Business context and reporting period
Nanophase Technologies Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The filing includes its wholly owned Solésence, LLC subsidiary; it is not a standalone Solésence filing. Unless noted otherwise, financial amounts below are in thousands of dollars.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $4,335 | $3,294 | $8,374 | $7,049 |
| Gross profit / margin | $1,710 / 39.4% | $832 / 25.3% | $2,744 / 32.8% | $1,716 / 24.3% |
| Operating income (loss) | $654 | $(597) | $611 | $(1,067) |
| Net income (loss) | $532 | $(647) | $365 | $(1,160) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(1,246) | $(1,940) |
Cash was $1,773 at June 30, 2020, versus $1,194 at year-end 2019. Current assets were $7,002 and current liabilities $5,208 (current ratio about 1.34). Total assets were $11,379; shareholders’ equity was $1,975. Cash used in investing was $276 and financing provided $2,101 in the first half. The company had a $500 bank line balance at June 30, repaid July 1, and related-party borrowings including a $1,489 revolver, a $500 term loan, and a convertible note with $2,000 principal ($964 carrying value after discount). It also recorded a $952 PPP loan. Interest expense was $122 in Q2 and $246 for the first half.
Material changes versus prior comparable periods
- Q2 revenue increased 32%; first-half revenue rose 19%. Q2 and first-half results shifted from losses to profits.
- Solésence product revenue increased to $1,318 in Q2 from $393 and to $2,841 in the first half from $1,289. Advanced Materials revenue also grew. Personal Care Ingredients revenue declined, including reduced orders from the largest customer.
- Gross margins improved, attributed to a more favorable product mix and cost-efficiency efforts. R&D and selling, general and administrative expenses declined in both comparison periods.
- First-half operating cash use improved year over year but remained negative, with receivables growth a significant use of cash. Financing included net related-party revolver borrowings and the PPP loan.
Outlook, risks, and unusual items
- Management expected Solésence sales to grow in 2020, but less than planned, and forecast $900–$1,100 of capital spending for the remainder of 2020, subject to demand, project progress, and financing.
- The filing discloses significant doubt about the company’s ability to continue as a going concern: management could not assert it had sufficient cash or assured financing for the next 12 months. Elsewhere, MD&A states management believed available cash, operations, and borrowing capacity would fund plans through 2020. The filing emphasizes uncertainty around this assessment and cash-flow timing.
- COVID-19 effects, customer and supplier disruptions, and demand beyond the near term were uncertain. Management described demand visibility through November 2020, with December and first-quarter 2021 demand unclear.
- Customer concentration is substantial. Three customers accounted for 32%, 26%, and 13% of Q2 revenue; the largest customer represented 63% of 2019 revenue and had significantly reduced 2020 orders.
- BASF supply agreements include financial and other triggers that could give BASF rights to technology licenses and production equipment. The company also warned that working-capital needs, customer losses, commodity/input costs, and limited access to financing could impair operations. Related-party lender Beachcorp’s agreements restrict additional indebtedness.
- The $952 PPP loan bears 1% interest and may be forgiven, but forgiveness was not assured; unforgiven amounts were scheduled for monthly repayment beginning November 2020. The related-party term loan’s $500 principal was due December 2020, while the revolver maturity had been extended to March 2021. The bank line maturity was extended to April 2021.
Important facts for investors to verify
- Whether Solésence growth and customer orders continue, particularly as the largest customer’s purchasing pattern changes.
- Cash conversion, accounts receivable collections, working-capital requirements, and access to financing; reconcile the going-concern warning with management’s through-2020 liquidity expectation.
- Compliance with BASF agreement covenants and whether any event could trigger technology-transfer or equipment-sale rights.
- PPP loan forgiveness status and repayment obligations, plus refinancing or repayment plans for related-party debt.
- Whether planned capital spending and COVID-19 assumptions remain achievable without further financing or operational curtailments.