Business context and reporting period
The supplied filing is Nanophase Technologies Corporation’s Form 10-Q for the quarter ended September 30, 2011; it does not identify Solesence, Inc. as the registrant. Nanophase develops and manufactures engineered nanomaterials for markets including sunscreen, coatings, polishing, personal care, and plastics. Results cover the three and nine months ended September 30, 2011, compared with the same 2010 periods.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net revenue | $2.24 million | $2.08 million | $7.95 million | $7.42 million |
| Gross profit (margin) | $349,000 (15.5%) | $474,000 (22.8%) | $2.25 million (28.3%) | $2.16 million (29.1%) |
| Operating loss | $1.01 million | $1.59 million | $2.09 million | $2.88 million |
| Net loss | $1.01 million | $1.58 million | $2.09 million | $2.86 million |
| Basic and diluted loss per share | $0.05 | $0.07 | $0.10 | $0.13 |
At September 30, cash and cash equivalents were $3.32 million, restricted investments were $30,000, and current assets were $6.64 million versus current liabilities of $1.18 million. The company had no balance outstanding on its $1 million secured line of credit, no long-term debt reported, and no current capital lease obligation. Stockholders’ equity was $8.66 million. Nine-month operating cash use was $2.32 million; investing cash use was $114,000 and financing cash provided was $3,000. Cash declined $2.43 million from year-end 2010.
Material changes versus prior periods
- Revenue rose 8% in Q3 and 7% for the first nine months, primarily due to higher product sales to the second-largest customer. Other revenue declined, partly because a research project generated revenue in Q3 2010.
- Q3 gross profit fell despite higher revenue, with gross margin down to 15.5% from 22.8%; management attributed higher costs in part to more expensive cerium oxide and higher production volume. Nine-month gross profit increased modestly.
- Operating loss improved year over year, but the 2010 comparison included a $700,000 agreement termination charge. Excluding that charge, Q3 2011 operating loss was greater than the comparable 2010 loss.
- Nine-month operating cash use increased from $541,000 to $2.32 million. Management attributed much of the working-capital increase to cerium oxide costs and related effects across manufacturing and sales.
Outlook, risks, and unusual items
- Management expected adoption by end users to grow into 2012 and cited progress through testing and development, including activity following the 2011 launch of abrasion-resistant additives. It cautioned that timing and significant revenue from developing products are uncertain.
- Management expected R&D expense not to increase significantly in Q4 2011, capital spending for known needs to remain below $100,000 for the rest of 2011, and cash, operations, and available credit to fund plans through the rest of 2011 and into 2012. It expected a modest working-capital benefit for the remainder of 2011.
- Two customers represented approximately 75% of Q3 revenue and 77% of nine-month revenue. The largest customer is BASF. Its supply agreements can trigger technology-transfer rights and, potentially, an equipment sale if specified conditions are met, including a combination of trailing 12-month losses and cash/investments below $2 million. The company reported approximately $3.3 million in cash, cash equivalents, and investments and no debt at quarter-end, and said it believed it could avoid the trigger through the rest of 2011 and into 2012. A trigger could materially reduce revenue and production capacity; replacement equipment could take more than 12 months.
- Restricted supply and increased prices for rare-earth materials, especially cerium oxide sourced largely from China, create cost and availability risks for polishing products. Management had inventory and orders covering expected needs through the first half of 2012, but described longer-term results as uncertain.
- Nasdaq notified the company that its share price had been below $1 for 30 consecutive days. It received a grace period through March 14, 2012 to regain compliance; failure could lead to delisting and impair access to capital markets.
- The company reported an approximately $84.5 million tax net operating loss carryforward, but ownership-change limits and expiration dates may restrict its use. No income-tax provision was recorded for the periods presented. No legal proceedings were reported; management said disclosure controls were effective and there were no material changes to internal control over financial reporting.
Important facts for investors to verify
- Confirm the issuer identity: the source filing is for Nanophase Technologies Corporation, not Solesence, Inc.
- Monitor customer concentration, BASF agreement covenants, and cash relative to the $2 million threshold.
- Track cerium oxide sourcing, costs, inventory coverage, and the effect on gross margins and operating cash flow.
- Assess whether new products and customer testing convert into diversified, recurring revenue, and whether the company regains Nasdaq minimum-bid compliance by the deadline.