Solesence, Inc.

Good day. Thank you for standing by. Welcome to the Solescence second quarter 2025 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. 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. The 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, an 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'll now hand the conference over to your speaker, Mr. Jess Jankowski, President and CEO. Please go ahead, sir.

Thank you, Daniel. Good afternoon, and thanks to all of you who have joined our call today. Also joining me on today's call is Kevin Curitan, our Chief Operating Officer. I'll begin with a summary of our second quarter results and a business update. Kevin will then discuss our operational initiatives, then we'll take your questions. I'm pleased to report we delivered a strong second quarter, both commercially and operationally. It truly was a total team effort that resulted in a sharp increase in revenue sequentially and annually. I'm proud of what we accomplished this quarter and want to use this opportunity to thank our dedicated team. I would like to remind our listeners that the second quarter is typically our seasonally strongest quarter. This is due to the advanced sunscreen orders for summer. This made it critical that we executed at the highest level to effectively manage the increased volume load. This exceptional performance has not only solidified our customer relationships, but also positioned us as well for repeat orders. Taking a step back, I'd like to highlight some of our key corporate updates that took place during the quarter. At the start of the quarter, we uplisted our common shares at the NASDAQ, a major milestone for Celescence and our valued shareholders. As we discussed on our first quarter call, listing on NASDAQ is important because it can deepen our visibility within the investment community, increase our liquidity, and deliver greater value to our shareholders and other stakeholders. We're excited to be a NASDAQ listed company and look forward to many future investor engagement opportunities. Since we listed on NASDAQ, we were added as a member of the broad market Russell 3000 and small cap Russell 2000 indices. Inclusion on these highly visible indices further enhances our marketability by opening us up to a wider range of institutional investors. These significant achievements underscore our commitment to maximizing shareholder value and expanding our presence within the financial markets. During the quarter, we also amended our existing loan agreements to increase our borrowing capacity to further support our growth initiatives. As Kevin will discuss in greater detail shortly, we not only enhanced our operational efficiencies during the quarter, but also restructured our debt facilities to ensure that we have the financial strength to invest in our future. Let's turn to an update on our second quarter financial results in approximate numbers. Revenue for the quarter was $20.4 million, representing an increase of 56% year-over-year. It was a record quarter for Celescence, driven by the sales of our consumer products to our largest customers, including our new partner and, of course, ColorScience. These results reflect the continued strength of our commercial execution and market demand for our products. We're also pleased with the improvement in our profitability in the second quarter, as we successfully navigated through the one-time production startup costs related to the first quarter launch of a new product line by an exciting new brand partner. Further, as expected, we've had no recurring production issues related to this new partner. Second quarter gross profit was up 55% at $5.9 million compared to $3.8 million for the same period in 2024. The gross profit margin was 29% for both periods. Notably, Gross margins expanded by six percentage points from the first quarter of 2025. Net income for the second quarter was $2.7 million, compared to net income of $900,000 for the same period in 2024. Net income in the second quarter of 2025 benefited from approximately $1.2 million in net credits, plus related interest from the federal government's employee retention credit program, which we applied for in 2022. This was a nice boost to our cash position. As pioneers in bringing industry-leading, award-winning, protective beauty solutions to leading brands globally, our mission, delivering joy, is embedded in our work culture. We honor this mission through our commitment to continually elevate our product offerings and offer outstanding performance. In doing so, we are transforming skincare and beauty products that protect, nourish, and celebrate every skin tone, type, and identity. Our product advancements were on full display at the 22nd edition of Cosmoprof North America held in Las Vegas two weeks ago. For those new to our company, Cosmoprof North America is the leading business-to-business beauty trade show in the Americas and the single most important networking opportunity in the US for all sectors of the global beauty industry. It's here where we showcase our novel products and unveil new technologies while forging new relationships and partnerships with leading brands globally. We really shine at Cosmoprof. At this year's event, we were excited to demonstrate a new white label product that was featured in Cosmo Trends, which is a widely circulated report that provides early insight into the most influential product, ingredient, and consumer behavior trends shaping the global beauty market. Our new product, Color Ninja Correcting Cream SPF 50 Plus is developed to cater to those consumers seeking both anti-aging and sun care products tailored towards sensitive skin. Infused with our patented ingredient, Clear, this color correcting cream promotes skin longevity while offering a perfected skin finish that counteracts redness. Additionally, we exhibited two new skin health technologies that we believe will further support our future growth initiatives. As a recognized leader in the beauty industry, we continue to strengthen our foundation for growth and evolve our technology to adapt to a rapidly changing demand environment. It's our relentless commitment to scientific excellence and innovation that sets us apart, enabling us to deliver on our mission. We look forward to sharing further technology updates, product developments, and new launches in the months ahead. At this time, I'll turn the call over to Kevin Curitan, our Chief Operating Officer, to share an update of our progress and outlook. Kevin?

Thanks, Jess. And as always, I'd like to begin with thanking our amazing team for their tireless commitment and demonstrating through our results their ability to consistently deliver solid performances for our investors, our brand partners, and for ourselves. We are pleased to generate another quarter of record revenues and unit volume shipped. This resulted from our ability to successfully ramp up inventory production earlier in the year in order to meet a higher level of customer orders during our seasonally strongest quarter. Importantly, we not just grew, but grew profitably as evidenced by our increase in EBITDA, which expanded to $3.5 million in the second quarter, up from $1.4 million in the year-ago period. Overall, for the quarter, Shipment volume increased 102% and production volume increased 127% compared to the year-ago period. These increases are a testament to our team's efforts to successfully work through large order quantities on time and produce high-quality solutions for our customers. I'd also like to highlight that we continue to receive new orders from our new brand partner from the first quarter, in which we resolved all production issues associated to that account. This shows our unyielding dedication to our work that customers equate to the Solescence brand. While improving manufacturing execution, we continued efforts in rebalancing our inventory levels. During the quarter, we reduced inventory levels by approximately $2 million, or about 9.5% of the inventory level we held at the end of Q1. Our goal remains to reset inventory levels in MIX so that they are fully aligned with our growth plans. On our Q3 call, we will share more specifics about our progress here. Our improved manufacturing execution also yielded lower overall labor expenses, as these were reduced as a percentage of revenue by four percentage points during the quarter as compared to Q1 2025. Our investments in increased scale and automation are starting to achieve the expected payoff. So over the next few quarters, we expect further cost reductions, which ultimately will raise our overall growth margins to be in line with what a technology-driven company like ourselves should achieve. Now, turning to the broader macroeconomic environment. So Lessence is a well-diversified business with brand partners spanning various skincare, color cosmetics, and sun care categories, as well as those operating in the prestige and mass markets. We believe our broad market mitigates many of the effects of microeconomic conditions if they were to weaken. Having said that, we anticipate demand to slow in the second half of 2025 as tariffs affect global purchasing decisions and consumer buying habits. This will likely have an impact on our revenues, but we are still projecting a record revenue year. On the expense side of the equation, we also expect a muted impact to our packaging component costs. However, as stated on our last call, we do anticipate that we will be able to pass all of the new tariff expenses through without adversely affecting our margins. We will continue to monitor this situation closely. In addition to our strong commercial and operational execution, as Jess mentioned, we enhanced our financial flexibility to support our future growth initiatives. In May, we amended our loan agreements to increase borrowing capacity from $14.2 million to $23 million and extended maturities to April 30, 2027. This expanded financial flexibility is crucial for executing our objectives, allowing for favorable raw material procurement, improved lead times for product launches, and stronger support of our brand partners. Taking a 30,000-foot view, we are now better positioned to scale operations and broaden the scope and depth of the type of offerings we present to our brand partners, all of which is reflected in the strong confidence of our finance partners. We really appreciate their continued support. I'll now turn it back to Jess. Jess?

Thanks, Kevin. Looking ahead, we anticipate moderating demand levels based on softer macroeconomic conditions. While we continue to receive reorders and exceed client expectations for our beauty care solutions, the combination of typical seasonality, longer brand purchasing decision processes, and an uncertain tariff environment will likely have an impact on our top line for the second half of 2025. Our shipped and open orders are currently in excess of $60 million compared to about $50 million in the second quarter of 2024 and $45 million when we last reported in May. For those listeners who are new to Celescence, this metric refers to the total value of customer orders that we've either already shipped or are still awaiting fulfillment. It represents a snapshot into our business, which we believe helps investors better understand current demand trends. While we navigate through this expected choppy market in the second half of 25, I would like to highlight three reasons why we're confident in our long-term prospects. First, leveraging our patented technology, unique performance products, and regulatory expertise, our specialized formulations for skin health, sun care, and color cosmetics position us at the forefront of the beauty market. Our ability to cater to both prestige and mass market brands is further amplified by our diversification across various beauty segments. As the preferred CDMO for top brands, we can constantly innovate with new technologies to retain our pole position, giving us an edge over the competition. Second, we have an impressive roster of loyal leading brand customers, which we do not take for granted. These brands, such as BSF, Color Science, Tatcha, Credo, and others, appreciate our differentiated offerings. They know that we're adding to their customers' confidence, self-expression, and well-being. Our high brand retention rates ensure recurring revenue and sustainable growth. Furthermore, we are relentless in meeting the specific demands of our customers. As we detailed last quarter, we perfected the delivery for a new multi-skew product launch with a new brand partner earlier this year. Despite the startup challenges we shared, this key brand partner has now placed a series of future orders. We mentioned last time that these challenges helped to build the relationship with this brand, and follow-on orders are commercial proof. And third, we have right-sized our operations and improved our financial flexibility, giving us added capability to not only invest, but also scale for growth. Much of the work associated with streamlining our operations occurred in late Q2 and early Q3, and as a result, we are well positioned to expand our gross margin and drive stronger EBITDA performance, which will be more evident throughout the second half of the year. You know, we work with several brands that do a great job in conceptualizing compelling concepts that drive the initial consumer purchase. The challenge and the opportunity are translating that excitement into second and third purchases. This is where Solescence breaks through and makes a difference. By creating loyalty with consumers, our patent-protected products live up to their expectations. That's the part that's difficult for other brands, those brands not working with Solescence, to replicate. It reinforces our strong competitive position, which drives our long-term value creation. With three proprietary technology platforms, we are well positioned to generate continued growth that we anticipate will happen at a multiple of the industry's current growth rate. Now, before we open the call for your questions, I'd like to share a brief update on our Chief Financial Officer search. We've been actively engaged in the process and are very pleased with the caliber of candidates we've interviewed. We're at a point where we expect to make an announcement regarding our new CFO soon. Now, we'd be happy to take some questions. Afterwards, I'll offer a few closing comments. Daniel, please open the call for Q&A.

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. In the interest of time, we ask that you please limit yourself to one question. Please stand by while we compile the Q&A roster. As a reminder, to ask a question, please press star 11 on your telephone. Our first question comes from James Lieberman with America Trust Investment Services. Your line is open.

Thank you. This is terrific results. I'm really impressed that you were able to have revenues of over 20 million for the quarter. It shows great ability to scale. And I'm sure with that scaling, there are a lot of costs and challenges along the way. And you gave some indication that the profit margins could be starting to improve going forward as you've met certain goals. Can you give a little bit more color to how we might look at that playing out over the year?

Hi, Jim. Certainly. I think over the year what you'll see is, you know, we were, as you know, or as the group knows that has listened to these calls, we had a We had some turmoil in Q1 in kind of making sure that launch got perfected, and we put in a lot of resources to do that. We made absolutely sure that we serviced that customer and their launch went out without a hitch. We also probably built up more inventory than we would have just to make sure that not only could we service that customer, but that the other customers that we weren't focused on that heavily, we're also being taken care of. And what's happening as a result now, as we make the business more efficient, we're realizing through all that production, and that's very high volume production, we got some efficiencies through some of the lines that we've put in over the years that we were waiting for the opportunity to have that kind of volume, to kind of do almost like a shakedown cruise to make sure that we could do it, we can get it there, and that gave us the confidence to kind of change the approach towards some of our manufacturing going forward. And we think we'll see more of that becoming evident in the last half. I'd hand it over to Kevin for a little more color there, given his expertise here.

Thanks, Jess. And Jess hit on the nail on the head, the button, something. But no, he hit the point there, Jim, and it's nice to hear from you. The real opportunity for us through what we learned in the first quarter was how we can better optimize the utilization of our and therefore the labor that is used on those lines. We actually have been able to improve that in second quarter, and we expect that we'll see even better and more improvements as we get through the rest of this year. We also, through that process, was able to do something very important, and that was to implement improvements in our processes to achieve first time prime so that we make things right the first time. That in and of itself helps to improve your efficiency and lower your cost. So those couple of items are really at the heart of where we expect to see some nice improvements in our gross profit margins as we go forward over the next few quarters.

Thank you. Once again, if you would like to ask a question at this time, please press star 11 on your telephone. Again, that is star 11 to ask a question. I'm showing no further questions at this time. I would now like to turn it back to Jeff Jankowski for closing remarks.

Thank you, Daniel. Thank you for your question, and to all those who took the time to join us today, thank you for your time. We remain confident in our long-term prospects, driven by our cutting-edge patented technology and specialized formulations that position us at the forefront of the beauty care market. Our ability to serve both prestige and mass market brands, coupled with our relentless innovation and position as a preferred CDMO, gives us a distinct competitive edge. We're proud of our impressive roster of loyal, leading brand partners, our customers, who value and promote our differentiated offerings, ensuring high retention rates and sustainable growth. Furthermore, we've proactively strengthened our operational foundation and financial flexibility, ensuring we're well equipped to invest and scale for future growth and guard against potential near-term demand headwinds. Our recent NASDAQ uplisting, inclusion in the Russell Indices, and increased borrowing capacity all underscore our commitment to maximizing shareholder value. I'd like to close by thanking our shareholders for your continued support and look forward to updating you on our progress next quarter. Daniel, you may close the call.

This concludes today's conference call. Thank you for participating. You may now disconnect.