Business context and reporting period
Nanophase Technologies Corporation filed this unaudited Form 10-Q for the quarter ended March 31, 2020. The consolidated results include wholly owned Solesence, LLC; the filing is for Nanophase, not a separate Solesence, Inc. The company develops and manufactures advanced materials, personal-care ingredients, and finished skin-care products sold under the Solésence brand.
Financial results and position
Amounts are in thousands of dollars, except per-share data and percentages.
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Total revenue | $4,039 | $3,755; up 7.6% |
| Product revenue | $3,961 | $3,497 |
| Gross profit / margin | $1,034 / 25.6% | $884 / 23.5% |
| Operating loss | $(43) | $(470) |
| Interest expense | $124 | $43 |
| Net loss | $(167) | $(513) |
| Operating cash flow | $(1,180) | $(1,537) |
| Capital expenditures | $181 | $240 |
| Cash at quarter-end | $951 | $1,194 at Dec. 31, 2019 |
Product-category revenue was $1,932 for Personal Care Ingredients, $584 for Advanced Materials, and $1,523 for Solésence, versus $2,009, $850, and $896, respectively, in Q1 2019. The company reported no income-tax provision. Basic and diluted loss per share was reported as $(0.00), versus $(0.02) a year earlier.
At March 31, 2020, current assets were $5,848 and current liabilities $5,522, with a current ratio of approximately 1.06. Total assets were $10,248 and shareholders’ equity $1,396. Borrowings included a $500 bank line, $1,400 related-party revolver, $500 related-party term loan, and a convertible note with $2,000 principal and $897 net carrying value after discounts. The company also reported lease obligations and other liabilities.
Changes and management commentary
- Revenue and gross profit increased, led by Solésence orders. Gross margin improved, but management cited material-price inflation and production inefficiencies associated with Solésence launches.
- Other revenue fell to $78 from $258, partly because Q1 2019 included a $211 one-time bulk-material and sample buyout. Q1 2020 included $65 of revenue under a Sumitomo development agreement.
- Research and development expense declined to $372 from $477, and selling, general and administrative expense to $705 from $877. Management expected quarterly R&D expense to rise during the rest of 2020 and SG&A to remain near current levels.
- Receivables increased by $1,284 during the quarter and were the main driver of operating cash use. Financing cash flow was $1,118, including net related-party revolver borrowings of $1,176; cash declined by $243.
- The company drew and repaid the $500 Libertyville bank line around quarter-end. The bank facility had not yet been renewed as of the filing, although management expected renewal in Q2 2020. Beachcorp extended maturities of its term and revolving facilities to March 31, 2021; the agreement restricts additional indebtedness.
Outlook, risks and contingencies
- Going concern: Management disclosed significant doubt about the company’s ability to continue as a going concern. It said available cash, operating cash flow, and borrowing capacity might not fund plans through 2020; the financial statements remain prepared on a going-concern basis.
- COVID-19: Management expected Solésence sales growth in 2020, but below plan, assuming pandemic impacts substantially improved from Q2 onward. It warned of possible harm to Personal Care Ingredients customers, said later-year demand was unclear, and could not quantify the effects.
- Funding: A PPP loan was received after quarter-end. The filing gives conflicting amounts: $952 in the liquidity note and $962 in the subsequent-events note. Management’s funding outlook also depends on bank-line renewal, related-party borrowing availability, and working-capital needs. Additional financing may be unavailable or dilutive.
- Customer concentration and BASF provisions: Three customers accounted for approximately 46%, 15%, and 15% of Q1 revenue. BASF supply agreements include financial and other triggers that could give BASF rights to license technology and acquire equipment. Such a transfer could materially reduce revenue and impair production capacity. The company also described minimum inventory and cash-related covenant requirements.
- Investment plans: Planned capital spending for the remainder of 2020 was $400–$950, subject to demand, project outcomes, available financing, and COVID-19 effects; actual spending could fall outside that range.
- Other risks: Management cited dependence on key customers, cost pass-through limits, raw-material and wage inflation, manufacturing scale-up, and the possibility that customer losses or working-capital demands could require operating or investment curtailments. No material pending legal proceedings were reported.
Important facts for investors to verify
- Confirm the PPP loan amount and its forgiveness eligibility; the filing reports both $952 and $962.
- Confirm renewal and availability of the Libertyville credit facility and remaining related-party borrowing capacity.
- Assess liquidity, cash burn, receivables collection, and the company’s stated going-concern uncertainty.
- Review BASF covenant compliance, required safety-stock levels, and the potential consequences of any technology-transfer trigger.
- Reconcile share-count disclosures: the balance sheet reports 33,911,792 shares at Dec. 31, 2019, while the equity statement reports 38,136,792 for that date.
- Track customer concentration, COVID-19-related demand, Solésence growth and margins, and planned capital spending.