Business context and reporting period
Nanophase Technologies Corporation (the registrant named in the filing; not Solesence, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. It develops and manufactures engineered nano- and sub-micron materials for personal care, coatings, polishing, energy and other applications. The company reports one business segment.
Financial performance and liquidity
Amounts below are in thousands, except per-share data and percentages.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $2,937 | $2,878 | $5,248 | $5,462 |
| Gross profit | $992 | $1,032 | $1,558 | $1,739 |
| Gross margin | 33.8% | 35.9% | 29.7% | 31.8% |
| Operating loss | $(90) | $(69) | $(693) | $(497) |
| Net loss | $(93) | $(70) | $(699) | $(499) |
| Net loss per share | $(0.00) | $(0.00) | $(0.02) | $(0.02) |
- Cash and cash equivalents were $1.156 million at June 30, 2015, down from $1.862 million at December 31, 2014. Current assets were $3.567 million and current liabilities $1.475 million.
- For the first six months, operating cash use was $749,000, investing cash use $192,000, and financing cash provided $235,000. The decrease in cash was $706,000. Higher receivables, associated with substantial June order flow, were a principal use of cash.
- At June 30, the balance sheet included a $250,000 line-of-credit borrowing, repaid July 3, 2015, and $215,000 of capital lease obligations. The company also entered into $65,000 of capital leases during Q2.
- No income tax provision was recorded. The company disclosed approximately $80 million of tax net operating loss carryforwards, whose use may be limited and whose portions may expire unused.
Material changes versus prior comparable periods
- Q2 revenue rose 2% year over year, while first-half revenue fell 4%. Management attributed the first-half decline primarily to about $1 million less volume from its largest customer, mostly in Q1; higher sales to other customers partly offset the decline.
- Gross profit and gross margin fell in both comparisons. Management said margins are constrained by insufficient revenue to absorb manufacturing overhead efficiently; future margins depend on volume, product mix, cost control and raw-material prices.
- First-half R&D expense declined to $645,000 from $673,000; SG&A increased to $1.606 million from $1.563 million. Q2 SG&A was lower year over year at $739,000 versus $765,000.
- Three customers represented 57%, 13% and 9% of Q2 revenue; the largest customer represented 58% of first-half revenue. The filing identifies BASF as the largest customer.
Outlook, risks and unusual items
- Management expected cash, operating cash flow and unused borrowing capacity to fund operating plans through 2015, but warned that additional financing might be unavailable, costly or dilutive. It projected $100,000–$150,000 of capital spending for the remainder of 2015, potentially more if projects succeed; R&D and SG&A were expected to remain around Q2 levels.
- Management described growth opportunities in polishing and energy-management applications, including increased orders in polishing and early commercial orders and testing in energy management. It cautioned that significant revenue from some development programs is uncertain.
- BASF supply agreements may permit a technology license and sale of certain equipment to BASF upon specified triggering events, including negative trailing-12-month earnings combined with cash and certain investments below $1 million, certain debt acceleration, insolvency, or specified contractual breaches. Such an event could jeopardize significant revenue and take more than 12 months to replace affected capacity. Management said it believed 2015 liquidity was adequate to avoid a trigger.
- Other disclosed risks include customer concentration, uncertain product demand and acceptance, raw-material cost increases (including rare-earth materials), manufacturing capacity, financing needs, and protection of intellectual property. The filing reported no material pending legal proceedings, no material control changes, and effective disclosure controls.
Important facts for investors to verify
- Whether the first-half sales decline from BASF and the high customer concentration persist, and whether growth in other accounts offsets them.
- Cash conversion and receivables collection after the June order surge, along with liquidity relative to the BASF covenant thresholds.
- Availability, terms and borrowing conditions of the revolving credit facility, including its March 2016 expiration and the five-day repayment requirement.
- Whether new-market testing converts into repeat commercial orders and improves production volume and gross margins.
- Expected capital spending, remaining funding needs, and any limits on use of tax net operating loss carryforwards.