Filing summary
Reporting entity and period: The filing is Nanophase Technologies Corporation’s Form 10-K for the fiscal year ended December 31, 2023—not a filing by a separate “Solésence, Inc.” Solésence, LLC is Nanophase’s wholly owned subsidiary and beauty-science business.
Business context
Nanophase develops and manufactures engineered materials for skin health and life-science applications. Its businesses include Solésence finished skin-care products, personal-care ingredients (including zinc oxide and titanium dioxide APIs), and advanced materials used in medical diagnostics and legacy markets. Management’s strategic focus is skin health and diagnostics; Solésence is the largest business.
Financial performance and position
- Revenue: $37.297 million in 2023, essentially flat versus $37.317 million in 2022. Solésence revenue rose to $25.211 million from $23.111 million; personal-care ingredients fell to $9.277 million from $11.121 million; advanced materials declined to $2.809 million from $3.085 million.
- Profit and margins: Gross profit was $7.825 million, a 21.0% gross margin, versus $8.360 million and 22.4% in 2022. Operating loss widened to $3.546 million from $2.258 million. Net loss was $4.390 million, or $0.09 per share, versus a net loss of $2.623 million, or $0.05 per share, in 2022. The filing’s audited statements report a 2022 net loss.
- Costs and interest: Cost of revenue increased to $29.472 million from $28.957 million. Research and development expense rose to $3.837 million from $3.037 million. Interest expense increased to $838,000 from $382,000.
- Cash flow: Operating activities used $2.006 million, compared with $1.650 million in 2022. Investing activities used $1.051 million, down from $2.823 million. Financing activities provided $2.593 million, versus $6.002 million. Year-end cash was $1.722 million, down from $2.186 million.
- Liquidity and debt: Current assets were $16.302 million and current liabilities $15.589 million at year-end. Outstanding borrowings totaled approximately $10.810 million: $2.810 million on the accounts-receivable revolver, $5.000 million on the inventory facility, $1.000 million on the term loan, and a $2.000 million bridge note. These loans are primarily from affiliates of the controlling shareholder. Operating lease liabilities totaled $10.449 million.
- Other balance-sheet items: Total assets were $32.881 million and stockholders’ equity was $1.902 million. Inventory, net of a $677,000 reserve, was $10.031 million. The allowance for credit losses was $225,000.
Material changes and outlook
- Solésence revenue increased about 9% and accounted for 68% of total revenue, versus 62% in 2022. Management said demand is constrained mainly by production capacity and expects 2024 Solésence volume to exceed 2023, based on shipments and customer orders in hand.
- Management plans further investment in facilities, equipment, staffing, and product development. Expected 2024 capital spending is $1 million to $5 million, with actual spending dependent on customer growth, project outcomes, and available financing.
- Management expects research and development spending to continue rising with Solésence growth. It expects 2024 SG&A to be slightly lower, partly due to anticipated lower legal costs. It cautioned that gross-margin improvement is not assured and depends on volume, product mix, manufacturing scale-up, costs, and pricing.
- On March 1, 2024, the company received $6 million from Strandler, an affiliate of its controlling shareholder, in exchange for 15,000 Series X preferred shares. Subject to shareholder approval and an increase in authorized common shares by August 1, 2024, the preferred shares may convert into 15 million common shares. If the required amendment is not filed by that date, the holder may require redemption for $420 per preferred share, or $6.3 million in total. The transaction also extended certain related-party loan maturities to October 1, 2025.
- Management stated that the March 2024 financing and available borrowing capacity were sufficient for operations and that substantial doubt about the company’s ability to continue as a going concern did not exist. The filing also notes that year-end cash consisted of funds borrowed under a revolving credit facility, and that little borrowing capacity remained.
Risks, contingencies, and unusual items
- BASF litigation: BASF alleges breaches of a long-term zinc oxide supply agreement, including alleged violations of exclusivity provisions involving Solésence sales, and seeks unspecified damages and injunctive relief. Nanophase denies wrongdoing; discovery is ongoing. No contingent liability or loss range was recorded or disclosed because management determined an unfavorable outcome was not probable and a loss range was not estimable. The auditor identified this assessment as a critical audit matter.
- Customer concentration: Three customers represented 57% of 2023 revenue: BASF at 25% and two Solésence customers at 17% and 15%. The company also reports dependence on major customers and warns that losing a key customer could materially harm results.
- Related-party financing and control: Bradford T. Whitmore beneficially owned approximately 63.75% of common shares as of March 28, 2024 and is affiliated with the company’s major lenders. The company’s reliance on these lenders, collateral arrangements, and preferred-stock terms warrants attention.
- Operating risks: Risks include supply dependence on certain single-source suppliers, high-purity zinc availability and pricing, inflation and wage costs, manufacturing capacity, customer demand, and long-term facility commitments. The company leases a 260,000-square-foot facility that exceeds current space needs and sublets part of it.
- Accounting and governance: Management recorded a $677,000 inventory reserve and an $225,000 receivables allowance. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not provide an internal-control attestation.
Most important facts for investors to verify
- Progress and outcome of the BASF litigation, including any effects on exclusivity, equipment, revenue, or supply arrangements.
- Whether the company obtains shareholder approval and files the authorized-share increase by August 1, 2024, and the resulting conversion or redemption implications of the Series X preferred stock.
- Available borrowing capacity, cash access under the related-party credit arrangements, debt maturities, and the company’s ability to fund operations and planned capital spending.
- Whether Solésence growth and capacity expansion materialize, and whether customer concentration declines as the business scales.
- Whether inventory reserves, receivables collectability, and operating lease costs remain manageable as sales and production needs change.