Business context and reporting period
Nanophase Technologies Corporation’s unaudited Form 10-Q covers the quarter ended March 31, 2019. The consolidated results include wholly owned Solésence, LLC; despite the request metadata, the filing is for Nanophase, not a standalone Solésence filing. The company develops and manufactures engineered materials and skin-care products, with reported product categories of Personal Care Ingredients, Advanced Materials, and Solésence.
Financial results
Amounts below are in thousands of dollars, except per-share data.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $3,755 | $2,898 | Up 30% |
| Gross profit | $884 | $410 | Up $474 |
| Gross margin | 23.5% | 14.1% | Up 9.4 percentage points |
| Operating loss | $(470) | $(913) | Loss narrowed |
| Net loss | $(513) | $(924) | Loss narrowed |
| Loss per share, basic and diluted | $(0.02) | $(0.03) | |
| Operating cash flow | $(1,537) | $(618) | Greater cash use |
| Capital expenditures | $240 | $5 |
Product revenue was $3,497, up from $2,867; other revenue was $258 versus $31 and included a one-time $211 bulk-material buyout and customer samples. By category, Personal Care Ingredients revenue was $2,009 (prior year $2,305), Advanced Materials $850 ($532), and Solésence $896 ($61).
Cash was $632 at quarter-end, down from $1,345 at December 31, 2018. Current assets were $5,374 and current liabilities $5,371. Stockholders’ equity was $928, down from $1,384. At March 31, borrowings included a $500 bank line advance and a $500 related-party term loan, plus $1,448 outstanding on the related-party revolving facility. The bank advance was repaid April 3. The company had $391 of additional availability under the Beachcorp facility at quarter-end, subject to its borrowing base.
Material changes and management commentary
- Revenue increased mainly on higher order flow from several larger customers. The three largest customers represented 54%, 19%, and 9% of Q1 revenue, versus 78%, 0%, and 0% for the corresponding customer positions in Q1 2018.
- Cost of revenue rose to $2,871 from $2,488, reflecting higher volume, material-price inflation, and manufacturing inefficiencies related to Solésence launches. Management said margins depend on product mix, volume, cost control, commodity costs, and efficient Solésence production scaling.
- Research and development expense declined to $477 from $558 due primarily to timing of outside testing costs; management expected quarterly R&D expense to rise during the rest of 2019. Selling, general and administrative expense increased to $877 from $765, largely due to Solésence brand-launch costs, and was expected to remain near current levels.
- Operating cash use was driven in part by a $1,276 increase in accounts receivable. Financing activities provided $1,064 net, including related-party credit-facility draws and repayments.
- On May 13, 2019, after quarter-end, Nanophase sold 4,189,000 shares to its largest investor, Bradford T. Whitmore, for $1,676,600 ($0.40 per share), for general corporate purposes. His ownership with affiliates rose to approximately 53%.
Outlook, risks, and unusual items
- Going concern: Management stated that available cash, operating cash, the May financing, and borrowing capacity should fund plans through 2019, but identified significant doubt about the company’s ability to continue as a going concern. Additional financing may be needed within 12 months; no further financing commitment was in place, and acceptable financing may not be available.
- Customer concentration and BASF terms: BASF accounted for 74% of 2018 revenue and expected a material reduction in orders in 2019. BASF supply agreements include financial and other triggers that could give BASF rights to obtain a technology license and/or purchase production equipment. Such an event could sharply reduce revenue and impair near-term manufacturing capacity.
- Solésence investment: Management planned continued operating and capital investment, while warning that growth could create temporary working-capital needs. Planned capital spending for the remainder of 2019 was $700–$900, subject to project progress and financing.
- Financing and control: Beachcorp, the related-party lender, is managed by Mr. Whitmore, who became the majority beneficial owner after the May share sale. Loan agreements restrict additional indebtedness; related-party borrowing and majority ownership warrant attention.
- Other risks: The filing cites commodity and wage inflation, inability to pass costs through to customers, uncertain product demand and acceptance, and possible dilution or reduced operations if funding is unavailable. The company adopted the new lease standard on January 1, 2019, recognizing operating lease right-of-use assets and liabilities; it said the effect on operations and cash flows was immaterial.
Most important facts for investors to verify
- Whether post-quarter financing and available credit are sufficient for cash needs, planned capital spending, and Solésence working capital.
- Actual 2019 BASF order levels and continued compliance with BASF’s financial, inventory, and other supply-agreement requirements.
- Whether revenue growth and improved gross margin persist after the one-time other-revenue item and as Solésence production scales.
- Collections of the quarter-end receivables, customer concentration, and ongoing reliance on related-party credit.
- The implications of Mr. Whitmore’s approximately 53% ownership and related-party lender relationship for minority shareholders.