Solesence Inc(SLSN) - 2024 Q4 - Annual Report

Part I Business Overview Solesence, Inc. is a science-driven skin health company strategically focused on its high-growth Consumer Products segment, leveraging patented technologies for innovative skincare solutions - On March 7, 2025, Nanophase Technologies Corporation rebranded as Solesence, Inc. to reflect its commitment to innovation in skin health. The stock ticker remains NANX[19] - The company's strategic focus has shifted to its Solesence consumer products, which are viewed as the primary driver for future growth, surpassing personal care ingredients in revenue[22][24] - The company's Active Stress Defense™ technology platform, including Kleair™, is a key competitive advantage, enabling unique skin health products that protect against UVA/UVB, pollution, and blue light[37] - Solesence has received numerous industry awards for its innovative formulations, including multiple Cosmopack and Cosmetics & Toiletries Allē Awards between 2022 and 2025, highlighting its technological and formulation expertise[28] Revenue by Product Category (2023-2024) | Product Category | 2024 Revenue | 2023 Revenue | | :--- | :--- | :--- | | Consumer Products | $44.4M (85% of total) | $25.2M (68% of total) | | Personal Care Ingredients | $6.8M | $9.3M | | Advanced Materials | $1.1M | $2.8M | Top Customer Revenue Concentration (2024) | Customer Type | % of 2024 Total Revenue | | :--- | :--- | | Consumer Products Customer 1 | 32% | | Personal Care Ingredients (BASF) | 13% | | Consumer Products Customer 2 | 7% | Risk Factors As a smaller reporting company, the company is not required to provide specific risk factor disclosures - Disclosure of Risk Factors is not required for a smaller reporting company[63] Cybersecurity The company employs a comprehensive cybersecurity strategy managed by an IT consultant with Board oversight, reporting no material incidents in 2024 - The company's cybersecurity strategy involves using antivirus software, VPNs, email security, and maintaining up-to-date software patches[66][73] - Oversight is managed by an IT consultant who reports to senior management, with the Board of Directors having ultimate responsibility[67][68] - The company is not aware of any material cybersecurity incidents in 2024 or any threats reasonably likely to materially affect its business[66] Properties Solesence operates three ISO-certified and FDA cGMP-compliant leased facilities in the Chicago suburbs, providing sufficient capacity for anticipated growth through 2026 - The company leases three facilities in the Chicago area: Romeoville (HQ, R&D, manufacturing), Burr Ridge (manufacturing), and Bolingbrook (warehousing, manufacturing, assembly)[69] - All facilities are registered under ISO 9001, ISO 22716, and ISO 14001, and are compliant with FDA cGMP regulations for API and OTC drug manufacturing[70][71][72] - The Bolingbrook lease extends to May 2032, while the Romeoville lease runs to January 2028. Management believes current facilities are sufficient for growth anticipated through 2025-2026[75][76] Legal Proceedings A legal dispute with BASF Corporation regarding an exclusivity agreement was settled in April 2024, clarifying terms to allow Solesence to sell finished zinc oxide products - A legal dispute with BASF Corporation, initiated in August 2022 regarding an alleged breach of an exclusivity agreement, was settled on April 10, 2024[77][78] - The settlement involved amending the supply agreement to clarify that Solesence can supply and sell finished products containing zinc oxide to customers globally, resolving the core of the dispute[79] Part II Market for Common Equity and Related Matters The company's common stock trades on OTCQB, with no cash dividends paid or anticipated due to reinvestment plans and loan restrictions Common Stock Price Range (Fiscal Year 2024) | Quarter | High | Low | | :--- | :--- | :--- | | First | $0.98 | $0.43 | | Second | $1.71 | $0.70 | | Third | $1.65 | $1.33 | | Fourth | $2.88 | $1.30 | - The company has never declared or paid cash dividends and intends to retain future earnings for reinvestment. Loan agreements with lenders also restrict dividend payments without prior consent[83] Management's Discussion and Analysis (MD&A) Solesence achieved a significant financial turnaround in 2024, with revenue growth, net profit, improved margins, and positive operating cash flow, driven by consumer product sales Results of Operations Total revenue increased 40% to $52.3 million in 2024, driven by consumer products, leading to a net income of $4.2 million and improved gross margin Consolidated Statement of Operations Summary (in thousands) | Metric | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $52,347 | $37,297 | +40.3% | | Gross Profit | $16,188 | $7,825 | +106.9% | | Net Income (Loss) from Operations | $5,132 | $(3,546) | N/A | | Net Income (Loss) | $4,235 | $(4,390) | N/A | | Diluted EPS | $0.07 | $(0.09) | N/A | - The increase in product revenue to $51.9 million in 2024 from $36.6 million in 2023 was due to a significant increase in revenue from consumer products, partially offset by decreases in personal care ingredients and advanced materials[88] - Selling, general and administrative (SG&A) expenses decreased to $7.2 million in 2024 from $7.5 million in 2023, largely due to a decrease in legal costs[93] - An inventory reserve of $1,987,000 was applied in 2024 for materials nearing expiration, soon-to-be obsolete products, and raw materials no longer in regular use[86] Liquidity and Capital Resources Liquidity significantly improved in 2024 with positive operating cash flow and a $6 million preferred stock issuance, enabling debt reduction and capital expenditures Cash Flow Summary (in thousands) | Activity | 2024 | 2023 | | :--- | :--- | :--- | | Cash from Operating Activities | $1,971 | $(2,006) | | Cash used in Investing Activities | $(4,558) | $(1,051) | | Cash from Financing Activities | $2,274 | $2,593 | - In March 2024, the company issued 15,000 shares of Series X Preferred Stock to Strandler, LLC for $6 million. These shares were subsequently converted into 15,000,000 shares of common stock in June 2024 after a shareholder vote to increase authorized shares[102][106][285] - The maturity date on related-party debt facilities with Beachcorp, LLC and Strandler, LLC was extended to October 1, 2025. Subsequent to year-end, the lender committed to refinancing the debt with a new maturity date after April 1, 2026[107][108][301] - The company has federal net operating loss (NOL) carryforwards of approximately $42 million as of December 31, 2024, which can be used to offset future taxable income[112] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2024, with no material changes - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[117] - Based on an assessment using the COSO framework, management believes the company maintained effective internal control over financial reporting as of December 31, 2024[120][121] - The annual report does not include an attestation report from the company's registered public accounting firm regarding internal controls, as permitted for smaller reporting companies[123] Part III Directors, Executive Officers and Corporate Governance The company's Board of Directors and executive team oversee corporate governance through established committees, a Code of Ethics, and an Insider Trading Policy Board of Directors | Name | Position | Director Since | | :--- | :--- | :--- | | R. Janet Whitmore | Chair of the Board | 2003 | | Laura M. Beres | Director | 2020 | | Mark E. Miller | Director | 2023 | | Jess A. Jankowski | President, CEO, CFO, Director | 2009 | - The executive officers are Jess A. Jankowski (President, CEO, CFO) and Kevin Cureton (COO)[133][145] - The Board has determined that directors Laura M. Beres and Mark E. Miller are independent. The company qualifies as a "controlled company" due to the majority ownership of Bradford T. Whitmore[187] Executive Compensation Executive compensation for named officers includes salary, bonuses, and equity awards, with outside directors receiving cash retainers and stock options 2024 & 2023 Named Executive Officer Compensation | Name and Position | Year | Salary ($) | Option Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | :--- | | Jess Jankowski, CEO | 2024 | 357,072 | 39,738 | 423,779 | | | 2023 | 341,409 | 5,521 | 374,849 | | Kevin Cureton, COO | 2024 | 309,256 | 39,738 | 370,293 | | | 2023 | 294,492 | 5,521 | 322,687 | - Performance milestones were achieved in 2024, and related bonuses will be paid. Milestones were not achieved in 2023, and no bonuses were paid for that year[162] 2024 Outside Director Compensation | Name | Fees Paid in Cash ($) | Option Awards ($) | Total ($) | | :--- | :--- | :--- | :--- | | R. Janet Whitmore | 24,000 | 21,193 | 45,193 | | Laura M. Beres | 18,000 | 15,895 | 33,895 | | Mark E. Miller | 18,000 | 15,895 | 33,895 | Security Ownership Bradford T. Whitmore is the principal stockholder, owning approximately 71.08% of common shares, while executive officers and directors collectively own 4.84% - Bradford T. Whitmore is the majority beneficial owner, holding approximately 71.08% of the company's common stock as of March 28, 2025[183][186] - All current executive officers and directors as a group beneficially own 3,441,304 shares, representing 4.84% of the outstanding common stock[183] Equity Compensation Plan Information (as of Dec 31, 2024) | Category | Securities to be issued upon exercise | Weighted-average exercise price ($) | Securities available for future issuance | | :--- | :--- | :--- | :--- | | Plans Approved by Shareholders | 3,212,000 | $1.47 | 63,000 | Related Transactions and Director Independence The company maintains significant financial relationships with its majority shareholder and affiliates, while the Board has independent directors and qualifies as a "controlled company" - The company has engaged in a series of debt and equity transactions with entities affiliated with its majority shareholder, Bradford T. Whitmore, including Beachcorp, LLC and Strandler, LLC[185][98] - Bradford T. Whitmore is the brother of R. Janet Whitmore, the Chair of the Board of Directors[185] - The Board has identified Laura M. Beres and Mark E. Miller as independent directors[187] Principal Accounting Fees and Services RSM US LLP billed approximately $296,000 in 2024 for audit and audit-related services, all pre-approved by the Audit and Finance Committee Accountant Fees (RSM US LLP) | Fee Type | 2024 ($) | 2023 ($) | | :--- | :--- | :--- | | Audit Fees | $270,000 | $263,000 | | Audit-Related Fees | $26,000 | $26,000 | | Tax Fees | $0 | $0 | | All Other Fees | $0 | $0 | | Total | $296,000 | $289,000 | - All audit and non-audit services provided by the principal accountant are pre-approved by the Audit and Finance Committee[192][193] Part IV Exhibits and Financial Statement Schedules This section includes consolidated financial statements, the independent auditor's report, and a comprehensive index of all exhibits filed with the Form 10-K - This part includes the consolidated financial statements and the report of the independent registered public accounting firm, RSM US LLP[197][202] - An extensive exhibit index lists all filed documents, including governance documents, material contracts, debt agreements, and executive compensation plans[303][304][305] Financial Statements Report of Independent Registered Public Accounting Firm RSM US LLP issued an unqualified opinion on the consolidated financial statements, identifying inventory reserve valuation as a critical audit matter - RSM US LLP expressed an unqualified opinion, stating the financial statements are presented fairly in accordance with U.S. GAAP[205] - The valuation of the inventory excess and obsolete reserve was identified as a Critical Audit Matter (CAM) because it involved significant and subjective management judgments[209][212] Consolidated Financial Statements Consolidated financial statements reflect significant financial improvement in 2024, with increased assets and stockholders' equity, and a shift from net loss to net income Key Balance Sheet Data (in thousands) | Account | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $29,348 | $16,302 | | Total Assets | $50,002 | $32,881 | | Total Current Liabilities | $25,773 | $15,589 | | Total Liabilities | $35,056 | $30,979 | | Total Stockholders' Equity | $14,946 | $1,902 | Key Income Statement Data (in thousands) | Account | 2024 | 2023 | | :--- | :--- | :--- | | Total Revenue | $52,347 | $37,297 | | Gross Profit | $16,188 | $7,825 | | Net Income (Loss) | $4,235 | $(4,390) | Notes to Consolidated Financial Statements Notes detail accounting policies, the strategic shift to consumer products, related-party transactions, inventory changes, and subsequent events like rebranding and debt refinancing - The company's strategic focus is on its Solesence consumer products line, which has become the majority of the business and the primary driver of growth[226] Revenue by Product Category (in thousands) | Product Category | 2024 | 2023 | | :--- | :--- | :--- | | Consumer Products | $44,373 | $25,211 | | Personal Care Ingredients | $6,827 | $9,277 | | Advanced Materials | $1,147 | $2,809 | | Total | $52,347 | $37,297 | Inventories, net (in thousands) | Component | 2024 | 2023 | | :--- | :--- | :--- | | Raw materials | $17,396 | $8,524 | | Finished goods | $4,858 | $2,184 | | Inventory reserve | $(1,987) | $(677) | | Total | $20,267 | $10,031 | - In March 2024, the company issued $6 million in Series X Preferred Stock to Strandler, LLC, an affiliate of the majority shareholder. This was converted to 15 million shares of common stock in June 2024[280][285] - Subsequent to year-end, in March 2025, the company rebranded from Nanophase Technologies Corporation to Solesence, Inc. and secured a commitment to refinance its related-party debt maturing in October 2025[300][301]