NANOPHASE TECHNOLOGIES CORPORATION Overview
Leveraging a platform of integrated patented and proprietary technologies, we create products with unique performance to enhance consumers' health and well-being. We offer soup-to-nuts production, from engineered materials, formulation development, and finished product development to commercial manufacturing and packaging capabilities. Our expertise in materials engineering allows us to effectively coat and disperse materials on a nano and "non-nano" scale for use in a variety of markets in skin health, including for use in sunscreens as APIs and as fully developed prestige skin care products, marketed and sold through our Solésence beauty science subsidiary. We believe that we have developed technological advantages with respect to our APIs sold for use as ingredients, while our Solésence beauty science technologies lead to enhanced efficacy in our finished products.
We believe that the advent of the SARS-CoV-2 ("COVID-19") Pandemic has driven significantly increase demand for our medical diagnostics materials during 2020 and 2021. It is our expectation that future demand may not reach the same volumes, but should remain greater than historic demand experienced prior to 2020. Polymerase Chain Reaction ("PCR") testing for various viruses, most notably "COVID-19," has become a critical use of our technology in the life science space. While it is difficult to predict to what extent the increased demand for our medical diagnostic materials used in COVID-19 testing will continue, we believe that our deep expertise in materials science has created advantages that enable performance in certain tests that may not be achievable through other materials. Outside of life science, we continue to sell advanced materials for use in legacy applications, all of which, along with medical diagnostics, currently fall into the advanced materials product category.
16
Given our technological position, in addition to the historical market acceptance of our APIs for use in skin health products and sunscreens, rapidly growing sales for our suite of Solésence® finished products, and growing use of our diagnostic materials in aiding the fight to curb the spread of COVID-19 and other viruses, we have reoriented our Company strategy. We are seeing unprecedented demand in both beauty science and life science areas. The markets for both have shown an appetite for what we are producing, and management believes that this growth is happening now due to a confluence of our technology, market conditions that favor what we produce, and our expanded expertise in these areas.
Results of Operations
Total revenue increased to
Other revenue decreased to
Cost of revenue generally includes costs associated with commercial production
and customer development arrangements. Cost of revenue increased to
17
At current revenue levels we have generated a positive gross margin, though margins can be impeded by the cyclicality of our demand, often leading to the Company not having enough revenue to efficiently absorb manufacturing overhead that is required to work with current customers and expected future customers. Another issue relating to demand cyclicality is that we have seen our lack of burst capacity creating strains, in terms of people and costs, when new product launches occur at the same time that we are experiencing demand from previously launched products. Since late 2020, the Company has found itself in a situation where our ability to produce and ship materials has been exceeded by customer demand. It is a key area of focus to increase throughput first, followed quickly by increased cost efficiency once we can achieve greater scale. We believe that our current fixed manufacturing cost structure is sufficient to support higher levels of revenue volume, but will need to be enhanced moving in to 2022 to accommodate what we expect to be additional growth. The extent to which margins grow, as a percentage of total revenue, will be dependent upon revenue mix, revenue volume, our ability to cut costs and pass commodity market-driven raw materials increases on to customers, and the speed and efficiency with which we are able to scale up production for our Solésence products. We expect that, as product revenue volume increases, our fixed manufacturing costs will be more efficiently absorbed, which should lead to increased margins as we grow. While additional production capacity is our most critical operational issue today, we expect to continue to focus on reducing controllable variable product manufacturing costs, with potential variability related to the commodity metals markets, but may or may not realize absolute dollar gross margin growth through 2021 and beyond, dependent upon the factors discussed above.
Research and development expense, which includes all expenses relating to the technology and advanced engineering groups, primarily consists of costs associated with the development or acquisition of new finished product formulations for skin care, new product applications for our skin care ingredients, advancement of our medical diagnostics ingredient knowledge, and the cost of enhancing our manufacturing processes. As an example, we are currently focusing the bulk of our resources on developing new product formulations, and related new technologies, as we expand marketing and sales efforts relating to our Solésence products. This work has led to several new products and additional potential new products. Our efforts in research and development, cosmetic formulating, process engineering and advanced engineering groups are focused in three major areas: 1) application development for our products; 2) creating or obtaining additional core materials technologies and/or materials that have the capability to serve multiple skin health-related markets; and 3) continuing to improve our core technologies to improve manufacturing operations and reduce costs.
Research and development expense increased to
Selling, general and administrative expense increased to
For both the three- and six-month periods in 2021, compensation expense was up generally due to a reorganization of some of the functions in this area and the addition of resources required to continue to execute on our growth plan. Marketing expenses were up primarily due to tradeshow deposits and additional market research expenses. Travel and entertainment expenses have been down as a product of the ongoing Covid-19 pandemic and its impact on air travel, live trade shows, and in-person meetings, which we expect to change, assuming the travel environment stabilizes.
The Company recognized
18
Inflation
We believe inflation has not had a material effect on our operations or financial position. However, supplier price increases and wage and benefit inflation, both of which represent a significant component of our costs of operations, may have a material effect on our operations and financial position in 2021 and beyond if we are unable to pass through any applicable increases under our present contracts or through to our markets in general.
Liquidity and Capital Resources
Our cash and cash equivalents amounted to
Net cash provided by financing activities was
We paid
On
19
Our supply agreements with our largest customer, BASF, contain certain financial
covenants which could potentially impact our liquidity. The most restrictive
financial covenants under these agreements require that we maintain a minimum of
We believe that cash from operations and cash on hand, in addition to unused borrowing capacity, which has recently been increased (see Note 7 to the Financial Statements), may not be adequate to fund our operating plans through 2021. We are working to reduce these risks, but some of this is dependent on several things over which we have limited control. We have seen an increase in sales of our Solésence products through 2020, and the first half of 2021, which we expect to continue in to 2022. If that does continue, we will require additional investment in working capital. Given these issues, and other commercial realities, we are monitoring the additional working capital demands that this could create as we continue to execute on our Solésence growth strategy. The timing of cash flows is critical. If cash generated from operations is not materially consistent with our plans, we believe that we may need to seek additional funding to address working capital demands. This uncertainty has caused us to be unable to assert that, for the next twelve months, we have enough current cash and guaranteed access to financing to fund operations, and to continue with our current growth strategy in terms of investment in capital equipment and in operating expenses related to Solésence, without securing additional financing. We believe that we will be able to secure additional financing if needed, but we do not have any additional financing commitments in place as of today. However, we may not be able to secure additional financing in a timely manner under commercially reasonable terms, or at all. If we are unable to secure additional financing, the operations of the Company might need to be curtailed to a certain degree, and we would need to delay capital expenditures related to our Solésence growth strategy, which could impede growth later in 2021 and 2022.
Our actual future capital requirements in 2021 and beyond will depend on many
factors, including customer acceptance of our current and potential finished
Solésence products, APIs sold as ingredients in to the skin health markets,
medical diagnostics ingredients, and other engineered materials, applications,
and products, continued progress in research and development activities and
product testing programs, the magnitude of these activities and programs, and
the costs necessary to increase and expand our manufacturing capabilities and to
market and sell these products and ingredients. Other important issues that will
drive future capital requirements will be the development of new markets and new
customers as well as the potential for significant unplanned growth with
existing customers. Depending on the success of certain projects, we expect that
capital spending relating to currently known capital needs during the balance of
2021 will be between
In the likely event that we will need to seek additional financing, such
additional financing may not be available on acceptable terms or even at all,
and any such additional financing could be dilutive to our shareholders. Such
financing could be necessitated by such things as the loss of an existing
customer; a significant decrease in revenue from one or more of our customers;
temporary working capital demands resulting from our expected growth in our
Solésence business that we cannot fund with existing capital; currently unknown
capital requirements considering the factors described above; new regulatory
requirements that are outside our control; the need to meet previously discussed
cash requirements to avoid a triggering event under our BASF agreement; or
various other circumstances coming to pass that we currently do not anticipate.
The failure to have access to sufficient capital to fund our business plans may
result in a curtailment or other change in those plans, and under such
circumstances, this raises doubt as to our ability to continue as a going
concern under
20
On
Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purposes of raising capital, incurring debt or operating our business. We do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.
As more fully described in Note 7 to our Financial Statements, in Part I, Item I
of this Form 10-Q, during 2014 we entered into a letter of credit and promissory
note for up to
Safe Harbor Provision
We want to provide investors with more meaningful and useful information. As a result, this Quarterly Report on Form 10-Q (the "Form 10-Q") contains and incorporates by reference certain "forward-looking statements", as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements reflect our current expectations of the future results of our operations, performance, and achievements. Forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have tried, wherever possible, to identify these statements by using words such as "anticipates", "believes", "estimates", "expects", "plans", "intends" and similar expressions. These statements reflect management's current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause our actual results, performance, or achievements in 2021 and beyond to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties and factors include, without limitation: our ability to be consistently profitable despite the losses we have incurred since our incorporation; a decision by a customer to cancel a purchase order or supply agreement in light of our dependence on a limited number of key customers; the terms of our supply agreements with BASF which could trigger a requirement to transfer technology and/or sell equipment to that customer; our potential inability to obtain working capital when needed on acceptable terms or at all; our ability to obtain materials at costs we can pass through to our customers, including Rare Earth elements, specifically cerium oxide, as well as high purity zinc; uncertain demand for, and acceptance of, our Solésence products, and our advanced materials; our manufacturing capacity and product mix flexibility in light of customer demand; our limited marketing experience, including with our suite of Solésence products; changes in development and distribution relationships; the impact of competitive products and technologies; our dependence on patents and protection of proprietary information; our ability to maintain an appropriate electronic trading venue for our securities; the impact of any potential new governmental regulations, especially any new governmental regulations focusing on the processing, handling, storage or sale of nanomaterials, that could be difficult to respond to or costly to comply with; business interruptions due to unexpected events or public health crises, including viral pandemics such as COVID-19; and the resolution of litigation or other legal proceedings in which we may become involved. In addition, our forward-looking statements could be affected by general industry and market conditions and growth rates. Readers of this Quarterly Report on Form 10-Q should not place undue reliance on any forward-looking statements. Except as required by federal securities laws, we undertake no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.
21
© Edgar Online, source
