Solesence Inc(SLSN) - 2024 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Financial Statements Unaudited condensed consolidated financial statements, including Balance Sheets, Statements of Operations, Shareholders' Equity, Cash Flows, and accompanying notes, are presented Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total Assets | $40,849 | $32,881 | | Total current assets | $24,260 | $16,302 | | Total Liabilities | $28,925 | $30,979 | | Total current liabilities | $13,769 | $15,589 | | Total Shareholders' Equity | $11,924 | $1,902 | - Total assets increased primarily due to growth in inventories (from $10.0 million to $13.9 million) and trade accounts receivable (from $3.5 million to $5.9 million)[6] - Shareholders' equity significantly increased from $1.9 million to $11.9 million, mainly driven by net income and the issuance of common stock following the conversion of preferred stock[6][10] Consolidated Statements of Operations Consolidated Statements of Operations (in thousands, except per share data) | Metric | Q2 2024 | Q2 2023 | H1 2024 | H1 2023 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $13,046 | $11,872 | $22,914 | $21,329 | | Gross Profit | $3,740 | $3,675 | $7,320 | $5,824 | | Income (loss) from operations | $1,047 | $579 | $2,156 | $(425) | | Net Income (Loss) | $856 | $333 | $1,747 | $(825) | | Net income (loss) per diluted share | $0.01 | $0.01 | $0.03 | $(0.02) | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (in thousands) | Activity | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(4,420) | $(1,961) | | Net cash used in investing activities | $(562) | $(811) | | Net cash provided by financing activities | $5,618 | $2,783 | | Increase in cash and cash equivalents | $636 | $11 | | Cash and cash equivalents at end of period | $2,358 | $2,197 | - The significant cash used in operating activities in H1 2024 was primarily due to increases in inventories ($3.8 million) and trade accounts receivable ($2.5 million)[13] - Financing activities in H1 2024 were driven by $6.0 million proceeds from the issuance of mezzanine preferred stock and $2.0 million from stock issuances/options, offset by debt repayments[13] Notes to Financial Statements - The company's business is focused on beauty and life-science markets, primarily skin health via its Solésence® subsidiary and medical diagnostics ingredients, though demand for the latter has decreased[17] Revenue by Product Category (in thousands) | Product Category | H1 2024 | H1 2023 | | :--- | :--- | :--- | | Solésence | $19,304 | $12,823 | | Personal Care Ingredients | $3,121 | $6,581 | | Advanced Materials | $489 | $1,925 | | Total Sales | $22,914 | $21,329 | - The company has a high customer concentration, with its top four customers accounting for 62% of total revenue in the first six months of 2024, down from 65% in the same period of 2023[49] - In March 2024, the company issued $6 million in Series X Preferred Stock to related party Strandler, LLC. These shares were subsequently converted into 15 million shares of common stock in June 2024 after shareholder approval to increase authorized shares[41][48] - On April 10, 2024, the company settled a legal dispute with BASF Corporation, which involved amending their supply agreement to clarify exclusivity provisions for zinc oxide materials[52][53] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, highlighting revenue growth driven by Solésence® beauty science, offsetting declines in other segments, and covers liquidity, capital resources, and future requirements Results of Operations - Total revenue increased by 9.8% to $13.0 million in Q2 2024 and by 7.4% to $22.9 million in H1 2024, compared to the same periods in 2023[61] - The revenue increase was driven by continued growth in Solésence® products, which was partially offset by a decrease in API sales to the largest customer in the personal care ingredients business[63] - Cost of revenue for H1 2024 increased to $15.6 million from $15.5 million in H1 2023, primarily driven by increased volume and manufacturing inefficiencies related to Solésence® product launches[65] - Both R&D and SG&A expenses decreased in Q2 and H1 2024 compared to 2023, largely due to reduced legal costs[68][69] Liquidity and Capital Resources Cash Flow Summary (in thousands) | Activity | Six months ended June 30, 2024 | Six months ended June 30, 2023 | | :--- | :--- | :--- | | Cash used in operating activities | $(4,420) | $(1,961) | | Cash used in investing activities | $(562) | $(811) | | Cash provided by financing activities | $5,618 | $2,783 | - The company's loan agreements with related parties Strandler, LLC and Beachcorp, LLC are set to expire on October 1, 2025, which could become an operating risk if not refinanced or extended[37][73] - Capital spending for 2024 is expected to be between $3 million and $6 million, funded by profits, existing loans, and possible new debt financing[74] Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Nanophase is not required to provide quantitative and qualitative disclosures about market risk - Disclosure is not required for a smaller reporting company[79] Controls and Procedures Management concluded the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level[80] - There were no changes in the company's internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls[81] PART II – OTHER INFORMATION Legal Proceedings This section details the settlement of a lawsuit with BASF Corporation regarding an exclusivity agreement, resolved on April 10, 2024, through an amended supply agreement and mutual release of claims - The company settled a lawsuit with BASF Corporation on April 10, 2024, resolving a dispute over an alleged breach of an exclusivity provision in their supply agreement[85] - As part of the settlement, the supply agreement was amended to clarify that while BASF has exclusive rights to zinc oxide materials sold by Nanophase as an ingredient, Nanophase and its subsidiary Solésence can sell finished products containing zinc oxide globally[86] - The lawsuit was formally dismissed with prejudice on April 11, 2024[85] Risk Factors As a smaller reporting company, Nanophase is not required to provide a discussion of risk factors in its Form 10-Q - Disclosure is not required for a smaller reporting company[87] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[88] Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[88] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[89] Other Information The company reported no other information required to be disclosed in this item - None[90] Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and PFO, and financial statements in XBRL format - The report includes certifications from the CEO and PFO as required by the Exchange Act (Exhibits 31.1, 31.2) and U.S.C. Section 1350 (Exhibit 32)[92] - Interactive Data Files (XBRL) for the financial statements and notes are included as Exhibit 101[92]