Filing Summary
Entity note: The supplied filing is Nanophase Technologies Corporation’s Form 10-Q, not a filing identifying Solesence, Inc. as the registrant. It covers the quarter and six months ended June 30, 2013; the interim financial statements are unaudited.
Business Context and Reporting Period
Nanophase develops and manufactures engineered nano- and sub-micron materials for markets including personal care, coatings, plastics, energy, diagnostics, and polishing. Product sales are its main revenue source. The company trades on OTCQB under NANX and reported as a smaller reporting company.
Key Financial Metrics
| Metric | Three months ended June 30, 2013 | Six months ended June 30, 2013 |
|---|---|---|
| Net revenue | $2.683 million | $5.662 million |
| Gross profit / margin | $849,025 / approximately 31.6% | $1.755 million / approximately 31.0% |
| Operating loss | $461,350 | $944,493 |
| Net loss | $451,594 | $935,774 |
| Net loss per share | $0.02 | $0.03 |
| Operating cash flow | Not separately presented for the quarter | $(862,591) |
At June 30, 2013, cash and cash equivalents were $3.161 million, with $30,000 of restricted certificates of deposit, for cash and short-term investments of approximately $3.191 million. Current assets were $5.977 million and current liabilities $1.067 million. Total assets were $8.687 million; stockholders’ equity was $6.803 million. Capital lease obligations totaled approximately $55,700; the company reported no debt.
Changes Versus Prior Comparable Period
- Second-quarter revenue declined approximately 3.6% year over year, while six-month revenue rose approximately 9.1%.
- Second-quarter product revenue was nearly flat, down to $2.677 million from $2.703 million. Six-month product revenue increased to $5.653 million from $5.033 million.
- Other revenue fell substantially: $5,618 for the quarter and $9,250 for the half year, versus $80,111 and $159,156, respectively. The prior-year amounts included license revenue from an agreement that expired in March 2013.
- Second-quarter net loss increased to $451,594 from $378,434; the six-month net loss narrowed to $935,774 from $1.153 million.
- Six-month gross margin improved to approximately 31.0% from 27.2%. Operating cash flow shifted from $38,566 provided in the first half of 2012 to $862,591 used in the first half of 2013, which management attributed largely to a roughly $0.5 million working-capital benefit in 2012 that reversed in 2013.
- Cash and cash equivalents decreased by $963,079 during the first half, to $3.161 million. The six-month weighted-average share count increased to 28.47 million from 21.21 million.
Outlook, Commentary, and Risks
- Management said available cash, investments, operating cash, and accessible capital should fund operating plans through 2013. Expected capital spending for known needs in the remainder of 2013 was $150,000–$300,000, depending on project progress.
- Management expects customer adoption and revenue opportunities in targeted markets, but noted that initiatives are progressing at different rates and that significant revenue from some developing materials is uncertain. It did not provide quantified revenue or earnings guidance.
- Margins depend on product mix and volume, cost control, and the ability to pass commodity-driven raw-material price increases to customers. Management said current fixed manufacturing capacity could support materially higher production, but there may not be continued absolute gross-profit growth.
- Customer concentration is significant: the three largest customers represented approximately 62%, 11%, and 9% of second-quarter revenue. BASF was the largest customer. Loss of a major customer could materially harm results.
- BASF supply agreements contain technology-transfer and equipment-sale rights under specified conditions, including a covenant trigger involving trailing 12-month earnings below zero together with cash, cash equivalents, and specified investments below $1 million, or acceleration of debt exceeding $10 million. The company reported about $3.2 million of cash and short-term investments and no debt at quarter-end. A trigger and BASF’s exercise of its rights could result in lost revenue and production capacity; replacing equipment could take more than 12 months.
- Other disclosed risks include uncertain customer demand, access to financing, raw-material cost increases, manufacturing capacity and product-mix flexibility, competition, and protection of intellectual property. Management said there were no material changes to previously disclosed risk factors. No legal proceedings were reported.
- Disclosure controls were assessed as effective at a reasonable-assurance level; the company reported no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the intended company: this filing identifies Nanophase Technologies Corporation, not Solesence, Inc.
- Track liquidity and operating cash use against the BASF $1 million covenant threshold and the company’s stated 2013 funding plan.
- Assess continued dependence on BASF and other major customers, including any changes in concentration or supply-agreement status.
- Monitor whether product growth and manufacturing efficiencies offset operating expenses and commodity-cost pressures, especially after expiration of the Japanese license agreement.
- Review subsequent filings for actual capital spending, cash balances, customer developments, and progress toward profitable operations.