SLSN - NASDAQ

Good day and thank you for standing by. Welcome to the Solesence First Quarter 2025 Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] Today's call is being recorded. During this call, management will make statements that include forward-looking statements within the meaning of the federal securities laws, which are pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. This conference call may contain statements that reflect the company's current beliefs, and a number of important factors could cause actual results for future periods to differ materially from those stated on this call. These important factors include without limitation, a decision of the customer to cancel purchase order or supplies, agreement, demand for an acceptance of the company's personal care, ingredients, advanced materials and formulated products, changes in development and distribution relationships, the impact of competitive products and technology, possible disruption in commercial activities occasioned by public health issues, terrorist activity and armed conflict and other risks indicated in the company's filings with the Securities and Exchange Commission. Except as required by federal securities laws, the Company undertakes no obligation to update or revise these forward-looking statements to reflect new events, uncertainties, or other contingencies. I will now hand the conference over to your speaker, Mr. Jess Jankowski, President and CEO. Please go ahead, sir.

Thank you, Carmen. Good afternoon, and thanks to all of you who have joined our call today. With me on today's call is Kevin Cureton, our Chief Operating Officer. I'll begin with a summary of our first quarter results and a business update. Kevin will then discuss our operational initiatives. Then we will take your questions. Last quarter, we hosted our first conference call rebranded as Solesence, a brand that reflects our simple, yet profound mission, Deliver Joy. Today, we are hosting our first conference call as a listed company on NASDAQ. In such a short period of time, we have undergone a remarkable transformation that has us well-positioned at the forefront of the beauty market. This is reinforced by our commitment to scientific excellence and innovation as we pioneer industry-leading, award-winning protective beauty solutions recognized globally. As a high-growth contract development and manufacturing organization, or CDMO, we are leveraging our novel technology suite, unique performance consumer products, and regulatory expertise to empower brands to enhance consumers' lives and well-being. Our vertically integrated, patent-protected formulations are used in skin health products spanning skin care, sun care and color cosmetic market segments. What sets us apart from other CDMOs is our proprietary technology, which enables us to build novel products that allow our brand partners to capture preferred positioning in retail environments and typically become the leading choice of the consumers they serve. Our integrated position of being a platform technology innovator, a developer of unique, award-winning formulas, and a cGMP manufacturer further allows our brand partners to reach the market much faster than their competitors. We believe that our patented technology provides us with a strong competitive position, safeguarding our market position, and enabling long-term value creation for both Solesence and brand partners. Importantly, because of our position as an innovator, who can rapidly bring new products to market, we have long-term relationships with private equity-backed beauty brands. These brands tend to be high growth organizations, who look to us for upstream support that few can match. The combination of these key factors is what attracts top-tier brands to us from the $570 billion plus global beauty market. All of this was on display in our first quarter 2025 performance where we achieved record revenues of $14.6 million, representing an increase of nearly 50% year-over-year. Revenue in the quarter was primarily driven by sales to our largest brand partners, including our new launch partner, and Colorescience for our consumer products and, of course, sales of Active Pharmaceutical Ingredients to BASF. These results reflect the continued strength of our commercial execution and demand for our products. While we were pleased with this strong performance, our margins were impacted by one-time production start-up costs related to the launch of a new product line by a new 6 key brand partner. Kevin will provide more details here shortly, but I'd like to note that our relentless efforts to resolve this issue successfully kept this critical product launch on schedule. As a result of these start-up hurdles, in the first quarter, gross profit was $3.3 million, or 23% of revenue, compared to $3.6 million, or 36% of revenue, for the same period in 2024. Excluding the one-time start-up costs, our gross margin would have been similar to last year's margin. Net income for the first quarter was at breakeven, compared to net income of $0.9 million for the same period in 2024. We anticipate a rebound in our margins starting in the second quarter as we ship more product to this new brand partner, as well as our many other growing brand partners. It's our expectation that there will be a minimal impact in the second quarter from these start-up costs as we believe we completely resolved these issues during the month of April. Turning to our recent uplisting to NASDAQ, on April 8, we started trading on NASDAQ under the new ticker SLSN. This uplisting marks a new chapter for Solesence, and I'd like to highlight three important reasons why. First, we believe that trading on NASDAQ will increase awareness of Solesence within the financial community. Listing on a major exchange like NASDAQ can enhance our visibility, and credibility, making it easier to attract diverse, long-term institutional investors. Second, it will increase our marketability, liquidity and access to the capital markets, all of which we expect to be critical to our growth initiatives down the line. And third, we believe that it will deliver greater value to our shareholders and other stakeholders. We are excited to have achieved this major milestone last month and look forward to building upon our success moving forward. At this time, I'll turn the call over to Kevin Cureton, our Chief Operating Officer, to share an update of our progress and outlook. Kevin?

Thanks Jess. And as I always like to begin, I would like to thank our amazing team for their tireless efforts and commitment, demonstrating through our results their ability to consistently deliver solid performances for our investors, our brand partners, and for ourselves. As Jess noted earlier, we achieved a record first quarter both in terms of our revenues and unit volumes, reflecting the strong demand for our consumer products. Operationally, as Jess mentioned, we encountered start-up challenges related to a new product launch for a key new brand partner. But, we are pleased to report that issues related to this launch were resolved and we have strengthened this customer relationship through our steadfast collaboration. A few points about this launch, first, the production was part of a multi-SKU launch in-line with bringing our novel technology to a broader audience. This launch is our single largest product launch to-date. Second, prior to the launch, we worked closely with our brand partner to ensure that the products were developed to meet the highest of standards of quality, including conducting multiple production trials. And third, as a result of the successful resolution, we established what we believe will be a long-term relationship with this leading brand, underscoring our commitment to be a strategic and responsive partner that can help fuel the brand's future growth. I'm pleased to say that we have successfully delivered launch orders in the first quarter, will ramp up order deliveries in the second quarter, and have already received re-orders for shipment in the third quarter all related to this launch. The preservation of this important relationship did come at a cost. To resolve the start-up issues related to packaging, additional labor costs were incurred to meet the demand and ensure that this key product launch would remain on schedule. However, the additional labor costs had an adverse impact on our gross profit during the first quarter. As part of our commitment to continuous improvement, we raised the bar on how we will approach future inbound packaging components. In this situation, as we have in others, every time our dedicated team executes a new product launch, we learn something new that lowers the potential risk inherent with all new product launches. As a result, we are now in a much better position to reduce both the risks and the costs associated with launching new products than we were just two short years ago. Turning to our technology, during the first quarter we further strengthened our competitive position with three new patents for our Kleair technology, our plant-based antioxidant technology, and our skin healing technology. These included an allowance for our Kleair™ technology in Japan, an allowance for our new plant-based antioxidant technology in South Korea, and an additional allowance in Mexico for our new skin healing technology that leverages allantoin, commonly used to ameliorate scarring. All of these patents increase our ability to create sustainable competitive advantages for our brand partners and for ourselves, now giving us three technology platforms with global IP protection. I would like to briefly touch on tariffs. As a domestic manufacturer, we anticipate tariffs having a modest impact on our top line as of today. Solesence has brand partners diversified across skin care, color cosmetics, and sun care categories, as well as those operating in prestige and mass markets. While we won't be immune to market pressures, we believe we are well-positioned should macroeconomic conditions cause demand to soften across certain product categories and segments. Regarding the impact on costs related to tariffs, although we participate in the global supply chain and source raw materials outside of the U.S., the impact will likely be muted on our cost position in the second quarter, and we will likely not see a significant effect from tariffs at least through most of the third quarter. However, on packaging components, we do expect tariffs to impact us and we are confident that we will be able to pass all of the new tariff expenses through without adversely affecting our margins. We continue to monitor the situation closely, particularly as we begin to look beyond the U.S. for further growth. Finally, before turning the call back to Jess, I would like to reiterate that we achieved yet another record unit volume quarter. With many of our production issues behind us, we anticipate our gross margins to increase moving forward. As previously planned, we expect that increasing product volumes will drive more efficient absorption of our fixed manufacturing costs, which should lead to increased margins. We are also focused on reducing controllable variable product manufacturing costs. This will enable us to grow more profitability and ultimately create more value for our shareholders I'll now turn the call back to Jess. Jess?

Thanks, Kevin. We are pleased to have achieved another record-breaking revenue quarter driven by robust demand for our consumer products, marketed through the leading brands, that we believe represent the future of beauty. These brands include a long-term exclusive relationship with BASF for our APIs, as well as brand partners Colorescience, a leading dermatologist-recommended brand, Tatcha, a Japanese inspired prestige brand, and Credo, a leading clean beauty retailer. We added to that impressive list with a multi-SKU product launch with a key new brand earlier this year, as we have discussed. Although we encountered one-time start-up issues that impacted our profitability in Q1, we proactively addressed them and are now well-positioned to scale for future gross margin expansion to drive stronger EBITDA performance. Turning to our book-of-business, for purposes of comparison, our shipped and open orders are currently in excess of $45 million, compared to about $40 million in the first quarter of 2024, and $38 million when we last reported in late March. It is important to note that when comparing our shipped and open orders to the year ago period that our current orders extend into the third quarter of this year, whereas last year's number included volume through the end of the year. Because our brand partners are becoming more comfortable with our agility, they are shortening their order horizons to better address near-term demand. We anticipate continued top line growth, with record revenues for the second quarter of 2025, and we expect more orders coming in relating to reorder quantities and launches for the second half of 2025. As consumer preferences rapidly evolve, Solesence remains at the forefront of addressing the needs of consumers. Two of our core strengths are diversification across various beauty segments, and our ability to cater to both prestige and mass-market brands. These differentiators expand our potential for market reach and increased volumes. It is why we believe our high brand retention rates will lead to recurring revenue and sustainable growth. At this time, I'd like to share a brief update on our Chief Financial Officer search. In connection with our top line growth, combined with our rebranding and the successful uplisting to NASDAQ, we made the decision to strengthen our leadership team with the appointment of a dedicated CFO. We have initiated an aggressive search and hope to announce this key appointment in the coming months. Now, we would be happy to take some questions. Afterwards, I'll offer a few closing comments. Carmen, please open the call for Q&A.

Thank you so much. [Operator Instructions] One moment for our first question, please. And it's from the line of Mr. Rueben. Please go ahead.

Hi, gentlemen. Good afternoon. I found it a little bit like a broken record, but congratulations on truly outstanding sales growth, open order growth, and, you know, expansion of the breadth of your product line. However, the operational failures also are a bit like a broken record. I don't know if these numbers are right, but Jess mentioned in the absence of your one-time startup snafu, your margin would have been similar to last year, and doing quick math, that's close to $2 million. Is that the true impact of that, those one-time costs that you mentioned? And again, to sound like a broken record, if so, we've had tremendous success on the sales side, but we've had tremendous disappointments on the operating side. And, Kevin, you constantly commend your group, which is a nice thing to do, but the group has let the collective down from a margin perspective. So, just to get some color, was it a $2 million one-time issue, and I'm glad you salvaged the customer, et cetera, et cetera. And how can we be assured that these things won't happen, because in the absence of that, if you had the same gross margins, even in last year, your earnings per share, even with a higher share count, would have been 80% higher. You know, this is, it's frustrating.

Hi, Tony. It's Jess Jankowski. It probably wasn't a full $2 million, but it was up in that range of we just saw some inefficiencies that were kind of across the manufacturing organization, and it lasted longer than we expected. And that's really where the issue came. Definitely none of us are happy about it, obviously. However, part of the reason that the magnitude of it was higher is just we're getting to the point where we're getting a lot bigger initial orders and having a lot more volume pumping through quickly. I think, I don't think it'll be repeated. I do think that the magnitude of it has a lot to do with the magnitude of the orders, which are just higher than we've ever seen, which is part of the issue. A little mistake becomes a big mistake when you turn up the volume. Kevin may want to comment somewhere on that as well, but I see it as a learning experience and I don't see it as something that I expect to be happening again.

Yeah. Good afternoon, Tony. Good afternoon, Tony. Are you able to hear us clearly?

Yes, you're both loud and clear.

Okay. Okay. All right. Thank you. Yeah, we had a couple background noise, so we weren't sure. So, thank you. Yes, as Jeff mentioned, as you said, the frustration is pretty significant. There are things that we are changing relative to addressing this issue. How this issue came about, I briefly mentioned, was really related to some issues we had relative to the packaging that came in, and it was a variance from what we had originally done with the setups and with the testing that we did on the trials. That said, we should have seen this faster, and so we are making some changes, which don't really want to go into the details of what those are, but they are to make sure that this type of issue does not occur to the extent that it occurred. Just being fully transparent here, one of the challenges that happens with any new launch is, particularly in the space that we operate, where we're trying to get these things to market pretty quickly, as part of the point of difference that we offer in the marketplace. There are usually some unknowns that come about that can affect the performance. The difference here is that, as Jess said, it was large, but also that it didn't get noticed until relatively late in the initial startup phase of the process, and that's really where we're emphasizing making sure that these types of things don't go that far, that there are proper screening checks, evaluation of the performance of the line and performance relative to meeting the specifications of the product much earlier in the production process. So, definitely frustrating after really expecting a much better result, given the scale of the revenue that we did have.

Okay, thank you. Would you venture an estimate as to full-year gross margins, assuming this is a one-time thing, as you mentioned?

We expect them to be certainly above 30%, but again, it's hard without knowing, you know, we're not going to give guidance relative to the full year, just based on the fact that there's a lot up in the air. But we are perfectly capable of generating margins in the 30s with our goal of exceeding that, and I don't expect them to be significantly lower for the year than that. I do think this is going to be an anomalous quarter with the worst margin we would have seen for the year.

Thank you.

Thank you. [Operator Instructions] One moment for our next question that comes from Wayne Win [ph]. Please proceed.

Yeah, Jess, I appreciate your dedication, both of you, Kevin, for your hard work. But should we have been able to anticipate some of this, and are we in position to correct this before it happens? Because this was kind of disappointing that the end of last year wasn't so hot, and now this year, and are we going to get better at anticipating these problems before they make such a significant impact on our margins?

Hi, Wayne. Yeah, we are. We are already better than we were. I think the -- it's not a super complicated business, but there's a lot of moving parts. And I think this area was one that exposed something that we didn't have enough coverage on in terms of catching something like that in advance. That said, we have put processes in place to avoid that from happening again, and as Kevin mentioned, part of it was just the magnitude of the, there was a big rush to get this thing out the door, and as usual, nobody wants to fail, so we did an incredible amount of it and realized too late that we needed to do some rework. So, I think we're better positioned to not have that happen again. I expect, I always expect there are going to be errors, and I mean, you don't have a perfect fill rate. You always have some issues. The question is, to your point, do you have a strong enough quality system that you catch the error after you make 100 of them instead of a million of them, and that's really the, where we're focusing and dialing in on how we're managing the organization. So in a nutshell, I think we will, we do have a better visibility now of this potential issue. I'm sure there's another one that we may not notice. But I think even saying that, we are looking at our procedures completely to make sure that during the trial phase, we're continuing to investigate all these potentials, and if there is a last minute change, which in this case, there was some changes later in the game, we need to address it at that time, and I think we will.

Yeah, just to follow up with that question, Wayne, once, just, there are a couple things that we should mention. First is, the quality issue really was on just a portion of the total production that is related to this launch. But it was a significant early portion of the production, but significantly less than half of the total production. So, that meant for us to first be able to correct it, which meant we had to go into a pretty heavy rework process, which is heavily manual process. That's why the costs were so high, and then we also had to put in place the proper changes to the production process where we were making prime or first production on additional goods. And during that, we were able to double down relative to ensuring that we were making the product right the first time through doing some additional quality checks at the front end and at the back end in order to make sure that the changes that we had made on process and in the machining or in the filling process specifically were actually working. So that's, again, going a little inside baseball on the issue, but given the magnitude of it and given the concern that this is something that could linger on, I wanted to ensure you that there is know-how within the organization on how to make sure this doesn't happen again to first and foremost look for these issues prior to starting production, which are basically variances against the specification on the package or variances in the way that the equipment was set up, and making sure that we're going to do things right the first time when we start the production. So all of that is a pretty heavy emphasis for us, not just this coming quarter, but on a going-forward basis.

Thank you. One moment for our next question. It comes from the line of Rand Kaye [ph]. Please proceed.

Good afternoon, gentlemen. Yeah.

Hey, Rand.

Good afternoon, gentlemen. A couple questions regarding to the tariff situation. A while ago in the 10-K, you guys stated that China was single-source on some key raw materials. I guess it was zinc, and that you were looking for other sources. Okay. Do we – have we second-sourced to your satisfaction this issue, especially with China?

Yeah, Rand, good afternoon. First of all, China is not a source for our zinc metal or for any single source of any key raw material. It's always been for us a second source, actually, if we source from China at all. So just to make sure it's clear, we do not source zinc metal for our processes from China, and we are very comfortable with our sourcing within the scope of the tariff situation as well, as it is – it's actually European or domestic where we typically get the zinc metal.

Well, what is the one issue that we single-sourced from China if it wasn't zinc?

You might be thinking – I don't know if it's in the most current 10-K. The prior ones, we used to get all of our ceria…

Correct.

Cerium oxide from China for the polishing business. And that's something that

Okay.

That we don't – we don't have much of a business or any of a business in that anymore, so that's not an issue. But that would be the poster child for a tough thing to be dependent on China. That falls into the rare earth category, which we're happy. We don't have any of that right now that we have to deal with.

Okay. And from a cost perspective, do tariffs affect more raw materials or packaging materials?

Yeah. For us, it's more packaging materials. And really, for the beauty industry, that's the lead is packaging materials are broadly sourced from China, and so that's where you would see the most impact.

As two of the previous callers mentioned, gentlemen, again, I don't want to beat a dead horse, but I'm very disappointed that we keep having these trial and error situations where, you know, we'll get it this time. And the thing that I'm a bit concerned with is that in Jess's discussion, you know, we're pretty sure this isn't going to happen again, or we hope this doesn't happen again. You know, I just wonder if there is a mindset that, you know, drills down a little more hard line throughout the organization that says, you know, this cannot happen again and will not happen again. And I guess my question is, specifically, is -- did this mistake come because we did not have somebody in the position, quality, either first article or whatever, or prototyping? And if not, is there now -- is it an issue that the mechanism wasn't in place, or was it a mechanism where whoever was in place wasn't doing their job properly?

Yeah, Rand, there were a couple different questions there, but I think the gist of what you're getting at is do we understand how it happened, and do we have the wherewithal, both in terms of our knowledge and the organizational, we'll call it chutzpah, to make sure it doesn't happen again. We do understand what happened. We understand what the cause of the error was. And we do have, as I mentioned earlier, corrective actions put in place. We do also have our organization tuned in to what this cost us as a company, and that on both sides, there was an opportunity to win bigger with success, but there's also a consequence for failure for all of us. And so I think everyone is tuned into that in the appropriate level of concern that they should have or we should have as an organization to make sure that we do not have these types of issues again. I just want to make sure it's clear, though, that it's more with this issue should have been not a significant seven-figure issue. It should have been maybe a few thousand to $10,000 type of issue for us, not the scale. And those types of issues will happen in launches of this magnitude. But they should be stopped earlier, and that's really the emphasis is to make sure that we know if we set it up to do it right the first time, we should do it right the first time. But if there is some mistake that's being made, that it's caught early, and it doesn't manifest itself in the manner that it did this time, this past quarter.

All right. I got to say, from a standpoint of being disappointed, I'm extremely disappointed because I really thought this was done. I really thought these, you know, oops, you know, we didn't take into account. And here it is again. And I am really concerned a little bit, gentlemen, with both of you, that well, we hope it doesn't happen again, but, you know, it could. And I think that fundamentally, I don't know. I just have been, in my experience, you know, consequences like this need to be dealt with effectively. And if people need to be cut loose as a result, that's how it goes. And I'm just wondering if the mindset is steely enough and tough enough to send a message throughout the organization. Yeah, we want to reward our people with praise and so on and so forth. But this should not be a situation where the ramifications of which well, it happened, big deal. So, I just want to…

You do want to make sure that you should praise in public and criticize in private. I know that probably gets all listening to it on the other end.

Well, it does. It does, Jess. And it does specifically because of these kinds of situations.

Sure. And in terms of your interpretation of my comment, my comment is that these issues are going to happen, the magnitude of it should never happen. That was the problem. I always think there's going to be, everybody has a, there's a failure rate in the business, and it should be a few percent tops. And you should winnow that down to nothing or as low as you can, which is something that we obviously want to be. It's, this is at the highest level of the company. We're talking about it. We're talking about it with the board. You know, this isn't something that anybody is taking lightly.

One moment for our next question, please. And it comes from the line of Mr. Ronald Richards [ph]. Please proceed.

Jess, can you hear me?

Hi, Ron. Yep. We can hear you.

Yeah. On your balance sheet, there's a big new account, liability for accounts receivable, and there's a bigger liability for inventory line of credit. What are those all about? And why were they necessary?

Well, accounts receivable is relating to just the increased volume. And as we said, that was the launch that we were supporting. And our supporting was probably the biggest one we ever have. So a lot of it, it ballooned based on volume. We're not in a, you know, from that perspective, naturally, it's hard on cash. But it's something that just happens in terms of the accounts receivable related, the line of credit, that's just, that's, we use that to support working capital. And the other line that you didn't mention, which is something that we are focused on is we have a high degree of inventory, even though it didn't change a lot, quarter over 1231, year over year it has, which is, as you know, is a drain on working capital, which supports some of that, that borrowing when it was, it was zero at 1231, that was anomalous. And that also related to the fact, you know, we had done the financing last year. And we also had in the fourth quarter, we didn't have that rapidity of growth that we had in Q1. So it kind of all came together. I think that comparison, if you compared it to the average of last year, the average of this year, it'll be higher this year, because sales are higher. But I expect us always to have something there.

Well, how soon will these be extinguished? I mean, your accounts receivable is a lot higher.

Sure. Well, the days outstanding are not that high on the accounts receivable. Again, it's just that we have a lot of them. We had a lot of shipments. So it's, I don't expect it to be materially older than any other receivables that we've had from that perspective. Internally, we're working to cut into our inventory. And part of that, one of the things that we've done, because of the tariffs coming on, because of the length of time it takes for things to get across the water, we do have a larger inventory that we would like if we could do just in time, which is really not possible at this point, at least, and maybe never in this industry. So those things are, are a drain on cash. We also, if you look at when we get together a cash flow statement, we're also in the process, we are continuing to invest some capital in the business, not so much in Q1. But last year, we did quite a bit. And this year will probably be less than last year or similar. But that comes out of operating cash. We're not at the point, we're trying to avoid financing all of that to the extent we can, while not being hamstrung to operate the business.

Thank you. And this concludes our Q&A session. I will turn it back to management for any final comments.

Thank you, Carmen. Thank you to all of those who took the time to join us today. Solesence's ability to deliver innovative, regulatory compliant, and market ready products, coupled with our strategic partnership approach, positions us as the preferred CDMO for brands seeking to achieve sustainable growth, market leadership, and unparalleled products spanning skin care, sun care, and color cosmetic market segments to consumers worldwide. In closing, we owe our continued success and our expectation of yet another record breaking year to the dedication of our team and the ongoing support of our brand partners and shareholders. We thank them and look forward to updating you on all of our progress in the next call. Carmen, you may close the call.