Business context and reporting period
The supplied filing is Nanophase Technologies Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2023—not a filing by an entity named Solesence, Inc. Nanophase operates in beauty and life-science markets, including through its wholly owned Solésence subsidiary. It is focused on skin health products and ingredients; management reported significantly lower demand for medical-diagnostics ingredients. Financial amounts below are in thousands of dollars except per-share data.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $11,872 | $11,222 | $21,329 | $19,378 |
| Gross profit | $3,675 | $2,736 | $5,824 | $4,904 |
| Gross margin | 31.0% | 24.4% | 27.3% | 25.3% |
| Operating income (loss) | $579 | $123 | $(425) | $228 |
| Net income (loss) | $333 | $50 | $(825) | $112 |
| Basic and diluted EPS | $0.01 | $0.00 | $(0.02) | $0.00 |
Six-month operating cash flow was negative $1,961, investing cash flow negative $811, and financing cash flow positive $2,783. Cash was $2,197 at June 30, 2023, versus $2,186 at year-end 2022. Current assets were $17,370 and current liabilities $19,382, implying negative working capital of $2,012 and a current ratio of about 0.90.
At June 30, the balance sheet showed $8,592 of related-party lines of credit and $2,338 of current related-party debt; no long-term related-party debt was shown. Operating lease liabilities totaled $9,482 long-term. Shareholders’ equity was $5,159. Six-month interest expense was $400, including $361 to related parties.
Material changes versus comparable periods
- Q2 revenue rose 5.8% year over year; six-month revenue rose 10.1%. Product revenue increased, while other revenue declined to $28 in Q2 and $149 for six months.
- Solésence revenue was $7,779 in Q2, up from $7,099, and $12,823 for six months, compared with $12,659. Personal Care Ingredients six-month revenue rose to $6,581 from $5,687; Advanced Materials rose to $1,925 from $1,032.
- Q2 gross profit and margin improved, with management attributing lower quarterly cost of revenue to better labor utilization. Six-month cost of revenue increased due to volume, material-price inflation, and manufacturing inefficiencies linked to Solésence launches.
- Six-month R&D expense increased to $1,994 from $1,463; SG&A increased to $4,255 from $3,213, partly reflecting legal and employee costs. Interest expense also increased.
- Six-month net loss of $825 contrasts with net income of $112 a year earlier. The first-quarter 2023 loss was $1,159, partly offset by Q2 income.
Outlook, risks, contingencies, and unusual items
- Management expects 2023 capital spending of $1.5 million to $3 million for currently identified needs, subject to project outcomes and available funding. It expects R&D expense to increase more slowly during the rest of 2023. Management cautioned that gross-margin percentage may or may not improve significantly in the remainder of the year.
- Management says manufacturing capacity has lagged customer demand and is a key operational constraint. It plans to add fixed manufacturing costs through 2023, aiming to expand throughput and later improve cost efficiency. Margins depend on sales mix and volume, input costs, pass-through pricing, and production scale-up.
- Four customers represented 68% of Q2 revenue and 65% of six-month revenue. BASF is the largest customer and has exclusive-supply agreements; specified performance or breach events could require sale of production equipment and jeopardize significant revenue and capacity.
- BASF litigation alleges breach of the zinc oxide supply agreement, including exclusivity and capacity provisions, and seeks unspecified damages and an injunction. Nanophase denies wrongdoing; discovery was ongoing. The company recorded no contingency, stating loss was not considered probable and a range was not estimable.
- Related-party credit agreements with Beachcorp and Strandler are scheduled to mature March 31, 2024. The filing warns failure to refinance or extend them would significantly affect the company’s ability to continue as a going concern. A separate $1,388 tenant-improvement loan was repaid, with accrued interest, on July 21, 2023 after landlord reimbursement.
- Management identified inflation in materials and wages as a potential material pressure if price increases cannot be passed through. Other stated risks include customer concentration, raw-material availability and cost, product demand, capacity constraints, litigation, and access to working capital.
- The company adopted the expected-credit-loss accounting standard on January 1, 2023, recording a $203 opening accumulated-deficit adjustment. Disclosure controls were assessed as effective; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended issuer: this filing is for Nanophase Technologies Corporation, with Solésence LLC as a subsidiary.
- Review the BASF litigation and related supply-agreement terms, including potential injunction, damages, or equipment-transfer consequences.
- Assess related-party borrowing availability, repayment and refinancing plans before the March 31, 2024 maturities, and the company’s negative working capital and operating cash use.
- Track customer concentration, Solésence growth, manufacturing capacity and launch-related inefficiencies, and whether cost inflation can be passed through.
- Compare actual capital spending and gross-margin performance with management’s stated 2023 plans and uncertainties.