Add
NANX to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| NANX > SEC Filings for NANX > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
Overview
Nanophase is a nanomaterials and applications developer and commercial
manufacturer with an integrated family of nanomaterial technologies. Nanophase
produces engineered nanomaterials for use in a variety of diverse markets:
sunscreens, architectural coatings, industrial coatings, ingredients, personal
care, abrasion-resistant applications, antimicrobial products, plastics
additives, medical diagnostics and a variety of polishing applications,
including semiconductors and optics. The Company targets markets in which it
feels practical solutions may be found using nanoengineered products. The
Company works closely with current and potential customers in these target
markets to identify their material and performance requirements and market its
own materials to various end-use applications manufacturers. Newer developed
technologies have made certain new products possible and opened potential new
markets. Management expects growth in end-user (customers of Nanophase's
customers) adoption in 2009 and beyond and revenue growth relative to these new
markets to follow thereafter. Management further expects that the Company will
attract additional customers to help it achieve growth in certain markets in
2009 and beyond.
Results of Operations
Total revenue decreased to $1,405,158 for the three months ended March 31, 2009, compared to $3,054,108 for the same period in 2008. A substantial majority of the Company's revenue for the three months ended March 31, 2009 is from the Company's three largest customers. See Note 8 to the Financial Statements for additional information regarding the revenue the Company derived from these three customers in the first quarter of 2009. Product revenue decreased to $1,296,813 for the three months ended March 31, 2009, compared to $2,942,722 for the same period in 2008. The decrease in product revenue was primarily attributed to a decrease in sales to its architectural coatings customer, which may have been impacted by the current state of the housing market, decreased sales from the Company's largest customer, a portion of which management attributes to inventory issues and decreased sales to Rohm and Haas Electronic Materials and BYK-Chemie. The Company and BASF Corporation currently have a technology agreement in place that has led to the joint development of the second generation of sunscreen nanomaterials for other potential personal care applications.
Other revenue decreased to $108,345 for the three months ended March 31, 2009, compared to $111,386 for the same period in 2008. This decrease was primarily attributed to decreases in shipping revenue.
The majority of the total revenue generated during the three months ended March 31, 2009 was from the Company's largest customer in healthcare for sunscreens components, from the Company's second largest customer for an application in architectural coatings and from the Company's medical diagnostic customer.
Cost of revenue generally includes costs associated with commercial production and customer development arrangements. Cost of revenue decreased to $1,314,924 for the three months ended March 31, 2009, compared to $2,000,208 for the same period in 2008. The decrease in cost of revenue was generally attributed to decreased revenue volume along with decreases in commodity metals pricing, reduction in manufacturing overhead and the Company's continued efficiencies in reducing its remaining variable manufacturing costs on nanomaterials. These decreases were partially offset by inefficiencies due to incomplete utilization of production assets. Nanophase expects to continue new nanomaterial development, primarily using its NanoArc ® synthesis and dispersion technologies, for targeted applications and new markets through 2009 and beyond. At current revenue levels the Company has generated a positive gross margin. Although the Company's margins have been impeded by not having enough revenue to absorb the manufacturing overhead that is required to work with current customers and expected future customers, particularly in light of the current quarter's reduction in revenue volume, the elimination of twelve positions within the Operations group as a result of a reorganization plan implemented in the first quarter of 2009 will have a positive near-term impact on margins. We have effectively reduced our manufacturing overhead to a point where we expect to see relative improvements beginning in the second quarter. Management continues to believe that the current fixed manufacturing cost structure is sufficient to support significantly higher levels of production, given current revenue mix and resultant product revenue. The extent to which the Company's margins continue to grow, as a percentage of total revenue, will be dependent upon revenue mix, revenue volume, the Company's ability to continue to cut costs and the Company's ability to pass commodity market-driven raw materials increases on to its customers. As product revenue volume increases, this will result in more of the Company's fixed manufacturing costs being absorbed, leading to increased margins. The Company expects to continue to focus on reducing its controllable variable product manufacturing costs through 2009 and beyond, with potential offsetting increases in the commodity metals markets, but may or may not continue to see absolute dollar gross margin growth through 2009 and beyond, dependent upon the factors discussed above.
Research and development expense, which includes all expenses relating to the technology and advanced engineering groups, primarily consists of costs associated with the Company's development or acquisition of new product applications and coating formulations and the cost of enhancing the Company's manufacturing processes. In another example, the Company has been and continues to be engaged in research to enhance its ability to disperse its material in a variety of organic and inorganic media for use as coatings and polishing materials. Much of this work has led to several new products and additional potential new products for use by BYK-Chemie and other customers of Nanophase.
Now that the Company has demonstrated the capability to produce pilot quantities of mixed-metal oxides in a single crystal phase, the Company does not expect development of further variations on these materials to present material technological challenges. Many of these materials exhibit performance characteristics that can enable them to serve in various catalytic applications. Management is now working on several related commercial opportunities. The Company expects that this technique should not be difficult to scale to large quantity commercial volumes once application viability and firm demand are established. The Company also has an ongoing advanced engineering effort that is primarily focused on the development of new nanomaterials as well as the refinement of existing nanomaterials, as dictated by our customer-driven marketing strategy. The Company is not certain when or if any significant revenue will be generated from the production of the materials described above.
Research and development expense decreased to $404,044 for the three months ended March 31, 2009, compared to $438,695 for the same period in 2008. The decrease in research and development expense was largely attributed to reduction in salary, stock compensation (non-cash) and materials and supplies expenses. These decreases were partially offset by increased legal fees. The Company does not expect research and development expense to increase significantly in 2009.
Selling, general and administrative expense decreased to $1,000,167 for the three month period ended March 31, 2009, compared to $1,574,744 for the same period in 2008. The net decrease was primarily attributed to decreases in salary expense, legal fees and stock compensation (non-cash) expenses.
In the first quarter of 2009, the Company announced the resignations of Mr. Robert Haines, its then-current Vice-President of Operations, and Dr. Richard Brotzman, its then-current Chief Technology Officer. Additionally, the Company eliminated twelve positions within the Operations group as a result of a reorganization plan implemented to align the organization with current demand based upon current economic conditions and the Company's shift in strategy to develop a more customer-focused direct selling approach. During this process, management continues to seek to build its marketing and applications development capabilities. As a result of the above resignations, the Company incurred a total of $794,069 of cash and non-cash severance charges. Included in these charges were salaries and benefits, accelerated vesting of stock options (non-cash) and other expenses. Of these charges, approximately $211,000 or 27% were related to the accelerated vesting of stock option which have no cash impact and are expected to have a minimal dilutive effect if any.
Interest income decreased to $34,003 for the three month period ended March 31, 2009, compared to $167,221 for the same period in 2008. The decrease was primarily due to decreased investment yields and decreases in funds available for investment.
Inflation
Management believes inflation has not had a material effect on the Company's operations or on its financial position. However, supplier price increases and wage and benefit inflation, both of which represent a significant component of the Company's costs of operations, may have a material effect on the Company's operations and financial position in 2009 and beyond, if the Company is unable to pass through those increases under its present contracts or through to its markets in general.
Liquidity and Capital Resources
The Company's cash, cash equivalents and investments amounted to $5,630,802 on March 31, 2009, compared to $7,631,957 on December 31, 2008 and $16,042,657 on March 31, 2008. On June 30, 2008, the Company reclassified its auction rate securities in the amount of $6 million as long-term investments. The net cash used in the Company's operating activities was $1,393,561 for the three months ended March 31, 2009, compared to $595,196 for the same period in 2008. Net cash provided by investing activities, which is due to maturities of securities and to a lesser extent capital expenditures offset partially by purchases of securities, amounted to $1,703,956 for the three months ended March 31, 2009 compared to $1,246,154 for the same period in 2008. Capital expenditures amounted to $52,097 and $87,548 for the three months ended March 31, 2009 and 2008, respectively. Net cash used in financing activities is due to principal payments on an equipment loan from BYK-Chemie and capital lease obligations amounting, in total, to $543,872 for the three months ended March 31, 2009 compared to $20,000 of net cash provided primarily by the issuance of shares of common stock pursuant to the exercise of options for the same period in 2008.
On July 2, 2007, the Company issued and sold 1,900,000 shares of common stock pursuant to a registration statement filed on May 22, 2007 and declared effective by the SEC on May 31, 2007 to certain institutional investors at a purchase price of $5.92 per share, for an aggregate purchase price of $11.2 million and net proceeds of approximately $10.5 million.
The Company's supply agreement with its largest customer contains several financial covenants which could potentially impact the Company's liquidity. The most restrictive financial covenants under this agreement require the Company to maintain a minimum of $2.0 million in cash and cash equivalents and that the Company not have the acceleration of any debt maturity having a principal amount of more than $10,000,000, in order to avoid triggering a transfer of technology and equipment to the Company's largest customer. The Company had approximately $5.6 million in cash, cash equivalents and investments and debt net of unamortized debt discount of less than $1.1 million on March 31, 2009. This supply agreement and its covenants are more fully described in Note 8 to the Company's Financial Statements.
The Company believes that cash from operations and cash, cash equivalents and investments on hand and interest income thereon, will be adequate to fund the Company's operating plans for the foreseeable future. The Company's actual future capital requirements in 2009 and beyond will depend, however, on many factors, including customer acceptance of the Company's current and potential nanomaterials and product applications, continued progress in the Company's research and development activities and product testing programs, the magnitude of these activities and programs, and the costs necessary to increase and expand the Company's manufacturing capabilities and to market and sell the Company's materials and product applications. Other important issues that will drive future capital requirements will be the development of new markets and new customers as well as the potential for significant unplanned growth with the Company's existing customers. The Company expects that capital spending relating to currently known capital needs for 2009 will be approximately $450,000, but could be even greater due to the factors discussed above.
As of May 4, 2009, the Company's investments in ARS's totaled $5.34 million. These ARS holdings in the Company's investment portfolio have experienced "failed auctions" due to a lack of available buyers for them on their expected auction dates. An auction failure means that the parties wishing to sell their securities could not be matched with an adequate volume of buyers. In the event that there is a failed auction the indenture governing the security requires the issuer to pay interest at a contractually defined rate that is generally above market rates for other types of similar short-term instruments. Despite these failed auctions, there have been no defaults on the underlying securities and investment income on these ARS holdings. They have been issued through the Federal Family Education Loan Program ("FFELPs Loans") and carry an AAA credit rating. These FFELPs Loans are guaranteed to 97% of their $6 million value by the Department of Education. Although a liquidity short-fall may exist from auction to auction, the Company is not aware of any changes to ratings or other indicators of a permanent decline in value. However, these failed auctions have caused the Company to change the level of inputs to determine their fair values. Should current market conditions for ARS persist, the Company may be forced to sell some portion or all of its holdings at a discount to face value of between 6% and 50% in order to avoid a potential liquidity crisis in 2010. Management has undertaken aggressive measures to reduce cash used in operations in hopes of avoiding a discounted sale of any of these ARS's prior to the market for them stabilizes. The values of the Company's ARS's were estimated using a discounted cash flow model of analysis. Since these inputs were not observable they are classified as level 3 inputs (see Note 4). As a result, for the period ending December 31, 2008, the Company recognized an other than temporary impairment loss on the ARS's in the amount of $660,000 which was reflected in the statement of operations. The Company's valuation models assume an average maturity of the ARS's in excess of one year; therefore, the Company has classified these securities as long-term on the March 31, 2009 balance sheet.
Should events arise that make it appropriate for the Company to seek additional financing, it should be noted that additional financing may not be available on acceptable terms or at all, and any such additional financing could be dilutive to the Company's stockholders. Such a financing could be necessitated by such things as the loss of existing customers; currently unknown capital requirements in light of the factors described above; new regulatory requirements that are outside the Company's control; the need to meet previously discussed cash requirements to avoid a triggering event; or various other circumstances coming to pass that are currently not anticipated by the Company.
On March 31, 2009, the Company had a net operating loss carryforward of approximately $79.4 million for income tax purposes. Because the Company may have experienced "ownership changes" within the meaning of the U.S. Internal Revenue Code in connection with its various prior equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the Internal Revenue Code. A layer of the Company's carryforward expired in 2008. If not utilized, the remaining carryforward will expire at various dates between January 1, 2009 and December 31, 2028. As a result of the annual limitation and uncertainty as to the amount of future taxable income that will be earned prior to the expiration of the carryforward, the Company has concluded that it is likely that some portion of this carryforward will expire before ultimately becoming available to reduce income tax liabilities.
Off-Balance Sheet Arrangements
The Company has not created, and is not party to, any special-purpose or off-balance sheet entities for the purposes of raising capital, incurring debt or operating the Company's business. Nanophase does not have any off-balance sheet arrangements or relationships with entities that are not consolidated into the Company's financial statements that are reasonably likely to materially affect Nanophase's liquidity or the availability of capital resources.
Credit Environment
The credit markets continue to be volatile and have experienced a shortage in overall liquidity due to the sub-prime lending industry. The Company neither engages in any business activities in the mortgage industry, nor does it hold mortgage-backed securities in its investment portfolio. Overall the liquidity shortage in the marketplace includes Auction Rate Securities. The Company believes it has sufficient liquidity from its cash and investment accounts to satisfy 2009 operational needs. See Notes 4 and 5 to the financial statements and Liquidity and Capital Resources in Management's Discussion and Analysis for a further discussion of liquidity issues.
Safe Harbor Provision
The Company wants to provide investors with more meaningful and useful information. As a result, this Quarterly Report on Form 10-Q (the "Form 10-Q") contains and incorporates by reference certain "forward-looking statements", as defined in Section 21E of the Securities Exchange Act of 1934, as amended. These statements reflect the Company's current expectations of the future results of its operations, performance and achievements. Forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company has tried, wherever possible, to identify these statements by using words such as "anticipates", "believes", "estimates", "expects", "plans", "intends" and similar expressions. These statements reflect management's current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause the Company's actual results, performance or achievements in 2009 and beyond to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties and factors include, without limitation: a decision by a customer to cancel a purchase order or supply agreement in light of the Company's dependence on a limited number of key customers; uncertain demand for, and acceptance of, the Company's nanocrystalline materials; the Company's limited manufacturing capacity and product mix flexibility in light of customer demand; the Company's limited marketing experience; changes in development and distribution relationships; the impact of competitive products and technologies; the Company's dependence on patents and protection of proprietary information; the resolution of litigation in which the Company may become involved; and other risks set forth under the caption "Risk Factors" in the Company's Annual Report on Form 10-K for
the year ended December 31, 2008. Readers of this Quarterly Report on Form 10-Q should not place undue reliance on any forward-looking statements. Except as required by federal securities laws, the Company undertakes no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.
|
|