and assigns, any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided herein.
6.4
Severability. If any provision of this Agreement is invalid, illegal, or unenforceable, it is to the extent practicable, modified so as to make it valid, legal and enforceable and to retain as nearly as practicable the intent of the parties, and the validity, legality, and enforceability of the remaining provisions are not in any way be affected or impaired thereby.
6.5
Amendment and Waiver. Except as otherwise provided herein, any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance, either retroactively or prospectively, and either for a specified period of time or indefinitely), with the written consent of the Company and the Purchaser. Any amendment or waiver made in accordance with this Section 6.5 is binding upon any holder of any Shares purchased under this Agreement, each future holder of all such securities, and the Company.
| Page 12 |
6.6
Fees and Expenses. Except as otherwise set forth herein, the Company and the Purchaser bear its or his own expenses and legal fees incurred on its or his behalf with respect to this Agreement and the transactions contemplated hereby. Each party hereby agrees to indemnify and to hold harmless of and from any liability the other parties for any commission or compensation in the nature of a finder’s fee to any broker or other person or firm (and the costs and expenses of defending against such liability or asserted liability) for which such indemnifying party or any of his or its employees or representatives are responsible.
6.7
Notices. All notices, requests, consents and other communications hereunder must be in writing, delivered (A) if within the United States, by first-class registered or certified airmail, or nationally recognized overnight express courier, postage prepaid or by facsimile or electronic mail, or (B) if from outside the United States, by International Federal Express (or comparable service) or by facsimile or electronic mail, and deemed given (i) if delivered by first-class registered or certified mail domestic, upon the business day received, (ii) if delivered by nationally recognized overnight carrier, one business day after timely delivery to such carrier, (iii) if delivered by International Federal Express (or comparable service), two business days after so mailed, or (iv) if delivered by facsimile or electronic mail at or prior to 5:30 p.m. (Chicago time) on a business day, on the business day so delivered or, if delivered by facsimile or electronic mail after 5:30 p.m. (Chicago time) on a business day or on a day that is not a business day, the next business day after the date of delivery, and addressed as follows, or to such other address or addresses as may have been furnished in writing by a party to another party pursuant to this paragraph:
| • | if to the Company, to the address of the Company’s principal office set forth on the first page of this Agreement, Attention: Chief Executive Officer, e-mail: jjankowski@nanophase.com |
| • | if to the Purchaser, at his address on the signature page to this Agreement. |
6.8
Survival of Representations, Warranties and Agreements . Notwithstanding any investigation made by any party to this Agreement, all covenants, agreements, representations and warranties made by the Company and the Purchaser herein survive the execution of this Agreement, the delivery to the Purchaser of the Shares being purchased and the payment therefor, and a party’s reliance on such representations and warranties are not affected by any investigation made by such party or any information developed thereby.
6.9
Counterparts. This Agreement may be executed by electronic or facsimile signature and in any number of counterparts, each of which is deemed an original, but all of which together constitute one instrument.
6.10
Headings . The headings herein are for convenience only, do not constitute a part of this Agreement and do not limit or affect any of the provisions hereof.
[ The Remainder of this Page is Blank; Signature Pages Follow ]
| Page 13 |
Signed:
| NANOPHASE TECHNOLOGIES CORPORATION | |||
| By: | /s/ Jess Jankowski | ||
| Name: Jess Jankowski | |||
| Title: President & Chief Executive Officer | |||
[Signature Page to Common Stock Purchase Agreement]
Signed:
| /s/ Bradford T. Whitmore | ||
| Bradford T. Whitmore | ||
| Investment Amount (# shares): 4,189,000 | ||
| Investment Amount ($ @ $0.40/share): $1,675,600 | ||
| Address for Notice: |
| 1603 Orrington Ave. |
| Suite 900 |
| Evanston, IL 60201 |
| Attention: Bradford T. Whitmore |
| Telephone: 847-378-7224 |
| Facsimile: 847-378-3651 |
| E-mail: bwhitmore@gbros.com |
| Delivery Instructions (if different from above): |
| Attention: |
| Telephone: |
[Signature Page to Common Stock Purchase Agreement]
EXHIBIT A
SELLING STOCKHOLDER QUESTIONNAIRE
NANOPHASE TECHNOLOGIES CORPORATION
Questionnaire for Selling Stockholder
This questionnaire is necessary to obtain information to be used by Nanophase Technologies Corporation (the “ Company ”) to complete a Registration Statement (the “Registration Statement”) covering the resale of certain shares of Company Common Stock currently outstanding. Please complete and return this questionnaire to Taft Stettinius & Hollister LLP, the Company’s legal counsel, to the attention of Matthew R. Godfrey either by mail to Taft Stettinius & Hollister LLP, 111 E. Wacker Drive, Suite 2800, Chicago, Illinois 60601-3713, or by fax to 312.966.8487. Please return the questionnaire by May 13, 2019, or sooner, if possible. Call Matthew R. Godfrey at 312.836.4092 with questions.
FAILURE TO RETURN THE QUESTIONNAIRE MAY RESULT IN THE EXCLUSION OF YOUR NAME AND SHARES FROM THE REGISTRATION STATEMENT.
Please answer all questions. If the answer to any question is “None” or “Not Applicable,” please so state .
If there is any question about which you have any doubt, please set forth the relevant facts in your answer.
| 1. | Please correct your name and/or address if not correct below |
| Name: |
| Address: | ||
____________________
* See Appendix A for definitions
| Page A- 1 |
| 2. | Please state the total number of currently outstanding shares of Company Common Stock that you beneficially own* and the form of ownership and the date that you acquired such stock. Include shares registered in your name individually or jointly with others and shares held in the name of a bank, broker, nominee, depository or in “street name” for your account. (DO NOT list options, warrants or other derivative securities. See Question #3). |
| 3. | Please list any outstanding options and warrants to purchase Company Common Stock or other derivative securities to acquire Company Common Stock that you beneficially own*, including (i) the number of shares of Company Common Stock to be issued upon the exercise of such option or warrant, (ii) the date such option or warrant is exercisable, (iii) the expiration date and (iv) the exercise price per share of EACH such option and warrant. |
| Number of Shares Covered by Option or Warrant |
Date Exercisable |
Exercise Price |
Expiration Date |
| 4. | Please list the number of shares of Common Stock listed under Question #2 above that you wish to include in the Registration Statement. |
____________________
* See Appendix A for definitions
| Page A- 2 |
| 5. | Please list the number of shares of Common Stock underlying warrants listed under Question #3 above that, upon exercise of such warrants, you wish to include in the Registration Statement. |
| 6. | If you are a limited liability company or limited partnership, please name the managing member or general partner and each person controlling such managing member or general partner. |
| 7. | If you are an entity, please identify the natural persons who exercises sole or shared voting power* and/or sole or shared investment power* with regard to the shares listed under Question #2 and Question #3. |
| 8. | Please advise whether you are a registered broker-dealer or an affiliate* thereof. If you are an affiliate of a registered broker-dealer, please explain the nature of the affiliation and disclose whether you acquired the shares in the ordinary course of business and whether at the time of the acquisition you had any plans or proposals, directly or with any other person, to distribute the shares listed under Question #2 and Question #3. |
| 9. | List below the nature of any position, office or other material relationship that you have, or have had within the past three years, with the Company or any of its predecessors or affiliates*. |
____________________
* See Appendix A for definitions
| Page A- 3 |
| 10. | If you expressly wish to disclaim any beneficial ownership* of any shares listed under Question #2 for any reason in the Registration Statement, indicate below the shares and circumstances for disclaiming such beneficial ownership*. |
| 11. | With respect to the shares that you wish to include in the Registration Statement, please list any party that has or may have secured a lien, security interest or any other claim relating to such shares, and please give a full description of such claims. |
| 12. | Please review Appendix B “Plan of Distribution.” Please identify and describe any method of distribution, other than described in Appendix B, that you plan on using to sell your shares of the Company’s Common Stock. By signing below you agree to distribute your shares of the Company’s Common Stock as described in Appendix B and this Item 12 and to notify the Company of any plan to distribute the Company’s Common Stock that is not described in Appendix B or herein under Item 12. |
The undersigned, a Selling Stockholder of the Company, hereby furnishes the foregoing information for use by the Company in connection with the preparation of the Registration Statement. The undersigned will notify Matthew R. Godfrey, at the address specified above, in writing immediately of any changes in the foregoing answers that should be made as a result of any developments occurring prior to the time that all the shares of Common Stock of the Company are sold pursuant to the Registration Statement referred to above. Otherwise, the Company is to understand that the above information continues to be, to the best of the undersigned’s knowledge, information and belief, complete and correct.
Dated: ___________ __, 20___
| By: | ||
| Name: | ||
| Its: |
____________________
* See Appendix A for definitions
| Page A- 4 |
APPENDIX A
To Exhibit A
Certain Terms Used in Questionnaire
AFFILIATE
An “ affiliate ” of a company is a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, such company.
BENEFICIAL OWNERSHIP
A person “ beneficially owns ” a security if such person, directly or indirectly, has or shares voting power or investment power of such security, whether through a contract, arrangement, understanding, relationship or otherwise. A person is also the beneficial owner of a security if he has the right to acquire beneficial ownership at any time within 60 days through the exercise of any option, warrant or right, or the power to revoke a trust, discretionary account or similar arrangement.
INVESTMENT POWER
“ Investment power ” includes the power to dispose, or to direct the disposition of, a security.
VOTING POWER
“ Voting power ” includes the power to vote, or to direct the voting of, a security.
APPENDIX B
To Exhibit A
PLAN OF DISTRIBUTION
We are registering for resale by the selling stockholder and certain transferees a total of 4,189,000 shares of common stock, all of which are issued and outstanding. We will not receive any of the proceeds from the sale by the selling stockholder of the shares of common stock. We will bear all fees and expenses incident to our obligation to register the shares of common stock. If the shares of common stock are sold through broker-dealers or agents, the selling stockholder will be responsible for any compensation to such broker-dealers or agents.
The selling stockholder may pledge or grant a security interest in some or all of the shares of common stock owned by him and, if he defaults in the performance of his secured obligations, the pledgees or secured parties may offer and sell the shares of common stock from time to time pursuant to this prospectus.
The selling stockholder also may transfer and donate the shares of common stock in other circumstances in which case the transferees, donees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.
The selling stockholder will sell his shares of common stock subject to the following:
| • | all of a portion of the shares of common stock beneficially owned by the selling stockholder or his perspective pledgees, donees, transferees or successors in interest, may be sold on the OTC Bulletin Board Market, any national securities exchange or quotation service on which the shares of our common stock may be listed or quoted at the time of sale, in the over-the counter market, in privately negotiated transactions, through the writing of options, whether such options are listed on an options exchange or otherwise, short sales or in a combination of such transactions; |
| • | each sale may be made at market price prevailing at the time of such sale, at negotiated prices, at fixed prices or at carrying prices determined at the time of sale; |
| • | some or all of the shares of common stock may be sold through one or more broker-dealers or agents and may involve crosses, block transactions or hedging transactions. The selling stockholder may enter into hedging transactions with broker-dealers or agents, which may in turn engage in short sales of the common stock in the course of hedging in positions they assume. The selling stockholder may also sell shares of common stock short and deliver shares of common stock to close out short positions or loan or pledge shares of common stock to broker-dealers or agents that in turn may sell such shares; |
| • | in connection with such sales through one or more broker-dealers or agents, such broker-dealers or agents may receive compensation in the form of discounts, concessions or commissions from the selling stockholder and may receive commissions from the purchasers of the shares of common stock for whom they act as broker-dealer or agent or to whom they sell as principal (which discounts, concessions or commissions as to particular broker-dealers or agents may be in excess of those customary in the types of transaction involved). Any broker-dealer or agent participating in any such sale may be deemed to be an “underwriter” within the meaning of the Securities Act and will be required to deliver a copy of this prospectus to any person who purchases any share of common stock from or through such broker-dealer or agent. We have been advised that, as of the date hereof, the selling stockholder has not made any arrangements with any broker-dealer or agent for the sale of his shares of common stock; and |
| • | in connection with any other sales or transfers of common stock not prohibited by law. |
The selling stockholder and any broker-dealer participating in the distribution of the shares of common stock may be deemed to be “underwriters” within the meaning of the Securities Act, and any profits realized by the selling stockholder and any commissions paid, or any discounts or concessions allowed to any such broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. In addition, any shares of common stock covered by this prospectus which qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to this prospectus. The selling stockholder may also transfer, devise or gift the shares of common stock by other means not covered in this prospectus in which case the transferee, devisee or giftee will be the selling stockholder under this prospectus.
If required at the time a particular offering of the shares of common stock is made, a prospectus supplement or, if appropriate, a post-effective amendment to the shelf registration statements of which this prospectus is a part, will be distributed which will set forth the aggregate amount of shares of common stock being offered and the terms of the offering, including the name or names of any broker-deals or agents, any discounts, commissions or concessions allowed or reallowed or paid to broker-dealers.
Under the securities laws of some states, the shares of common stock may be sold in such states only through registered or licensed brokers or dealers. In addition, in some states the shares of common stock may not be sold unless such shares have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with. There can be no assurance that the selling stockholder will sell any or all of the shares of common stock registered pursuant to the shelf registration statement, of which this prospectus forms a part.
The selling stockholder and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Regulation M of the Exchange Act, which may limit the timing of purchases and sales of any of the shares of common stock by the selling stockholder and any other participating person. Regulation M may also restrict the ability of any person engaged in the distribution of the shares of common stock to engage in market-making activities with respect to the shares of common stock. All of the foregoing may affect the marketability of the shares of common stock and the ability of any person or entity to engage in market-making activities with respect to the shares of common stock.
We will bear all expenses of the registration of the shares of common stock including, without limitation, Securities and Exchange Commission filing fees and expenses of compliance with the state securities of “blue sky” laws. The selling stockholder will pay all underwriting discounts and selling commissions and expenses, brokerage fees and transfer taxes, as well as the fees and disbursements of counsel to and experts for the selling stockholder, if any. We will indemnify the selling stockholder against liabilities, including some liabilities under the Securities Act, in accordance with the registration rights agreement or the selling stockholder will be entitled to contribution. We will be indemnified by the selling stockholder against civil liabilities, including liabilities under the Securities Act that may arise from any written information furnished to us by the selling stockholder for use in this prospectus, in accordance with the related securities purchase agreement or will be entitled to contribution. Once sold under this shelf registration statement, of which this prospectus forms a part, the shares of common stock will be freely tradable in the hands of persons other than our affiliates.
Nanophase Technologies Corporation 10-Q
Exhibit 10.1
AMENDMENT NO. 4 TO
ZINC OXIDE SUPPLY AGREEMENT
THIS AMENDMENT NO. 4 TO ZINC OXIDE SUPPLY AGREEMENT is entered into as of January 1, 2019 by and between BASF CORPORATION, a Delaware corporation (“BASF”) and NANOPHASE TECHNOLOGIES CORPORATION, a Delaware corporation (“Nanophase”).
RECITALS
A. Nanophase and BASF (as successor-in-interest to Sun Smart, Inc.) entered into that certain Zinc Oxide Supply Agreement, dated September 16, 1999 (the “Agreement”), as amended by that certain Amendment No. 1 to Zinc Oxide Supply Agreement dated January 2001, Amendment No. 2 to Zinc Oxide Supply Agreement dated March 17, 2003, and Amendment No. 3 to Zinc Oxide Supply Agreement dated September 30, 2012 (collectively the “Amendments”).
B. BASF and Nanophase desire to amend the Agreement and Amendments as set forth herein.
NOW THEREFORE, BE IT RESOLVED, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:
| 1. | The “Triggering Event” set forth in Section 5.01(e)(i) of the Agreement, as amended by Paragraph 1 of Amendment No. 2 to the Agreement, and amended by Paragraph 1 of Amendment No. 3, is hereby further amended to delete the language in Section 5.01(e)(i) of the Agreement and Paragraph 1 of Amendment No. 2 and Paragraph 1 of Amendment No. 3, and replace it with the following language: |
“(e)(i) Earnings of Nanophase for the twelve-month period ending on the date of Nanophase’s most recent published quarterly financial statements (calculated in accordance with generally accepted accounting principles applied on a consistent basis) shall be less than $0 and cash and cash equivalents of Nanophase at the end of such period (calculated in accordance with generally accepted accounting principles applied on a consistent basis) shall be less than $500,000. Cash and cash equivalents – including any accounts receivable outstanding and due from BASF over 30 days from ship date ($[*] min), finished goods Z-COTE in Nanophase inventory ($[*]max), and zinc metal Nanophase inventory ($[*]max) shall be less than $1,000,000.”
| 2. | Section 3.04 of the Agreement is hereby amended to delete the language in that section and replace it with the following language: |
| a. | “Nanophase shall maintain inventory of manufactured Product available to fill orders from BASF equal to the higher of either [*]kg or the monthly average of the previous [*] months orders. Nanophase shall be required to establish this safety stock level by August 31, 2019. [*]kg minimum of inventory shall be established by Mar 31, 2019; 34,000 kg minimum of inventory shall be established by Jun 31, 2019; the full [*]kg minimum of inventory shall be established by Aug 31, 2019. This inventory value may be revised after Dec 31, 2019 depending on business demands.” |
| b. | Should BASF commercial requirements exceed [*] full truckloads during this time, Nanophase shall be permitted one week of additional time for each truckload shipped in excess of the [*] truckloads shipped to meet BASF demand. |
| c. | Implementation grace period: During the ramp up of safety stock levels, Nanophase shall follow the same ramp up for working capital mix. |
| d. | Implementation Requirements: |
| i. | Q1 2019: $500,000 cash minimum, plus [*]kg min. inventory |
| ii. | Q2 2019: $500,000 cash minimum, plus [*]kg min. inventory |
| iii. | Q3 2019: Full requirements outlined in amendment apply. |
| 3. | All other terms and conditions of the Agreement and the Amendments shall remain in full effect in accordance with their terms. |
*Confidential Treatment Requested
[ Signatures next page ]
IN WITNESS WHEREOF , the parties have executed this Amendment as of the date first set forth above.
| Nanophase Technologies Corporation | BASF Corporation | |||
| By: | /s/ Jess Jankowski | By: | /s/ Amy Ciemniecki | |
| Name: | Jess Jankowski | Name: | Amy Ciemniecki | |
| Title: | President and CEO | Title: | Category Buyer | |
Nanophase Technologies Corporation 10-Q
Exhibit 31.1
Certification of the Chief Executive Officer
Pursuant to
Rules 13a-14(a) and 15d-14(a) under the Exchange Act
I, Jess A. Jankowski, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nanophase Technologies Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 15, 2019
| /s/ JESS A. JANKOWSKI | ||
| Jess A. Jankowski | ||
| (principal executive officer, and principal financial officer) | ||
Nanophase Technologies Corporation 10-Q
Exhibit 31.2
Certification of the Principal Financial Officer
Pursuant to
Rules 13a-14(a) and 15d-14(a) under the Exchange Act
I, Jess Jankowski, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Nanophase Technologies Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 15, 2019
| /s/ JESS A. JANKOWSKI | ||
| Jess A. Jankowski | ||
| (principal executive officer, and principal financial officer) | ||
Nanophase Technologies Corporation 10-Q
Exhibit 32
Certification Pursuant to 18 U.S.C. Section 1350
(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
In connection with this quarterly report of Nanophase Technologies Corporation (the “Company”) on Form 10-Q for the quarter ending March 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jess A. Jankowski, Chief Executive Officer, and acting as Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: May 15, 2019
| /s/ JESS A. JANKOWSKI | ||
| Jess A. Jankowski | ||
| Chief Executive Officer | ||
| (principal executive officer, and principal financial officer) | ||