Nanophase Technologies Corporation — Q3 2023 Form 10-Q
Business context and period. This filing is for the quarter ended September 30, 2023. Although the request identifies Solesence, the registrant is Nanophase Technologies Corporation; consolidated results include its wholly owned Solésence subsidiary. The company focuses primarily on skin-health ingredients and finished products, alongside advanced materials and legacy markets.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $7.958 | $9.678 | $29.286 | $29.056 |
| Gross profit | $1.530 | $2.493 | $7.354 | $7.397 |
| Gross margin | 19.2% | 25.8% | 25.1% | 25.5% |
| Operating loss | $(1.222) | $(0.634) | $(1.649) | $(0.406) |
| Net loss | $(1.436) | $(0.750) | $(2.262) | $(0.638) |
| Net loss per share | $(0.03) | $(0.02) | $(0.05) | $(0.01) |
- Q3 revenue fell 17.8% year over year, with declines in Solésence, Personal Care Ingredients and Advanced Materials. Nine-month revenue increased 0.8%; product revenue rose to $28.925 million from $28.515 million.
- Q3 cost of revenue declined to $6.428 million, but gross profit and margin also fell, reflecting lower sales volume and mix. Nine-month cost of revenue rose to $21.932 million, with management citing volume, material inflation and manufacturing inefficiencies related to product launches.
- Research and development expense increased to $1.057 million for Q3 and $3.052 million year to date. Nine-month selling, general and administrative expense increased to $5.951 million, in part because of higher legal and employee-related costs.
- Cash from operating activities was $0.644 million for the first nine months, versus cash used of $2.397 million in the prior-year period. Investing used $0.852 million; financing used $0.790 million. Cash declined by $0.998 million to $1.188 million.
- At September 30, cash was $1.188 million, current assets $15.550 million and current liabilities $17.660 million. Working capital was negative $2.110 million. Inventories were $10.123 million, including $0.670 million in excess and obsolete inventory reserves.
- Related-party credit-line borrowings were $6.338 million and related-party long-term debt was $1.000 million. Operating lease obligations totaled $10.778 million, including current and long-term portions. Q3 interest expense was $0.214 million, versus $0.116 million a year earlier.
- The three largest customers represented 69% of Q3 revenue and 59% of nine-month revenue. One customer, BASF, accounted for 30% and 31%, respectively.
Changes, outlook and material risks
- Revenue trends diverged by period: Q3 sales decreased substantially, while nine-month sales were slightly higher. Solésence nine-month revenue declined to $17.839 million from $18.591 million; Personal Care Ingredients and Advanced Materials increased.
- Management said it expects R&D expense to remain flat or decrease slightly during the balance of 2023. It estimated 2023 capital spending of $0.2–$0.5 million, subject to project outcomes and available funding. The filing gives no specific revenue or earnings guidance.
- Management identified manufacturing throughput, controllable variable production costs, product mix, the ability to pass through material-cost increases, and efficient scaling of Solésence production as important to margins. It described demand as cyclical and said demand has at times exceeded production and shipping capacity.
- On November 13, 2023, after quarter-end, the company entered into a related-party Bridge Note with a maximum borrowing amount of $2.0 million, bearing interest at prime plus 0.75%. It is due upon completion of a planned rights offering or by May 13, 2024, whichever comes first. Related-party loan maturities were extended to March 31, 2025, and the inventory facility limit and borrowing base were increased.
- BASF litigation remains ongoing over the zinc oxide supply agreement, including alleged exclusivity breaches involving Solésence products. Management disputes the allegations; discovery is ongoing. No contingent loss was recorded because the company did not consider an outcome probable and could not estimate a loss range. The agreement also contains provisions that could require equipment transfers if specified triggering events occur.
- Other stated risks include customer concentration, access to working capital, inflation and raw-material availability, product acceptance, manufacturing capacity, and litigation. The company adopted the expected-credit-loss standard in 2023, recording a $0.203 million opening retained-earnings adjustment.
Investor verification points
- Review the BASF litigation status, possible effects on supply agreements and production equipment, and any subsequent change in the company’s assessment of contingent losses.
- Verify the rights offering’s terms and timing, Bridge Note borrowings and repayment requirements, and the availability and terms of related-party credit facilities.
- Track cash, working capital, operating cash flow, inventory levels and reserves, and the company’s ability to fund operations and planned investment.
- Assess whether customer concentration, product demand, production capacity and launch-related inefficiencies are improving or affecting margins.
- Reconcile Q3’s revenue decline and margin contraction with management’s expectations for the remainder of 2023; the filing does not provide a quantified revenue or earnings forecast.