Filing summary
Entity and period: The supplied filing is Nanophase Technologies Corporation’s Form 10-K for the fiscal year ended December 31, 2013—not a filing for SOLESENCE, INC. It reports annual results; standalone fourth-quarter figures are not clearly provided in the supplied text.
Business context
Nanophase develops and manufactures engineered nano- and sub-micron materials for personal care and sunscreen, coatings, polishing, plastics, diagnostics, and other applications. BASF is its largest customer, primarily for zinc oxide products used in personal care. The company reported one business segment and operated two manufacturing facilities in the Chicago area.
Financial performance
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $9.590 million | $10.037 million |
| Product revenue | $9.566 million | $9.725 million |
| Gross profit | $2.560 million | $2.641 million |
| Gross margin | 26.7% | 26.3% |
| Operating loss | $2.491 million | $2.389 million |
| Net loss | $2.478 million | $2.393 million |
| Net loss per share, basic and diluted | $0.09 | $0.10 |
| Cash used in operating activities | $0.522 million | $0.600 million |
| Cash and cash equivalents | $3.276 million | $4.124 million |
Other revenue fell to $24,000 from $312,000, mainly because a royalty license expired in March 2013. Cost of revenue declined to $7.030 million from $7.396 million. Research and development expense was $1.679 million versus $1.627 million; selling, general and administrative expense was $3.372 million versus $3.403 million.
At year-end, current assets were $4.537 million and current liabilities were $857,000. Total liabilities were approximately $1.660 million, including capital lease obligations of $41,000; the company reported no debt. Stockholders’ equity was $5.368 million, and accumulated deficit was $90.678 million. Capital expenditures were approximately $279,000.
Changes and drivers versus 2012
- Revenue decreased approximately 4.5%. Lower legacy polishing sales to a former major customer were mostly offset by increased sales to BASF and smaller or newer customers.
- Net loss widened by $85,000, despite slightly higher gross margin percentage; gross profit declined in dollars and operating expenses remained substantial.
- Cash declined by $848,000. Operating cash use improved modestly, but 2012 included $2.220 million in net proceeds from a shareholder rights offering; there was no comparable equity raise in 2013.
- Revenue from the three largest customers was approximately 72%, 6%, and 5% in 2013, compared with 67%, 4%, and 5% in 2012.
Outlook, risks, and unusual items
- Management expected a loss for 2014, but said cash, cash equivalents, and investments on hand, together with operating cash, should fund operating plans through 2014. Planned 2014 capital spending was estimated at $200,000–$400,000, potentially more if business-development projects succeed.
- Management anticipated slightly lower R&D spending and SG&A near 2013 levels, potentially higher if initiatives succeed. New polishing and energy-management solutions were being qualified with potential customers; timing and revenue outcomes were uncertain.
- BASF supply agreements include provisions that could permit technology transfer and sale of specified production equipment if triggering conditions occur. One financial trigger involves trailing 12-month earnings below zero together with cash and certain investments below $1 million. Year-end cash and investments were approximately $3.306 million, and the company reported no debt.
- Dependence on BASF, long customer adoption cycles, recurring losses, the need to grow revenue, and possible need for additional capital are key risks. Cerium oxide supply and cost remain a concern for polishing applications, despite improved availability and pricing from earlier peaks.
- The 2013 cash-flow benefit included $0.8 million from working-capital timing, principally receivables collections and fourth-quarter shipment timing. Management cautioned that this benefit may not recur.
- The company had approximately $79 million of tax net operating loss carryforwards, but ownership-change limits and uncertainty over future taxable income may restrict use or lead to expiration. No income tax provision was recorded.
Most important facts to verify
- Confirm the intended issuer: the filing is for Nanophase Technologies Corporation (NANX), not SOLESENCE, INC.
- Review the full 10-K financial statements and subsequent filings for cash burn, liquidity, and whether the company’s 2014 funding outlook was achieved.
- Verify customer concentration, BASF supply-agreement terms and trigger status, and any changes to the company’s relationship with BASF.
- Track sales qualification and commercialization of new products, particularly polishing and energy-management solutions, and whether revenue becomes less dependent on BASF.
- Assess the effects of cerium oxide pricing and availability, operating losses, and potential financing needs.
The independent auditor issued an unqualified opinion on the 2013 and 2012 financial statements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not attest to internal-control effectiveness.