Solesence Inc(SLSN) - 2025 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements Presents Solésence, Inc.'s unaudited consolidated condensed financial statements for Q2 2025, detailing financial position, operational results, and cash flows Consolidated Balance Sheets (Unaudited Consolidated Condensed) Metric | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Total assets | $59,956 | $50,002 | | Total current assets | $38,770 | $29,348 | | Cash | $4,108 | $1,409 | | Trade accounts receivable, net | $11,049 | $4,869 | | Inventories, net | $19,832 | $20,267 | | Total liabilities | $41,768 | $35,056 | | Total current liabilities | $22,536 | $25,773 | | Total stockholders' equity | $18,188 | $14,946 | - Total assets increased by $9,954 thousand (19.9%) from December 31, 2024, to June 30, 2025, driven by increases in cash and trade accounts receivable[8] - Total stockholders' equity increased by $3,242 thousand (21.7%) from December 31, 2024, to June 30, 2025[8] Consolidated Statements of Operations (Unaudited Consolidated Condensed) Metric | Metric | Three months ended June 30, 2025 (in thousands) | Three months ended June 30, 2024 (in thousands) | Six months ended June 30, 2025 (in thousands) | Six months ended June 30, 2024 (in thousands) | | :---------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total revenue | $20,359 | $13,046 | $34,984 | $22,914 | | Product revenue | $20,261 | $12,923 | $34,836 | $22,694 | | Gross profit | $5,877 | $3,740 | $9,259 | $7,320 | | Net income | $2,667 | $856 | $2,747 | $1,747 | | Net income per share-basic | $0.04 | $0.02 | $0.04 | $0.03 | | Net income per share-diluted | $0.04 | $0.01 | $0.04 | $0.03 | - Total revenue increased by 56.1% for the three months ended June 30, 2025, compared to the same period in 2024, and by 52.7% for the six months ended June 30, 2025, compared to the same period in 2024[10] - Net income for the three months ended June 30, 2025, was $2,667 thousand, a significant increase from $856 thousand in the prior year, partly due to $1,234 thousand in other income from the Employee Retention Credit[10][53] Consolidated Statements of Shareholders' Equity (Unaudited Consolidated Condensed) Metric | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | | Total Stockholders' Equity | $18,188 | $14,946 | | Common Stock Shares Outstanding | 70,481,945 | 70,103,279 | | Additional Paid-in Capital | $115,165 | $114,674 | | Accumulated Deficit | $(97,681) | $(100,428) | - The accumulated deficit decreased from $(100,428) thousand at December 31, 2024, to $(97,681) thousand at June 30, 2025, reflecting net income generated during the period[13] - Issuance of shares and stock option exercises contributed $245 thousand to additional paid-in capital and common stock for the three months ended June 30, 2025[13] Consolidated Statements of Cash Flows (Unaudited Consolidated Condensed) Cash Flow Activity | Cash Flow Activity | Six months ended June 30, 2025 (in thousands) | Six months ended June 30, 2024 (in thousands) | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net cash used in operating activities | $(7,875) | $(4,420) | | Net cash used in investing activities | $(1,275) | $(562) | | Net cash provided by financing activities | $11,849 | $5,618 | | Total cash at period end | $4,108 | $2,358 | - Net cash used in operating activities increased to $(7,875) thousand for the six months ended June 30, 2025, primarily due to increased accounts receivable and decreased deferred revenue[15][71] - Net cash provided by financing activities significantly increased to $11,849 thousand for the six months ended June 30, 2025, mainly due to increased use of debt, including proceeds from related party lines of credit[15][71] Notes to Unaudited Consolidated Condensed Financial Statements (1) Basis of Presentation Outlines the basis for preparing the unaudited consolidated condensed interim financial statements - The unaudited consolidated condensed interim financial statements include Solésence, Inc. and its wholly-owned subsidiary, Solésence, LLC, reflecting normal recurring adjustments[16] - Operating results for the interim periods are not necessarily indicative of the full year ending December 31, 2025[16] (2) Description of Business Describes Solésence, Inc.'s business, focusing on beauty and life-science markets and recent Nasdaq uplisting - Solésence, Inc. is a science-driven company focused on beauty- and life-science markets, with skin health and medical diagnostics comprising the majority of its business[18] - The company offers engineered materials, formulation development, and commercial manufacturing, utilizing proprietary Active Stress Defense™ Technology for personal care products, including sunscreens and prestige skin care/cosmetics[18][20] - Solésence's securities were uplisted to Nasdaq under the symbol SLSN on April 8, 2025, expanding its reach within foreign markets[21] (3) Revenues and Other Income Details revenue recognition policies, contract balances, and other income sources - Revenue from goods is recognized when control is transferred to customers, typically at the shipping point[24] Contract Balance | Contract Balance | December 31, 2023 (in thousands) | December 31, 2024 (in thousands) | June 30, 2025 (in thousands) | | :----------------- | :------------------------------- | :------------------------------- | :--------------------------- | | Accounts Receivable | $3,467 | $4,869 | $11,049 | | Contract Liabilities | $2,353 | $5,571 | $2,169 | - Other revenue, primarily from laboratory tests, technology license fees, and paid development projects, decreased for both the three and six months ended June 30, 2025, compared to 2024[29] (4) Earnings per Share Provides calculations for basic and diluted earnings per common share Metric | Metric | Three months ended June 30, 2025 | Three months ended June 30, 2024 | Six months ended June 30, 2025 | Six months ended June 30, 2024 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (in thousands) | $2,667 | $856 | $2,747 | $1,747 | | Weighted average basic shares outstanding | 70,200,039 | 56,674,170 | 70,151,928 | 54,675,011 | | Basic earnings per common share | $0.04 | $0.02 | $0.04 | $0.03 | | Diluted earnings per common share | $0.04 | $0.01 | $0.04 | $0.03 | - The weighted average number of basic common shares outstanding increased significantly year-over-year, reflecting share issuances and stock option exercises[13][31] (5) Financial Instruments Discusses the fair value of financial instruments, including cash, receivables, and debt - The carrying values of cash, accounts receivable (net), accounts payable, and accrued expenses are considered reasonable estimates of their fair value due to their short-term nature[34] - The fair value of short-term and long-term debt approximates its carrying value based on comparisons to similar debt offerings[34] (6) Related Party Notes and Lines of Credit Details related party debt facilities, borrowing capacities, and outstanding balances Lender | Lender | Rate at June 30, 2025 | Total Borrowing Capacity (June 30, 2025, in thousands) | Outstanding Borrowed Balance (June 30, 2025, in thousands) | Outstanding Borrowed Balance (Dec 31, 2024, in thousands) | | :-------------------- | :-------------------- | :------------------------------------------------------- | :--------------------------------------------------------- | :--------------------------------------------------------- | | Beachcorp, LLC (A/R) | 8.25% | $12,000 | $6,099 | $0 | | Beachcorp, LLC (Inv) | 8.25% | $10,000 | $9,500 | $4,000 | | Strandler, LLC (Term) | 8.25% | $1,000 | $1,000 | $1,000 | - The A/R Revolver Facility with Beachcorp, LLC was expanded from $8,000 to $12,000 and its maturity extended to April 30, 2027, on May 27, 2025[36] - Related party interest expense for the three months ended June 30, 2025, was $282 thousand, up from $181 thousand in the prior year[39] (7) Inventories, net Presents a breakdown of inventory components and changes over the period Inventory Component | Inventory Component | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :------------------ | :----------------------------- | :------------------------------- | | Raw materials | $15,093 | $17,396 | | Finished goods | $7,179 | $4,858 | | Inventory reserve | $(2,440) | $(1,987) | | Total Inventories, net | $19,832 | $20,267 | - Net inventories decreased slightly from $20,267 thousand at December 31, 2024, to $19,832 thousand at June 30, 2025, with a notable increase in finished goods and a decrease in raw materials[40] (8) Capital Stock Outlines the company's capital stock structure, including authorized and issued shares - As of June 30, 2025, the company had 24,088 authorized but unissued shares of preferred stock[42] - On June 20, 2024, 15,000 shares of Series X Preferred Stock were converted into 15,000,000 shares of Common Stock[43] (9) Significant Customers Identifies major customers and their revenue contribution, highlighting customer concentration risks Customer | Customer | Product Category | % of Total Revenue (3 months ended June 30, 2025) | % of Total Revenue (3 months ended June 30, 2024) | % of Total Revenue (6 months ended June 30, 2025) | % of Total Revenue (6 months ended June 30, 2024) | | :--------- | :--------------- | :------------------------------------------------ | :------------------------------------------------ | :------------------------------------------------ | :------------------------------------------------ | | 1 | Consumer Products | 33% | 33% | 23% | 34% | | 2 | Consumer Products | 27% | 0% | 19% | 0% | | 3 | Personal Care Ingredients | 13% | 13% | 12% | 14% | | Total | | 73% | 46% | 54% | 48% | - The top three customers accounted for 73% of total revenue for the three months ended June 30, 2025, indicating significant customer concentration[45] - Exclusive supply agreements with BASF Corporation include contingencies that could result in the sale of production equipment to BASF if performance requirements are not met, potentially leading to a significant loss of revenue[45][46] (10) Business Segmentation and Geographical Distribution Describes the company's single business segment and geographical revenue distribution - The Company operates as a single business segment, with performance assessed based on net income and gross profit[47][48] Product Category | Product Category | Three months ended June 30, 2025 (in thousands) | Three months ended June 30, 2024 (in thousands) | Six months ended June 30, 2025 (in thousands) | Six months ended June 30, 2024 (in thousands) | | :----------------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Consumer Products | $17,544 | $11,200 | $30,426 | $19,304 | | Personal Care Ingredients | $2,687 | $1,745 | $4,061 | $3,121 | | Advanced Materials | $128 | $101 | $497 | $489 | | Total Sales | $20,359 | $13,046 | $34,984 | $22,914 | - Revenue from international sources significantly increased to $2,519 thousand for the three months ended June 30, 2025, from $478 thousand in the prior year, with a substantial portion from the United Kingdom[49] (11) Contingencies Details significant contingent events, including the Employee Retention Credit and related reserve - In June 2025, the Company received a payment of $1,729 thousand from the U.S. Department of the Treasury under the Employee Retention Credit (ERC) program, along with $272 thousand in related interest[51] - The Company recognized $1,234 thousand of the ERC as other income and $194 thousand in interest income, creating a $572 thousand reserve for the discrepancy, which is included in accrued expenses as a contingent liability[53][54] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion of Solésence, Inc.'s Q2 2025 financial performance, condition, liquidity, and future outlook Overview Provides an overview of the company's rebranding, Nasdaq uplisting, and strategic focus on skin health solutions - Nanophase Technologies Corporation rebranded as Solésence, Inc. on March 7, 2025, and its stock uplisted to Nasdaq under the symbol SLSN on April 8, 2025[55][56] - The company's primary strategic focus is on skin health solutions, particularly consumer products, leveraging integrated patented and proprietary technologies for engineered materials, formulation, and manufacturing[56][57][58] Results of Operations Analyzes Solésence, Inc.'s revenue, cost of revenue, and operating expenses for the reporting periods Metric | Metric | Three months ended June 30, 2025 (in thousands) | Three months ended June 30, 2024 (in thousands) | Six months ended June 30, 2025 (in thousands) | Six months ended June 30, 2024 (in thousands) | | :---------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total revenue | $20,359 | $13,046 | $34,984 | $22,914 | | Product revenue | $20,261 | $12,923 | $34,836 | $22,694 | | Cost of revenue | $14,482 | $9,306 | $25,725 | $15,594 | | Research and development expense | $955 | $864 | $1,973 | $1,776 | | Selling, general and administrative expense | $3,012 | $1,829 | $5,120 | $3,388 | | Other income, net | $1,234 | $0 | $1,234 | $0 | - Total revenue increased by 56.1% and 52.7% for the three and six months ended June 30, 2025, respectively, primarily driven by higher sales in consumer products and personal care ingredients[60][62] - Cost of revenue increased due to higher volume, manufacturing operating inefficiencies, and facilities improvements, impacting gross margin percentage despite efforts to pass through costs[64][65] - Selling, general and administrative expense increased due to higher allowance for credit loss, legal costs, NASDAQ uplisting costs, and increased employee-related costs[68] Inflation Discusses the impact of inflation on operational costs and the company's mitigation strategies - Inflation has had an incremental impact on operational costs, with supplier price increases and wage/benefit inflation posing potential material effects if not passed through to customers[70] - The company is actively increasing pricing where possible and adjusting pricing to market conditions and contract limitations[70] Liquidity and Capital Resources Examines the company's cash flows, liquidity position, and future capital requirements Cash Flow Metric | Cash Flow Metric | Six months ended June 30, 2025 (in thousands) | Six months ended June 30, 2024 (in thousands) | | :-------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Cash (used in) provided by operating activities | $(7,875) | $(4,420) | | Net cash used in investing activities | $(1,275) | $(562) | | Net cash provided by financing activities | $11,849 | $5,618 | | Total cash at period end | $4,108 | $2,358 | - Net cash used in operating activities increased due to higher accounts receivable and decreased accounts payable and deferred revenue[71] - Future capital requirements for 2025 are estimated between $1 million and $3 million for capital equipment, to be funded by operating profit, existing loans, and potential new debt financing[72] Additional Consideration Highlights federal and state net operating loss carryforwards and their potential impact - The company has federal net operating loss carryforwards of approximately $42 million as of December 31, 2024, with $36 million expiring between 2025 and 2037, and $6.8 million generated after January 1, 2018, which do not expire[73] - Illinois net loss deduction carryforwards totaled approximately $18.2 million as of December 31, 2024, expiring between 2030 and 2043[73] Off-Balance Sheet Arrangements Confirms the absence of special-purpose or off-balance sheet entities - The company has not created, nor is it party to, any special-purpose or off-balance sheet entities for capital raising, debt, or business operations[74] Safe Harbor Provision Warns about forward-looking statements and associated risks and uncertainties - The report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially[75] - Key risks include consistent profitability, customer dependence, terms of supply agreements (e.g., BASF), ability to obtain working capital, material costs, uncertain demand, manufacturing capacity, marketing experience, competitive products, patent protection, regulatory changes, business interruptions, and litigation[75] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Solésence, Inc. is not required to provide market risk disclosures - Disclosure is not required for a smaller reporting company[76] Item 4. Controls and Procedures Details the company's disclosure controls and internal control over financial reporting, affirming their effectiveness Disclosure controls Management's conclusion on the effectiveness of the company's disclosure controls and procedures - Management, including the Principal Executive Officer and Principal Financial Officer, concluded that the company's disclosure controls and procedures were effective at providing reasonable assurance as of June 30, 2025[77] Internal control over financial reporting Management's confirmation of no material changes in internal control over financial reporting - Management confirmed no material changes in the company's internal control over financial reporting during the period covered by the report[78] PART II – OTHER INFORMATION Item 1. Legal Proceedings Solésence, Inc. reported no legal proceedings during the quarter ended June 30, 2025 - There are no legal proceedings to report[80] Item 1A. Risk Factors As a smaller reporting company, Solésence, Inc. is not required to provide a separate discussion of risk factors - Disclosure is not required for a smaller reporting company[81] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Solésence, Inc. reported no unregistered sales of equity securities or use of proceeds - There were no unregistered sales of equity securities and use of proceeds to report[82] Item 3. Defaults Upon Senior Securities Solésence, Inc. reported no defaults upon senior securities during the quarter ended June 30, 2025 - There were no defaults upon senior securities to report[83] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to Solésence, Inc.'s operations - Mine safety disclosures are not applicable[84] Item 5. Other Information Solésence, Inc. reported no other information requiring disclosure in this section - There is no other information to report[85] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including certifications and XBRL formatted financial statements - Exhibits include certifications from the Chief Executive Officer and Principal Financial Officer (31.1, 31.2, 32)[87] - XBRL formatted financial statements (Balance Sheets, Statements of Operations, Statements of Shareholders Equity, Statements of Cash Flows, and Notes) are included as Exhibit 101[87] SIGNATURES - The report was duly signed on August 14, 2025, by Jess A. Jankowski, President and Chief Executive Officer (also serving as principal executive officer and principal financial officer) of Solésence, Inc[89][91]