UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
⌧
(cid:2)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
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
(State or other jurisdiction of
incorporation or organization)
36-3687863
(I.R.S. Employer
Identification No.)
1319 Marquette Drive, Romeoville, Illinois 60446
(Address of principal executive offices) (zip code)
Registrant’s telephone number, including area code: (630) 771-6708
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Preferred Stock Purchase Rights
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
No
(cid:0)
(cid:0)
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Act. Yes
No
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
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(cid:0)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes
(cid:0)
(cid:0)
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. Yes
No
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(cid:0)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12B-2 of
the Exchange Act. (Check one):
Large accelerated filer
Non-accelerated filer
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Accelerated filer
Smaller reporting company
(cid:0)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
(cid:0)
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Act). Yes
No
The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant based upon the last reported
sale price of the registrant’s common stock on June 30, 2009 was $16,154,413 as of such date.
The number of shares outstanding of the registrant’s common stock, par value $.01, as of March 22, 2010 was 21,204,162.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Table of Contents
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART I
Business
General
Nanomaterials
The Company’s Technologies
Marketing
Technology and Engineering
Manufacturing Operations
Intellectual Property and Proprietary Rights
Competition
Governmental Regulations, Including Climate Change
Employees
Backlog
Business Segment and Geographical Information
Key Customers
Forward Looking Statements
Investor Information
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
[Removed and Reserved]
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A (T). Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
Item 15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
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PART IV
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Item 1.
General
Business
PART I
Nanophase Technologies Corporation (“Nanophase” or the “Company”, including “we” or “us”) develops applications, and
produces engineered nanomaterial products for diverse markets – sunscreens, personal care, architectural coatings, architectural
window cleaning and restoration, industrial coating ingredients, plastic additives, semiconductor polishing, optics polishing and other
markets. The Company develops and commercially manufacturers a broad range of nanomaterials and dispersions. Recently, the
Company evolved from the role of strictly a materials provider to a that of a solutions provider. By directly integrating its products
into customer products the Company can most effectively prove added value. Along these lines, the Company also extended its reach
by launching its first complete product line in the Architectural Window Cleaning market, under the trade name NanoUltra™
(www.nano-ultra.com). Although Nanophase markets its products globally, the Company’s primary strategic focus has been the
North American market. The Company was incorporated in Illinois on November 25, 1989, and became a Delaware corporation on
November 30, 1997. The Company’s common stock trades on the NASDAQ Global Market under the symbol NANX.
Nanophase has created a leading commercial approach to the application of its integrated nanomaterials technologies designed
to deliver an optimal engineered nanomaterial ‘solution’ for a target market or specific customer application. With respect to the
products it makes, the Company has complete capability from application development and laboratory samples through pilot
production and, finally, commercial production in metric ton(s) capacity. Nanophase has development and application laboratories
and manufacturing capacity in two locations in the Chicago area. The Company’s manufacturing is based on Lean Six Sigma
discipline and is certified to ISO 9001, American National Standard, Quality Management System Requirements; ISO 14001,
American National Standard, Environmental Management System Requirements; and is compliant with current Good Manufacturing
Practices (“cGMP”) for products under FDA regulation.
We have undergone a strategic shift toward penetrating key markets via interactive applications development with end
customers in these markets. We believe this strategy leverages the applications development expertise we have cultivated over the last
several years and best positions us to build direct sales to end use customers, in addition to translating these advantages through our
market partners.
Nanomaterials
Nanomaterials are generally comprised of particles (nanoparticles) that are less than 100 nanometers in diameter and these
nanoparticles have a wide range of unique properties owing to their very small size. A nanometer is one-billionth of a meter, or about
100,000 times smaller in size than the width of a human hair. To give another perspective, a six-foot tall person is around two billion
nanometers in height.
Nanotechnology involves manipulating the properties of materials, made up of basic elements or combinations thereof, at the
100-nanometer level or below. At this scale, the relatively small number of constituent atoms, the large proportion of these atoms on
surfaces, and their confined dimensions lead materials to exhibit unique properties that can be used in many applications to benefit
performance.
Nanomaterials are an important and enabling part of the diverse field of nanotechnology and are the building blocks of the
Company’s nanotechnology products. The ultimate performance and value of Nanophase’s products in a given application is a
function of composition, size, shape, structure, surface chemistry and coating and dispersion potential. The Company’s technologies
for engineering and manufacturing nanomaterials, and the Company’s understanding of how to make nanomaterials exhibit desirable
performance characteristics in various media, result in commercial nanomaterials solutions that Nanophase believes offer superior
performance in many applications.
1
Nanomaterials have applications in diverse global markets where they are incorporated into a process, such as semiconductor
polishing, or a product, such as an industrial coating to prevent degradation from ultra-violet radiation or significantly improve wear
resistance or an architectural window glass polishing solution family (NanoUltra™). Multiple markets exist for Nanophase’s products
since nanomaterials offer advantages in many applications, such as improved properties and performance, longer wear or product life,
lower overall product cost, or in the development of new products or processes.
Most of the raw materials used in the Company’s various processes are commercially available. In some cases, Nanophase relies
on sole-source processors of materials that utilize an array of worldwide sources for the raw materials that they process to the
Company’s specifications.
The Company’s Technologies
Nanophase has created an integrated platform of commercial nanomaterial technologies that are patented, patent-pending or
proprietary. These technologies are designed to deliver a nanomaterial solution for a targeted market or a specific customer
application. The Company’s platform provides flexibility and capability to engineer nanomaterials that meet a customer’s
performance requirements and deliver its nanomaterial solutions in a readily usable format. Nanophase’s technologies are scalable
and robust, having produced several hundred metric tons annually.
The Company’s nanomaterials platform includes two distinct manufacturing processes (PVS and NanoArc Synthesis) to make
®
nanomaterials or nanoparticles. These technologies allow Nanophase to control critical nanomaterial properties (composition, size,
shape, structure, surface chemistry) and engineer those to meet specific application performance. Compared to other well developed
known nanoparticle processes, the Company’s plasma-produced particles are produced as nonporous, dense, discrete single crystals,
which the Company believes possess a unique set of bulk and surface properties. Nanophase currently has the capacity to produce
over a million pounds of nanomaterials annually.
Perhaps of equal importance, Nanophase has also developed proprietary technology to disperse nanoparticles in both aqueous
(water-based) and several organic solvent systems. These dispersions are highly stable at high weight loading (typically 18-55% by
weight), attributes which provide distinct market advantages. Dispersed nanomaterials are desired by many customers for use in their
processes or products because of the ease of incorporation. As examples, dispersed nanomaterials are used in architectural coatings,
architectural window cleaners, industrial coatings, plastic additives and semiconductor polishing. This integration flexibility allows
Nanophase to serve more customers and serve them better, and is critical to its role as a solutions provider, not simply that of a
materials provider.
Nanophase has also developed patented and proprietary technology to coat or surface treat nanoparticles to further engineer
surface chemistry by two main processes. In many applications, such as sunscreens, this technology is vital to ensure formulation
compatibility and, in some cases, optimal application performance. The Company delivers hundreds of tons of surface engineered
nanoparticles to its customers annually, including coated nanomaterials that are used by major global consumer products companies
for sunscreens and personal care products.
As markets continue to develop and grow, we believe that customers’ preferred delivery formats will continue to be dispersed
and/or coated nanomaterials. We believe we are well positioned with our platform of integrated commercial nanomaterial
technologies to respond to this demand. We plan to maintain and advance our intellectual property and technologies to remain
competitive in the fields of nanomaterials development, applications development and commercialization.
2
We have steadily expanded our ability to commercially utilize and deliver our technologies. Through large-scale manufacturing
of nanomaterials utilized in the manufacture of consumer sunscreen and personal care products and architectural coatings, we have
developed production expertise that has allowed us to improve processes relating to those nanomaterials as well as processes relating
to other nanomaterials. This experience has translated into additional know-how, intellectual property and advances in the
technologies and manufacturing processes that reduce variable manufacturing costs and improve gross margins.
Marketing
We focus our marketing strategy on differentiated nano solutions that create superior value for our customers. This customer-
focused strategy means we will not be solely dependent upon the efforts of our market partners for future sales growth. While the
partner model can be an excellent method for addressing the needs of certain markets, we have found an increasing number of cases
where our integration experience is critical to presenting an effective solution to a customer, and therefore launched a second,
“customer direct” business model where we deal with the manufacturer directly and demonstrate the benefits of our solutions in the
manufacturer’s product. Our deep market knowledge of certain market segments has allowed us to thoroughly understand customer
needs and our products’ value proposition. This knowledge, combined with our applications development expertise, supports
marketing and selling of our nano solutions to multiple companies within each market segment. We work closely with each customer
to develop a nanomaterial solution for their specific application, but we find that as we develop greater applications development
expertise in a given area, specific applications development often becomes a routine process within Nanophase. This is where we
believe our future customers will perceive the greatest value to working with Nanophase.
This customer-focused marketing approach increases the probability of success, allows us to use an integrated platform of
nanomaterial technologies and reduce the time-to-market. The more our applications development scientists and sales team work
directly with customers to develop nanomaterial solutions, the more quickly and successfully we will be able to grow sales.
We will, of course, also continue to devote significant resources to maintaining and growing our relationships with our valued
market partners. We expect these relationships to continue to contribute to our future growth for the foreseeable future.
In early 2010, Nanophase launched its first standalone direct-to-user products, the NanoUltra line of architectural window
cleaning and restoration products. This marks a change in the way the Company goes to market, as we acted on compelling market
feedback that our stain removal and cleaning products could be competitive in the professional window cleaning supplies market. At
this time, we plan on selling these products to customers in the contractor market and through distributors. We think that a
commercially successful introduction to the professional window cleaning and restoration market could lead to further deployment to
the consumer products market. We expect to learn more about the acceptability of our products in these markets over the next twelve
to eighteen months.
Our market partners currently include BASF Corporation (“BASF”), a $50+billion global chemical company; Altana Chemie, a
$1+billion chemical company and a leader in coating and plastic additives; and Alfa Aesar, a division of Johnson Matthey. Each
market partner is viewed as a leader in its respective markets with recognized brands, significant revenues and global sales reach.
Nanophase has long-term exclusive relationships with each of its market partners. Market partners typically sell clearly defined
nanomaterial products into specific markets.
In addition to the applications with market partners, Nanophase’s end-use manufacturing customers are using its nanomaterial
products for architectural coatings, medical diagnostics, optics polishing, textile coatings and variety of other applications.
3
Because our technology can be applied to a wide variety of applications, we focus our efforts on only a handful of market
segments to gain a depth of knowledge and leverage our learning curve. If we find a unique application outside of these segments that
does not require significant development resources then we may pursue it as “opportunistic” business, but we will not chase every
potential application simply because we feel we might add value. We believe this approach has been directly responsible for the
increase in our pipeline of well-defined customer opportunities over the past year, and will contribute to a higher success rate of those
opportunities.
Technology and Engineering
Our efforts in research and development, process engineering and advanced engineering groups are focused in three major areas:
1) application development for nanomaterial products; 2) creating or obtaining additional core nanomaterial technologies and/or
nanomaterials that have the capability to serve multiple markets; and 3) continuing to improve our core technologies to improve
manufacturing operations and reduce costs.
Most of the research and development at Nanophase is directly related to applications development. We endeavor to either meet
specific customer needs or to develop applications solutions to unmet needs in a particular market where our materials may offer a
distinct performance advantage. We believe that aggressively pursuing applications in targeted areas will help Nanophase compete as
a technical and commercial innovator using nanomaterials, and more importantly, become perceived as a solutions provider by our
customers and not simply as another materials supplier.
Nanophase’s total research and development expense, which includes all expenses relating to the technology and advanced
engineering groups, during the years ended December 31, 2009 and 2008, was $1,615,894 and $1,764,284, respectively. This
represents the Company’s share of these expenses only and does not take into account amounts spent by our largest customers in
support of our partnerships. The Company’s future success will depend in large part upon its ability to develop products which bring a
high degree of value to its customers’ products. Through the three-year period ended December 31, 2009, the Company has had
cumulative research and development expenses of approximately $5.2 million and cumulative expenditures on equipment and
leasehold improvements of approximately $1.9 million.
Manufacturing Operations
The Company has manufacturing capacity based in two locations in the Chicago area. At each of these facilities, Nanophase is
able to develop and supply nanomaterials in quantities ranging from grams to metric tons. Nanophase’s facilities are certified to ISO
9001:2000 international standards and are cGMP compliant for applicable bulk pharmaceutical manufacturing. Nanophase is also in
the process of registering some of the chemicals it ships to customers in Europe in compliance with the European Chemical Agency’s
regulations issued to date pertaining to Registration Evaluation and Authorization of Chemicals (“REACH”). The Company’s
facilities are also certified to the international standard for environmental management, ISO 14001:2004.
Our operations employ a cellular, team-based manufacturing approach, where workers operate in work “cells,” under a lean
manufacturing environment to continuously advance and improve production capabilities. We have also developed a highly flexible
workforce that has been cross-trained to allow it to be employed broadly across our manufacturing processes. Our manufacturing
approach and targeted engineering actions have resulted in continuing process innovations and improvements that have reduced the
variable manufacturing cost significantly over the past five years.
We are committed to a lean manufacturing approach, to the extent possible given a certain measure of irregular demand, where
we are able to reduce excess labor and manage the lowest practical inventory and supply levels in order to minimize working capital
demands. This approach complements two of the Company’s major operational goals - (1) to increase nanomaterials output without
adding unnecessarily to existing equipment and (2) to continually reduce production costs while consistently producing high quality
products.
4
Intellectual Property and Proprietary Rights
Nanophase relies on a combination of patent, trademark, copyright, trade secret and other intellectual property laws,
nondisclosure agreements and other protective measures to protect its intellectual property. In addition to obtaining patent and
trademarks based on the Company’s inventions and products, Nanophase may also license certain third-party patents from time-to-
time to expand its technology base.
As of the date of this filing, Nanophase owns 11 U.S. patents and 2 pending U.S. patent applications. Nanophase also owns 33
foreign patents and patent applications consisting of 28 issued or allowed foreign patents and 5 pending foreign patent applications.
All of the pending and owned foreign patents are counterparts to domestic filings covering its platform of nanotechnologies. The
Company’s oldest issued patents will begin to expire in 2013.
Nanophase has licensed its PVS technology for specific markets in certain geographic regions to CIK NanoTek (formerly C.I.
Kasei), a subsidiary of Itochu Corporation. Under this license agreement, the Company earns royalties on net sales of manufactured
products containing nanocrystalline materials. The license agreement also provides for minimum royalty payments to maintain
exclusivity. The license agreement expires on March 31, 2013 unless earlier terminated as provided therein. Upon expiration of the
license agreement, the license will become non-exclusive.
Competition
Within each of its targeted markets and product applications, Nanophase faces potential competition from advanced materials
and chemical companies and suppliers of traditional materials. In many markets, the actual or potential competitors are larger and
more diversified than we are; however, we believe we focus in market segments and opportunities where our materials and related
technologies are superior to those of our competitors, often due to our ability to produce highly engineered products to meet specific
performance requirements and develop nanomaterial solutions for customers’ specific applications.
With respect to traditional suppliers, we may compete against lower priced traditional materials for certain customer
applications. In some product or process applications the benefits of using nanomaterials do not always outweigh their typically
higher costs.
With respect to larger producers of nanomaterials, while many of these producers do not currently offer directly competitive
products, these companies may have greater financial and technical resources, larger research and development staffs and greater
manufacturing and marketing capabilities and could begin to compete directly against Nanophase. In addition, the number of
development-stage companies involved in nanocrystalline materials continues to grow on a global basis, posing increasing
competitive risks. Many of these companies are associated with university or national laboratories and use chemical and physical
methods to produce nanocrystalline materials. We believe that most of these companies are engaged primarily in funded research and
not commercial production; however, they may represent competitive risks in the future. Some development-stage companies,
especially in other countries, receive significant government assistance or enjoy other benefits due to their location. We anticipate that
foreign competition may play a greater role in the nanomaterials arena in the future.
We believe that our nanomaterial technologies and manufacturing platforms are currently at the forefront of nanomaterials
production. We believe we are well positioned with our platform of integrated commercial nanomaterial technologies and track record
of technology improvement and evolution.
5
Governmental Regulations, Including Climate Change
The manufacture and use of certain of the products that contain the Company’s nanocrystalline materials are subject to
governmental regulations. As a result, the Company is required to adhere to the cGMP requirements of the U.S. Food and Drug
Administration (“FDA”) and similar regulations that include testing, control and documentation requirements enforced by periodic
inspections. Nanophase is also in the process of registering some of the chemicals it ships to customers in Europe in compliance with
the European Chemical Agency’s regulations issued to date pertaining to REACH.
Nanophase is committed to environmental health and safety (“EH&S”). We believe we comply with all applicable exposure
limit standards issued by OSHA. Because nanotechnology remains an emerging and evolving science, there are no currently accepted
standards, measurements or personal protective equipment available that are specific to nanoparticle safety. Accordingly, Nanophase
relies on nuisance dust standards and general chemical safety practices to identify safe personal protective equipment and appropriate
handling protocols. We believe that Nanophase has taken a leadership position on EH&S in our operations and fugitive emissions,
and has internal and external review and monitoring of its practices.
In addition, the Company’s facilities and all of its operations are subject to the plant and laboratory safety requirements of
various environmental and occupational safety and health laws. We believe we are in compliance with all such laws and regulations,
and to date, those regulations have not materially restricted or impeded operations. Further, we believe our processes to be highly
efficient, generating very low levels of waste and emissions. For this reason, we do not view issues surrounding climate change and
any currently foreseeable related regulations as materially impacting our business and financial statements, beyond any inestimable
impact on the macro-economic environment.
Nanophase has taken a responsible, proactive approach to EH&S by implementing appropriate procedures and processes to have
its facilities certified to ISO 14001, American National Standard, Environmental Management System Requirements. We are also
involved with leading industry groups that are defining nanomaterial standards and protocols. These currently include the ASTM
International Committee on Nanotechnology, Nanoscale Materials Stewardship Program under the Toxic Substances Control Act, the
US TAG to ISO TC 229 Nanotechnology committee managed by the American National Standards Institute committee (ANSI). We
also participate in FDA reviews relative to cosmetic applications. We have a full-time, advanced degreed professional who spends a
significant amount of time managing governmental regulation compliance and EH&S. We believe that the Company has an
exemplary safety record.
Employees
During the first quarter of 2009, we announced the resignations of Mr. Robert Haines, our then-current Vice-President of
Operations, and Dr. Richard Brotzman, our then-current Chief Technology Officer. Additionally, we eliminated twelve positions
within the Operations group as a result of a reorganization plan implemented to align the organization with current demand based
upon current economic conditions and our shift in strategy to develop a more customer-focused direct selling approach. Also during
the first quarter of 2009, Mr. Jess Jankowski was appointed President and Chief Executive Officer. Mr. Jankowski had been our
Acting Chief Executive Officer, and prior to that, our Chief Financial Officer.
During the second quarter of 2009, we hired Frank Cesario as our Chief Financial Officer.
During the fourth quarter of 2009, we appointed Mr. Glenn Judd to the position of Vice President of Operations. Mr. Judd had
been the Company’s Assistant Vice President of Operations since September 2008.
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On December 31, 2009, we had a total of 42 full-time employees, 9 of whom hold advanced degrees. We have no collective
bargaining agreements and believe that we have a strong relationship with our employees.
Backlog
We do not believe that a backlog as of any particular date is indicative of future results. Our sales are primarily pursuant to
purchase orders for delivery of our nanomaterials. Nanophase has some agreements that give customers the right to purchase a
specific quantity of nanomaterials during a specified time period. These agreements, however, do not obligate the customers to
purchase any minimum quantity of such nanomaterials. The quantities actually purchased by the customer, as well as the shipment
schedules, are frequently revised during the agreement term to reflect changes in the customer’s needs. For these reasons we do not
believe that such agreements are meaningful for determining backlog amounts.
Business Segment and Geographical Information
See Note 15 to the Financial Statements for additional information.
Key Customers
A limited number of key customers account for a substantial portion of the Company’s commercial revenue. In particular,
revenue from three customers (one of which is also a market partner) - (1) our partner BASF, (2) our largest customer in architectural
coatings and (3) our medical diagnostics customer constituted approximately 63%, 13% and 5%, respectively, of our 2009 total
revenue. Many of our customers are significantly larger than we are and therefore may be able to exert a high degree of influence over
us. While our agreement with BASF is a long-term agreement, it may be terminated by BASF under certain circumstances with
reasonable notice and does not provide any guarantees that BASF will continue to buy our products. The loss of one of these key
customers or the failure to attract new customers could have a material adverse effect on the Company’s business, results of
operations and financial condition. Due to the high concentration of sales to a limited number of customers, we have aggressively
pursued a significant number of new customers, typically smaller entities, through our customer direct business model. To the extent
we are successful in adding a large number of customers through this model and maintaining or expanding our existing partners, we
believe we will be able to best manage the risks associated with customer concentration.
Forward-Looking Statements
Nanophase wants to provide investors with more meaningful and useful information. As a result, this Annual Report on
Form 10-K (the “Form 10-K”) contains and incorporates by reference certain “forward-looking statements”, as defined in Section 21E
of the Securities Exchange Act of 1934, as amended. These statements reflect the Company’s current expectations of the future
results of its operations, performance and achievements. Forward-looking statements are covered under the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. The Company has 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 the Company’s actual results, performance or achievements in 2010 and
beyond to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties and factors include,
without limitation: a decision by a customer to cancel a purchase order, supply agreement or technology agreement in light of the
Company’s dependence on a limited number of key customers; uncertain demand for, and acceptance of, the Company’s
nanocrystalline materials; the Company’s manufacturing capacity and product mix flexibility in light of customer demand; the
Company’s limited marketing experience; changes in development and distribution relationships; the impact of competitive products
and technologies; the ability of the Company to remain listed on NASDAQ; the Company’s dependence on patents and protection of
proprietary information; and the resolution of litigation in which the Company may become involved. Readers of this Annual Report
on Form 10-K should not place undue reliance on any forward-looking statements. Except as required by federal securities laws, the
Company undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.
7
Investor Information
The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the “Exchange Act”) and,
accordingly, files periodic reports, proxy statements and other information with the Securities and Exchange Commission (the
“SEC”). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at
450 Fifth Street, NW, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet
site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding issuers that file
electronically.
Financial and other information may also be accessed at the Company’s web site. The address is www.nanophase.com. The
Company makes available, free of charge, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after filing such material electronically with, or otherwise furnishing it to, the SEC, and intends to make all
such reports and amendments to reports available free of charge on its web site.
Item 1A. Risk Factors
Not required for a smaller reporting company.
Item 1B. Unresolved Staff Comments
There are currently no open comments from the SEC Staff.
Item 2.
Properties
Nanophase operates a 36,000 square-foot production, research and headquarters facility in Romeoville, Illinois and a 20,000
square-foot production facility in Burr Ridge, Illinois. Both locations are in the Chicago suburbs. The Company also leases a 9,000
square-foot offsite warehouse in the same vicinity as the Romeoville facility.
The Company’s manufacturing operations in Burr Ridge are certified under ISO 9001:2000, and we believe that our
manufacturing operations are within the cGMP requirements of the FDA for products that require such compliance. The Company’s
facilities are also ISO 14001:2004 certified which is the international standard for environmental management. The Burr Ridge
facility has a quality control laboratory designed for the dual purposes of validating operations to cGMP and ISO standards and
production process control. This laboratory is equipped to handle many routine analytical and in-process techniques that are currently
required.
The Romeoville facility houses the Company’s headquarters, advanced engineering, manufacturing (nanoparticle coating,
nanoparticle dispersion and pilot-scale manufacturing) and three applications development laboratories. All Romeoville
manufacturing processes are certified to ISO 9001:2000 and ISO 14001:2004, and we believe that the manufacturing of nanoparticle
coating used for sunscreens and personal care is in compliance with the cGMP requirements of the FDA.
8
Nanophase leases both its Romeoville and Burr Ridge facilities. On October 18, 2005 Nanophase entered into a Lease
Amendment amending its current lease for its facility in Romeoville, Illinois, which, among other things, extended the term of such
lease through December 31, 2015 (with the option to extend the term for two additional five year periods) and granted Nanophase an
option to purchase such facility in certain instances. The Company renewed its Burr Ridge facility lease in September 2007 (with the
option to extend the term for three additional one-year periods). The Company exercised its option to extend the lease for one year,
which expires in September 2010. We intend to renew this lease before its expiration in September 2010.
We believe that our leased facilities provide sufficient capacity to fulfill current known customer demand as well as substantial
additional space to enable expansion of key production processes. We believe that our capital expenditures made in 2009, and
projected for 2010, will support currently anticipated demand from existing customers. Our actual future capacity requirements will
depend on many factors, including new and potential customer acceptance of our current and potential nanomaterials and product
applications, both expected and currently unplanned growth from existing customers, continued progress in our research and
development activities and product testing programs and the magnitude of these activities and programs.
Item 3.
Legal Proceedings
As discussed in Note 4 of the accompanying financial statements, pursuant to the applicable rules of FINRA, during 2009 we
filed an arbitration demand against Credit Suisse, the Company’s investment advisor with respect to our ARS (auction rate securities)
investments. The hearing on our arbitration had been scheduled for April 2010. Pursuant to an agreement between the parties
executed during March 2010, Credit Suisse agreed to purchase our remaining ARS holdings for $4 million on or before March 31,
2010, and we agreed not to seek reimbursement for the $280,000 loss realized on the sale of another ARS bond or for legal and other
costs. Under this agreement, the arbitration will not proceed and our arbitration claim has been resolved.
Item 4.
Removed and Reserved
9
PART II
Item 5.
Market Information; Holders; Dividends
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company’s common stock is traded on the NASDAQ Global Market under the symbol NANX. The following table sets
forth, for the periods indicated, the range of high and low sale prices for the common stock on the NASDAQ Global Market:
Fiscal year ended December 31, 2009:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal year ended December 31, 2008:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$1.40
1.43
1.20
1.25
$4.17
3.67
2.44
1.93
$0.71
0.80
0.86
0.76
$3.73
2.09
1.17
0.76
On March 15, 2010, the last reported sale price of the Company’s common stock was $.82 per share, and there were
approximately 143 holders of record of the common stock. On December 18, 2009, we received notice from the NASDAQ Stock
Market that the closing bid price of our common stock had fallen below $1.00 for thirty consecutive business days and as a result, we
are currently not in compliance with NASDAQ Listing Rule 5450(a)(1). We have a 180-day grace period, ending June 16, 2010, to
regain compliance with the Rule. To regain compliance, the bid price for the Company’s common stock must close at $1.00 or higher
for a minimum of 10 consecutive business days within the stated 180-day grace period. We have not yet determined what action, if
any, of those available to us we would take in the event that we do not regain compliance within the allotted time.
The Company has never declared or paid any cash dividends on its common stock and does not currently anticipate paying any
cash dividends or other distributions on its common stock in the foreseeable future. The Company intends instead to retain any future
earnings for reinvestment in its business. Any future determination to pay cash dividends will be at the discretion of the Company’s
Board of Directors and will be dependent upon the Company’s financial condition, results of operations, capital requirements and
such other factors deemed relevant by the Board of Directors.
On August 25, 2006, the Company sold, in a private placement to Rohm and Haas Electronic Materials CMP Holdings, Inc.
(“RHEM”, which is now part of Dow), 847,918 shares of common stock at $5.8968 per share and received gross proceeds of $5.0
million. The Company registered the common stock held by RHEM by way of a Form S-3 filed on November 25, 2009, amended on
January 22, 2010, and declared effective as of February 1, 2010.
10
Securities Authorized for Issuance under Equity Compensation Plan
The following table gives information about our common stock that may be issued upon the exercise of options and rights under
all of our existing compensation plans on December 31, 2009, including the 1992 Amended and Restated Stock Option Plan and the
2001 and the Amended 2004 Equity Compensation Plan and the 2005 Non-Employee Director Restricted Stock Plan.
(a) Number of Securities
to be Issued Upon
Exercise of Outstanding
Options and Rights
(b) Weighted Average
Exercise Price of
Outstanding Options
and Rights
(c) Number of Securities
Remaining Available
for Future Issuance
Under Equity
Compensation Plans
(Excluding Securities
Reflected in Column
(a))
(d) Total of Securities
Reflected in Columns
(a) and (c)
1,046,075(1)
None
$
$
4.13
—
654,805(2)
1,700,880
None
—
Plan Category
Plans Approved by
Shareholders
Plans Not Approved by
Shareholders
(1) Consists of the 1992 Amended and Restated Stock Option Plan, the 2001 and the Amended 2004 Equity Compensation Plans
and shares of authorized but unissued Preferred Stock.
(2) Consists of shares available for future issuance under the Amended 2004 Equity Compensation Plan and the 2005 Non-
Employee Director Restricted Stock Plan.
Item 6.
Selected Financial Data
Not required for a smaller reporting company.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with risks discussed in other filings made by the Company
with the Securities and Exchange Commission, and the financial statements and related notes thereto appearing elsewhere in this
Form 10-K. When used in the following discussions, the words “anticipates,” “believes,” “estimates,” “expects,” “plans,”
“intends” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks,
uncertainties and contingencies that could cause actual results, performance or achievements to differ materially from those
expressed in, or implied by, such statements. See the “Forward Looking Statements” section in Part I., Item 1.
11
Overview
Nanophase is a nanomaterials developer and commercial manufacturer with an integrated family of nanomaterial technologies.
Nanophase produces engineered nanomaterials for use in a variety of diverse markets: sunscreens, architectural coatings, industrial
coatings, ingredients, personal care, abrasion-resistant applications, plastics additives, water filtration, DNA biosensors and a variety
of polishing applications, including semiconductors and optics. We target markets in which we feel practical solutions may be found
using nanoengineered products, including our first complete product line in the Architectural Windows Cleaning market under the
trade name NanoUltra™. We work closely with leaders in our target markets to identify their material and performance requirements,
and then market material solutions for various end-use applications. More recently developed technologies have made certain new
products possible and opened potential new markets. We have added a large number of potential customers to our sales funnel during
the past year, many with new potential applications for our material technologies, and are in various stages of qualification with them.
Some of these qualification cycles may take as little as 6-12 months, while others may take years. There can be no assurance that we
will be successful in securing these potential customers or in completing the qualification process with them, or that these
relationships will translate into meaningful revenues for the Company.
On August 25, 2006, the Company sold, in a private placement to Rohm and Haas Electronic Materials CMP Holdings, Inc.
(“RHEM”, now part of Dow), 847,918 shares of common stock at $5.90 per share and received gross proceeds of $5.0 million. In
accordance with our agreement, we filed a registration statement for these shares on Form S-3 on November 25, 2009, which was
amended on January 22, 2010 and deemed effective as of February 1, 2010.
Our revenue depends largely on the performance of the consumer products and exterior coatings markets. Both have been
severely impacted by the global recession and the focus of firms that are or might be our customers has been to reduce their
inventories and focus on cheaper products that are less likely to contain our higher performance materials. While we believe we will
benefit from an anticipated reversal of this trend, it is our intention to broaden our market reach, which is expected to reduce
excessive reliance on any particular customer or industry. We are doing this by addressing several market segments with targeted
solutions.
Critical Accounting Policies
Investments are classified by the Company at the time of purchase for appropriate designation and are reevaluated as of each
balance sheet date. Our policy is to classify money market funds, certificates of deposit and similar assets, with maturities at time of
purchase of 90 days or less, as cash equivalents, while longer maturities and other assets are deemed to be investments. These
investments are classified as held-to maturity when we have the positive intent and ability to hold the securities to maturity. Held-to
maturity securities are stated at amortized cost and are adjusted to maturity for the amortization of premiums and accretion of
discounts. Such adjustments for amortization and accretion are included in interest income.
As of March 5, 2010, we held investments in auction rate securities (“ARS”) totaling $3.56 million, net of other than temporary
impairment, as of March 5, 2010. These ARS holdings have experienced “failed auctions” due to a lack of available buyers for them
on their expected auction dates. An auction failure means that parties wishing to sell their securities could not be matched with an
adequate volume of buyers. In the event there is a failed auction, the indenture governing the security requires the issuer to pay
interest at a contractually defined rate that may be above market rates for other types of similar short-term instruments. Despite these
failed auctions, there were no defaults on the underlying securities and investment income on these ARS holdings. They were issued
through the Federal Family Education Loan Program (“FFELPs Loans”) and carry an AAA credit rating. These FFELPs Loans are
guaranteed to 97% of their $4 million value by the Department of Education. However, these failed auctions caused us to change the
level of inputs to determine their fair values. The values of these ARS’s were estimated using a discounted cash flow model of
analysis. Since these inputs were not observable, they are classified as level 3 inputs (see Note 3 to the accompanying financial
statements). As a result, for the period ending December 31, 2008, we recognized an other than temporary impairment loss on these
ARS’s in the amount of $660,000 which was reflected in the 2008 statement of operations. We sold $2 million of these securities
during 2009, leaving $4 million of gross value and $440,000 of related other than temporary impairment on our balance sheet as of
December 31, 2009. Our valuation models assumed an average maturity of the ARS’s in excess of one year, therefore, we classified
these securities as long-term on the December 31, 2008 balance sheet and would have done so again if not for the subsequent event
below, which changed their classification to current on our December 31, 2009 balance sheet.
12
Subsequent to the reporting date, we entered into an agreement to sell the remaining ARS to Credit Suisse for $4 million on or
before March 31, 2010. Consequently, we recorded a recovery of expense (other income) and a related current receivable in our
December 31, 2009 financial statements in the amount of $440,000. We also classified the underlying securities, to be sold on or
before March 31, 2010 pursuant to this agreement, as current assets. See Note 4 of the accompanying financial statements for
additional information regarding this agreement.
See Note 3 of the accompanying financial statements for more detail pertaining to the valuation of these securities.
See Note 2 of the accompanying financial statements “Summary of Significant Accounting Policies,” for a further discussion of
liquidity issues.
Results of Operations
Years Ended December 31, 2009 and 2008
Total revenue decreased to $6,320,326 in 2009, compared to $10,213,817 in 2008. A substantial majority of our revenue for the
year ended December 31, 2009 is from our largest customers. See Note 14 to the Financial Statements for additional information
regarding revenue from these customers for the year ended December 31, 2009. Product revenue, the primary component of our total
revenue, decreased to $5,937,100 in 2009, compared to $9,744,759 in 2008. The decrease in product revenue was primarily attributed
to decreased sales to our largest customers, including aggressive inventory reduction programs that have been felt across our and
many other industries.
Other revenue decreased to $383,226 in 2009, compared to $469,058 in 2008. This decrease was primarily attributed to
recognizing revenue in connection with a promissory note to BYK Chemie that was fully repaid during July 2009, and from an
evaluation agreement with a customer during 2008.
The majority of the total revenue generated during the year ended December 31, 2009 was from BASF Corporation, the
Company’s largest customer/partner. Other large customers purchased materials for applications in architectural coatings and medical
diagnostics.
Cost of revenue generally includes costs associated with commercial production and customer development arrangements. Cost
of revenue decreased to $5,368,719 in 2009, compared to $7,501,468 in 2008. The decrease in cost of revenue was generally
attributed to decreased revenue volume, along with the reduction in manufacturing overhead and the continued efficiencies in
reducing our remaining variable manufacturing costs for nanomaterials. These decreases were partially offset by inefficiencies due to
decreased utilization of production assets. We expect to continue new nanomaterial development, primarily using our NanoArc
®
synthesis and dispersion technologies, for targeted applications and new markets during 2010 and beyond. Even 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 eliminated twelve
positions within the Operations group as a result of a cost savings initiative implemented in the first quarter of 2009 that we expect
will have a positive near-term impact on margins. We believe that our current fixed manufacturing cost structure is sufficient to
support significantly higher levels of production, given current revenue mix and resultant product revenue. The extent to which
margins continue to grow, as a percentage of total revenue, will be dependent upon revenue mix, revenue volume, our ability to
manage costs and our ability to pass commodity market-driven raw materials increases on to customers. With product revenue
volume increases, more of our fixed manufacturing costs would be absorbed, which should lead to increased margins. We expect to
continue to focus on reducing controllable variable product manufacturing costs through 2010 and beyond, with potential offsetting
increases in the commodity metals markets. We expect to see absolute dollar gross margin growth through 2010 and beyond, but this
expectation is dependent upon the factors discussed above and therefore may or may not occur as expected.
13
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 coating formulations and
the cost of enhancing the Company’s manufacturing processes. We have been, and continue to be, engaged in research to enhance our
ability to disperse material in a variety of organic and inorganic media for use as coatings and polishing materials. We have also
extended our efforts to produce our first complete product line of Architectural Window cleaning products – the NanoUltra™ family.
Now that we have demonstrated the capability to produce pilot quantities of mixed-metal oxides in a single crystal phase, we do
not expect development of further variations on these materials to present material technological challenges. Many of these materials
exhibit performance characteristics that can enable them to serve in various catalytic applications. We have an ongoing advanced
engineering effort that is primarily focused on the development of new nanomaterials as well as the refinement of existing
nanomaterials, as dictated by our customer-driven marketing strategy. 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 $1,615,894 in 2009, compared to $1,764,284 in 2008. The decrease in research
and development expense was largely attributed to reduction in salary and stock compensation (non-cash) expenses after our
restructuring efforts during 2008 and 2009. We do not expect research and development expense to increase significantly in 2010.
Selling, general and administrative expense decreased to $3,852,737 in 2009, compared to $5,390,771 in 2008. The net
decrease, quantified for the twelve month period, was primarily attributed to decreases in salary expense following our 2008 and 2009
restructuring efforts ($841,000), legal fees ($298,000) and non-cash stock compensation ($205,000) expenses.
In the first quarter of 2009, we announced the resignations of Mr. Robert Haines, our then-current Vice-President of Operations,
and Dr. Richard Brotzman, our then-current Chief Technology Officer. Additionally, we eliminated twelve positions within the
Operations group as a result of a reorganization plan implemented to align the organization with current demand based upon current
economic conditions and the Company’s shift in strategy to develop a more customer-focused direct selling approach. During this
process, we have continued to seek to build our marketing and applications development capabilities. As a result of the above
resignations, we incurred a total of $794,069 of cash and non-cash severance charges. Included in these charges were salaries and
benefits, accelerated vesting of stock options (non-cash) and other expenses. Of these charges, approximately $211,000 or 27% were
related to the accelerated vesting of stock options which have no cash impact and are expected to have a minimal dilutive effect if
any. We believe that the impact of all cost savings and realignment measures implemented during 2008 and 2009 will be an annual
savings of approximately $2 million.
Interest income decreased to $89,615 in 2009, compared to $383,083 in 2008. The decrease was primarily due to severely
decreased investment yields and decreases in funds available for investment.
14
Inflation
Management believes inflation has not had a material effect on the Company’s operations or on its financial position. However,
supplier price increases and wage and benefit inflation, both of which represent a significant component of the Company’s costs of
operations, may have a material effect on the Company’s operations and financial position in 2010 and beyond, particularly if we are
unable to pass through any applicable increases.
Liquidity and Capital Resources
Our cash, cash equivalents and short-term investments amounted to $3,933,997 as of December 31, 2009, compared to
$7,631,957 on December 31, 2008. On June 30, 2008, we reclassified our auction rate securities (ARS) in the amount of $6 million
from current to long-term investments. Additional discussion on these auction rate securities is below. The net cash used in the
Company’s operating activities was $3,614,979 and $2,560,783 for the years ended December 31, 2009 and 2008, respectively, which
is a result of a significant decrease in revenue (approximately $3.9 million) as well as the payment of restructuring costs, partially
offset by certain cost savings initiatives described previously. Net cash provided by investing activities, which is due to maturities of
securities and to a lesser extent capital expenditures offset partially by purchases of securities, amounted to $8,410,937 for the year
ended December 31, 2009 compared to $2,733,471 of net cash used for the year ended December 31, 2008. Capital expenditures
amounted to $171,721 and $499,967 for the years ended December 31, 2009 and 2008, respectively. Net cash used in financing
activities is due to principal payments on an equipment loan from BYK-Chemie and capital lease obligations amounting, in total, to
$1,619,634 for the year ended December 31, 2009 compared to $12,694 for the same period in 2008.
Our supply agreement with our largest customer contains several financial covenants which could potentially impact our
liquidity. The most restrictive financial covenants under this agreement require that we maintain a minimum of $2 million in cash,
cash equivalents and certain investments, 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 a transfer of certain technology and sale of related equipment to this customer. We
believe it is in our best interest to avoid such a transfer. We had approximately $3.9 million in cash, cash equivalents and current
investments (excluding ARS) on December 31, 2009. In addition, we had a gross value of $4 million of ARS, $3.56 million net of an
other than temporary impairment, as of that date that might be sold or otherwise used to obtain cash. A $2 million ARS note was sold
for $1.72 million of proceeds which were received during the fourth quarter 2009, as discussed below. Additionally, we reported that,
subsequent to the reporting date, we entered into an agreement to sell the remaining ARS to Credit Suisse for $4 million, thus
improving our position with respect to this covenant. Our debt position renders the acceleration issue inapplicable to our current
situation; and in fact we became debt-free when our final loan payment was made during July 2009. This supply agreement and its
covenants are more fully described in Note 14 to our Financial Statements.
For many reasons, our cash position has decreased significantly during the past year. Customers have more aggressively reduced
their inventories, which has decreased our order flow. We have started to see this pattern reverse slightly, but customers remain very
concerned about managing inventory levels. We have also seen certain customers more inclined to focus on cost than performance,
which has impeded new formulation development that may include our materials, as well as pressure on existing customers to reduce
the amount of material purchased from us in an attempt to control short term costs. In addition, we have expended significant efforts
in trying to qualify for new markets. While we believe this to be the right course of action for future revenue growth, the early stages
of this process tend to result in trial activity, which we expect to become commercial revenue over time. Some industries require two
or more years of qualification prior to potential acceptance. For this reason we have begun the qualification process with several
potential customers in a number of industries, and continue to look for market applications for which we can begin this qualification
process. There can be no assurance that we will be successful in our qualification efforts, or that such efforts will result in increased
Company revenues. We also repaid $1.6 million in debt during 2009, with our final payment made in July 2009. While these
payments have reduced our cash position, they have left us debt-free as of July 2009, and the lack of these payments in the future will
reduce the related cash outflows we experienced during 2009.
15
We adapted our business during the past twelve months by reducing work force and overhead in a manner designed to make us
more lean and efficient. This has reduced the cost of running our business, which should become even more apparent once severance
payments have concluded in February 2010 (see Note 16 on severance). This cost reduction has helped us withstand the drop in our
commercial revenue from 2008 levels through 2009, and we expect this more efficient structure will help optimize our financial
performance with anticipated increases in revenue.
We believe that cash from operations, cash and equivalents and investments on hand, including the value of the ARS portfolio
(particularly in light of the sale of this portfolio completed during March 2010), will be adequate to fund our operating plans through
2010. Our actual future capital requirements in 2010 and beyond will depend, however, on many factors, including customer
acceptance of our current and potential nanomaterials and product applications, continued progress in our 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 materials and product applications. Other important issues that will
drive future capital requirements will be the development of new markets and new customers as well as the potential for significant
business growth with existing customers. We expect that capital spending relating to currently known capital needs for 2010 will be
approximately $300,000.
In October 2009 we sold one of our ARS investments, a Connecticut Student Loan Foundation bond (see Note 4) pursuant to a
reverse auction tender offer initiated by the Connecticut Student Loan Foundation. Our net proceeds were $1.72 million, which is
reflected in our cash balance as of December 31, 2009. We had been seeking the difference between the net proceeds and the $2
million par value as part of our damages in the FINRA claim against Credit Suisse noted below, which was subsequently resolved in a
settlement executed in March 2010. This note was valued, net of other than temporary impairment, at $1.78 million at the time of its
sale. We accounted for the additional $60,000 loss on sale as an expense in our statement of operations for 2009.
As of March 5, 2010, our remaining investments in ARS totaled $3.56 million, net of other than temporary impairment. These
ARS holdings have experienced “failed auctions” due to a lack of available buyers for them on their expected auction dates. An
auction failure means that parties wishing to sell their securities could not be matched with an adequate volume of buyers. In the
event there is a failed auction the indenture governing the security requires the issuer to pay interest at a contractually defined rate.
Despite these failed auctions, there have been no defaults on the underlying securities and investment income on these ARS holdings.
They have been issued through the Federal Family Education Loan Program and carry an AAA credit rating. These FFELPs Loans
are guaranteed to 97% of their $4 million value by the Department of Education. However, these failed auctions have caused us to
change the level of inputs to determine their fair values. These values were estimated as of December 31, 2009 and 2008 by an
independent appraisal firm, Houlihan, Smith & Company, Inc., using a discounted cash flow model. Since these inputs were not
observable they are classified as Level 3 inputs (see Notes 3 and 4). As a result, for the period ended December 31, 2008, we
recognized an “other than temporary impairment loss” on the ARS in the amount of $660,000, thus reducing the $6 million in
nominal value to $5.34 million in net carrying value. One of the underlying securities was then sold during October 2009, leaving $4
million in gross value, $3.56 million net of other than temporary impairment, in our ARS portfolio. Our appraisal firm updated its
analysis during the fourth quarter of 2009 for the remaining two ARS securities we currently hold, and determined that the fair value
estimates made for the year ended December 31, 2008 have not changed through December 31, 2009, and therefore, recommended no
changes to the carrying value of these investments be made. We have reviewed and agreed with that analysis, and therefore have
maintained the net value of these securities at $3.56 million. We monitored the creditworthiness of the companies underwriting these
securities and made any adjustments we deemed necessary to reflect the fair value of these securities.
16
It has been our intention to sell these instruments for as close to their $4 million value as possible as soon as we were able to do
so. However, because we could not ascertain when we would ultimately sell these instruments, and they have nominal maturity in
excess of one year, we would have classified these securities as long-term on the December 31, 2009 balance sheet if not for the
subsequent event described below.
Pursuant to the applicable rules of FINRA, we filed an arbitration demand against Credit Suisse, the Company’s investment
advisor with respect to our ARS investments. The hearing on our arbitration had been scheduled for April 2010. Pursuant to an
agreement between the parties executed during March 2010, Credit Suisse agreed to purchase our remaining ARS holdings for $4
million on or before March 31, 2010, and we agreed not to seek reimbursement for the $280,000 loss realized on the sale of another
ARS bond or for legal and other costs. Under this agreement, the arbitration will not proceed and our arbitration claim has been
resolved.
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 a financing could be
necessitated by such things as the loss of existing customers; 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 supply agreement; or various other circumstances coming to pass that we currently do not anticipate.
On December 31, 2009, we had a net operating loss carryforward of approximately $80 million for income tax purposes.
Because the Company may have experienced “ownership changes” within the meaning of the U.S. Internal Revenue Code in
connection with its various prior equity offerings, future utilization of this carryforward may be subject to certain limitations as
defined by the Internal Revenue Code. A layer of the carryforward expired in 2008 and another is expected to expire in 2009. If not
utilized, the remaining carryforward will expire at various dates between January 1, 2010 and December 31, 2029. 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 some portion of this carryforward will expire before ultimately becoming
available to reduce income tax liabilities.
Off—Balance Sheet Arrangements
The Company has not created, and is not party to, any special-purpose or off-balance sheet entities for the purposes of raising
capital, incurring debt or operating the Company’s business. Nanophase does not have any off-balance sheet arrangements or
relationships with entities that are not consolidated into the Company’s financial statements that are reasonably likely to materially
affect Nanophase’s liquidity or the availability of capital resources.
17
Credit Environment
The credit markets continue to be volatile and have experienced a shortage in overall liquidity due to the sub-prime lending
industry. The Company neither engages in any business activities in the mortgage industry, nor does it hold mortgage-backed
securities in its investment portfolio. Overall the liquidity shortage in the marketplace includes Auction Rate Securities. We believe
we have sufficient liquidity from our cash and investment accounts to satisfy 2010 operational needs. See Notes 2 and 3 to the
financial statements, “Summary of Significant Accounting Policies” for a further discussion of liquidity issues.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not required for a smaller reporting company.
Item 8.
Financial Statements and Supplementary Data
The financial statements, with the report of independent auditors, listed in Item 15 are included in this Form 10-K.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A (T).
Controls and Procedures
Evaluation of Disclosure Controls and Procedures. An evaluation of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”)) as of December 31, 2009 was conducted under the supervision and with the participation of
the Company’s management, including Jess Jankowski, the Chief Executive Officer (CEO) and Frank Cesario, the Chief Financial
Officer (CFO). Based on that evaluation, Mr. Jankowski and Mr. Cesario concluded that the Company’s disclosure controls and
procedures were effective as of such date to ensure that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms and that the Company’s disclosure controls and procedures are effective to
ensure that material information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is
accumulated and communicated to the management, including the CEO and CFO, as appropriate to allow timely decisions regarding
required disclosures.
Management’s Annual Report on Internal Control Over Financial Reporting. Management is responsible for the preparation,
integrity and fair presentation of the financial statements and Notes to the financial statements. The financial statements were
prepared in accordance with the accounting principles generally accepted in the U.S. and include certain amounts based on
management’s judgment and best estimates. Other financial information presented is consistent with the financial statements.
Management is also responsible for establishing and maintaining adequate internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is
designed under the supervision of the Company’s principal executive and financial officers in order 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. The Company’s internal control over financial reporting includes those policies and
procedures that:
(i)
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of assets of the Company;
18
(ii) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and directors of the Company; and
(iii) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009. In
making this assessment, management used the criteria established in Internal Control–Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
Based on our assessment and those criteria, management believes that the Company maintained effective internal control over
financial reporting as of December 31, 2009.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal
control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting
firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s
report in this annual report.
Changes in Internal Control over Financial Reporting. The Company’s management, including Mr. Jankowski, the CEO, and
Mr. Cesario, the CFO, confirms that there was no change in the Company’s internal control over financial reporting during the quarter
ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control
over financial reporting.
Item 9B. Other Information
Entry into a Material Definitive Agreement
On March 26, 2010, the Company and Credit Suisse Securities (USA) LLC (“Credit Suisse”) entered into a Confidential
General Release of Claims and Settlement Agreement (the “Settlement Agreement”). Pursuant to this Settlement Agreement, Credit
Suisse agreed to purchase our remaining ARS holdings for $4 million, and we agreed to dismiss the arbitration initiated by us against
Credit Suisse and to release all claims arising out of the transactions which formed the basis for the arbitration or related to our
account with Credit Suisse, including, but not limited to, our claim to recoup the $280,000 loss realized on the sale of another ARS
bond.
19
PART III
Item 10. Directors, Executive Officers and Corporate Governance
DIRECTORS
Set forth below is certain information regarding the directors of the Company.
Name
James A. Henderson
James A. McClung, Ph.D.
R. Janet Whitmore
Jess A. Jankowski
Richard W. Siegel, Ph.D.
George A. Vincent, III
Donald S. Perkins
Jerry K. Pearlman
Age
75
72
55
44
72
65
82
70
Position with
Company
Director
Director
Director
Director
Director
Vice Chairman of the
Board of Directors
Chairman of the Board
of Directors
Director
Served as
Director Since
2001
Term Expires
2010
Class
I
2000
2003
2009
1989
2007
1998
1999
2010
2010
2011
2011
2012
2012
2012
I
I
II
II
III
III
III
Mr. Henderson has served as a director of the Company since July 2001. He retired as Chairman and Chief Executive Officer
of Cummins Engine Company (now Cummins Inc.) in December 1999, after joining the company in 1964. Mr. Henderson became
President and Chief Operating Officer of Cummins in 1977, was promoted to President and Chief Executive Officer in 1994 and
served as Chairman and Chief Executive Officer from 1995 until his retirement in 1999. Mr. Henderson attended Culver Military
Academy, holds an A.B. in public and international affairs from Princeton University and an M.B.A. from Harvard Business School.
Mr. Henderson also currently serves as a member of the Board of Directors of Hillenbrand, Inc. Mr. Henderson previously served as a
director of AT&T, Inc., International Paper, Rohm & Haas and Ryerson, Inc. He serves as Chairman of the Board of the Culver
Education Foundation and is a past Chair of the Executive Committee of the Princeton University Board of Trustees. The Company
believes that Mr. Henderson’s extensive and diverse background in corporate leadership in technology-based companies, operations
experience, and business acumen makes him a valuable member of its Board of Directors.
Mr. McClung has served as a director of the Company since February 2000. Currently he is Chairman/CEO of Lismore
International. He retired as Senior Vice President and executive officer for FMC Corporation (which has since been split into three
public corporations: 1) FMC, 2) FMC Technology and 3) John Bean Technologies), a leading producer of a diversified portfolio of
chemicals and machinery. He has over 30 years of international business development experience in over 75 countries, having
managed and developed new technologies and production processes for diversified global businesses, including specialized chemicals
and machinery, while living in the United States, Europe and Africa. Mr. McClung currently serves as Corporate Board member of
Alticor (Amway), NCCI and Hu-Friedy. He was a founding member of the U.S.-Russia Business Council and is active in other
international business organizations, such as the Japan American Society, Chicago Council on Global Affairs, Executive Club of
Chicago, and the Economic Club of Chicago. He serves as a board director at Thunderbird School of Global Management and the
College of Wooster (Ohio). Mr. McClung earned a Bachelor’s degree from the College of Wooster, a Master’s degree from the
University of Kansas and a Doctorate from Michigan State University. The Company believes that Mr. McClung’s extensive global
business development and worldwide management experience, including his experience in the specialty chemicals industry, make
him a valuable member of its Board of Directors.
Ms. Whitmore joined the board in November 2003. She is a former director of Silverleaf Resorts, Inc., where she served as
Chairman of the Compensation Committee and as a member of the Audit Committee. She is also a former director of Epoch
Biosciences, a supplier of proprietary products used to accelerate genomic analysis. Ms. Whitmore is Founder of Benton Consulting,
LLC, which specializes in business development and processes. From 1976 through 1999, Ms. Whitmore held numerous engineering
and finance positions at Mobil Corporation, including Mobil’s Chief Financial Analyst and Controller of Mobil’s Global
Petrochemicals Division. Ms. Whitmore holds a B.S. degree in Chemical Engineering from Purdue University and an M.B.A. from
Lewis University. The Company believes that Ms. Whitmore’s combination of global financial, engineering, and management
expertise makes her a valuable member of its Board of Directors.
Mr. Jankowski joined the board in February 2009. He has served as Controller of the Company since joining in 1995 until
September 2008. He was elected Secretary and Treasurer in November 1999, Acting Chief Financial Officer in January 2000, Vice
President in April 2002, Vice President of Finance and Chief Financial Officer in April 2004 and President and Chief Executive
Officer in February 2009. From 1990-1995 he served as Controller for two building contractors in the Chicago area, during which
time he had significant business development responsibilities. From 1986 to 1990 he worked for Kemper Financial Services in
their accounting control corporate compliance unit, serving as unit supervisor during his last two years. Mr. Jankowski holds a B.S.
from Northern Illinois University and an M.B.A. from Loyola University. He has served on the TechAmerica Midwest Board since
2008 and was an active member of the TechAmerica Midwest CFO Committee from 2006 through 2008. He was appointed to the
Advisory Board of the Nanobusiness Alliance in 2009. Mr. Jankowski was appointed to the Romeoville Economic Development
Commission in 2004. He has also served on the advisory board of NITECH (Formerly WESTEC), an Illinois Technology Enterprise
Center focusing on the commercialization of advanced manufacturing technologies from 2003 to 2008. The Company believes that
Mr. Jankowski’s long-term and intimate experience with Nanophase operations, along with his financial and management expertise
makes him a valuable member of its Board of Directors.
20
Dr. Siegel is a co-founder of the Company and has served as a director of the Company since 1989. Dr. Siegel served as a
consultant to the Company from 1990 to 2002 with regard to the application and commercialization of nanomaterials. Dr. Siegel is an
internationally recognized scientist in the field of nanomaterials. During his tenure on the research staff at Argonne National
Laboratory from July 1974 to May 1995, he was the principal scientist engaged in research with the laboratory-scale synthesis process
that was the progenitor of the Company’s physical-vapor-synthesis production system. Dr. Siegel has been the Robert W. Hunt
Professor in Materials Science and Engineering at Rensselaer Polytechnic Institute since June 1995, and served as Department Head
from 1995 to 2000. In April 2001, Dr. Siegel became the founding Director of the newly created Rensselaer Nanotechnology Center
at the Institute. During 1995-1998, he was also a visiting professor at the Max Planck Institute for Microstructure Physics in Germany
on an Alexander von Humboldt Research Prize received in 1994. During 2003-2004 he was a visiting professor in Japan on a RIKEN
Eminent Scientist Award. He chaired the World Technology Evaluation Center worldwide study of nanostructure science and
technology for the U.S. government, has served on the Council of the Materials Research Society and as Chairman of the
International Committee on Nanostructured Materials. He also served on the Committee on Materials with Sub-Micron Sized
Microstructures of the National Materials Advisory Board and was the co-chairman of the Study Panel on Clusters and Cluster-
Assembled Materials for the U.S. Department of Energy. He served on the Nanotechnology Technical Advisory Group to the U.S.
President’s Council of Advisors on Science and Technology during 2003-2009. Dr. Siegel holds an A.B. degree in physics from
Williams College and an M.S. degree and Ph.D. from the University of Illinois at Urbana-Champaign. The Company believes that
Dr. Siegel’s value to its Board of Directors, as co-founder of the Company and inventor of its initial base technology, is self-
explanatory.
Mr. Vincent has served as a Director of the Company since November 2007. In August 2008, he was appointed as Vice
Chairman of the Company’s Board of Directors. He is currently Chairman and Commercial Development Officer of The HallStar
Company, where he served as CEO for twenty years. HallStar is a chemical manufacturer and innovator specializing in material
science, marketing its products worldwide, primarily into the polymer and personal care industries. Prior to HallStar, Mr. Vincent
held positions in purchasing, sales, commercial development and strategic planning with FMC Corporation (chemicals) and General
Electric Company (chemicals and plastics). Mr. Vincent has served as Chairman of the Illinois Manufacturers’ Association (IMA)
and the Chemical Industry Council of Illinois (CICI), as well as Director of the American Chemistry Council (ACC). Mr. Vincent
serves on the Boards of several closely-held companies in the chemicals and materials industry sector. Mr. Vincent holds a Bachelor
of Science degree in Chemistry from Dartmouth College and an M.B.A. degree from Harvard Business School. The Company
believes that Mr. Vincent’s extensive experience in the chemicals industry and management leadership makes him a valuable member
of its Board of Directors.
21
Mr. Perkins has served as a director of the Company since February 1998. Mr. Perkins retired from Jewel Companies, Inc., the
retail supermarket and drug chain, in 1983. He had been with Jewel since 1953, serving as President from 1965 to 1970, as Chairman
of the Board of Directors from 1970 to 1980, and as Chairman of the Executive Committee until his retirement. He has served on a
number of corporate boards and is currently a director of LaSalle Hotel Properties and La Salle U.S. Realty Income and Growth Fund
III. For more than 30 years, he has served on corporate boards including AT&T, Aon, Corning, Cummins Engine, Eastman Kodak,
Firestone, Inland Steel Industries, Kmart, Lucent Technologies, The Putnam Funds, Springs Industries and Time-Warner, Inc. He has
served as a Trustee of The Ford Foundation and The Brookings Institution, as a member of The Business Council and as a Protector
of the Thyssen-Bornemisza Continuity Trust. Mr. Perkins is a life trustee and was Vice Chairman of the Board of Trustees of
Northwestern University. He is also a member of the Civic Committee of The Commercial Club of Chicago, and Advisory Boards for
Blue Ridge Partners, Shields-Meneley, RoundTable Healthcare Partners L.P., Northwestern University’s School of Communication
and its School of Education and Social Policy. Mr. Perkins holds a B.A. degree from Yale University and an M.B.A. degree from the
Harvard Graduate School of Business Administration. The Company believes that Mr. Perkins’ extensive resume of corporate
leadership, including Board service, makes him a valuable member of its Board of Directors.
Mr. Pearlman has served as a director of the Company since April 1999. Mr. Pearlman retired as Chairman of Zenith
Electronics Corporation in November 1995. He joined Zenith as controller in 1971 and served as chief executive officer from 1983
through April 1995. Mr. Pearlman is currently a director of Smurfit Stone Container Corporation. He is a life trustee of Northwestern
University and a life director and past chairman of the board of Evanston Northwestern Healthcare. Mr. Pearlman graduated from
Princeton with honors from the Woodrow Wilson School and from Harvard Business School with highest honors. The Company
believes that Mr. Pearlman’s extensive financial and leadership experience make him a valuable member of its Board of Directors.
Meetings of the Board and Committees — During the year ended December 31, 2009, the Board of Directors held eight
formal meetings. No director missed more than one board and committee meeting held during 2009 (for all committees on which a
particular director served).
Committees of the Board of Directors — The Board of Directors has established an Audit and Finance Committee,
Compensation and Governance Committee and a Nominating Committee, each comprised entirely of independent directors who are
not officers or employees of the Company. The members of the Audit and Finance Committee are Mr. McClung (Chairman),
Mr. Pearlman, Mr. Perkins and Mr. Vincent. The members of the Compensation and Governance Committee are Mr. Pearlman
(Chairman), Mr. Henderson, Mr. Perkins and Mr. Vincent. The members of the Nominating Committee are Mr. Henderson
(Chairman), Mr. McClung, Mr. Pearlman, Mr. Perkins, Dr. Siegel and Mr. Vincent.
The Audit and Finance Committee generally has responsibility for retaining the Company’s independent public auditors,
reviewing the plan and scope of the accountants’ annual audit, reviewing the Company’s internal control functions and financial
management policies and reporting to the Board of Directors regarding all of the foregoing. The Audit and Finance Committee held
six formal meetings in 2009. The Board of Directors has determined that Mr. Pearlman and Mr. Perkins are “audit committee
financial experts” as described in applicable SEC rules. Each member of the Audit and Finance Committee is independent, as defined
in Rule 4200(a) (15) of the National Association of Securities Dealers’ listing standards and applicable SEC rules.
The Compensation and Governance Committee generally has responsibility for establishing executive officer and key employee
compensation, reviewing and establishing the Company’s executive compensation and general corporate governance policies and
reporting to the Board of Directors regarding the foregoing. The Compensation and Governance Committee also has responsibility for
administering the Amended 2004 Equity Compensation Plan and the 2006 Stock Appreciation Rights Plan, determining the number
of options, if any, to be granted to the Company’s employees and consultants pursuant to the Amended 2004 Equity Compensation
Plan and reporting to the Board of Directors regarding the foregoing. The Compensation and Governance Committee held four formal
meetings in 2009.
22
The Nominating Committee generally has responsibility for nominating candidates to serve on the Board of Directors. All
members of the Nominating Committee are independent. The Nominating Committee was formed in 2004 and held one formal
meeting in 2009.
The Board of Directors considers its role in risk oversight to focus primarily on evaluating risk at the entity and strategic levels,
with management primarily responsible for managing day-to-day risk factors and presenting summary materials for those positions to
the Board of Directors. Consistent with this philosophy, the Board of Directors has no formal policy as to whether the roles of Chief
Executive Officer and Chairman should be segregated or combined. The Board of Directors considers the circumstances of the
Company and makes a determination as to the appropriate leadership structure for the Company at that time. As of the time of this
filing, the positions of CEO and Chairman are held by two individuals – Mr. Perkins serves as Chairman and Mr. Jankowski serves as
CEO. Mr. Perkins brings extensive experience in corporate leadership from his own working experience and from the many Boards
on which he serves or has served in the past, and Mr. Jankowski, in his relatively new role as CEO, is expected to benefit from that
experience. The Board of Directors believes that is the most appropriate structure for the Company at this time.
The Board of Directors does not have a stated policy regarding diversity. The Board seeks experienced individuals for service
who bring extensive experience in leadership, operations, finance, and engineering, particularly in areas directly applicable to the
Company or its intended future endeavors.
Set forth below is certain information regarding the named executive officers of the Company as of the date of this Form 10-K
who are not identified above as directors.
EXECUTIVE OFFICERS
Name
Frank Cesario
David Nelson
Nancy Baldwin
Patrick Murray, Ph.D.
H. Glenn Judd
Age Position
40 Chief Financial Officer
42 Vice President - Sales and Marketing
58 Vice President - Human Resources and Investor Relations
43 Vice President - Research and Development
41 Vice President - Operations
Mr. Cesario joined the Company in June 2009 as Chief Financial Officer. He brings more than 10 years of CFO and controller
experience at manufacturing entities. Prior to joining Nanophase, Mr. Cesario served in a similar capacity with ISCO International,
Inc., a publicly traded global supplier of telecommunications equipment, as well as Turf Ventures LLC, a privately held chemicals
distributor. He began his career with KPMG Peat Marwick and then served in progressively responsible finance positions within
Material Sciences Corporation and Outokumpu Copper, Inc. Mr. Cesario holds an M.B.A. (Finance) from DePaul University and a
B.S. (Accountancy) from the University of Illinois, as well as a CPA license from the state of Illinois.
Mr. Nelson joined the Company in April 2007 as Vice President of Sales. He was appointed Vice President of Sales and
Marketing in August 2008. He is an executive who brings over 15 years of business development experience. Prior to joining
Nanophase, Mr. Nelson started and managed the LCD business for Eastman Chemical Company. Prior to that, he was a consultant
with Mercer Management Consulting working on corporate strategy development and implementation. Mr. Nelson has also started
two consumer goods manufacturing companies and has served as National Sales Manager for Pelouze Scale Company. He holds a
B.S. in Marketing from Miami University and a M.B.A. from the Kellogg Graduate School of Management at Northwestern
University.
23
Ms. Baldwin has served as the Director of Human Resources and Information Technology since joining the Company in 2000.
In September of 2008, she was appointed as the Company’s Vice-President of Human Resources and Investor Relations. Prior to
joining Nanophase, she served as Vice-President of iLink Global, and Chief Human Resources Officer at the Marketing Store, a
global supplier to McDonald’s Corporation. Previous experience includes 14 years at Arthur Andersen, LLP & Andersen Consulting,
LLP in various positions. Ms. Baldwin has a B.S. in Education from Western Illinois University and post graduate studies at Northern
Illinois University. She is currently an active member of the Will County Three Rivers Manufacturing Human Resources Association.
Dr. Murray joined the Company in 2001 as a senior scientist. He was promoted to Director of Research and Development in
2005 and appointed Vice President of Research and Development in 2008. He holds an undergraduate degree in Biochemistry from
Illinois Benedictine College (Benedictine University) and a doctorate in Organic Chemistry from the University of Illinois at Urbana-
Champaign. Dr. Murray has over 15 years of experience in the areas of polymer synthesis, particle dispersion, chemical process
development and technical project management. Dr. Murray has been focused on dispersion product development and technical
support for business development. Prior to joining Nanophase, Dr. Murray held various research and management positions at Nalco
Chemical Company.
Mr. Judd joined the Company in 2000 as a senior process engineer. In December of 2009, he was appointed as the Company’s
Vice President of Operations. In his 9 years within the Company, he has served in progressively responsible engineering positions and
has been instrumental in developing, building, and improving the Company’s engineering and production capabilities. He has 20
years of experience in the area of chemical process scale-up, particle dispersion technology, and manufacturing support. Before
joining Nanophase, Mr. Judd held various research and engineering positions at the Eastman Kodak Company, and prior to that, spent
time as an intern at Michigan Biotechnology Institute while attending college. He graduated with Honors from Michigan State
University with a B.S. in Chemical Engineering, and currently holds a professional engineering license.
The Board of Directors elects executive officers and such executive officers, subject to the terms of their employment
agreements, serve at the discretion of the Board of Directors. Messrs. Jankowski, Cesario, Nelson and Judd, Ms. Baldwin, and
Dr. Murray each have employment agreements with the Company. See Item 11 below. There are no family relationships among any
of the directors or officers of the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires the Company’s officers (as
defined under Section 16), directors and persons who beneficially own greater than 10% of a registered class of the Company’s equity
securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission. Based solely on a
review of the forms it has received and on written representations from certain reporting persons that no such forms were required for
them, the Company believes that during 2009, all Section 16 filing requirements applicable to its officers, directors and 10%
beneficial owners were complied with by such persons.
CODE OF ETHICS
The Company has adopted a Code of Business Conduct and Ethics (“Code of Ethics”) that applies to, among others, the
Company’s principal executive officer, principal financial officer and principal accounting officer or controller, or persons
performing similar functions. The Code of Ethics is posted on its Internet web site www.nanophase.com under the “Investor
Relations” section. In the event that the Company makes any amendment to, or grants any waiver from, a provision of the Code of
Ethics that requires disclosure under applicable SEC rules, the Company intends to disclose such amendment or waiver on its web
site.
24
Executive Compensation
Item 11.
Compliance with Section 162(m)
The Compensation Committee currently intends for all compensation paid to the executive officers to be tax deductible to the
Company pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended (“Section 162(m)”). Section 162(m)
provides that compensation paid to the executive officers in excess of $1,000,000 cannot be deducted by the Company for Federal
income tax purposes unless, in general, (1) such compensation is performance-based, established by a committee of outside directors
and objective, and (2) the plan or agreement providing for such performance-based compensation has been approved in advance by
stockholders. The Compensation Committee believes that the requirements of Section 162(m) are uncertain at this time and may
arbitrarily impact the Company. In the future, the Compensation Committee may determine to adopt a compensation program that
does not satisfy the conditions of Section 162(m) if in its judgment, after considering the additional costs of not satisfying Section 162
(m), such program is appropriate.
The following table sets forth a summary of the compensation for each of our named executive officers in U.S. dollars for the
financial year ended December 31, 2009.
SUMMARY COMPENSATION TABLE
Name and Principal Position
Jess Jankowski
President and Chief Executive Officer (formerly
Chief Financial Officer) (5)
Frank Cesario
Chief Financial Officer (6)
David Nelson
Vice President Sales and Marketing
Nancy Baldwin
Vice President Human Resources and Investor
Relations
Year
Salary
($)
Bonus
($)(1)
Non-Equity
Incentive
Plan
Compensation
($)(3)
Option
Awards
($)(2)
All Other
Compensation
($)(4)
Total
($)
2009 $246,311 $ 35,000 $22,314 $
— $
18,218 $321,843
2008 $196,000 $125,000 $51,702 $
— $
23,626 $396,328
2009 $ 50,192 $
5,000 $15,606 $
— $
— $ 70,798
2009 $176,670 $ 16,000 $22,314 $
— $
17,073 $232,057
2009 $147,992 $ 10,000 $22,314 $
— $
7,633 $187,939
(1) These amounts were earned in 2009 and 2008, but paid in early 2009 and 2010, respectively. Sixty percent of the 2008 bonus to
Mr. Jankowski was authorized at the special meeting of the Board of Directors held on August 13, 2008, when Mr. Jankowski
was appointed acting CEO. This bonus was in recognition of additional responsibilities required of Mr. Jankowski and paid in
quarterly increments.
(2) The amounts in this column represent the dollar amount recognized for financial statement reporting purposes with respect to the
2009 and 2008 fiscal years in accordance with FASB ASC Topic 718 (formerly SFAS 123R). See Note 12 of the notes to our
financial statements contained elsewhere in this Annual Report for a discussion of all assumptions made by us in determining
the FASB ASC Topic 718 (formerly SFAS 123R) values.
(3) None.
(4) The amounts in this column represent 401(k) match, health and life insurance. Health insurance benefits are the same for all
employees. Life insurance is provided in the amount of one times the annual base salary with a maximum of $150,000.
(5) Effective August 2008, Mr. Jankowski was appointed Acting Chief Executive Officer. Effective February 2009, Mr. Jankowski
was appointed President and Chief Executive Officer.
25
(6) Effective June 2009, Mr. Cesario joined Nanophase as our Chief Financial Officer.
Employment Agreements
Effective August 12, 2009, the Company entered into an employment agreement with Jess Jankowski in connection with his
services as President and Chief Executive Officer of the Company.
Pursuant to the terms of his employment agreement, Mr. Jankowski will receive an annual base salary of not less than $275,000.
In addition, Mr. Jankowski will be eligible for discretionary bonuses for services to be performed as an executive officer of the
Company based on performance and achieving milestones approved by the Board of Directors of the Company (the “Board”).
Mr. Jankowski will be eligible for such stock options and other equity compensation as the Board deems appropriate, subject to
the provisions of the Company’s 2004 Equity Compensation Plan (the “Plan”). Mr. Jankowski will also be entitled to the employee
benefits made available by the Company generally to all other executive officers of the Company, subject to the terms and conditions
of the Company’s employee benefit plan in effect from time to time.
In the event Mr. Jankowski’s employment is terminated other than for “cause”, as defined in the employment agreement,
Mr. Jankowski will receive a sum equal to Mr. Jankowski’s base salary in effect at the time of termination for 52 full weeks after the
effective date of termination, payable in proportionate amounts on the Company’s regular pay cycle for professional employees,
provided that Mr. Jankowski signs, without subsequent revocation, a separation agreement and release in a form acceptable to the
Company. In addition, all stock options granted to Mr. Jankowski prior to termination will become fully vested and exercisable in
accordance with the applicable option grant agreement and the Plan. If he is terminated for cause, or if he resigns as an employee of
the Company, Mr. Jankowski will not be entitled to any severance or other benefits accruing after the term of the employment
agreement and such rights will be forfeited immediately upon the end of such term.
If, within two years after the occurrence of a change in control, as defined in his employment agreement, Mr. Jankowski’s
employment is terminated other than for cause, his responsibilities or annual compensation are materially reduced without his prior
consent, or the Company ceases to be publicly held (each, a “Trigger”), then, subject to Mr. Jankowski signing, without subsequently
revoking, a Separation Agreement and Release in a form acceptable to the Company, Mr. Jankowski will receive a sum equal to his
base salary for 104 full weeks after the date the Trigger occurs. In addition, all stock options granted to Mr. Jankowski prior to the
Trigger will become fully vested and exercisable in accordance with the applicable option grant agreement and the Plan.
Effective as of June 24, 2009, the Company entered into an employment agreement with Mr. Frank Cesario providing for an
annual base salary of not less than $150,000. The Company also granted to Mr. Cesario options to purchase up to 20,000 shares of
Common Stock at an exercise price of $1.07 per share with options for one-third of such shares becoming exercisable on each of the
first three anniversaries of the dates of grant. No term has been assigned to Mr. Cesario’s employment agreement. If Mr. Cesario is
terminated other than for “cause” (as such term is defined in Mr. Cesario’s employment agreement), Mr. Cesario will receive
severance benefits in an amount equal to Mr. Cesario’s base salary for 3 weeks.
Effective as of September 28, 2008, the Company entered into an employment agreement with Mr. Nelson which provided for
an annual base salary of not less than $185,000. No term has been assigned to Mr. Nelson’s employment agreement. If Mr. Nelson is
terminated other than for “cause” on or before September 22, 2010 (as such term is defined in Mr. Nelson’s employment agreement),
Mr. Nelson will receive severance benefits in an amount equal to Mr. Nelson’s base salary for 52 weeks; if termination without cause
occurs thereafter, the Company shall pay Mr. Nelson 39 weeks.
26
Effective as of September 25, 2008 the Company entered into an employment agreement with Ms. Nancy Baldwin providing for
an annual base salary of not less than $150,000. No term has been assigned to Ms. Baldwin’s employment agreement. If Ms. Baldwin
is terminated other than for “cause” (as such term is defined in Ms. Baldwin’s employment agreement), Ms. Baldwin will receive
severance benefits in an amount equal to Ms. Baldwin’s base salary for 26 weeks.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth information regarding each unexercised option held by each of our named executive officers as of
December 31, 2009.
NAME
Jess Jankowski
Frank Cesario
David Nelson
Nancy Baldwin
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
EARNED
OPTIONS
(#)
EXERCISABLE
21,775
13,000
13,000
20,000
18,000
11,000
10,000
15,000
12,000
7,666
-0-
-0-
14,000
10,000
6,666
-0-
10,000
6,000
3,000
7,500
6,000
5,000
-0-
OPTION AWARDS
STOCK AWARDS
EQUITY INCENTIVE
PLAN AWARDS:
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED
UNEARNED OPTIONS
(#)
UNEXERCISABLE
OPTION
EXERCISE
PRICE
($)
-0- $
7.687
-0- $ 10.875
7.062
-0- $
6.650
-0- $
3.660
-0- $
5.550
-0- $
6.030
-0- $
6.010
-0- $
4.480
6,000 $
3.140
15,334 $
1.020
30,000 $
OPTION
EXPIRATION
DATE
05/24/10
01/26/11
02/28/11
01/03/12
03/24/13
10/11/14
09/27/15
09/27/16
11/06/17
05/12/18
05/04/19
20,000 $
1.070
06/24/19
21,000 $
5,000 $
13,334 $
30,000 $
6.130
4.480
3.140
1.020
-0- $ 11.625
6.650
-0- $
5.550
-0- $
6.010
-0- $
4.480
3,000 $
3.140
10,000 $
1.020
30,000 $
04/09/17
11/06/17
05/12/18
05/04/19
11/20/10
01/03/12
10/11/14
09/27/16
11/06/17
05/12/18
05/04/19
EQUITY
INCENTIVE PLAN
AWARDS: NUMBER
OF SHARES OF
STOCK
THAT HAVE NOT
VESTED
(#)
EQUITY INCENTIVE
PLAN AWARDS: MARKET
VALUE
OF SHARES OF STOCK
THAT HAVE NOT
VESTED
($)
—
—
—
—
—
—
—
—
POTENTIAL PAYMENT UPON TERMINATION OR CHANGE IN CONTROL
Severance Protection. Please see discussion of severance benefits under Item 11 - “Employment Agreements” above.
27
Change in Control. Upon a change in control, the 2001 Equity Compensation Plan (the predecessor to the 2004 Equity
Compensation Plan) and the 2004 Equity Compensation Plan provide that: (1) vesting under all outstanding stock options will
automatically accelerate and each option will become fully exercisable; (2) the restrictions and conditions on all outstanding restricted
shares shall immediately lapse; and (3) the holders of performance shares will receive a payment in settlement of the performance
shares, in an amount determined by the Compensation Committee, based on the target payment for the performance period and the
portion of the performance period that precedes the change in control. If the Company is not the surviving entity, the successor is
required to assume all unexercised options. Under the Company’s 1992 Stock Option Plan, the vesting of options issued under it is
accelerated upon a “sale or merger” (as defined in the 1992 Stock Option Plan).
The following table quantifies the estimated payments that would be made in each covered circumstance:
TERMINATION BY COMPANY
WITHOUT CAUSE (1)
NAME
Jess Jankowski
Frank Cesario
David Nelson
Patrick Murray
Nancy Baldwin
H. Glenn Judd
(1) This amount represents the severance benefits that would be received under the executive officers employment agreement as
275,000
9,000
185,000
75,000
75,000
74,000
550,000
9,000
185,000
75,000
75,000
74,000
$
$
$
$
$
$
$
$
$
$
$
$
CHANGE IN
CONTROL (2)
-0-
$
-0-
$
-0-
$
-0-
$
-0-
$
-0-
$
INVOLUNTARY TERMINATION IN
CONNECTION WITH OR FOLLOWING
A CHANGE IN CONTROL (3)
described had the executive officer been terminated by the Company without cause on December 31, 2009.
(2) This amount represents an estimate of the value that would have been received under the equity incentive plans had a change in
control occurred as of December 31, 2009 and the executive officers benefited from an acceleration of vesting in the equity-
based plan awards as described above. For this purpose, the share price as of December 31, 2009 was used. The amount
represents the difference between the exercise price of any unvested options and $0.87.
(3) This amount represents an estimate of the payments and value that would have been received by the executive officers had the
executive officers been terminated by the Company without cause on December 31, 2009 in connection with a change in control
on this date. It is the sum of the first two columns.
DIRECTOR COMPENSATION
Upon first being elected to the Board of Directors, each director of the Company who is not an employee or consultant of the
Company (an “Outside Director”) is granted stock options to purchase 10,000 shares of common stock at the closing price as of the
date of issuance (the fair market value). This initial option grant to an Outside Director vests over five years.
In 2009, the Company paid $5,500 as quarterly compensation to the Chairman of the Board of Directors totaling $22,000. The
Company paid $4,500 as quarterly compensation to the Chairman of the Finance and Audit committee totaling $18,000. The
Company paid $4,000 in the first quarter and $4,500 in the second, third and fourth quarters to the Vice Chairman of the Board of
Directors totaling $17,500, compared to all other directors being paid $4,000 each, which will amount to an annual total of $16,000
per outside director for services performed in their capacity as directors.
In addition, the Chairman of the Board of Directors received $2,090 in the first quarter of 2009 in deferred common stock (the
“Director Restricted Stock Plan” as described below) based on the closing price on February 10, 2009. The Vice Chairman of the
Board of Directors and the Chairman of the Finance and Audit committee received $1,710 respectively, compared to $1,520 to all
other directors.
28
During the second, third and fourth quarters of 2009, the Company granted its outside directors stock appreciation rights
(SAR’s) totaling 45,750 shares, under the Company’s Amended and Restated 2006 Stock Appreciation Rights Plan. The fair value of
the awards granted was $14,550 and is included in director compensation expense for the year ended December 31, 2009. The SAR’s
granted vested immediately and are payable upon the directors’ termination from the position of director.
In 2005, the Company adopted, and the Shareholders’ approved, the 2005 Non-Employee Director Restricted Stock Plan (the
“Director Restricted Stock Plan”) which reserves 150,000 shares of the Company’s common stock to be issued to Outside Directors in
the form of restricted shares. In 2005, no awards were made under the Director Restricted Stock Plan. In 2005, the Company also
adopted the Non-Employee Director Deferred Compensation Plan (the “Director Deferred Compensation Plan”) which permits an
Outside Director to defer the receipt of director fees until separation from service or the Company undergoes a change in control. The
Company amended the Director Restricted Stock Plan in 2005 to permit an Outside Director to defer receipt of restricted stock
granted under it. The deferred restricted shares are accounted for under the Director Deferred Compensation Plan and issued upon
separation from service or the Company’s change in control. Under the Director Deferred Compensation Plan, the deferred fees that
would have been paid in cash are deemed invested in 5 year U.S. Treasury Bonds during the deferral period. The accumulated
hypothetical earnings are paid following the Outside Director’s separation from service or the Company’s change in control. The
deferred fees that would have been paid as restricted shares are deemed invested in common stock of the Company during the deferral
period. The Director Deferred Compensation Plan is an unfunded, nonqualified deferred compensation arrangement. In 2008 and
2009, all Outside Directors elected to defer receipts of all of the restricted shares they became entitled to under the Director Restricted
Stock Plan. In 2008 and 2009, no Outside Directors elected to defer receipt of cash under the Director Deferred Compensation Plan.
All Outside Directors are reimbursed for their reasonable out-of-pocket expenses incurred in attending board and committee
meetings.
2009 Outside Director Compensation
Name
James A. Henderson
James A. McClung
Jerry K. Pearlman
Donald S. Perkins
Richard W. Siegel, Ph.D.
R. Janet Whitmore
George A. Vincent, III
Fees Earned or
Paid in
Cash($)
$
$
$
$
$
$
$
16,000
18,000
16,000
22,000
16,000
16,000
17,500
Stock
Awards($)
$ 1,520
$ 1,710
$ 1,520
$ 2,090
$ 1,520
$ 1,520
$ 1,710
Stock
Appreciation
Rights($)
$
$
$
$
$
$
$
1,908
2,147
1,908
2,624
1,908
1,908
2,147
Total($)
$19,428
$21,857
$19,428
$26,714
$19,428
$19,428
$21,357
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 14, 2010 certain information with respect to the beneficial ownership of the common
stock by (1) each person known by the Company to own beneficially more than 5% of the outstanding shares of common stock,
(2) each Company director, (3) each of the Company’s named executive officers and (4) all Company executive officers and directors
as a group.
29
Name
Bradford T. Whitmore
Spurgeon Corporation
Grace Brothers, Ltd.
Altana Chemie, AG
James A. Henderson
Richard W. Siegel, Ph.D.
James McClung
Jerry Pearlman
Donald S. Perkins
R. Janet Whitmore
George A. Vincent, III
Jess Jankowski
David Nelson
Patrick Murray, Ph.D.
Nancy Baldwin
All executive officers and directors as a group (13 persons)
Number of Shares
Beneficially Owned (1)
Percent of Shares
Beneficially Owned
5,188,307(2)
4,763,920(3)
4,463,920(4)
1,256,281(5)
22,410(6)
223,350(7)
41,771(8)
39,948(9)
69,811(10)
184,291(11)
6,667(12)
172,524(13)
56,333(14)
44,066(15)
52,500(16)
963,504(17)
24.47%
22.47%
21.05%
5.92%
*
1.05%
*
*
*
*
*
*
*
*
*
4.51%
Unless otherwise indicated below, the persons address is the same as the address for the Company.
Denotes beneficial ownership of less than one percent.
*
(1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission (the
(2)
(3)
“Commission”). Unless otherwise indicated below, the persons in the above table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them.
Includes 4,463,920 shares of common stock held by Grace Brothers, Ltd., 300,000 shares of common stock held by Grace
Investments, Ltd. and 424,387 shares held by Bradford T. Whitmore. Mr. Whitmore is a general partner of both Grace entities.
In such capacities, Mr. Whitmore shares voting and investment power with respect to the shares of common stock held by the
Grace entities. This information is based on information reported on Form 4 filed on December 24, 2009 with the Commission
by Mr. Whitmore. The address of the stockholder is 1560 Sherman Avenue, Suite 900, Evanston, Illinois 60201.
Includes 4,463,920 shares of common stock held by Grace Brothers, Ltd. and 300,000 shares of common stock held by Grace
Investments, Ltd. Spurgeon Corporation is a general partner of both Grace entities and shares voting and investment power with
respect to the shares of common stock held by such Grace entities. This information is based on information reported on Form 4
filed on December 24, 2009 with the Commission by Spurgeon Corporation. The address of the stockholder is 1560 Sherman
Avenue, Suite 900, Evanston, Illinois 60201.
(4) This information is based on information reported on Form 4 filed on December 24, 2009 with the Commission by Spurgeon
Corporation and Bradford T. Whitmore. The address of the stockholder is 1560 Sherman Avenue, Suite 900, Evanston, Illinois
60201.
In accordance with the terms of the private placement of 1,256,281 shares of common stock to Altana Chemie AG, the
Company filed a registration statement for the shares on February 5, 2007 which was declared effective by the SEC on May 18,
2007.
Includes Mr. Henderson’s 14,000 shares of common stock issuable upon exercise of options exercisable currently or within 60
days of March 15, 2010.
(5)
(6)
30
(7)
(8)
(9)
Includes Dr. Siegel’s 6,000 shares of common stock issuable upon exercise of options exercisable currently or within 60 days of
March 15, 2010.
Includes Mr. McClung’s 18,000 shares of common stock issuable upon exercise of options exercisable currently or within 60
days of March 15, 2010.
Includes Mr. Pearlman’s 8,000 shares of common stock issuable upon exercise of options exercisable currently or within 60
days of March 15, 2010.
(10) Includes Mr. Perkin’s 21,000 shares of common stock issuable upon exercise of options exercisable currently or within 60 days
of March 15, 2010.
(11) Includes Ms. Whitmore’s 10,000 shares of common stock issuable upon exercise of options exercisable currently or within 60
days of March 15, 2010.
(12) Includes Mr. Vincent’s 6,667 shares of common stock issuable upon exercise of options exercisable currently or within 60 days
of March 15, 2010.
(13) Includes Mr. Jankowski’s 159,108 shares of common stock issuable upon exercise of options exercisable currently or within 60
days of March 15, 2010.
(14) Includes Mr. Nelson’s 54,333 shares of common stock issuable upon exercise of options exercisable currently or within 60 days
of March 15, 2010.
(15) Includes Dr. Murray’s 44,066 shares of common stock issuable upon exercise of options exercisable currently or within 60 days
of March 15, 2010.
(16) Includes Ms. Baldwin’s 52,500 shares of common stock issuable upon exercise of options exercisable currently or within 60
days of March 15, 2010.
(17) Includes all executive officers and directors as a group’s 963,504 shares of common stock issuable upon exercise of options
exercisable currently or within 60 days of March 15, 2010.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Since the beginning of the Company’s last fiscal year, the Company has not engaged in any transaction in which a related person
had or will have a direct or indirect material interest.
Director Independence. The Board of Directors has determined that the following directors are “independent” as that term is
defined in (i) paragraph (m) of Section 10A of the Securities Exchange Act of 1934 (15 U.S.C. 78f), and the rules and regulations of
the Securities and Exchange Commission promulgated thereunder, and (ii) the rules of the NASDAQ stock market: Mr. McClung,
Mr. Henderson, Mr. Pearlman, Mr. Perkins, Mr. Siegel and Mr. Vincent.
The Board of Directors has established an Audit and Finance Committee, Compensation and Governance Committee and a
Nominating Committee each comprised entirely of independent directors. The members of the Audit and Finance Committee are
Mr. McClung (Chairman), Mr. Pearlman, Mr. Perkins and Mr. Vincent. The members of the Compensation and Governance
Committee are Mr. Pearlman (Chairman), Mr. Henderson, Mr. Perkins and Mr. Vincent. The members of the Nominating Committee
are Mr. Henderson (Chairman), Mr. McClung, Mr. Pearlman, Mr. Perkins, Dr. Siegel and Mr. Vincent.
31
Item 14.
Principal Accountant Fees and Services
Audit Fees. The aggregate amount billed by our principal accountant, McGladrey & Pullen, LLP, for audit services performed
for the fiscal years ended December 31, 2009 and 2008 was $163,000 and $164,000, respectively. Audit services include the auditing
of financial statements and quarterly reviews.
Audit Related Fees. Total fees billed by McGladrey & Pullen, LLP were $16,000 and $14,000 for the years ended December 31,
2009 and 2008, which included costs incurred for reviews of registration statements, assistance with Staff comment letters, and
consultation on various accounting matters in support of the Company’s financial statements.
Tax Fees. Total fees billed by RSM McGladrey, Inc. (an affiliate of McGladrey & Pullen, LLP) for tax related services for the
fiscal years ended December 31, 2009 and 2008 were $7,000 and $9,000, respectively. These services include the preparation of
federal and state income tax returns and other tax matters.
All Other Fees. Other than those fees described above, during the fiscal year ended December 31, 2009 and 2008 there were no
other fees billed for services performed by McGladrey & Pullen, LLP or RSM McGladrey, Inc.
All of the fees described above were approved by Nanophase’s Audit Committee.
Audit Committee Pre-Approval Policies and Procedures. Nanophase’s audit committee pre-approves the audit and non-audit
services performed by McGladrey & Pullen, LLP, our principal accountants, and RSM McGladrey, Inc. (an affiliate of McGladrey &
Pullen, LLP) in order to assure that the provision of such services does not impair McGladrey & Pullen, LLP’s independence. Unless
a type of service to be provided by McGladrey & Pullen, LLP and RSM McGladrey, Inc. (an affiliate of McGladrey & Pullen, LLP)
has received general pre-approval, it will require specific pre-approval by the Audit Committee. In addition, any proposed services
exceeding pre-approval cost levels will require specific pre-approval by the Audit Committee.
The term of any pre-approval is 12 months from the date of pre-approval, unless the audit committee specifically provides for a
different period. The Audit Committee will periodically revise the list of pre-approved services, based on subsequent determinations,
and has delegated pre-approval authority to the Chairman of the audit committee. In the event the Chairman exercises such delegated
authority, he shall report such pre-approval decisions to the audit committee at its next scheduled meeting. The Audit Committee does
not delegate its responsibilities to pre-approve services performed by the independent auditor to management.
Item 15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this Form 10-K:
PART IV
1.
2.
The following financial statements of the Company, with the report of independent registered public accounting firm, are
filed as part of this Form 10-K:
Report of McGladrey & Pullen, LLP, Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2009 and 2008
Statements of Operations for the Years Ended December 31, 2009 and 2008
Statements of Stockholders’ Equity for the Years Ended December 31, 2009 and 2008
Statements of Cash Flows for the Years Ended December 31, 2009 and 2008
Notes to Financial Statements
The following exhibits are filed with this Form 10-K or incorporated by reference as set forth below.
32
Exhibit
Number
2
3(i).1
3(i).2
3(ii).1
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
Plan and Agreement of Merger dated as of November 25, 1997 by and between the Company and its Illinois predecessor,
incorporated by reference to Exhibit 2 to the Company’s Annual Report on Form 10-K for the year ended December 31,
1997 (the “1997 10-K”).
Certificate of Incorporation of the Company, incorporated by reference to Exhibit 3.1 to the 1997 10-K.
First Amendment to the Certificate of Incorporation of Nanophase Technologies Corporation dated July 27, 2006,
incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed July 27, 2006.
Bylaws of the Company, incorporated by reference to Exhibit 3.2 to the 1997 10-K.
Specimen stock certificate representing common stock, incorporated by reference to Exhibit 4.1 to the Company’s
Registration Statement on Form S-1 (File No. 333-36937) (the “IPO S-1”).
Form of Warrants, incorporated by reference to Exhibit 4.2 to the IPO S-1.
Rights Agreement dated as of October 28, 1998 by and between the Company and LaSalle National Bank, incorporated
by reference to Exhibit 1 to the Company’s Registration Statement on Form 8-A, filed October 28, 1998.
Certificate of Designation of Series A Junior Participating Preferred Stock incorporated by reference to Exhibit 4.4 to the
Company’s Annual Report on Form 10-K for the year ended December 31, 1998 (the “1998 10-K”).
Amendment to Rights Agreement dated August 1, 2001 between the Company and LaSalle National Association, as
Rights Agent, incorporated by reference to Exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q for the quarter
ended June 30, 2001.
2001 Nanophase Technologies Corporation Equity Compensation Plan, incorporated by reference to Exhibit 4.3 to the
Company’s Registration Statement on Form S-8 (File No. 333-74170).
Second Amendment to Rights Agreement dated May 24, 2002 between the Company and LaSalle National Association,
as Rights Agent, incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-3 (File
No. 333-90326) filed June 12, 2003.
Third Amendment to Rights Agreement dated September 5, 2003 between the Company and LaSalle National
Association, as Rights Agent, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K
filed September 10, 2003.
Subscription Agreement dated September 8, 2003 between the Company and Grace Brothers, Ltd., incorporated by
reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed September 10, 2003.
33
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
10.1
10.2
10.3
10.4
Stock Purchase Agreement dated March 23, 2004 between the Company and Altana Chemie AG, incorporated by
reference to Exhibit 4.10 to the Company’s Annual Report on Form 10-K filed March 30, 2004.
Registration Rights Agreement dated March 23, 2004 between the Company and Altana Chemie AG, incorporated by
reference to Exhibit 4.11 to the Company’s Annual Report on Form 10-K filed March 30, 2004.
2004 Nanophase Technologies Corporation 2004 Equity Compensation Plan, (“2004 Equity Plan”) incorporated by
reference to Exhibit 4 to the Company’s Registration Statement on Form S-8 (File No. 333-119466).
Form of Stock Option Agreement under the 2004 Equity Plan, incorporated by reference to Exhibit 4.13 to the
Company’s Annual Report on Form 10-K filed March 15, 2005.
Form of Restricted Share Grant Agreement under the 2004 Equity Plan, incorporated by reference to Exhibit 4.14 to the
Company’s Annual Report on Form 10-K filed March 15, 2005.
Form of Performance Share Grant Agreement under the 2004 Equity Plan, incorporated by reference to Exhibit 4.15 to
the Company’s Annual Report on Form 10-K filed March 15, 2005.
2005 Nanophase Technologies Corporation Equity Compensation Plan, incorporated by reference to Exhibit 4 to the
Company’s Non-Employee Director Restricted Stock Plan, incorporated by reference to Exhibit A to the Company’s
Definitive Proxy Statement on Form DEF14A filed May 17, 2005.
First Amendment to the Nanophase Technologies Corporation 2005 Non-Employee Director Restricted Stock Plan,
incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed January 9, 2006.
Fourth Amendment to Shareholders’ Rights Agreement, dated as of October 24, 2008, incorporated by reference to
Exhibit 4.1 to the Company’s Current Report on Form 8-K filed November 3, 2008.
Amended and Restated Rights Agreement, dated as of January 30, 2009, by and between the Company and Mellon
Investor Services LLC, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K/A filed
February 5, 2009.
Amended and Restated 2006 Stock Appreciation Rights Plan, adopted April 8, 2009, incorporated by reference to Exhibit
99.1 to the Company’s Current Report on Form 8-K filed April 9, 2009.
The Nanophase Technologies Corporation Amended and Restated 1992 Stock Option Plan, as amended (the “Stock
Option Plan”), incorporated by reference to Exhibit 10.1 to the IPO S-1.
Form of Indemnification Agreement between the Company and each of its directors and executive officers, incorporated
by reference to Exhibit 10.2 to the IPO S-1.
Amended and Restated Registration Rights Agreements dated as of March 16, 1994, as amended, incorporated by
reference to Exhibit 10.2 to the IPO S-1.
License Agreement dated June 1, 1990 between the Company and ARCH Development Corporation, as amended,
incorporated by reference to Exhibit 10.7 to the IPO S-1.
34
10.5
10.6
10.7
10.8*
10.9
10.10
10.11
10.12
10.13*
10.14**
10.15
10.16**
10.17
10.18**
10.19
10.20
License Agreement dated October 12, 1994 between the Company and Hitachi, incorporated by reference to
Exhibit 10.8 to the IPO S-1.
License Agreement dated May 31, 1996 between the Company and Research Development Corporation of Japan,
incorporated by reference to Exhibit 10.9 to the IPO S-1.
License Agreement dated April 1, 1996 between the Company and Cornell Research Foundation, incorporated by
reference to Exhibit 10.10 to the IPO S-1.
Consulting and Stock Purchase Agreement between Richard W. Siegel and the Company dated as of May 9, 1990, as
amended February 13, 1991, November 21, 1991 and January 1, 1992, incorporated by reference to Exhibit 10.11 to the
IPO S-1.
Lease Agreement between the Village of Burr Ridge and the Company, dated September 15, 1994, incorporated by
reference to Exhibit 10.12 to the IPO S-1.
Distribution Agreement between the Company and C.I. Kasei, Ltd., (a subsidiary of Itochu Corporation) dated as of
October 30, 1996, incorporated by reference to Exhibit 10.15 to the IPO S-1.
Supply Agreement between the Company and Schering-Plough HealthCare Products, Inc. dated as of March 15, 1997,
incorporated by reference to Exhibit 10.17 to the IPO S-1.
License Agreement between the Company and C.I. Kasei Co., Ltd. (a subsidiary of Itochu Corporation) dated as of
December 30, 1997, incorporated by reference to Exhibit 10.17 to the 1997 10-K.
Form of Options Agreement under the Stock Option Plan, incorporated by reference to Exhibit 4.5 to the Company’s
Registration Statement on Form S-8 (File No. 333-53445).
Zinc Oxide Supply Agreement dated as of September 16, 1999 between the Company and BASF Corporation, as
assignee, incorporated by reference to Exhibit 10.22 to the 1999 10-K.
Lease Agreement between Centerpointe Properties Trust and the Company, dated June 15, 2000, incorporated by
reference to Exhibit 10.23 to the 2000 10-K.
Amendment No. 1 to Zinc Oxide Supply Agreement dated as of January, 2001 between the Company and BASF
Corporation, incorporated by reference to Exhibit 10.24 to the 2000 10-K.
Promissory Note dated as of September 14, 2000 between the Company and BASF Corporation, incorporated by
reference to Exhibit 10.25 to the 2000 10-K.
Cooperation Agreement dated June 24, 2002 between the Company and Rodel, Inc., incorporated by reference to
Exhibit 10.23 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
First Amendment to Promissory Note dated as of March 11, 2003 between the Company and BASF Corporation,
incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2002.
Amendment No. 2. to Zinc Oxide Supply Agreement dated as of March 17, 2003 between the Company and BASF
Corporation, incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K for the year
ended December 31, 2002.
35
10.21**
10.22
10.23
10.24**
10.25
10.26**
10.27
10.28**
10.29
10.30
10.31**
10.32
10.33
10.34
Amendment No. 1 to Cooperation Agreement dated February 25, 2004 between the Company and Rohm and Haas
Electronic Materials CMP Inc. (formerly known as Rodel, Inc.), incorporated by reference to Exhibit 10.28 to the
Company’s Annual Report on Form 10-K filed March 30, 2004.
Joint Development Agreement dated March 23, 2004 between the Company and Altana Chemie AG., incorporated by
reference to Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q filed August 13, 2004
Amendment No. 1 to License Agreement dated July 16, 2004 between the Company and C.I. Kasei Co., Ltd.,
incorporated by reference to Exhibit 10.30 to the Company’s Quarterly Report on Form 10-Q filed August 13, 2004.
Letter Agreement Amending Cooperation Agreement dated October 15, 2004 between the Company and Rohm and
Haas Electronic Materials CMP Inc., incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed October 22, 2004.
Building Lease dated September 15, 2004 between the Company and the Village of Burr Ridge, incorporated by
reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K filed March 15, 2005.
Second Amendment to Promissory Note dated as of May 1, 2005 between the Company and BASF Corporation,
incorporated by reference to Exhibit 10.33 to the Company’s Quarterly Report on Form 10-Q filed May 9, 2005.
Lease Amendment effective October 1, 2005 between Nanophase Technologies Corporation and Centerpoint Properties
Trust, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed October 20, 2005.
Distributor Agreement dated October 24, 2005 between Johnson Matthey Catalog Company, Inc., d/b/a ALFA AESAR,
and Nanophase Technologies Corporation, incorporated by reference to Exhibit 99.1 to the Company’s Current Report
on Form 8-K filed November 1, 2005.
First Amendment to 2005 Non-Employee Director Restricted Stock Plan, incorporated by reference to Exhibit 99.1 to
the Company’s Current Report on Form 8-K filed January 9, 2006.
Nanophase Technologies Corporation Non-Employee Director Deferred Compensation Plan, incorporated by reference
to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed January 9, 2006.
Supply Agreement dated March 3, 2006 between Roche Diagnostics GmbH and Nanophase Technologies Corporation,
incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed March 9, 2006.
Z-COTE HP-2 Brand Supply Agreement dated May 15, 2006 between BASF Corporation and Nanophase Technologies
Corporation, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed June 20,
2006.
Amendment to 2004 Equity Compensation Plan, incorporated by reference to Exhibit 99.1 to the Company’s Current
Report on Form 8-K filed July 27, 2006.
Stock Purchase Agreement dated August 25, 2006 between Rohm and Haas Electronic Materials CMP Holdings, Inc.
and Nanophase Technologies Corporation, incorporated by reference to Exhibit 99.1 to the Company’s Current Report
on Form 8-K filed August 28, 2006.
36
10.35
10.36**
10.37
10.38
10.39
Registration Rights Agreement dated August 25, 2006 between Rohm and Haas Electronic Materials CMP Holdings,
Inc. and Nanophase Technologies Corporation, incorporated by reference to Exhibit 99.2 to the Company’s Current
Report on Form 8-K filed August 28, 2006.
Amended and Restated Cooperation Agreement dated August 25, 2006 between Rohm and Haas Electronic Materials
CMP Inc. and Nanophase Technologies Corporation, incorporated by reference to Exhibit 99.3 to the Company’s
Current Report on Form 8-K filed August 28, 2006.
2006 Stock Appreciation Rights Plan, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on
Form 8-K filed October 3, 2006.
Form of Grant Agreement, incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K
filed October 3, 2006.
Placement Agency Agreement dated as of June 29, 2007 between the Company and Global Crown Capital, L.L.C.,
incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed June 2, 2007.
10.40**
Agreement dated July 7, 2008 between the Company and Altana Chemie GmbH, incorporated by reference to Exhibit
99.1 to the Company’s Current Report on Form 8-K filed July 18, 2008.
10.41
10.42*
10.43*
10.44*
10.45*
10.46*
10.47
10.48
2008 Long-Term Cash Incentive Plan, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed July 25, 2008.
Separation Agreement effective August 25, 2008, between the Company and Joseph E. Cross, incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 29, 2008.
Separation Agreement effective September 12, 2008, between the Company and Kevin J. Wenta, incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed September 15, 2008.
Employment Agreement effective as of September 25, 2008, between the Company and Nancy Baldwin, incorporated
by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed October 2, 2008.
Employment Agreement effective as of September 25, 2008, between the Company and Patrick Murray, incorporated by
reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed October 2, 2008.
Employment Agreement effective as of September 25, 2008, between the Company and David W. Nelson, incorporated
by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed October 2, 2008.
Supply Agreement effective as of March 23, 2009, between the Company and Rohm and Haas Electronic Materials
CMP Inc., incorporated by reference to Exhibit 10.56 to the Company’s Annual Report on Form 10-K/A filed March 27,
2009.
Separation Agreement and General Release of All Claims between Richard Brotzman, Jr. and the Company, effective
March 2, 2009, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 3,
2009.
37
10.49*
10.50
10.51*
10.52*
10.53*
10.54*
23.1
23.2
31.1
31.2
32
Separation Agreement and General Release of All Claims between Robert W. Haines and the Company, effective
February 19, 2009, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
March 3, 2009.
Supply Agreement effective as of March 23, 2009, between the Company and Rohm and Haas Electronic Materials CMP
Inc, incorporated by reference to Exhibit 10.56 to the Company’s Annual Report on Form 10-K filed March 25, 2009.
Nanophase Technologies Corporation’s Amended and Restated 2006 Stock Appreciation Rights Plan, incorporated by
reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed April 9, 2009.
Employment Agreement dated June 24, 2009 between the Company and Frank Cesario, incorporated by reference to
Exhibit 99.1 to the Company’s Current Report on Form 8-K filed June 26, 2009.
Employment Agreement effective August 12, 2009 between the Company and Jess Jankowski, incorporated by reference
to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed August 12, 2009.
Employment Agreement dated December 14, 2009 between the Company and Glenn Judd, incorporated by reference to
Exhibit 99.1 to the Company’s Current Report on Form 8-K filed December 18, 2009.
Consent of McGladrey & Pullen, LLP.
Consent of Houlihan Smith & Company Inc., dated February 24, 2010
Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.
Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.
Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. Section 1350
* Management contract or compensatory plan or arrangement.
** Confidentiality previously granted for portions of this agreement.
38
NANOPHASE TECHNOLOGIES CORPORATION
INDEX TO FINANCIAL STATEMENTS
Report of McGladrey and Pullen, LLP, Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2009 and 2008
Statements of Operations for the years ended December 31, 2009 and 2008
Statements of Stockholders’ Equity for the years ended December 31, 2009 and 2008
Statements of Cash Flows for the years ended December 31, 2009 and 2008
Notes to the Financial Statements
F-1
Page
F-2
F-3
F-4
F-5
F-6
F-7
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Nanophase Technologies Corporation
We have audited the balance sheets of Nanophase Technologies Corporation as of December 31, 2009 and 2008, and the related
statements of operations, stockholders’ equity and cash flows for the years then ended. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Nanophase
Technologies Corporation as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then
ended in conformity with U.S. generally accepted accounting principles.
We were not engaged to examine management’s assessment of the effectiveness of Nanophase Technologies Corporation’s internal
control over financial reporting as of December 31, 2009, included in the accompanying Item 9A(T) – Controls and Procedures and,
accordingly, we do not express an opinion thereon.
/s/ McGladrey & Pullen, LLP
Schaumburg, Illinois
March 30, 2010
F-2
NANOPHASE TECHNOLOGIES CORPORATION
BALANCE SHEETS
ASSETS
Current assets:
Cash and cash equivalents
Investments
Trade accounts receivable, less allowance for doubtful accounts of $9,000 December 31,
2009 and 2008
Other receivables
Inventories, net
Prepaid expenses and other current assets
Total current assets
Investments
Equipment and leasehold improvements, net
Other assets, net
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of capital lease obligations
Current portion of deferred other revenue
Accounts payable
Accrued expenses
Accrued severance
Total current liabilities
Long-term debt, less current maturities and unamortized debt discount
Long-term portion of capital lease obligations
Long-term deferred rent
Asset retirement obligations
Total long-term liabilities
Contingent liabilities
Stockholders’ equity:
Preferred stock, $.01 par value, 24,088 shares authorized and no shares issued and outstanding
Common stock, $.01 par value, 30,000,000 shares authorized; 21,204,162 and 21,188,912
shares issued and outstanding on December 31, 2009 and 2008, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
(See accompanying Notes to Financial Statements)
F-3
As of December 31,
2009
2008
$ 3,899,393
3,594,604
$
723,069
6,908,888
858,706
477,989
884,326
294,738
10,009,756
—
5,557,832
37,283
$ 15,604,871
1,092,125
7,749
1,154,207
482,452
10,368,490
5,340,000
6,651,842
39,765
$ 22,400,097
$
8,470
—
202,975
509,206
38,060
758,711
—
748
617,642
134,763
753,153
—
22,211
74,243
356,853
772,167
541,014
1,766,488
1,570,346
9,219
592,562
128,533
2,300,660
—
—
—
212,042
92,246,777
(78,365,812)
14,093,007
$ 15,604,871
211,889
91,597,529
(73,476,469)
18,332,949
$ 22,400,097
Revenue:
Product revenue
Other revenue
Total revenue
Operating expense:
Cost of revenue
Gross profit
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF OPERATIONS
Years ended December 31,
2008
2009
$ 5,937,100 $ 9,744,759
469,058
10,213,817
383,226
6,320,326
Research and development expense
Selling, general and administrative expense
Severance charges
Loss from operations
Interest income
Interest expense
Unrealized losses on investments
Auction rate securities settlement
Realized loss on investment
Other, net
Loss before provision for income taxes
Provision for income taxes
Net loss
Net loss net per share-basic and diluted
Weighted average number of basic and diluted common shares outstanding
(See accompanying Notes to Financial Statements)
F-4
5,368,719
951,607
1,615,894
3,852,737
794,069
(5,311,093)
89,615
(35,813)
—
440,000
(60,000)
(12,052)
(4,889,343)
—
7,501,468
2,712,349
1,764,284
5,390,771
1,578,859
(6,021,565)
383,083
(130,992)
(660,000)
—
—
(8,373)
(6,437,847)
—
$ (4,889,343) $ (6,437,847)
(0.30)
21,144,336
(0.23)
21,202,492
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF STOCKHOLDERS’ EQUITY
Description
Balance on December 31, 2007
Exercise of stock options
Common stock issuances
Stock-based compensation
Net loss for the year ended December 31,
2008
Balance on December 31, 2008
Stock-based compensation
Common stock issuances
Net loss for the year ended December 31,
2009
Balance on December 31, 2009
Preferred Stock
Common Stock
Shares Amount
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Deficit
Total
— $ — 21,088,068 $210,881 $90,201,131 $(67,038,622) $23,373,390
30,417
—
180,000
—
1,186,989
—
30,251
179,158
1,186,989
16,667
84,177
—
—
—
—
—
—
—
166
842
—
—
—
(6,437,847)
—
— $ — 21,188,912 $211,889 $91,597,529 $(73,476,469) $18,332,949
637,811
—
11,590
—
637,811
11,437
—
15,250
—
—
(6,437,847)
—
—
—
153
—
—
—
(4,889,343)
— $ — 21,204,162 $212,042 $92,246,777 $(78,365,812) $14,093,007
(4,889,343)
—
—
—
—
(See accompanying Notes to Financial Statements)
F-5
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF CASH FLOWS
Operating activities:
Net loss
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization
Amortization of debt discount
Amortization of deferred revenue
Share-based compensation
Charges for accelerated vesting of stock options
Allowance for excess inventory quantities
Loss on disposal of equipment
Realized loss on auction rate securities
Unrealized losses on auction rate securities
Settlement of auction rate securities
Abandonment of trademarks
Changes in assets and liabilities related to operations:
Trade accounts receivable
Other receivables
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued expenses
Net cash used in operating activities
Investing activities:
Acquisition of equipment and leasehold improvements
Proceeds from disposal of equipment
Payment of accounts payable incurred for the purchase of equipment and leasehold
improvements
Proceeds from sale of auction rate securities
Purchases of investments
Sales of investments
Net cash provided by investing activities
Financing activities:
Principal payment on debt obligations, including capital leases
Proceeds from sale of common stock and exercise of stock options, net
Net cash used in financing activities
Increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental cash flow information:
Interest paid
Supplemental non-cash investing and financing activities:
Accounts payable incurred for the purchase of equipment and leasehold improvements
(See accompanying Notes to Financial Statements)
F-6
Years ended December 31,
2009
2008
$
(4,889,343)
$
(6,437,847)
1,247,866
27,076
(74,243)
453,257
210,694
14,791
13,451
60,000
—
(440,000)
—
233,419
(30,240)
255,090
187,714
(129,125)
(755,386)
(3,614,979)
1,287,987
57,840
(127,273)
774,204
592,785
—
11,792
—
660,000
—
37,211
311,081
(7,749)
(68,843)
(183,988)
88,250
443,767
(2,560,783)
(171,721)
24,000
(499,967)
1,800
(35,626)
1,720,000
(124,171,970)
131,046,254
8,410,937
(5,318)
—
(232,213,181)
235,450,137
2,733,471
(1,619,634)
—
(1,619,634)
3,176,324
723,069
3,899,393
22,407
10,873
$
$
$
$
$
$
(43,111)
30,417
(12,694)
159,994
563,075
723,069
76,920
35,626
NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(1) Description of Business
Nanophase is a nanomaterials developer and commercial manufacturer with an integrated family of nanomaterial technologies.
Nanophase produces engineered nanomaterial products for use in a variety of diverse existing and developing markets: sunscreens,
personal care, architectural coatings, industrial coating ingredients, abrasion-resistant applications, plastic additives, antimicrobial
products and a variety of polishing applications, including semiconductors and optics. New markets and applications are also being
developed. We target markets where we believe practical, high added value solutions are likely to be found using our nanoengineered
products. We work with leaders in these targeted markets to identify and supply their material and performance requirements. Finally,
we have applied our technology and developed a complete product family in the Architectural Windows Market under the trade name
NanoUltra™. The Company was incorporated in Illinois on November 25, 1989, and became a Delaware corporation on
November 30, 1997. The Company’s common stock trades on the NASDAQ Global Market under the symbol NANX.
While product sales comprise the majority of our revenue, we also recognize revenue in connection with our promissory note to
BYK Chemie that was fully repaid during July 2009 and from a technology license. These activities are not expected to drive the
long-term growth of the business. Both the deferred and license revenue are recognized as “other revenue” in the Company’s
Statement of Operations, as they do not represent revenue directly from the Company’s nanocrystalline materials.
(2) Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements requires us to make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of demand deposits, but also include certain lower risk investments with a stated
maturity upon acquisition of 90 days or less (e.g., money market funds or a certificate of deposit with a maturity of 90 days or less at
the time of purchase). The Company has employed corporate “sweep” accounts, when cost-effective in order to maximize interest
income earned with its operating funds.
Investments and Risks and Uncertainties
Investments are classified at the time of purchase for appropriate designation and are reevaluated as of each balance sheet date.
The Company’s policy is to classify United States treasury bills and certificates of deposit with maturities at the time of purchase in
excess of 90 days as investments. These investments are classified as available-for-sale and held-to maturity, respectively. Based on
the nature of available-for-sale investments, cost approximates fair value. Held-to maturity securities are stated at amortized cost and
are adjusted to maturity for the amortization of premiums and accretion of discounts. Such adjustments for amortization and accretion
are included in interest income. We made investments in auction rate securities (“ARS”). These ARS holdings have experienced
“failed auctions” due to a lack of available buyers for them on their expected auction dates. An auction failure means that parties
wishing to sell their securities could not be matched with an adequate volume of buyers. In the event there is a failed auction the
indenture governing the security requires the issuer to pay interest at a contractually defined rate that is generally above market rates
for other types of similar short-term instruments. Despite these failed auctions, there have been no defaults on the underlying
securities and investment income on these ARS holdings. They have been issued through the Federal Family Education Loan
Program (“FFELPs Loans”) and carry an AAA credit rating. These FFELPs Loans are guaranteed at maturity to 97% of their $4
million value by the Department of Education. However, these failed auctions have caused the Company to change the level of inputs
to determine their fair values. These values were estimated as of December 31, 2009 and 2008 by an independent appraisal firm,
Houlihan, Smith & Company, Inc., using a discounted cash flow model. Since these inputs were not observable they are classified as
level 3 inputs (see Note 3). As a result, for the period ending December 31, 2008, we recognized an other than temporary loss on the
ARS’s in the amount of $660,000 which was reflected in our statement of operations. We sold an ARS during October 2009,
recognizing a loss of $60,000 on the sale. This charge was recognized in our 2009 statement of operations. Our valuation models
assumed an average maturity of the ARS’s in excess of one year, therefore, we classified these securities as long-term on the
December 31, 2008 balance sheet and we would have done so again on the December 31, 2009 balance sheet if not for a subsequent
event. During March 2010, we entered into an agreement to sell these remaining ARS holdings as further described in Note 4. Due to
this subsequent event, we classified these securities as current on the December 31, 2009 balance sheet.
F-7
If not for this subsequent event, due to the level of liquidity risk associated with such investments and the level of uncertainty
related to changes in the value of such investments, it would be at least reasonably possible that changes in risks in the near term
would have materially affected the amounts reported in the financial statements.
Trade Accounts Receivable
Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a
review of all outstanding amounts on a monthly basis. We determine the allowance for doubtful accounts by identifying troubled
accounts and by using historical experience applied to an aging of accounts. Trade accounts receivable are written off when deemed
uncollectible. Recoveries of trade accounts receivable previously written off are recorded when received.
The Company’s typical credit terms are thirty days from shipment and invoicing.
Inventories
Inventories are stated at the lower of cost, maintained on a first in, first out basis, or market. We have recorded allowances to
reduce inventory relating to excess quantities of certain materials. Write-downs of inventories establish a new cost basis, which is not
increased for future increases in market value of inventories or changes in estimated excess quantities.
Equipment and Leasehold Improvements
Equipment is stated at cost and is being depreciated over its estimated useful life (3-20 years) using the straight-line method.
Leasehold improvements are stated at cost and are being amortized using the straight-line method over the shorter of the useful life of
the asset or the term of the lease (3-16 years). Depreciation expense for leased assets is included with depreciation expense for owned
assets. From time to time the company has self-constructed assets. These assets are stated at cost plus the capitalization of labor and
have an estimated useful life (7-10 years) using the straight-line method.
Long Lived Assets
We follow the provisions of the FASB issued ASC 360-10-20 (formerly SFAS 144, Accounting for the Impairment or Disposal
of Long-Lived Assets). Reviews are performed whenever events or changes in circumstances indicate that the carrying amount of
assets may not be recoverable or that the useful life is shorter than originally estimated. We assess the recoverability of its assets by
comparing the projected undiscounted net cash flows associated with the related asset or group of assets over their remaining lives
against their respective carrying amounts. Assessment is based on certain assumptions such as growth, capacity constraints, and the
remaining economical life of the asset. Impairment, if any, is based on the excess of the carrying amount over the fair value of those
assets. If assets are determined to be recoverable, but the useful lives are shorter than originally estimated, the net book value of the
assets is depreciated over the newly determined remaining useful lives.
F-8
Asset Retirement Obligations
In connection with its leased facilities, the Company is required to remove certain leasehold improvements upon termination of
its occupancy. Effective January 1, 2003, the Company follows the provisions of the FASB issued ASC 410-20 (formerly SFAS 143,
Accounting for Asset Retirement Obligations), under which the Company recognizes a liability for the fair value of its asset retirement
obligations. The fair value of that liability is measured based on an expected cash flow approach and accretion expense is recognized
each period to recognize increases to the fair value of the liability due to the passage of time. Increases to the fair value of the
liability, except for accretion, are added to the carrying value of the long-lived asset. Those increases are then reported in amortization
expense over the estimated useful life of the long-lived asset.
Activity in the asset retirement obligation account for the years ended December 31, is as follows:
Balance, beginning
Accretion of liability due to passage of time
Amortization of asset due to passage of time
Balance, ending
2009
$128,533
4,062
2,168
$134,763
2008
$122,680
3,685
2,168
$128,533
Fair Value of Financial Instruments
On January 1, 2009, we adopted the provisions of FASB ASC Section 820-10-65 (formerly SFAS 157-2) for our nonfinancial
assets and liabilities that are not required to be measured at fair value on a recurring basis. The adoption of FASB ASC Section 820-
10-65 (formerly SFAS 157-2) for our nonfinancial assets and liabilities did not have a significant effect on our results of operations or
financial condition (see Note 3).
The Company’s financial instruments include investments, accounts receivable, accounts payable, accrued expenses and long-
term debt. The fair values of all financial instruments were not materially different from their carrying values.
Product Revenue
Product revenue consists of sales of product that are recognized when realized and earned. This occurs when persuasive
evidence of an arrangement exists, title transfers via shipment of products or when delivery has occurred, the price is fixed or
determinable and collectability is reasonably assured.
Other Revenue
In connection with our promissory note to BYK-Chemie (see Note 7), we recorded $350,000 of deferred other revenue. The note
required the Company to give BYK-Chemie first preference in use of the new equipment commissioned on November 1, 2006 and
accordingly, resulted in the recognition of deferred revenue under this note on a straight-line basis over a period beginning with the
commissioned date on November 1, 2006 and ending on July 30, 2009, the date of the Company’s final payment under the note. For
the years ended December 31, 2009 and 2008 the Company recognized approximately $74,000 and $127,000 of deferred other
revenue, respectively.
F-9
In addition to deferred revenue described above, other revenue includes revenue from a technology license. Technology license
fees are recognized when earned pursuant to the agreed upon contractual arrangement, when performance obligations are satisfied,
the amount is fixed or determinable, and collectability is reasonably assured.
In December 1997, the Company entered into a license agreement whereby the Company granted a royalty-bearing exclusive
right and license, as defined, to purchase, make, use and sell nanocrystalline materials in designated parts of Asia to CIK Nanotek
(formerly C. I. Kasei), a subsidiary of Itochu Corporation (“CIK”). Under this agreement, the Company will also earn royalties on net
sales of manufactured products containing nanocrystalline materials. The agreement also provided for minimum sales targets and
minimum royalty payments to maintain exclusivity. The agreement expires on March 31, 2013 unless earlier terminated as provided
therein. The Company recorded royalty revenues, classified as “Other Revenue” on the Statements of Operations, under this
agreement of $300,000 for each of the years ended December 31, 2009 and 2008, respectively.
Shipping and handling costs are included in other revenue when products are shipped and invoiced to the customer. The
Company includes the related cost of shipping and handling in cost of goods sold.
Research and Development Expenses
Research and development expenses are recognized as expense when incurred.
Income Taxes
The Company accounts for income taxes using the liability method. As such, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes. Deferred tax assets and liabilities are calculated using the enacted tax rates and laws that are expected to be in
effect when the anticipated reversal of these differences is scheduled to occur. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be
realized.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing
authorities, while others are subject to uncertainty about merits of the position taken or the amount of the position that would be
ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all
available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the
resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax
positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than
50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with
tax positions taken that exceeds the amount measured as described above is reflected as a liability for uncertain tax benefits in the
accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon
examination.
We have not recorded a reserve for any tax positions for which the ultimate deductibility is highly certain but for which there is
uncertainty about the timing of such deductibility. The Company files tax returns in all appropriate jurisdictions, which include a
federal tax return and Illinois state tax return. Open tax years for both jurisdictions are 2006 to 2009, which statutes expire in 2010 to
2013, respectively, under most cases and subject to appropriate laws and regulations. When and if applicable, potential interest and
penalty costs are accrued as incurred, with expenses recognized in selling, general and administrative expenses in the statements of
operations. As of December 31, 2009 and 2008, the Company has recognized a 100% valuation allowance on all deferred tax assets
and has recognized no liabilities associated with its tax positions.
F-10
Earnings Per Share
Net loss per common share is computed based upon the weighted average number of common shares outstanding. Included in
common equivalent shares are in-the-money stock options and unvested restricted stock grants. No equivalent shares are included in
2009 and 2008 because stock options are anti-dilutive and restricted grants have all vested or expired.
Reclassifications
Certain items in the 2008 financial statements have been reclassified to conform to the 2009 presentation with no effect on net
loss.
Recently Issued Accounting Standards
In June 2009, the FASB issued ASC 105-10 (formerly SFAS No. 168), “The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles”, which authorized the Codification as the sole source for authoritative U.S.
GAAP. We adopted ASC 105-10 for the quarter ended September 30, 2009. The adoption did not have an effect on our financial
position or results of operations.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 requires some new disclosures and clarifies some
existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. ASU 2010-06 amends
Codification Subtopic 820-10 to now require (1) a reporting entity disclose separately the amounts of significant transfers in and out
of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; (2) in the reconciliation for fair value
measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales,
issuances, and settlements and (3) a reporting entity should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements. ASU 2010-06 is effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in
the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. We do not believe the adoption of ASU No. 2010-06 will have
a material impact on our financial position or results of operations.
(3) 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. The three levels are defined as follows:
•
•
•
Level 1: Unadjusted quoted prices in active markets for identical assets and liabilities.
Level 2: Observable inputs other than those included in Level 1. For example, quoted prices for similar assets or liabilities
in active markets or quoted prices for identical assets or liabilities in inactive markets.
Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or
liability.
F-11
As of December 31, 2009, the fair values of our financial assets are approximately categorized as follows:
Financial Assets
Auction rate securities
Other available-for-sale securities
(a)
Total
Level 1 Level 2
Level 3
$3,560,000 $ — $ — $3,560,000
—
$3,564,604 $4,604 $ — $3,560,000
4,604
—
4,604
There are no financial liabilities adjusted to fair value on December 31, 2009.
(a) Based on appraisal net of any mark-to-market adjustments (see Note 4).
As of December 31, 2008, the fair values of our financial assets were approximately categorized as follows:
Financial Assets
Auction rate securities
Available-for-sale securities
(b)
(a)
Total
Level 1
Level 2
Level 3
$ 5,340,000 $
6,880,000
— $ — $5,340,000
—
$12,220,000 $6,880,000 $ — $5,340,000
6,880,000
—
There were no financial liabilities adjusted to fair value on December 31, 2008.
(a) Based on defined rates for auction rate securities dependent on the participation of willing buyers (see Note 4). The Company
has adopted FSP SFAS 157-3, determining the fair value of a financial asset when the market is not active. The consideration of
FSP SFAS 157-3 resulted in an other than temporary impairment loss on the ARS’s in the amount of $660,000 which was
reflected in the statement of operations.
(b) Based on the price of United States treasury bills.
F-12
In February 2010, we hired Houlihan Smith & Company, an independent third party valuation firm, to update its previous
estimate of the fair value of the Company’s ARS’s using a discounted cash flow analysis and an assessment of secondary markets.
Based on this estimation and other factors, we concluded that the other than temporary impairment loss for the two securities we
owned on December 31, 2009, that was recorded during 2008 in the amount of $440,000, remained appropriate, and no change in
value should be recorded during 2009. We monitored the credit worthiness of the companies underwriting these securities and made
any adjustments we deemed necessary to reflect the fair value of these securities. A third ARS security was sold during October 2009.
The sale proceeds were $60,000 less than the adjusted carrying value of that security, so a corresponding charge was recognized
during 2009. As further described in Note 4, during March 2010 we entered into an agreement under which we sold the remaining $4
million of ARS holdings for $4 million.
As of December 31, 2009, a reconciliation of assets measured at fair value on a recurring basis using significant unobservable
inputs (Level 3) are as follows:
Fair Value Measurements Using
Significant Unobservable Inputs
(Level 3)
Auction Rate Securities
2008
2009
Beginning balance
Transfers in to Level 3
Proceeds from sale of auction rate securities
Total unrealized losses included in statement of operations
Total realized losses in excess of reserve included in statement of operations
Ending balance
$ 5,340,000 $
—
6,000,000
—
(660,000)
—
$ 3,560,000 $ 5,340,000
—
(1,720,000)
—
(60,000)
The amount of total losses included in the statement of operations attributable to the change in
unrealized losses relating to assets still held at the reporting date
$
— $ 660,000
(4) Investments
Investments on December 31, 2009 and 2008, were comprised of auction rate securities, certificates of deposit and a money
market fund. Included in investments is $30,000 on December 31, 2009 and 2008, respectively, in the form of 180 day certificates of
deposit which are pledged as collateral, primarily for the Company’s rent in 2009 and 2008, and is restricted as to withdrawal or
usage. Investments held in auction rate securities are classified as long-term due to the stated maturity of the assets. Money market
investments have maturity days of less than 30 days and thus are classified as cash equivalents. The Company’s investments on
December 31, 2009 and 2008 were as follows:
United States treasury bills
Certificates of deposit
Accrued interest
Auction rate securities
F-13
As of December 31,
2009
2008
$
4,065 $ 6,875,982
30,000
30,000
2,906
539
6,908,888
34,604
5,340,000
3,560,000
$3,594,604 $12,248,888
As of March 5, 2010, our remaining investments in auction rate securities (“ARS”) totaled $3.56 million, net of other than
temporary impairment. These ARS holdings have experienced “failed auctions” due to a lack of available buyers for them on their
expected auction dates. An auction failure means that parties wishing to sell their securities could not be matched with an adequate
volume of buyers. In the event there is a failed auction the indenture governing the security requires the issuer to pay interest at a
contractually defined rate. Despite these failed auctions, there have been no defaults on the underlying securities or investment
income on these ARS holdings. They have been issued through the Federal Family Education Loan Program (“FFELPs Loans”) and
carry an AAA credit rating. These FFELPs Loans are guaranteed to 97% of their $4 million value by the Department of Education
and we are not aware of any defaults or threatened defaults by any of the underlying securities, the risk of which we believe to be very
low. However, these failed auctions caused us to change the level of inputs to determine their fair values. These values were estimated
as of December 31, 2009 and 2008 by an independent appraisal firm, Houlihan, Smith & Company, Inc., using a discounted cash flow
model. Since these inputs were not observable they are classified as Level 3 inputs (see Note 3). As a result, for the period ended
December 31, 2008, we recognized an “other than temporary impairment loss” on our ARS holdings in the amount of $660,000, thus
reducing the original $6 million in nominal value to $5.34 million in net carrying value. After the sale of one $2 million ARS
investment during 2009, as described below, we had $4 million gross value ARS holdings, to which $440,000 of this other than
temporary impairment applies. No adjustments in carrying value were made during 2009.
In October 2009, we sold a third ARS security, a $2 million Connecticut Student Loan Foundation bond pursuant to a reverse
auction tender offer initiated by the Connecticut Student Loan Foundation. Our net proceeds were $1.72 million, with a realized loss
of $60,000 which we recognized in our statement of operations as of December 31, 2009. We were seeking the difference between the
net proceeds and the $2 million par value as part of our damages in the FINRA claim noted below. This information was considered
when we performed a re-valuation of our ARS portfolio during the fourth quarter 2009.
We monitored the creditworthiness of the issuers and underwriting of these securities and made any adjustments we deemed
necessary to reflect the fair value of these securities.
It has been our intention to sell these instruments for as close to their $4 million value as possible as soon as we are able to do
so. However, because we could not ascertain when we ultimately would sell these instruments, and they have stated maturities in
excess of one year, we classified these securities as long-term on the December 31, 2008 balance sheet and would have done so again
on the December 31, 2009 balance sheet if not for the subsequent event described below. Additional information about these
securities, all with maturities in excess of 10 years, includes:
1. $2 million principal value Brazos Higher Ed Auth 2006 A, which we value at approximately $1.8 million based on a 5-6%
liquidity premium and a very low risk of default. This instrument matures 12/1/2042 and carries a variable coupon interest rate
(approximately 1.8% as of date of this filing, which has been impacted by depressed benchmark rates). This obligation is insured and
collateralized by student loans.
2. $2 million principal value Illinois Student Assistance Ser VIII-1, which we value at approximately $1.8 million based on a 5-
6% liquidity premium and a very low risk of default. This instrument matures 6/1/2045 and carries a variable coupon interest rate
(coupon rates ranging between 1.7% and 0.5% during 2010, which has been impacted by depressed benchmark rates). This obligation
is insured and collateralized by student loans.
F-14
Pursuant to the applicable rules of the Financial Industry Regulatory Authority (“FINRA”), during 2009 we filed an arbitration
demand against Credit Suisse Securities (USA) LLC (“Credit Suisse”), the Company’s investment advisor with respect to our ARS
investments. The hearing on our arbitration had been scheduled for April 2010. Pursuant to an agreement between the parties
executed during March 2010, Credit Suisse agreed to purchase our remaining ARS holdings for $4 million by March 31, 2010, and
we agreed not to seek reimbursement for the $280,000 loss realized on the sale of the Connecticut ARS bond (described above) or for
legal and other costs. Under this agreement, the arbitration will not proceed and our arbitration claim has been resolved. As a result of
this agreement, we classified the ARS securities as current and also recorded an expense recovery of $440,000 and related “other
receivable” on the December 31, 2009 financial statements.
(5) Inventories
Inventories consist of the following:
Raw materials
Finished goods
Allowance for excess quantities
(6) Equipment and Leasehold Improvements
Equipment and leasehold improvements consist of the following:
Machinery and equipment
Office equipment
Office furniture
Leasehold improvements
Construction in progress
Less: Accumulated depreciation and amortization
As of December 31,
2009
2008
$138,567 $ 183,150
1,013,704
1,196,854
(42,647)
$884,326 $1,154,207
803,197
941,764
(57,438)
As of December 31,
2009
$ 12,976,005
714,871
108,093
4,681,315
—
18,480,284
(12,922,452)
$ 5,557,832
2008
$ 12,911,175
637,112
78,242
4,681,315
38,170
17,837,309
(11,694,172)
$ 6,651,842
Depreciation expense was $1,239,153 and $1,279,826, for the years ended December 31, 2009 and 2008, respectively.
F-15
(7) Long-Term Debt
We have no long-term debt as of December 31, 2009.
In November 2005, the Company executed a promissory note, held by BYK-Chemie (a U.S. subsidiary of Altana Chemie AG
®
which owns approximately 6% of the Company’s outstanding common stock) in the amount of $1,597,420 for the purchase and
installation of additional dispersion capacity and an additional NanoArc synthesis reactor at the Company’s Romeoville, Illinois
facility. The note required that the Company give BYK-Chemie first preference in use of the new equipment commissioned on
November 1, 2006 under this note, and that the Company agreed to provide experimental product made using this equipment. In
addition, the Company also capitalized approximately $74,000 in interest related to this note. The rate of interest in the note floated at
1% over LIBOR, measured on a quarterly average. Interest did not begin to accrue until one year after the commissioning of the
specified equipment and principal was repaid in three equal payments during the first three quarters of 2009. Management determined
that the required interest payments, including a flexible interest free period of more than a year, were substantially lower than the
Company would be required to pay in a more traditionally underwritten equipment note. As such, management’s imputation of
interest, in accordance with the provisions of the FASB issued ASC 835-30 (formerly APB No. 21, “Interest on Receivables and
Payables”), at 9% over the entire life of the note, its determination of a market interest rate, resulted in the Company recording a debt
discount of $350,000, having an unamortized balance of $0 and $27,074 on December 31, 2009 and 2008, respectively. Management
further determined that the debt discount of $350,000 recorded at the inception of the loan was attributable to deferred other revenue
relating to the issuance of right of first preference on the new equipment being commissioned and the Company’s commitment to
provide experimental product. We repaid the entire $1.6 million in debt during 2009, with our final payment made in July 2009 and
are now debt-free.
(8) Lease Commitments
The Company leases its operating facilities under operating leases. On October 18, 2005 Nanophase entered into a Lease
Amendment amending its current lease for its facility in Romeoville, Illinois, which, among other things, extended the term of such
lease through December 31, 2015 (with the option to extend the term for two additional five year periods) and granted Nanophase an
option to purchase such facility in certain instances. The current monthly rent on this lease amounts to $27,100. Nanophase leases its
Burr Ridge facility under an agreement whose initial term expired in September 1999. The Company renewed its Burr Ridge facility
lease in September 2007 (with the option to extend the term for three additional one-year periods). The Company exercised its option
to extend the lease for one year, which expires in September 2010. The current monthly rent on this lease amounts to $11,860. At this
time, the Company intends to renew this lease on or before September 2010.
The following is a schedule of future minimum lease payments including real estate taxes as required under the above operating
leases:
Year ending December 31:
2010
2011
2012
2013
2014
Thereafter
Total minimum payments required:
$ 568,202
423,510
432,556
440,439
449,560
5,582,025
$7,896,292
Rent expense, including real estate taxes, under these leases amounted to $651,944 and $633,925, for the years ended
December 31, 2009 and 2008, respectively.
On December 31, 2009 and 2008, equipment under capital lease(s) had a cost of $31,800 and $137,552, respectively, with
accumulated depreciation of $19,080 and $41,802, respectively. The Company had one capital lease as of December 31, 2009 and
two capital leases as of December 31, 2008.
F-16
(9) Accrued Expenses
Accrued expenses consist of the following:
Accrued payroll and related expenses
Accrued professional services
Other
As of December 31,
2008
2009
$254,323 $476,163
165,774
130,230
$509,206 $772,167
149,826
105,057
On December 31, 2009 and 2008, respectively, $38,060 and $541,014 remained in accrued severance.
(10) Income Taxes
The Company has no income tax provision, current or deferred, relating to U.S. federal, state or local income taxes.
A reconciliation of income tax expense to the amount computed by applying the Federal income tax rate to loss before provision
for income taxes as of December 31, 2009 and 2008 is as follows:
2009
2008
Income tax credit at statutory rates
Nondeductible expenses
State income tax, net of federal benefits
Other
Increase in valuation allowance
$(1,662,377) $(2,188,868)
6,579
(305,926)
—
2,488,215
—
7,260
(232,342)
(72,784)
1,960,243
— $
$
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred
income taxes consist of the following:
Deferred tax assets (liabilities):
Net operating loss carryforwards
Inventory and other allowances
Excess (tax) book depreciation
Excess (tax) book amortization
Investments
Patents and trademarks
Other accrued costs
Total deferred tax assets
Less: Valuation allowance
Deferred income taxes
F-17
As of December 31,
2009
2008
$ 31,347,000
36,000
(79,000)
53,000
—
—
276,000
31,633,000
(31,633,000)
—
$
$ 30,161,000
30,000
(111,000)
43,000
257,000
83,000
280,000
30,743,000
(30,743,000)
—
$
The valuation allowance increased approximately $1.3 million and $1.9 million for the years ended December 31, 2009 and
2008, respectively (net of approximately $0.6 million for each of 2009 and 2008, respectively, for expiring net operating loss
carryforwards and credits) due principally to the increase in the net operating loss carryforward and uncertainty as to whether future
taxable income will be generated prior to the expiration of the carryforward period. In 2009, the change in deferred tax assets also
includes a decrease of approximately $435,000 to beginning of year net operating loss carryforward, and a corresponding decrease in
beginning of year valuation allowance for changes in tax estimates recorded when the 2008 tax returns were filed. Under the Internal
Revenue Code, certain ownership changes, including the prior issuance of preferred stock and the Company’s public offering of
common stock, may subject the Company to annual limitations on the utilization of its net operating loss carryforward. As of
December 31, 2009, the amounts subject to limitations has not yet been determined.
The Company has net operating loss carryforwards for tax purposes of approximately $80 million on December 31, 2009, which
expire between 2010 and 2029.
(11) Capital Stock
In October 1998, pursuant to a Stockholder Rights Agreement between Nanophase and LaSalle National Association, as Rights
Agent, the Company declared a dividend of one Preferred Stock Purchase Right (a “Right”) for each outstanding share of Company
common stock on November 10, 1998 and each share of common stock issued by the Company after such date. The Rights are not
presently exercisable. Each Right entitles the holder, upon the occurrence of certain specified events, to purchase from the Company
one ten-thousandth of a share of the Company’s Series A Junior Participating Preferred Stock at a purchase price of $25 per one-ten
thousandth of a share (the “Purchase Price”). The Rights further provide that each Right will entitle the holder, upon the occurrence of
certain specified events, to purchase from the Company, common stock having a value of twice the Purchase Price and, upon the
occurrence of certain other specified events, to purchase from another entity into which the Company is merged or which acquires
50% or more of the Company’s assets or earnings power, common stock of such other entity having a value of twice the Purchase
Price. In general, the Rights may be redeemed by the Company at a price of $0.01 per Right. The Rights expire on October 28, 2011.
On September 5, 2003, the Company amended its Stockholder Rights Agreement to revise the beneficial ownership threshold at
which a person or group of persons becomes an “acquiring person” and triggers certain provisions under the Stockholder Rights
Agreement. As revised, a person or group would become an “acquiring person” if that person or group becomes the beneficial owner
of 35% or more of the outstanding shares of the Company’s stock. Prior to this amendment, the beneficial ownership threshold was
25%.
On January 30, 2009, the Company entered into an Amended and Restated Rights Agreement between the Company and Mellon
Investor Services LLC, which amends and restates in its entirety the original Rights Agreement, dated as of October 28, 1998. The
original Rights Agreement was amended and restated to appoint Mellon Investor Services LLC as the successor Rights Agent to
LaSalle National Bank and to make certain conforming changes. No other material changes were made.
As of December 31, 2009 and 2008, the Company has 24,088 authorized shares of preferred stock, of which 2,500 shares have
been designated as Series A Junior Participating Preferred Stock and reserved for issuance in connection with the Rights described
above. Shares of Series A Junior Participating Preferred Stock are nonredeemable and subordinate to any other series of the
Company’s preferred stock, unless otherwise provided for in the terms of the preferred stock; has a preferential dividend in an amount
equal to 10,000 times any dividend declared on each share of common stock; has 10,000 votes per share, voting together with the
Company’s common stock; and in the event of liquidation, entitles its holder to receive a preferred liquidation payment equal to
10,000 times the payment made per share of common stock. In addition, as of December 31, 2009, 1,700,880 authorized but unissued
shares of common stock have been reserved for future issuance upon exercise of stock options.
F-18
(12) Stock Options and Stock Grants
We have entered into stock option agreements with certain officers, employees, directors and three members of our former
Advisory Board. The stock options generally expire ten years from the date of grant.
Employees Stock Options
The Company follows FASB ASC Topic 718 (formerly SFAS 123R), Share-Based Payments, in which compensation expense is
recognized only for share-based payments expected to vest. The Company recognized compensation expense related to stock options
of $427,117 and $627,279 for the years ended December 31, 2009 and 2008, respectively. The Company also recognized stock
compensation expense related to accelerated vesting of stock options pursuant to severance agreements in the amount of $210,694
and $592,785 on December 31, 2009 and 2008, respectively.
As of December 31, 2009, there was approximately $555,000 of total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under the Company’s stock option plans. That cost is expected to be recognized over
a remaining weighted-average period of 1.7 years.
Fair Value and Assumptions Used to Calculate Fair Value under FASB ASC Topic 718 (formerly SFAS 123R)
The following table illustrates the various assumptions used to calculate the Black-Scholes option pricing model for all years
presented:
Weighted-average risk-free interest rates:
Dividend yield:
Weighted-average expected life of the option:
Weighted-average expected stock price volatility:
Weighted-average fair value of the options granted:
Years Ended December 31,
2008
2009
2.64%
0.00%
7 years
73.68%
0.74
$
3.43%
0.00%
7 years
75.07%
2.22
$
The Company uses the Black–Scholes option pricing model to determine the fair value of stock based compensation. The
Black–Scholes model requires the Company to make several assumptions, including the estimated length of time employees will
retain their vested stock options before exercising them (“expected term”), the estimated volatility of the Company’s common stock
price over the expected term and estimated forfeitures. Expected price volatility of the fiscal 2009 and 2008 grants is based on the
daily market rate changes of the Company’s stock going back to January 1, 1998. The shares granted in fiscal 2009 and 2008 had a
vesting period of either three or five years and a contractual life of 10 years. Forfeitures were estimated at 5.14% and 4.6% for the
years ended December 31, 2009 and 2008, respectively, based on the Company’s historical experience. The Black–Scholes model
also requires a risk free interest rate, which is based on the U.S. Treasury yield curve in effect at the time of the grant, and the
dividend yield on the Company’s common stock, which is assumed to be zero since the Company does not pay dividends and has no
current plans to do so in the future. Changes in these assumptions can materially affect the estimate of fair value of stock based
compensation and consequently, the related expense recognized on the condensed consolidated statement of operations. The
Company recognizes stock based compensation expense on a straight-line basis.
F-19
The following table summarizes the Company’s option activity for Nanophase Technologies Corporation employees and
directors during the years ended December 31, 2009 and 2008:
Options
Outstanding on January 1, 2008
Granted
Exercised
Forfeited or expired
Outstanding on December 31, 2008
Granted
Exercised
Forfeited or expired
Outstanding on December 31, 2009
Exercisable on December 31, 2009
Shares available for grant
Weighted
Average
Remaining
Contractual
Term
(years)
Aggregate
Intrinsic
Value
Weighted
Average
Exercise
Price per
Share
$ 5.84
$ 3.11
$ 3.30
$ 3.79
$ 4.13
$ 6.00
6.53
4.52
—
—
Shares
1,672,214
340,000
(16,667)
(265,721)
1,729,826
340,750
—
(1,024,501)
1,046,075
542,289
654,805
The aggregate intrinsic value in the table above is zero, based on Nanophase’s closing stock price of $0.87 on the last business
day for the period ended December 31, 2009.
During the years ended December 31, 2009 and 2008 the total intrinsic value of Nanophase stock options exercised was $0 and
$24,517, respectively. Cash received for option exercises was $0 and $30,417 during the years ended December 31, 2009 and 2008.
Based on the Company’s election of the “with and without” approach, no realized tax benefits from stock options were recognized for
the years ended December 31, 2009 and 2008.
During 2009, 1,024,501 stock options were forfeited primarily due to termination of officers in 2008 and 2009.
Stock Appreciation Rights
For the year ended December 31, 2009, the Company granted its outside directors stock appreciation rights (SAR’s) totaling
45,750 shares, under the Company’s Amended and Restated 2006 Stock Appreciation Rights Plan. The fair value of the awards
granted was $14,550 and is included in non-cash compensation expense for the year ended December 31, 2009. The SAR’s granted
vested immediately and are payable upon the directors’ removal or resignation from the position of director. These awards are
accounted for as liability awards, included in accrued expenses as of December 31, 2009, and adjusted to fair value each reporting
period.
F-20
Restricted Stock
For the years ended December 31, 2009 and 2008, the Company was to grant its outside directors shares of deferred common
stock totaling 15,250 and 78,077 shares under the Company’s 2005 Non-Employee Director Restricted Stock Plan. However, each
outside director elected to defer receipt of the restricted stock until the termination of their services to the Company. The deferral of
restricted stock is being accounted for under the Company’s Non-Employee Director Deferred Compensation Plan. The fair value of
the awards granted was $11,590 and $180,000, respectively, for the restricted stock grants and is included in stock-based
compensation expense for the years ending December 31, 2009 and 2008.
For the year ended December 31, 2008, the stock-based compensation (recovery) was ($33,075) for non-director restricted
stock. As of December 31, 2009 and 2008, respectively, the Company does not have any unvested non-director restricted stock or
performance shares outstanding. For the year ended December 31, 2008, the fair value of performance shares vested was
approximately $7,400.
(13) 401(k) Profit-Sharing Plan
We have a 401(k) profit-sharing plan covering substantially all employees who meet defined service requirements. In 2004, we
amended the 401(k) plan providing for deferred salary contributions by the plan participants and maximum contributions by us of
100% of the first 3% and 50% of the next 2% of the participant’s salary. The Company contributions under this plan were $36,569
and $158,541 for the years ended December 31, 2009 and 2008, respectively. We discontinued contributions to employees as of the
first quarter of 2009. We intend to restart contributions at some point in the future.
(14) Significant Customers and Contingencies
Revenue from two customers constituted approximately 63% and 13%, respectively, of the Company’s 2009 revenue. Amounts
included in accounts receivable on December 31, 2009 relating to these two customers were approximately $372,000 and $7,200,
respectively. Revenue from these two customers constituted approximately 48% and 24%, respectively, of the Company’s 2008
revenue. Amounts included in accounts receivable on December 31, 2008 relating to these two customers were approximately
$784,000 and $31,000, respectively.
We currently have supply agreements with BASF Corporation (“BASF”), our largest customer, and a technology development
agreement with Altana Chemie, that have contingencies outlined in them which could potentially result in the license of technology
and/or the sale of production equipment, providing capacity sufficient to meet the customer’s production needs, from the Company to
the customer, if triggered by our failure to meet certain performance requirements, certain other obligations and/or certain financial
condition covenants. The financial condition covenants in one of these supply agreements with BASF “trigger” a technology transfer
(license and, optionally, an equipment sale) in the event (a) that earnings of our twelve month period ending with its most recently
published quarterly financial statements are less than zero and our cash, cash equivalents and certain investments are less than
$2,000,000, (b) of an acceleration of any debt maturity having a principal amount of more than $10,000,000, or (c) our insolvency, as
further defined within the agreement. In the event of an equipment sale, upon incurring a triggering event, the equipment would be
sold to the customer at 115% of the equipment’s net book value. Under another of our supply agreements with BASF, upon our
breach of its contractual obligations to BASF, we would be required to sell BASF certain production equipment at 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.
F-21
We believe that we have sufficient cash and investment balances, including the value of the ARS portfolio (sold in March 2010
for $4 million as part of the agreement disclosed herein) and with the debt-free balance sheet as of March 2010, to avoid the
triggering events under the supply agreement with BASF through 2010. 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 the Company’s 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 or our technology development agreement with Altana Chemie. Any such event may 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 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.
(15) Business Segmentation and Geographical Distribution
Revenue from international sources approximated $652,650 and $676,828 for the years ended December 31, 2009 and 2008,
respectively. As part of its revenue from international sources, the Company recognized approximately $315,960 in product revenue
from a number of German companies, in the aggregate, and $300,000 in other revenue from a technology license fee from its
Japanese licensee for the year ended December 31, 2009. Revenue from these same international sources approximated $268,704 and
$300,000, respectively, for the year ended December 31, 2008. The $300,000 technology license fee typically received every twelve
months from our Japanese licensee is included in each of the two years presented.
The Company’s operations comprise a single business segment and all of the Company’s long-lived assets are located within the
United States.
(16) Severance Charges
In the first quarter of 2009, we announced the resignations of Mr. Robert Haines, our then-current Vice-President of Operations,
and Dr. Richard Brotzman, our then-current Chief Technology Officer. Additionally, we eliminated twelve positions within the
Operations group as a result of a reorganization plan implemented to align the organization with current demand based upon current
economic conditions and our shift in strategy to develop a more customer-focused direct selling approach. During this process, we
continue to seek to build our marketing and applications development capabilities. As a result of these resignations, the Company
incurred a total of $794,069 of cash and non-cash severance charges. Included in these charges were salaries and benefits, accelerated
vesting of stock options (non-cash) and other expenses. Of these charges, approximately $211,000 or 27% were related to the
accelerated vesting of stock option which have no cash impact and are expected to have a minimal dilutive effect if any. On
December 31, 2009, $38,060 remained in accrued severance from these events.
In the third quarter of 2008, the Company announced the resignations of Mr. Joseph E. Cross, its then-current President and
Chief Executive Officer and Mr. Kevin J. Wenta, its then-current Executive Vice-President of Sales and Marketing along with
Mr. Edward Ludwig its then-current Vice-President of Business Development. As a result of these resignations, the Company
incurred $1,578,859 in severance charges. Included in these charges were salaries and benefits, accelerated vesting of stock options
(non-cash) and other expenses. Of these charges, approximately $593,000 or 38% were related to the accelerated vesting of stock
options which had no cash impact and was expected to have a minimal dilutive effect if any.
F-22
Pursuant to the requirements of Section 13 or 15(d) 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, on the 30th day of March, 2010.
SIGNATURES
NANOPHASE TECHNOLOGIES CORPORATION
By:
/s/ Jess Jankowski
Jess Jankowski
President and Chief Executive Officer
By: /s/ Frank Cesario
Frank Cesario
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated on the 30th day of March, 2010.
Signature
/s/ Jess Jankowski
Jess Jankowski
/s/ Frank Cesario
Frank Cesario
/s/ Donald S. Perkins
Donald S. Perkins
/s/ George Vincent
George Vincent
/s/ James A. Henderson
James A. Henderson
/s/ James A. McClung
James A. McClung
/s/ Jerry Pearlman
Jerry Pearlman
/s/ Richard W. Siegel
Richard W. Siegel
/s/ R. Janet Whitmore
R. Janet Whitmore
Title
President, Chief Executive Officer (principal executive
officer) and Director
Chief Financial Officer (principal financial and chief
accounting officer
Chairman of the Board and Director
Vice Chairman of the Board and Director
Director
Director
Director
Director
Director
23.1 Consent of McGladrey & Pullen, LLP.
23.2 Consent of Houlihan Smith & Company Inc., dated February 24, 2010.
EXHIBIT INDEX
31.1 Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.
31.2 Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.
32 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements (No. 333-53445, No. 333-74170 and No. 333-119466)
on Form S-8, and Registration Statements (No. 333-90326, No. 333-112130, No. 333-116224, No. 333-140461, No. 333-143153 and
333-163363) on Form S-3, of Nanophase Technologies Corporation of our report dated March 30, 2010 relating to our audit of the
financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K
of Nanophase Technologies Corporation for the year ended December 31, 2009.
Exhibit 23.1
/s/ McGladrey & Pullen LLP
Schaumburg, Illinois
March 30, 2010
Exhibit 23.2
We consent to the inclusion in the Annual Report of Nanophase Technologies Corporation and subsidiaries on Form 10-K for the
period ended December 31, 2009 of references to our Valuation Report relating to the estimation of fair value of certain auction rate
securities held by the Company as of December 31, 2009 and to references to our firm’s name therein.
Houlihan Smith & Company, Inc.
Chicago, Illinois
February 23, 2010
Certification of the Chief Executive Officer
Pursuant to
Rules 13a-14(a) and 15d-14(a) under the Exchange Act
Exhibit 31.1
I, Jess Jankowski, certify that:
1. I have reviewed this annual report on Form 10-K 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: March 30, 2010
/s/ JESS A. JANKOWSKI
Jess A. Jankowski
Chief Executive Officer
Certification of the Chief Financial Officer
Pursuant to
Rules 13a-14(a) and 15d-14(a) under the Exchange Act
Exhibit 31.2
I, Frank Cesario, certify that:
1. I have reviewed this annual report on Form 10-K 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: March 30, 2010
/s/ FRANK CESARIO
Frank Cesario
Chief Financial Officer
Certification Pursuant to 18 U.S.C. Section 1350
(as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002)
Exhibit 32
In connection with this annual report of Nanophase Technologies Corporation (the “Company”) on Form 10-K for the year
ending December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jess A.
Jankowski, Chief Executive Officer of the Company and Frank Cesario Chief 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: March 30, 2010
/s/ JESS A. JANKOWSKI
Jess A. Jankowski
Chief Executive Officer
/s/ FRANK CESARIO
Frank Cesario
Chief Financial Officer