Business context and reporting period
Nanophase Technologies Corporation’s Form 10-K reports the fiscal year ended December 31, 2021, compared with 2020. Solésence, LLC is its wholly owned subsidiary. Although the request metadata names Solesence, the registrant in the filing is Nanophase Technologies Corporation.
The company makes mineral-based skin-health products and ingredients, medical-diagnostics materials, and legacy advanced materials. Management refocused growth efforts on beauty science and life science; Solésence sells finished, customer-branded products, while the company also supplies personal-care ingredients and diagnostic materials.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial-statement amounts are in millions unless otherwise noted.
| Metric | 2021 | 2020 |
|---|---|---|
| Total revenue | $29.475 | $17.123 |
| Gross profit / gross margin | $8.690 / 29.5% | $5.990 / 35.0% |
| Operating income / margin | $2.559 / 8.7% | $1.485 / 8.7% |
| Interest expense | $1.154 | $0.496 |
| Net income / diluted EPS | $2.320 / $0.05 | $0.989 / $0.03 |
| Cash from operating activities | $2.321 | $(2.061) |
| Capital expenditures | $1.874 | $0.878 |
| Cash at year-end | $0.657 | $0.957 |
- Revenue increased about 72%. Product revenue rose to $29.325 million from $16.422 million; other revenue declined to $0.150 million from $0.701 million.
- By product category, Solésence revenue was $18.175 million versus $6.737 million; personal-care ingredients were $7.739 million versus $5.536 million; advanced materials were $3.561 million versus $4.850 million.
- Gross margin fell about 5.5 percentage points as rapid volume growth strained capacity and manufacturing efficiency; product mix, lower-than-expected fourth-quarter volume, inventory write-downs, and lower contract revenue also weighed on the rate.
- Research and development expense rose to $2.235 million from $1.571 million; selling, general and administrative expense rose to $3.896 million from $2.934 million.
- Operating cash flow improved by $4.382 million year over year. Working-capital investment included $1.005 million of increased receivables and $1.755 million of increased inventory.
- At year-end, current assets were $11.599 million and current liabilities $8.734 million. Cash was $0.657 million, receivables $3.937 million, and net inventory $6.095 million. The reported cash balance consisted of funds borrowed under the related-party revolver and was subject to account-control provisions.
- Year-end borrowings included a $1.351 million related-party revolving balance and a $1.000 million related-party term loan. Finance-lease liabilities totaled $0.111 million. Operating-lease liabilities were $12.289 million, including $1.983 million current.
Material changes, outlook and risks
- Solésence represented 62% of 2021 revenue, up from 39% in 2020. Management said capacity was the main constraint and expected 2022 Solésence volume, based on shipments and orders in hand, to exceed 2021.
- Management planned $4 million–$8 million of 2022 capital spending, primarily to expand capacity, and expected higher 2022 R&D and selling/general/administrative expenses. It cautioned that margin improvement was not assured and depended on mix, volume, cost control, pricing, and scaling efficiency.
- The company leased a 260,000-square-foot Bolingbrook facility in December 2021, with a lease term through May 2032. This materially increased recognized lease assets and obligations; management said the space exceeded immediate needs and planned to expand and consolidate operations.
- In January 2022, financing arrangements with affiliates of majority shareholder Bradford Whitmore expanded the accounts-receivable facility limit to $8 million and added a $4 million inventory facility; the term loan was $1 million. These facilities mature in March 2024 and carry interest at prime plus 0.75%. They are subsequent events, not year-end borrowings.
- Net income included $0.952 million of other income from forgiveness of the 2020 PPP loan. The filing says that loan may be audited for six years after forgiveness and repayment could be required if any amount is found ineligible. Interest expense included $0.903 million of accelerated debt-discount amortization after conversion of a $2 million related-party convertible note into shares in May 2021.
- Inventory reserves increased to $0.406 million from $0.030 million. The company disclosed a material weakness in inventory controls and concluded internal control over financial reporting and disclosure controls were not effective at year-end. Management reported remediation efforts underway; the auditor did not attest to internal-control effectiveness.
- Five customers accounted for 78% of 2021 revenue. BASF alone represented 26%; the medical-diagnostics customer’s share fell to 8% from 20%. BASF agreements contain provisions that, under specified triggers, can permit technology licensing and equipment transfer, potentially disrupting revenue and capacity.
- Management and the auditor concluded there was no substantial doubt about the company’s ability to continue as a going concern, relying on operating cash, cash on hand, and borrowing capacity. The auditor nevertheless identified the going-concern assessment as a critical audit matter because of uncertainty in cash-flow assumptions.
- Other risks include reliance on limited or single-source suppliers, labor and wage inflation, supply-chain disruption, customer payment timing, capacity constraints, product acceptance, competition, and dependence on patents. Management said COVID-related diagnostic-material demand declined in 2021 versus 2020 and its future level was uncertain.
Important facts for investors to verify
- Whether Solésence demand and customer orders translate into sustained revenue growth, and whether expanded manufacturing capacity can be brought online efficiently.
- Whether gross margins recover despite inflation, raw-material costs, product mix, and the added facility’s long-term lease commitments.
- Current liquidity, actual availability and borrowing-base terms of the January 2022 related-party facilities, and the degree of lender control over cash and collateral.
- Progress and independent validation of inventory-control remediation, including the accuracy of inventory counts, valuation, and reserve adequacy.
- Customer concentration, BASF contract triggers, and the durability of medical-diagnostics revenue as testing demand changes.
- Potential dilution: common shares outstanding increased from 38.2 million to 48.9 million during 2021, primarily after conversion of the related-party note; also verify outstanding options and subsequent share changes.