Filing summary
Issuer and period: Nanophase Technologies Corporation (NASDAQ/OTCQB symbol NANX), Form 10-Q for the quarter ended June 30, 2017. Solésence LLC is identified as a wholly owned subsidiary; this filing reports Nanophase on a consolidated basis, not Solésence as a separate issuer.
Unless otherwise noted, financial amounts below are in thousands of dollars. The filing states that interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Total revenue | $3,582 | $3,683 | $7,067 | $5,894 |
| Gross profit | $1,201 | $1,513 | $2,405 | $1,969 |
| Gross margin | 33.5% | 41.1% | 34.0% | 33.4% |
| Operating income (loss) | $28 | $466 | $85 | $(140) |
| Net income (loss) | $22 | $463 | $69 | $(148) |
- Second-quarter product revenue was $3,535, down from $3,678; six-month product revenue was $7,001, up from $5,867. Other revenue was $47 and $66 for the quarter and six months, respectively.
- Cash and cash equivalents were $1,150 at June 30, 2017, versus $1,779 at December 31, 2016. Current assets were $4,519 and current liabilities $2,045. Accounts receivable increased to $2,199 from $434 at year-end.
- For the first half, operating cash use was $568 (versus $692 in 2016); investing activities provided $19, and financing activities used $80. Cash declined by $629. Capital expenditures were $77.
- Capital lease obligations totaled $362 ($57 current and $305 long-term). No borrowings were outstanding on the revolving line of credit or the separate promissory note.
- Stockholders’ equity was $2,955, compared with $2,791 at December 31, 2016. The accumulated deficit was $94,811. No income tax provision was recorded.
Changes, agreements, and outlook
- Revenue declined 2.7% in the second quarter year over year but increased 19.9% for the first half. Management attributed first-half growth mainly to increased orders from major customers; it said 2016 had more uneven quarterly order timing.
- Second-quarter gross margin fell to 33.5% from 41.1%, as cost of revenue rose to $2,381 from $2,170 while revenue declined. For the first half, gross margin was approximately flat year over year. Research and development expense increased to $476 for the quarter and $860 for the half-year; selling, general and administrative expense was $697 and $1,460, respectively.
- In June, Nanophase entered into agreements with Eminess Technologies, Inc. for polishing-related products: an exclusive know-how license with royalties, an exclusive supply agreement for other products, and technology-development assistance. Eminess paid $36 for equipment and a one-time $250 fee for development assistance; the latter was recorded as deferred revenue at quarter-end.
- Management expected quarterly R&D and selling, general and administrative expenses to remain near current levels for the rest of 2017. It anticipated capital spending of $100–$300 for the remainder of 2017, subject to project outcomes, and stated that higher product volumes could improve absorption of fixed manufacturing costs. No specific revenue or earnings guidance was provided.
- Management said available cash and unused borrowing capacity should fund operating plans through 2017, while noting that actual capital needs depend on customer demand, development and manufacturing requirements, and other factors. Additional financing may be unavailable, unacceptable in terms, or dilutive.
Risks and contingencies
- Customer concentration is substantial: the three largest customers represented approximately 72%, 7%, and 5% of second-quarter revenue and 70%, 7%, and 5% of first-half revenue. The largest customer, BASF, is a major personal-care and sunscreen customer.
- BASF supply agreements include covenants and potential rights to license technology and acquire specified equipment if defined trigger conditions occur. One trigger includes trailing-twelve-month earnings below zero together with cash and qualifying investments below $1 million. Quarter-end cash was approximately $1.15 million; the filing reports no line-of-credit borrowings.
- Management warned that a BASF technology/equipment transfer could cause substantial near-term revenue and capacity loss, and that rebuilding capacity could take more than 12 months. Customer loss or reduced orders could also require financing or business-plan changes.
- Other cited risks include commodity and supplier costs, the ability to pass cost increases to customers, uncertain adoption of new products, financing availability, and potential limits on use of approximately $82 million in tax-loss carryforwards. Management said there were no material changes to the risk factors in its 2016 Form 10-K.
- No material pending legal proceedings were reported. The company implemented a new ERP system in April 2017 and said it had not materially affected internal control over financial reporting; management concluded disclosure controls were effective.
Key facts for investors to verify
- Whether cash remains above the BASF agreement’s $1 million threshold and whether all related financial and operational covenants are being met.
- Receivables collection and working-capital needs, given the increase in accounts receivable and first-half operating cash outflow.
- Revenue concentration, order patterns, and the sustainability of growth from major customers and newer Solésence and energy-management products.
- Progress and commercial terms under the Eminess agreements, including royalty revenue, supply activity, and recognition of the $250 deferred fee.
- Whether planned capital spending and operating cash needs can be funded without additional, potentially dilutive financing.