Filing summary
Issuer and period: The supplied filing is Nanophase Technologies Corporation’s Form 10-K for the fiscal year ended December 31, 2017, not a filing by Solesence, Inc. Solésence, LLC is identified as Nanophase’s wholly owned subsidiary. The filing reports annual results; it does not provide a clear standalone fourth-quarter financial summary.
Business context and strategy
Nanophase develops and manufactures engineered nano and non-nano materials for applications including personal care, coatings, polishing, medical diagnostics and energy management. Its strategy emphasizes direct customer collaboration and expanding finished skin-care formulations sold through Solésence. Management said it was directing most business-development resources toward personal care while continuing to serve other markets.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $12.471 million | $10.783 million |
| Gross profit / margin | $3.850 million / 30.9% | $3.240 million / 30.0% |
| Operating loss | $0.772 million | $1.268 million |
| Net loss | $0.789 million | $1.283 million |
| Cash used in operating activities | $0.960 million | $0.241 million |
| Cash at year-end | $1.955 million | $1.779 million |
- Revenue rose about 15.7%. Product revenue increased to $12.129 million from $10.720 million. Other revenue was $342,000, including a one-time $250,000 technology-development fee from Eminess Technologies.
- Cost of revenue increased to $8.621 million from $7.543 million, reflecting higher volume, zinc costs and manufacturing inefficiencies for new personal-care materials. Gross margin remained broadly similar year over year.
- Research and development expense increased to $1.736 million from $1.554 million; selling, general and administrative expense decreased to $2.886 million from $2.954 million. Interest expense was $34,000 versus $15,000.
- Operating cash use increased, largely due to higher accounts receivable and inventory, partly offset by higher accounts payable. Investing activities used $72,000; financing activities provided $1.208 million.
- At year-end, current assets were $4.624 million and current liabilities $2.024 million. The balance sheet showed $300,000 drawn on the line of credit and $559,000 of capital-lease obligations. Stockholders’ equity was $3.232 million; accumulated deficit was $95.669 million.
Changes, outlook and key developments
- Revenue from the largest customer, BASF, was 61% of total revenue in 2017, down from 69% in 2016. The second-largest customer’s share rose to 11% from 4%; the third-largest customer accounted for 4% versus 5%.
- In June 2017, Nanophase entered agreements with Eminess for polishing-market products and technology. Eminess paid a $250,000 development fee and $36,000 for equipment; the arrangements also include exclusive supply and licensing/royalty provisions.
- Management expected Solésence product sales to expand in 2018 and anticipated broader customer adoption, but cautioned that timing and revenue realization were uncertain. It forecast 2018 capital spending of $400,000–$650,000, subject to project progress and financing.
- Management said cash on hand, operating cash and available borrowing capacity were expected to fund operating plans through 2018. It also warned that working-capital needs, customer losses or weaker-than-expected growth could require additional financing or changes to plans. The filing does not provide a specific revenue or profitability forecast.
- In March 2018, the company executed a replacement bank facility with a maximum stated limit of $500,000, subject to borrowing-base restrictions and restrictive covenants. Advances are short-term, secured by company assets, and must be repaid within five business days. The prior $300,000 line was repaid in January 2018.
- BASF agreements include financial and other triggers that could give BASF rights to a technology license and/or purchase certain production equipment. One financial trigger includes negative earnings over the specified period together with cash and certain investments below $1 million.
- The company reported no pending legal proceedings it believed would materially adversely affect it. Management stated disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
Principal risks and unusual items
- Nanophase has incurred annual losses since inception and reported a $0.789 million net loss in 2017. Customer concentration and BASF’s contractual rights create material revenue and operational exposure.
- Cash use from operations accelerated, while management cited potential temporary Solésence working-capital demands and possible need for additional capital. Financing may be unavailable on acceptable terms and could dilute shareholders.
- Raw-material availability and pricing, including high-purity zinc and rare-earth materials, may pressure margins. Adoption cycles for new products can take one to five years, making demand and timing difficult to forecast.
- Competition, manufacturing scale-up, regulatory requirements, product liability, intellectual-property protection and dependence on customer development and marketing channels may affect results.
- A $1.0 million common-stock sale to the largest investor in December 2017 funded corporate needs and increased shares outstanding by 2.5 million. The same investor and affiliates beneficially owned approximately 47% of shares as of March 14, 2018.
- The 2017 tax-law change reduced deferred tax assets and the related valuation allowance by approximately $9.3 million; the company recorded no income-tax provision. It reported approximately $83 million of tax net operating loss carryforwards, whose use may be limited and whose realization is uncertain.
Investor verification points
- Confirm the intended issuer: the supplied 10-K is for Nanophase Technologies Corporation, with Solésence, LLC as a subsidiary.
- Review BASF contract terms, including the cash/earnings trigger, technology-transfer and equipment-sale rights, and the consequences of any triggering event.
- Track customer concentration, customer order trends, and whether Solésence launches generate recurring product revenue rather than one-time development fees.
- Assess operating cash use, receivables and inventory growth, capital spending, and the availability and restrictive terms of the bank facility.
- Verify margin improvement against raw-material costs, production efficiency and product mix, and monitor whether the company reaches profitability without further equity financing.