Business context and reporting period
Nanophase Technologies Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2019. The consolidated results include wholly owned Solesence, LLC; the filing is by Nanophase, not a separate Solesence, Inc. The company develops and manufactures advanced materials and personal-care products, with a strategic focus on growing its Solésence skincare business. Dollar amounts below are in thousands except per-share data.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $3,294 | $4,116 | $7,049 | $7,014 |
| Gross profit | $832 | $1,405 | $1,716 | $1,815 |
| Gross margin | 25.3% | 34.1% | 24.3% | 25.9% |
| Operating income (loss) | ($597) | $97 | ($1,067) | ($816) |
| Net income (loss) | ($647) | $88 | ($1,160) | ($836) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | ($1,940) | ($603) |
- Q2 product revenue fell to $3,257 from $4,043, principally due to reduced orders from larger customers, including the largest personal-care customer. Six-month product revenue was $6,754 versus $6,910.
- Six-month Solésence product revenue increased about 150% to $1,289 from $512; Personal Care Ingredients revenue declined to $4,160 from $5,228, while Advanced Materials revenue rose to $1,600 from $1,274.
- Q2 R&D expense was $485 versus $538; six-month expense was $962 versus $1,096. SG&A rose to $944 from $770 for the quarter and to $1,821 from $1,535 for six months, partly reflecting Solésence brand-launch costs.
- Cash was $1,015 at June 30, 2019, versus $1,345 at year-end 2018. Current assets were $5,111 and current liabilities $4,150. Six-month investing cash outflow was $389; financing cash inflow was $1,999.
- At June 30, related-party debt comprised a $500 term loan and $1,246 revolving balance. The company reported $345 of remaining availability under the Beachcorp revolver. Finance lease obligations totaled $617; operating lease liabilities totaled $2,367.
Material changes, outlook and risks
- Management said cash, May equity proceeds and available borrowing capacity should fund operating plans through 2019, but warned that additional financing may be needed within 12 months. The filing states that these conditions raise significant doubt about the company’s ability to continue as a going concern; no additional financing commitments were in place.
- The largest customer, BASF, represented 74% of 2018 revenue, and management expected a material reduction in its orders in 2019. Three customers accounted for about 65%, 5% and 4% of Q2 revenue, respectively.
- BASF supply agreements include financial and other triggers that could allow BASF to obtain a technology license and purchase specified production equipment. The filing describes potential loss of substantial revenue and a potentially lengthy capacity-replacement period if this right is exercised.
- Management expected quarterly R&D spending to increase in the remainder of 2019 and SG&A to remain around current levels. Planned capital spending for known needs in the remainder of 2019 was estimated at $150–$200, subject to project outcomes and financing. This is an outlook, not formal earnings guidance.
- On May 13, the company issued 4,189,000 shares to its largest investor, Bradford T. Whitmore, for $1,675.6 ($0.40 per share). With affiliates, he beneficially owned about 53% of common stock; he is also connected to the related-party lender.
- A July 31, 2019 joint development agreement with Sumitomo Corporation of Americas has an initial ten-year term. It provides a $250 commitment fee, two $125 milestone payments and royalties on product sales.
- Other risks include raw-material and manufacturing costs, customer concentration, uncertain Solésence demand and scaling, possible dilution or unavailability of financing, and constraints under loan covenants. Adoption of the new lease accounting standard materially increased reported assets and liabilities, with no material income-statement effect.
Important facts for investors to verify
- Whether operating cash flow, customer collections and available credit are sufficient to meet near-term obligations and avoid a going-concern shortfall.
- BASF order trends, compliance with its supply-agreement covenants and any change in its potential technology-transfer or equipment-purchase rights.
- Solésence order growth, production efficiency and working-capital needs, including the ability to improve gross margins as volume scales.
- Current borrowing-base availability and terms of related-party debt, plus the impact of the controlling shareholder’s ownership and lending relationships.
- Progress and payment milestones under the Sumitomo development agreement and the timing and cost of planned capital expenditures.