Business context and reporting period
This is Nanophase Technologies Corporation’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The consolidated results include its wholly owned Solésence, LLC subsidiary; the filing is not a standalone Solésence report. Nanophase develops and manufactures advanced materials and skin-care products, including Solésence formulations.
Financial results and position
Amounts below are in thousands of dollars, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $3,069 | $4,022 | $10,118 | $11,036 |
| Gross profit / margin | $563 / 18.3% | $1,057 / 26.3% | $2,279 / 22.5% | $2,872 / 26.0% |
| Operating loss | $(815) | $(124) | $(1,882) | $(940) |
| Net loss | $(862) | $(136) | $(2,022) | $(972) |
| Net loss per share | $(0.02) | $(0.00) | $(0.06) | $(0.03) |
At September 30, cash was $962, current assets $4,764, and current liabilities $4,615. Total assets were $9,139 and stockholders’ equity was $1,233. Debt included $500 drawn on the bank line, $1,103 on the related-party revolving facility, and a $500 Beachcorp term loan. Finance and operating lease liabilities totaled $3,051. The company reported a $2,161 operating cash outflow, $523 of investing outflows, and $2,301 of financing inflows for the nine months; cash declined $383 from year-end 2018.
Changes versus the prior comparable period
- Q3 revenue declined 24% year over year; nine-month revenue declined 8%. Management attributed the product-revenue decrease chiefly to lower orders from larger customers, particularly its largest personal-care customer.
- Solésence revenue rose 56% for the first nine months to $1,666, but fell to $377 in Q3 from $557 a year earlier. Personal Care Ingredients revenue fell to $6,464 for nine months from $8,210; Advanced Materials increased to $1,988 from $1,757.
- Gross margin contracted in both comparisons. Management cited insufficient volume to absorb manufacturing overhead, raw-material cost pressure, and Solésence launch inefficiencies.
- Nine-month SG&A rose to $2,711 from $2,299, partly due to Solésence brand-launch costs. R&D was $1,450 versus $1,513. Interest expense increased to $140 from $32.
- Cash used in operations increased to $2,161 from $921. Capital expenditures were $523 versus $115. Financing included approximately $1.7 million from a May 2019 common-stock issuance and net borrowing of $271 from Beachcorp.
Outlook, risks, and unusual items
- Going concern: Management stated that the circumstances raise significant doubt about the company’s ability to continue as a going concern. It expected available cash, financing, and unused borrowing capacity to fund plans through 2019, but said additional funding may be needed within 12 months and no further financing commitment was in place at the time.
- Customer concentration: The largest customer accounted for 64% of nine-month revenue, down 20% from the prior-year period. Three customers represented approximately 75%, 5%, and 4% of Q3 revenue. Loss of a major customer or further order reductions could materially affect results and liquidity.
- BASF supply-agreement provisions: Certain financial or other triggering events could give BASF rights to license technology and acquire production equipment. The filing said required safety stock was below the prescribed amount at September 30, although cash and eligible receivables exceeded the stated $1 million minimum at that date.
- Financing and related-party exposure: Beachcorp is managed by the controlling shareholder’s affiliate; its facilities are secured and include restrictions on additional indebtedness. A November 13, 2019 agreement provided for a $2 million, 2% secured convertible note from the controlling shareholder, with a May 2024 maturity and conversion price of $0.20 per share. The filing said the transaction was expected to close November 20. If the required charter amendment to reserve conversion shares was not filed by December 31, 2019, 105% of outstanding principal plus accrued interest would become due; a change of control also permits redemption at 105% plus applicable amounts. Conversion could materially increase the shareholder’s ownership.
- Development agreement: A ten-year joint development agreement with Sumitomo Corporation of Americas included a $250 commitment fee, recorded as deferred revenue because performance obligations had not yet begun; two additional $125 payments are contingent on performance.
- Management outlook: The company planned continued investment in Solésence and expected R&D expense to rise in the rest of 2019, while SG&A was expected to remain around current levels. Planned capital spending for the remainder of 2019 was estimated at $60–$100, subject to project outcomes and financing. The filing provides no specific revenue or earnings guidance.
- The adoption of lease accounting in 2019 added operating right-of-use assets and lease liabilities to the balance sheet. The filing reported no pending legal proceedings believed likely to have a material adverse effect and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the November 2019 convertible-note financing closed, and whether the charter amendment was approved and filed on time.
- Current cash, borrowing availability, working-capital needs, and the company’s ability to fund operations beyond 2019.
- Subsequent revenue trends and customer concentration, especially orders from the largest customer and growth and margins in Solésence.
- Compliance with BASF supply-agreement covenants and safety-stock requirements, and any resulting technology-transfer or equipment-sale rights.
- Debt terms, related-party transactions, covenant restrictions, and the potential dilution and control effects of note conversion.