Executive Summary / Key Takeaways

• Transformative Growth & Strategic Focus: Solésence (SLSN) has successfully rebranded and uplisted to Nasdaq, shifting its core focus from advanced materials to a high-growth contract development and manufacturing organization (CDMO) for the $570 billion global beauty market, driven by its proprietary skin health technologies.
• Strong Revenue Momentum with Margin Recovery: The company delivered record Q2 2025 revenue of $20.359 million, a 56% year-over-year increase, and expects record full-year revenue. While Q1 2025 gross margins were impacted by one-time operational challenges, Q2 saw a rebound to 28.87%, with management projecting full-year gross margins "certainly above 30%."
• Differentiated Technology as a Core Moat: Solésence's Active Stress Defense Technology suite, including Kleair and new plant-based antioxidant and skin healing patents, provides a significant competitive advantage, enabling brand partners to offer unique, high-performance, clean, and inclusive beauty products with global IP protection.
• Operational Execution and Liquidity Management: The company is actively addressing past operational inefficiencies, implementing new processes to ensure smoother product launches and margin expansion. Increased working capital needs from rapid growth are being managed through expanded related-party credit facilities and a focus on inventory optimization.
• New Leadership and Market Visibility: Recent leadership appointments, including Kevin Cureton as CEO and Laura Riffner as CFO, coupled with the Nasdaq uplisting and Russell Index inclusion, are poised to enhance strategic execution, financial oversight, and investor awareness, supporting long-term value creation.

The Evolution of a Beauty Science Powerhouse

Solésence, Inc., formerly known as Nanophase Technologies Corporation, has undergone a profound transformation, repositioning itself from a diversified advanced materials company to a focused innovator in the burgeoning beauty and life sciences sectors. This strategic pivot, culminating in its 2025 rebranding and Nasdaq uplisting, underscores a commitment to "Deliver Joy" through scientifically-driven skin health solutions. The company now operates as a high-growth contract development and manufacturing organization (CDMO), leveraging its unique technological platform to serve a global beauty market valued at over $570 billion.

At the heart of Solésence's competitive advantage lies its proprietary Active Stress Defense Technology. This suite, which includes Original Active Stress Defense, Kleair, and Bloom technologies, utilizes unique mineral-based formulations to significantly improve the performance and aesthetics of skin health products. These innovations enable the effective coating and dispersion of particles on both nano and non-nano scales, a critical capability for sunscreens and other protective beauty solutions. The tangible benefits for brand partners are clear: superior product efficacy, enhanced aesthetic qualities, and the ability to meet the escalating consumer demand for clean and inclusive beauty. This technological edge allows Solésence's partners to secure preferred positioning in retail environments and become leading choices for consumers.

Recent advancements further solidify this technological moat. In Q1 2025, Solésence secured three new patents, including an allowance for its Kleair™ technology in Japan, a plant-based antioxidant technology in South Korea, and a skin healing technology leveraging allantoin in Mexico. These patents establish global intellectual property protection across three distinct technology platforms. For investors, this robust IP portfolio translates into sustainable competitive advantages, enabling higher average selling prices, potentially lower manufacturing costs through optimized processes, and stronger market positioning in a crowded industry. The company's vertically integrated model, from engineered materials to finished product development and manufacturing, allows brand partners to bring new products to market "much faster than their competitors," a critical differentiator in the fast-paced beauty industry.

Strategic Focus and Competitive Dynamics

Solésence's strategic evolution has seen its consumer products segment become the primary growth engine. This segment, which includes prestige skin care, sun care, and color cosmetics, is growing rapidly, with Q2 2025 revenue reaching $17.544 million, a 56.64% increase from $11.200 million in Q2 2024. Year-to-date Q2 2025, consumer products revenue grew 57.61% to $30.426 million. The company's ability to attract and retain high-growth, private equity-backed beauty brands like Colorescience, Tatcha, and Credo, along with a long-term exclusive relationship with BASF (BASFY) for Active Pharmaceutical Ingredients (APIs), underscores its value proposition.

In the broader competitive landscape, Solésence operates alongside giants such as L'Oréal (LRLCY), Estée Lauder (EL), and Procter & Gamble (PG). While these multinational corporations command vast market shares and benefit from immense scale, Solésence carves out its niche through specialized technological innovation and agility. Comparing profitability, Solésence's latest TTM Gross Profit Margin of 28.14% and Net Profit Margin of 8.13% are considerably lower than L'Oréal's (74% Gross, 15% Net) and Procter & Gamble's (51% Gross, 19% Net). Estée Lauder, despite a high 74% TTM Gross Margin, recently reported a negative Net Profit Margin of -8%, indicating its own challenges. Solésence's strength lies not in competing on sheer scale or breadth, but in its ability to deliver unique, high-performance solutions that larger, more generalized players may struggle to replicate with the same speed and efficacy in the clean beauty space. Its integrated CDMO model and proprietary technology allow it to lead in niche innovation speed, offering a distinct value proposition that fosters high brand retention rates and recurring revenue.

The Personal Care Ingredients segment, primarily driven by API sales to BASF, also demonstrated robust growth, with Q2 2025 revenue increasing 53.98% to $2.687 million. In contrast, the Advanced Materials category, encompassing legacy markets like medical diagnostics and industrial coatings, is no longer a strategic focus and is expected to constitute a diminishing portion of total revenue over time, despite a modest 26.73% increase to $128,000 in Q2 2025.

Financial Performance and Operational Resilience

Solésence's recent financial performance highlights both impressive growth and the challenges inherent in scaling rapidly. For the three months ended June 30, 2025, total revenue surged to $20.359 million, a significant increase from $13.046 million in the prior-year quarter. Product revenue, the primary driver, grew to $20.261 million from $12.923 million. Gross profit for Q2 2025 was $5.877 million, up from $3.740 million, resulting in a gross margin of 28.87%. This marks a notable recovery from Q1 2025, which saw a gross margin of 23% and breakeven net income, primarily due to one-time production start-up costs related to a new, large multi-SKU product launch.

Management acknowledged that these Q1 operational issues, largely stemming from packaging challenges and requiring extensive manual rework, significantly impacted profitability. However, they confirmed that these issues were "completely resolved during the month of April," leading to a "minimal impact in the second quarter." This swift resolution underscores the company's commitment to operational resilience and customer relationships, preserving a critical new brand partnership.

Year-to-date for the six months ended June 30, 2025, total revenue reached $34.984 million, a 52.68% increase from $22.914 million in the same period of 2024. Gross profit for the six months was $9.259 million, up from $7.320 million, yielding a gross margin of 26.46%. Net income for the six months was $2.747 million, compared to $1.747 million in the prior year. Selling, general and administrative expenses increased to $5.120 million for the six months, driven by higher legal costs, NASDAQ uplisting expenses, increased employee-related costs, and a rise in the allowance for credit loss. Research and development expenses also increased to $1.973 million, primarily due to higher salaries. Other income included a $1.234 million payment from the Employee Retention Credit (ERC) program, along with $0.194 million in related interest income.

Liquidity, Capital, and Outlook

Rapid growth has naturally placed demands on Solésence's working capital. For the six months ended June 30, 2025, net cash used in operating activities was $7.875 million, primarily due to increased accounts receivable and inventory. The company's reliance on related-party lines of credit, including the AR Revolver Facility and Inventory Revolver Facility with Beachcorp, LLC, and a Term Maturity Note with Strandler, LLC, has increased. Notably, in May 2025, the limits on these facilities were expanded to $12.0 million and $10.0 million, respectively, with maturities extended to April 30, 2027, providing crucial liquidity to support its growth initiatives. Capital expenditures for 2025 are projected between $1.0 million and $3.0 million, funded by operating profit and existing credit facilities.

Management's outlook is optimistic, anticipating "yet another record breaking year" for revenue, with record revenues specifically expected for Q2 2025. The company projects full-year gross margins to be "certainly above 30%," with Q1's 23% margin being an "anomalous quarter" and the "worst margin" for the year. This margin expansion is expected to be driven by increasing product volumes, leading to more efficient absorption of fixed manufacturing costs, and a focused effort on reducing controllable variable product manufacturing costs. Shipped and open orders currently exceed $45 million, extending into Q3 2025, reflecting strong demand and shorter order horizons from agile brand partners.

Key risks include the company's dependence on a limited number of key customers, notably the exclusive supply agreement with BASF which contains contingencies that could lead to the sale of production equipment and a significant loss of revenue if performance requirements are not met. The company also faces potential impacts from inflation on costs, though it is actively working to pass through price increases. The $0.572 million liability related to a potential IRS audit of ERC payments remains a contingent risk until 2029. However, management's proactive approach to operational improvements and their confidence in passing through tariff-related costs, particularly for packaging components, suggest a robust strategy to mitigate these challenges.

Conclusion

Solésence is in the midst of a compelling transformation, successfully pivoting to become a technologically differentiated CDMO in the high-growth beauty science market. Its proprietary Active Stress Defense Technology suite provides a formidable competitive moat, enabling it to partner with leading brands and deliver innovative, clean beauty solutions. While the company experienced a temporary setback in Q1 2025 due to operational inefficiencies, the swift resolution and subsequent rebound in Q2 margins demonstrate management's commitment to execution and continuous improvement.

The strategic uplisting to Nasdaq, inclusion in the Russell Indexes, and recent leadership appointments are poised to enhance Solésence's visibility, access to capital, and operational excellence. With a clear focus on expanding gross margins through increased volume and cost control, coupled with a strong order book and a pipeline of new product launches, Solésence appears well-positioned for sustained growth. Investors should monitor the continued expansion of gross margins and the successful integration of new leadership as key indicators of the company's ability to capitalize on its technological leadership and achieve its ambitious financial targets in the dynamic beauty industry.