Business context and reporting period
This is Nanophase Technologies Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2011, filed August 12, 2011. The request metadata names SOLESENCE, INC., but the filing identifies Nanophase Technologies Corporation as the registrant (NASDAQ: NANX). Nanophase develops and manufactures engineered nanomaterials for markets including sunscreens, coatings, personal care, and polishing.
Financial results and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net revenue | 2011: $2.92 million; 2010: $3.33 million | 2011: $5.71 million; 2010: $5.34 million |
| Gross profit and margin | 2011: $0.98 million, 33.5%; 2010: $1.20 million, 36.1% | 2011: $1.90 million, 33.3%; 2010: $1.68 million, 31.5% |
| Operating loss | 2011: $0.53 million; 2010: $0.13 million | 2011: $1.08 million; 2010: $1.29 million |
| Net loss | 2011: $0.53 million; 2010: $0.13 million | 2011: $1.08 million; 2010: $1.27 million |
| Operating cash flow | Six months 2011: use of $2.17 million; 2010: use of $0.15 million |
Second-quarter product revenue fell to $2.84 million from $3.24 million, while first-half product revenue rose to $5.54 million from $5.17 million. The company attributed first-half growth primarily to increased purchases from its second-largest customer, partly offset by lower purchases from its largest customer. Second-quarter loss widened as revenue and gross profit declined and research and development and selling, general and administrative expenses increased.
At June 30, 2011, cash and cash equivalents were $3.47 million, restricted investments were $30,000, and total current assets were $7.53 million against current liabilities of $1.45 million. Cash, cash equivalents, and short-term investments totaled approximately $3.50 million, down from $5.77 million at December 31, 2010. The company had no outstanding balance on its $1 million asset-secured line of credit and no material debt outstanding. Capital expenditures were $52,141 in the first half.
Material changes and management commentary
- Operating cash use increased substantially year over year. Management attributed this mainly to approximately $1.8 million of working-capital growth, associated largely with higher cerium oxide costs and their effects on manufacturing and sales.
- Management said gross margins have improved at current revenue levels but remain constrained by insufficient volume to absorb manufacturing overhead. Margin development depends on sales volume and mix, cost reductions, and the ability to pass raw-material increases to customers.
- Management expected a modest working-capital benefit in the rest of 2011, no significant increase in R&D expense for the remainder of the year, and less than $200,000 of capital spending for the remainder of 2011. It believed available cash, operating cash, and the unused credit line would fund plans for at least 12 months. These are expectations, not guaranteed results.
- The company reported that Chinese export limitations had sharply constrained rare-earth availability and raised costs, particularly for cerium oxide used in polishing. It had inventory and 2011 purchase orders but said longer-term polishing business prospects depended on supply and cost.
Risks, contingencies, and unusual items
- Customer concentration is significant: three customers represented approximately 54%, 18%, and 6% of second-quarter revenue. The filing also states that a substantial majority of first-half revenue came from the two largest customers.
- BASF supply agreements include potential technology-transfer and equipment-sale rights if specified performance, contractual, or financial triggers occur. A financial trigger includes trailing 12-month earnings below zero together with cash, cash equivalents, and certain investments below $2 million; another involves acceleration of debt exceeding $10 million. The company reported about $3.5 million of qualifying liquidity and no debt at quarter-end. A trigger could impair revenue and production capacity, and replacement equipment could take more than 12 months.
- Management warned that additional financing, if needed, might not be available on acceptable terms and could dilute shareholders. Risks also include uncertain demand, customer loss, manufacturing capacity, competition, and the ability to pass through material and wage cost increases.
- The company reported an approximately $83.5 million tax net operating loss carryforward; use may be limited by prior ownership changes, and management expects some portion may expire unused. No legal proceedings were reported.
Important facts for investors to verify
- Confirm the issuer identity: the supplied metadata says SOLESENCE, INC., whereas the filing is for Nanophase Technologies Corporation.
- Track cash burn and working capital, especially receivables, inventory, and rare-earth material costs.
- Monitor revenue concentration, BASF contract covenants, and the company’s liquidity relative to the $2 million contractual threshold.
- Assess whether customer demand and sales volume can improve manufacturing-cost absorption and sustain margins.
- Review the availability and pricing of cerium oxide and the potential effect on polishing revenue and production.