Nanophase Technologies Corporation — Q1 2016 Form 10-Q
Filing identity: The request metadata names SOLESENCE, INC., but the supplied filing is for Nanophase Technologies Corporation (OTCQB: NANX). This summary reflects the supplied filing. Reporting period: three months ended March 31, 2016; dollar amounts are in thousands unless noted.
Business context and financial results
Nanophase develops and manufactures engineered nano- and sub-micron materials for markets including personal care, coatings, polishing, plastics, diagnostics and energy. Management reported early-stage revenue from newer personal-care, polishing and energy-management offerings.
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total revenue | $2,211 | $2,310 |
| Gross profit / gross margin | $456 / 20.6% | $565 / 24.5% |
| Research and development | $301 | $302 |
| Selling, general and administrative | $761 | $866 |
| Operating loss | $(606) | $(603) |
| Net loss | $(610) | $(606) |
| Basic and diluted loss per share | $(0.02) | $(0.02) |
| Cash used in operating activities | $(698) | $(612) |
Revenue declined about 4%. Product revenue was $2,189 versus $2,300; other revenue was $22 versus $10. The filing attributes the revenue decrease primarily to timing: a medical-diagnostics customer shipment occurred in Q1 2015 but not Q1 2016, with management expecting a shipment in Q2 2016 instead. Gross profit fell as cost of revenue increased slightly despite lower revenue, reducing gross margin by about 3.9 percentage points.
Financial position, cash flow and funding
- Cash and cash equivalents were $1,478 at March 31, 2016, up from $1,275 at December 31, 2015. Current assets were $3,462 and current liabilities $1,142.
- Operating cash use was $698, including working-capital demands, notably increased accounts receivable. Investing cash use was $64, including $27 of equipment and leasehold-improvement purchases.
- Financing provided $965, principally from a $988 common-stock issuance to the largest stockholder on February 10, 2016. The company issued 2.6 million shares; outstanding shares rose to 31,185,496 from 28,585,496 at year-end.
- Capital lease obligations totaled $215 ($96 current and $119 long-term). No borrowings were outstanding on the revolving credit line; it was extended to March 4, 2017, with a maximum advance of $300 subject to borrowing conditions. A separate $30 promissory note supporting a lease had no borrowings.
- Stockholders’ equity was $3,285, and accumulated deficit was $94,208. No income-tax provision was recorded.
Outlook, risks and notable items
- Management said cash, operating cash flow and unused borrowing capacity should fund operating plans through 2016. Planned capital spending for the rest of 2016 was $200–$350, depending on project progress.
- Management expected quarterly R&D expense to rise about 10% in each remaining 2016 quarter versus Q1, largely for planned staffing in personal care and energy management. SG&A was expected to increase about 5% over Q1 levels during the rest of 2016.
- Management expected higher product volumes to improve fixed-cost absorption, but said margin improvement depends on product mix, volume, cost reductions and the ability to pass through raw-material price increases. It cautioned that absolute gross-profit growth was uncertain.
- Three customers represented approximately 71%, 7% and 4% of Q1 revenue. BASF, the largest customer, is covered by exclusive supply agreements. Certain performance, financial, insolvency or other contractual triggers could give BASF rights to technology and/or production equipment. A triggered transfer could materially reduce revenue and production capacity; rebuilding capacity could take more than 12 months.
- One BASF covenant trigger applies if trailing 12-month earnings are negative and cash and certain investments fall below $1 million; other triggers include specified debt acceleration or insolvency. Cash was approximately $1.5 million at quarter-end. The filing warns that additional financing may be unavailable, unacceptable or dilutive and that insufficient capital could curtail plans or raise going-concern doubt.
- Other risks include continued losses, customer concentration, uncertain adoption of products, commodity input costs (including cerium oxide), competition, manufacturing flexibility and potential regulatory changes. The company reported no material change to its previously disclosed risk factors, no material pending legal proceedings, and effective disclosure controls.
Most important facts for investors to verify
- Confirm issuer identity: the supplied filing is Nanophase Technologies Corporation, not the company specified in the request metadata.
- Track BASF/customer concentration, supply-agreement covenants and whether cash remains above the relevant threshold.
- Assess operating cash burn, receivables collection, available credit and funding needs against the company’s 2016 plan.
- Monitor whether expected Q2 medical-diagnostics shipments and newer product opportunities translate into sustained revenue and improved margins.
- Review the full supply agreements, equity issuance terms and subsequent filings for developments affecting dilution, liquidity or customer rights.