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What changed in SOLESENCE, INC.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of SOLESENCE, INC.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+101 added−89 removedSource: 10-K (2024-03-28) vs 10-K (2023-03-29)

Top changes in SOLESENCE, INC.'s 2023 10-K

101 paragraphs added · 89 removed · 79 edited across 5 sections

Item 1. Business

Business — how the company describes what it does

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Biggest changeWe have registered some of the chemicals we ship to customers in Europe pursuant to the European Chemical Agency’s regulations issued to date pertaining to Registration Evaluation and Authorization of Chemicals (“REACH”). Currently, we have registered Zinc Oxide, Aluminum Oxide, Iron Oxide and Octyltrimethoxysilane under REACH.
Biggest changeIt is also compliant with cGMP for products under FDA regulation, applying to the manufacture of APIs and OTC Finished Dosage Form materials (primarily used in sun protection). We have registered some of the chemicals we ship to customers in Europe pursuant to the European Chemical Agency’s regulations issued to date pertaining to Registration Evaluation and Authorization of Chemicals (“REACH”).
Accordingly, we rely on general chemical safety and process safety practices to identify safe personal protective equipment and appropriate handling protocols. We believe that we have taken a leadership position on EH&S in our operations and have internal and external review and monitoring of our practices.
Accordingly, we rely on general chemical safety and process safety requirements to identify safe personal protective equipment and appropriate handling protocols. We believe that we have taken a leadership position on EH&S in our operations and have internal and external review and monitoring of our practices.
We have no collective bargaining agreements and believe that we have a strong relationship with our employees, whom management believes represent the strength of our Company. Backlog We do not believe that a backlog as of any particular date is indicative of future results.
We have no collective bargaining agreements and believe that we have a strong relationship with our employees, whom management believes represent the strength of our Company. 6 Backlog We do not believe that a backlog as of any particular date is indicative of future results.
These technologies revolve around our two distinct manufacturing process (PVS – Plasma Vapor Synthesis and NAS – NanoArc ® Synthesis) and are designed to deliver nano- and advanced-materials solutions for a targeted market or a specific customer application.
These technologies revolve around our two distinct manufacturing process (PVS – Plasma Vapor Synthesis and NAS – NanoArc ® Synthesis) and are designed to deliver nano-, non-nano and advanced-materials solutions for a targeted market or a specific customer application.
To reduce the impact of having a high concentration of sales to a limited number of customers, we have aggressively pursued new customers through our market focused business model, and particularly through our Solésence beauty science subsidiary.
To reduce the impact of having a high concentration of sales to a limited number of customers, we have pursued new customers through our market focused business model, and particularly through our Solésence beauty science subsidiary.
We have a long-term exclusive relationship with BASF, primarily to provide nano-scale specific zinc oxide-based products made to specific specifications to be used in personal care cosmetics, with sunscreens and daily wear products being the dominant applications. On August 9, 2022 BASF filed a complaint in the Superior Court of New Jersey.
We have a long-term exclusive relationship with BASF, primarily to provide nano-scale specific zinc oxide-based products made to specific specifications to be used as ingredients in personal care cosmetics, with sunscreens and daily wear products being the dominant applications. On August 9, 2022 BASF filed a complaint in the Superior Court of New Jersey.
We believe we comply with all applicable exposure limit standards issued by the United States Department of Labor’s Occupational Health and Safety Administration (“OSHA”). Because nanotechnology remains an emerging and evolving science, there are no currently accepted standards, measurements or personal protective equipment available that are specific to nanoparticle safety.
We believe we comply with all applicable exposure limit standards issued by the United States Department of Labor’s Occupational Health and Safety Administration (“OSHA”). Because nanotechnology remains an emerging and evolving science, there are no currently required, measurements or personal protective equipment available that are specific to nanoparticle safety.
Medical diagnostics, which we view as being a life science application, was the largest market for our advanced materials business from 2020 through 2022, and we expect this to be true for the foreseeable future. This is a key area of focus in advanced materials in terms of new business development.
Medical diagnostics, which we view as being a life science application, was the largest market for our advanced materials business from 2020 through 2023, and we expect this to be true for the foreseeable future. This is a key area of focus in advanced materials in terms of new business development.
These statements reflect management’s current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause our actual results, performance or achievements in 2023 and beyond to differ materially from those expressed in, or implied by, such statements.
These statements reflect management’s current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause our actual results, performance or achievements in 2024 and beyond to differ materially from those expressed in, or implied by, such statements.
Our volumes are continuing to grow, limited mainly by our capacity. We expect our Solésence volume, based on 2023 shipments and customer orders in-hand, to exceed full year 2022 volume. The extent to which we grow will be dependent upon our ability to effectively expand our capabilities during 2023.
Our volumes are continuing to grow, limited mainly by our capacity. We expect our Solésence volume, based on 2024 shipments and customer orders in-hand, to exceed full year 2023 volume. The extent to which we grow will be dependent upon our ability to effectively expand our capabilities during 2024.
Solésence Beauty Science Business In 2020, Solésence beauty science finished products surpassed our personal care ingredients business in terms of total revenue, and in 2021 and 2022, Solésence beauty science more than doubled our revenue from personal care ingredients. We believe that Solésence offers the greatest growth potential of any group of products in any market in the Company’s history.
Solésence Beauty Science Business In 2020, Solésence beauty science finished products surpassed our personal care ingredients business in terms of total revenue, and since 2021, Solésence beauty science more than doubled our revenue from personal care ingredients. We believe that Solésence offers the greatest growth potential of any group of products in any market in the Company’s history.
We produce these products using proprietary coating and dispersion technologies that comply with the requirements of cGMP and are classified as Active Pharmaceutical Ingredients, or APIs, by the FDA. We believe we have opportunities for growth in API sales in 2023.
We produce these products using proprietary coating and dispersion technologies that comply with the requirements of cGMP and are classified as Active Pharmaceutical Ingredients, or APIs, by the FDA. We believe we have opportunities for growth in API sales in 2024.
As our Solésence products continue to represent more of our total revenues, we expect to see a number of smaller (sub-10% of revenue) customers represent a more significant portion of our total revenue. We have experienced this in 2022 and 2021 and expect it to continue in 2023 and beyond.
As our Solésence products continue to represent more of our total revenues, we expect to see a number of smaller (sub-10% of revenue) customers represent a more significant portion of our total revenue. We have experienced this in 2023 and 2022 and expect it to continue in 2024 and beyond.
Additionally, we have a number of temporary, and temporary-to-permanent employees, typically 85 to 100 on a demand-driven basis, and a number of contractors with specific industry experience that have become a part of our talent pool.
Additionally, we have a number of temporary, and temporary-to-permanent employees, typically 65 to 85 on a demand-driven basis, and a number of contractors with specific industry experience that have become a part of our talent pool.
With our first Solésence beauty science product revenue recognized during 2017, we had our first material amounts of Solésence product revenue in 2018, and saw significant expansion in these sales through 2022.
With our first Solésence beauty science product revenue recognized during 2017, we had our first material amounts of Solésence product revenue in 2018, and saw significant expansion in these sales through 2023.
Additionally, we could be disrupted by conditions unrelated to our business operations or that are beyond our control, including but not limited to international trade restrictions and conditions related to COVID-19 or other epidemics.
Additionally, we could be disrupted by conditions unrelated to our business operations or that are beyond our control, including but not limited to international trade restrictions and conditions related to epidemics.
As a result, we plan to continue investments in facilities and equipment as well as in human resources, in 2023 and beyond.
As a result, we plan to continue investments in facilities and equipment as well as in human resources, in 2024 and beyond.
Through the three-year period ended December 31, 2022, we had cumulative research and development expenses of approximately $6.8 million and related cumulative expenditures on equipment and leasehold improvements of approximately $0.2 million. 4 Competitive Advantage In our Solésence beauty science business, our Active Stress Defense™ platform of proprietary technologies – which includes Kleair™ – offers unique skin health benefits through performance-related and aesthetic advantages in environmental protection skin health products, including in UVA/UVB, pollution and HEV (blue) light protection.
Through the two-year period ended December 31, 2023, we had cumulative research and development expenses of approximately $6.8 million and no related cumulative capital expenditures on equipment and leasehold improvements. 4 Competitive Advantage In our Solésence beauty science business, our Active Stress Defense™ platform of proprietary technologies – which includes Kleair™ – offers unique skin health benefits through performance-related and aesthetic advantages in environmental protection skin health products, including in UVA/UVB, pollution and HEV (blue) light protection.
Our total research and development expense, which includes all expenses relating to our technology and advanced engineering groups, during the years ended December 31, 2022 and 2021, was $3.0 million and $2.2 million, respectively.
Our total research and development expense, which includes all expenses relating to our technology and advanced engineering groups, during the years ended December 31, 2023 and 2022, was $3.8 million and $3.0 million, respectively.
For 2022, total Solésence revenue amounted to $23.1M or 62% of total revenue compared to $18.2M, or 62% for 2021. In particular, revenue from four customers across all business areas, our largest customer in personal care applications (BASF), three of our Solésence customers, constituted approximately 30%, 17%, 15%, and 7%, respectively, of our 2022 total revenue.
For 2023, total Solésence revenue amounted to $25.2M or 68% of total revenue compared to $23.1M, or 62% for 2022. In particular, revenue from four customers across all business areas, our largest customer in personal care applications (BASF) and three of our Solésence customers, constituted approximately 25%, 17%, 15%, and 7%, respectively, of our 2023 total revenue.
We have a full-time, advanced degreed professional, along with a supporting staff, who spend a significant amount of time managing governmental regulation compliance and EH&S. We believe that our Company has an exemplary safety record. 6 Employees On December 31, 2022, we had a total of 82 full-time employees, 11 of whom hold advanced degrees.
We have a full-time, advanced degreed professional, along with a supporting staff, who spend a significant amount of time managing governmental regulation compliance and EH&S. We believe that our Company has an exemplary safety record. Employees On December 31, 2023, we had a total of 79 full-time employees, 12 of whom hold advanced degrees.
Advanced Materials Business Our third line of business has been the manufacture and sale of advanced nanoparticle materials, including a material used in life science applications to enhance the performance of PCR test methods. Given the high level of demand for our medical diagnostics material during 2020 and 2021, this composes the majority of our advanced materials business.
Advanced Materials Business Our third line of business has been the manufacture and sale of advanced nanoparticle materials, including a material used in life science applications to enhance the performance of PCR test methods.
Some of the raw materials that are critical to the production of our products and parts that are critical to the operation of our equipment are sourced from single suppliers, suppliers from China and Korea, and in some cases, a single supplier from China. In 2022 we continue to monitor delays in shipping exports from China and Korea.
Some of the raw materials that are critical to the production of our products and parts that are critical to the operation of our equipment are sourced from single suppliers, suppliers from China and Korea, and in some cases, a single supplier from China. However, we do not knowingly source any materials from the Xinjiang region of China.
Despite the Russian invasion of Ukraine, we do not anticipate any directly related supply disruptions as we do not knowingly source any materials directly from either country.
Since 2022 we continue to monitor delays in shipping exports from China and Korea. Despite the Russian invasion of Ukraine, we do not anticipate any directly related supply disruptions as we do not knowingly source any materials directly from either country.
Outside of life science, we continue to sell advanced materials for use in legacy applications, all of which, along with medical diagnostics, currently fall into the advanced materials product category.
We believe that our deep expertise in materials science has created advantages that enable performance in certain tests that may not be achievable through other materials. Outside of life science, we continue to sell advanced materials for use in legacy applications, all of which, along with medical diagnostics, currently fall into the advanced materials product category.
Competition Within each of our targeted markets and product applications, we face potential competition from contract manufacturers and developers, advanced materials and chemical companies, and suppliers of traditional materials.
All of the pending and owned foreign patents are counterparts to domestic filings covering our platform of nanotechnologies and surface treatments. 5 Competition Within each of our targeted markets and product applications, we face potential competition from contract manufacturers and developers, advanced materials and chemical companies, and suppliers of traditional materials.
We typically maintain no less than one month’s supply of raw materials and parts that are sourced from sole suppliers and make efforts to identify additional suppliers who may be able to provide such raw materials or parts. 3 Markets and Distribution Solésence Beauty Science Business We partner with brands on a global basis to develop, manufacture and market products that enhance lives through healthy skin.
We typically maintain no less than one month’s supply of raw materials and parts that are sourced from sole suppliers and make efforts to identify additional suppliers who may be able to provide such raw materials or parts.
Beginning in late 2019, we also began to employ a significant number of temporary operators to assist us in supporting the production of our Solésence products.
We have also developed a highly flexible workforce that has been cross trained to allow it to be employed broadly across our manufacturing processes. Beginning in late 2019, we also began to employ a significant number of temporary operators to assist us in supporting the production of our Solésence products.
Intellectual Property and Proprietary Rights We rely on a combination of patent, trademark, copyright, trade secret and other intellectual property laws, nondisclosure agreements and other protective measures to protect our intellectual property.
Intellectual Property and Proprietary Rights We rely on a combination of patent, trademark, copyright, trade secret and other intellectual property laws, nondisclosure agreements and other protective measures to protect our intellectual property. In addition to obtaining patent and trademarks based on our inventions and products, we may also license certain third-party patents from time-to-time to expand our technology base.
Our operations employ a cellular, team-based manufacturing approach, where workers operate in work “cells,” under a lean manufacturing environment to continuously advance and improve production capabilities. We have also developed a highly flexible workforce that has been cross trained to allow it to be employed broadly across our manufacturing processes.
Currently, we have registered Zinc Oxide, Aluminum Oxide, Iron Oxide and Octyltrimethoxysilane under REACH. Our operations employ a cellular, team-based manufacturing approach, where workers operate in work “cells,” under a lean manufacturing environment to continuously advance and improve production capabilities.
We also own 56 foreign patents and patent applications consisting of 35 issued or allowed foreign patents and 21 pending foreign patent applications. All of the pending and owned foreign patents are counterparts to domestic filings covering our platform of nanotechnologies and surface treatments.
As of the date of this filing, we own 10 U.S. patents and 8 pending U.S. patent applications. We also own 56 foreign patents and patent applications consisting of 35 issued or allowed foreign patents and 21 pending foreign patent applications.
Removed
Through our medical diagnostics materials, we have been able to support efforts to curb the COVID-19 pandemic. We believe that our deep expertise in materials science has created advantages that enable performance in certain tests that may not be achievable through other materials.
Added
In July of 2023, Solésence was again awarded the Cosmopack Award for best Formulation, this time for its product Natural Glow Face Oil SPF 40+ featuring Kleair™ and Bloom™ technology, recognizing our continued innovative approach to formulation and product development.
Removed
Our third facility, our newest and also in the Chicago area, is compliant with cGMP for products under FDA regulation, applying to the manufacture of APIs and OTC Finished Dosage Form materials (primarily used in sun protection) and we expect to have similar capabilities and registrations as those in our two other manufacturing facilities by the end of 2023.
Added
In 2023, Solésence also won the 2023 BeautyMatter NEXT Award for Best Contract Manufacturer and was a winner of the 22nd Chicago Innovation Awards. Most recently, Solésence’s market-ready product Soft Glow SPF 50+ won the 2024 Cosmetics & Toiletries Allē Awards Best in Finished Formula-Prestige Category, spotlighting the ingenuity and creativity of our formulas.
Removed
In addition to obtaining patent and trademarks based on our inventions and products, we may also license certain third-party patents from time-to-time to expand our technology base. 5 As of the date of this filing, we own 10 U.S. patents and 8 pending U.S. patent applications.
Added
The Company is actively taking steps to reduce the number of singularly sourced raw materials. 3 Markets and Distribution Solésence Beauty Science Business We partner with brands on a global basis to develop, manufacture and market products that enhance lives through healthy skin.
Added
Our third facility, our newest and also in the Chicago area, is now registered under the ISO 9001, American National Standard, Quality Management System Requirements, and ISO 14001, American National Standard, Environmental Management System Requirements.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeDuring December 2021, we entered into a Standard Form Industrial Lease for a new facility in Bolingbrook, Illinois, which, among other things, will end in May of 2032, with options to extend this lease at market rent for each of three concurrent five-year periods. 8 With the addition of our new Bolingbrook space, we believe that our leased facilities will provide sufficient capacity to fulfill current known customer demand as well as allow for the creation of substantial additional space to enable expansion of key production processes.
Biggest changeDuring December 2021, we entered into a Standard Form Industrial Lease for a new facility in Bolingbrook, Illinois, which, among other things, will end in May of 2032, with options to extend this lease at market rent for each of three concurrent five-year periods.
Our actual future capacity requirements will depend on many factors, including new and potential customer acceptance of our current and potential engineered materials, applications and products, both expected and currently unplanned growth from existing customers, continued progress in our research and development activities and product testing programs and the magnitude of these activities and programs.
Our actual future capacity requirements will depend on many factors, including new and potential customer acceptance of our current and potential engineered materials, applications and products, both expected and currently unplanned growth from existing customers, continued progress in our research and development activities and product testing programs and the magnitude of these activities and programs. 8
We believe we will be able to expand certain operations, and consolidate others, to support additional growth in an economically efficient manner. We believe that our capital expenditures made in 2022, and projected for 2023, will support currently anticipated demand from existing and expected customers through 2023 and into 2024.
We believe we will be able to expand certain operations, and consolidate others, to support additional growth in an economically efficient manner. We believe that our capital expenditures made in 2023, and projected for 2024, will support currently anticipated demand from existing and expected customers through 2024 and into 2025.
The Bolingbrook facility houses our warehousing operations and is being built out to accommodate filling and assembly of our Solésence ® products and additional quality control spaces. The Bolingbrook facility is registered with the FDA for OTC drug manufacturing and packaging. We lease our Romeoville, Burr Ridge and Bolingbrook facilities.
The Bolingbrook facility houses our warehousing operations, sunscreen lotions manufacturing, filling and assembly of our Solésence ® products and additional quality control spaces. The Bolingbrook facility is registered with the FDA for OTC drug manufacturing and packaging, site is registered under ISO 9001, ISO 22716 and ISO 14001. We lease our Romeoville, Burr Ridge and Bolingbrook facilities.
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With the addition of our new Bolingbrook space, we believe that our leased facilities will provide sufficient capacity to fulfill current known customer demand as well as allow for the creation of substantial additional space to enable expansion of key production processes.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeOn September 7, 2022, Nanophase filed a Complaint for Declaratory Judgment against BASF in the Circuit Court of Cook County, Illinois (the “Illinois Complaint”). The Illinois Complaint asked the court for a declaration similar to that subsequently sought in Nansphase’s counterclaim in the New Jersey litigation.
Biggest changeOn October 31, 2023, BASF filed its answer to Nanophase’s declaratory judgment counterclaim, denying the counterclaim. Discovery in the New Jersey litigation is ongoing. On September 7, 2022, Nanophase filed a Complaint for Declaratory Judgment against BASF in the Circuit Court of Cook County, Illinois (the “Illinois Complaint”).
On November 3, 2022, BASF moved to dismiss Nanophase’s Illinois Complaint, arguing that it duplicates the New Jersey litigation. Following briefing and a hearing, the Illinois court granted BASF’s motion on procedural grounds on March 16, 2023. Discovery in the New Jersey litigation is ongoing.
The Illinois Complaint asked the court for a declaration similar to that subsequently sought in Nansphase’s counterclaim in the New Jersey litigation. On November 3, 2022, BASF moved to dismiss Nanophase’s Illinois Complaint, arguing that it duplicates the New Jersey litigation. Following briefing and a hearing, the Illinois court granted BASF’s motion on procedural grounds on March 16, 2023.
Thereafter, on February 28, 2023, Nanophase answered BASF’s New Jersey Complaint, denying all wrongdoing and, as mandated by New Jersey procedural requirements, certain counterclaims including a request for a declaration that contrary to BASF’s views, the exclusivity provision of the Agreement does not apply to all products containing zinc oxide as an ingredient for uses designated under the Agreement nor does the exclusivity provision prohibit Nanophase’s sales of Solésence products containing zinc oxide as an ingredient.
Thereafter, on February 28, 2023, Nanophase answered BASF’s New Jersey Complaint, denying all wrongdoing and, as mandated by New Jersey procedural requirements, filed two counterclaims: (1) a request for a declaration that contrary to BASF’s views, the exclusivity provision of the Agreement does not apply to all products containing zinc oxide as an ingredient for uses designated under the Agreement nor does the exclusivity provision prohibit Nanophase’s sales of Solésence products containing zinc oxide as an ingredient; and (2) a claim that BASF had breached its obligations under the Agreement to buy from Nanophase at least 70% of BASF’s zinc oxide requirements for use in the Field.
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On April 17, 2023, BASF moved to dismiss Nanophase’s counterclaims, arguing that the declaratory judgment claim duplicated BASF’s claim for Nanophase’s alleged breach of contract and Nanophase’s claim for BASF’s breach of its zinc oxide purchase requirements was procedurally insufficient.
Added
Following briefing and a hearing on October 6, 2023, the SCNJ: (1) denied BASF’s motion to dismiss Nanophase’s declaratory judgment counterclaim, finding that it did not duplicate BASF’s breach of contract claim and that BASF’s litigating its claim would not provide Nanophase with complete relief as to the exclusivity issues raised in the counterclaim; and (2) granted BASF’s motion to dismiss Nanophase’s claim for BASF’s breach of its zinc oxide purchase requirements on procedural grounds.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeThe following table sets forth, for the periods indicated, the range of high and low sale prices for our common stock on the OTCQB marketplace: High Low Fiscal year ended December 31, 2022: First Quarter $ 4.42 $ 2.04 Second Quarter 3.45 2.51 Third Quarter 3.25 2.32 Fourth Quarter 2.50 1.12 Fiscal year ended December 31, 2021: First Quarter $ 1.26 $ 0.74 Second Quarter 1.76 1.15 Third Quarter 2.77 1.52 Fourth Quarter 4.45 2.46 On March 22, 2023, the last reported sale price of our common stock was $1.30 per share, and there were 121 holders of record of our common stock.
Biggest changeThe following table sets forth, for the periods indicated, the range of high and low sale prices for our common stock on the OTCQB marketplace: High Low Fiscal year ended December 31, 2023: First Quarter $ 1.79 $ 1.08 Second Quarter 1.45 0.50 Third Quarter 1.40 0.88 Fourth Quarter 1.00 0.55 Fiscal year ended December 31, 2022: First Quarter $ 4.42 $ 2.04 Second Quarter 3.45 2.51 Third Quarter 3.25 2.32 Fourth Quarter 2.50 1.12 On March 27, 2024, the last reported sale price of our common stock was $0.72 per share, and there were 121 holders of record of our common stock.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeWe expect 2023 expenses in this area to be slightly higher, if growth continues as planned. We will be expanding our selling and marketing efforts, and parts of our administrative functions, including related staffing additions. The extent to which this increase occurs will be dependent upon growth.
Biggest changeWe will be expanding parts of our administrative functions, including related staffing additions. The extent to which this increase occurs will be dependent upon growth. Interest expense increased to $838,000 in 2023, compared to $382,000 in 2022, due to higher interest rates in 2023 and increased usage of the debt facilities.
See the “Forward Looking Statements” section in Part 1, Item 1, of this Form 10-K. Overview Nanophase is a health-oriented, science-driven company, which, along with its wholly owned subsidiary, Solésence, LLC (our “Solésence beauty science subsidiary”), is focused in various beauty- and life-science markets.
See the “Forward Looking Statements” section in Part 1, Item 1, of this Form 10-K. Overview Nanophase is a health-oriented, science-driven company, which, along with its wholly owned subsidiary, Solésence, LLC (our “Solésence beauty science subsidiary”), is focused on various beauty- and life-science markets.
Our actual future capital requirements in 2023 and beyond will depend on many factors, including customer acceptance of our current and potential finished Solésence products, APIs sold as ingredients in to the skin health markets, medical diagnostics ingredients, and other engineered materials, applications, and products, continued progress in research and development activities and product testing programs, the magnitude of these activities and programs, and the costs necessary to increase and expand our manufacturing capabilities and to market and sell these products and ingredients.
Our actual future capital requirements in 2024 and beyond will depend on many factors, including customer acceptance of our current and potential finished Solésence products, APIs sold as ingredients in to the skin health markets, medical diagnostics ingredients, and other engineered materials, applications, and products, continued progress in research and development activities and product testing programs, the magnitude of these activities and programs, and the costs necessary to increase and expand our manufacturing capabilities and to market and sell these products and ingredients.
We expect to continue to focus on reducing controllable variable product manufacturing costs, with potential variability related to the commodity metals markets and cost and wage inflation, but may or may not realize gross margin percentage growth through 2023 and beyond, dependent upon the factors discussed above.
We expect to continue to focus on reducing controllable variable product manufacturing costs, with potential variability related to the commodity metals markets and cost and wage inflation but may or may not realize gross margin percentage growth through 2024 and beyond, dependent upon the factors discussed above.
Similarly, substantial success in business development projects may cause the actual 2023 capital investment to exceed the top of this range. The Company currently has two areas within its strategic plan that will result in material cash requirements that could have an impact on operations.
Similarly, substantial success in business development projects may cause the actual 2024 capital investment to exceed the top of this range. The Company currently has two areas within its strategic plan that will result in material cash requirements that could have an impact on operations.
We expect supplier price increases and wage and benefit inflation, both of which represent a significant component of our costs of operations, may have a material effect on our operations and financial position in 2023 and beyond. We will apply our best efforts to pass through cost increases to our customers.
We expect supplier price increases and wage and benefit inflation, both of which represent a significant component of our costs of operations, may have a material effect on our operations and financial position in 2024 and beyond. We will apply our best efforts to pass through cost increases to our customers.
The Loan Agreements change the terms of both the Company’s asset-based revolving loan facility (the “A/R Revolver Facility”) and the secured advance (the “Term Loan”, which was assigned from Beachcorp, LLC to Strandler, LLC) under the Master Agreement and provide a new asset-based revolving loan facility based on inventory (the “Inventory Facility”).
The Loan Agreements changed the terms of both the Company’s asset-based revolving loan facility (the “A/R Revolver Facility”) and the secured advance (the “Term Loan”, which was assigned from Beachcorp, LLC to Strandler, LLC) under the Master Agreement and provide a new asset-based revolving loan facility based on inventory (the “Inventory Facility”).
While we have seen costs continue to increase on an inflationary basis as we enter 2023, it is our belief that we will be able to offset much of this cost as we gain greater production efficiencies and seek to increase our pricing where possible.
While we have seen costs continue to increase on an inflationary basis as we enter 2024, it is our belief that we will be able to offset much of this cost as we gain greater production efficiencies and seek to increase our pricing where possible.
We expect to continue new materials development and dispersion technologies for personal care applications and for our formulated Solésence products during 2022 and beyond, as part of our business model.
We expect to continue new materials development and dispersion technologies for personal care applications and for our formulated Solésence products during 2024 and beyond, as part of our business model.
In Company-wide operations, we believe inflation has not had a material effect on our operations or financial position for 2022, although we have seen increases in our costs.
In Company-wide operations, we believe inflation has not had a material effect on our operations or financial position for 2023, although we have seen increases in our costs.
As of December 31, 2022 there was no outstanding borrowings on this line of credit. This credit agreement has a maturity of December 22, 2023. On November 16, 2018, we entered into a Business Loan Agreement (the “Master Agreement”) with Beachcorp, LLC.
As of December 31, 2023 there was no outstanding borrowings on this line of credit. This credit agreement has a maturity of December 22, 2024. 12 On November 16, 2018, we entered into a Business Loan Agreement (the “Master Agreement”) with Beachcorp, LLC.
Under the guidance referenced above, management judgmentally applied an estimate of the portion of gross receivables for which loss is both probable and can be reasonably estimated and accrued a loss contingency by a charge to income. A bad debt reserve of $139,000 and $60,000 was applied to gross receivables for 2022 and 2021, respectively.
Under the guidance referenced above, management judgmentally applied an estimate of the portion of gross receivables for which loss is both probable and can be reasonably estimated and accrued a loss contingency by a charge to income. A bad debt reserve of $225,000 and $139,000 was applied to gross receivables for 2023 and 2022, respectively.
We expect our capital spending to increase further in 2024 and 2025. At December 31, 2022, our commitments to equipment suppliers relate mainly to the $1 million of construction in progress, much of which reflects deposits on to-be-delivered equipment. We estimate the unpaid committed capital relating to capital spending to be less than $1 million as of December 31, 2022.
We expect our capital spending to increase further in 2025 and 2026. At December 31, 2023, our commitments to equipment suppliers relate mainly to the $1 million of construction in progress, much of which reflects deposits on to-be-delivered equipment. We estimate the unpaid committed capital relating to capital spending to be less than $1 million as of December 31, 2023.
Internal Revenue Code (“IRC”) in connection with any future equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the IRC. If not utilized, $51 million of this loss carryforward will expire between 2023 and 2037.
Internal Revenue Code (“IRC”) in connection with any future equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the IRC. If not utilized, $44 million of this loss carryforward will expire between 2024 and 2037.
Given changes to the IRC, net operating loss carryforwards generated after January 1, 2018 do not expire, therefore, $5 million in net operating losses generated since January 1, 2018 do not expire. We have Illinois net loss deduction carryforwards for tax purposes of approximately $21 million on December 31, 2022.
Given changes to the IRC, net operating loss carryforwards generated after January 1, 2018 do not expire, therefore, $5.6 million in net operating losses generated since January 1, 2018 do not expire. We have Illinois net loss deduction carryforwards for tax purposes of approximately $21.3 million on December 31, 2023.
The balance of interest expense for 2021 and 2022 related to interest paid relating to our revolving lines of credit for working capital funding, and finance leases and term loans supporting some of our equipment.
The interest expense for 2023 and 2022 related to interest paid relating to our revolving lines of credit for working capital funding, and finance leases and term loans supporting some of our equipment.
Research and development expense increased to $3,037,000 in 2022, compared to $2,235,000 in 2021. The primary reasons for this were increases in compensation expense and headcount, outside testing, and materials charges associated with the development and launch of our Solésence line of personal care products and related capabilities.
Research and development expense increased to $3,837,000 in 2023, compared to $3,037,000 in 2022. The primary reasons for this were increases in compensation expense and headcount, outside testing, and materials charges associated with the development and launch of our Solésence line of personal care products and related capabilities.
Lower-then-expected volume in the fourth quarter of 2022, write-downs of obsolete inventory, reduction in contract revenue (which generally has little direct cost associated with it), and changes in product mix, added to relative increases in cost of revenue. All of these factors contributed to a reduction of overall gross margin percentage by 7% when compared to 2021.
Lower-than-expected volume in the fourth quarter of 2023, write-downs of obsolete inventory, reduction in contract revenue (which generally has little direct cost associated with it), and changes in product mix, added to relative increases in cost of revenue. All of these factors contributed to a reduction of overall gross margin percentage by 1% when compared to 2022.
The Loan Agreements also extend the date for which all principal and accrued interest under the A&R Revolver Facility and the Term Loan are due from March 31, 2023 and March 31, 2022, respectively, to March 31, 2024, which is also the maturity date for the Inventory Facility.
The Loan Agreements also extended the date for which all principal and accrued interest under the A&R Revolver Facility and the Term Loan are due from March 31, 2023 and March 31, 2022, respectively, to March 31, 2024, which was also the maturity date for the Inventory Facility.
If we were to not grow more than incrementally in 2023, we would need to re-evaluate our expansion strategy in light of the increases in our facilities costs that extend for as much as ten years into the future. Similarly, our capital spending plan for 2023 will amount to between $3 million and $6 million.
If we were to not grow more than incrementally in 2024, we would need to re-evaluate our expansion strategy in light of the increases in our facilities costs that extend for as much as ten years into the future. Similarly, our capital spending plan for 2024 will amount to between $1 million and $5 million.
Results of Operations Years Ended December 31, 2022 and 2021 Total revenue increased to $37,317,000 in 2022, compared to $29,475,000 in 2021. A substantial majority of our revenue for each year is from our largest customers, in particular, sales to our largest customer in skin care and sunscreen applications, finished skin health products marketed through our Solésence beauty science subsidiary.
Results of Operations Years Ended December 31, 2023 and 2022 Total revenue decreased to $37,297,000 in 2023, compared to $37,317,000 in 2022. A substantial majority of our revenue for each year is from our largest customers, in particular, sales to our largest customer in skin care and sunscreen applications, finished skin health products marketed through our Solésence beauty science subsidiary.
We have estimated our future growth through a combination of industry experience, customer feedback, market intelligence, and our successful history in commercializing new products. Sales of our Solésence products have roughly tripled between 2019 and 2021 and increased by 27% in 2022 to have reached $23 million annually.
We have estimated our future growth through a combination of industry experience, customer feedback, market intelligence, and our successful history in commercializing new products. Sales of our Solésence products have roughly tripled between 2019 and 2021, increased by 27% in 2022, and increased by 9% in 2023 to reach $25 million annually.
In the application of this policy in 2022, management deemed a portion of inventory will likely experience such an impairment and elected to apply a $500,000 inventory reserve in anticipation.
In the application of this policy in 2023, management deemed a portion of inventory will likely experience such an impairment and elected to apply a $677,000 inventory reserve in anticipation.
We have federal net operating loss carryforwards for tax purposes of approximately $56 million on December 31, 2022. We have section 179 carryforwards of approximately $0.5M at December 31,2022. Because the Company may experience “ownership changes” within the meaning of the U.S.
We have federal net operating loss carryforwards for tax purposes of approximately $50 million on December 31, 2023. We have section 179 carryforwards of approximately $0.2M at December 31, 2023. Because the Company may experience “ownership changes” within the meaning of the U.S.
Depending on the success of certain projects, we expect that capital spending relating to currently known capital needs for 2023 will be between $3 million and $6 million, to be funded by profit from operations, our existing loans and lines of credit, and possible new debt financing.
Depending on the success of certain projects, we expect that capital spending relating to currently known capital needs for 2024 will be between $1 million and $5 million, to be funded by profit from operations, our existing loans and lines of credit, and possible new financing.
We have several operating leases (see note 6 to the financial statements) for our facilities that require us to increase our cash outlays for facilities expenses significantly beginning in 2022. The new 260,000 square foot facility we leased in December 2021 exceeds our current needs for space considerably.
We have several operating leases (see note 6 to the financial statements) for our facilities that require us to increase our cash outlays for facilities expenses significantly beginning in 2022. The 260,000 square foot facility we leased in December 2021 exceeds our current needs for space considerably. We consequently have sublet a portion of the facility on shorter term leases.
Our investor chose to exercise his conversion rights effective May 7, 2021. 13 For more information regarding the New Business Loan Agreement, see Note 3 to our Financial Statements referred to in Part II, Item 8 of this Annual Report on Form 10-K.
For more information regarding the New Business Loan Agreement, see Note 3 to our Financial Statements referred to in Part II, Item 8 of this Annual Report on Form 10-K.
Current Significant Customers 2022 2021 Largest Personal Care Customer 30 % 26 % Solésence Customer - 1 17 % 19 % Solésence Customer - 2 15 % 15 % Solésence Customer - 3 7 % 10 % Significant Customer Total 69 % 70 % 11 Cost of revenue generally includes costs associated with commercial production and customer development arrangements.
Current Significant Customers 2023 2022 Largest Personal Care Customer 25 % 30 % Solésence Customer - 1 17 % 17 % Solésence Customer - 2 15 % 15 % Significant Customer Total 57 % 62 % 11 Cost of revenue generally includes costs associated with commercial production and customer development arrangements.
Liquidity and Capital Resources Cash, cash proceeds and use of cash for 2022 and 2021 were: For the year ended December 31, 2022 2021 Total cash $ 2,186,000 $ 657,000 Cash (used in) provided by operating activities (1,650,000 ) 2,321,000 Net cash (used in) investing activities (2,823,000 ) (1,874,000 ) Net cash provided by (used in) financing activities 6,002,000 (747,000 ) 12 The $3,971,000 year-over-year decrease in cash provided by operating activities for the year ended December 31, 2022 was mainly due to the Company incurring $2,623,000 in net loss in 2022 compared to $2,320,000 in net income in 2021.
Liquidity and Capital Resources Cash, cash proceeds and use of cash for 2023 and 2022 were: For the year ended December 31, 2023 2022 Total cash $ 1,722,000 $ 2,186,000 Cash used in operating activities (2,006,000 ) (1,650,000 ) Net cash used in investing activities (1,051,000 ) (2,823,000 ) Net cash provided by financing activities 2,593,000 6,002,000 The $354,000 year-over-year increase in cash used in operating activities for the year ended December 31, 2023 was mainly due to the Company incurring $4,390,000 in net loss in 2023 compared to $2,623,000 in net income in 2022.
Other critical estimates include the allowance for doubtful accounts applied against our receivables balance as well as an inventory reserve. In the determination of a reserve to apply toward receivables, management considered provisions in FASB ASC 450-20-25 regarding the recognition of loss contingencies and applied a reserve balance against gross receivables to arrive at the net reported balance.
In the determination of a reserve to apply toward receivables, management considered provisions in FASB ASC 326 & ASC 450-20-25 regarding the recognition of loss contingencies and applied a reserve balance against gross receivables to arrive at the net reported balance.
As a result of the annual limitation and uncertainty as to the amount of future taxable income that will be earned prior to the expiration of the carryforward, we have concluded that it is likely that some portion of this carryforward will expire before ultimately becoming available to reduce income tax liabilities.
Due to the provisions of Illinois Public Act 102-0669 signed November 16, 2021, Illinois net loss deductions expire between 2029 and 2042. 14 As a result of the annual limitation and uncertainty as to the amount of future taxable income that will be earned prior to the expiration of the carryforward, we have concluded that it is likely that some portion of this carryforward will expire before ultimately becoming available to reduce income tax liabilities.
If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals.
If the undiscounted cash flows do not indicate the carrying amount of the asset is recoverable, an impairment charge is measured as the amount by which the carrying amount of the asset group exceeds its fair value based on discounted cash flow analysis or appraisals. 10 Other critical estimates include the allowance for doubtful accounts applied against our receivables balance as well as an inventory reserve.
We consequently have sublet a portion of the facility on shorter term leases. We are growing rapidly and continue to expect significant growth going forward. We will also consolidate some of our facilities to mitigate costs.
We are growing rapidly and continue to expect significant growth going forward. We will also consolidate some of our facilities to mitigate costs.
Additionally, we continue to sell products in legacy markets including architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, and surface finishing technologies (polishing) applications— all of which, along with medical diagnostics, currently fall into the advanced materials product category. 10 Critical Accounting Estimates We review long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable.
Additionally, we continue to sell products in legacy markets including architectural coatings, industrial coating applications, abrasion-resistant additives, plastics additives, and surface finishing technologies (polishing) applications— all of which, along with medical diagnostics, currently fall into the advanced materials product category.
The A/R Revolver Facility, the Inventory Facility and the Term Loan are all secured by all the unencumbered assets of the Company and subordinated to the Company’s revolving line of credit with Libertyville Bank & Trust.
The A/R Revolver Facility, the Inventory Facility and the Term Loan are all secured by all the unencumbered assets of the Company and subordinated to the Company’s revolving line of credit with Libertyville Bank & Trust. On November 13, 2023 to support working capital demands the Company entered into (i) a new Promissory Note (“Bridge Note”) with Strandler, LLC,.
We conduct long-lived asset impairment analyses in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360-10-15, Impairment or Disposal of Long-Lived Assets .
Critical Accounting Estimates We review long-lived assets for impairment whenever events or changes in circumstances indicate that the asset’s carrying amount may not be recoverable. We conduct long-lived asset impairment analyses in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360-10-15, Impairment or Disposal of Long-Lived Assets .
On December 31, 2022, the balance on the Term Loan was $1,000,000, the balance on the A/R Revolver Facility was $4,282,000, and the balance on the Inventory Facility was $3,000,000. On December 31, 2021, the balances on the Term Loan was $1,000,000, and the balance on the A/R Revolver Facility was $1,351,000.
On December 31, 2023, the balance on the Term Loan was $1,000,000, the balance on the A/R Revolver Facility was $2,810,000, the balance on the Inventory Facility was $5,000,000, and the balance on the Bridge Note was $2,000,000.
Cash capital expenditures amounted to approximately $2,823,000 and $1,874,000 for the years ended December 31, 2022 and 2021, respectively. We did not dispose of or sell any assets during 2022 or 2021. On April 17, 2020, we received a loan of $952,000 from the Libertyville Bank and Trust Company (“Libertyville”) under the Paycheck Protection Program (the “PPP”).
Cash capital expenditures amounted to approximately $1,051,000 and $2,823,000 for the years ended December 31, 2023 and 2022, respectively. We did not dispose of or sell any assets during 2023 or 2022. The Company maintains a credit agreement with Libertyville to support our obligations under our newly leased manufacturing and warehouse space in Bolingbrook, Illinois.
This increase was due to rapid growth in the adoption of our Solésence® products, and growth in sales to our largest customer in our personal care ingredients business, offset by a decrease in revenue from our medical diagnostics materials customer (within our advanced materials business).
Product revenue, the primary component of our total revenue, decreased to $36,641,000 in 2023, compared to $36,731,000 in 2022. This slight decrease was due to a decrease in revenue from our personal care business and a medical diagnostics materials customer (within our advanced materials business).
Cost of revenue increased to $28,957,000 in 2022, compared to $20,785,000 in 2021. The increase in cost of revenue was primarily driven by the rapid increases in product revenue volume, with attendant inefficiencies caused by hitting capacity limits in various critical processes.
Cost of revenue increased to $29,472,000 in 2023, compared to $28,957,000 in 2022. The increase in cost of revenue was primarily driven by the higher management costs related to the production processes.
Removed
Product revenue, the primary component of our total revenue, increased to $36,731,000 in 2022, compared to $29,325,000 in 2021.
Added
Selling, general and administrative expense decreased to $7,534,000 in 2023, compared to $7,581,000 in 2022. The net decrease was largely attributed to a decrease in professional services. We expect 2024 expenses in this area to be slightly lower, even if growth continues as planned due to expected decreased legal costs.
Removed
Selling, general and administrative expense increased to $7,581,000 in 2022, compared to $3,896,000 in 2021. The net increase was largely attributed to an increase in compensation expense and headcount, including consultants and increases due to the cyber fraud, legal expenses, marketing and trade shows and insurance.
Added
The maximum borrowing amount under the Bridge Note is $2,000,000.
Removed
Interest expense decreased to $382,000 in 2022, compared to $1,154,000 in 2021, due largely to the remaining discount-related interest expense, amounting to $814,000, taken on an accelerated basis in May 2021 at the early conversion of our $2,000,000 Convertible Note, partially offset by higher interest rates in 2022.
Added
The interest rate for the Bridge Note is at the prime rate plus 0.75%, and it matures on May 13, 2024, and (ii) amendments to the Loan Agreements increasing increasing the principal amount of the Inventory Facility to $5,200,000 and extending the maturity date under the Loan Agreement to March 31, 2025.
Removed
This loan was forgiven by the Small Business Administration (“SBA”) in February 2021. These funds specifically were used to absorb a portion of the Company’s salary and benefit costs. The Company maintains a credit agreement with Libertyville to support our obligations under our newly leased manufacturing and warehouse space in Bolingbrook, Illinois.
Added
On December 31, 2022, the balance on the Term Loan was $1,000,000, the balance on the A/R Revolver Facility was $4,282,000, and the balance on the Inventory Facility was $3,000,000. On March 1, 2024, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”), between the Company and Strandler, LLC (“Strandler”).
Removed
In November 2019, we entered in to a 2% Convertible Promissory Note in the original principal amount of $2,000,000.
Added
Pursuant to the Purchase Agreement, the Company issued to Strandler 15,000 shares of the Company’s Series X Preferred Stock (the “Series X Preferred Stock”) at a purchase price per share of $400, for total consideration of $6,000,000, in a transaction exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof.
Removed
The maturity date of this note was May 15, 2024, and was payable to our investor at that time in cash, or through conversion of the rights to purchase up to 10,000,000 unregistered shares of the Company’s common stock at $0.20 per share.
Added
The terms of the Preferred Stock are set forth in the Company’s Certificate of Designations to its Certificate of Incorporation, filed with the Secretary of State of the State of Delaware on March 4, 2024 (the “Certificate of Designations”). 13 Under the Purchase Agreement, the Company granted Strandler customary registration rights with respect to shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”), it may receive in connection with any conversion of Series X Preferred Stock into Common Stock, as described below.
Removed
Due to the provisions of Illinois Public Act 102-0669 signed November 16, 2021, Illinois net loss deductions expire between 2029 and 2039.
Added
For so long as any amount of Preferred Stock is outstanding, the Purchase Agreement also (i) prevents the Company from paying any dividend on any shares of the Company’s capital stock (other than dividends consisting solely of Common Stock or rights to purchase Common Stock), (ii) prevents the Company from repurchasing any Common Stock, and (iii) subject to certain permitted exceptions, restricts the Company’s ability to permit any lien or other encumbrance on Company assets.
Added
At any time and from time to time, in whole or in part, following the Company properly filing an amendment (the “Certificate Amendment”) to its Certificate of Incorporation to increase the number of authorized shares of its Common Stock from 60,000,000 to 95,000,000, each share of Series X Preferred Stock is convertible, at the option of the holder, into 1,000 shares of Common Stock at no additional cost.
Added
If the Company has not properly filed, upon shareholder approval, the Certificate Amendment on or before August 1, 2024, then each share of Series X Preferred Stock will be redeemable at the holder’s option, in whole or in part, without penalty or premium, at a redemption price equal to $420 per share (each, a “Redemption”).
Added
If the Company fails to fully pay any Redemption within five days of receiving notice, all unpaid amounts will bear interest at a rate of 10% per annum.
Added
In addition, in the event of a Change in Control (as defined in the Certificate of Designations) of the Company, each share of the Series X Preferred Stock is redeemable at the option of the holder, without penalty or premium, at a redemption price equal to $420 per share.
Added
Upon any conversion of Preferred Stock into Common Stock by Strandler, Strandler is required to hold the Common Stock received in the conversion for a period of 12 months.
Added
Holders of Series X Preferred Stock (i) are not entitled to receive dividends, subject to customary anti-dilution protections, (ii) have no voting rights, and (iii)receive a liquidation preference of $400 per share. The Series X Preferred Stock ranks senior in right of payment to all securities designated as junior securities, including Common Stock.
Added
In connection with the Company’s entry into the Purchase Agreement, the Company also entered into (i) a Second Amendment to Business Loan Agreement (the “Term Loan Agreement Amendment”) with Strandler, LLC, (ii) a Second Amendment to Business Loan Agreement (the “A&R Loan Agreement Amendment”) with Beachcorp, LLC, which is also an affiliate of our controlling shareholder, Bradford T.
Added
Whitmore (“Beachcorp”), and (iii) a Second Amendment to Business Loan Agreement with Beachcorp (the “Revolving Loan Agreement Amendment” and together with the Term Loan Agreement Amendment and the A&R Term Loan Agreement Amendment, the “Loan Agreement Amendments”). The Loan Agreement Amendments extend the maturity date under each respective loan agreement from March 31, 2025 to October 1, 2025.

Other SLSN 10-K year-over-year comparisons