Nanophase Technologies Corporation (including Solésence, LLC) — Q2 2021 Form 10-Q
Entity note: The filing is for Nanophase Technologies Corporation, whose wholly owned subsidiary is Solésence, LLC; it is not a standalone Solésence, Inc. filing. The reporting period ended June 30, 2021. Financial amounts below are in millions of dollars unless noted.
Business context and reporting period
Nanophase develops and manufactures materials, ingredients, and finished products for skin health and life-science markets, alongside legacy advanced-materials applications. Management’s strategic focus is on skin health and medical diagnostics, including Solésence prestige skin-care products and materials used in diagnostic testing. The unaudited statements consolidate Nanophase and Solésence.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $7.114 | $4.335 | $14.186 | $8.374 |
| Gross profit | $2.514 | $1.710 | $4.544 | $2.744 |
| Gross margin | 35.3% | 39.4% | 32.0% | 32.8% |
| Operating income | $0.960 | $0.654 | $1.457 | $0.611 |
| Interest expense | $0.919 | $0.122 | $1.058 | $0.246 |
| Net income | $0.041 | $0.532 | $1.351 | $0.365 |
| Diluted earnings per share | $0.00 | $0.01 | $0.03 | $0.01 |
Q2 product revenue was $7.025 million; other revenue was $0.089 million. For the first half, product revenue was $14.075 million and other revenue was $0.111 million. Q2 revenue grew about 64% year over year and first-half revenue about 69%. Solésence revenue was $4.499 million in Q2 and $8.797 million in the first half, compared with $1.318 million and $2.841 million, respectively, in 2020. Personal Care Ingredients revenue was $1.780 million in Q2 and $3.176 million year to date; Advanced Materials revenue was $0.835 million and $2.213 million, respectively.
Cash from operations was $0.488 million in the first half, versus cash used of $1.246 million a year earlier. Capital spending was $0.508 million, making operating cash flow less capital expenditures approximately negative $0.020 million. Cash increased to $1.077 million from $0.957 million at year-end 2020. At June 30, current assets were $10.814 million and current liabilities $7.985 million (working capital $2.829 million; current ratio approximately 1.35).
Debt included a $2.310 million related-party revolving balance and a $1.000 million related-party term loan. The revolver had $0.890 million of additional availability reported at quarter-end. There was no bank line balance, convertible-note balance, or PPP loan balance. Finance and operating lease obligations totaled approximately $2.220 million. The $2.000 million convertible note was converted in May into 10,000,000 common shares, with 95,555 additional shares issued for accrued interest; common shares outstanding rose to 48,460,347 at quarter-end.
Changes versus the prior comparable period
- Revenue growth was driven primarily by Solésence product adoption, with a smaller increase in personal-care ingredient sales. Medical-diagnostics sales declined in Q2 but increased modestly for the six-month period, according to management.
- Cost of revenue increased faster than Q2 revenue, and gross margin contracted to 35.3% from 39.4%. The filing cites higher volume, raw-material price inflation, and manufacturing inefficiencies associated with Solésence launches.
- Q2 net income declined despite higher operating income, mainly reflecting increased interest expense. The company recorded $0.836 million of accelerated convertible-note discount accretion in Q2 after the note conversion.
- First-half net income included $0.952 million of PPP loan-forgiveness income. Excluding this unusual income item, reported first-half earnings were substantially lower; the filing does not present adjusted earnings.
- Research and development and SG&A expenses both increased in Q2 and the first half as the company added resources for growth and product development.
Outlook, risks, and unusual items
- Management expects Solésence sales growth to continue into 2022 and anticipates medical-diagnostics demand will remain above pre-pandemic levels, though it may not match pandemic-period volumes. These are expectations, not guaranteed results.
- Management estimated remaining-2021 capital spending of $0.9 million to $1.6 million, depending on project progress and financing capacity. It expected R&D expense to increase incrementally during the rest of 2021.
- The filing states that available cash, operating cash flow, and borrowing capacity may not be adequate to fund operating plans through the next 12 months without additional financing. Management could not conclude it had sufficient cash and guaranteed financing for that period; the company disclosed substantial doubt about its ability to continue as a going concern. No additional financing commitment was in place, and financing might not be available on acceptable terms or at all.
- Working-capital needs are rising with growth, and management described production capacity, throughput, and launch-related manufacturing inefficiencies as key constraints. Raw-material and wage inflation may pressure margins if costs cannot be passed to customers.
- Revenue is concentrated: the five largest customers represented approximately 75% of Q2 revenue and 81% of first-half revenue. BASF supply-agreement covenants may permit technology licensing and equipment transfer if specified financial or other triggering events occur, potentially disrupting revenue and production.
- The related-party lender Beachcorp is managed by a beneficial owner of approximately 62% of the company’s shares. Its April 2021 amendment increased the revolver limit to $6.0 million, extended its maturity to March 2023, and reduced the rate; the $1.0 million term loan matures March 2022.
- The PPP loan was legally forgiven in February 2021, with notice received in June; the company recognized $0.952 million of other income. The filing reported no pending legal proceedings believed likely to have a material adverse effect.
Important facts for investors to verify
- Confirm the filing entity and consolidated scope: Nanophase Technologies Corporation and Solésence, LLC.
- Track cash generation, working-capital requirements, revolver availability, and whether additional financing is secured.
- Monitor customer concentration and compliance with BASF’s financial and inventory covenants.
- Assess whether Solésence growth can be produced efficiently, whether capacity investments are completed, and whether gross margins recover.
- Distinguish recurring operating performance from the $0.952 million PPP forgiveness gain and the $0.836 million accelerated debt-discount expense.
- Consider dilution from the convertible-note conversion and the increase in shares outstanding.