SLSN 10-K & 10-Q changes, risk factors and insider trading

Solésence is a health-oriented, science-driven company, focused on various skin healthhealth, beauty and beautywellness markets. Our primary skin health products products are fully developed prestige skin care formulations with mineral-based UV protection enabled by our proprietary Active Pharmaceutical Pharmaceutical Ingredients (“APIs”), which are also marketed as APIs for sale to manufacturers of other types of skin health products, including sunscreens and daily care products. Additionally, we continue to sell products in legacy markets including medical diagnostics, architectural coatings, industrial coating applications, abrasion-resistant additives, and plastics additives applications— all of which currently fall into the advanced materials product category.

Management also monitors the value of inventory for the effects of aging, obsolescence, and seasonality. Consistent with the provisions in FASB FASB ASC 330-10-35, we adjust inventory valuation upon management’s determination that the potential for obsolete materials exist. exist. The majority of the reserve is done by specific identification. Factors include inventory in quarantine, aging finished goods goods or obsolete materials as identified by management. In the application of this policy in 2025 and 2024, management deemed a portion of inventory will likely experience such an impairment and elected to apply a $1,987,000$2,721,000 and $1,987,000, respectively, inventory reserve in anticipation. Some of the materials in question are nearing expiration and therefore more difficult to sell, some represent soon-to-be obsolete products, and some are raw materials that we no longer use regularly.

Certain assumptions are necessary to assess the impact of risksrisk and uncertaintiesuncertainty on theof financial information, such as cash flow projections, availability availability of capital if needed to support the ongoing operations of the business, and our expected compliance with contractual commitments. commitments. Any changes in those plans or assumptions could have a material impact on our liquidity and financial condition. While we have seen costs continue to increase on an inflationary basis as we enter 2025,2026, it is our belief that we will be able to offset much of this cost as we gain greater production efficiencies and seek to increase our pricing where possible.

Total revenue increased to $52,347,000$62,064 in 2024,2025, compared to $37,297,000$52,347 in 2023.2024. A substantial majority of our revenue for each year is from our largest customers, in particular, sales to our largest customer in skin care and sunscreen applications,applications and finished skin skin health products marketed through our consumer products. Product revenue, the primary component of our total revenue, increased to $51,890,000$61,794 in 2024,2025, compared to $36,641,000$51,890 in 2023.2024. This increase was due to an increase in revenue from our consumer products partially partially offset by decreased personal care ingredients and advanced materials products.

Cost of revenue generally includes costs associated with commercial production and customer development arrangements. Cost of revenue increased to $36,159,000$46,001 in 2024,2025, compared to $29,472,000$36,159 in 2023.2024. The increase in cost of revenue was primarily driven by higher materials materials and direct labor costs related to the increased sales volume. Also contributing to the higher cost of revenue was increased costs costs associated with supply chainquality and maintenance activities costs due to the increased sales volume. We expect to continue new materials materials development and dispersion technologies for personal care applications and for our formulated Solésenceconsumer products during 20252026 and beyond, as part of our business model. At current revenue levels we have generated a positive gross margin, though margins can be impeded by the cyclicality of our demand, often leading to the Company not having enough revenue to efficiently absorb manufacturing overhead that is required to work with current customers and expected future customers. We believe that our current fixed manufacturing cost structure is sufficient to support higher levels of revenue volume. 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. We expect to continue to focus on reducing controllable variable product manufacturing costs, with potential variability related to the commodity metals markets and cost and wage inflation but may or may not realize gross margin percentage growth through 20252026 and beyond, dependent upon the factors discussed above.

Research and development expense, which includes all expenses relating to the technology and advanced engineering groups, primarily consists of costs associated with the development or acquisition of new finished product formulations for skin care, new product applications for our skin care ingredients, advancement of our medical diagnostics ingredient knowledge, and the cost of enhancing our manufacturing processes. This includes legal fees related to intellectual property development, protection, and maintenance. As an example, we are currently focusing the bulk of our resources on developing new product formulations, and related new technologies, as we expand marketing and sales efforts relating to our Solésence products. This work has led to several new products and additional potential new products. Our efforts in research and development, cosmetic formulating, process engineering and advanced engineering groups are focused in three major areas: 1) application development for our products; 2) creating or obtaining additional core materials technologies and/or materials that have the capability to serve multiple skin health-related markets; and 3) continuing to improve our core technologies to improve manufacturing operations and reduce costs.

Research and development expense remainedincreased theto same$4,090 in 2024,2025, totalingcompared $3,837,000,to the same as$3,837 in 2023.2024. In 20242025 labor costs were higher than 2024 and 2023 which were offset by lower legal and consulting costs were also higher in 20242025 compared to 2023.2024. We expect expenses for research and development to increaseremain about the same or decrease slightly in 20252026 depending on growth in our Solésence line ofconsumer products, and related technologies. This expense growthchange will be dependent upon the success we have in developing new products, which adds significantly to outside testing fees to both enhance product development and comply with regulatory requirements.

Selling, general and administrative expense decreasedincreased to $7,219,000$10,401 in 2024,2025, compared to $7,534,000$7,219 in 2023.2024. The net decreaseincrease was largely attributed attributed to aan decreaseincrease in legal costs.costs and labor. We expect 20252026 expenses in this area to be slightly higherlower due to expandingcontrolling parts of our administrative functions functions,costs, including related staffing additions.staffing. The extent to which this increase occurs will be dependent upon growth.

InterestNet interest expense decreasedincreased to $670,000$931 in 2025, compared to $670 in 2024, comparedincreased tousage $838,000of inthe 2023,debt duefacilities toand partially offset by lower interest rates than in 2024 and decreased usage of the debt facilities.2024. The interest expense for 20242025 and 20232024 related to interest paid relating to our revolving lines of credit for working capital funding and term loans supporting some of our equipment.

The $3,977,000approximate $10,538,000 year-over-year increase in cash providedused byin operating activities for the year ended December 31, 20242025 was mainly due to the Company earning $4,235,000$1,790,000 in net income in 20242025 compared to $4,390,000$4,235, inpayments netmade lossto inreduce 2023.accounts payable and accrued expenses, and performance of deferred revenue obligations. Cash capital expenditures amounted to approximately $4,558,000 $2,525,000 and $1,051,000$4,558,000 for the years ended December 31, 20242025 and 2023,2024, respectively. We did not dispose of or sell any assets during 2024 2025 or 2023.2024.

The Company maintains a credit agreement with Libertyville Bank & Trust to support our obligations under our leased manufacturing and warehouse space in Bolingbrook, Illinois. As of December 31, 20242025 there was no outstanding borrowings on this line of credit. This credit agreement has a maturity of December 22, 2025.2026, and the Company plans on renewing on a yearly basis.

On January 28, 2022, to support the working capital demands created by the commercial growth of the Company and its wholly owned subsidiary, Solésence, LLC, the Company entered into (i) an Amended and Restated Business Loan Agreement (the “A&R Loan Agreement”), whichwith amendsBeachcorp, and restates the Master Agreement,LLC, (ii) a Business Loan Agreement (the “New Term Loan Agreement”) with Strandler, LLC, (iii) a Business Loan Agreement (the “New Revolving Loan Agreement” and together with the A&R Loan Agreement and the New Term Loan Agreement, the “Loan Agreements”) with Beachcorp, LLC, and (iv) three promissory notes in order to evidence the loans pursuant to the Loan Agreements (the “Notes”). Beachcorp, LLC and Strandler, LLC are affiliates of Mr. Bradford T. Whitmore, who beneficially owns a majority of the Company’s common stock and is the brother of Ms. R. Janet Whitmore, a director of the Company and the chair of the Company’s board of directors.

The Loan Agreements changed the terms of both the Company’s asset-based revolving loan facility (the “A/R Revolver Facility”) and the secured advance (the “Term Loan”, which was assigned from Beachcorp, LLC to Strandler, LLC) under the Master Agreement and provide a new asset-based revolving loan facility based on inventory (the “Inventory Facility”). The maximum borrowing amount under the A/R Revolver Facility increasesincreased from $6,000,000 to $8,000,000, with a borrowing base consisting of qualified accounts receivable of the Company. The maximum borrowing amount under the Inventory Facility iswas $4,000,000, with a borrowing base consisting of up to 50% of the value of qualified inventory of the Company. The Loan Agreements also extended the date for which all principal and accrued interest under the A&R Revolver Facility and the Term Loan are due from March 31, 2023 and March 31, 2022, respectively, to March 31, 2024, which was also the maturity date for the Inventory Facility. The Loan Agreements reduce interest on outstanding borrowings under the A/R Revolver Facility and the Term Loan from the prime rate plus 2% and 5.25% per year, to a floating rate equal to the prime rate plus 0.75%, which is also the interest rate for borrowings under the Inventory Facility. The amount of the Term Loan remains $1,000,000. The A/R Revolver Facility, the Inventory Facility and the Term Loan are all secured by all the unencumbered assets of the Company and subordinated to the Company’s revolving line of credit with Libertyville Bank & Trust.

In connection with the Company’s entry into the Purchase Agreement, the Company also entered into (i) a Second Amendment to Business Loan Agreement (the “Term Loan Agreement Amendment”) with Strandler, LLC, (ii) a Second Amendment to Business Loan Agreement (the “A&R Loan Agreement Amendment”) with Beachcorp, LLC, which is also an affiliate of our controlling shareholder, Bradford T. Whitmore (“Beachcorp”), and (iii) a Second Amendment to Business Loan Agreement with Beachcorp (the “Revolving Loan Agreement Amendment” and together with the Term Loan Agreement Amendment and the A&R Term Loan Agreement Amendment, the “Loan Agreement Amendments”). The Loan Agreement Amendments extend the maturity date under each respective loan agreement from March 31, 2025 to October 1, 2025. As of December 31, 2024, the Company’s A/R Revolver, Inventory Facility and New Term Loan matured on October 1, 2025. Since then, the Company’s related party debt holder for the A/R Revolver, Inventory Facility and New Term Loan has committed to refinancing the debt with a new maturity date after April 1, 2026.

For more information regarding the New Business Loan Agreement,Agreements, see Note 3 to our Financial Statements referred to in Part II, Item 8 of this Annual Report on Form 10-K.

Total revenue decreasedwas to $12,957$15,332 for the three months ended MarchJune 31,30, 2026, compared to $14,625$20,359 for the same period in 2025. Total revenue was $28,290 for the six months ended June 30, 2026, compared to $34,984 for the same period in 2025. Much of our revenue was from our three largest customers for the three-monththree- and six-month periods ended MarchJune 31,30, 2026,2026 and 2025, 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-monthsthree- and six-month periods ended MarchJune 31,30, 2026,2026 and 2025, respectively:

Product revenue, the primary component of our total revenue, decreasedwas to $12,957$15,286 for the three months ended MarchJune 31,30, 2026, compared to $14,625$20,261 during the same period of 2025, and was $28,205 for the six months ended June 30, 2026, compared to $34,836 during the same period of 2025. The three-month product revenuedecrease was lower due to a new customer launch and supply to their distribution channels, resulting in higher sales in our2025 personalwhen care ingredientscompared categoryto and lower sales in our consumer products and advanced materials product categories.2026.

Other revenue decreasedwas to$46,000 $38and $85,000 for the three-monththree- periodand six-month periods ended MarchJune 31,30, 2026, compared to $50$98,000 and $148,000 for the same periodperiods in 2025, respectively. Other revenuesrevenue are typically comprisedcomprises primarily oflaboratory testing fees and developmental or licensing fees. The decrease was due to fewer tests being billed in 2026 compared to 2025.

Research and development expense was increased to $1,042$947 for the three months ended MarchJune 31,30, 2026, compared to $1,018$955 for the same period in 2025. TheFor increasethe issix duemonths inended largeJune part30, to increased legal costs2026 related to research and development,development andexpense salarieswas in 2026$1,990, compared to $1,973 for the same period in 2025. Research and development costs remained flat from year to year.

Selling, general and administrative expense increasedwas to $2,799$3,680 for the three months ended MarchJune 31,30, 2026, compared to $2,108$3,012 for the same period in 2025. For the six months ended June 30, 2026, selling, general and administrative expense was $6,479, compared to $5,120 for the same period in 2025. The increase is was due to anhigher increaseprofessional service costs amounts in legalconnection costswith andthe increasedRefy employee-related costsSettlement Agreement (as described below) recorded in 2026 to when compared to 2025.June.

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

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 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.