Nanophase Technologies Corporation — 2018 Form 10-K
Entity and period: The filing is for Nanophase Technologies Corporation, not Solesence, Inc. It covers the fiscal year ended December 31, 2018; the financial results below are annual, not Q4-only. Solésence is a wholly owned subsidiary and product brand. The company engineers and manufactures personal-care ingredients, formulated skin-care products and advanced materials.
Financial performance
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $14.193 million | $12.471 million |
| Gross profit / gross margin | $3.290 million / 23.2% | $3.850 million / 30.9% |
| Operating loss | $2.023 million | $0.772 million |
| Net loss | $2.081 million | $0.789 million |
| Cash used in operating activities | $1.342 million | $0.960 million |
| Cash at year-end | $1.345 million | $1.955 million |
- Revenue increased 13.8%, while cost of revenue rose faster, by 26.5%. Management attributed the gross-margin decline to higher zinc costs, increased volume and manufacturing inefficiencies for new personal-care materials.
- R&D expense was $2.057 million, up from $1.736 million; SG&A was $3.256 million, up from $2.886 million. Interest expense was $58,000, versus $34,000.
- Revenue by product category: Personal Care Ingredients, $10.573 million (2017: $7.874 million); Advanced Materials, $2.253 million (2017: $4.543 million); Solésence, $1.367 million (2017: $54,000). Other revenue fell to $153,000 from $342,000, partly because 2017 included a one-time $250,000 development fee.
- Year-end current assets were $4.689 million and current liabilities $3.637 million, for a current ratio of about 1.29. Stockholders’ equity fell to $1.384 million from $3.232 million; accumulated deficit was $97.750 million.
- Year-end borrowings included $832,000 under Beachcorp’s revolving facility and a $500,000 Beachcorp term loan, plus $724,000 of capital-lease obligations. The Beachcorp facilities are related-party financing; a majority shareholder’s affiliate is the lender.
Material changes, outlook and risks
- Sales concentration increased: BASF accounted for 74% of 2018 revenue, versus 61% in 2017. The next two largest customers represented 7% and 3%. Management reported that BASF expected a material reduction in orders in 2019.
- Management expected Solésence sales to grow further in 2019, but noted that growth could require additional working capital. Planned 2019 capital spending was approximately $700,000–$850,000, subject to project success and available funding. Management expected R&D spending to remain similar to 2018 and SG&A to increase about 3%.
- Management said cash on hand and borrowing availability should fund operating plans through 2019, but also said it could not assure sufficient cash and guaranteed financing for the next 12 months while continuing its growth strategy. No additional financing commitments were in place. The auditor’s report highlighted substantial doubt about the company’s ability to continue as a going concern.
- At December 31, 2018, cash was $1.345 million and reported availability under revolving loans was $308,000. The company also disclosed that Beachcorp borrowings were temporarily $192,000 above the borrowing base at year-end, with the excess absorbed by an increase in the borrowing base in early January.
- BASF supply-agreement covenants can, under specified financial or other triggering events, give BASF rights to a technology license and purchase of certain production equipment. The company also must meet minimum liquidity and safety-stock requirements; failure could jeopardize capacity and revenue.
- Key risks include sustained losses, reliance on a small number of customers, raw-material availability and pricing, long product-adoption cycles, competition, financing and covenant compliance, and possible costs or restrictions from regulation of nanomaterials. The company reported no pending legal proceedings it believed would materially harm it.
- In March 2019, the company renewed its Libertyville revolving credit arrangement, with a stated maximum of $500,000 subject to borrowing-base and other conditions, and a maturity date of April 4, 2020. Separately, the financial statements note adoption of the new lease standard was expected to add lease assets and liabilities; the amounts had not yet been determined.
Important facts for investors to verify
- Whether BASF’s anticipated 2019 order reduction occurred, and the resulting effect on revenue, gross margin and cash generation.
- Current cash, usable borrowing capacity and borrowing-base compliance, including the status and terms of related-party Beachcorp financing.
- Compliance with BASF liquidity, inventory and other covenants, and whether any event could trigger technology-transfer or equipment-sale rights.
- Actual Solésence growth, working-capital needs and capital spending compared with management’s plans.
- The timing and terms of any additional financing, given the auditor’s going-concern warning and the absence of committed additional financing at filing.