Business context and reporting period
The supplied filing is Nanophase Technologies Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2014—not a filing by Solesence, Inc. The company develops and manufactures engineered nano- and sub-micron materials for personal care, coatings, polishing, medical diagnostics, energy, and other markets. Financial amounts below are in thousands of dollars unless stated otherwise.
Key financial metrics
| Metric | Three months ended Sept. 30, 2014 | Three months ended Sept. 30, 2013 | Nine months ended Sept. 30, 2014 | Nine months ended Sept. 30, 2013 |
|---|---|---|---|---|
| Net revenue | $2,654 | $2,164 | $8,116 | $7,826 |
| Gross profit | $796 | $516 | $2,535 | $2,271 |
| Gross margin | 30.0% | 23.8% | 31.2% | 29.0% |
| Operating loss | $(348) | $(632) | $(846) | $(1,577) |
| Net loss | $(349) | $(633) | $(849) | $(1,569) |
| Net loss per share | $(0.01) | $(0.02) | $(0.03) | $(0.06) |
- Cash flow: For the first nine months of 2014, operating activities used $890, compared with $591 in 2013. Investing activities used $375, including $352 of equipment and leasehold-improvement spending; financing activities provided $7. Cash declined by $1,258 to $2,018.
- Liquidity and debt: At September 30, 2014, current assets were $4,337 and current liabilities were $1,166. Cash and cash equivalents were $2,018; there were no investments on the balance sheet and no borrowings under the bank promissory note. Capital lease obligations totaled $18, all current. Total liabilities were $1,955.
- Equity: Stockholders’ equity was $4,674, down from $5,368 at year-end 2013, primarily reflecting the nine-month net loss.
Material changes versus prior comparable periods
- Third-quarter revenue grew 23% year over year; nine-month revenue grew 4%. Management attributed growth to higher orders from the largest personal-care and sunscreen customer, polishing applications, and medical diagnostics. These gains partly offset weaker orders from coatings customers.
- Gross margin improved in both comparisons. Management cited revenue volume and manufacturing efficiencies, while noting that overhead absorption, product mix, and raw-material costs affect margins.
- Operating losses narrowed as gross profit increased and research and development spending declined. Nine-month selling, general and administrative expense also fell, although it increased in the third quarter.
- Cash used in operations increased by $299 year over year, primarily because accounts receivable drove an approximately $0.8 million working-capital outflow. Receivables rose to $1,326 from $52 at December 31, 2013.
Outlook, risks, and unusual items
- Management said cash on hand and cash from operations should fund operating plans through the remainder of 2014 and into 2015. Planned capital spending for the remainder of 2014 was estimated at $100–$150, mainly for polishing-related equipment; spending depends on project progress.
- Management expected research and development expense to rise slightly from its current rate and selling, general and administrative expense to increase slightly, but remain below 2013 spending. It did not provide a specific revenue or earnings forecast.
- Customer concentration is substantial: the largest customer accounted for approximately 71% of third-quarter revenue and 73% of nine-month revenue. The filing identifies BASF as the largest customer and describes supply-agreement provisions that could allow technology licensing and equipment transfer if specified conditions are triggered. These include a trailing 12-month loss combined with cash and qualifying investments below $1 million, certain debt-maturity acceleration, insolvency, or specified breaches. The company reported approximately $2.0 million in cash and short-term investments and no debt at quarter-end.
- If BASF exercised the transfer rights, the company warned it could lose significant revenue and production capacity; replacing equipment could take more than 12 months. Management also cited risks involving customer demand, access to financing, rare-earth and other input costs, manufacturing capacity, competition, intellectual property, and regulation.
- Other revenue included a nonrecurring fee-based development project completed in the second quarter. A $30 bank letter of credit and related promissory note supported lease obligations; no amount was borrowed. Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material pending legal proceedings.
Important facts for investors to verify
- Confirm the issuer identity: the filing is for Nanophase Technologies Corporation, despite the request metadata naming Solesence, Inc.
- Assess the sustainability of revenue growth and gross-margin improvement, including dependence on the largest customer and changing orders from coatings customers.
- Monitor receivable collections and operating cash burn; the sharp rise in receivables materially affected nine-month cash flow.
- Track cash against the BASF agreement’s $1 million threshold and review the agreement’s technology-transfer, equipment-sale, and other trigger terms.
- Evaluate whether planned capital spending and expected customer or market growth can be funded without additional financing, which management warned might be unavailable or dilutive.