Nanophase Technologies Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The filing is by Nanophase Technologies Corporation; Solésence, LLC is its wholly owned subsidiary and skincare brand. Financial amounts below are in thousands of dollars unless stated otherwise.
Business context and key financial results
Nanophase develops and manufactures engineered nano- and non-nano materials for personal care, coatings, polishing and other applications. It is expanding into fully formulated skincare products through Solésence. The company reported lower revenue and a net loss compared with Q1 2017.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $2,898 | $3,485 |
| Product revenue | $2,867 | $3,466 |
| Gross profit | $410 | $1,204 |
| Gross margin | 14.1% | 34.5% |
| Operating income (loss) | $(913) | $57 |
| Net income (loss) | $(924) | $46 |
| Basic and diluted earnings (loss) per share | $(0.03) | $0.00 |
| Net cash used in operating activities | $(618) | $(158) |
Financial position and liquidity
- Cash and cash equivalents were $1,190 at March 31, 2018, down from $1,955 at December 31, 2017. Total current assets were $4,017; total current liabilities were $2,303.
- Debt and lease obligations included a $200 line-of-credit balance at March 31 and capital lease obligations of $517 ($140 current and $377 long-term). The company drew $200 on March 30 and repaid it on April 4, 2018. The line expires in March 2019, is capped at $500 or 75% of eligible receivables (whichever is less), and is secured by specified assets.
- Cash decreased by $765 during the quarter. Investing cash outflow was $5, including $5 of capital expenditures; financing cash outflow was $142.
- Stockholders’ equity was $2,351, compared with $3,232 at year-end 2017. The accumulated deficit was $96,593.
Material changes and management commentary
- Revenue declined 17% year over year, primarily because of reduced orders from several large customers, including the largest personal-care and sunscreen customer.
- Cost of revenue rose to $2,488 from $2,281 despite lower sales. Management cited higher wages, materials-price inflation and manufacturing inefficiencies related to Solésence product launches. Gross margin fell to 14.1% from 34.5%.
- Research and development expense increased to $558 from $384, principally due to added personnel and external product testing and evaluation for Solésence. Selling, general and administrative expense was approximately flat at $765.
- Three customers generated approximately 78%, 4% and 4% of Q1 2018 revenue. International revenue was $18, versus $347 in Q1 2017.
- Management said higher sales volume could improve manufacturing-cost absorption and margins, but results depend on revenue mix and volume, cost control, passing through raw-material increases, and scaling Solésence production.
Outlook, risks and contingencies
- Management expected cash on hand, operating cash and available borrowing capacity to fund operations through 2018. It projected $400–$600 of capital spending for the remainder of 2018, depending on project progress and financing; spending could fall outside that range.
- Management expected quarterly R&D expense to decline during the rest of 2018 as initial Solésence launch and testing efforts ease, and expected SG&A to remain near current levels.
- The BASF supply agreements include covenants that can give BASF rights to obtain a technology license and purchase specified equipment if defined trigger conditions occur. These include, under one covenant, trailing 12-month earnings below zero while cash, cash equivalents and certain investments are below $1 million, or acceleration of qualifying debt. The filing states that such an event could cause substantial revenue and capacity loss; replacing equipment could take more than 12 months. Q1 cash was only modestly above the stated $1 million threshold, and the filing describes the $200 line borrowing as included in cash available for covenant purposes.
- Revenue concentration, uncertain adoption of products, raw-material and wage inflation, working-capital needs, access to financing, and the ability to scale Solésence are key risks. The company warned that unavailable or inadequate financing could curtail plans and raise doubt about its ability to continue as a going concern. No material changes to previously disclosed risk factors were reported.
- The company reported no material pending legal proceedings. Adoption of Topic 606 had no material financial-statement impact. The filing states that management considered disclosure controls effective at a reasonable-assurance level and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the largest customer’s ordering levels recover and how customer concentration evolves.
- Cash runway, working-capital requirements, borrowing availability and compliance with BASF covenant conditions.
- Solésence customer adoption, launch costs, production efficiency and the timing and amount of any revenue contribution.
- Whether planned capital spending proceeds, and whether additional financing or dilution becomes necessary.
- How raw-material and labor cost changes affect margins and the company’s ability to pass costs through to customers.