Business context and reporting period
This is Nanophase Technologies Corporation’s Form 10-K for the fiscal year ended December 31, 2020, filed March 26, 2021. The request identifies Solesence, Inc.; however, the filing’s registrant is Nanophase Technologies Corporation, whose wholly owned subsidiary is Solésence, LLC. Nanophase develops and manufactures materials and finished products for skin health and medical diagnostics, alongside legacy advanced-materials applications. Its strategic focus is increasingly on Solésence beauty products and life-science diagnostic materials.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $17.123 million | $12.509 million |
| Gross profit / margin | $5.990 million / 35.0% | $2.616 million / 20.9% |
| Operating income (loss) | $1.485 million | $(2.796) million |
| Net income (loss) | $0.989 million | $(3.006) million |
| Net margin | 5.8% | (24.0%) |
| Operating cash flow | $(2.061) million | $(2.776) million |
| Capital expenditures | $0.878 million | $0.740 million |
| Cash at year-end | $0.957 million | $1.194 million |
Revenue rose 36.9%; product revenue was $16.422 million, with the increase driven by Solésence and medical-diagnostics growth, partly offset by lower sales to the largest personal-care ingredients customer. Solésence revenue increased to $6.737 million from $1.857 million; advanced materials revenue rose to $4.850 million from $2.733 million; personal-care ingredients revenue declined to $5.536 million from $7.919 million. R&D expense fell to $1.571 million from $1.870 million, SG&A to $2.934 million from $3.542 million, while interest expense increased to $0.496 million from $0.210 million.
Current assets were $8.835 million and current liabilities $6.784 million at year-end (current ratio approximately 1.30). Total assets were $13.540 million; stockholders’ equity was $2.732 million. Operating cash use continued despite the return to annual net income, largely reflecting increases in receivables and inventory to support growth. Financing activities provided $2.702 million.
Debt and financing included a $0.500 million bank line, $2.155 million drawn on the related-party Beachcorp revolver, a $0.500 million Beachcorp term loan, a $2.000 million convertible note principal (reported net of discount at $1.097 million), and a $0.952 million PPP loan. The Beachcorp revolver limit was expanded to $4.000 million and its maturities extended to March 31, 2022. The bank line was due April 4, 2021, and management intended to renew it. The convertible note is held by the controlling shareholder, bears 2% interest, matures in 2024, and is convertible at $0.20 per share.
Material changes versus the prior comparable period
- Nanophase moved from a $3.006 million net loss to $0.989 million net income, with gross margin improving to 35.0% from 20.9%.
- Solésence became the largest product category by revenue, while personal-care ingredient sales—particularly to BASF—declined. The largest customer represented 30% of 2020 revenue versus 63% in 2019; the top four customers together represented 75% versus 78%.
- Medical-diagnostics revenue increased materially amid elevated COVID-19 testing demand. The company cautioned that the duration of this demand is uncertain.
- Working capital expanded: year-end receivables rose to $2.932 million from $0.970 million and inventory to $4.340 million from $2.554 million. The company continued to use operating cash despite improved earnings.
Outlook, risks, contingencies and unusual items
Management expected net income again in 2021 and stated that Solésence shipments and orders in hand were expected to exceed full-year 2020 volume during the first half of 2021. It planned 2021 capital spending of $1.2–$1.8 million, subject to project outcomes and available funding. Management anticipated R&D expense could rise 30%–40% and SG&A could rise as much as 20%–35% if growth continued as planned.
The company and its auditor reported substantial doubt about its ability to continue as a going concern. Management said cash, operating cash generation, and available borrowing capacity might not fund operating plans and required obligations over the next twelve months; it had no additional financing commitments, and additional financing might not be available on acceptable terms or at all. Funding shortfalls could require reduced operations or delayed investment.
- Customer concentration remains material. BASF supply-agreement covenants may permit technology licensing and equipment-sale rights upon specified triggers, including certain financial covenant failures or insolvency-related events. The company said it met the specified safety-stock requirement at December 31, 2020.
- Related-party financing is significant: Beachcorp is managed by the controlling shareholder, who also holds the convertible note and beneficially owned approximately 62.6% of shares as of March 26, 2021. Conversion of the note could result in up to 10 million shares being issued.
- The PPP loan forgiveness application was submitted in 2021; forgiveness was not assured. Any unforgiven amount remains a repayment obligation.
- Supply-chain exposure includes sole-source suppliers and suppliers in China and Korea. COVID-19 caused some 2020 delays, particularly in Solésence packaging; management reported reduced impact by early 2021 but noted potential renewed disruption.
- Raw-material price and availability, production capacity, customer demand, and the ability to pass cost increases through to customers could affect margins and growth. The company also reported approximately $67 million of tax net operating loss carryforwards, some potentially subject to ownership-change limits or expiration.
Important facts for investors to verify
- Confirm the issuer’s identity: the filing is for Nanophase Technologies Corporation, not Solesence, Inc.
- Track cash conversion and working-capital needs alongside reported earnings, especially receivables, inventory, and operating cash flow.
- Verify renewal or replacement of the bank line, access to additional financing, and the company’s progress in addressing the disclosed going-concern uncertainty.
- Monitor Solésence growth, production capacity, margins, and whether medical-diagnostics demand persists beyond pandemic-related testing needs.
- Review BASF covenant compliance and customer concentration, as well as the terms, balances, maturity, and dilution implications of related-party debt and the convertible note.
- Confirm the outcome of the PPP forgiveness application and any resulting repayment schedule.