Business context and reporting period
This is Nanophase Technologies Corporation’s unaudited consolidated Form 10-Q for the quarter ended March 31, 2021. Results include its wholly owned Solésence, LLC subsidiary; the filing does not provide standalone Solésence financial statements. The company focuses on skin-health products and ingredients, medical diagnostics materials, and other advanced materials.
Financial performance
Amounts below are in thousands of dollars except per-share data.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total revenue | $7,072 | $4,039 |
| Gross profit | $2,030 | $1,034 |
| Gross margin | 28.7% | 25.6% |
| Operating income (loss) | $497 | $(43) |
| Net income (loss) | $358 | $(167) |
| Operating cash flow | $(137) | $(1,180) |
| Capital expenditures | $166 | $181 |
- Revenue increased 75% year over year. Product revenue was $7,050; other revenue was $22.
- Product-category revenue was $4,299 for Solésence, $1,395 for Personal Care Ingredients, and $1,378 for Advanced Materials. Solésence and medical-diagnostics growth more than offset lower sales to the largest personal-care customer.
- Gross profit increased, while cost of revenue rose to $5,042 from $3,005. Management cited higher volume, materials inflation, and manufacturing inefficiencies related to Solésence launches.
- R&D expense rose to $499 from $372; selling, general and administrative expense rose to $1,034 from $705. Interest expense was $139 versus $124. Diluted EPS was $0.01, compared with a loss per share rounded to $(0.00).
Financial position, liquidity and debt
- At March 31, 2021, cash was $1,819, current assets $11,301, current liabilities $9,008, total assets $16,201, and shareholders’ equity $3,132. Cash was $957 at December 31, 2020.
- Operating cash use was $137; cash increased by $862 in the quarter, primarily with $1,165 of net financing cash flow. Receivables increased $896 and inventory increased $661, uses of operating cash.
- Reported borrowings included a $500 bank line, a $3,365 related-party revolving line, a $500 related-party term loan, a $952 PPP loan, and a convertible note with a $1,164 net carrying value. Lease obligations were also outstanding. The filing notes $388 of additional availability under the related-party revolver at quarter-end.
- Management stated cash, operating cash flow, and available borrowing capacity may not be sufficient to fund operating plans through the next twelve months; the filing says this raises substantial doubt about the company’s ability to continue as a going concern. No additional financing commitments were in place.
Material changes, outlook and risks
- Management expected 2021 capital spending of $1.4 million to $2.0 million, subject to project progress and funding. It anticipated R&D expense at or slightly above Q1 levels and SG&A expense at current levels for the rest of 2021.
- On April 21, 2021, after quarter-end, the related-party lender increased the revolver limit from $4 million to $6 million, extended its maturity to March 31, 2023, and reduced its rate to prime plus 2% with no minimum floor. The term loan was increased from $500 to $1,000 and its rate reduced from 8.25% to 5.25%; its maturity remained March 31, 2022.
- The company’s largest customer, BASF, has supply-agreement provisions that may permit technology licensing and equipment transfers under specified conditions. The company reported meeting its safety-stock requirement at March 31, 2021. Customer concentration was significant: five customers represented 86% of Q1 revenue, including one customer at 24%.
- Management cited working-capital needs from growth, customer concentration, manufacturing capacity and launch-related inefficiencies, raw-material and wage inflation, and uncertainty in demand for COVID-19 diagnostic materials. It warned financing might not be available on acceptable terms, or at all, and that operations or planned investment could be curtailed.
- The company applied for forgiveness of its $952 PPP loan in February 2021; forgiveness was not assured. The related-party convertible-note holder elected conversion effective May 7, 2021; the filing says this will accelerate recognition of the remaining discount as Q2 2021 interest expense.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter. No material pending legal proceedings were reported.
Investor verification points
- Confirm the company’s ability to fund working capital and planned capital expenditures, and monitor progress toward resolving the going-concern uncertainty.
- Review the terms, availability, and covenant compliance of the amended related-party facilities and expected renewal of the bank line.
- Track BASF agreement conditions, safety-stock compliance, and any potential technology-transfer or equipment-sale trigger.
- Assess whether Solésence growth and product launches translate into improved manufacturing efficiency and sustainable margins, while monitoring customer concentration and diagnostic-material demand.
- Verify the outcomes of PPP forgiveness and the May 2021 convertible-note conversion, including related Q2 interest expense and share issuance.