Business Context and Reporting Period
This Form 10-Q is for Nanophase Technologies Corporation, for the quarter and nine months ended September 30, 2017. Nanophase develops and manufactures engineered nano- and sub-micron materials; its wholly owned Solésence subsidiary markets finished skin-care formulations. The filing is not a separate Solésence, Inc. report.
Financial Results
Amounts are in thousands of dollars except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $2,785 | $2,521 | $9,852 | $8,415 |
| Product revenue | $2,524 | $2,510 | $9,525 | $8,377 |
| Gross profit / margin | $585 / 21.0% | $680 / 27.0% | $2,990 / 30.3% | $2,649 / 31.5% |
| Operating loss | $(634) | $(422) | $(549) | $(562) |
| Net loss | $(643) | $(425) | $(574) | $(573) |
| Basic and diluted loss per share | $(0.02) | $(0.01) | $(0.02) | $(0.02) |
- Cash and cash equivalents were $1.070 million at September 30, down from $1.779 million at December 31, 2016. The company used $866,000 in operating cash in the first nine months, versus $354,000 in the comparable 2016 period.
- Investing activities provided $15,000, including $136,000 of equipment-sale proceeds; financing activities provided $142,000, including a $250,000 line-of-credit draw. The draw was repaid October 3, 2017.
- At September 30, the balance sheet showed $250,000 drawn on the line of credit and $401,000 of current and long-term capital lease obligations. Current assets were $3.916 million and current liabilities $2.111 million.
Material Changes and Management Commentary
- Quarterly revenue rose 10.5%, but product revenue was nearly flat; the increase in total revenue primarily reflected a one-time $250,000 ETI technology-development fee, as well as stronger coatings orders and new personal-care revenue. Nine-month revenue increased 17.1%, primarily on higher orders from major customers.
- Q3 gross profit declined despite higher revenue, and gross margin fell to 21.0% from 27.0%. Management cited higher zinc costs and manufacturing inefficiencies associated with new Solésence products. Nine-month gross profit increased, but gross margin also declined.
- Research and development expense increased to $494,000 in Q3 and $1.354 million year to date, reflecting added personnel and Solésence testing. Management expected Q4 R&D expense to decline about 10%; it expected SG&A to remain near current levels.
- Under June 2017 agreements, Eminess Technologies received an exclusive license for certain polishing products and an exclusive supply arrangement for others. ETI paid a $250,000 one-time development fee and $36,000 for testing equipment.
Outlook, Risks, and Unusual Items
- Management expected cash, operating cash flow, and available borrowing capacity to fund operating plans through 2017. It estimated remaining-2017 capital spending of $30,000–$80,000, subject to project outcomes; no longer-term earnings or revenue guidance was provided.
- Management cautioned that additional financing might be unavailable or dilutive, and that inadequate capital could curtail plans and raise going-concern concerns. It also cited uncertain customer demand, raw-material costs, product mix, manufacturing capacity, and Solésence launch costs.
- Three customers represented approximately 70% of Q3 revenue and 78% of nine-month revenue. BASF, the largest customer, has supply-agreement covenants that can permit technology transfer and equipment sale if specified conditions are met, including a combination of negative trailing-12-month earnings and cash/investments below $1 million. The filing warns that such an outcome could materially reduce revenue and impair replacement capacity.
- The company reported a roughly $82 million tax net operating loss carryforward, some of which may expire unused or be subject to limitations. No material litigation was reported; management stated there were no material changes to previously disclosed risk factors.
- After quarter-end, CFO Frank J. Cesario resigned effective November 17, 2017. The filing said the resignation was not related to a disagreement with the company.
Investor Verification Priorities
- Track cash conversion and receivables: accounts receivable increased to $1.581 million from $434,000 at year-end, and the filing attributes much of operating cash use to shipment timing.
- Monitor customer concentration, BASF covenant compliance, and any changes in supply agreements or potential technology-transfer rights.
- Assess whether Solésence and other new products generate repeat revenue and improve manufacturing efficiency and gross margins, apart from non-recurring ETI fees.
- Verify liquidity and financing needs after repayment of the quarter-end credit draw, including the cost and obligations of new capital leases.