Business context and reporting period
Nanophase Technologies Corporation’s Form 10-Q covers the quarter and nine months ended September 30, 2020. The consolidated company includes wholly owned Solésence, LLC; the filing is not a standalone Solésence report. Nanophase develops and manufactures engineered materials and skin-care products, with businesses in personal-care ingredients, Solésence products, and advanced materials, including medical diagnostics ingredients. Financial amounts below are in thousands of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $3,888 | $3,069 | $12,262 | $10,118 |
| Gross profit (margin) | $1,687 (43.4%) | $563 (18.3%) | $4,430 (36.1%) | $2,279 (22.5%) |
| Operating income (loss) | $552 | $(815) | $1,163 | $(1,882) |
| Net income (loss) | $430 | $(862) | $795 | $(2,022) |
| Net income (loss) per diluted share | $0.01 | $(0.02) | $0.02 | $(0.06) |
- Revenue rose 27% in Q3 and 21% for the nine-month period. Product revenue growth was driven by Solésence and sales to Roche for COVID-19 testing kits, offset in part by lower sunscreen-active sales through the company’s largest customer.
- Solésence product revenue increased approximately 164% year over year for the nine months. Advanced Materials revenue rose to $3,678 from $1,988, while Personal Care Ingredients revenue declined to $4,190 from $6,464.
- Cost of revenue was $2,201 in Q3 and $7,832 for nine months. Management cited Solésence manufacturing efficiencies and lower managerial payroll, partly offset by raw-material price inflation. R&D and SG&A expenses also declined year over year.
- Interest expense increased to $122 in Q3 and $368 for nine months, versus $47 and $140 in the comparable periods, including amortization of the convertible note discount.
- At September 30, cash was $1,134, current assets $7,768, current liabilities $5,762, and stockholders’ equity $2,476. Cash was $1,194 at December 31, 2019.
- For the first nine months, operating cash use was $1,732, investing cash use was $448, and financing provided $2,120. Cash declined $60 to $1,134. Receivables and inventory increased by $1,481 and $1,030, respectively, in the operating cash-flow reconciliation.
- Debt included a $500 bank line balance at quarter-end (repaid October 2), a $1,541 related-party revolving balance, a $500 related-party term loan, and a $952 PPP loan. The convertible note has $2,000 face principal, but its reported carrying amount was $1,030 after unamortized discount. Finance lease liabilities totaled $334.
Changes, outlook, and risks
- Nanophase swung from losses in 2019 to profits in both the three- and nine-month 2020 periods, with higher revenue and improved gross margins. The shift reflects growth in Solésence and diagnostic-related sales, alongside reduced Personal Care Ingredients sales.
- Management expected Solésence growth through 2020 and anticipated additional growth in 2021, but described the outlook beyond the first quarter of 2021 as unclear. It said COVID-19 effects on customers, consumer behavior, and markets could continue, and the impact later in 2020 and thereafter was not quantifiable.
- The filing states that significant doubt exists about the company’s ability to continue as a going concern. Management cautioned that cash, operations, and available borrowing may not fund its plans through September 30, 2021; cash-flow timing and working-capital needs are critical. Elsewhere, management said resources should be adequate through 2020.
- Debt maturities and financing access are material concerns. The Beachcorp term loan and revolving facility mature March 31, 2021; the Libertyville facility maturity was extended to April 2021. Credit agreements restrict additional indebtedness. The Beachcorp lender is an affiliate of an investor who, with affiliates, beneficially owned approximately 63% of shares.
- The $952 PPP loan bears 1% interest; forgiveness was not assured and the company was applying for it, with resolution not expected until Q1 2021. Unforgiven amounts are payable in installments through April 2022.
- BASF supply agreements include financial and other conditions that could give BASF rights to a technology license and/or production equipment. Customer concentration is significant: the top four customers represented approximately 80% of Q3 revenue and 79% of nine-month revenue. BASF, the largest customer in 2019, significantly reduced orders in 2020.
- Other risks include raw-material cost increases that may not be fully passed through, uncertain demand and COVID-19 disruption, and the possibility that additional financing may be unavailable or dilutive. No material pending legal proceedings were reported; management said disclosure controls were effective.
Important facts for investors to verify
- Whether operating cash flow, customer collections, and working-capital requirements support the Solésence growth plan, given the stated going-concern doubt.
- Repayment, extension, or refinancing of the Beachcorp and Libertyville facilities due in 2021, including compliance with borrowing terms and covenants.
- Whether the PPP loan is forgiven, and the amount and timing of any repayment required.
- Whether Solésence and diagnostic sales can offset continuing weakness in Personal Care Ingredients, including reduced orders from the major customer.
- Compliance with BASF supply-agreement requirements and any potential technology-transfer or equipment-sale rights.