Prepared remarks
Good day, and thank you for standing by. Welcome to Solesence's second quarter 2026 conference call. Today's call is being recorded. On today's call, we have Kevin Cureton, President and Chief Executive Officer of Solesence, and Laura Riffner, Chief Financial Officer of Solesence. During this call, management will make statements that include forward-looking statements within the meaning of the federal securities laws pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. This conference may contain certain statements that reflect the company's current beliefs and a number of important factors that 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 a customer to cancel purchase orders or supply agreements, demands for and 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 activities, and 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 Kevin Cureton, President and Chief Executive Officer. Please go ahead, sir.
Thank you, Lisa, and thank you to our investors, brand partners, and teammates who join us today for your continued support. We have an important issue to discuss today, the Form NT 10-Q, the impact on this past quarter's results, and how we move forward. Laura will take us through much of the first part of this discussion. As you prepare to hear Laura's remarks, however, please keep three things in mind. First, the highest priority for Laura and for me is ensuring that Solesence operates with uncompromising integrity across every aspect of our business, from our manufacturing floors to our financial reporting. This is to ensure that all our stakeholders—shareholders, teammates, brand partners, and supply partners—can have faith in the results we report. We fully appreciate the seriousness of this accounting matter, and we are addressing it accordingly. While solving a legacy costing matter is never easy, addressing it head-on and retooling our internal controls is precisely what it takes to mature into the world-class enterprise we plan to be. Therefore, Laura and I have been laser-focused on ensuring we take the necessary steps to make our financial foundation reliable and rigorous. That's the second point I wanted to make. The third point is that we expect our business strategy, our growth prospects, and our plans for growing the company's enterprise value will remain unchanged and unaffected by this matter. With that, I'll turn the call over to Laura.
Thank you, Kevin. Before walking through our second quarter financial performance, I want to address our recent Form NT 10-Q filing and provide full clarity on our accounting evaluation. During our quarter-end review, we identified an issue with our historical inventory costing methodology regarding how indirect manufacturing costs were allocated to inventory. Working closely with our advisors, we have completed our evaluation and are implementing the necessary restatements to correct this inventory valuation issue. I want to be clear about what the restatement means for our shareholders. The adjustments relate to the accounting for certain costs within inventory and do not affect the underlying cash generated or used by the business, our day-to-day operations, or our ability to serve our brand partners. The adjustments relate primarily to the accounting for certain costs within inventory and the resulting recognition of those costs in the financial statements. As part of our remediation efforts, we are enhancing our inventory costing processes and related controls, including additional formalized periodic reviews of overhead cost pools, allocation methodologies, and burden rates. We are also strengthening the documentation and oversight of these processes to support their consistent application going forward. We will continue implementing these remediation activities. Turning to our operational execution, we continued the disciplined implementation of our Transform and Transcend strategy in the second quarter, building on our foundational work to drive operational efficiency. For Q2 of 2026, revenue was $15.3 million compared to $20.4 million in the second quarter of 2025, which had been a quarter that benefited from a major new product launch and pipeline fill. While Q2 2026 revenue from this product was lower than Q2 2025, we continue to see gains in both reorders and forecasts for this product line. The drop in revenue for this product line was partially offset by growth with other brand partners in the prestige beauty sector. In Q2 2026, we achieved a 31% gross margin versus a restated 32% in Q2 2025. This gross margin performance on a 25% lower revenue level as compared to last year is a clear sign of continued improvement in labor efficiency in line with our Transform and Transcend goals, and we are pleased to see that momentum has continued in the second quarter. The second quarter had a loss of $158,000 compared to net income of $3.2 million in the prior year. Adjusted EBITDA for the second quarter was $523,000 compared to $3.7 million for the second quarter of last year. The decline in net income and adjusted EBITDA versus the prior year was related to the lower revenue as compared to 2025 and one-time events related to REFY that decreased net income by approximately $938,000, and the ERC payment we received in Q2 2025 that positively increased net income last year by $1.4 million. Looking forward, we can now confidently expect to outperform 2025 on a full-year revenue basis. Underpinning our confidence is that as of August 17, our shipped and on-hand orders for 2026, which includes orders shipped as well as those we expect to ship this year, totaled $64.9 million, up from $60 million in the same period in 2025. We also expect the third quarter to show sequential improvement in both revenue and profitability, and we project that the second half of 2026 will generate approximately $35 million in revenue, marking the strongest second-half performance in the company's history. Overall, while we are disappointed that this issue with our legacy accounting methodology existed, we are fully committed to addressing it and are prepared to do so while maintaining the consistent progress in our first and foundational pillar of Transform and Transcend, Operational Excellence. While much work remains, we are confident in our ability to continue the positive momentum of Q2. I'll now turn it back to Kevin.
Thank you, Laura. As I mentioned earlier, we want to make sure it's absolutely clear that we take these inventory valuation changes seriously and, like you, are frustrated and disappointed by issues like this that result from how this business was grown and managed in the past. However, it should not be overlooked that as we exit Q2 and enter Q3, Solesence has gained momentum to achieve double-digit growth, a consistent part of our history. We have also implemented the tools and processes to deliver sustainable profitability commensurate with our expectations as a technology-driven company and those of our investors. More importantly, this accounting matter does not change the commercial reality of our business. Our operational momentum is accelerating, our brand partners are growing, and we are entering the strongest second half in Solesence history with $64.9 million in shipped and on-hand orders. With that, Lisa, we are ready for questions.
Questions and answers
And our first question for the day will be coming from the line of James Liberman.
I just got a little bit of a disconnect, but I think I heard you. So it's Jim Lieberman—I'm happy to ask away. Thank you for your honesty and for the work you're doing, preparing the company for its growth. It sounds like the $64 million number you gave going forward is a really good base from which to grow. Could you give a little color regarding the hair and scalp products that you mentioned earlier and how we might view that—what type of market you're looking at and what kind of scope? I have some follow-on questions to that. But if you could start on that area, I'd like it.
All right, thank you, Jim, and it's good to hear from you. Yes, the market you specifically mentioned—the scalp care segment—is a new segment for us. We launched this year, in fact just back in July, utilizing some of our new technologies. That market is an area where we approximately believe it's about a $3 billion addressable market for what we do. Obviously, there's lots of work to still be done there, but the good feedback that we can provide is that during July and from the launch of that product, we had one of the best volumes in terms of lead generation and new opportunity generation based upon that launch. So I think we're off to a good start. As is the case within our industry, it's still early to say when that will develop into revenue, but we're off to a good start with that new technology.
The next question will be coming from the line of Wayne Rowan. We see a sizable addressable market for what we do. There is still a lot of work to be done, but the encouraging feedback is that in July, following the product launch, we had one of the best volumes for lead generation and new opportunity creation based on that launch. So I think we're off to a good start. As is typical in our industry, it's still too early to say when that will develop into revenue, but we're off to a good start with that new technology.
I would like to know, are we going to see higher sales growth at the end of the year? This is maybe a two-part question. Are we getting less trouble with inventory control and a better handle on production efficiency, because if we are, it gives me a reason for optimism. If we're not, I'd be a little frustrated because it's been an ongoing issue for a while and I was hoping we'd make—excuse me—the medicine makes me stutter a little. Is that less of a concern than it was a year or two ago? Are we making progress in inventory control and production efficiency, and if so, give yourself a pat on the back and tell Laura to behave herself.
All right, Wayne, thank you for your question. First of all, we wish you the best in your recovery, and certainly wish all the best to you and your health in the future. To comment on what you asked, we've got three different topics here. One was related to sales growth, which I'll comment on, and then I'll turn it to Laura, who did comment a bit about production efficiency and inventory control. If we start with sales growth, as Laura mentioned during her remarks, we can now confidently project that on a year-over-year basis we will grow versus 2025. We will set a record on a revenue basis this year. We're excited about the momentum that we see in the business. As you may recall, we made some changes to our commercial leadership back at the beginning of the year, and we're excited about what that does mean as we continue to expand our business both domestically and as we start to work on globalization of the business as well. With that being said, I'll turn it over to Laura to comment about our production efficiency and inventory control.
Wayne, I'd like to reiterate Kevin's expression that we wish you well in your recovery. Regarding your questions about production efficiency, that has been a very significant focus for the organization since I've been here. Over the last nine to ten months, I've seen improvements in efficiency related to things like cost efficiency in production and OEE in production. We have implemented Kaizen events to take a look at the organization from the production and manufacturing standpoint to examine our processes and put improvements in place where it makes sense. So to get to the point of your question of, is there reason to have optimism? My answer is yes. I think there is a lot of reason to have optimism with our production efficiency, given where we started this year, the advancements we've made, and where I see us going.
Great. I think Wayne also wanted to chat about inventory control as well. Laura, you want to provide any color on that?
Of course. Wayne, there are certainly many aspects to inventory control that we could discuss. I assume you are referring to the costing methodology issue that has come to light. Assuming that's the situation, it was an issue in our costing methodology that we identified. The moment it was identified, it was raised to the appropriate levels within the organization, was taken quite seriously, and considerable and appropriate efforts were taken to resolve and remediate the situation. I feel very confident moving forward. We're in a very good place there as well.
Just to echo what Laura has said about production efficiency in particular, she also recognized the improvement on a relative basis that we are seeing in gross profit performance. As everyone realizes with a manufacturing business like ours, scale also has a factor in that. So when we reference the gross profit numbers that we achieved in Q2 2026 this past quarter versus last year on lower revenue, that's a reinforcement of the fact that the labor efficiency Laura mentioned is coming through. Operational excellence is a key element for us, and we are still focused on delivering that through this year and on a continuing basis.
Our next question will be coming from the line of James Liberman with American Trust Investment Securities with a follow-up question. Please go ahead.
Could you talk a little bit more about how your scalp products and new products you're introducing are differentiated from some of the many other products that are out there?
Yes, thanks, Jim. There are a couple of points of differentiation. We have launched two different products to be specific—two different product groups. One is in scalp protection. That product is the first of its kind: a combination of a dry shampoo and an SPF product. As people may know, the Skin Cancer Foundation has cited the scalp as an increasing area of concern for melanoma. Oftentimes it can be more deadly because it's harder to diagnose; it's not an area that we're typically looking at or examining. So it's an area of importance, and with the launch of that product we received a lot of good feedback that it was well aligned with a need in the marketplace. The other scalp product is a treatment product. As you also may know, those products are growing and are among the fastest-growing product categories in the market right now. We typically don't enter these markets without having some novelty relative to the patent protection that we can deliver. This scalp treatment technology utilizes our Whisper technology, which is a delivery system for allantoin, allowing us to deliver higher levels of a proven ingredient for addressing and soothing erythematous irritation and helping with keratolytic effects on the scalp and other areas. We're excited about what that technology and that product line might deliver in the future.
That's great to hear. Do you see this as being a larger market than the current market you're in?
No, we see it as a nice adjacency. If you look at the overall hair care market, it is very large, but we are really targeting a specific segment within it. We see it as a nice adjacency to extend our participation. We believe we've got a good total addressable market overall—greater than $50 billion—so our addressable market is substantial. This is a high-growth additional segment for us to address and offers another way for us to leverage our technologies with our brand partners.
I wondered if I might ask one other question. I think the FDA approved a non-mineral-based sunscreen platform recently. Are you seeing any changes in interest in your mineral-based sunscreen technology?
Great question, Jim. We're excited for two reasons. One, we think the introduction of this new technology—commonly referred to as BEMT—is good for the marketplace. While it is newer to the United States, it is not new to the world; it's been around internationally for over 20 years. We're confident in what this technology will deliver and in the place of our mineral technologies in the market as well. As we've been introducing other technologies like Chromolume, which is an adjacent technology that can enhance the performance of other sunscreen actives, we see Chromolume as something that can be used along with BEMT. We anticipate launching products with our brand partners that combine BEMT and our proprietary mineral technologies and other booster technologies. We're excited about the attention this is bringing to the SPF market, and we're not worried about its impact on our business. We still see an exciting growth path for what we do.
I'm looking forward to the very strong second half of the year. Appreciate it.
Our next question is coming from the line of Stefano Bolis. Please go ahead.
Kevin and Laura, about the settlement with the dispute with REFY: the fact that in the settlement you have this still-open window for agreeing on some new formulation or product, does it mean you are still actively working with REFY to come up with a new product or a satisfactory formulation for what they need?
Stefano, yes, the agreement does give us an opportunity to work together on a possible development of a new SPF product. So that door is still open.
And at the moment you are not providing them any other product, correct?
Yes, thank you, Stefano. I'll just briefly comment on that. Consistent with our policies with other brand partners or potential brand partners, without their permission to talk about specific developments, we're not permitted to say much more than what Laura has just said. But we do value our relationship with REFY.
And there are no more questions in the queue. At this time, I would like to turn the call back over to Kevin for closing remarks. Please go ahead.
Thank you, Lisa, and thank all of you for joining us today. While this accounting issue remains an important matter, our core strengths are unchanged, as you've just heard throughout the discussion. Solesence continues to operate as a market leader in a high-growth business, providing a product line with one of the highest growth rates in the category. When paired with our proven operational improvements, these strong fundamentals demonstrate that our underlying momentum continues to build as we execute on the work ahead. To help our stakeholders better understand our long-term trajectory as we continue to advance our Transform and Transcend initiatives, we recently uploaded a strategic vision document to our investor relations website, which we encourage you all to review. Looking ahead to the second half of the year, we expect continued progress in our strategy as we demonstrate that Solesence is on the right path to growing our company's enterprise value at a rate significantly greater than the market and creating long-term value through combining financial and operational excellence with world-leading innovation in skin health. Again, thank you for your continued support, and we look forward to updating you in the next quarter.
This concludes today's program. Thank you so much for joining. You may now disconnect.