SLSN - NASDAQ

Good day. Thank you for standing by. Welcome to the Solésence fourth quarter and full year 2025 conference call. 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 provisions 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 discussion of a customer to cancel a purchase order or supply agreements, demand for acceptance of the company's personal care ingredients, advanced materials and formulator products, changes in development and distribution relationships, the impact of the competitive products and technology, possible disruption in commercial activities occasioned by public health issues, terrorist activities and armed conflicts, 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'll now hand the conference call over to Kevin Cureton, President and Chief Executive Officer. Please go ahead, sir.

Thank you, operator, and thank you to our investors, brand partners and teammates who are joining us today. Today, we will provide more guidance on our 2026 plan and the strategy we initiated at the end of 2025, which aims to take our company forward to enhance consumer health and well-being while delivering outstanding results to our investors. This initiative is called Transform and Transcend. Before we delve into our plans, we will review our 2025 results. To walk you through how we wrapped up 2025, I'll turn the call over to our CFO, Laura Riffner. Laura.

Thank you, Kevin. I will begin with a review of our fourth quarter 2025 results before moving to full year performance and our 2026 outlook. For the fourth quarter, revenue was $12.5 million, roughly even compared to the previous year. Fourth quarter 2025 gross profit was $3.4 million compared to $2.8 million for the same period in 2024. Gross margin was 27% in the fourth quarter of 2025 compared to 22% in the same period in 2024. Our results were affected by transition costs and operational inefficiencies in manufacturing resulting from our facility consolidation. Operating expenses in the fourth quarter of 2025 were $3.2 million compared to $2.8 million in the same period in 2024.

This figure included relocation charges as we transitioned from three facilities to two. Solésence reported net income for the quarter of $163,000 compared to a net loss of $558,000 the previous year. Turning to the full year of 2025, revenue reached a record $62.1 million, up 18.6% from $51.9 million in 2024. This was primarily driven by a large scale launch in the first half of 2025, as well as 20 new brand partners who launched products in 2025. While revenue growth was substantial, full year gross profit was $16.1 million compared to $16.2 million in 2024. As Kevin noted in our third quarter call last November, our margins were compressed by three key areas.

The first is labor costs. Elevated labor costs this period were primarily driven by extended process changeovers and related downtime as we scaled our production volume. The second is product design, which relates to startup and quality costs associated with a complex launch in the first half of 2025. Third, inventory control, which represented the most substantial headwind to margins this period. Driven by our efforts to grow while scaling production, we experienced yield volatility and associated losses, which impacted our bottom line. We are now prioritizing cycle counting and pre-production staging to improve production flow as we continue to expand. With the above results, we delivered adjusted EBITDA of $4.2 million, less than 7% of revenue. As we look ahead, our 2026 guidance focuses on operational health.

As a result, we are establishing a 30% gross margin floor as our target for the year. We expect EBITDA improvement in 2026, returning to double digits as we realize six-figure annual savings from our facility consolidation and the elimination of 2025's operational inefficiencies. A critical goal in 2026 is to increase our free cash flow by reducing safety stock and improving procurement operations. We began 2026 with momentum from 2025, driven by organizational changes and the launch of the Transform and Transcend initiative. Still, our first quarter results will be impacted by investments in training and restructuring associated with Transform and Transcend, as well as by changes in customer order patterns, largely due to retail dynamics and weak sell-through from one of our large mass-market customers.

Our current shift in open orders stands at just under $33 million as compared to a year ago when they were at $38 million. While we anticipate a period of revenue normalization, we plan to improve EBITDA relative to 2025 and remain confident in our ability to achieve our full year guidance. I'll turn it back over to Kevin to provide more details about our Transform and Transcend initiative. Kevin?

Thank you, Laura. As we look back on 2025, it is important to reflect on our company's journey over the last 12 months, indeed the past two years. During that period, our company nearly doubled its revenue. As I noted in our press release, this affirmed both the value we bring to the industry and our ability to establish ourselves as a leading innovator and manufacturer of SPF-infused beauty products. We increased our patent portfolio by 20%, which now numbers over 120, and through this expanded position, created a valuable picket fence that protects our market position and provides one-of-a-kind leverage for our brand partners as they grow.

While we achieved these important business milestones, we invested in building our manufacturing infrastructure, which both modernized our production capabilities and expanded capacity, which will enable us to generate over $200 million in revenue without further major investment. In October 2025, we showcased a new product, Day Mode Hero Concealer. Day Mode is a hybrid product that combines skincare and color cosmetics with skin longevity claims, including UV protection, and leverages two new technology platforms that we will bring to market in 2026. This prototype product was recently named a finalist across four categories of the Cosmetics & Toiletries Allē Awards. These categories are wellness, anti-aging and skincare, color cosmetics, and UV protection.

While the winners will not be announced until later in 2026, the cross-category recognition for this multifunctional concealer demonstrates the broad and enduring appeal of our innovations and affirms that our technology and product stories resonate with brands and industry experts alike. Through these developments, we have built a company on the cusp of changing the health and well-being of millions of people while dynamically growing our enterprise value. There is still more work to be done. In our Q3 call, I spoke about three specific areas where our operating model needed changes that were revealed by our rapid growth. These areas are product design, labor efficiency, and inventory control. While we achieved record-breaking revenue this year, our business processes were tested by the sheer volume and complexity of our success. As Laura highlighted, these challenges led to lower than planned income performance.

As we faced these challenges, we also saw that our opportunities to simultaneously increase profitability and growth were being limited by our execution. As a result, we launched the initiative that today we are formally introducing to our investors, Transform and Transcend. It is the framework we will use to ensure our financial performance aligns with our technological excellence in order to secure a path forward for sustainable profitability. This is a roadmap designed to fundamentally correct the operating challenges we have identified while amplifying the innovation platform we created, ultimately resulting in what we believe will be significantly increased enterprise value. The Transform and Transcend initiative is built on four core pillars. The first pillar is operational excellence through the implementation of lean management principles. We began work on this first and foundational pillar in November 2025.

Through lean management principles, we are equipping our company with the processes and discipline to meet or exceed our brand partners' requirements while aggressively eliminating the inefficiencies we have identified across our business. A key tenet of this is a modernized sales, inventory, and operations planning process or SIOP. These improvements will address the labor inefficiencies, inventory control issues, and yield losses we saw in 2025. We plan to increase our growth profit margin by at least 5% by the end of this year compared to 2025. The second pillar is technology-driven expansion. Starting in late Q2 to early Q3 2026, we plan to expand our addressable market by introducing new product categories. These include bringing the technologies behind the prototype Day Mode Hero Concealer product to market.

We are leveraging our 120 patents with new formulation innovations to move into adjacent prestige beauty segments like scalp care, where our technologies can provide an immediate competitive advantage. The third pillar is our shift toward a product development and supply model that enables us and our brand partners to capture more value and a greater share of wallet. This includes an emphasis on turnkey supply and collaborative marketing to drive sell-through and leverage increased consumer recognition of Solésence branded technologies. We kicked off our first major co-marketing activation two weeks ago with brand partners Colorescience and Bloomeffects. The fourth and final pillar is collaborative globalization. Beginning in the first quarter of 2027, we plan to support select brand partners as they expand into international markets.

Given the regulatory complexity of the global SPF market, this pillar represents an opportunity to modify our service model in those regions, increasing margins by 10% or more relative to our domestic benchmarks. The change in leadership, starting with my appointment as President and Chief Executive Officer, was made to achieve profitable growth for our company, including the development and implementation of the Transform and Transcend initiative. As you know, in support of our profitable growth objective, we also added a seasoned CFO, Laura Riffner, to our team in September 2025. This represents the first time that we added a C-suite level finance and accounting professional to our team who has demonstrated success in our industry. We also recently added Yoolie Park as Vice President of Brand Partnerships. Yoolie brings over 20 years of experience in component supply and turnkey manufacturing.

Her mandate is to institutionalize our new commercial strategy and help us further deepen and expand our relationships with existing and new brand partners. Looking ahead into 2026, beauty sectors remain resilient, and consumers continue to view beauty as an affordable luxury, with SPF-infused skincare at the intersection of essential and discretionary spending. Consumers are more critically examining how protecting their skin, their largest organ, impacts their overall well-being. As a result, we believe SPF-infused beauty will be a central aspect of the more than $500 billion global beauty and personal care market. We remain excited about how closely our products and technologies are aligned to consumer demand and the value our strategic brand partners see in our consumer products. Before we go to Q&A, please keep these thoughts in mind.

Following two years of growth that significantly outpaced the industry average, 2026 will be a year focused on execution, which is at the heart of what the Transform and Transcend program will yield. It is this focus, accompanied by the associated restructuring and investment, that is a necessary step to transform our operational execution in order to transcend beyond the traditional CDMO model. Ultimately, this will turn Solésence into a strategic innovation partner that drives superior financial performance for both our brand partners and our company. Operator, we are now ready for the Q&A.

Thank you ladies and gentlemen our first question comes from Tony Rubin, who's an investor.

Hi. Good morning. You know, I heard a lot of interesting words in the call, but I was hoping you could drill down to brass tacks. In 2024, you had EPS of $0.07 per share. Laura, you talked about increasing EBIT, but didn't really provide a EPS goal. My question on that aspect is, will EPS in 2026 be at or above the 2024 levels? Kind of a related question is, Kevin, previously, you had suggested that gross margins would return to at least the mid-thirties level. On this call, Laura mentioned a floor of 30%. I hope you would both agree that maximizing shareholder value is the purpose of a company.

With those goals in mind, could you address those two specific items?

Thank you, Tony, and thanks for joining. What we'll do is have Laura address your first question and also can provide some color on the gross margin area, and then, I may offer additional color to that. Laura?

Good morning, Tony. Thank you for joining us today. Regarding the EPS, we aren't prepared to provide guidance on that this morning. As I did mention, we are expecting and targeting an increase in EBITDA to return to double-digit numbers in 2026. Regarding the 30% gross margin floor, on that, Tony, our guidance is intentionally conservative. While we have that as our guidepost, our intention is to leverage the Transform and Transcend initiative to improve that number.

I think Laura's answered both those questions very well, so there's nothing additional I can offer at this point, other than again, reaffirming our guidance is on an annual basis, and that we are taking a conservative approach to that guidance, but expect to obviously focus on improving enterprise value, which ultimately will increase the value to our shareholders.

Thank you. One moment for our next question. Our next question comes from James Liberman with American Trust Investment Services. Your line is open.

Thank you very much for the presentation. I wanna actually congratulate you for all the transitions that are going on. Most people don't fully appreciate what you've accomplished over the last couple of years. In terms of consolidating manufacturing into your new facility, I'm sure that's a major step, and you had to be extremely careful about doing that transition so that you don't have real, you know, supply issues and manufacturing issues that could have been more difficult to meet your customers' goals.

Can you address some of the questions of if you have an aspirational say that you could grow the company to be $200 million, is there sort of like a some sort of roadmap to get there in terms of the kind of new products you're coming out with, the relationships with your customers and how you see the market sort of, say, like a two to three year period? Or, and also, can you give us an aspirational profit margin? Say, you're hitting on all cylinders, could you reach as high as, like, a 40%? Can you address those areas?

Good morning, Jim, and thank you for your thoughts and appreciate your involvement in our company for as long as you have been. Thank you. There's a lot you offered there. We'll try and start by addressing, yes, the consolidation was successful. In fact, through that consolidation, we did not have any impact or negative impact on OTIF. We actually continued to have a high performance on time and in full while we conducted that consolidation. We're excited about that and excited about what contributions that consolidation will have in terms of improving our overall financial performance. When looking beyond the current state and being aspirational in a careful manner this morning, that is really at the heart of the Transform and Transcend plan.

What we talked about in our prepared remarks was to really address some of our operational execution challenges so that we could amplify our innovation platform. We're really in a unique position based upon the type of IP that we've created, the type of protection that it builds around our brand partners and for us, and uniquely addresses what's really the most important or really preferred area for consumers, which is, mineral-based, sunscreen is, preferred by all consumers, or at least that 70% of women as one of our resources say. We're building a platform that really is targeting the areas that are growing the fastest. We're working with brands that are the fastest-growing. We work with the middle-market brands primarily, and those are the brands that are the fastest-growing in industry.

We're addressing a critical area that also is driving the change in the marketplace. All of those things point to us resuming the type of growth that we've had in the past, which is growing at a multiple of the industry's growth rate. We anticipate that to happen. We also have talked in the past, Jim, about getting full value of the technology that we provide through the Transform and Transcend initiative. We also mentioned some of the changes that we're making relative to increasing our share of the value chain.

Quite honestly, along with that, the share of the value chain that our brand partners have as well. Those initiatives or that specific initiative, along with the rest of what we've described in Transform and Transcend, will help to significantly increase our gross profit margin performance and therefore in the end, our EBITDA, so that we are targeting levels that you mentioned and maybe even greater. All of that takes time, as you know, and as you have appreciated over the many years you've been part of our investor community. We're excited about what's going to start, but we know that it will take some time for us to get to all of those objectives. We're really excited about where we are and where it's headed.

Thank you. Once again, ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your telephone. One moment for our next question. Our next question comes from Stefano Bolis who is an Investor. Your line is open.

Hello, good morning, and thanks for taking my questions. I have two. The first is, are you still planning to have a dedicated investor call, as you mentioned last time? The second is on the BASF volumes. In the last three years, they've been decreasing. One would have expected after the lawsuit story that they needed more, not because they needed less. How do you see this trend moving forward on BASF?

Thank you, Stefano. I appreciate your call in today. Couple of questions there. Let's take the last one first and just guide that. As with many of our brand partners, even those that we are well known, like BASF or publicly known may be a better way to state it, like BASF, we are very careful not to provide specific guidance on their performance. We are permitted to acknowledge those brands, but not really provide specific guidance on their performance. I'll not be able to provide more than that. We certainly continue to partner with them closely and have a good working relationship with BASF.

Thank you. One moment for our next question. Our next question comes from Wayne Ruin, who is an investor. Your line is open.

Yeah, I'd like to thank you for your integrity and not trying to gloss over things. That's much appreciated. Nobody likes BS. Why have we struggled so much on production? Because it seems like we've been struggling with that for quite a while now. The other thing is, did we lose a brand partner, a place where we sold a lot of product, or did I mishear that? I'm a little old and sometimes my hearing ain't so good. The other thing I'd like you to address is why it took so long to get this call this quarter. Do you anticipate an improvement in sales this year? Thank you for your hard work, and tell Jeff hello too, and thank you.

Thank you, Wayne, for continuing to be a committed investor in our company. We certainly are committed to providing as much transparency as we can, and I hope as you and Stefano, I did not address your first question, which was related to the investor call. It is our intent to provide improved communications to the investors. Now that we've communicated a little bit more relative to the Transform and Transcend program, we will be prepared to continue that process going forward. What we had talked about, again, I'll first finish up by addressing Stefano's question regarding the investor call. What we really talked about was an investor presentation. We do believe that is something that is important for us to present, and we will have further information and guidance that we'll provide in the months to come.

Thank you again for that question, and we'll move on to some of Wayne's questions now. Wayne, you had several questions, and thank you for our team helping me to track all of them. The first one is related to production, and I believe as we mentioned in the script, one of our challenges has been that we've simultaneously grown at a multiple of the industry's growth rate and installed new capability. What our emphasis has been over that time has been to make sure that we met the quality standards that are necessary for a cGMP production, which has its own unique challenges. Also to make sure that we're meeting the on time and in full performance that's necessary to keep products on the shelves for our brand partners.

That simultaneous challenge certainly has been one that hasn't translated into the gross profit margins that we would like to see, but we've now reached a place through the plans that we have in front of us that we are confident in our ability to perform well in the future. I think the next question that you had, Wayne, was related to a brand partner. We did not mention in any of our guidance that there was any loss of any brand partner, just to be clear. What we guided was that there were some challenges that one of our brand partners was having in sell-through in the mass market.

The next question, Wayne, I believe, was why it took so long to schedule the call. We prefer to schedule the call after our year-end audit is completed, and the scheduling of the audit gets done quite literally almost a year in advance. By the time the audit was scheduled with our auditing firm and finalized, it's simply just how long it took to get it scheduled.

Yes, sir. The last question was related to the sales target. Again, thanks, Wayne, for all the questions. The sales targets, as we've guided, is that this year will be a period of normalization. That is, on a full year basis, the guidance that we can provide at this point. We are excited about the future of our business. We continue to be excited about the addition of our new Vice President of Brand Partnerships, Yoolie Park, who brings over 20 years of experience in turnkey manufacturing.

That in and of itself has already helped us in terms of our ability to more effectively deepen the relationships that we have with some of our key brand partners and put new brand partners in front of us in a way that will materially improve and grow our company over the years to come.

Thank you. I'm not showing any further questions at this time. I'd like to turn the call back over to Kevin for any further remarks.

Thank you, Kevin. Before we sign off, I wanted to just give you a final thought on our future. Back in 2019, when our consumer products line was less than $2 million, we said the future of sun care is the future of beauty. Today, with over $50 million in revenue from our consumer products line and a global patent estate to support it, that vision has been validated. However, our 2025 results showed us that scale without operational excellence will not enable us to create a platform for our company to achieve our goal of dynamic growth in our enterprise value. That is why 2026 is our year of transformation.

Through Transform and Transcend, we are removing inefficiencies from our operations, modernizing our supply chain, and refining our partner base and ways of working with them to ensure mutual success at both the top and bottom lines. We are doing the hard work now to ensure that our proprietary technologies and consumer preferred products translate into the best-in-class financial returns our shareholders expect. We are confident by stabilizing our foundation this year, we are setting the stage for the next five years to be the most profitable in our company's history. Thank you for your continued support. Have a great day.