Quarterly Report for Quarter Ending September 30, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Solésence, Inc. ("Solésence", "Company", "we", "our", or "us") is a science- and technology-driven consumer health company which, along with its wholly owned subsidiary, Solésence, LLC (our "Solésence beauty science subsidiary"), is focused across beauty and health care markets. Through working with selected customers ("clients," "brand partners"), we offer skin health and beauty products infused with SPF protection and other key health claims as fully finished goods for sun care, skin care, color cosmetics, and scalp applications. While a few legacy products remain, these areas are no longer considered strategic, and all, along with medical diagnostics, fall into the advanced materials product category.

Results of Operations

Total revenue was $20,163 for the three months ended September 30, 2026, compared to $14,597 for the same period in 2025. Total revenue was $48,453 for the nine months ended September 30, 2026, compared to $49,581 for the same period in 2025. Much of our revenue was from our three largest customers for the three- and nine-month periods ended September 30, 2026 and 2025, respectively. This reflects sales to our largest customers for our consumer products and sales of Active Pharmaceutical Ingredients ("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- and nine-month periods ended September 30, 2026 and 2025, respectively:

Product revenue, the primary component of our total revenue, was $19,978 for the three months ended September 30, 2026, compared to $14,533 during the same period of 2025, and was $48,184 for the nine months ended September 30, 2026, compared to $49,369 during the same period of 2025. The quarterly increase was due to stronger demand from brand partners. Product revenue declined approximately 2.4% for the nine-month period.

Other revenue was $185 and $269 for the three- and nine-month periods ended September 30, 2026, compared to $64 and $212 for the same periods in 2025, respectively. Other revenue consists primarily of laboratory testing fees and developmental or licensing fees. The increase was due to additional testing and development work.

Cost of revenue generally includes costs associated with commercial production and customer development arrangements. Cost of revenue was $12,235 for the three months ended September 30, 2026, compared to $11,123 for the same period in 2025, and was $32,708 for the nine months ended September 30, 2026, compared to $36,043 for the same period in 2025. The increase for the three months was due to higher sales in 2026 compared to 2025. The decrease for the nine months was primarily due to increased production efficiency in 2026 compared to 2025.

Operating efficiency, including the implementation of lean management practices, is a key area of focus for the company. Our company's growth in both complexity and scale since 2023 has required increases in our fixed manufacturing costs to ensure continued compliance with the requirements of manufacturing and distributing FDA-regulated products in an increasingly consumer-centric industry. These requirements, when combined with increases in scale and the number of customers, increase the variety and number of sku's in our inventory. Improving overall equipment effectiveness and throughput through lean management will help the company maintain a competitive cost position and drive improvements in our operating margins as a percentage of total revenue. Selected automation will also enable the company to gain additional margin leverage as our business volume grows.

Research and development expense, which includes all expenses relating to the technology and advanced engineering groups, primarily consists of costs associated with the development of new technology platforms that are core to the company's market competitiveness, along with the development of finished product formulations for skin care, color cosmetics, sun care, and scalp applications. Our patented technologies also create a competitive advantage for our customers, allowing them to differentiate their business in an increasingly competitive market and gain additional market share. Our technology position also contributes to improved customer retention and a stronger long-term supply position at favorable pricing for the company.

Research and development expense was $1,082 for the three months ended September 30, 2026, compared to $1,082 for the same period in 2025. For the nine months ended September 30, 2026 research and development expense was $3,071, compared to $3,055 for the same period in 2025. Research and development costs remained flat from year to year.

Selling, general and administrative expense was $2,810 for the three months ended September 30, 2026, compared to $3,069 for the same period in 2025. The decrease was due to lower bad debt expense partially offset by higher legal fees. For the nine months ended September 30, 2026, selling, general and administrative expense was $9,287, compared to $8,188 for the same period in 2025. The increase reflected higher professional service costs and the Refy settlement expense recorded in June 2026 (see Note 11).

Inflation

In Company-wide operations, we believe inflation has not had a material effect on our operations or financial position for 2026, although we have seen increases in our costs. We expect supplier price increases and wage and benefit inflation, both of which represent a significant component of our costs of operations, may have a material effect on our operations and financial position in 2026 and beyond. We will apply our best efforts to pass through cost increases to our customers. If we are unable to pass through any increases due to contractual limitations or conditions in our markets specifically, this could reduce margins and net income.

Liquidity and Capital Resources

Cash, cash proceeds and use of cash for the nine months ended September 30, 2026 and 2025, and year ended December 31, 2025 were:

The net cash provided by operating activities during the nine months ended September 30, 2026 was primarily due to net income, a decrease in inventories, and additional prepayments for future orders.

The net cash used in investing activities during the nine months ended September 30, 2026 was primarily due to investments in new equipment.

The net cash used in financing activities during the nine months ended September 30, 2026 was primarily due to reducing the outstanding related party debt. As a result of the restatements the Company would have been in default of the Inventory Revolving Loan Effective August 17, 2026, Beachcorp, LLC provided a waiver of all breaches and defaults under the Inventory Facility as a result of the foregoing up to a maximum of $3,000,000 per occurrence, of over-advances on the Inventory Revolving Loans. The Company does not expect there to be any prospective impact on the compliance or availability of the Inventory Revolving Loan.

Our actual future capital requirements in 2026 and beyond will depend on many factors, including customer acceptance of our current and potential future consumer products, APIs sold as ingredients in 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 2026 will be between $0.5 million and $1.5 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 2026 capital investment to exceed the top of this range.

Additional Consideration

We had federal net operating loss carryforwards for tax purposes of approximately $38.5 million on December 31, 2025. 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, $30.7 million of this loss carryforward will expire between 2026 and 2038. Given changes to the IRC, net operating loss carryforwards generated after January 1, 2018 do not expire, therefore, $7.7 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 $18.4 million on December 31, 2025. Due to the provisions of Illinois Public Act 102-0669 signed November 16, 2021, Illinois net loss deductions expire between 2029 and 2039.

Because of uncertainty as to the amount of future taxable income that will be earned prior to the expiration of the carryforward, we have concluded that it is likely that some portion of this carryforward will expire before ultimately becoming available to reduce income tax liabilities. The Company continues to maintain a valuation allowance against certain deferred tax assets. In assessing the realizability of its deferred tax assets, the Company considers all available positive and negative evidence, including historical operating results, recent trends in profitability, expectations regarding future taxable income, and the reversal of existing taxable temporary differences. Recent improvements in the Company's operating results represent positive evidence regarding the realizability of its deferred tax assets. Should these operating trends continue, it is reasonably possible that sufficient positive evidence could develop within the next twelve months to support the release of some or all of the Company's valuation allowance. The Company will continue to assess the realizability of its deferred tax assets in future periods. Any change in the valuation allowance could have a material effect on income tax expense and net income in the period in which such determination is made.

Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purposes of raising capital, incurring debt or operating our business. We do not have any off-balance sheet arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of capital resources.

Safe Harbor Provision

We want to provide investors with more meaningful and useful information. As a result, this Quarterly Report on Form 10-Q (the "Form 10-Q") contains and incorporates by reference certain "forward-looking statements", as defined in Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements reflect our current expectations of the future results of our operations, performance, and achievements. Forward-looking statements are covered under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have tried, wherever possible, to identify these statements by using words such as "anticipates", "believes", "estimates", "expects", "plans", "intends" and similar expressions. These statements reflect management's current beliefs and are based on information now available to it. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause our actual results, performance, or achievements in 2026 and beyond to differ materially from those expressed in, or implied by, such statements. These risks, uncertainties and factors include, without limitation: our ability to be consistently profitable despite the losses we have incurred since our incorporation; a decision by a customer to cancel a purchase order or supply agreement in light of our dependence on a limited number of key customers; the terms of our supply agreements with BASF which could trigger a requirement to sell equipment to that customer; our potential inability to obtain working capital when needed on acceptable terms or at all; our ability to obtain materials at costs we can pass through to our customers, including Rare Earth elements, specifically cerium oxide, as well as high purity zinc; uncertain demand for, and acceptance of, our Solésence products, and our advanced materials; our manufacturing capacity and product mix flexibility in light of customer demand; our limited marketing experience, including with our suite of Solésence products; changes in development and distribution relationships; the impact of competitive products and technologies; our dependence on patents and protection of proprietary information; our ability to maintain an appropriate electronic trading venue for our securities; the impact of any potential new governmental regulations, especially any new governmental regulations focusing on the processing, handling, storage or sale of nanomaterials, that could be difficult to respond to or costly to comply with; business interruptions due to unexpected events or public health crises, including viral pandemics such as COVID-19; and the resolution of litigation or other legal proceedings in which we may become involved. In addition, our forward-looking statements could be affected by general industry and market conditions and growth rates. Readers of this Quarterly Report on Form 10-Q should not place undue reliance on any forward-looking statements. Except as required by federal securities laws, we undertake no obligation to update or revise these forward-looking statements to reflect new events or uncertainties.