SOLESENCE, INC. (SLSN)

Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Solésence
is a health-oriented, science-driven company, focused on various skin health, beauty and wellness markets. Our primary skin health
products are fully developed prestige skin care formulations with mineral-based UV protection enabled by our proprietary Active
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.

Results
of Operations

Three
Months Ended March 31, 2026 and 2025

Total
revenue decreased to $12,957 for the three months ended March 31, 2026, compared to $14,625 for the same period in 2025. Much
of our revenue was from our three largest customers for the three-month periods ended March 31, 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-months periods ended March 31, 2026, and 2025, respectively:

12

Product
revenue, the primary component of our total revenue, decreased to $12,957 for the three months ended March 31, 2026, compared
to $14,625 during the same period of 2025. The three-month product revenue was lower due to higher sales in our personal care
ingredients category and lower sales in our consumer products and advanced materials product categories.

Other
revenue decreased to $38 for the three-month period ended March 31, 2026, compared to $50 for the same period in 2025, respectively.
Other revenues are typically comprised primarily of developmental fees.

Cost
of revenue generally includes costs associated with commercial production and customer development arrangements.  Cost of
revenue decreased to $9,620 for the three months ended March 31, 2026, compared to $11,243 for the same period in 2025.
The decrease for the three months in the cost of revenue was primarily driven by decreased volume resulting in decreased labor
and material costs. While we typically pass-through costs to our customers, we sometimes cannot pass through 100% of pricing increases
on raw materials, and even with pass throughs, our gross margin percentage is negatively impacted by higher material costs. The
Company continues to monitor the potential impact of the tariffs and associated legal actions and pricing on our materials sourced
internationally.

Capacity
is a key area of focus to increase throughput first, followed quickly by increased cost efficiency once we can achieve greater
scale. Our planning has had us adding to our current fixed manufacturing cost structure through 2026 to accommodate additional
growth, and to build a better base for further growth beyond that level. 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 consumer
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. Our most critical operational issue today is reducing controllable variable
product manufacturing costs.

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, 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 increased to $1,042 for the three months ended March 31, 2026, compared to $1,018 for the same period
in 2025. The increase is due in large part to increased legal costs
related to research and development, and salaries in 2026 compared to 2025.

Selling,
general and administrative expense increased to $2,799 for the three months ended March 31, 2026, compared to $2,108 for the same
period in 2025. The increase is due to an increase in legal costs and increased employee-related
costs in 2026 to when compared to 2025.

Inflation

In
Company-wide operations, we believe inflation has not had a material effect on our operations or financial position for 2025,
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 three months ended March 31, 2026, and 2025, and year ended December 31, 2025 were:

The
net cash provided by operating activities during the three months ended March 31, 2026 was primarily due to increase in accounts
payable and deferred revenue, offset by net income (loss) and decrease in inventory. Net cash used in investing activities was
attributable to expenditures on capital equipment for all periods presented above. The net cash used in financing activities was
attributable to the decreased use of debt.

13

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, 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 $36.9 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, $6.2 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
$20 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.

As
a result of the annual limitation and 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.

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 achievem

[Excerpt truncated for page length; source filing is linked above.]

Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The
following discussion and analysis should be read in conjunction with risks discussed in the financial statements and related notes
thereto appearing elsewhere in this Form 10-K. When used in the following discussions, the words “anticipates,” “believes,”
“estimates,” “expects,” “plans,” “intends” and similar expressions are intended
to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and contingencies that could
cause actual results, performance or achievements to differ materially from those expressed in, or implied by, such statements.
See the “Forward Looking Statements” section in Part 1, Item 1, of this Form 10-K.

Overview

Solésence
is a health-oriented, science-driven company, focused on various skin health, beauty and wellness markets. Our primary skin health
products are fully developed prestige skin care formulations with mineral-based UV protection enabled by our proprietary Active
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.

10

Critical
Accounting Estimates

Management
monitors the value of inventory for the effects of aging, obsolescence, and seasonality. Consistent with the provisions in FASB
ASC 330-10-35, we adjust inventory valuation upon management’s determination that the potential for obsolete materials exist.
The majority of the reserve is done by specific identification. Factors include inventory in quarantine, aging finished 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 $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 risk and uncertainty of financial information, such as cash flow projections, availability
of capital if needed to support the ongoing operations of the business, and our expected compliance with contractual 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 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.

Results
of Operations

Years
Ended December 31, 2025 and 2024

Total
revenue increased to $62,064 in 2025, compared to $52,347 in 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 and finished skin
health products marketed through our consumer products. Product revenue, the primary component of our total revenue, increased
to $61,794 in 2025, compared to $51,890 in 2024. This increase was due to an increase in revenue from our consumer products partially
offset by decreased personal care ingredients and advanced materials products.

Current
Significant Customers

Cost
of revenue generally includes costs associated with commercial production and customer development arrangements. Cost of revenue
increased to $46,001 in 2025, compared to $36,159 in 2024. The increase in cost of revenue was primarily driven by higher materials
and direct labor costs related to the increased sales volume. Also contributing to the higher cost of revenue was increased costs
associated with quality and maintenance activities costs due to the increased sales volume. We expect to continue new materials
development and dispersion technologies for personal care applications and for our formulated consumer products during 2026 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 2026 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, 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.

11

Research
and development expense increased to $4,090 in 2025, compared to $3,837 in 2024. In 2025 labor costs were higher than 2024 and
legal and consulting costs were also higher in 2025 compared to 2024. We expect expenses for research and development to remain
about the same or decrease slightly in 2026 depending on growth in our consumer products, and related technologies. This expense
change 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 increased to $10,401 in 2025, compared to $7,219 in 2024. The net increase was largely attributed
to an increase in legal costs and labor. We expect 2026 expenses in this area to be slightly lower due to controlling our administrative
functions costs, including related staffing.  The extent to which this occurs will be dependent upon growth.

Net
interest expense increased to $931 in 2025, compared to $670 in 2024, increased usage of the debt facilities and partially offset
by lower interest rates than in 2024. The interest expense for 2025 and 2024 related to interest paid relating to our revolving
lines of credit for working capital funding and term loans supporting some of our equipment.

In
Company-wide operations, we believe inflation has not had a material effect on our operations or financial position for 2025,
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 2025 and 2024 were:

The
approximate $10,538,000 year-over-year increase in cash used in operating activities for the year ended December 31, 2025 was
mainly due to the Company earning $1,790,000 in net income in 2025 compared to $4,235, payments made to reduce accounts payable
and accrued expenses, and performance of deferred revenue obligations. Cash capital expenditures amounted to approximately $2,525,000
and $4,558,000 for the years ended December 31, 2025 and 2024, respectively. We did not dispose of or sell any assets during 2025
or 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, 2025 there was no outstanding borrowings on this line of credit.
This credit agreement has a maturity of December 22, 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”), with Beachcorp, 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 “I

[Excerpt truncated for page length; the complete text is on the linked full-MD&A page.]