SOLESENCE, INC. Q2 FY2026 earnings call

• Accounting Remediation

  • A legacy inventory costing methodology error related to indirect manufacturing cost allocation was identified during the quarter, requiring financial restatements.
  • Management is enhancing internal controls, including adding formal periodic reviews of overhead cost pools, allocation methodologies, and burden rates, while strengthening process documentation and oversight.
  • Uncompromising business and financial reporting integrity is the company's top priority, and the accounting issue does not alter existing business strategy, growth prospects, or plans to grow enterprise value.

• Operational Progress

  • The company continued disciplined execution of its Transform and Transcend strategy to drive operational efficiency.
  • Gross margin performance on 25% lower year-over-year revenue demonstrates sustained improvement in labor efficiency aligned with operational excellence goals.
  • Kaizen process improvement events have been implemented to boost production efficiency and overall equipment effectiveness (OEE).
  • Commercial leadership changes implemented at the start of 2025 are driving accelerating operational momentum.
  • A new scalp care product line was launched in July 2026, which delivered strong early lead and new opportunity generation.

• Commercial Momentum

  • Reorder volumes and forecasts for the core major product launched in 2025 continue to grow.
  • As of August 17, 2026, total on-hand and projected shifted orders for 2026 reached $64.9 million, up from $60 million in the same period of 2025.

Company-level overall Q2 2026 revenue is $15.3 million, down from $20.4 million in Q2 2025 (which benefited from a major new product launch and pipeline fill). Gross margin hit 31% in Q2 2026, compared to a restated 32% in Q2 2025. Net loss for Q2 2026 was $158,000, versus net income of $3.2 million in the prior-year quarter. Adjusted EBITDA was $523,000 in Q2 2026, down from $3.7 million in Q2 2025. The decline in profitability is attributed to lower year-over-year revenue, a one-time $938,000 negative impact from an RFI-related settlement, and the absence of a $1.4 million positive ERP-related payment received in Q2 2025. Growth in prestige beauty sector partner revenue partially offset the core product line revenue decline. No separate absolute or percentage revenue contribution figures are provided for individual product segments.

• Full-year 2026 revenue is expected to outperform full-year 2025 revenue, achieving year-over-year revenue growth that will set a new company growth record.
• Q3 2026 is projected to deliver sequential improvement in both revenue and profitability compared to Q2 2026.
• The second half of 2026 is expected to generate approximately $35 million in total revenue, which will be the strongest second-half performance in the company's history.

• Forward-looking results are subject to material risks, including customer cancellation of purchase orders or supply agreements, fluctuating demand and market acceptance for the company's personal care ingredients, advanced materials, and formulated products, changes to development and distribution partnerships, competitive product and technology pressures, and commercial activity disruption from public health events, terrorism, or armed conflict.
• The legacy inventory costing error created a need for financial restatements and required significant remediation work, though management has addressed the issue and implemented controls to prevent recurrence.
• Ongoing operational risk related to production and inventory management, which has been a historical concern, though management notes significant improvement.

Q: An analyst asks for details on the newly launched scalp and scalp product line, including the market scope and early performance. / A: Celesence launched the new scalp care segment in July 2026 using proprietary new technologies, with a $3 billion addressable market for the company's offerings. The launch delivered one of the company's best ever volumes of lead generation and new opportunity, though it is still early to project when meaningful revenue will develop. The segment is a strategic high-growth adjacency to the company's existing product portfolio, leveraging existing technologies for brand partners, within the company's overall $50+ billion total addressable market. Two differentiated products were launched: a first-of-its-kind combination dry shampoo and scalp SPF addressing an unmet need for skin cancer risk reduction, and a scalp treatment using the company's patented Whisper delivery technology for a proven active ingredient that soothes scalp irritation and redness. / Q: An investor asks if full-year 2026 will deliver higher sales growth, and if progress has been made on improving inventory control and production efficiency, which have been longstanding concerns. / A: Management confirms full-year 2026 will achieve year-over-year revenue growth, a new company record, driven by improved commercial leadership and ongoing domestic and global expansion. Production efficiency has been a core organizational focus for the last 9-10 months, with improvements in production cost efficiency and OEE delivered via targeted Kaizen process improvement events, and improved labor efficiency is already visible in the Q2 2026 gross margin results. The legacy inventory costing issue was identified promptly, escalated appropriately, and fully remediated with new controls in place, and management expresses confidence in the company's current inventory processes. / Q: An analyst asks how the recent FDA approval of a new non-mineral sunscreen active (DEMT) will impact demand for Celesence's mineral-based sunscreen technology. / A: Management views the FDA approval as positive for the overall SPF market, and is not concerned about negative impacts on its own business. The company's Chromalume proprietary booster technology can enhance the performance of other sunscreen actives including DEMT, and the company plans to launch new combination products with brand partners that pair DEMT with Celesence's proprietary mineral and booster sunscreen technologies, maintaining a strong growth path for its offerings. / Q: An investor asks if Celesence is still actively developing a new product with former partner RFI following their dispute settlement, which included an open window for future collaboration. / A: Management confirms the settlement leaves the door open for joint development of a new FTF product with RFI, but per partner confidentiality policies, cannot share additional details on active development work, and notes the company values its ongoing relationship with RFI.