SOLESENCE, INC.

Previous wording

Leveraging a platform of integrated patented and proprietary technologies, we create products with unique performance to enhance end-consumers’ health and well-being. We offer soup-to-nuts production, from engineered materials, formulation development, and finished product development, to commercial manufacturing and packaging capabilities. Our expertise in materials engineering allows us to effectively coat and disperse materials on a nano and “non-nano” scale for use in a variety of markets in skin health, including for use in sunscreens as APIs and as fully developed prestige skin care products, marketed and sold through our Solésence beauty science subsidiary. We believe that we have developed technological advantages with respect to our APIs sold for use as ingredients, while our Solésence beauty science technologies lead to enhanced efficacy and aesthetics in our finished products, which have received broad acceptance in the marketplace. Due to the enhanced efficacy and aesthetic qualities offered by our proprietary technology platform, Solésence finished products satisfy growing consumer demands around “clean” and inclusive beauty. Solésence beauty science also benefits from the Company’s vertical integration with each product’s key active ingredient that delivers its point-of-difference. This vertical integration helps us to improve efficiency and avoid potential major supply chain challenges while also addressing ongoing sustainability efforts.

Current wording

Leveraging a platform of integrated patented and proprietary technologies, we create products with unique performance to enhance end-consumers’ health and well-being. We offer comprehensive production, from engineered materials, formulation development, and finished product development, to commercial manufacturing and packaging capabilities. Our expertise in materials engineering allows us to effectively coat and disperse materials on a nano and “non-nano” scale for use in a variety of markets in skin health, including for use in sunscreens as APIs. We believe our innovative approach to creating these materials gives us technological and market advantages. We also leverage expertise to develop skin care, sun care, and color cosmetics products (“Solésence consumer products”) that offer unique skin health benefits. We offer these for sale to brands who ultimately sell products to consumers in both prestige and mass markets within the beauty industry. Our Solésence consumer products have received broad acceptance in the marketplace. Due to the enhanced efficacy and aesthetic qualities offered by our proprietary technology platform, Solésence consumer products satisfy growing consumer demands for “clean” and inclusive beauty across a range of product formats and categories. The vertically integrated nature of our Solésence consumer products helps us to develop ingredient technologies and formulas in tandem. We have leveraged this to develop specialized formulation know-how with our unique ingredients, improve efficiency, and avoid potential major supply chain challenges, while also addressing ongoing sustainability efforts.

Previous wording

Nanophase, primarily through Solésence, now partners with brands to develop, manufacture, and market products and ingredients that enhance lives through healthy skin. We are focusing our combined business-, ingredient-, and product-development capabilities on products with unique performance in this area. While we will continue to produce and sell materials to our other advanced materials customers, it is not our strategic focus. We may develop additional technologies or find unique applications outside of our core markets in the future, but to maximize the use of our resources today, we plan on expanding efforts in areas where we have proven we can deliver innovation and growth.

Current wording

Solésence, now partners with brands to develop, manufacture, and market products and ingredients that enhance lives through healthy skin.

Previous wording

Total revenue increased to $16,866 for the three months ended September 30, 2024, compared to $7,958 for the same period in 2023. Total revenue increased to $39,780 for the nine months ended September 30, 2024, compared to $29,286 for the same period in 2023. Much of our revenue was from our largest customers for the three- and nine-month periods ended September 2024, and 2023, respectively. This reflects sales to our largest customers for our finished skin health products marketed through our Solésence subsidiary and sales of APIs to our largest customer in skin care and sunscreen applications. This is the revenue breakdown, as a percentage of total revenue, from the customers referenced above during the three- and nine- months periods ended September 2024, and 2023 respectively:

Current wording

Total revenue increased to $14,625 for the three months ended March 31, 2025, compared to $9,868 for the same period in 2024. Much of our revenue was from our three largest customers for the three-month periods ended March 2025, and 2024, respectively. This reflects sales to our largest customers for our consumer products and sales of APIs to our largest customer in personal care ingredients. This is the revenue breakdown, as a percentage of total revenue, from the customers referenced above during the three-months periods ended March 31, 2025, and 2024 respectively:

Previous wording

Product revenue, the primary component of our total revenue, increased to $16,785 for the three months ended September 30, 2024, compared to $7,746 during the same period of 2023, and increased to $39,479 for the nine months ended September 30, 2024, compared to $28,925 during the same period of 2023. The three-month and nine-month increase in product revenue were due to higher sales in our Solésence® and Personal Care Ingredients product categories offset by lower sales in our Advanced Materials product category.

Current wording

Product revenue, the primary component of our total revenue, increased to $14,575 for the three months ended March 31, 2025, compared to $9,772 during the same period of 2024. The three-month product revenue was due to higher sales in our consumer products category and flat sales in the personal care ingredients product categories and advanced materials product category.

Previous wording

Other revenue decreased to $81 and $301 for the three- and nine-month periods ended September 30, 2024, respectively, compared to $212 and $361 for the same periods in 2023, respectively. Other revenue is typically comprised primarily of developmental or licensing fees.

Current wording

Other revenue decreased to $50 the three-month period ended March 31, 2025, compared to $96 for the same period in 2024, respectively. Other revenues are typically comprised primarily of developmental or licensing fees.

Previous wording

Cost of revenue generally includes costs associated with commercial production and customer development arrangements. Cost of revenue increased to $10,764 for the three months ended September 30, 2024, compared to $6,428 for the same period in 2023, and increased to $26,358 for the nine months ended September 30, 2024, compared to $21,932 for the same period in 2023. The increase for the three months in the cost of revenue was primarily driven by increased volume, manufacturing operating inefficiencies, and facilities improvements. The increase for the nine months in cost of revenue was primarily driven by increased volume, price inflation on materials, manufacturing operating inefficiencies and facilities improvements. While we typically pass-through costs to our customers, we sometimes cannot pass through 100% of pricing increases on raw materials, and even with pass throughs, our gross margin percentage is negatively impacted by higher material costs.

Current wording

Cost of revenue generally includes costs associated with commercial production and customer development arrangements. Cost of revenue increased to $11,243 for the three months ended March 31, 2025, compared to $6,288 for the same period in 2024. The increase for the three months in the cost of revenue was primarily driven by increased volume, manufacturing operating inefficiencies, and facilities improvements. While we typically pass-through costs to our customers, we sometimes cannot pass through 100% of pricing increases on raw materials, and even with pass throughs, our gross margin percentage is negatively impacted by higher material costs. The Company continues to monitor the potential impact of the new tariffs on our materials sourced internationally.

Previous wording

Capacity is a key area of focus to increase throughput first, followed quickly by increased cost efficiency once we can achieve greater scale. Our planning has had us adding to our current fixed manufacturing cost structure through 2024 to accommodate additional growth, and to build a better base for further growth beyond that level. The extent to which margins grow, as a percentage of total revenue, will be dependent upon revenue mix, revenue volume, our ability to cut costs and pass commodity market-driven raw materials increases on to customers, and the speed and efficiency with which we are able to scale up production for our Solésence products. We expect that, as product revenue volume increases, our fixed manufacturing costs will be more efficiently absorbed, which should lead to increased margins as we grow. Our most critical operational issue today is reducing controllable variable product manufacturing costs.

Current wording

Capacity is a key area of focus to increase throughput first, followed quickly by increased cost efficiency once we can achieve greater scale. Our planning has had us adding to our current fixed manufacturing cost structure through 2025 to accommodate additional growth, and to build a better base for further growth beyond that level. The extent to which margins grow, as a percentage of total revenue, will be dependent upon revenue mix, revenue volume, our ability to cut costs and pass commodity market-driven raw materials increases on to customers, and the speed and efficiency with which we are able to scale up production for our consumer products. We expect that, as product revenue volume increases, our fixed manufacturing costs will be more efficiently absorbed, which should lead to increased margins as we grow. Our most critical operational issue today is reducing controllable variable product manufacturing costs.

Previous wording

Research and development expense decreased to $970 for the three months ended September 30, 2024, compared to $1,057 for the same period in 2023. For the nine months ended September 30, 2024 research and development expense decreased to $2,746 compared to $3,052 for the same period in 2023. The decrease is due in large part to decreased legal costs related to research and development, and salaries in 2024 compared to 2023.

Current wording

Research and development expense increased to $1,018 for the three months ended March 31, 2025, compared to $910 for the same period in 2024. The increase is due in large part to increased legal costs related to research and development, and salaries in 2025 compared to 2024.

Previous wording

Selling, general and administrative expense increased to $1,934 for the three months ended September 30, 2024, compared to $1,695 for the same period in 2023. The increase is due to an increase in the allowance for credit loss and increased employee-related costs in 2024 to when compared to 2023. For the nine months ended September 30, 2024, selling, general and administrative expense decreased to $5,321, compared to $5,951 for the same period in 2023. The decrease is due to lower legal costs in 2024 when compared to 2023.

Current wording

Selling, general and administrative expense increased to $2,108 for the three months ended March 31, 2025, compared to $1,559 for the same period in 2024. The increase is due to an increase in the allowance for credit loss, increased legal costs and increased employee-related costs in 2025 to when compared to 2024.

Previous wording

Cash, cash proceeds and use of cash for the nine months ended September 30, 2024, 2023, and year ended December 31, 2023 were:

Current wording

Cash, cash proceeds and use of cash for the three months ended March 31, 2025, 2024, and year ended December 31, 2024 were:

Previous wording

The net cash used in operating activities during the nine months ended September 30, 2024 was primarily due to increased accounts receivable and inventory offset by net income and increased customer deposits. Net cash used in investing activities was attributable to expenditures on capital equipment for all periods presented above. The net cash provided by financing activities was attributable to the issuance of additional common stock.

Current wording

The net cash used in operating activities during the three months ended March 31, 2025 was primarily due to increased accounts receivable, net and inventory, net offset by net income and increased deferred revenue. Net cash used in investing activities was attributable to expenditures on capital equipment for all periods presented above. The net cash provided by financing activities was attributable to the increased use of debt.

Previous wording

Our actual future capital requirements in 2024 and beyond will depend on many factors, including customer acceptance of our current and potential finished Solésence products, APIs sold as ingredients in to the skin health markets, medical diagnostics ingredients, and other engineered materials, applications, and products, continued progress in research and development activities and product testing programs, the magnitude of these activities and programs, and the costs necessary to increase and expand our manufacturing capabilities and to market and sell these products and ingredients. Other important issues that will drive future capital requirements will be the development of new markets and new customers as well as the potential for significant unplanned growth with existing customers. Depending on the success of certain projects, and conditions within the markets supplying labor and materials for capital equipment, we expect that capital spending relating to currently known capital needs for 2024 will be between $1 million and $2 million, to be funded by profit from operations, our existing loans and lines of credit, and possible new debt financing. If those projects are delayed or ultimately prove unsuccessful, or if we fail to be able to support the additional cost of funding them in the near term, we expect our capital expenditures may fall below the lower end of the range. Similarly, substantial success in business development projects may cause the actual 2024 capital investment to exceed the top of this range.

Current wording

Our actual future capital requirements in 2025 and beyond will depend on many factors, including customer acceptance of our current and potential future consumer products, APIs sold as ingredients in to the skin health markets, medical diagnostics ingredients, and other engineered materials, applications, and products, continued progress in research and development activities and product testing programs, the magnitude of these activities and programs, and the costs necessary to increase and expand our manufacturing capabilities and to market and sell these products and ingredients. Other important issues that will drive future capital requirements will be the development of new markets and new customers as well as the potential for significant unplanned growth with existing customers. Depending on the success of certain projects, and conditions within the markets supplying labor and materials for capital equipment, we expect that capital spending relating to currently known capital needs for 2025 will be between $2 million and $4 million, to be funded by profit from operations, our existing loans and lines of credit, and possible new debt financing. If those projects are delayed or ultimately prove unsuccessful, or if we fail to be able to support the additional cost of funding them in the near term, we expect our capital expenditures may fall below the lower end of the range. Similarly, substantial success in business development projects may cause the actual 2025 capital investment to exceed the top of this range.

Previous wording

We had federal net operating loss carryforwards for tax purposes of approximately $50 million, and tax effected section 179 carryforwards of approximately $0.2 million at December 31, 2023. Because the Company may experience “ownership changes” within the meaning of the U.S. Internal Revenue Code (“IRC”) in connection with any future equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the IRC. If not utilized, $44 million of this loss carryforward will expire between 2024 and 2037. Given changes to the IRC, net operating loss carryforwards generated after January 1, 2018 do not expire, therefore, $5.6 million in net operating losses generated since January 1, 2018 do not expire. We had Illinois net loss deduction carryforwards for tax purposes of approximately $21.3 million on December 31, 2023. Due to the provisions of Illinois Public Act 102-0669 signed November 16, 2021, Illinois net loss deductions expire between 2029 and 2042.

Current wording

We have federal net operating loss carryforwards for tax purposes of approximately $42 million on December 31, 2024. Because the Company may experience “ownership changes” within the meaning of the U.S. Internal Revenue Code (“IRC”) in connection with any future equity offerings, future utilization of this carryforward may be subject to certain limitations as defined by the IRC. If not utilized, $36 million of this loss carryforward will expire between 2025 and 2037. Given changes to the IRC, net operating loss carryforwards generated after January 1, 2018 do not expire, therefore, $6.8 million in net operating losses generated since January 1, 2018 do not expire. We have Illinois net loss deduction carryforwards for tax purposes of approximately $18.2 million on December 31, 2024. Due to the provisions of Illinois Public Act 102-0669 signed November 16, 2021, Illinois net loss deductions expire between 2030 and 2043.