Business context and reporting period
Filing: Nanophase Technologies Corporation (including its wholly owned Solésence, LLC subsidiary), Form 10-Q for the quarter and nine months ended September 30, 2021. The request identifies Solesence, Inc.; the filing registrant is Nanophase Technologies Corporation. Financial figures below are in thousands of dollars except per-share data.
The company focuses on skin health ingredients and finished Solésence products, alongside medical-diagnostics materials and other advanced materials. Management is prioritizing beauty-science and life-science markets.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $7,924 | $3,888 | $22,110 | $12,262 |
| Gross profit | $2,978 | $1,687 | $7,522 | $4,430 |
| Gross margin | 37.6% | 43.4% | 34.0% | 36.1% |
| Operating income | $1,401 | $552 | $2,858 | $1,163 |
| Net income | $1,363 | $430 | $2,714 | $795 |
| Diluted EPS | $0.03 | $0.01 | $0.06 | $0.02 |
- Revenue increased 104% in Q3 and 80% for the nine-month period. Solésence product revenue was $4,571 in Q3 and $13,369 year to date, versus $1,553 and $4,394, respectively, in 2020.
- Q3 gross margin declined despite higher gross profit, reflecting material-price inflation, manufacturing inefficiencies associated with product launches, added supply-chain staffing, and temporary warehouse costs. Management cited limited burst capacity and production throughput as operational constraints.
- Cash and cash equivalents were $1,380 at September 30, 2021, versus $957 at December 31, 2020. Current assets were $13,128 and current liabilities $9,473, implying working capital of $3,655.
- Nine-month operating cash flow was positive $269, compared with negative $1,732 in 2020. Investing cash flow was negative $1,445, primarily for equipment and leasehold improvements; financing cash flow was positive $1,599. Cash increased $423 during the period.
- At September 30, debt included $3,740 drawn on the Beachcorp related-party revolver and a $1,000 related-party term loan; the company reported $721 of additional revolver availability. The bank line had no balance. The $952 PPP loan was forgiven and recorded as other income. Operating and finance lease obligations totaled $2,060 on a present-value basis.
- Total assets were $18,830 and shareholders’ equity $7,741. Common shares outstanding rose to 48.7 million from 38.2 million at year-end, largely following conversion of a $2 million related-party convertible loan into 10 million shares, plus shares for accrued interest.
Material changes and management commentary
- Growth was driven by Solésence adoption and increased personal-care ingredient sales; medical-diagnostics demand declined significantly in Q3 and modestly for the nine-month period. Management said pandemic-related diagnostics demand may remain above historic levels but may not return to 2020/early-2021 volumes.
- The five largest customers represented 77% of Q3 revenue and 80% of nine-month revenue. Management warned that loss of a major customer or reduced purchases could materially affect results.
- Management expects additional research and development spending during the rest of 2021 and further product-development investment in 2022; it also anticipates continued staffing and compensation growth into 2022.
- Planned capital spending for the balance of 2021 was estimated at $900–$1,400, depending on project timing and success. Management expects growth to require additional working capital and manufacturing capacity, and noted that higher volume could improve fixed-cost absorption, subject to mix, costs, and scaling execution.
- The company reported $952 of PPP-loan forgiveness income and accelerated recognition of the remaining convertible-note discount in Q2, contributing to nine-month interest expense of $1,096. Nine-month results also included $903 of debt-discount amortization and the $952 forgiveness gain.
Outlook, risks, and contingencies
- Going concern: Management said cash, operating cash generation, and existing borrowing capacity may not be sufficient to fund its operating plans through the next 12 months. The filing states that substantial doubt exists about the company’s ability to continue as a going concern. No additional financing commitments were in place; financing may not be available on acceptable terms or at all. Without it, the company may need to curtail operations or delay growth-related capital expenditures.
- Liquidity depends on cash-flow timing, working-capital needs, customer demand, and the ability to fund planned capacity expansion. The company had been buying raw materials earlier to mitigate supply-chain delays, increasing inventory and cash needs.
- Beachcorp, managed by an affiliate of a shareholder who beneficially owned approximately 62% of shares, is a major related-party lender. The revolver limit was increased to $6 million and maturity extended to March 2023; its rate was reduced to prime plus 2%. The $1 million term loan bears 5.25% interest and matures March 2022. The loan agreement restricts additional indebtedness.
- Management believes BASF supply-agreement financial covenants and associated technology-transfer/equipment-sale triggers were permanently relieved after six consecutive quarters of operating income totaling more than $1.5 million. Other agreement provisions may still permit technology transfer in an insolvency event.
- Risks include customer concentration, uncertain Solésence and diagnostics demand, capacity limitations, raw-material and wage inflation that may not be fully passed through, financing availability and potential dilution, supply-chain disruption, competition, regulatory changes, and dependence on intellectual property. No pending legal proceeding was identified as expected to have a material adverse effect.
Important facts for investors to verify
- Whether operating cash flow and available borrowing capacity can support working-capital requirements and planned capital investment, given the stated going-concern doubt.
- Subsequent trends in Solésence demand, medical-diagnostics revenue, gross margins, production throughput, and inventory levels.
- Customer concentration and the status and terms of major supply agreements, including any remaining BASF transfer rights or requirements.
- Availability, cost, and potential dilution of any additional financing, as well as related-party debt terms and maturity obligations.
- Actual 2021 capital spending versus the stated $900–$1,400 estimate and whether planned manufacturing expansion delivers the expected capacity and cost benefits.