Business context and reporting period
This is Nanophase Technologies Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The request metadata names Solesence, Inc.; the filing identifies Nanophase Technologies Corporation as the registrant and describes Solésence as its personal-care brand.
Nanophase develops and manufactures nano- and sub-micron materials for personal care, coatings, polishing, energy and other applications. It reported early-stage revenue from newer personal-care and energy-management products.
Financial results
Amounts below are in thousands of dollars, except per-share data and percentages.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $2,521 | $2,786 | $8,415 | $8,033 |
| Gross profit | $680 | $883 | $2,649 | $2,440 |
| Gross margin | 27.0% | 31.7% | 31.5% | 30.4% |
| Operating loss | $(422) | $(151) | $(562) | $(845) |
| Net loss | $(425) | $(155) | $(573) | $(854) |
| Net loss per share | $(0.01) | $(0.01) | $(0.02) | $(0.03) |
For the nine months, operating cash outflow was $354, compared with $542 in 2015; investing cash outflow was $139, compared with $236. Financing provided $936, chiefly from a $988 stock sale to the largest stockholder. Cash rose by $443 to $1,718 at September 30, 2016.
At quarter-end, current assets were $4,030 and current liabilities $1,372. Capital lease obligations totaled $168 ($98 current and $70 long-term); no line-of-credit borrowings were outstanding. Stockholders’ equity was $3,423. The filing reports no income-tax provision.
Material changes versus prior comparable periods
- Q3 revenue fell 9.5% year over year, which management attributed primarily to shipment timing. Nine-month revenue increased 4.8%, driven particularly by higher volume with the largest customer in personal care.
- Q3 gross margin declined to 27.0% from 31.7%; management cited lower volume and manufacturing inefficiencies. Nine-month gross margin improved to 31.5% from 30.4%.
- Q3 net loss widened to $425 from $155, while the nine-month net loss narrowed to $573 from $854.
- Research and development expense increased to $1,060 for the nine months from $969; selling, general and administrative expense decreased to $2,151 from $2,316.
- Cash increased from $1,275 at December 31, 2015, primarily reflecting the equity issuance, despite continued operating cash use. Shares outstanding rose from 28.6 million at year-end to 31.2 million at September 30.
Outlook, risks and contingencies
- Management expected Q4 2016 R&D expense to be consistent with Q3 and SG&A expense to increase approximately 5%, reflecting planned product launches, primarily in personal care. It estimated remaining-2016 capital spending of $100–$125.
- Management believed cash, operating cash flows and unused borrowing capacity would fund plans through 2016 and into 2017. This outlook is subject to customer demand, product testing and acceptance, manufacturing needs and other capital requirements.
- The largest customer, BASF, accounted for approximately 65% of Q3 revenue and 69% of nine-month revenue. BASF agreements include potential technology-transfer and equipment-sale rights following specified triggers. A key trigger includes trailing 12-month earnings below zero together with cash and certain investments below $1 million; quarter-end cash was approximately $1.7 million. A trigger and BASF’s exercise of its rights could materially reduce revenue and impair production capacity.
- The company warned that losing major customers, difficulty obtaining financing, raw-material or labor cost increases that cannot be passed through, and uncertain adoption of new products could harm results or liquidity. Additional financing might be unavailable or dilutive; inadequate funding could require curtailing plans and could raise going-concern doubt.
- No material pending legal proceedings were reported, and the company stated there were no material changes to the risk factors in its 2015 Form 10-K. Disclosure controls were deemed effective at a reasonable-assurance level.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for Nanophase Technologies Corporation, not Solesence, Inc.
- Track BASF’s share of sales, contract performance and the cash/earnings conditions that could trigger technology-transfer or equipment-sale rights.
- Assess whether newer products and customer adoption can support higher revenue and manufacturing utilization, especially given the Q3 margin decline.
- Monitor operating cash use, remaining liquidity, planned capital spending and the availability and terms of additional financing.
- Consider the impact of the 2016 share issuance and outstanding stock options on ownership dilution.