Business context and reporting period
Nanophase Technologies Corporation’s unaudited consolidated Form 10-Q covers the three months ended March 31, 2023 and includes wholly owned subsidiary Solésence, LLC. The business focuses on skin-health ingredients and finished beauty products, alongside medical diagnostics and other advanced materials. Management identifies skin health as the strategic growth focus; demand for medical-diagnostics materials declined.
Financial performance and liquidity
Amounts below are in thousands of dollars, except per-share data. Comparisons are with Q1 2022 unless otherwise noted.
- Revenue: $9,457, up 16% from $8,156. Product revenue was $9,336; other revenue was $121.
- Revenue mix: Solésence $5,044, down from $5,560; Personal Care Ingredients $3,544, up from $2,382; Advanced Materials $869, up from $214.
- Profitability: Gross profit was $2,149 versus $2,168; gross margin was approximately 22.7% versus 26.6%. Operating loss was $1,004 versus operating income of $105. Net loss was $1,159 versus net income of $62; loss per share was $0.02.
- Expenses: Cost of revenue rose to $7,308 from $5,988. R&D increased to $1,003 from $666, and selling, general and administrative expense rose to $2,150 from $1,397.
- Cash flow: Operating cash use was $782, compared with $1,775; investing cash use was $21, compared with $378. Financing used $289, versus providing $2,393. Cash declined by $1,092 during the quarter to $1,094.
- Balance sheet and liquidity: Current assets were $14,525 and current liabilities $16,863, a $2,338 working-capital deficit. Total assets were $31,478; shareholders’ equity was $4,597.
- Debt and leases: Related-party borrowings totaled $7,892 at quarter-end: $6,892 under lines of credit and $1,000 of term debt, with the term debt classified as current. Operating lease obligations totaled $9,751. The related-party facilities were scheduled to mature March 31, 2024. A subsequent $1,750 related-party note was entered into May 1, 2023, maturing September 30, 2023.
Material changes and management commentary
Revenue growth reflected increased Solésence adoption and higher personal-care ingredient sales to the largest customer; medical-diagnostics materials declined significantly. Management attributed higher cost of revenue to volume, materials inflation, and manufacturing inefficiencies associated with Solésence launches. It cited production capacity constraints and said margin improvement depends on sales mix and volume, cost control, passing through input-cost increases, and scaling production efficiently. Management cautioned that significant percentage gross-margin growth may not occur through the first half of 2023.
Management expects R&D expense to rise more slowly during the rest of 2023. Planned 2023 capital spending for currently known needs was estimated at $3 million to $6 million, subject to project progress and available funding; spending could fall below or exceed that range. Management said failure to refinance or extend the related-party loan maturities could significantly affect the Company’s ability to continue as a going concern.
Risks, contingencies, and unusual items
- Customer concentration: Four customers represented 62% of Q1 revenue, compared with 69% in Q1 2022; the largest customer alone accounted for 37%, versus 29%.
- BASF litigation and supply exposure: BASF alleges breach of a zinc-oxide supply agreement, including its exclusivity provisions, and seeks unspecified damages and an injunction. Discovery was ongoing. Management considers the claims without merit; it recorded no contingent loss because an outcome was not considered probable and a loss range could not be estimated. Related supply agreements also include potential technology-transfer and equipment-sale provisions under specified triggering events.
- Related-party financing: Beachcorp and Strandler are affiliates of a major shareholder. The company relies on their secured credit facilities, and management identified refinancing risk.
- Input costs and operations: Inflation in materials, wages, and benefits could materially affect results if costs cannot be passed through. Capacity limitations, launch cycles, and customer demand create execution risks.
- Accounting change: Adoption of the expected-credit-loss standard resulted in a $203 opening retained-earnings adjustment.
- Controls: Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and potential financial impact of the BASF litigation, including any effect on Solésence sales or supply arrangements.
- Cash needs, borrowing availability, related-party facility terms, and the ability to refinance or extend debt due in 2024.
- Whether planned capital investment increases manufacturing capacity and improves launch efficiency and gross margins.
- Durability of sales growth and concentration exposure, particularly the largest customer’s purchases.
- Ability to pass through inflation and manage the mix shift, including the continued decline in medical-diagnostics demand.