SECURITIES & EXCHANGE COMMISSION EDGAR FILING
NANOPHASE TECHNOLOGIES CORPORATION
Form: 10-K
Date Filed: 2015-03-27
Corporate Issuer CIK: 883107
Symbol:
SIC Code:
Fiscal Year End:
NANX
3390
12/31
© Copyright 2015, Issuer Direct Corporation. All Right Reserved. Distribution of this document is strictly prohibited, subject to the
terms of use.
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2014
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
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ❑ No x
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 x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ❑
Indicate by check mark whether the registrant 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). x Yes ❑ No
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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. ❑
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
❑
Accelerated filer
❑
Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ❑ No x
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, 2014 was $6,893,000 as of such date.
The number of shares outstanding of the registrant’s common stock, par value $.01, as of March 13, 2015 was 28,585,496.
None.
DOCUMENTS INCORPORATED BY REFERENCE
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PART I
Table of Contents
Table of Contents
Item 1. Business
General
Nanomaterials
Our Technologies
Marketing and Distribution Methods
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
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3.
Item 4. Mine Safety Disclosures
Legal Proceedings
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accountant Fees and Services
PART III
Item 15. Exhibits and Financial Statement Schedules
PART IV
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Item 1.
Business
General
PART I
Nanophase Technologies Corporation (“Nanophase” or the “Company”, including “we”, “our” or “us”) is an advanced
materials and applications developer and commercial manufacturer with an integrated family of materials technologies. We produce
engineered nano and sub-micron materials for use in a variety of diverse markets: personal care including sunscreens, architectural
coatings, industrial coating applications, abrasion-resistant additives, plastics additives, medical diagnostics, energy and a variety of
surface finishing technologies (polishing) applications, including optics.
While our origin is based on the creation of nanoscale metal oxide products, we have expanded our offerings to include
larger but still sub-micron materials. We have developed techniques for managing attributes including particle size, shape, surface
coatings, and other valuable aspects of the material. Our focus is on customer need where we believe we have an advantage, as
opposed to finding uses for one particular technology. Additionally, as the format of delivery is important to customers, we have
developed proprietary capabilities for dispersing our materials into both aqueous (water-based) and solvent-based liquid media.
These capabilities allow us to better integrate with the customer’s need and application.
We target markets in which we believe practical solutions may be found using our products. We work closely with current
and potential customers in these target markets to identify their material and performance requirements and market our materials to
various end-use applications manufacturers. Recently developed technologies have made certain new products possible and opened
potential new markets. We expect growth in end-user (manufacturing customers, including customers of our customers) adoption in
2015 and beyond. Our initiatives in targeted market areas are progressing at differing rates of speed, but we have been broadly
moving through testing and development cycles, and in a number of cases believe we are approaching first revenue or next stage
revenue with particular customers in the industries referenced above. During 2014 we developed new solutions in surface finishing
technologies (polishing) and energy-management areas that have been taken to potential customers, with commercial order flow
accelerating in the former and significant commercial testing activities happening in the latter. We believe that successful introduction
of our materials with manufacturers may lead to follow-on orders for other materials in their applications. Although our primary
strategic focus has been the North American market, we currently sell material to customers overseas and have been working to
expand our reach within foreign markets. The Company was incorporated in Illinois on November 25, 1989, and became a Delaware
corporation during November 1997. Our common stock trades on the OTCQB marketplace under the symbol NANX.
We have created a leading commercial approach to the application of our integrated materials technologies designed to
deliver an optimal engineered solution for a target market or specific customer application. With respect to our products, we have
complete capability from application development and laboratory samples through pilot production and, finally, commercial production
currently at rates as high as hundreds of metric tons per year for individual products. We have development and application
laboratories and manufacturing capacity in two locations in the Chicago area. Our 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 U.S. Food and Drug Administration (“FDA”) regulation.
We have undergone a strategic shift during recent years toward penetrating key markets via interactive applications
development with end-use customers in these markets. We also supply both
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nanoscale and larger materials, based on market requirement. 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.
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 our
nanotechnology products. The ultimate performance and value of Nanophase’s products in a given application is a function of
nanoparticle composition, size, shape, structure, surface chemistry and coating and dispersion potential. Our technologies for
engineering and manufacturing nanomaterials, and our understanding of how to make nanomaterials exhibit desirable performance
characteristics in various media, result in commercial nanomaterials solutions that we believe offer superior performance in many
applications.
Nanomaterials have applications in diverse global markets where they are incorporated into a process, such as optics
polishing, or a product, such as an industrial coating to prevent degradation or aid in application, or significantly improve wear
resistance, or promote/hamper particular chemical reactions within respective systems. Multiple markets exist for our 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 we use are commercially available. In some cases, we rely on sole-source processors of
materials that utilize an array of worldwide sources for the raw materials that they process to our specifications. However, in certain
cases we deal with very limited supply of certain elements, such as those classified as “Rare Earth” elements- specifically cerium
oxide for use in surface finishing technologies (polishing) applications. On a worldwide basis, the vast majority of these elements are
sourced from China. Due to severe export limitations imposed by China from 2010 through 2012, the supply of all Rare Earth
elements was drastically reduced from previous levels. While prices and availability improved by the end of 2012, the cost remains
higher than it was prior to 2010. In addition, this market dynamic created significant concerns, globally, pertaining to the availability
and cost of using these materials, which continue to pose customer acceptance risk for elements of our polishing business going
forward.
Our Technologies
We have 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. Our platform provides flexibility and capability to engineer nanomaterials that meet a customer’s performance
requirements and delivers our nanomaterial solutions in a readily usable format. Our technologies are scalable and robust, having
produced several hundred metric tons annually.
Our nanomaterials platform includes two distinct manufacturing processes (PVS — Plasma Vapor Synthesis and NAS -
NanoArc® Synthesis) to make nanomaterials or nanoparticles. These technologies
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allow us to control critical nanomaterial properties (composition, size, shape, structure, surface chemistry) and engineer these
attributes to meet specific application performance. Compared to other well-developed known nanoparticle processes, our plasma-
produced particles are produced as nonporous, dense, discrete single crystals, which we believe possess a unique set of bulk and
surface properties.
Perhaps of greater importance, we have developed proprietary technology to disperse nanoparticles in both aqueous
(water-based) and several organic solvent systems. These dispersions are stable at high weight loading (typically 18-55% by weight).
These aspects 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, industrial cleaning solutions, industrial coatings, plastic additives and optical and semiconductor polishing. This integration
flexibility allows us to serve more customers and serve them better, and is critical to our role as a solutions provider, not simply that of
a materials provider.
We have 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. We deliver hundreds of metric tons of surface engineered
nanoparticles to our 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 often 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.
We have used our expertise in nanoscale materials to develop larger sub-micron particle–based products that are not
considered “nano” in various applications. Controlling aspects including particle size and shape, as well as surface chemistries, allow
us to provide superior materials to the marketplace in various formats, both at the nano level and above.
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 and Distribution Methods
We focus our marketing strategy on differentiated solutions that create superior value for our customers. This customer-
focused strategy means we are not solely dependent upon the efforts of a distributor for future sales growth. We have found many
cases where our ability to effectively integrate nanomaterials into a customer’s specific chemistry is critical to presenting an effective
solution. Given this reality, we launched a “customer direct” business model during 2009 for those markets that are not conducive to
an intermediary. In these markets, we interact with customers directly rather than through intermediaries, demonstrating the benefits
of our solutions in their products. Our deep market knowledge of certain markets and applications has allowed us to understand
customer needs and our products’ value proposition, and adapt our offerings accordingly. This knowledge, combined with our
applications development expertise, supports leveraging our development efforts by marketing and selling our solutions to multiple
customers within each market. We work closely with each customer to develop a material solution for that entity’s specific
application(s), but we find that as we develop greater applications development expertise in a given area, specific applications
development often becomes a
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routine process within Nanophase. This is where we believe our future customers will perceive the greatest value in working with us,
and where we will be able to leverage our product development efforts into multiple revenue generating customer solutions. Surface
finishing technologies (polishing) is an example of such a market.
We see this customer-focused marketing approach increasing our probability of success in many markets, allowing us to
use an integrated platform of material technologies and typically reducing the total 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 believe we will be able to grow sales.
In addition to serving customers in diverse markets and geographic locations, we will continue to devote significant
resources to maintaining and growing our relationship with BASF Corporation (“BASF”), our largest customer in the personal care
market. This has been a successful relationship that we expect will contribute to our future growth. BASF, which describes itself as
the world’s leading chemical company with revenue in excess of $100 billion, is a global leader in the personal care market with
recognized brands, significant revenues and sales reach. We have a long-term exclusive relationship with BASF, primarily to provide
our zinc oxide-based products to be used in personal care with sunscreens and daily wear products being the dominant applications.
In addition to the personal care applications described above, our products are used in a variety of other applications,
including architectural coatings, polishing applications (including optical glass and CMP), plastics additives, medical diagnostics,
textiles and graphic arts, energy control applications, and others. Recent activities have expanded our presence in the polishing /
surface finishing applications space, and 2013 saw us develop two solutions for the energy sector (consumer) that were taken to
market leaders for evaluation during 2014. Our efforts in these areas of recent activity will continue in 2015, and we expect a
combination of these new solutions in the surface finishing (polishing) and energy sector (consumer) areas to yield significant
incremental revenue going forward.
Because our technology can be applied to a wide variety of applications, we focus our efforts on only a handful of
applications to gain a depth of knowledge and leverage our learning curve. If we find a unique application outside of our core markets
that does not require significant development resources then we may pursue it as “opportunistic” business. We believe this focused
approach will contribute to a higher success rate for related opportunities than we would experience by pursuing more opportunities
simultaneously.
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 our products; 2) creating or obtaining additional core material technologies and/or
materials 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 our research and development is directly related to applications development. We endeavor to either meet specific
customer needs or to develop applications solutions to address unmet needs in a particular market where we believe our materials
will offer a distinct performance advantage. We believe that aggressively pursuing applications in targeted areas will help us compete
as a technical and commercial innovator using our materials expertise, and more importantly, become perceived as a solutions
provider by our customers and not simply as another materials supplier.
Our total research and development expense, which includes all expenses relating to our technology and advanced
engineering groups, during the years ended December 31, 2014 and 2013, was $1.3 million and $1.7 million, respectively. This
represents our share of these expenses only and does not take into account amounts spent by any of our customers in support of
new product development. Our
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future success will depend in large part upon our ability to develop products which bring a high degree of value to our customers’
products. Through the three-year period ended December 31, 2014, we had cumulative research and development expenses of
approximately $5 million and cumulative expenditures on equipment and leasehold improvements of approximately $0.4 million.
Manufacturing Operations
We have manufacturing capacity based in two locations in the Chicago area. At each of these facilities, we are able to
develop and supply nanomaterials in quantities ranging from grams to metric tons. Our facilities are certified to ISO 9001:2008
international standards and are cGMP compliant for applicable bulk pharmaceutical manufacturing. We are also in the process of
registering some of the chemicals we ship to customers in Europe pursuant to the European Chemical Agency’s regulations issued to
date pertaining to Registration Evaluation and Authorization of Chemicals (“REACH”). We have registered Zinc Oxide under REACH
and filed preliminary registrations for other materials. Our 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 several 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 our major operational goals - (1) to increase output without adding
unnecessarily to existing equipment and (2) to continually reduce production costs while consistently producing high quality products.
Intellectual Property and Proprietary Rights
We rely on a combination of patent, trademark, copyright, trade secret and other intellectual property laws, nondisclosure
agreements and other protective measures to protect our intellectual property. In addition to obtaining patent and trademarks based
on our inventions and products, we may also license certain third-party patents from time-to-time to expand our technology base.
As of the date of this filing, we own 11 U.S. patents and 2 pending U.S. patent applications. We also own 35 foreign
patents and patent applications consisting of 30 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 our platform of nanotechnologies. Our oldest issued
patents began to expire during 2013. We do not believe that the expiration of these patents will have a material impact on our
business or financial condition.
Competition
Within each of our targeted markets and product applications, we face 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
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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 justify a process change or
outweigh their frequently 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 compete directly against us. 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 will play a greater role in the nanomaterials arena in the future, something we are increasingly seeing today, albeit
indirectly.
We believe that our nanomaterial technologies and manufacturing platforms are strong. We believe we are well-positioned
with our platform of integrated commercial nanomaterial technologies and track record of technology improvement and evolution.
Governmental Regulations, Including Climate Change
The manufacture and use of certain of the products that contain our nanocrystalline materials are subject to governmental
regulations. As a result, we are required to adhere to the cGMP requirements of the FDA and similar regulations that include testing,
control and documentation requirements enforced by periodic inspections. We are also in the process of registering some of the
chemicals we ship to customers in Europe in compliance with the European Chemical Agency’s regulations issued to date pertaining
to REACH (to date, we have registered Zinc Oxide under REACH and filed preliminary registrations for other materials).
We are 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, we rely on
general chemical safety and process safety practices to identify safe personal protective equipment and appropriate handling
protocols. We believe that we have taken a leadership position on EH&S in our operations and have internal and external review and
monitoring of our practices.
In addition, our facilities and 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.
We have taken a responsible, proactive approach to EH&S by implementing appropriate procedures and processes to
have our 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
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Committee on Nanotechnology, Nanoscale Materials Stewardship Program under the Toxic Substances Control Act, and 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 our Company has an
exemplary safety record.
Employees
On December 31, 2014, we had a total of 39 full-time employees, 5 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. We have 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
Our operations comprise a single business segment and all of our long-lived assets are located within the United States.
See Note 13 to the accompanying Financial Statements for additional information.
Key Customers
A limited number of key customers account for a substantial portion of our commercial revenue. In particular, revenue from
three customers - our largest customer in personal care applications (BASF), our medical diagnostics application customer, and our
largest coatings customer - constituted approximately 72%, 6% and 5%, respectively, of our 2014 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
agreements with BASF are long-term agreements, they may be terminated by BASF under certain circumstances with reasonable
notice and do not provide any guarantees that BASF will buy our products. The loss of one of our largest customers or the failure to
attract new customers could have a material adverse effect on our business, results of operations and financial condition. Due to the
high concentration of sales to a limited number of customers, we have aggressively pursued new customers 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
We want to provide investors with more meaningful and useful information. As a result, this Annual Report on Form 10-K
(the “Form 10-K”) contains certain “forward-looking statements”, as defined in Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). These statements reflect our current expectations of the future results of our operations,
performance and achievements. Forward-looking statements are covered under the safe harbor provisions of the Private
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Securities Litigation Reform Act of 1995. We have tried, wherever possible, to identify these statements by using words such as
“anticipates”, “believes”, “estimates”, “expects”, “plans”, “intends” and similar expressions. These statements reflect management’s
current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks,
uncertainties and contingencies that could cause our actual results, performance or achievements in 2015 and beyond to differ
materially from those expressed in, or implied by, such statements. These risks, uncertainties and factors include, without limitation:
our ability to become profitable despite the losses we have incurred since our incorporation; our dependence on our principal
customers and the terms of our supply agreement with BASF which could trigger a requirement to transfer technology and/or sell
equipment to that customer; our potential inability to obtain working capital when needed on acceptable terms or at all; our ability to
obtain materials at costs we can pass through to our customers, including Rare Earth elements, specifically cerium oxide; uncertain
demand for, and acceptance of, our nanocrystalline materials; our manufacturing capacity and product mix flexibility in light of
customer demand; our limited marketing experience; changes in development and distribution relationships; the impact of competitive
products and technologies; our dependence on patents and protection of proprietary information; our ability to maintain an
appropriate electronic trading venue for our securities; the impact of any potential new governmental regulations that could be difficult
to respond to or costly to comply with; and the resolution of litigation or other legal proceedings in which we may become involved. In
addition, our forward-looking statements could be affected by general industry and market conditions and growth rates. Readers of
this Form 10-K should not place undue reliance on any forward-looking statements. Except as required by federal securities laws, we
undertake no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.
Investor Information
We are subject to the informational requirements of the Exchange Act and, accordingly, file 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 100 F Street, N.E., 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 our website. The address is www.nanophase.com. We make
available, free of charge, copies of our 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 intend to make all such reports and
amendments to reports available free of charge on our website. We have included our website address throughout this Form 10-K as
textual references only. The information contained on our website is not incorporated into this Form 10-K.
Item 1A. Risk Factors
The following factors, among others, could cause actual results to differ materially from those contained in forward-looking
statements made in this Annual Report on Form 10-K and presented elsewhere by management from time to time. Such factors may
have a material adverse effect on our business, financial condition, and results of operations, and you should carefully consider them
before deciding to invest in, or retain, shares of our common stock. Additional risks and uncertainties not presently known to us or
which are currently not believed to be material or which we have not predicted may also harm our business operations or affect our
actual results. Because of these and other factors, past performance should not be considered an indication of future performance.
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We have a history of losses that may continue in the future.
We have incurred net losses in each year since our inception, with net losses of $1.7 million in 2014 and $2.5 million in 2013. As
of December 31, 2014, we had an accumulated deficit of approximately $92 million and may incur a loss on an annual basis during
2015. We believe that our business depends, among other things, on our ability to significantly increase revenue. If revenue fails to
grow at anticipated rates or if operating expenses increase without a commensurate increase in revenue, or if we fail to adjust
operating expense levels accordingly, then the imbalance between revenue and operating expenses will negatively impact our cash
balances and our ability to achieve profitability in future periods.
We depend on a few major customers for a high percentage of our sales, and the loss of orders from a significant customer
could cause a decline in revenue and/or increases in the level of losses incurred.
Sales to our customers are executed pursuant to purchase orders and long-term supply contracts; however, customers can
cease doing business with us at any time with limited advance notice. It is possible that a significant portion of our future sales may
remain concentrated within a limited number of strategic customers. We may not be able to retain our strategic customers, such
customers may cancel or reschedule orders, or in the event of canceled orders, such orders may not be replaced by other sales or by
sales that are on as favorable terms. In addition, sales to any particular customer may fluctuate significantly from quarter to quarter,
which could affect our ability to achieve anticipated revenues on a quarterly basis.
Sales to our three largest customers accounted for 72%, 6% and 5%, respectively, of our total revenue in 2014 and sales to
these same customers accounted for 72%, 3% and 6%, respectively, of our total revenue in 2013.
We plan to expand both our marketing and business development efforts and our production efficiency in order to address the
issues of our dependence upon a limited amount of customers, enhancement of gross profit and operating cash flows, and the
achievement of profitability. Given the nature of our products, and the fact that markets for them are not yet fully developed, it is
difficult to accurately predict when additional large customers will materialize. Going forward, our margins, as a percentage of
revenue, will be dependent upon revenue mix, revenue volume, raw materials pricing, and our ability to continue to cut costs. The
extent of the growth in revenue volume and the related gross profit that this revenue generates will be the main drivers in generating
positive operating cash flows and, ultimately, net income.
Any downturn in the product markets served by us would harm our business.
A majority of our products are incorporated into products such as personal care applications including sunscreens, architectural
coatings, surface finishing technologies (polishing), and to a lesser extent, medical diagnostics, abrasion-resistant coatings and other
products. These markets have from time to time experienced cyclical, depressed business conditions, often in connection with, or in
anticipation of, a decline in general economic conditions. These industry downturns often result in reduced product demand and
declining average selling prices. Our business would be harmed by a continuation of any downturn and/or any future downturns in
the markets that we serve.
Our products often have long adoption cycles, which could make it difficult to achieve market acceptance and makes it
difficult to forecast revenues.
Due to their often novel characteristics and potential unfamiliarity with them that exists in the marketplace, our nanomaterials
may require longer adoption cycles than existing materials technologies, to the point that adoption cycles typically require one to five
years. Our nanomaterials have to receive appropriate attention within any potential customer’s organization, and then they must be
tested to prove a performance advantage over existing materials, typically on a systems-cost basis. Once we have proven initial
commercial viability, pilot scale production runs are typically required and completed by the customer, followed by further testing.
Once production-level commercial viability is established, then our nanomaterials can be introduced, often to a downstream
marketplace that needs to be familiarized with them. If we are unable to demonstrate to our potential customers the performance
advantages and economic value of our nanomaterials over existing and competing materials and technologies, we will be unable to
generate significant sales. Our long adoption cycle makes it difficult to predict when sales will occur.
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We frequently depend on collaborative development relationships with our customers. If we are unable to initiate or sustain
such collaborative relationships or if the terms of these relationships limit the distribution of our products, then we may be
unable to successfully develop, manufacture or market our current and future nanomaterials or applications.
We have established, and will continue to pursue, strategic relationships with many of our customers and do not have a
substantial direct sales force or an established distribution network (other than distribution arrangements for research samples).
Through these relationships, we seek to develop new applications for our nanomaterials and share development and manufacturing
resources. We also seek to coordinate the development, manufacture and marketing of our nanomaterials products, particularly as a
result of our selling additives that must be integrated into complete formulations by the customer. Future success will depend, in part,
on our continued relationships with these customers and our ability to enter into similar strategic relationships with other customers.
Our customers may not continue in these collaborative development relationships, may not devote sufficient resources to the
development or sale of our materials or may enter into strategic development relationships with our competitors. These customers
may also require a share of control of these collaborative programs. While less prevalent than in the past, some of our agreements
with these customers limit our ability to license our technology to others and/or limit our ability to engage in certain product
development or marketing activities with others. These relationships generally can be terminated unilaterally by customers.
If we are unable to initiate or sustain such collaborative relationships or if the terms of these relationships materially limit our
access to distribution channels for our products, then we may be unable to successfully develop, manufacture or market our current
and future nanomaterials or applications.
If commodity metal prices increase at such a rate that we are unable to recover lost margins on a timely basis or that our
products became uncompetitive in their current marketplaces, our financial and liquidity position and results of operations
would be substantially harmed.
Many of our significant raw materials come from commodity metal markets that may be subject to rapid price increases. While
we generally are able to pass a significant portion of commodity “price-related” increases on to our customers, it is possible that,
given our limited customer base and the limited control we have over it, commodity metal prices could increase at such a rate that
could hinder our ability to recover lost margins from our customers. It is also possible that such drastic cost increases could render
some of our materials uncompetitive in their current marketplaces when considered relative to other materials on a cost benefit basis.
If either of these potential results occurred, our financial and liquidity position and results of operations would be substantially harmed.
From 2010-2012, the availability of one of the materials we use, cerium oxide, a “Rare Earth” material, was constrained by a
change in Chinese export policy, causing a dramatic increase in material cost. While prices and availability improved by the end of
2012, the cost of this material remains higher than it was prior to 2010. While cerium oxide continues to be used for many
applications, polishing applications in our case, customers are more inclined to look for alternative solutions today as they consider
the supply (including cost) risk of this material. Failure of customers to either adopt solutions utilizing cerium oxide or continue to use
solutions containing cerium oxide could harm one of our business areas, and thus negatively impact our financial and liquidity position
and results of operations.
Protection of our intellectual property is limited and uncertain.
Our intellectual property is important to our business. We seek to protect our intellectual property through patent, trademark,
copyright, and trade secret protection and confidentiality or license agreements with our employees, customers, suppliers and others.
Our means of protecting our intellectual property rights in the United States or abroad may not be adequate and others, including our
competitors, may use our proprietary technology without our consent. We may not receive the necessary patent protection for any
applications pending with the U.S. Patent and Trademark Office (“USPTO”) and any of the patents
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that we currently own or license may not be sufficient to keep competitors from using our materials or processes. In addition, patents
that we currently own or license may not be held valid if subsequently challenged by others and others may claim rights in the patents
and other proprietary technology that we own or license. Additionally, others may have already developed or may subsequently
develop similar products or technologies without violating any of our proprietary rights. If we fail to obtain or maintain patent
protection or preserve our trade secrets, we may be unable to effectively compete against others offering similar products and
services. In addition, if we fail to operate without infringing the proprietary rights of others or lose any license to technology that we
currently have or will acquire in the future, we may be unable to continue making the products that we currently make.
Moreover, at times, attempts may be made to challenge the prior issuance of our patents. Furthermore, litigation may be
necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary
rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion
of resources and could harm our business, operating results and financial condition. Such litigation might occur with parties that have
substantially greater resources, and thus more capability to engage and continue litigation. In addition, if others assert that our
technology infringes their intellectual property rights, resolving the dispute could divert our management team and financial resources.
Due to the expanding length of time required in order to obtain a patent, and the inherent ongoing risks of the protections truly
provided by any patent, we made a decision during 2008 that we could no longer place a value on these intangible assets. In the
future, we may license certain of our intellectual property, such as trademarks, to third parties. While we would attempt to ensure that
any licensees maintain the quality and value of our brand, these licenses might diminish this quality and value.
If a catastrophe strikes either of our manufacturing facilities or if we were to lose our lease for either facility due to non-
renewal or other unforeseen events, we may be unable to manufacture our materials to meet customers’ demands.
Our manufacturing facilities are located near Chicago—in Romeoville and Burr Ridge, Illinois. These facilities and some of our
manufacturing and testing equipment would be difficult to replace in a timely manner. Therefore, any material disruption at one of our
facilities due to a natural or man-made disaster or a loss of lease due to non-renewal or other unforeseen events could have a
material adverse effect on our ability to manufacture products to meet customers’ demands. While we maintain property insurance,
this insurance may not adequately compensate us for all losses that we may incur in the event of a material interruption in our
business.
If we are unable to expand our production capabilities to meet unexpected demand, we may be unable to manage our
growth and our business would suffer.
Our success will depend, in part, on our ability to manufacture nanomaterials in significant quantities, with consistent quality and
in an efficient and timely manner. We expect to be able to expand our current facilities or obtain additional facilities in the future, and
outsource production aspects as necessary, available and appropriate, in order to respond to unexpected demand for existing
materials or for new materials that we do not currently make in quantity. Such unplanned demand, if it resulted in rapid expansion,
could create a situation where growth could become difficult to manage, which could cause us to lose potential revenue.
Our industry is experiencing rapid changes in technology. If we are unable to keep pace with these changes, our business
may not grow.
Rapid changes have occurred, and are likely to continue to occur, in the development of advanced materials and processes. Our
success will depend, in large part, upon our ability to keep pace with advanced materials technologies, industry standards and market
trends and to develop and introduce new and improved products on a timely basis. We expect to commit substantial resources to
develop our technologies and product applications and, in the future, to expand our commercial manufacturing capacity as volume
grows. Our development efforts may be rendered obsolete by the research efforts and technological advances of others and other
advanced materials may prove more advantageous than those we produce.
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The markets we serve are highly competitive, and if we are unable to compete effectively, then our business will not grow.
The advanced materials industry is new, rapidly evolving and intensely competitive, and we expect competition to intensify in the
future. The market for materials having the characteristics and potential uses of our nanomaterials is the subject of intensive research
and development efforts by both governmental entities and private enterprises around the world. We believe that the level of
competition will increase further as more product applications with significant commercial potential are developed. The nanomaterials
product applications that we are developing will compete directly with products incorporating both conventional and advanced
materials and technologies. While commercially available competitive products may not possess the same attributes as those we
offer, other companies may develop and introduce new or competitive products. Our competitors may succeed in developing or
marketing materials, technologies and better or less expensive products than the ones we offer. In addition, many of our potential
competitors have substantially greater financial and technical resources, and greater manufacturing and marketing capabilities than
we do. If we fail to provide nanomaterials at an acceptable price, or otherwise compete on a commodity basis with producers of
conventional materials, we will lose market share and revenue to our competitors.
We may need to raise additional capital in the future. If we are unable to obtain adequate funds, we may be required to delay,
scale-back or eliminate some of our manufacturing and marketing operations or we may need to obtain funds through
arrangements on less favorable terms or we may be required to sell key production equipment to our largest customer.
We expect to expend resources on research, development and product testing, and in expanding current capacity or capability
for new business. In addition, we may incur significant costs in preparing, filing, prosecuting, maintaining and enforcing our patents
and other proprietary rights. If necessary, we may seek funding through public or private financing and through contracts with
governmental entities or other companies. Additional financing may not be available on acceptable terms or at all. If we are unable to
obtain adequate funds, we may be required to delay, scale-back or eliminate some of our manufacturing and marketing operations or
we may need to obtain funds through arrangements on less favorable terms. If we obtain funding on unfavorable terms, we may be
required to relinquish rights to some of our intellectual property.
To raise additional funds in the future, we would likely sell our equity or debt securities or enter into loan agreements. To the
extent that we issue debt securities or enter into loan agreements, we may become subject to financial, operational and other
covenants that we must observe. In the event that we were to breach any of these covenants, then the amounts due under such
loans or debt securities could become immediately payable by us, which could significantly harm us. To the extent that we sell
additional shares of our equity securities, our stockholders may face economic dilution and dilution of their percentage of ownership.
We currently have a supply agreement with BASF that contains provisions which could potentially result in a mandatory license
of technology and/or sale of production equipment to BASF, providing capacity sufficient to meet BASF’s production needs. Under our
supply agreement with BASF, a “triggering event” also would occur:
•
•
if our earnings for a twelve month period ending with our most recently published quarterly financial statements are less
than zero and our cash, cash equivalents and certain investments are less than $1 million, or
upon the acceleration of any debt maturity having a principal amount of more than $10 million, or if we become insolvent
as defined in the supply agreement.
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In the event of a triggering event where we are required to sell to BASF production equipment providing capacity sufficient to
meet BASF’s production needs, the equipment would be sold at either 115% of the equipment’s net book value or at the greater of
30% of the original book value of such equipment (including any associated upgrades to it) or 115% of the equipment’s net book
value, depending on the particular equipment and contract.
If we were determined to have materially breached certain other provisions of our supply agreement with BASF, we similarly
could be subject to a “triggering event” that potentially could result in a mandatory license of technology and/or sale of certain
production equipment to the customer.
We believe that our current cash balances and other assets that might be monetized if and as needed, as well as unused
capacity that might be available for short-term borrowings, will be sufficient to avoid the first triggering event under the BASF supply
agreement for the foreseeable future, and because we are debt-free, the second triggering event is not currently applicable to us.
If a triggering event were to occur and BASF elected to proceed with the license and related sale mentioned above, 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 would be purchased and removed by the customer pursuant to this triggering event could
take in excess of 12 months. Any additional capital outlays required to rebuild capacity would probably be greater than the proceeds
from the purchase of the assets pursuant to our agreement with BASF. This potential shortfall might put us in a position where it
would be difficult to secure additional funding given what would then be an already tenuous cash position. Such an event would also
likely result in the loss of many of our key staff and line employees due to economic realities. We believe that our employees are a
critical component of our success and would be difficult to quickly replace and train. Upon the occurrence of such an event, we might
not be able to hire and retrain skilled employees given the stigma relating to such an event and its impact on us. We might elect to
effectively reduce our size and staffing to a point where we could remain a going concern in the near term.
We depend on key personnel, and their unplanned departure could harm our business.
Our success will depend, in large part, upon our ability to attract and retain highly qualified research and development,
management, manufacturing, marketing and sales personnel on favorable terms. Due to the specialized nature of our business, we
may have difficulty locating, hiring and retaining qualified personnel on favorable terms. If we were to lose the services of any of our
key executive officers or other key personnel, or if we are unable to attract and retain other skilled and experienced personnel on
acceptable terms in the future, or if we are unable to implement a succession plan to prepare qualified individuals to assume key roles
upon any loss of our key personnel, then our business, results of operations and financial condition could be materially harmed.
We face potential product liability risks which could result in significant costs that exceed our insurance coverage, damage
our reputation and harm our business.
We may be subject to product liability claims in the event that any of our products are alleged to be defective or cause harmful
effects to humans or physical environments. Because our nanomaterials are used in other companies’ products, to the extent our
customers become subject to suits relating to their products, these claims may also be asserted against us. We may incur significant
costs including payment of significant damages, in defending or settling product liability claims. Although we maintain insurance for
product liability claims, our coverage may not prove sufficient. Even if a suit is without merit and regardless of the outcome, claims
can divert management time and attention, injure our reputation and adversely affect demand for our nanomaterials.
We may be subject to periodic litigation and other regulatory proceedings or governmental investigations, which could
result in the unexpected expenditure of time and resources.
From time to time, we may be a defendant in lawsuits and regulatory proceedings or are the subject of governmental
investigations relating to our business. Due to the inherent uncertainties of litigation, regulatory proceedings and governmental
investigations, we cannot accurately predict the ultimate
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outcome of any such proceedings or investigations. An unfavorable outcome could have a material adverse impact on our business,
financial condition and results of operations. In addition, regardless of the outcome of any litigation, regulatory proceedings or
governmental investigations, such matters are expensive and will require that we devote substantial resources and executive time to
defend, thereby diverting management’s attention and resources that are needed to successfully run our business.
The disclosure requirements under the “conflict minerals” provisions of the Dodd-Frank Act could increase our costs and
limit the supply of certain metals used in our products and affect our reputation with customers and shareholders.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, as amended, or the Dodd-Frank Act, the SEC
adopted disclosure requirements, which became effective in 2014, for public companies using certain minerals and metals in their
products. These minerals and metals are generally referred to as “conflict minerals” regardless of their country of origin. We
anticipate commercial sales of one or more products containing these materials to begin during 2015 (energy application). Under
these rules, we are required to perform due diligence and disclose our efforts to prevent the sourcing of such conflict minerals from
the Democratic Republic of Congo or adjoining countries. As a result of these new regulations, we expect to incur, additional costs to
comply with the disclosure requirements, including costs related to determining the source of any of the conflict minerals used in our
products. These new requirements could also adversely affect the sourcing, availability and pricing of such minerals, and the pool of
suppliers who provide “conflict free” metals may be limited. As a result, we or our suppliers may not be able to obtain materials
necessary for production of our products in sufficient quantities or at competitive prices. In addition, we may not be able to sufficiently
verify the origins of all metals used in our products and confirm that they are “conflict free,” which may adversely affect our reputation.
We are subject to governmental regulations. The costs of compliance and liability for noncompliance with governmental
regulations could have a material adverse effect on our business, results of operations and financial condition.
Current and future laws and regulations may require us to make substantial expenditures for preventive or remedial action. Our
operations, business or assets may be materially and adversely affected by governmental interpretation and enforcement of current
or future environmental, health and safety laws and regulations. In addition, our coating and dispersion operations may pose a risk of
accidental contamination or injury. The damages in the event of an accident or the costs to prevent or remediate a related event
could exceed both the amount of our liability insurance and our resources or otherwise have a material adverse effect on our
business, results of operations and financial condition.
In addition, both of our facilities and all of our operations are subject to the plant and laboratory safety requirements of various
occupational safety and health laws. We believe we have complied in all material respects with governmental regulations applicable
to us. However, we may have to incur significant costs in defending or settling future claims of alleged violations of governmental
regulations and compliance with these regulations may materially restrict or impede our operations in the future. In addition, our
efforts to comply with or contest any regulatory actions may distract personnel or divert resources from other important initiatives.
The manufacture and use of certain products that contain our nanomaterials are subject to extensive governmental regulation,
including regulations promulgated by the FDA, the U.S. Environmental Protection Agency and OSHA. As a result, we are required to
adhere to the requirements of the regulations of governmental authorities in the United States and other countries, including
regulations issued to date pertaining to REACH. These regulations could increase our cost of doing business and may render some
potential markets prohibitively expensive. In addition, new rules or regulations could impose restrictions or prohibitions on certain
materials being marketed with or incorporated into certain applications, which could limit our ability to sell our nanomaterials in the
marketplace.
A large investor and his affiliates have significant influence on all matters requiring stockholder approval because they
beneficially own a large percentage of our common stock and they may vote their shares of common stock in ways with
which other stockholders disagree.
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As of December 31, 2014, Bradford T. Whitmore, together with his affiliates, Grace Brothers, Ltd. and Grace Investments, Ltd.,
beneficially owned approximately 38% of the outstanding shares of our common stock. The current ownership position of
Mr. Whitmore and his affiliates could delay, deter or prevent a change of control or adversely affect the price that investors might be
willing to pay in the future for shares of our common stock. The interests of Mr. Whitmore and his affiliates may differ from the
interests of our other stockholders and they may vote the common stock they beneficially own in ways with which our other
stockholders disagree. R. Janet Whitmore, one of our directors since 2003 and a stockholder, is the sister of Mr. Whitmore.
We have never paid dividends.
We currently intend to retain earnings, if any, to support our growth strategy. We do not anticipate paying dividends on our stock
in the foreseeable future.
Sales, or the availability for sale, of substantial amounts of our common stock could adversely affect the value of our
common stock.
No prediction can be made as to the effect, if any, that future sales of our common stock, or the availability of our common stock
for future sales, will have on the market price of our common stock. Sales of substantial amounts of our common stock in the public
market and the availability of shares for future sale could adversely affect the prevailing market price of our common stock. This in
turn could impair our future ability to raise capital through an offering of our equity securities.
There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock.
We are not restricted from issuing additional shares of common stock, including any securities that are convertible into or
exchangeable for, or that represent the right to receive, common stock. The market price of our common stock could decline as a
result of future sales of our common stock or the perception that such sales could occur.
Provisions in our certificate of incorporation, our by-laws, and Delaware law could make it more difficult for a third party to
acquire us, discourage a takeover, and adversely affect existing stockholders.
Our certificate of incorporation, our by-laws and the Delaware General Corporation Law (the “DGCL”) contain provisions that
may have the effect of making more difficult, delaying or deterring attempts by others to obtain control of our Company, even when
these attempts may be in the best interests of stockholders. These include provisions on our maintaining a classified Board of
Directors and limiting the stockholders’ powers to remove directors or take action by written consent instead of at a stockholders’
meeting. Our certificate of incorporation also authorizes our Board of Directors, without stockholder approval, to issue one or more
series of preferred stock, which could have voting and conversion rights that adversely affect or dilute the voting power of the holders
of common stock. The DGCL also imposes conditions on certain business combination transactions with “interested stockholders.”
These provisions and others that could be adopted in the future could deter unsolicited takeovers or delay or prevent changes in
our control or management, including transactions in which stockholders might otherwise receive a premium for their shares over
then current market prices. These provisions may also limit the ability of stockholders to approve transactions that they may deem to
be in their best interests.
Failure to protect the integrity and security of individually identifiable data of our customers, vendors and employees could
expose us to litigation and damage our reputation.
We receive and maintain certain personal, sensitive and confidential information about our customers, vendors and employees.
The collection and use of this information is regulated at the international, federal and state levels, and is subject to certain contractual
restrictions in third party
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contracts. Although we have implemented processes to collect and protect the integrity and security of this personal information, there
can be no assurance that this information will not be obtained by unauthorized persons, or collected or used inappropriately. If our
security and information systems or the systems of our employees or external business associates are compromised or our
employees or external business associates fail to comply with these laws and regulations and this information is obtained by
unauthorized persons, or collected or used inappropriately, it could negatively affect our reputation, as well as our operations and
financial results, and could result in litigation or regulatory action against us or the imposition of costs, fines or other penalties. As
privacy and information security laws and regulations change, we may incur additional costs to remain in compliance.
Item 1B. Unresolved Staff Comments
There are currently no open comments from the SEC Staff.
Item 2.
Properties
We operate two facilities in the Chicago suburbs - 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. We also lease a 9,000 square-foot offsite
warehouse in the vicinity of the Romeoville facility.
Our manufacturing operations in Burr Ridge are certified under ISO 9001:2008, and we believe that our manufacturing
operations are within the cGMP requirements of the FDA for products that require such compliance. Our 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 our headquarters, advanced engineering, manufacturing (including nanoparticle coating,
nanoparticle dispersion and pilot-scale manufacturing) and research and development with three applications development
laboratories. All Romeoville manufacturing processes are certified to ISO 9001:2008 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.
We lease our Romeoville and Burr Ridge facilities. During November 2014 we entered into a Lease Amendment amending
the then-current lease for the facility in Romeoville, Illinois, which, among other things, extended the term of such lease through
December 31, 2019 (with our option to extend the term for an additional five-year period). We renewed the Burr Ridge facility lease in
September 2010, extending the terms through September 2014 (we subsequently exercised our option to extend the term through
September 2016, and have the option to extend the term for one additional one-year period). During 2013 we also renewed the lease
for our offsite warehouse through August 2016.
We believe that our leased facilities provide sufficient capacity to fulfill current known customer demand as well as allow for
the creation of substantial additional space to enable expansion of key production processes. We believe additional facilities could be
obtained in the area at competitive prices if necessary to support growth. We believe that our capital expenditures made in 2014, and
projected for 2015, 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.
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Item 3.
Legal Proceedings
We are not a party to any pending legal proceedings or claims that we believe will result in a material adverse effect on our
business, financial condition, or operating results.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information; Holders; Dividends
Our common stock is traded on the OTCQB marketplace, operated by OTC Markets Group, since voluntarily delisting from
the NASDAQ Capital Market on March 20, 2012. Our symbol, “NANX”, did not change as a result of this venue transfer. The following
table sets forth, for the periods indicated, the range of high and low sale prices for our common stock on the OTCQB marketplace:
Fiscal year ended December 31, 2014:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal year ended December 31, 2013:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
$0.56
0.56
0.51
0.56
$0.59
0.63
0.61
0.55
$0.44
0.40
0.40
0.40
$0.40
0.28
0.40
0.26
On March 13, 2015, the last reported sale price of our common stock was $0.51 per share, and there were approximately
118 holders of record of our common stock.
We have never declared or paid any cash dividends on our common stock and do not currently anticipate paying any cash
dividends or other distributions on our common stock in the foreseeable future. We intend instead to retain any future earnings for
reinvestment in its business. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will
be dependent upon our financial condition, results of operations, capital requirements and such other factors deemed relevant by our
Board of Directors.
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 our 2010 Equity Compensation Plan (the “2010 Equity Plan”) on December 31, 2014. The 2010 Equity Plan replaced the 2004
Equity Compensation Plan (the “2004
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Plan”), the 2005 Non-Employee Director Restricted Stock Plan (as amended, the “2005 Plan”), and the Amended and Restated 2006
Stock Appreciation Rights Plan (the “2006 Plan”).
(a) Number of securities to
be issued upon exercise
of
outstanding options,
warrants and rights
(b) Weighted -
average exercise
price of
outstanding
options, warrants
and rights
(c) Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities
reflected
in column (a))
2,534,000
None
$
$
1.31
—
599,000
None
Plan Category
Plans Approved by
Shareholders
Plans Not Approved by
Shareholders
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 Part I, Item 1A, Risk Factors of
this Form 10-K, 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 1, Item 1, of this Form 10-K.
Overview
Nanophase is an advanced materials and applications developer and commercial manufacturer with an integrated family of
materials technologies. We produce engineered nano and sub-micron materials for use in a variety of diverse markets: personal care
including sunscreens, architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, medical
diagnostics, energy, and a variety of surface finishing technologies (polishing) applications, including optics. We target markets in
which we believe practical solutions may be found using our products. We work closely with current and potential customers in these
target markets to identify their material and performance requirements and market our materials to various end-use applications
manufacturers. Recently developed technologies have made certain new products possible and opened potential new markets. For
example, we have applied our skills at producing precisely defined nanomaterials to now create and sell larger, sub-micron material
products. Our focus is on customer need where we believe we have an advantage, as opposed to finding uses for one particular
technology. We expect growth in end-user (manufacturing customers, including customers of our customers) adoption in 2015 and
beyond. Our initiatives in targeted market areas are progressing at differing rates of speed, but we have been broadly moving through
testing and development cycles, and in a number of cases believe we are approaching first revenue or next stage revenue with
particular customers in the industries referenced above. For example, during 2014 we developed new solutions in the surface
finishing technologies (polishing) and energy-management areas that were presented to potential customers during the year and
have already resulted in accelerating order flows in the former and significant commercial testing in the latter. We believe that
successful introduction of our materials with manufacturers may lead to follow-on orders for other materials in their applications. We
expect that we will both work more deeply with current customers and attract additional customers, which should help us achieve
growth in these markets in 2015 and beyond.
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Critical Accounting Estimates
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s
carrying amount may not be recoverable. We conduct long-lived asset impairment analyses in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360-10-15, Impairment or Disposal of Long-Lived
Assets. ASC 360-10-15 requires us to group assets and liabilities at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities and evaluate the asset group against the sum of the undiscounted future
cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is
measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow
analysis or appraisals.
Certain assumptions are necessary to assess the impact of risks and uncertainties on the financial information, such as
cash flow projections, availability of capital if needed to support the ongoing operations of the business, and our expected compliance
with contractual commitments. Any changes in those plans or assumptions could have a material impact on our liquidity and financial
condition.
Results of Operations
Years Ended December 31, 2014 and 2013
Total revenue increased to $9,936,000 in 2014, compared to $9,590,000 in 2013. A substantial majority of our revenue for
each year is from our largest customers, in particular sales to our largest customer in personal care and sunscreen applications.
Product revenue, the primary component of our total revenue, increased to $9,880,000 in 2014, compared to $9,566,000 in 2013.
This increase was primarily due to increased revenue from our largest customer, as well as increased revenue from our customer in
medical diagnostics and increased revenues in our surface finishing (polishing) applications, offset in part by a reduction from one of
our two largest coatings customers. Revenue from our top three customers was approximately 72%, 6% and 5%, respectively, in
2014, compared to 72%, 3% and 6% for the same customers in 2013.
Other revenue increased to $56,000 in 2014, compared to $24,000 in 2013. The increase was primarily related to a fee-
based project that was completed and we do not expect to be repeated during the foreseeable future.
Cost of revenue generally includes costs associated with commercial production and customer development
arrangements. Cost of revenue increased to $7,105,000 in 2014, compared to $7,030,000 in 2013. The increase in cost of revenue
was primarily driven by the increase in product revenue volume, offset by a reduction in depreciation expense related to fully
depreciated equipment and efficiencies gained in the production system. We expect to continue new nanomaterial development,
primarily using our NanoArc® synthesis and dispersion technologies, for targeted applications and new markets during 2015 and
beyond. At current revenue levels we have generated a positive gross margin, though margins have been impeded by not having
enough revenue to efficiently absorb manufacturing overhead that is required to work with current customers and expected future
customers. We believe that our current fixed manufacturing cost structure is sufficient to support significantly higher levels of
production. The extent to which margins grow, as a percentage of total revenue, will be dependent upon revenue mix, revenue
volume, our ability to continue to cut costs and pass commodity market-driven raw materials increases on to customers. As product
revenue volume increases, this should result in our fixed manufacturing costs being more efficiently absorbed, leading to increased
margins. We expect to continue to focus on reducing controllable variable product manufacturing costs, with potential variability
related to the commodity metals markets, but may or may not continue to realize absolute dollar gross margin growth through 2015
and beyond, dependent upon the factors discussed above.
Research and development expense, which includes all expenses relating to the technology and advanced engineering
groups, primarily consists of costs associated with the development or acquisition
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of new product applications and coating formulations and the cost of enhancing our manufacturing processes. As an example, 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, including polishing products. Much of this work has led to several new products
and additional potential new products.
Having 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 are now working on several
related commercial opportunities using the same materials. We expect that this technique should enable us to scale to large quantity
commercial volumes. We also have an ongoing advanced engineering effort that is 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 $1,338,000 in 2014, compared to $1,679,000 in 2013. The primary
reasons for this decrease were reduced product development costs (salaries and materials) as we transferred new material solutions
in the energy sector from development to operations for commercial activity and wage and benefit savings associated with lower
staffing. We expect an approximately 10% increase in spending in this area during 2015 as we begin additional development projects
and add to our staff.
Selling, general and administrative expense decreased to $3,215,000 in 2014, compared to $3,372,000 in 2013. The net
decrease was primarily attributed to decreased salary and personnel costs, partially offset by increases in consulting fees and
marketing and selling expenses, all related to our stronger focus on a few, well-qualified initiatives and the advancement of
development projects into commercial applications. We expect 2015 costs to be approximately 8% higher and driven largely by the
selling function, depending on the status of certain initiatives.
Interest income was insignificant during both periods, as it decreased to $810 in 2014, compared to $1,501 in 2013. The
decrease was primarily due to small investment yields not offset by bank related fees and limited excess cash for investment
purposes.
Inflation
We believe inflation has not had a material effect on our operations or financial position. However, supplier price increases
and wage and benefit inflation, both of which represent a significant component of our costs of operations, may have a material effect
on our operations and financial position in 2015 and beyond if we are unable to pass through any increases under present contracts
or through to our markets in general.
Liquidity and Capital Resources
Our cash, cash equivalents and short-term investments amounted to $1,862,000 as of December 31, 2014, compared to
$3,306,000 on December 31, 2013. The net cash used in our operating activities for the year ended December 31, 2014 was
$1,181,000 compared to $522,000 for the year ended December 31, 2013. The 2014 figure includes approximately $400,000 of
working capital spending while the 2013 figure includes $800,000 in working capital benefit primarily related to the timing of
receivables collections and fourth quarter shipment dates. Net cash used in investing activities amounted to $239,000 for the year
ended December 31, 2014, compared to $276,000 for the year ended December 31, 2013. Capital expenditures amounted to
approximately $400,000 (including one new capital lease for $200,000) and $300,000 (with no new capital leases) for the years
ended December 31, 2014 and 2013, respectively. Net cash provided by financing activities was $6,000 in 2014, compared to a use
of $50,000 in cash used in financing activities in 2013.
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Our supply agreements with our largest customer, BASF, contain certain financial covenants which could potentially impact
our liquidity. The most restrictive financial covenants under these agreements require that we maintain a minimum of $1 million in
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 the customer’s potential right to transfer certain technology and equipment to that
customer at a contractually defined price. We had approximately $1.9 million in cash on December 31, 2014, and no debt.
We believe that cash from operations and cash on hand, in addition to unused borrowing capacity which might be used to
secure financing, will be adequate to fund our operating plans through 2015. Our actual future capital requirements in 2015 and
beyond will depend, however, on many factors, including customer acceptance of our current and potential nanomaterials and
product applications, continued progress in research and development activities and product testing programs, the magnitude of
these activities and programs, and the costs necessary to increase and expand our manufacturing capabilities and to market and sell
our 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 unplanned growth with existing customers. Depending on the
success of certain projects, we expect that capital spending relating to currently known capital needs for 2015 will be between
$300,000 and $450,000. If those projects are delayed or ultimately prove unsuccessful, we would expect our capital requirements to
be toward the lower end of the range. Similarly, substantial success in business development projects may cause the actual 2015
capital investment to exceed the top of this range.
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 shareholders. Such 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 agreement; or various other circumstances coming to pass that we currently do not
anticipate. The failure to have access to sufficient capital to fund our business plans may result in a curtailment or other change in
those plans.
On December 31, 2014, 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. If not utilized, the remaining carryforward will expire at various dates between January 1, 2018 and
December 31, 2034. 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. Changes in Illinois state tax law beginning in 2011 may impact net loss
carryforward duration and utilization on the state tax level.
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purposes of raising
capital, incurring debt or operating our business. We do not have any off-balance sheet arrangements or relationships with entities
that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of
capital resources.
As more fully described in Note 3 to our Financial Statements, referenced in Part II, Item 8 and set forth on page F-10 of
this Form 10-K, during July 2014 we entered into a new bank-issued letter of credit and promissory note for up to $30,000 supporting
our obligations under our facility lease agreement. No borrowings have been incurred under this promissory note.
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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 appear on pages F-1 through F-16 of
this Form 10-K.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We are responsible for establishing and maintaining disclosure controls and
procedures that are designed to ensure that information required to be disclosed by us in the reports filed by us under the Exchange
Act is: (a) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and
(b) accumulated and communicated to our management, including our principal executive and principal financial officers, to allow
timely decisions regarding required disclosures. It should be noted that in designing and evaluating our disclosure controls and
procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and that our management necessarily was required to apply its judgment
regarding the design of our disclosure controls and procedures. As of the end of the period covered by this report, we conducted an
evaluation, under the supervision (and with the participation) of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules
13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective at reaching that level of reasonable assurance.
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;
(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.
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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, 2014. In
making this assessment, management used the criteria established in Internal Control–Integrated Framework (2013) 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, 2014.
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 the 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, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over
financial reporting.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Set forth below is certain information regarding the directors of the Company.
DIRECTORS
Name
James A. Henderson
James A. McClung, Ph.D.
R. Janet Whitmore
Jess A. Jankowski
Richard W. Siegel, Ph.D.
W. Ed Tyler
George A. Vincent, III
Position with Company
Chairman of the Board of Directors
Director
Director
Age
80
77
60
49 President, Chief Executive Officer and Director
77
62
70
Director
Director
Director
Served as
Director
Since
2001
2000
2003
2009
1989
2011
2007
Term
Expires Class
2016
2016
2016
2017
2017
2017
2015
I
I
I
II
II
II
III
Mr. Henderson has served as a director of the Company since July 2001 and Chairman of the Board of Directors since
August 2011. 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
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public and international affairs from Princeton University and an M.B.A. from Harvard Business School. Mr. Henderson previously
served as a director of AT&T, Inc., International Paper, Rohm & Haas, Hillenbrand, Inc., Inland Steel, and Ryerson, Inc. He serves as
Chairman Emeritus of the Board of the Culver Education Foundation and is a past Chair of the Princeton University Board of
Trustees. We believe 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 our Board of Directors.
Mr. McClung has served as a director of the Company since February 2000, and is chairman of the Audit and Finance
Committee. Currently he is Chairman & CEO of Lismore International. He retired as a senior vice president and executive officer for
FMC Corporation (which has since been split into 3 public corporations: FMC Corp; FMC Technologies; JB Technologies), a leading
producer of a diversified portfolio of chemicals and machinery. He has over 30 years of global business development and 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. In addition to currently serving on
the Nanophase Board, he previously served on other corporate boards: Alticor (Amway); NCCI; Turtle Wax; Beaulieu Corp; and Hu-
Friedy. He was a founding member of the US-Russia Business Council and is active in other international business organizations,
such as Japan American Society, Chicago Council on Global Affairs, Executive Club of Chicago, and the Economic Club of Chicago.
He serves as a board trustee at Thunderbird School of Global Management and Board Emeritus Trustee for the College of Wooster
(Ohio). Mr. McClung earned a bachelor’s degree from College of Wooster (Ohio), a master’s degree from the University of Kansas,
and a doctorate from Michigan State University. We believe that Mr. McClung’s extensive global business development and worldwide
management experience, including experience in the specialty chemical industry, make him a valuable member of our 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.
We believe that Ms. Whitmore’s combination of global financial, engineering, and management expertise makes her a valuable
member of our Board of Directors.
Mr. Jankowski joined the board in February 2009. He has served as the Company’s President and Chief Executive Officer
since that time. After joining the Company in 1995, Mr. Jankowski held offices including Vice President of Finance, Chief Financial
Officer, Secretary, Treasurer and Controller. From 1990-1995 he served as Controller for two building and public works 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 served on the TechAmerica
Midwest Board from 2008 to 2012 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 Commercialization Association in 2009. Mr. Jankowski was also
appointed to the Romeoville Economic Development Commission and served from 2004 to 2010. 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. In 2009, Mr. Jankowski was appointed to the board of directors of the Northern Illinois
Technology Foundation, an economic development and technology transfer entity that is part of Northern Illinois University. We
believe 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 our Board of Directors.
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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 the period from 1995 until 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 the period from 2003
until 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. We
believe that Dr. Siegel’s value to our Board of Directors, as co-founder of the Company and inventor of our initial base technology, is
self-explanatory.
Mr. Tyler joined Nanophase as a director in January 2011. Mr. Tyler is Chairman of the Board of First Industrial Realty
Trust, where he has served as a director since 2000. He has also served in recent leadership positions at Ideapoint Ventures, an
early stage venture fund that focuses on nanotechnologies, and Industrial Nanotech, Inc., an entity which develops and sells
nanomaterial solutions. Previously, Mr. Tyler served as President and CEO of Moore Corporation Limited, a provider of data capture,
information design, marketing services, digital communications and print solutions. Mr. Tyler also worked for 24 years with R. R.
Donnelley & Sons Company in Chicago, beginning his career as an electronics engineer and ultimately serving as Executive Vice
President, Sector President, and Chief Technology Officer. He also was responsible for 77 Capital, an early stage venture capital
subsidiary of Donnelley, where he was directly responsible for investment decisions and worked closely with the portfolio companies
while participating on many of their boards. Mr. Tyler is a former Chairman of the American Red Cross (Mid-America Chapter) and
Campaign Chairman of the United Way of Lake County, and serves as a director for several small, private companies. He is a
member of the Board of Directors of Lake Forest Graduate School of Management, where he is also an adjunct faculty member. We
believe that Mr. Tyler’s extensive and diverse background in corporate leadership in technology-based companies, operations
experience, and business acumen makes him a valuable member of our Board of Directors.
Mr. Vincent has served as a director of the Company since November 2007. He is the retired Chairman and President 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 Arts degree in Chemistry from Dartmouth College and an M.B.A. degree from Harvard Business School. We believe
that Mr. Vincent’s extensive experience in the chemicals industry and management leadership makes him a valuable member of our
Board of Directors.
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Meetings of the Board and Committees — During the year ended December 31, 2014, the Board of Directors held four
meetings. No director missed more than one board or committee meeting held during 2014 (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 Committee and Nominating and Corporate Governance Committee. Each operates in accordance with its charter
(available on our website www.nanophase.com under the “Investor Relations” section). The members of the Audit and Finance
Committee are Mr. McClung (Chairman), Mr. Vincent and Dr. Siegel. The members of the Compensation Committee are Mr. Tyler
(Chairman), Mr. Henderson, and Mr. Vincent. The members of the Nominating and Corporate Governance Committee are
Mr. Henderson (Chairman), Mr. McClung, Dr. Siegel, Mr. Vincent, Mr. Tyler and Ms. Whitmore.
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, reviewing and approving all related party transactions, and reporting to the Board of Directors regarding all of
the foregoing. The Audit and Finance Committee held seven meetings during 2014. The Board of Directors has determined that
Mr. Vincent and Mr. McClung are the “audit committee financial experts” as described in applicable SEC rules. Each member of the
Audit and Finance Committee is independent, as defined in applicable SEC rules.
The Compensation Committee generally has responsibility for establishing executive officer and key employee
compensation, reviewing and establishing the Company’s executive compensation, evaluating our Outside Director compensation,
and reporting to the Board of Directors regarding the foregoing. The Compensation Committee also has responsibility for
administering the 2010 Equity Plan, determining the number of options, if any, to be granted to the Company’s employees and
consultants pursuant to the 2010 Equity Plan and reporting to the Board of Directors regarding the foregoing. Regarding most
compensation matters, including executive compensation, our management provides recommendations to the Compensation
Committee; however, the Compensation Committee does not delegate any of its functions to others in setting compensation. The
Compensation Committee does not currently utilize external consultants in executive or director compensation matters. The
Compensation Committee held two meetings during 2014. Each member of the Compensation Committee is independent, as defined
in applicable SEC rules, is a “non-employee director” as defined in Rule 16b-3 under the Exchange Act and is an “Outside Director”
as defined by the regulations under Section 162(m) of the Internal Revenue Code.
The Nominating and Corporate Governance Committee generally has responsibility for evaluating and nominating
candidates to serve on the Board of Directors, and for establishing and reviewing our Corporate Governance Principles. Five of the
six members of the Nominating and Corporate Governance Committee are independent, as defined in applicable SEC rules. The
Nominating and Corporate Governance Committee held two meetings during 2014.
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. Henderson serves as Chairman and Mr. Jankowski
serves as CEO. Mr. Henderson 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 is expected to benefit from that experience. The Board
of Directors believes that is the most appropriate structure for the Company at this time. Under our Corporate Governance Principles,
in the event that the Chairman of the Board is not an Outside Director, the Board will elect a lead independent director, who will have
the responsibility to
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Table of Contents
schedule and prepare agendas for meetings of the Outside Directors, communicate with the CEO, disseminate information to the rest
of the Board and raise issues with management on behalf of the Outside Directors when appropriate. The Board evaluates its
leadership structure on an ongoing basis and may change it as circumstances warrant.
The Board of Directors does not have a stated policy regarding diversity, although pursuant to our Corporate Governance
Principles, diversity is one factor that the Nominating and Corporate Governance Committee considers when recommending directors
for stockholder approval. 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.
EXECUTIVE OFFICERS
Set forth below is certain information regarding the executive officers of the Company as of the date of this Form 10-K who
are not identified above as directors.
Name
Age
Position
Frank Cesario
Kevin Cureton
Nancy Baldwin
45 Chief Financial Officer
53 Vice President – Sales, Marketing and Business Development
63 Vice President – Human Resources and Investor Relations
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 being a registered CPA in the state of Illinois.
Mr. Cureton joined the Company in November 2012 as Vice President of Sales, Marketing and Business Development.
His chemical industry experience has spanned more than twenty years with companies including twelve years at AMCOL, where one
of his roles was Managing Director of its nanomaterial-based Health & Beauty Solutions division. Prior to that, he made significant
contributions at Air Products, Borden, and other entities. He holds an undergraduate degree in chemical engineering from Carnegie
Mellon University and an M.B.A. from the University of Chicago.
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. In 2010, Ms. Baldwin was appointed to the Romeoville Economic Development Commission. She is currently an
active member of the Will County Three Rivers Manufacturing Human Resources Association.
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, and Cureton, and Ms. Baldwin, 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.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of 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 our equity securities to file reports of ownership and changes in ownership
with the SEC. Based solely on a review of the forms we have received and on written representations from certain reporting persons
that no such forms were required for them, we believe that during 2014 all Section 16 filing requirements applicable to our officers,
directors and 10% beneficial owners were complied with by such persons except as follows: a Form 4 filing related to a May 14, 2014
stock purchase by Ms. Whitmore was filed 3 days late, a Form 4 filing related to a May 20, 2014 stock purchase by Ms. Whitmore
was filed 1 day late, and a Form 4 filing related to a December 23, 2014 stock purchase by Mr. Henderson was filed 1 day late.
CODE OF ETHICS
We have adopted a Code of Business Conduct and Ethics (“Code of Ethics”) that applies to, among others, our principal
executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions. The
Code of Ethics is posted on our Internet website www.nanophase.com under the “Investor Relations” section. In the event that we
make any amendment to, or grants any waiver from, a provision of the Code of Ethics that requires disclosure under applicable SEC
rules, we intend to disclose such amendment or waiver on our website.
Item 11. Executive Compensation
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 (“Section 162(m)”). Section 162(m) provides that
compensation paid to the executive officers in excess of $1,000,000 cannot be deducted by the Company for Federal income tax
purposes unless, in general, (1) such compensation is performance-based, established by a committee of Outside Directors and
objective, and (2) the plan or agreement providing for such performance-based compensation has been approved in advance by
stockholders. The Compensation Committee may determine to adopt a compensation program that does not satisfy the conditions of
Section 162(m) if in its judgment, after considering the additional costs of not satisfying Section 162(m), it deems such program to be
appropriate.
The following table sets forth a summary of the compensation for each of our named executive officers in U.S. dollars for
the years ended December 31, 2014 and 2013.
SUMMARY COMPENSATION TABLE
Name and Principal Position
Jess Jankowski
Chief Executive Officer
Frank Cesario
Chief Financial Officer
Kevin Cureton
Vice President Sales, Marketing,
Option
Awards
($)
(2)
Non-Equity
Incentive Plan
Compensation
($)
(3)
Salary
($)
Bonus
($)
(1)
Year
2014 $281,242 $ — $37,728 $
2013 $291,174 $ — $29,428 $
2014 $160,685 $ — $16,768 $
2013 $164,351 $ — $12,752 $
2014 $173,718 $ — $31,440 $
Total
($)
All Other
Compensation
($)
(4)
20,120 $339,090
32,020 $352,622
1,224 $178,677
7,793 $184,896
19,936 $225,094
— $
— $
— $
— $
— $
Business Development
2013 $184,868 $ — $15,695 $
— $
26,718 $227,281
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Patrick Murray (5)
former Vice President Research and Development
Nancy Baldwin
Vice President Human Resources and Investor
2014 $176,235 $— $20,960 $— $20,082 $217,277
2013 $171,790 $— $15,695 $— $26,157 $213,642
2014 $158,632 $— $16,768 $— $ 8,468 $183,868
Relations
2013 $162,338 $— $12,752 $— $15,061 $190,151
(1) Any amounts earned during 2014 and 2013 would have been paid in early 2015 and 2014, respectively. Bonus compensation is
driven by Company performance against its goals as ultimately determined by the Compensation Committee of the Board of
Directors. A set of Company-level objectives is created at the beginning of the year, focusing on total revenue, revenue growth,
particular sources of revenue growth, business development achievements, cash flows and related targets, as well as a small
discretionary component designed to capture items not specifically listed. Each measure has varying levels of achievement,
which is reflected in the aggregate bonus measurement. The resulting bonus calculation is then applied to each individual’s
bonus potential as a percentage of salary. Because total revenue growth was only 4% during 2014 and did not increase during
2013, performance targets were not met and thus no bonus was awarded to any of the named executive officers for 2014 or
2013.
(2) The amounts in this column represent the aggregate fair value of awards granted in 2014 and 2013 fiscal years in accordance
with FASB ASC Topic 718. See Note 10 of the notes to our financial statements contained elsewhere in this Form 10-K for a
discussion of all assumptions made by us in determining the FASB ASC Topic 718 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) Dr. Murray resigned from his position as Vice President Research and Development effective December 5, 2014.
Employment Agreements
Effective as of August 12, 2009, we entered into an employment agreement with Jess Jankowski in connection with his
services as President and Chief Executive Officer. No term has been assigned to Mr. Jankowski’s employment agreement.
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 our Board of Directors (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 2010 Equity Plan. Mr. Jankowski will also be entitled to the employee benefits made available by us
generally to all of our other executive officers, subject to the terms and conditions of our employee benefit plan in effect from time to
time.
In the event Mr. Jankowski’s employment is terminated other than for “cause” (as such term is 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 our regular pay cycle for professional employees,
provided that Mr. Jankowski signs, without subsequent revocation, a separation agreement and release in a form acceptable to us. 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 2010 Equity 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.
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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 we cease 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 us, 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 2010 Equity Plan.
Effective as of June 24, 2009, we entered into an employment agreement with Mr. Frank Cesario providing for an annual
base salary of not less than $150,000. We 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 date of grant. No term has been assigned to Mr. Cesario’s employment agreement. As subsequently amended
during 2012, 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 26 weeks.
Effective as of November 28, 2012, we entered into an employment agreement with Mr. Kevin Cureton providing for an
annual base salary of not less than $190,000. No term has been assigned to Mr. Cureton’s employment agreement. If Mr. Cureton is
terminated other than for “cause” (as such term is defined in Mr. Cureton’s employment agreement), Mr. Cureton will receive
severance benefits in an amount equal to Mr. Cureton’s base salary for 26-39 weeks, with the amount beginning at 39 weeks if
terminated within the first year and declining annually to 26 weeks after three full years of employment. A signing bonus of $25,000
was paid upon Mr. Cureton’s acceptance of employment.
Effective as of September 25, 2008, we entered into an employment agreement with Ms. Nancy Baldwin providing for an
annual base salary of not less than $150,000. No term has been assigned to Ms. Baldwin’s employment agreement. If Ms. Baldwin is
terminated other than for “cause” (as such term is defined in Ms. Baldwin’s employment agreement), Ms. Baldwin will receive
severance benefits in an amount equal to Ms. Baldwin’s base salary for 26 weeks.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth information regarding each unexercised option held by each of our named executive officers
as of December 31, 2014. In addition to the named executive officers below, Dr. Murray had the right under the 2010 Equity Plan to
exercise 187,666 options that were vested as of his December 5, 2014 termination of employment for a period of 90 days thereafter.
OPTION AWARDS
STOCK AWARDS
EQUITY
INCENTIVE PLAN
AWARDS: NUMBER
OF SHARES OF
STOCK
THAT HAVE NOT
VESTED
(#)
EQUITY INCENTIVE
PLAN AWARDS: MARKET
VALUE
OF SHARES OF STOCK
THAT HAVE NOT
VESTED
($)
NAME
Jess Jankowski
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
(#)
EXERCISABLE
10,000
15,000
18,000
23,000
30,000
27,000
85,000
65,333
NUMBER OF SECURITIES
UNDERLYING
UNEXERCISED OPTIONS
(#)
UNEXERCISABLE
-0-
-0-
-0-
-0-
-0-
-0-
-0-
32,667 (1)
OPTION
EXERCISE
PRICE
($)
$ 6.030
$ 6.010
$ 4.480
$ 3.140
$ 1.020
$ 1.700
$ 1.260
$ 0.300
OPTION
EXPIRATION
DATE
09/27/15
09/27/16
11/06/17
05/12/18
05/04/19
05/03/20
05/02/21
08/07/22
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Frank Cesario
Kevin Cureton
Nancy Baldwin
30,000
-0-
60,000 (2)
90,000 (3)
20,000
20,000
31,000
27,333
13,000
-0-
34,667
16,000
-0-
7,500
9,000
15,000
30,000
27,000
31,000
27,333
13,000
-0-
-0-
-0-
-0-
13,667 (1)
26,000 (2)
40,000 (3)
17,333 (4)
32,000 (2)
75,000 (3)
-0-
-0-
-0-
-0-
-0-
-0-
13,667 (1)
26,000 (2)
40,000 (3)
$0.415
$0.520
$1.070
$1.700
$1.260
$0.300
$0.415
$0.520
$0.300
$0.415
$0.520
$6.010
$4.480
$3.140
$1.020
$1.700
$1.260
$0.300
$0.415
$0.520
02/14/23
02/13/24
06/24/19
05/03/20
05/02/21
08/07/22
02/14/23
02/13/24
11/28/22
02/14/23
02/13/24
09/27/16
11/06/17
05/12/18
05/04/19
05/03/20
05/02/21
08/07/22
02/14/23
02/13/24
—
—
—
—
—
—
—
—
(1) The grants expiring August 7, 2022 vest in three equal installments on August 7, 2013, 2014 and 2015.
(2) The grants expiring February 14, 2023 vest in three equal installments on February 14, 2014, 2015 and 2016.
(3) The grants expiring February 13, 2024 vest in three equal installments on February 13, 2015, 2016 and 2017.
(4) The grant expiring November 28, 2022 vests in three equal installments on November 28, 2013, 2014 and 2015.
POTENTIAL PAYMENT UPON TERMINATION OR CHANGE IN CONTROL
Severance Benefits. Please see discussion of severance benefits under “Employment Agreements” above.
Change in Control. Upon a change in control, the 2010 Equity Plan provides 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.
Payments. The following table quantifies the estimated payments that would be made in each covered circumstance to our
named executive officers:
NAME
Jess Jankowski
Frank Cesario
Kevin Cureton
Nancy Baldwin
TERMINATION BY COMPANY
WITHOUT CAUSE (1)
$
$
$
$
301,000
82,500
110,000
82,500
33
CHANGE IN
CONTROL (2)
3,267
$
1,367
$
1,733
$
1,367
$
INVOLUNTARY TERMINATION IN
CONNECTION WITH OR FOLLOWING
A CHANGE IN CONTROL (3)
$
$
$
$
602,000
82,500
110,000
82,500
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Table of Contents
(1) This amount represents the severance benefits that would be received under the executive officer’s employment
agreement as described had the executive officer been terminated by the Company without cause on December 31, 2014.
(2) This amount represents an estimate of the value that would have been received under the equity compensation plans had
a change in control occurred as of December 31, 2014 and the executive officers benefited from an acceleration of vesting
in the equity-based plan awards, as described above. For this purpose, the closing price of our common stock as of
December 31, 2014 was used. The amount represents the difference between the exercise price of any unvested options
and $0.40.
(3) This amount represents an estimate of the payments and value (in addition to any acceleration of vesting of equity-based
awards) that would have been received by the executive officers had the executive officers been terminated by the
Company without cause on December 31, 2014 in connection with a change in control on this date.
Upon his resignation effective December 5, 2014, Dr. Murray did not receive any severance benefits or any accelerated
vesting of his equity-based awards.
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 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 typically vests over three years, though may
accelerate upon termination from the Board of Directors.
In 2014, we paid quarterly compensation to the Chairman of the Board of Directors, for an annual rate of $19,250. We paid
quarterly compensation to the Chairman of the Audit and Finance Committee and to the Chairman of the Compensation Committee
totaling $15,750 to each. Each of our other Outside Directors was paid quarterly compensation for an annual total of $14,000 per
Outside Director for services performed in their capacity as a director.
During the first quarter of 2014, we granted our Outside Directors stock options totaling 69,000 shares under the 2010
Equity Plan, as follows: the Chairman of the Board of Directors received stock options to purchase 15,000 shares of our common
stock, the Chairman of the Audit and Finance Committee and the Chairman of the Compensation Committee each received stock
options to purchase 12,000 shares of our common stock and each of our other Outside Directors received stock options to purchase
10,000 shares of our common stock. Our Outside Directors had the following shares of our common stock underlying stock options
(both vested and unvested) outstanding as of December 31, 2014: Mr. Henderson: 55,000 shares; Mr. McClung: 48,000 shares;
Mr. Vincent: 54,000 shares; Ms. Whitmore: 40,000 shares; Mr. Siegel: 40,000 shares; and Mr. Tyler: 44,000 shares.
Prior to 2011, we granted our Outside Directors stock appreciation rights (SARs) totaling 106,750 shares, under our
Amended and Restated 2006 Stock Appreciation Rights Plan and subsequently under the 2010 Equity Plan. No SARs were granted
during 2013 or 2014. The SARs granted vested immediately and are payable upon the directors’ termination from the position of
director. The fair value of the liability for the 73,500 shares that were outstanding on December 31, 2014 was approximately $1,000.
In 2013, we paid quarterly compensation to the Chairman of the Board of Directors for an annual rate of $22,000. We paid
quarterly compensation to the Chairman of the Audit and Finance Committee and the Chairman of the Compensation Committee
totaling $18,000 each. We paid all other Outside Directors quarterly compensation amounting to an annual total of $16,000 per
Outside Director for services performed in their capacity as directors.
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In 2005, we adopted, and our stockholders approved, the 2005 Non-Employee Director Restricted Stock Plan (the “Director
Restricted Stock Plan”) which reserved 150,000 shares of our 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, we 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. We 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 our common stock during the deferral period. The Director Deferred Compensation
Plan is an unfunded, nonqualified deferred compensation arrangement. In 2009, all Outside Directors elected to defer receipts of all of
the restricted shares they became entitled to under the Director Restricted Stock Plan, which was consolidated into the 2010 Equity
Plan.
All Outside Directors are reimbursed for their reasonable out-of-pocket expenses incurred in attending board and
committee meetings.
2014 Outside Director Compensation
Fees Earned or
Paid in Cash
($)
19,250
15,750
15,750
14,000
14,000
14,000
$
$
$
$
$
$
Option Awards
($) (1)
$
$
$
$
$
$
6,288
5,030
5,030
4,192
4,192
4,192
Stock
Appreciation
Rights
($)
—
—
—
—
—
—
Total($)
$25,538
$20,780
$20,780
$18,192
$18,192
$18,192
Name
James A. Henderson
James A. McClung
W. Ed Tyler
R. Janet Whitmore
George A. Vincent, III
Dr. Richard Siegel
(1) The amounts in this column represent the aggregate fair value of awards granted in fiscal 2014 in accordance with FASB ASC
Topic 718. See Note 10 of the notes to our financial statements contained elsewhere in this Form 10-K for a discussion of all
assumptions made by us in determining the FASB ASC Topic 718 values.
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 13, 2015 certain information with respect to the beneficial ownership of our
common stock by (1) each person known by us to own beneficially more than 5% of the outstanding shares of common stock,
(2) each of our directors, (3) each of our named executive officers and (4) all of our executive officers and directors as a group.
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Name
Bradford T. Whitmore
Spurgeon Corporation
Grace Brothers, Ltd.
John H. Conley, Jr.
James A. Henderson
Richard W. Siegel, Ph.D.
James A. McClung
W. Ed Tyler
R. Janet Whitmore
George A. Vincent, III
Jess A. Jankowski
Kevin Cureton
Nancy Baldwin
Frank J. Cesario
All current executive officers and
directors as a group
(10 persons)
Number of Shares
Beneficially Owned (1)
Percent of Shares
Beneficially Owned
10,683,739 (2)
3,034,710 (3)
2,433,300 (4)
1,940,000 (5)
354,973 (6)
416,505 (7)
79,653 (8)
28,667 (9)
1,015,713 (10)
40,000 (11)
403,134 (12)
91,667 (13)
187,154 (14)
168,117 (15)
37.4%
10.6%
8.5%
6.8%
1.2%
1.5%
*
*
3.6%
*
1.4%
*
*
*
2,785,583 (16)
9.4%
Unless otherwise indicated below, the person’s address is the same as the address for the Company.
*
(1)
(2)
(3)
(4)
(5)
(6)
(7)
Denotes beneficial ownership of less than one percent.
Beneficial ownership is determined in accordance with the rules of the SEC. 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 2,433,300 shares of common stock held by Grace Brothers, Ltd., 601,410 shares of common stock held by Grace
Investments, Ltd. and 7,649,029 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 May 8, 2013 with the SEC. The
address of the stockholder is 1560 Sherman Avenue, Suite 900, Evanston, Illinois 60201.
Includes 2,433,300 shares of common stock held by Grace Brothers, Ltd. and 601,410 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
the Form 4 referenced above. The address of the stockholder is 1560 Sherman Avenue, Suite 900, Evanston, Illinois 60201.
This information is based on information reported on the Form 4 referenced above. The address of the stockholder is 1560
Sherman Avenue, Suite 900, Evanston, Illinois 60201.
This information is based on information reported on Schedule 13G filed with the SEC on February 5, 2014. The address of
the stockholder is 8 Rene Carr Street, Elkton, Maryland 21921.
Includes Mr. Henderson’s 35,000 shares of common stock issuable upon exercise of options exercisable currently or within 60
days of March 13, 2015.
Includes Dr. Siegel’s 26,667 shares of common stock issuable upon exercise of options exercisable currently or within 60 days
of March 13, 2015.
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(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
Includes Mr. McClung’s 32,000 shares of common stock issuable upon exercise of options exercisable currently or within 60
days of March 13, 2015, as well as 30,071 shares held by his spouse.
Includes Mr. Tyler’s 28,667 shares of common stock issuable upon exercise of options exercisable currently or within 60 days
of March 13, 2015.
Includes Ms. Whitmore’s 26,667 shares of common stock issuable upon exercise of options exercisable currently or within 60
days of March 13, 2015, as well as 32,675 shares held by her daughter.
Includes Mr. Vincent’s 40,000 shares of common stock issuable upon exercise of options exercisable currently or within 60
days of March 13, 2015.
Includes Mr. Jankowski’s 363,333 shares of common stock issuable upon exercise of options exercisable currently or within 60
days of March 13, 2015, as well as 1,000 shares held by his spouse.
Includes Mr. Cureton’s 91,667 shares of common stock issuable upon exercise of options exercisable currently or within 60
days of March 13, 2015.
Includes Ms. Baldwin’s 186,167 shares of common stock issuable upon exercise of options exercisable currently or within 60
days of March 13, 2015.
Includes Mr. Cesario’s 84,334 shares of common stock issuable upon exercise of options exercisable currently or within 60
days of March 13, 2015.
Includes all executive officers and directors as a group’s 914,500 shares of common stock issuable upon exercise of options
exercisable currently or within 60 days of March 13, 2015.
As of the date of his termination of employment, December 5, 2014, Dr. Murray held 1,503 shares of common stock. All options
not exercised within 90 days of his termination date were forfeited, so he had no outstanding stock options as of March 13,
2015.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Under our Audit and Finance Committee’s charter, the Audit and Finance Committee must review and approve all related
person transactions in which any executive officer, director, director nominee or more than 5% stockholder, or any of their immediate
family members, has a direct or indirect material interest. The Audit and Finance Committee may not approve a related person
transaction unless it is in, or not inconsistent with, our best interests and, where applicable, the terms of such transaction are at least
as favorable to us as could be obtained from an unrelated third party.
We did not engage in any transactions in which a related person had or will have a direct or indirect material interest during
2013 or 2014. No such transactions are currently contemplated.
Director Independence. The Board of Directors has determined that the following directors are “independent” as that term
is defined in the rules and regulations of the SEC and the NASDAQ Stock Market: Mr. McClung, Mr. Henderson, Dr. Siegel, Mr. Tyler
and Mr. Vincent. Though we are no longer listed on NASDAQ, our Board of Directors used the NASDAQ listing standards in making
its independence determinations.
The Board of Directors has established an Audit and Finance Committee, Compensation Committee and Nominating and
Corporate Governance Committee. The members of the Audit and
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Table of Contents
Finance Committee are Mr. McClung (Chairman), Mr. Vincent, and Dr. Siegel. The members of the Compensation Committee are
Mr. Tyler (Chairman), Mr. Henderson, and Mr. Vincent. The members of the Nominating and Corporate Governance Committee are
Mr. Henderson (Chairman), Mr. McClung, Dr. Siegel, Mr. Vincent, Mr. Tyler and Ms. Whitmore.
Item 14. Principal Accountant Fees and Services
Audit Fees. The aggregate amount billed by our principal accountant, McGladrey LLP, for audit services performed for the
fiscal years ended December 31, 2014 and 2013 was approximately $149,000 and $145,000, respectively. Audit services include the
auditing of financial statements and quarterly reviews.
Audit Related Fees. Total audit related fees billed by McGladrey LLP was approximately none and $4,000 for the years
ended December 31, 2014 and 2013, respectively, which may include costs incurred for reviews of registration statements,
assistance with Staff comment letters, and consultation on various accounting matters in support of our financial statements.
Tax Fees. There were no fees billed by our principal accountant for tax related services for the fiscal years ended
December 31, 2014 and 2013.
All Other Fees. Other than those fees described above, during the fiscal years ended December 31, 2014 and 2013, there
were no other fees billed for services performed by our principal accountant.
All of the fees described above were approved by our Audit and Finance Committee.
Audit and Finance Committee Pre-Approval Policies and Procedures. Nanophase’s Audit and Finance Committee pre-
approves the audit and non-audit services performed by McGladrey LLP, our principal accountants, in order to assure that the
provision of such services does not impair McGladrey LLP’s independence. Unless a type of service to be provided by McGladrey
LLP has received general pre-approval, it will require specific pre-approval by the Audit and Finance Committee. In addition, any
proposed services exceeding pre-approval cost levels or budgeted amounts will require specific pre-approval by the Audit and
Finance Committee.
The term of any pre-approval is 12 months from the date of pre-approval, unless the Audit and Finance Committee
specifically provides for a different period. The Audit and Finance 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 and Finance Committee.
In the event the Chairman exercises such delegated authority, he shall report such pre-approval decisions to the Audit and Finance
Committee at its next scheduled meeting. The Audit and Finance Committee does not delegate its responsibilities to pre-approve
services performed by the independent auditor to management.
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Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Form 10-K:
PART IV
1.
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 LLP, Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2014 and 2013
Statements of Operations for the Years Ended December 31, 2014 and 2013
Statements of Stockholders’ Equity for the Years Ended December 31, 2014 and 2013
Statements of Cash Flows for the Years Ended December 31, 2014 and 2013
Notes to Financial Statements
2.
A list of exhibits required to be filed as part of this Form 10-K is set forth in the Exhibit Index beginning on page E-1 of this
Form 10-K, which immediately precedes such exhibits, and is incorporated herein by reference.
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NANOPHASE TECHNOLOGIES CORPORATION
INDEX TO FINANCIAL STATEMENTS
Report of McGladrey LLP, Independent Registered Public Accounting Firm
Balance Sheets as of December 31, 2014 and 2013
Statements of Operations for the years ended December 31, 2014 and 2013
Statements of Stockholders’ Equity for the years ended December 31, 2014 and 2013
Statements of Cash Flows for the years ended December 31, 2014 and 2013
Notes to the Financial Statements
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Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Nanophase Technologies Corporation
We have audited the accompanying balance sheets of Nanophase Technologies Corporation as of December 31, 2014 and 2013,
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. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, 2014 and 2013, and the results of its operations and its cash flows for the years then
ended, in conformity with U.S. generally accepted accounting principles.
/s/ McGladrey LLP
Schaumburg, Illinois
March 27, 2015
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NANOPHASE TECHNOLOGIES CORPORATION
BALANCE SHEETS
Current assets:
ASSETS
Cash and cash equivalents
Investments
Trade accounts receivable, less allowance for doubtful accounts of $6 on
December 31, 2014 and 2013
Other receivables
Inventories, net
Prepaid expenses and other current assets
Total current assets
Equipment and leasehold improvements, net
Other assets, net
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of capital lease obligations
Accounts payable
Accrued expenses
Total current liabilities
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, 35,000,000 shares authorized;
28,516,163 and 28,481,496 shares issued and outstanding on
December 31, 2014 and December 31, 2013, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ equity
(in thousands except share and per share data)
As of December 31,
2014
2013
$
$
$
$
1,862
—
388
—
950
367
3,567
2,138
25
5,730
70
493
413
976
121
621
166
908
—
—
285
95,966
(92,405)
3,846
5,730
$
$
$
$
3,276
30
52
1
976
202
4,537
2,464
27
7,028
31
503
323
857
10
633
160
803
—
—
285
95,761
(90,678)
5,368
7,028
(See accompanying Notes to Financial Statements)
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Revenue:
Product revenue
Other revenue
Total revenue
Operating expense:
Cost of revenue
Gross profit
Research and development expense
Selling, general and administrative expense
Loss from operations
Interest income
Interest expense
Other, net
Loss before provision for income taxes
Provision for income taxes
Net loss
Net loss per share-basic and diluted
NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF OPERATIONS
(in thousands except share and per share data)
Years ended December 31,
2014
2013
$
$
$
9,880
56
9,936
7,105
2,831
1,338
3,215
(1,722)
1
(6)
—
(1,727)
—
(1,727)
(0.06)
$
9,566
24
9,590
7,030
2,560
1,679
3,372
(2,491)
2
(12)
23
(2,478)
—
(2,478)
(0.09)
Weighted average number of basic and diluted common shares outstanding
28,482,256
28,469,393
(See accompanying Notes to Financial Statements)
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NANOPHASE TECHNOLOGIES CORPORATION
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands except share data)
Preferred Stock
Common Stock
Additional
Balance on December 31, 2012
Description
Stock option exercises
Stock-based compensation
Net loss for the year ended December 31,
Shares Amount
— $ — 28,458,162 $ 285 $ 95,512 $
Amount
Shares
Paid-in
Capital
Accumulated
Deficit
(88,200) $ 7,597
Total
—
—
—
—
23,334
—
—
—
7
242
—
—
7
242
2013
—
—
—
—
—
(2,478)
(2,478)
Balance on December 31, 2013
— $ —
28,481,496 $ 285 $ 95,761 $
(90,678) $ 5,368
Stock option exercises
Stock-based compensation
—
—
—
—
34,667
—
—
—
10
195
—
—
10
195
Net loss for the year ended December 31,
2014
—
—
—
—
—
(1,727)
(1,727)
Balance on December 31, 2014
— $ —
28,516,163 $ 285 $ 95,966 $
(92,405) $ 3,846
(See accompanying Notes to Financial Statements)
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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
Share-based compensation
Gain on disposal of equipment
Allowance for excess inventory quantities
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:
Proceeds from disposal of equipment
Acquisition of equipment and leasehold improvements
Payment of accounts payable incurred for the purchase of equipment and leasehold improvements
Net cash used in investing activities
Financing activities:
Principal payment on capital leases
Proceeds from sale of investment
Proceeds from exercise of stock options
Net cash provided by (used in) financing activities
Decrease 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
Capital lease obligations incurred in the purchase of equipment
(See accompanying Notes to Financial Statements)
F-6
(in thousands)
Years ended December 31,
2014
2013
$
(1,727) $
(2,478)
742
188
—
—
(336)
1
26
(167)
5
87
(1,181)
—
(216)
(23)
(239)
(34)
30
10
6
(1,414)
3,276
875
242
(23)
52
979
26
111
39
(180)
(165)
(522)
23
(279)
(20)
(276)
(57)
—
7
(50)
(848)
4,124
$
$
$
$
1,862
$
3,276
6
$
12
8
184
$
$
23
—
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NANOPHASE TECHNOLOGIES CORPORATION
NOTES TO FINANCIAL STATEMENTS
(In thousands, except share and per share data or as otherwise noted herein)
(1) Description of Business
Nanophase is an advanced materials and applications developer and commercial manufacturer with an integrated family of
nanomaterial and related technologies. We produce engineered nano and larger, sub-micron, materials for use in a variety of diverse
markets: personal care including sunscreens, architectural coatings, industrial coating applications, abrasion-resistant additives,
plastics additives, medical diagnostics, energy, and a variety of surface finishing technologies (polishing) applications. We target
markets in which we believe practical solutions may be found using our products. We work closely with current and potential
customers in these target markets to identify their material and performance requirements and market our materials to various end-
use applications manufacturers. Recently developed technologies have made certain new products possible and opened potential
new markets. We recently developed new material solutions in surface finishing technologies (polishing) and energy-management
areas that have been taken to potential customers, and for which we are experiencing accelerating revenue growth (former) and are
in the process of commercial testing and qualification (latter). Although our primary strategic focus has been the North American
market, we currently sell material to customers overseas and have been working to expand our reach within foreign markets. The
Company was incorporated in Illinois on November 25, 1989, and became a Delaware corporation during November 1997. Our
common stock trades on the OTCQB marketplace under the symbol NANX.
While product sales comprise the majority of our revenue, we also recognize revenue from other sources from time to time.
These activities are not expected to drive the long-term growth of the business. For this reason, we classify such revenue as “other
revenue” in our Statements of Operations, as it does not represent revenue directly from our nanocrystalline materials.
(2) Summary of Significant Accounting Policies
Use of Estimates and Risks and Uncertainties
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. Certain assumptions are also
necessary to assess the impact of risks and uncertainties on the financial statements, such as cash flow projections, availability of
capital if needed to support the ongoing operations of the business, and our expected compliance with contractual commitments.
These risks and uncertainties are further discussed in Note 12. Any changes in these assumptions or business plans could have a
material impact on the financial statements.
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).
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. Our typical credit terms are
thirty days from shipment and invoicing.
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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 (3-13 years). Depreciation expense for leased assets is included with depreciation
expense for owned assets. From time to time we have self-constructed assets. These assets are stated at cost plus the capitalization
of labor and are depreciated over an estimated useful life (7-10 years) using the straight-line method.
Long Lived Assets
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s
carrying amount may not be recoverable. We conduct long-lived asset impairment analyses in accordance with ASC 360-10-15,
Impairment or Disposal of Long-Lived Assets. ASC 360-10-15 requires us to group assets and liabilities at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other assets and liabilities and evaluate the asset group against
the sum of the undiscounted future cash flows. If the undiscounted cash flows do not indicate the carrying amount of the asset is
recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value
based on discounted cash flow analysis or appraisals.
Asset Retirement Obligations
In connection with our leased facilities, we are required to remove certain leasehold improvements upon termination of our
occupancy. We follow the provisions of the FASB issued ASC 410-20, Asset Retirement Obligations, under which we recognize a
liability for the fair value of these 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
F-8
2014
$160
6
—
$166
2013
$154
6
—
$160
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Financial Instruments
We follow ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. The fair value framework requires the categorization
of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides
the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued
expenses, along with the promissory note with no related borrowings described in Note 3. The fair values of all financial instruments
were not materially different from their carrying values.
There were no financial assets or liabilities adjusted to fair value on December 31, 2014 and 2013.
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
Other revenue may include revenue from technology license fees and paid development projects. Technology license fees
and paid development projects 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.
Shipping and handling costs are included in other revenue when products are shipped and invoiced to the customer. We
include 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
We account 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
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Table of Contents
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. We file tax returns in all appropriate jurisdictions, which includes a federal tax
return and Illinois state tax return. Open tax years for both jurisdictions are 2011 to 2013, which statutes expire in 2015 to 2017,
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, 2014 and 2013, we had no liability for unrecognized tax benefits.
Earnings Per Share
Net loss per common share is computed based upon the weighted average number of common shares outstanding. No
equivalent shares are included in 2014 and 2013 because the effect of these securities is anti-dilutive, and because the impact on a
per share basis would not be meaningful.
New Accounting Pronouncement
During May 2014, the FASB issued ASU No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers, which
supersedes nearly all existing revenue recognition guidance under U.S. generally accepted accounting principles. The new standard
requires a company to recognize revenue when it transfers goods or services to customers in an amount that reflects the
consideration that the company expects to receive for those goods or services. Additionally, the guidance requires certain disclosures
designed to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue and cash
flows arising from contracts with customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15,
2016, including interim periods within that reporting period, which is our first quarter of 2017. Early application is not permitted. The
new standard allows application either retrospectively to each prior reporting period presented or retrospectively as a cumulative-
effect adjustment as of the date of adoption. We are evaluating the effect that ASU 2014-09 will have on our financial statements and
related disclosures, but do not expect it to have a material impact on our financial position, results of operations, or cash flows.
(3)
Investments and Outstanding Note
Investments on December 31, 2013 were comprised of certificates of deposit in the amount of $30, pledged as collateral
for our rent and restricted as to withdrawal or usage under our facility lease agreement. During July 2014 we entered into a new
bank-issued letter of credit and related promissory note for up to $30 in borrowings to support our obligations under our facility lease
agreement. We then sold our certificates of deposit. No borrowings have been incurred under this promissory note. Should any
borrowings occur in the future, the interest rate would be the prime rate plus 1%, with the bank having the right to “set off” or apply
unpaid balances against our checking account if we fail to meet our obligations under any borrowings under the note. It is our
intention to renew this note annually, for as long as we need to pursuant to the terms of our facility lease agreement. Because there
were no amounts outstanding on the note at any time during 2014, we have recorded no related liability on our balance sheet.
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(4)
Inventories
Inventories consist of the following:
Raw materials
Finished goods
Allowance for excess quantities
(5) 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,
2014
$ 173
829
2013
$ 132
896
1,002
(52)
$ 950
1,028
(52)
$ 976
As of December 31,
2013
2014
$ 13,737
752
110
4,749
45
$ 14,095
766
110
4,760
70
19,801
(17,663)
19,393
(16,929)
$ 2,138
$ 2,464
Depreciation expense was $734 and $866, for the years ended December 31, 2014 and 2013, respectively.
(6) Lease Commitments
We lease our operating facilities under operating leases. During November 2014 we entered into a Second Lease
Amendment related to our primary facility in Romeoville, Illinois, extending the term of the lease through December 31, 2019 (with our
option to extend the term for an additional five-year period). The current monthly rent on this lease amounts to $29.
We lease our Burr Ridge, Illinois, facility under an agreement most recently extended during September 2010, which
extended the term through September 2014 (we have since exercised options to extend the term through September 2016 and have
the option to extend the term for an additional one-year period). The current monthly rent on this lease amounts to $13. During
August of 2013 we also renewed our lease for our offsite warehouse in Romeoville, Illinois, through August 2016. The current monthly
rent on this lease amounts to $5.
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:
2015
2016
2017
2018
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588
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2019
Thereafter
Total minimum payments required:
444
2,165
$4,753
Rent expense, including real estate taxes, under these leases amounted to $658 and $653, for the years ended
December 31, 2014 and 2013, respectively.
On December 31, 2014 equipment under capital leases had a cost of $272 with accumulated depreciation of $29. Principal
and interest payments are due monthly under the capital lease obligations through November 2017. We entered into one new capital
lease during November 2014 for $184 and a three year duration (through November 2017). We did not enter into any capital leases
during 2013.
(7) Accrued Expenses
Accrued expenses consist of the following:
Accrued payroll and related expenses
Other
As of December 31,
2014
$ 259
154
2013
$ 240
83
$ 413
$ 323
(8)
Income Taxes
We have 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, 2014 and 2013 is as follows:
Income tax credit at statutory rates
Nondeductible expenses
State income tax, net of federal benefits
Other
Increase in valuation allowance
2014
$(587)
3
(88)
3
669
2013
$(842)
2
(127)
4
963
$ —
$ —
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 our deferred
income taxes consist of the following:
Deferred tax assets:
Net operating loss carryforwards
Capital loss carryforwards
Inventory and other allowances
Charitable contribution carryforwards
Excess (tax) book depreciation
Excess (tax) book amortization
F-12
As of December 31,
2014
2013
$31,252
—
29
6
601
62
$30,765
109
31
5
492
62
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Share-based compensation
Other accrued costs
Total deferred tax assets
Less: Valuation allowance
Deferred income taxes
1,326
279
33,555
(33,555)
$ —
1,253
279
32,996
(32,996)
$ —
The valuation allowance increased approximately $0.7 million and $1.0 million for the years ended December 31, 2014 and
2013, respectively (with no expiring net operating loss carryforwards and credits for either period; a capital loss carryforward expired
during 2014) due principally to the change 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. Under the Internal Revenue Code, certain ownership changes,
including the prior issuance of preferred stock and our public offering of common stock, may subject us to annual limitations on the
utilization of our net operating loss carryforward. As of December 31, 2014, the amounts subject to limitations has not yet been
determined.
We have net operating loss carryforwards for tax purposes of approximately $80 million on December 31, 2014, which expire
between 2018 and 2034. We had capital loss carryforwards for tax purposes of approximately $0.3 million on December 31, 2013
which expired in 2014.
During 2011, the state of Illinois suspended the use of net operating loss carryforwards for a four year period beginning 2011,
extending the term of all net loss carryforwards by a corresponding four years.
(9) Capital Stock
As of December 31, 2014 and 2013, we had 24,088 authorized but unissued shares of preferred stock. In addition, as of
December 31, 2014, 599,000 authorized but unissued shares of common stock have been reserved for future issuance upon exercise
of stock options.
(10) Stock Options and Stock Grants
We have entered into stock option agreements with certain officers, employees and directors. The stock options generally
expire ten years from the date of grant.
Employee Stock Options
We follow FASB ASC Topic 718, Share-Based Payments, in which compensation expense is recognized only for share-
based payments expected to vest. We recognized compensation expense related to stock options of $195 and $242 for the years
ended December 31, 2014 and 2013, respectively.
As of December 31, 2014, there was approximately $229 of total unrecognized compensation cost related to nonvested
share-based compensation arrangements granted under our stock option plans. That cost is expected to be recognized over a
remaining weighted-average period of 1.7 years.
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Table of Contents
The following table illustrates the various assumptions used to calculate the Black-Scholes option pricing model for options
granted 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,
2013
2014
2.0%
0.00%
1.9%
0.00%
7 years
7 years
95%
95%
$
0.42
$
0.34
We use the Black-Scholes option pricing model to determine the fair value of stock based compensation. The Black-
Scholes model requires us 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 our common stock price over the expected term and
estimated forfeitures. Expected price volatility of the fiscal 2014 and 2013 grants is based on the daily market rate changes of our
stock going back to January 1, 2006. The shares granted in fiscal 2014 and 2013 had a vesting period of three years and a
contractual life of 10 years. Forfeitures were estimated at 4.0% and 4.4% for the years ended December 31, 2014 and 2013, based
on our 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 our common stock, which is assumed to be zero since we do
not pay dividends and have 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 statement of operations. We
recognize stock based compensation expense on a straight-line basis.
The following table summarizes the option activity for our employees and directors during the year ended December 31,
2014:
Options
Outstanding on January 1, 2014
Granted
Exercised
Forfeited or expired
Outstanding on December 31, 2014
Exercisable on December 31, 2014
Shares available for grant
Weighted
Average
Remaining
Contractual
Term
(years)
Aggregate
Intrinsic
Value
Weighted
Average
Exercise
Price per
Share
$ 1.30
$ 0.52
$ 0.30
$ 1.20
(rounded)
Shares
2,094,000
568,000
(35,000)
(187,000)
2,440,000
$ 1.15
1,500,000
$ 1.58
6.5
5.2
$
$
45
30
599,000
The aggregate intrinsic value in the table above is based on our closing stock price of $0.40 on the last business day for
the year ended December 31, 2014.
During the years ended December 31, 2014 and 2013, the total intrinsic value of our stock options exercised was $4 and
$3, respectively. Cash received for option exercises was $10 and $7 during the years ended December 31, 2014 and 2013,
respectively. We had approximately 35,000 options exercised
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during the year ended December 31, 2014, compared to 23,000 in 2013. Based on our election of the “with and without” approach,
no realized tax benefits from stock options were recognized for the years ended December 31, 2014 and 2013.
Stock Appreciation Rights
Prior to 2011, we granted our Outside Directors stock appreciation rights (SARs) under our Amended and Restated 2006
Stock Appreciation Rights Plan and subsequently under our 2010 Equity Plan. The change in fair value of the awards granted during
prior years is included in non-cash compensation expense for the years ended December 31, 2014 and 2013. The SARs 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, 2014 and 2013, and adjusted to fair value each
reporting period. The fair value of the liability on December 31, 2014 and 2013 was $1 and $8, respectively.
Restricted Stock
As of both December 31, 2014 and 2013, we did not have any unvested non-director restricted stock or performance
shares outstanding.
(11) 401(k) Profit-Sharing Plan
We have a 401(k) profit-sharing plan covering substantially all employees who meet defined service requirements. We
have made in the past, and may make in the future, maximum contributions of 100% of the first 3% and 50% of the next 2% of the
participant’s salary. Our contributions under this plan were $109 for the year ended December 31, 2013. We made changes to our
benefits program and, as part of those changes, discontinued these Company contributions effective January 2014, which resulted in
no contributions made during 2014.
(12) Significant Customers and Contingencies
Revenue from three customers constituted approximately 72%, 6% and 5%, respectively, of our 2014 revenue. Amounts
included in accounts receivable on December 31, 2014 relating to these three customers were approximately $54, none and $47,
respectively. Revenue from these three customers constituted approximately 72%, 3% and 6%, respectively, of our 2013 revenue.
Amounts included in accounts receivable on December 31, 2013 relating to these three customers were approximately ($308) –
customer payments in excess of outstanding volume purchase rebate, none and $46, respectively. The loss of one of these
significant customers or the failure to attract new customers could have a material adverse effect on our business, results of
operations and financial condition.
We currently have exclusive supply agreements with BASF Corporation (“BASF”), our largest customer, that have
contingencies outlined which could potentially result in the license of technology and/or the sale of production equipment from the
Company to the customer intended to provide capacity sufficient to meet the customer’s production needs. This outcome may occur if
we fail to meet certain performance requirements, certain other obligations and/or certain financial condition covenants. The financial
condition covenants in one of our supply agreements with BASF “trigger” a technology transfer right (license and equipment sale at
BASF’s option) in the event (a) that earnings for the twelve month period ending with our most recently published quarterly financial
statements are less than zero and our cash, cash equivalents and certain investments are less than $1 million, or (b) of an
acceleration of any debt maturity having a principal amount of more than $10 million. Our supply agreements with BASF also “trigger”
a technology transfer right in the event of our insolvency, as further defined within the agreements. In the event of an equipment sale,
upon incurring a triggering event, the equipment would be sold to the customer at either 115% of the equipment’s net book value or
the greater of 30% of the original book value of such equipment, and any associated upgrades to it, or 115% of the equipment’s net
book value, depending on the equipment and related products.
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We believe that we have sufficient cash, (See Liquidity and Capital Resources in Management’s Discussion and Analysis
in Part II, Item 7 of this Form 10-K for a further discussion) to operate our business during 2015. If a triggering event were to occur
and BASF elected to proceed with the license and related equipment sale mentioned above, we would receive royalty payments from
this customer for products sold using our technology; however, we would lose both significant revenue and the ability to generate
significant revenue to replace that which was lost in the near term. Replacement of necessary equipment that could be purchased
and removed by the customer pursuant to this triggering event could take in excess of twelve months. Any additional capital outlays
required to rebuild capacity would probably be greater than the proceeds from the purchase of the assets as dictated by our
agreement with the customer. Similar consequences would occur if we were determined to have materially breached certain other
provisions of the supply agreement with BASF. Any such event would also likely result in the loss of many of our key staff and line
employees due to economic realities. We believe that our employees are a critical component of our success and could be difficult to
replace them quickly. Given the occurrence of any such event, we might not be able to hire and retain skilled employees given the
stigma relating to such an event and its impact on us. Finally, any shortfall in capital needed to operate the business as management
intends, including with respect to avoiding this triggering event as described above, may result in a curtailment of certain activities or
anticipated investments.
(13) Business Segmentation and Geographical Distribution
Revenue from international sources approximated $906 and $915 for the years ended December 31, 2014 and 2013,
respectively. As part of our revenue from international sources, we recognized approximately $760 in product revenue from a number
of German companies, in the aggregate, for the year ended December 31, 2014. Revenue from these same international sources
approximated $894 for the year ended December 31, 2013.
Our operations comprise a single business segment and all of our long-lived assets are located within the United States.
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SIGNATURES
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 27th day of March, 2015.
NANOPHASE TECHNOLOGIES CORPORATION
By: /s/ Jess A. Jankowski
Jess A. Jankowski
President and Chief Executive Officer
By: /s/ Frank J. Cesario
Frank J. 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 27th day of March, 2015.
Signature
/s/ Jess A. Jankowski
Jess A. Jankowski
/s/ Frank J. Cesario
Frank J. Cesario
/s/ James A. Henderson
James A. Henderson
/s/ George A. Vincent, III
George A. Vincent, III
/s/ James A. McClung
James A. McClung
/s/ Richard W. Siegel
Richard W. Siegel
/s/ W. Ed Tyler
W. Ed Tyler
/s/ R. Janet Whitmore
R. Janet Whitmore
President, Chief Executive Officer (principal executive officer) and Director
Title
Chief Financial Officer (principal financial and chief accounting officer)
Chairman of the Board of Directors
Director
Director
Director
Director
Director
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EXHIBIT INDEX
Exhibit
Number
2
3(i).1
3(i).2
3(i).3
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”), SEC File No. 000-22333.
Certificate of Incorporation of the Company, incorporated by reference to Exhibit 3.1 to the 1997 10-K, SEC File No.
000-22333.
First Amendment to the Certificate of Incorporation of the Company 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, SEC File No. 000-22333.
Second Amendment to the Certificate of Incorporation of the Company dated August 23, 2010, incorporated by
reference to Exhibit A of the Company’s Definitive Proxy Statement on Form DEF14A filed July 9, 2010.
3(ii).1
Bylaws of the Company, incorporated by reference to Exhibit 3.2 to the 1997 10-K, SEC File No. 000-22333.
4.1
4.2
4.3
4.4
4.5
4.6
4.7
10.1
Specimen stock certificate representing common stock, incorporated by reference to Exhibit 4.1 to the Company’s
Registration Statement on Form S-1/A filed November 4, 1997 (File No. 333-36937) (the “Form S-1/A”).
Form of Warrants, incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-1 filed
October 1, 1997 (File No. 333-36937) (the “IPO S-1”).
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, SEC File No. 000-22333.
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 for the year ended December 31, 2003 (the
“2003 10-K”), SEC File No. 000-22333.
Registration Rights Agreement dated March 23, 2004 between the Company and Altana Chemie AG, incorporated by
reference to Exhibit 4.11 to the 2003 10-K, SEC File No. 000-22333.
Stock Purchase Agreement dated August 25, 2006 between the Company and Rohm and Haas Electronic Materials
CMP Holdings, Inc., incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed
August 28, 2006, SEC File No. 000-22333.
Registration Rights Agreement dated August 25, 2006 between the Company and Rohm and Haas Electronic Materials
CMP Holdings, Inc., incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed
August 28, 2006, SEC File No. 000-22333.
Industrial 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 for the year ended December 31, 2004
(the “2004 10-K”), SEC File No. 000-22333.
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10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12*
10.13*
10.14
10.15*
Industrial Building Lease Agreement between Centerpoint Properties Trust and the Company, dated June 15, 2000,
incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2000 (the “2000 10-K”), SEC File No. 000-22333.
Lease Amendment effective October 1, 2005 between the Company 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, SEC File No. 000-22333.
Second Amendment to Lease Agreement effective November 13, 2014 between the Company and MLRP 1319 Marquette
LLC.
Distribution Agreement between the Company and C.I. Kasei Co., Ltd. (a subsidiary of Itochu Corporation) dated as of
October 30, 1996, incorporated by reference to Exhibit 10.15 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, SEC File No. 000-22333.
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 for the quarter ended June 30, 2004, SEC
File No. 000-22333.
Mutual Cooperation Agreement entered into on January 17, 2012, by and among the Company, C.I. Kasei Co., Ltd. and
CIK NanoTek Corporation, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
January 20, 2012.
Trademark Ownership Assignment Agreement, dated March 31, 2012, between the Company and CIK NanoTek
Corporation, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 4, 2012.
Memorandum on the Payment of Royalty, dated March 31, 2012, between the Company and CIK NanoTek Corporation,
incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed April 4, 2012.
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 Form S-1/A.
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 Company’s Annual Report on Form 10-K for the year ended
December 31, 1999, SEC File No. 000-22333.
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, SEC File No. 000-22333.
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 10.26 to the Company’s Annual Report on Form 10-K for the year ended
December 31, 2002 (the “2002 10-K”), SEC File No. 000-22333.
Amendment No. 3 to Zinc Oxide Supply Agreement entered into on December 2, 2012, between the Company and BASF
Corporation, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed December 6,
2012.
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10.16
10.17
10.18*
10.19
10.20*
10.21
10.22*
10.23*
10.24*
10.25
10.26*
10.27*
10.28*
10.29
Promissory Note dated as of October 6, 2000 between the Company and BASF Corporation, incorporated by reference to
Exhibit 10.25 to the 2000 10-K, SEC File No. 000-22333.
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 2002 10-K, SEC File No. 000-22333.
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 for the quarter ended March
31, 2005, SEC File No. 000-22333.
Z-COTE HP-2 Brand Supply Agreement dated May 15, 2006 between the Company and BASF Corporation, incorporated
by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed June 20, 2006, SEC File No. 000-22333.
Amended and Restated Cooperation Agreement dated August 25, 2006 between the Company and Rohm and Haas
Electronic Materials CMP Inc., incorporated by reference to Exhibit 99.3 to the Company’s Current Report on Form 8-K filed
August 28, 2006, SEC File No. 000-22333.
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 for the year ended
December 31, 2008, SEC File No. 000-22333.
Distributor Agreement dated October 24, 2005 between Johnson Matthey Catalog Company, Inc., d/b/a ALFA AESAR and
the Company, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed November 1,
2005, SEC File No. 000-22333.
Supply Agreement dated March 3, 2006 between Roche Diagnostics GmbH and the Company, incorporated by reference
to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed March 9, 2006, SEC File No. 000-22333.
First Amendment to the Supply Agreement entered into on November 19, 2014 between the Company and Roche
Diagostics GmbH, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November
25, 2014.
Joint Development Agreement dated March 23, 2004 between the Company and Altana Chemie AG, incorporated by
reference to Exhibit 10.29 to the 2003 10-K, SEC File No. 000-22333.
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, SEC File No. 000-22333.
Settlement and Termination Agreement, dated August 20, 2010, between the Company and Altana Chemie GmbH,
incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 25, 2010.
Supply Agreement, dated August 20, 2010, between the Company and Altana Chemie GmbH, incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed August 25, 2010.
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, SEC File No. 000-22333. +
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Table of Contents
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
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, SEC File No. 000-22333. +
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, SEC File No. 000-22333. +
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 for the quarter ended June 30, 2009, SEC File No. 000-
22333. +
Employment Agreement dated November 28, 2012, between the Company and Kevin Cureton, incorporated by reference to
Exhibit 10.36 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. +
Form of Indemnification Agreement between the Company and each of its directors and executive officers, incorporated by
reference to Exhibit 10.2 to the Form S-1/A. +
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). +
First Amendment to 2004 Plan, incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed
July 27, 2006, SEC File No. 000-22333. +
Form of Stock Option Agreement under the 2004 Equity Plan, incorporated by reference to Exhibit 4.13 to the 2004 10-K,
SEC File No. 000-22333. +
Form of Restricted Share Grant Agreement under the 2004 Equity Plan, incorporated by reference to Exhibit 4.14 to the
2004 10-K, SEC File No. 000-22333. +
Form of Performance Share Grant Agreement under the 2004 Equity Plan, incorporated by reference to Exhibit 4.15 to the
2004 10-K, SEC File No. 000-22333. +
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, SEC File No. 000-22333. +
2006 Stock Appreciation Rights Plan (the “2006 Plan”), incorporated by reference to Exhibit 99.1 to the Company’s Current
Report on Form 8-K filed October 3, 2006, SEC File No. 000-22333. +
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, SEC File No. 000-22333. +
Form of Grant Agreement under the 2006 Plan, incorporated by reference to Exhibit 99.2 to the Company’s Current Report
on Form 8-K filed October 3, 2006, SEC File No. 000-22333. +
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, SEC File No. 000-22333. +
Nanophase Technologies Corporation 2010 Equity Compensation Plan, incorporated by reference to Exhibit B to the
Company’s Definitive Proxy Statement on Form DEF14A filed July 9, 2010. +
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10.46
Form of Stock Option Award Agreement under the 2010 Equity Compensation Plan, incorporated by reference to Exhibit
10.47 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. +
23.1
31.1
31.2
32
101
Consent of McGladrey LLP.
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
The following materials from the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, formatted
in XBRL (Extensible Business Reporting Language): (1) the Balance Sheets, (2) the Statements of Operations, (3) the
Statements of Cash Flows, (4) the Statements of Stockholders’ Equity, and (5) the Notes to the Financial Statements.
* Confidentiality previously granted for portions of this agreement.
+ Indicates management contracts or compensatory plans or arrangements.
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SECOND AMENDMENT TO INDUSTRIAL LEASE AGREEMENT
Exhibit 10.4
THIS SECOND AMENDMENT TO LEASE AGREEMENT (this “Second Amendment”) is made as of the 13th day of November,
2014 (the “Effective Date”), by and between MLRP 1319 MARQUETTE LLC, a Delaware limited liability company (“Landlord”), and
NANOPHASE TECHNOLOGIES, INC., a Delaware corporation (“Tenant”).
RECITALS:
A. Landlord’s predecessor-in-interest, CP FINANCING TRUST, a Maryland real estate financing trust, and Tenant entered into
that certain Industrial Building Lease dated June 15, 2000 (the “Original Lease”) as amended by that certain Lease Amendment dated
October 1, 2005 (“First Amendment”), by and between Tenant and Landlord’s predecessor-in-interest, CENTERPOINT
PROPERTIES TRUST, a Maryland real estate investment trust, with respect to that certain Premises (defined in the Lease) at the
address commonly known as 1319 Marquette, Romeoville, Illinois (the Original Lease and First Amendment shall be collectively
referred to hereinafter as the “Lease”);
B. The Lease is scheduled to expire on December 31, 2015; and
C. Landlord and Tenant desire to extend the term of the Lease and amend certain other provisions of the Lease, subject to the
terms, covenants and conditions of this Second Amendment.
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby amend the Lease in the
following respects only:
1. Lease in Full Force and Effect; Definitions. Except as herein modified or amended, the provisions, conditions, and terms of
the Lease shall remain unchanged and in full force and effect and are hereby ratified and confirmed by the parties hereto. Capitalized
terms used in this Second Amendment shall have the same definitions as set forth in the Lease to the extent such capitalized terms
are defined therein and are not redefined in this Second Amendment. All references to the terms “Lease”, “the Lease” or “this Lease”
provided in the Lease shall refer to the Lease, as amended herein, unless the context dictates otherwise.
2. Extension of Term. The Term of the Lease is hereby extended from its current expiration date for a period of forty-eight
(48) months (the “Second Extension Term”), commencing on January 1, 2016 (the “Rent Commencement Date”) and ending on
December 31, 2019. All references in the Lease to the “term” or “Term” shall include the Second Extension Term.
3. Rent Following Rent Commencement Date. Notwithstanding anything in the Lease to the contrary, beginning on the Rent
Commencement Date, Tenant shall pay Base Rent for the Premises in the same manner required by the Lease in the following
amounts:
Period
1/1/16 to 12/31/16
1/1/17 to 12/31/17
1/1/18 to 12/31/18
1/1/19 to 12/31/19
Annual Base Rent
305,331.60
$
312,964.89
$
320,789.01
$
328,808.74
$
1
Monthly Base Rent
25,444.30
$
26,080.41
$
26,732.42
$
27,400.73
$
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Tenant shall continue to pay Additional Rent and all other amounts due to Landlord, as required under the Lease.
4. Landlord’s Work. Prior to the Rent Commencement Date, Landlord shall perform the work set forth on Exhibit A, attached
hereto and made a part hereof, to the parking lot serving the Premises (the “Landlord’s Work”). Landlord shall be solely responsible
for the cost and expense of Landlord’s Work. Tenant acknowledges that Landlord’s Work may impact Tenant’s use and operations at
the Premises and that Tenant will reasonably cooperate with Landlord and its contractors in order to allow for the completion of
Landlord’s Work. Landlord shall not be liable for any inconvenience, annoyance, disturbance or other damage to Tenant by reason of
the performance of such work or on account of bringing materials, supplies and equipment into, onto or through the property during
the course thereof and the obligations of Tenant under this Lease shall not thereby be affected; provided, however, that Landlord
shall use commercially reasonable efforts to prevent Landlord’s Work from interfering with Tenant’s use and operations at the
Premises.
5. Extension Option.
(a) Subject to Subsections (b), (c), and (d) below, Tenant shall have the option (the “Extension Option”) to extend the Term for
the entire Premises for one (1) period of five (5) years (the “Third Extension Term”). The Third Extension Term shall be upon the
same terms contained in the Lease, excluding the provisions of this Section and Section 4 of this Second Amendment; and any
reference in the Lease to the “Term” of the Lease shall be deemed to include the Third Extension Term and apply thereto, unless it is
expressly provided otherwise. Tenant shall have no additional extension options.
(b) The Base Rent during the first year of the Third Extension Term shall be at 90% of the Market Rate (defined herein) for such
space commencing on the first day of the Third Extension Term. The Base Rent during each year, other than the first year, of the
Third Extension Term shall be subject to 2.5% annual increases during the Third Extension Term in the same manner as such Base
Rent was increased during the initial Term. “Market Rate” shall mean the then prevailing market negotiated rate for a comparable
term commencing on the first day of the Third Extension Term for tenants of comparable size and creditworthiness for space
comparable to the Premises in comparable buildings within a ten (10) mile radius of the Premises, as reasonably determined by
Landlord.
(c) To exercise the Extension Option, Tenant must deliver an initial non-binding notice to Landlord not less than nine (9) months
prior to the expiration of the then current Term. If Tenant provides Landlord with its non-binding notice of exercise of its Extension
Option, then at some point within thirty (30) days of such notice, Landlord shall calculate and inform Tenant of the Base Rent for the
Premises. Such calculation shall be final and shall not be recalculated at the actual commencement of the Third Extension Term, if
any. Tenant shall, within fifteen (15) days after receiving Landlord’s calculation of Base Rent, either accept Landlord’s proposed Base
Rent and give Landlord final binding notice of its intent to exercise the Extension Option, or object to Landlord’s proposed Base Rent.
If Tenant fails to give either its initial non-binding notice or its final binding notice of objection timely, Tenant will be deemed to have
waived the Extension Option. If Tenant objects to Landlord’s proposed Base Rent, Landlord and Tenant shall use diligent efforts to
negotiate a mutually agreeable rate of Base Rent. If Landlord and Tenant are unable to reach agreement within twenty (20) days after
the Landlord’s receipt of Tenant’s notice of objection, then Tenant shall have the option, by written notice to Landlord within seven
(7) days after such 20-day period, to either (x) revoke its exercise of the Extension Option, or (y) to submit the calculation of Base
Rent to binding appraisal as provided in subsections (i)-(iv) below. If Tenant fails to timely respond during such 7-day period, Tenant
will be deemed to have waived the Extension Option.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(i) If the Base Rent calculation is submitted to appraisal, then within seven (7) days after the expiration of the 7-day period
referenced above, Landlord and Tenant shall each simultaneously submit to the other in a sealed envelope its good faith estimate of
the Market Rate. If the higher of such estimates is less than five percent (5%) more than the lower estimate, then the Market Rate
shall be the average of the two and appraisal shall not be necessary. Otherwise, the dispute shall be resolved by appraisal in
accordance with (2) below.
(ii) Within seven (7) days after the exchange of estimates, the parties shall select as an appraiser an independent Illinois
licensed real estate broker with at least ten (10) years of experience in leasing industrial/warehouse buildings in the greater Chicago
metropolitan area (a “Qualified Broker”). If the parties cannot agree on a Qualified Broker within such seven (7) day period, then
within seven (7) days thereafter, each party shall appoint a Qualified Broker, then within ten (10) days after the expiration of said
second seven (7) day period referred to in this subsection (2), the two appointed Qualified Brokers shall select a third Qualified
Broker and the third Qualified Broker shall be the sole appraiser. If one party shall fail to select a Qualified Broker within said second
seven (7) day period, then the Qualified Broker chosen by the other party shall be the sole appraiser.
(iii) Within twenty one (21) days after submission of the matter to the appraisal, the appraiser shall determine the Base
Rent by choosing whichever of the estimates of the Market Rate submitted by Landlord and Tenant the appraiser determines to be
more accurate. The appraiser shall notify Landlord and Tenant of its decision, which shall be final and binding. If the appraiser
believes that expert advice would materially assist him, the appraiser may retain one or more qualified persons to provide expert
advice. The fees of the appraiser and the expenses of the appraisal proceeding, including the fees of any experts retained, shall be
paid by the party whose estimate is not selected. Each party shall pay the fees of its respective counsel and the fees of any experts
retained.
(iv) Tenant shall have the option, by written notice to Landlord within seven (7) days after Tenant’s receipt of the appraiser’s
notice of decision, to either (x) revoke its exercise of the Extension Option, or (y) give Landlord final binding notice of its intent to
exercise the Extension Option. If Tenant fails to timely respond during such 7-day period, Tenant will be deemed to have waived the
Extension Option.
(d) Tenant may exercise the Extension Option, and the exercise thereof shall be effective, only if at the time of Tenant’s exercise
of the Extension Option the Lease is in full force and effect and there has been no Tenant Event of Default and inasmuch as the
option is intended only for the benefit of the Tenant named in the Lease, the entire Premises are occupied by the original Tenant
named therein, and the Tenant has neither assigned the Lease or sublet any portion of the Premises. Without limitation of the
foregoing, no sublessee or assignee shall be entitled to exercise any right or option hereunder, and no exercise of any right or option
hereunder by the original Tenant named herein shall be effective in the event that Tenant assigns the Lease or subleases all or any
part of the Premises.
6. Other Amendments. Tenant shall have no options to renew or extend the Lease, or expand or Purchase the Premises, other
than as provided in this Second Amendment. Sections 5, 6 and 7 of the First Amendment are hereby deleted and are null, void and of
no further force and effect. The parties hereby acknowledge that Section 8 of the First Amendment incorrectly referenced certain
Lease provisions. Accordingly, Articles XXVII and XXVIII of the Lease are hereby reinstated and made a part of the Lease. Articles
XXXVI, XXXVII, and XXXVIII of the Lease are hereby deleted and are null, void and of no further force and effect.
7. Condition of Premises. TENANT HEREBY ACKNOWLEDGES AND AGREES THAT OTHER THAN AS PROVIDED IN
THIS SECOND AMENDMENT AND IN SECTIONS
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
8.5 AND 11.1 OF THE LEASE, NO PROMISES OF LANDLORD TO ALTER, REMODEL, IMPROVE, REPAIR, DECORATE OR
CLEAN THE PREMISES OR ANY PART THEREOF HAVE BEEN MADE, AND NO REPRESENTATIONS RESPECTING THE
CONDITION OF THE PREMISES HAVE BEEN MADE TO TENANT BY OR ON BEHALF OF LANDLORD, INCLUDING ANY
EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY, FITNESS OR HABITABILITY, AND TENANT, AS OF THE
DATE HEREOF, CONTINUES TO ACCEPT THE PREMISES IN ITS “AS-IS,” “WHERE-IS” CONDITION FOR THE BALANCE OF
THE TERM, THE SECOND EXTENSION TERM AND THE THIRD EXTENSION TERM.
8. Brokers. Tenant represents that Tenant has not dealt with any real estate broker, sales person or finder other than
REOLOGIE, LLC, an Illinois limited liability company (the “Broker”), in connection with this Second Amendment, and that no other
such person initiated or participated in the negotiation of this Second Amendment or is entitled to any fee or commission in
connection herewith. Tenant agrees to indemnify and hold Landlord, any mortgagee holding an interest in the Premises, and their
respective agents and employees harmless from any and all liabilities, claims, demands, actions, damages, costs and expenses
(including attorneys’ fees) arising from either (a) a claim for a fee or commission made by any broker other than the Broker, claiming
to have acted by or on behalf of Tenant in connection with this Second Amendment, or (b) a claim or rights to a real estate broker lien
with respect to any such broker, other than the Broker, retained by Tenant.
9. No Personal Liability. This Second Amendment is executed by the undersigned authorized agent of Landlord, not
personally, but solely as authorized agent of Landlord, and it is expressly understood and agreed by the parties hereto, anything
contained herein to the contrary notwithstanding, that each and all of the covenants, undertakings, representations, and agreements
herein made are made and intended, not as personal covenants, undertakings, representations, warranties, and agreements of the
undersigned authorized agent, but as the covenants, undertakings, representations and agreements of Landlord, and no personal
liability or personal responsibility is assumed by, nor shall at any time be asserted or enforced against said authorized agent or any
partner, officer, director, shareholder, manager, member, trustee, beneficiary or agent of Landlord, or under any covenant,
undertaking, representation, warranty, or agreement herein contained, either expressed or implied; all such personal liability, if any,
being and is expressly waived and released by the parties hereto or holder hereof, and by all persons claiming by or through or under
said parties or holder hereof. In the event Landlord is in breach or default with respect to Landlord’s obligations or otherwise under
the Lease, Tenant shall look solely to Landlord’s interest in the Premises for recovery of any judgments from Landlord.
10. Miscellaneous.
(a) The entire agreement of the parties concerning the Premises is set forth in the Lease, as amended herein. No prior
agreement or understanding with respect to the Lease and this Second Amendment shall be valid or of any force and effect. The
recitals to this Second Amendment are incorporated herein by reference and constitute a part hereof.
(b) In the event of any conflict or inconsistency between the terms and conditions of this Second Amendment and the terms and
conditions of the Lease, the terms and conditions of this Second Amendment shall in all instances govern and control.
(c) Tenant and Landlord hereby represent, each to the other, they have the power and authority to enter into this Second
Amendment. This Second Amendment shall be binding upon and inure to the benefit of Landlord and Tenant and their respective
successors and assigns.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
(d) To facilitate execution, this Second Amendment may be executed in as many counterparts as may be convenient or
required. It shall not be necessary that the signature of, or on behalf of, each party, or that the signature of all persons required to
bind any party, appear on each counterpart. All counterparts shall collectively constitute a single document. A fully executed facsimile
or e-mail copy of this Second Amendment shall be effective as an original.
[Signature Page Follows]
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment to be effective as of the date first above
written.
LANDLORD:
MLRP 1319 MARQUETTE LLC,
a Delaware limited liability company
By: ML Realty Partners, LLC,
a Delaware limited liability company
Its:
Sole Member
By:
/s/ Michael Dolan
Name: Michael Dolan
Title: SVP
TENANT:
NANOPHASE TECHNOLOGIES, INC.,
a Delaware corporation
/s/ Jess Jankowski
By:
Name: JESS JANKOWSKI
Title: PRESIDENT & CHIEF EXECUTIVE OFFICER
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
EXHIBIT A
LANDLORD’S WORK
(SEE ATTACHED)
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements (No. 333-53445, No. 333-74170, No. 333-119466,
No. 333-150765, and 333-187649) on Form S-8 and Registration Statements (No. 333-90326, No. 333-116224, No. 333-140461, and
333-163363) on Form S-3, of Nanophase Technologies Corporation of our report dated March 27, 2015 relating to our audit of the
financial statements, which appears in this Annual Report on Form 10-K of Nanophase Technologies Corporation for the year ended
December 31, 2014.
Exhibit 23.1
/s/ McGladrey LLP
Schaumburg, Illinois
March 27, 2015
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 31.1
Certification of the Chief Executive Officer
Pursuant to
Rules 13a-14(a) and 15d-14(a) under the Exchange Act
I, Jess A. Jankowski, certify that:
1. I have reviewed this 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 27, 2015
/s/ JESS A. JANKOWSKI
Jess A. Jankowski
Chief Executive Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
Exhibit 31.2
Certification of the Chief Financial Officer
Pursuant to
Rules 13a-14(a) and 15d-14(a) under the Exchange Act
I, Frank J. 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 27, 2015
/s/ FRANK J. CESARIO
Frank J. Cesario
Chief Financial Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.
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, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Jess A.
Jankowski, Chief Executive Officer of the Company and Frank J. 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 27, 2015
/s/ JESS A. JANKOWSKI
Jess A. Jankowski
Chief Executive Officer
/s/ FRANK J. CESARIO
Frank J. Cesario
Chief Financial Officer
EDGAR Stream is a copyright of Issuer Direct Corporation, all rights reserved.