Nanophase Technologies Corporation (including Solésence, Inc.) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The filing is by Nanophase Technologies Corporation; Solésence is its wholly owned subsidiary. Financial amounts below are in thousands of dollars unless stated otherwise. Statements are unaudited.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $4,022 | $2,785 | $11,036 | $9,852 |
| Product revenue | $3,998 | $2,524 | $10,908 | $9,525 |
| Gross profit | $1,057 | $585 | $2,872 | $2,990 |
| Gross margin | 26.3% | 21.0% | 26.0% | 30.4% |
| Operating loss | $(124) | $(634) | $(940) | $(549) |
| Net loss | $(136) | $(643) | $(972) | $(574) |
| Operating cash flow | Not separately provided | Not separately provided | $(921) | $(866) |
Q3 basic and diluted loss per share rounded to $0.00; nine-month loss per share was $0.03, versus $0.02 in 2017.
Liquidity, debt, and balance sheet
- Cash was $1,034 at September 30, 2018, down from $1,955 at December 31, 2017. Current assets were $5,297 and current liabilities $3,593; working capital was $1,704.
- Quarter-end debt included a $500 revolving line balance and capital lease obligations of $693 ($197 current and $496 long-term). The $500 line balance was repaid October 1, 2018.
- Cash declined by $921 in the first nine months. Investing activities used $115; financing activities provided $115. Receivables and inventory increased by $802 and $706, respectively, during the period.
- On November 19, 2018, the company entered into related-party Beachcorp loan facilities: a term loan of up to $500 at 8.25% and a revolving facility of up to $2,000 at prime plus 3% (8.25% minimum). Both were undrawn as of the filing. They are secured by unencumbered assets, subordinate to LB&T, and restrict additional indebtedness.
Changes, outlook, and risks
- Q3 revenue rose 44% year over year, partly reflecting recovery from the July 2017 production shutdown to install a coating blender. Nine-month revenue growth was attributed primarily to Solésence product launches and higher demand for mineral-based sunscreen products.
- Q3 gross margin improved year over year, but nine-month gross profit and margin fell. Management cited wage and material-cost inflation, including zinc, and manufacturing inefficiencies tied to Solésence launches; cost increases cannot always be fully passed through.
- Management expected R&D expense to decline in the remainder of 2018 as initial launch and testing work eased, and SG&A to remain near current levels. It estimated $200–$300 of capital equipment spending for the remainder of 2018, depending on project progress and financing.
- Management said cash, available credit, and operating cash were expected to fund operations through the remainder of 2018, while warning that Solésence growth could create working-capital needs and that unavailable or unfavorable financing could force reduced activity or raise going-concern concerns.
- Customer concentration is material: the notes report the largest customer represented approximately 74% of Q3 and nine-month revenue. BASF supply agreements include financial and other triggers that can give BASF technology-transfer and equipment-purchase rights. One trigger involves trailing 12-month earnings below zero together with cash and qualifying investments below $1 million.
- Other risks include dependence on key customers, raw-material costs and supply, product acceptance, manufacturing capacity, and protection of intellectual property. No material changes to previously disclosed risk factors were reported. The company reported no pending legal proceedings believed likely to have a material adverse effect.
- Revenue standard Topic 606 was adopted January 1, 2018 using the modified retrospective method; management reported no material impact. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts to verify
- Customer concentration: the notes state the top customer contributed about 74% of Q3 revenue, while MD&A gives about 70%; confirm the correct figure and the associated customer exposures.
- Liquidity after quarter-end: confirm repayment of the LB&T draw, availability and terms of credit, and whether the Beachcorp facilities were subsequently drawn.
- BASF covenant compliance and the effect of any cash, earnings, or supply-performance trigger on technology and equipment rights.
- Whether Solésence launches can generate repeat demand and improved manufacturing utilization sufficient to support margins and working-capital requirements.