Business context and reporting period
The supplied filing is Nanophase Technologies Corporation’s Form 10-Q for the quarter and six months ended June 30, 2012; it does not identify Solesence, Inc. Nanophase develops and manufactures engineered nanomaterials for personal care, coatings, polishing, and other applications. Figures are unaudited.
Financial results
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 |
|---|---|---|
| Net revenue | $2.783 million, down 4.8% year over year | $5.192 million, down 9.1% |
| Gross profit / margin | $850,425 / 30.6%, versus $979,779 / 33.5% | $1.414 million / 27.2%, versus $1.904 million / 33.4% |
| Operating loss | $376,476, compared with $530,109 | $1.157 million, compared with $1.085 million |
| Net loss | $378,434, versus $529,565 | $1.153 million, versus $1.083 million |
| Operating cash flow | Not separately presented for the quarter | $38,566 provided, versus $2.173 million used |
At June 30, cash and cash equivalents were $2.666 million and restricted certificates of deposit were $30,000. Current assets were $5.377 million and current liabilities $1.435 million. Capital-lease obligations totaled approximately $114,000; management reported no debt. Stockholders’ equity was $6.486 million, down from $7.476 million at year-end 2011.
Changes, outlook, and risks
- Second-quarter revenue and operating loss improved versus 2011, but first-half revenue fell and the operating and net losses widened. First-half gross margin declined, reflecting revenue volume and mix and manufacturing inefficiencies.
- R&D and SG&A expenses declined year over year. Management expected R&D expense not to increase significantly during the rest of 2012 and said growth in production volume could improve margins by absorbing fixed manufacturing costs. It anticipated customer adoption and potential revenue growth in new markets, while noting timing and demand remained uncertain.
- Management expected available cash, operations, working-capital changes, and the subsequent rights-offering proceeds to fund plans through 2012 and into 2013. If specified projects proceeded, remaining-2012 capital spending was estimated at $100,000–$300,000.
- BASF represented about 70% of second-quarter revenue. Its supply agreement includes a $2 million minimum-liquidity covenant and provisions that can trigger technology-transfer and equipment-sale rights; the filing says earnings below zero combined with cash and certain investments below $2 million can trigger those rights. The company had about $2.7 million in cash and investments at quarter-end and received additional capital after quarter-end.
- Cerium oxide costs had fallen from 2011 peaks but remained several times their level two years earlier. Management cited supply and pricing, customer concentration, uncertain product adoption, financing availability, manufacturing capacity, and the BASF agreement as material risks.
- A Japanese licensee prepaid $279,000 in April toward a $300,000 final minimum royalty due in 2013; the prepayment was recorded as deferred revenue and is to be recognized over the contract term.
Important facts for investors to verify
- The filing identifies Nanophase Technologies Corporation, not Solesence, Inc.; confirm the intended issuer and filing.
- Review BASF’s covenant definitions, trigger conditions, and potential impact on Nanophase’s production capacity and revenue.
- Assess reliance on the largest customer and whether new markets and customers can offset declining revenue and weak margins.
- Confirm the post-quarter rights offering: 7.25 million shares at $0.33 per share, generating approximately $2.2 million net proceeds. The shares and proceeds were not included in June 30 financial statements; the filing reported 28,458,162 shares outstanding as of August 8, 2012.
- Track cash burn, working-capital requirements, cerium oxide costs, capital spending, and progress toward sustained profitability.