Nanophase Technologies Corporation (including Solésence, LLC) — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The filing is by Nanophase Technologies Corporation; Solésence is its wholly owned subsidiary, not the registrant. Financial statement amounts below are in thousands of dollars except per-share data.
Business context and results
Nanophase develops and sells engineered materials for several markets, including personal care and cosmetics. Management said it was prioritizing growth of the Solésence brand and finished skin-care products. Solésence supported the launch of three customer products during Q2.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $4,116 | $3,582 | $7,014 | $7,067 |
| Gross profit | $1,405 | $1,201 | $1,815 | $2,405 |
| Gross margin | 34.1% | 33.5% | 25.9% | 34.0% |
| Operating income (loss) | $97 | $28 | $(816) | $85 |
| Net income (loss) | $88 | $22 | $(836) | $69 |
| Net income (loss) per share | $0.00 | $0.00 | $(0.02) | $0.00 |
Q2 product revenue rose to $4,043 from $3,535, which management attributed mainly to Solésence launches and higher demand for mineral-based sunscreen products. First-half product revenue declined to $6,910 from $7,001, primarily due to order timing at major customers. Higher wages, zinc and other material costs, and launch-related manufacturing inefficiencies increased cost of revenue. R&D and SG&A also increased in the first half, largely reflecting Solésence staffing, testing, and brand-launch costs.
Cash, liquidity, debt, and balance sheet
Cash was $1,341 at June 30, 2018, versus $1,955 at December 31, 2017. First-half operating cash use was $603, compared with $568 in the prior-year period; investing cash use was $132, and financing provided $121. Cash declined by $614 during the half. Capital expenditures were $132.
At quarter-end, the company reported $500 outstanding on its revolving line of credit; that borrowing was repaid July 2. The new facility, expiring March 2019, has a maximum of $500 and is secured by company assets. Other balance-sheet obligations included $525 of capital lease obligations ($145 current and $380 long-term). Current assets were $4,696 and current liabilities $2,923. Stockholders’ equity was $2,484, down from $3,232 at year-end.
Changes, outlook, and risks
- Management expected cash on hand and operating cash flows to fund operations through the remainder of 2018, while noting that Solésence growth could create temporary working-capital needs.
- Planned capital spending for the remainder of 2018 was estimated at $400–$600, depending on project progress and financing; actual spending could be lower or higher.
- Management expected quarterly R&D expense to decline during the rest of 2018 as initial launch testing requirements eased, and SG&A to remain around current levels.
- The top three customers represented 66%, 10%, and 3% of Q2 revenue, and 73%, 6%, and 4% of first-half revenue. BASF was the largest customer. Loss of a major customer or reduced orders could materially affect results.
- BASF supply agreements include financial and other conditions that could give BASF rights to license technology and acquire specified equipment. The filing describes a trigger involving negative trailing-12-month earnings and cash, cash equivalents, and certain investments below $1 million, among other potential triggers. A transfer could impair revenue and production capacity.
- Other risks include raw-material and wage inflation that cannot be fully passed on, customer acceptance and product-launch execution, working-capital and financing availability, and possible dilution from future financing. Management cautioned that inadequate capital could require curtailing plans and could raise going-concern concerns.
- The company reported no material change in previously disclosed risk factors, no material pending legal proceedings, and effective disclosure controls. Adoption of revenue standard Topic 606 had no material impact.
Important facts for investors to verify
- Whether Solésence launches generate repeat orders and improve production efficiency and margins.
- Customer concentration, BASF agreement covenants and potential technology/equipment transfer triggers, including the company’s covenant cash calculation.
- Liquidity and working-capital needs, including the timing and financing of the estimated $400–$600 in second-half capital spending.
- Drivers of the sharp first-half gross-margin decline and whether material-cost increases can be passed through to customers.
- First-half cash burn, line-of-credit repayment and availability, and the company’s ability to fund operations without additional financing.