Nanophase Technologies Corporation — Q2 2016 Form 10-Q
Filing identity: The filing is for Nanophase Technologies Corporation, not Solesence, Inc. It covers the quarter and six months ended June 30, 2016; interim financial statements are unaudited. Unless otherwise stated, amounts are in thousands of dollars.
Business context and reporting period
Nanophase develops and manufactures engineered nano- and sub-micron materials for markets including personal care, coatings, polishing, plastics, medical diagnostics, and energy. Product sales are the principal source of revenue. The company reported one business segment and sells internationally as well as in North America.
Financial performance and liquidity
| Metric | Three months ended June 30, 2016 | Three months ended June 30, 2015 | Six months ended June 30, 2016 | Six months ended June 30, 2015 |
|---|---|---|---|---|
| Total revenue | $3,683 | $2,937 | $5,894 | $5,248 |
| Gross profit | $1,513 | $992 | $1,969 | $1,558 |
| Gross margin | 41.1% | 33.8% | 33.4% | 29.7% |
| Operating income (loss) | $466 | $(90) | $(140) | $(693) |
| Net income (loss) | $463 | $(93) | $(148) | $(699) |
For the first half, research and development expense was $673 (up from $645) and selling, general and administrative expense was $1,436 (down from $1,606). Interest expense was $8 for the six months. No income tax provision was recorded.
Cash and cash equivalents were $1,424 at June 30, 2016, versus $1,275 at year-end 2015. Current assets were $4,168 and current liabilities $1,215. Capital lease obligations totaled $192 ($97 current and $95 long-term); no line-of-credit borrowings were outstanding. First-half operating cash use was $692, investing cash use $100, and financing cash provided $941. Financing included $988 from issuing 2.6 million shares to the largest stockholder. Capital expenditures were $63.
Material changes versus the prior comparable period
- Q2 revenue rose 25% year over year, primarily due to higher volume from the largest customer in personal care and sunscreen applications. First-half revenue increased 12%.
- Q2 shifted from a $93 net loss to $463 net income. The first-half net loss narrowed to $148 from $699.
- Gross margin improved in both comparison periods. Management attributed margin potential to higher production volumes and better absorption of fixed manufacturing costs, while noting the effects of revenue mix and raw-material costs.
- Cash increased by $149 during the first half, supported by the equity issuance; operating activities continued to use cash. A June increase in receivables, associated with order flow, was the main operating cash use.
Outlook, risks, contingencies, and other notable items
- Management expected quarterly R&D expense for the rest of 2016 to be consistent with Q2 levels, and SG&A to increase by up to 10% from Q2 levels as it marketed and launched products. Planned capital spending for the rest of 2016 was $150–$250, potentially higher if projects succeeded. These are expectations, not guarantees.
- The company said cash, operating cash flow, and unused borrowing capacity were expected to fund operating plans through 2016. Its receivables-based credit line had a maximum of $300, subject to eligible receivables, and expired March 4, 2017; no advances were made in the first half.
- BASF was the largest customer. The top three customers represented 84% of Q2 revenue and 81% of first-half revenue. BASF supply agreements include conditions that could give BASF technology-transfer and equipment-purchase rights. A key covenant trigger includes trailing 12-month earnings below zero together with cash and specified investments below $1 million; another relates to acceleration of debt over $10 million. The company reported $1.4 million in cash and no outstanding debt at quarter-end.
- Management warned that customer losses, insufficient financing, cost increases that cannot be passed through, or weak adoption of new products could impair results and plans; insufficient capital could raise going-concern doubts. The company reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
- Management stated that disclosure controls were effective at a reasonable-assurance level and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing identifies Nanophase Technologies Corporation, despite the request metadata naming Solesence, Inc.
- Track customer concentration, especially BASF sales and compliance with the supply-agreement covenants and potential technology-transfer triggers.
- Monitor receivables collection, operating cash use, available credit capacity, and whether the company maintains cash above the relevant covenant threshold.
- Assess whether new product launches and higher volumes materialize, support gross margins, and justify planned capital spending and expense increases.
- Review share dilution from the 2.6 million-share issuance and the continuing impact of the company’s accumulated deficit and losses over the first half.