Business context and reporting period
Filing identity: The supplied filing is Nanophase Technologies Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. This does not match the request metadata naming SOLESENCE, INC.; verify the intended issuer.
Nanophase develops and manufactures engineered nanomaterials and related technologies for personal care, coatings, plastics, medical, energy and polishing applications. Its common stock traded on OTCQB under NANX.
Financial performance and condition
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenue | $2.164 million | $2.101 million | $7.826 million | $7.293 million |
| Gross profit | $516 thousand | $529 thousand | $2.271 million | $1.944 million |
| Gross margin | 23.8% | 25.2% | 29.0% | 26.7% |
| Operating loss | $633 thousand | $656 thousand | $1.577 million | $1.813 million |
| Net loss | $633 thousand | $658 thousand | $1.569 million | $1.811 million |
| Basic and diluted loss per share | $0.02 | $0.02 | $0.06 | $0.08 |
For the nine months, operating cash used was $591 thousand, versus $202 thousand in 2012. Investing cash used was $180 thousand; financing cash used was $46 thousand, compared with $2.206 million provided in 2012, largely from a rights offering. Cash and equivalents were $3.307 million at September 30, down $817 thousand from year-end 2012. Including restricted investments, cash and short-term investments totaled $3.337 million.
At quarter-end, current assets were $5.544 million and current liabilities $1.167 million. Total capital lease obligations were approximately $48 thousand; the company reported no debt. Total assets were $8.202 million, and stockholders’ equity was $6.224 million.
Material changes versus comparable periods
- Nine-month revenue grew 7.3%, with product revenue up and other revenue sharply lower after a Japanese license agreement expired in March 2013. Q3 revenue increased 3.0% year over year.
- Nine-month gross profit and gross margin improved, while Q3 gross profit and margin declined slightly. Management attributed higher cost of revenue to greater sales volume and said margins depend on volume, product mix, cost control and raw-material prices.
- Nine-month net loss narrowed by $242 thousand. Operating cash use nevertheless increased, primarily because 2012 benefited from a temporary working-capital inflow of nearly $0.5 million.
- Cash declined from $4.124 million at December 31, 2012. The 2012 financing comparison included rights-offering proceeds; no such proceeds were received in 2013.
Outlook, risks and other notable items
Management said cash and cash equivalents were expected to fund operating plans through 2013 and 2014, and anticipated approximately $100 thousand of capital spending for the remainder of 2013. It expected R&D spending to remain broadly stable in Q4 2013 and described customer adoption and revenue opportunities as potential sources of growth in 2014 and beyond; timing and revenue from development opportunities were uncertain.
Customer concentration is substantial: the largest customer represented approximately 74% of Q3 revenue and 71% for the nine-month period. Under BASF supply agreements, specified events—including a trailing 12-month loss together with cash, equivalents and qualifying investments below $1 million, or acceleration of debt over $10 million—can trigger BASF rights to obtain a technology license and/or purchase production equipment. Management reported about $3.3 million of cash, equivalents and short-term investments and no debt at quarter-end. A trigger and exercise of those rights could reduce revenue and production capacity; replacement equipment could take more than 12 months.
Other risks cited include continued losses, customer concentration, financing availability, uncertain product demand, raw-material and wage cost increases, manufacturing capacity, competition, intellectual property and potential regulation. The company reported approximately $77 million of tax NOL carryforwards, whose use may be limited and some of which may expire unused. No legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Investor verification priorities
- Confirm the intended issuer: the filing names Nanophase Technologies Corporation, not SOLESENCE, INC.
- Assess dependence on BASF and the consequences and precise terms of the supply-agreement transfer and equipment-sale provisions.
- Track cash burn, working-capital movements, capital spending and liquidity relative to the $1 million covenant threshold.
- Evaluate whether revenue growth, customer diversification and product adoption can improve gross margins and reduce recurring losses.
- Review the expired license-related revenue, NOL utilization limitations and any financing needs or dilution risk.