10-K: Nanophase Technologies Corporation Reports 2023 Annual Results, Highlights Growth in Solsence Business

Nanophase Technologies Corporation's 2023 annual report reveals a slight decrease in total revenue but significant growth in its Solsence beauty science business.

Summary

• Nanophase Technologies Corporation reported a total revenue of $37.3 million for 2023, a slight decrease compared to $37.3 million in 2022.
• Product revenue, the primary component of total revenue, decreased slightly to $36.6 million in 2023 from $36.7 million in 2022.
• The Solsence beauty science business saw its revenue increase to $25.2 million in 2023, representing 68% of total revenue, compared to $23.1 million and 62% in 2022.
• The company experienced a net loss of $4.4 million in 2023, compared to a net loss of $2.6 million in 2022.
• Research and development expenses increased to $3.8 million in 2023 from $3.0 million in 2022, driven by investments in Solsence product development.
• The company's gross margin percentage decreased by 1% compared to 2022 due to lower-than-expected volume in the fourth quarter, write-downs of obsolete inventory, and changes in product mix.
• The company has federal net operating loss carryforwards of approximately $50 million as of December 31, 2023, with $44 million expiring between 2024 and 2037.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While there is strong growth in the Solsence business and positive recognition for the company's technology, the overall financial results are worse than the previous year, with a net loss and decreased gross margin. The ongoing litigation with BASF and reliance on related party debt also add to the uncertainty. The recent capital raise is a positive step but also introduces new restrictions.

Positives

• The Solsence beauty science business is experiencing rapid growth and is expected to continue to grow in 2024.
• The company's proprietary technologies, including Active Stress Defense and Kleair, are gaining market recognition and industry awards.
• The company has a strong manufacturing base with three facilities in the Chicago area, all registered under ISO 9001 and ISO 14001.
• The company is committed to a Lean Six Sigma manufacturing approach to reduce costs and improve efficiency.
• The company has a flexible workforce that is cross-trained to work across various manufacturing processes.

Negatives

• Total revenue decreased slightly in 2023 compared to 2022.
• The company experienced a net loss of $4.4 million in 2023.
• Gross margin percentage decreased by 1% compared to 2022.
• The company is facing a legal dispute with BASF, its largest customer, regarding the exclusivity provision of their supply agreement.
• The company relies on sole-source processors for some raw materials, which could lead to supply chain disruptions.
• The company has a high concentration of sales to a limited number of customers, which could pose a risk if one of those customers is lost.

Risks

• The company's ability to be consistently profitable is uncertain due to past losses.
• The company is dependent on a limited number of key customers, and the loss of one could have a material adverse effect.
• The company's supply agreements with BASF could trigger a requirement to transfer technology and/or sell equipment.
• The company may be unable to obtain working capital when needed on acceptable terms.
• The company's ability to obtain materials at costs they can pass through to customers is uncertain.
• Demand for and acceptance of the company's Solsence products and advanced materials is uncertain.
• The company has limited marketing experience, particularly with its Solsence products.
• The company is dependent on patents and protection of proprietary information.
• The company could be impacted by new governmental regulations, especially those focusing on nanomaterials.
• The company could experience business interruptions due to unexpected events or public health crises.
• The company is involved in ongoing litigation with BASF, the outcome of which is uncertain.

Future Outlook

The company expects Solsence volume to exceed full year 2023 volume based on 2024 shipments and customer orders in-hand and plans to continue investments in facilities, equipment, and human resources in 2024 to support Solsence growth. The company also expects to continue new materials development and dispersion technologies for personal care applications and for its formulated Solsence products during 2024 and beyond.

Management Comments

• Management believes that Solsence offers the greatest growth potential of any group of products in any market in the Company's history.
• Management believes that the growth in beauty science and life science areas is happening now due to a confluence of technology, market conditions, and expanded expertise.
• Management believes that the company is well-positioned with its platform of integrated commercial nanomaterial technologies to respond to demand in life science applications.
• Management believes that the company's material technologies and manufacturing platforms are strong.
• Management believes that the company has an exemplary safety record.

Industry Context

The company is benefiting from the growing consumer interest in mineral-based sunscreens and clean beauty products. The company's focus on skin health and medical diagnostics aligns with current market trends. The company is competing with other contract manufacturers and developers, advanced materials and chemical companies, and suppliers of traditional materials.

Comparison to Industry Standards

• The company's Solsence business is competing in the prestige beauty segment, which is known for higher margins and brand loyalty, similar to companies like Estee Lauder and L'Oreal.
• The company's personal care ingredients business competes with large chemical companies like BASF, which is a major supplier of ingredients for the personal care industry.
• The company's advanced materials business competes with companies that produce nanomaterials for various applications, including life science, coatings, and plastics.
• The company's manufacturing operations are compliant with cGMP and ISO standards, which are common benchmarks for companies in the pharmaceutical and personal care industries.
• The company's research and development expenses are focused on developing new products and technologies, which is a common practice for companies in the technology and materials sectors.

Legal Proceedings

• BASF filed a complaint against Nanophase in New Jersey state court on August 9, 2022, alleging breach of the Zinc Oxide Supply Agreement.
• Nanophase filed a Complaint for Declaratory Judgment against BASF in Illinois state court on September 7, 2022.
• The New Jersey court denied Nanophase's Motion to Dismiss BASF's complaint on February 10, 2023.
• Nanophase filed an answer to BASF's New Jersey Complaint and counterclaims on February 28, 2023.
• The Illinois court granted BASF's Motion to Dismiss Nanophase's Illinois Complaint on March 16, 2023.
• The New Jersey court ruled on BASF's motion to dismiss Nanophase's counterclaims on October 6, 2023.
• Discovery in the New Jersey litigation is ongoing.

Related Party Transactions

• The company has engaged in a series of debt and equity transactions with Bradford T. Whitmore and his affiliates.
• Beachcorp, LLC and Strandler, LLC, affiliates of Bradford T. Whitmore, are substantial lenders to the company.
• The company entered into a Securities Purchase Agreement with Strandler, LLC on March 1, 2024, issuing Series X Preferred Stock for $6 million.

Stakeholder Impact

• Shareholders are impacted by the company's net loss and the ongoing litigation with BASF.
• Employees are impacted by the company's growth plans and potential changes in operations.
• Customers are impacted by the company's ability to deliver products and maintain supply chains.
• Suppliers are impacted by the company's reliance on sole-source processors and potential supply chain disruptions.
• Creditors are impacted by the company's debt levels and ability to repay loans.

Next Steps

• The company plans to continue investments in facilities, equipment, and human resources in 2024 to support Solsence growth.
• The company will continue to develop new materials and dispersion technologies for personal care applications and Solsence products.
• The company will continue to negotiate with BASF in good faith to resolve the ongoing legal issues.
• The company will seek shareholder approval to increase the number of authorized shares of common stock to enable conversion of the Series X Preferred Stock.
• The company will monitor the value of inventory for the effects of aging, obsolescence, and seasonality.

Key Dates

Keywords

Solsence, Nanophase, skin health, beauty science, personal care ingredients, advanced materials, zinc oxide, titanium dioxide, sunscreen, medical diagnostics, Active Stress Defense, Kleair, BASF, manufacturing, patents