SOLESENCE, INC. annual report, FY2016

Business Context and Reporting Period

The supplied filing is Nanophase Technologies Corporation’s Form 10-K for the fiscal year ended December 31, 2016—not a filing by Solésence, Inc. Solésence LLC is identified as Nanophase’s wholly owned subsidiary. Nanophase develops and manufactures engineered nano- and sub-micron materials and skincare formulations; it reports one business segment.

Financial Performance and Liquidity

Revenue rose approximately 4.6%, primarily from increased sales to the largest personal-care customer. Net loss widened approximately 7.6%; basic and diluted loss per share remained $0.04. R&D expense increased to $1.554 million from $1.273 million, while SG&A declined to $2.954 million from $3.019 million. The filing reports no income tax provision.

At year-end, current assets were $3.427 million and current liabilities were $1.297 million. The balance sheet shows $217,000 of capital-lease obligations, including current and long-term portions; no bank-line borrowings were outstanding. Stockholders’ equity was $2.791 million, and accumulated deficit was $94.880 million. Investing activities used $165,000; financing activities provided $910,000, including $988,000 from a stock sale to the company’s largest investor.

Material Changes and Outlook

• In February 2016, Nanophase issued 2.6 million shares to its largest investor for $988,000, increasing shares outstanding and providing funding for general corporate purposes.
• First revenue from the company’s proprietary particle surface treatment was recognized in 2016; Solésence launched formulated personal-care products. Nanophase also developed and began selling energy-management, particularly solar-control, solutions.
• Management expected customer adoption and growth in 2017 and beyond, but gave no specific revenue or earnings guidance. It expected 2017 SG&A to be about 5% higher, R&D spending to be similar to 2016, and capital spending of $600,000–$1 million, potentially financed in part through leases. Management believed available cash, operating cash flow and unused borrowing capacity would fund plans through 2017.
• Management cautioned that margins depend on sales volume and mix, manufacturing-cost control, and the ability to pass through raw-material cost increases. It did not guarantee gross-margin growth or profitability; the company reported losses in every year since inception.

Risks, Contingencies, and Unusual Items

• Customer concentration is substantial: the largest customer, BASF, represented 69% of 2016 revenue, versus 63% in 2015. The next two customers represented 5% and 4%. Customer agreements generally do not guarantee purchase volumes.
• BASF agreements contain financial and other triggers that could give BASF rights to license technology and acquire specified production equipment. One financial trigger involves trailing 12-month earnings below zero and cash, cash equivalents and certain investments below $1 million. Year-end cash was approximately $1.8 million and debt was nil, but continuing losses and liquidity remain relevant to the covenant.
• Other key risks include prolonged product-adoption cycles, uncertain demand, competition, dependence on specialized or limited-supply inputs (including cerium oxide and high-purity zinc), regulatory and product-liability exposure, and potential need for additional capital. The company reported an $82 million tax net operating loss carryforward, subject to potential ownership-change limitations and expiration dates.
• A $54,000 fixed-asset impairment was recorded in 2016. The filing reports no pending legal proceedings expected to have a material adverse effect. The independent auditor gave an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting, without auditor attestation of internal controls.

Important Facts for Investors to Verify

• Confirm the issuer identity: this is Nanophase Technologies Corporation’s 2016 10-K; Solésence is a subsidiary, not the registrant named in the filing.
• Track BASF sales concentration, customer order patterns, and the company’s compliance with BASF agreement triggers.
• Assess whether new Solésence and solar-control products generate repeat sales and diversify revenue beyond the largest customer.
• Monitor cash use, financing and capital-lease commitments, planned capital spending, and the path toward profitability.
• Review raw-material availability and pricing, gross-margin trends, and whether management’s 2017 expectations were achieved.