Nanophase Technologies Corporation — Q1 2013 Form 10-Q
Business context and period: The filing is for the unaudited three months ended March 31, 2013. Nanophase develops and manufactures engineered nano- and sub-micron materials for markets including personal care, coatings, polishing, plastics, and energy. The filing identifies the registrant as Nanophase Technologies Corporation; this differs from the company name in the request metadata.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Total revenue | $2.979 million | $2.409 million |
| Product revenue | $2.976 million | $2.330 million |
| Gross profit and margin | $906,255; 30.4% | $563,687; 23.4% |
| Operating loss | $483,143 | $780,242 |
| Net loss | $484,180; $0.02 per share | $774,122; $0.04 per share |
| Operating cash flow | $(428,457) | $(358,083) |
| Cash and cash equivalents | $3.608 million | $4.124 million at Dec. 31, 2012 |
| Current assets / current liabilities | $6.255 million / $1.127 million | $6.592 million / $1.199 million at Dec. 31, 2012 |
Cash, cash equivalents, and restricted investments totaled $3.638 million at quarter-end. Total liabilities were approximately $1.952 million, including $62,800 of capital lease obligations; management reported no debt. Cash declined $516,052 during the quarter. Investing cash use was $56,114 and financing cash use was $31,481. The filing reports a $30,000 certificate of deposit pledged as rent collateral.
Material changes and management commentary
- Revenue rose approximately 24% year over year, primarily from product sales. Other revenue fell to $3,632 from $79,045, principally because technology-license revenue declined and the Japanese license agreement expired.
- Gross margin improved to approximately 30% from 23%, while the net loss narrowed by about $290,000. Management attributed higher cost of revenue mainly to increased sales volume and said manufacturing overhead remains underabsorbed at current revenue levels.
- Research and development expense was $428,730, up from $399,614; SG&A was $960,668, up from $944,315. Management did not expect R&D expense to increase significantly in 2013.
- Three customers represented approximately 79%, 7%, and 5% of Q1 revenue. BASF was the largest customer. Management said growth opportunities depend on customer adoption, product development and testing, and expanding sales in targeted markets; timing and revenue contribution are uncertain.
Outlook, risks, and contingencies
- Management believed available cash, operating cash flows, and accessible capital would fund operating plans through 2013. Planned capital spending for the remainder of 2013 was estimated at $300,000–$500,000, depending on project progress and success. Additional financing might be unavailable or dilutive.
- BASF supply agreements include technology-transfer and equipment-sale rights under specified triggers. These include a trailing 12-month loss together with cash, cash equivalents, and specified investments below $1 million, or acceleration of debt exceeding $10 million. Quarter-end liquidity was above the stated $1 million threshold, and the company reported no debt. If triggered and exercised, the arrangement could reduce revenue and manufacturing capacity; replacement equipment could take more than 12 months.
- Rare-earth supply, particularly cerium oxide used in polishing, remains a cost and availability risk. Management noted that higher input costs may not be passable to customers and could affect customer acceptance.
- The company reported approximately $77 million of tax net operating loss carryforwards; use may be limited by prior ownership changes and some carryforwards may expire unused.
- No legal proceedings were reported, and the company stated there were no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective at providing reasonable assurance.
Important facts for investors to verify
- Whether revenue growth and improved gross margin continue, given customer concentration and manufacturing overhead absorption.
- Current BASF agreement terms, covenant compliance, and any change in the customer’s technology-transfer or equipment-sale rights.
- Cash burn, actual capital spending, and financing needs relative to management’s 2013 plans.
- Availability and pricing of cerium oxide and other inputs, and the company’s ability to pass cost increases through to customers.
- Progress, commercialization timing, and customer demand for products and applications described as growth opportunities.