Filing summary
Reporting period: Fiscal year ended December 31, 2022; filed March 29, 2023. Although the request identifies Solesence, Inc., the filing is Nanophase Technologies Corporation’s Form 10-K. Solésence, LLC is its wholly owned subsidiary. The filing reports annual results, not a standalone fourth-quarter income statement.
Business context
Nanophase develops and manufactures engineered materials for skin health, beauty products and medical diagnostics, alongside legacy advanced-materials applications. Its growth strategy prioritizes Solésence finished skin-care products and personal-care ingredients. Solésence represented 62% of revenue in both 2022 and 2021; management says growth is constrained principally by production capacity.
Financial performance and liquidity
| Metric | 2022 | 2021 |
|---|---|---|
| Revenue | $37.317 million | $29.475 million |
| Gross profit / gross margin | $8.360 million / 22.4% | $8.690 million / 29.5% |
| Operating income (loss) | ($2.258 million) | $2.559 million |
| Net income (loss) | ($2.623 million) | $2.320 million |
| Operating cash flow | ($1.650 million) | $2.321 million |
| Capital expenditures | $2.823 million | $1.874 million |
| Cash at year-end | $2.186 million | $0.657 million |
Revenue increased 27%; product revenue rose to $36.731 million from $29.325 million. Solésence revenue was $23.111 million, personal-care ingredients $11.121 million and advanced materials $3.085 million. Growth in Solésence and personal-care ingredients was partly offset by lower medical-diagnostics revenue. Gross margin fell about 7 percentage points, reflecting capacity-related inefficiencies, lower-than-expected fourth-quarter volume, inventory write-downs, reduced contract revenue and product mix. The company recorded a $500,000 inventory reserve and reported R&D expense of $3.037 million, up from $2.235 million, and SG&A of $7.581 million, up from $3.896 million. Interest expense declined to $382,000 from $1.154 million.
At December 31, 2022, current assets were $16.625 million and current liabilities $16.835 million. Related-party revolving borrowings totaled $7.282 million, with a further $1.000 million related-party term loan; the balance sheet reports $8.282 million of related-party debt in total. The $2.186 million cash balance consisted of funds borrowed under the revolving credit facility. The loans are primarily from entities affiliated with controlling shareholder Bradford T. Whitmore, are secured by company assets, and mature March 31, 2024. Operating lease liabilities totaled $9.823 million. Stockholders’ equity was $5.649 million.
Changes, outlook and material risks
- Operating cash flow moved from positive $2.321 million to negative $1.650 million, while the company returned to a net loss. Cash increased through financing activity, including higher related-party borrowings.
- Management expects 2023 Solésence volume, based on shipments and customer orders in hand, to exceed 2022 volume. Planned 2023 capital spending is $3 million to $6 million, subject to project outcomes and funding; management anticipates further capital spending in 2024 and 2025. It cautions that 2023 gross-margin improvement is uncertain.
- Capacity constraints, scaling execution, inflation in supplier and labor costs, raw-material availability, and reliance on a few customers may affect growth, margins and liquidity. Four customers represented 69% of 2022 revenue, versus 70% in 2021; the largest accounted for 30%.
- BASF is litigating over alleged breaches of the zinc-oxide supply agreement, including alleged exclusivity, capacity and inventory breaches. BASF seeks unspecified damages and an injunction. Nanophase denies wrongdoing; discovery is ongoing. The company recorded no contingent liability, stating that a loss was not considered probable and a range could not be estimated.
- The independent auditor identified going-concern assessment as a critical audit matter because of uncertainty in cash-flow forecasts, but issued an unqualified opinion on the financial statements. Management stated that cash, operating cash flows and available borrowing capacity should fund plans and required debt repayments for one year after issuance, with no substantial doubt about continued operation.
- Management reported effective disclosure controls and internal control over financial reporting at year-end, and said a 2021 inventory-control material weakness was remediated in 2022. The auditor did not attest to internal control effectiveness.
Investor verification priorities
- Confirm the latest BASF litigation status, potential remedies and any implications for Solésence sales or the supply agreement.
- Review borrowing availability, borrowing-base requirements, related-party loan terms and maturities, and the company’s reliance on borrowed funds for cash.
- Assess whether planned capacity expansion is funded and sufficient to meet customer demand, and whether growth translates into improved margins and operating cash flow.
- Track customer concentration, collection of receivables, inventory quality and the effects of the $500,000 reserve.
- Reconcile the filing’s 2023 outlook and capital-spending plans with subsequent results and filings; the stated volume expectation is not a quantified revenue or earnings forecast.