Annual Report for Fiscal Year Ending 06-30, 2025 (Form 10-K)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion and analysis is intended to help you understand our financial condition and results of operations as of June 30, 2025 and 2024 and for each of the last two fiscal years then ended. You should read the following discussion and analysis together with our audited consolidated financial statements and the notes to the consolidated financial statements included under Item 8 in this report. Our future financial condition and results of operations will vary from our historical financial condition and results of operations described below based on a variety of factors. You should carefully review the risks described under Item 1A and elsewhere in this report, which identify certain important factors that could cause our future financial condition and results of operations to vary.

Executive Overview

The following overview does not address all of the matters covered in the other sections of this Item 7 or other items in this report or contain all of the information that may be important to our stockholders or the investing public. You should read this overview in conjunction with the other sections of this Item 7, the financial statements and accompanying notes, and this report.

Our primary business activity is providing private-label contract manufacturing services to companies that market and distribute vitamins, minerals, herbal and other nutritional supplements, as well as other health care products, to consumers both within and outside the U.S. Historically, our revenue has been largely dependent on sales to two or three private-label contract manufacturing customers and subject to variations in the timing of such customers' orders, which in turn is impacted by such customers' internal marketing programs, supply chain management, entry into new markets, new product introductions, the demand for such customers' products, and general industry and economic conditions. Our revenue also includes raw material sales, royalty and licensing revenue generated from our patent estate pursuant to license and supply agreements with third parties for the distribution and use of the ingredient known as beta-alanine sold under our CarnoSyn®, SR CarnoSyn® and TriBsyn™ trademarks.

A cornerstone of our business strategy is to achieve long-term growth and profitability and to diversify our sales base. We have sought and expect to continue to seek to diversify our sales by developing relationships with additional, quality-oriented, private-label contract manufacturing customers, and commercializing our patent estate through sales of beta-alanine under our CarnoSyn®, SR CarnoSyn® and TriBsyn™ trademarks, royalties from license agreements, and potentially additional contract manufacturing opportunities with licensees.

During fiscal 2025, our consolidated net sales were 14% higher than in fiscal 2024. Private-label contract manufacturing net sales increased 16% primarily due to increased orders from two of our larger customers and shipments to new customers partially offset by lower sales from our largest customer. Revenue concentration from our largest private-label contract manufacturing customer as a percentage of our total net sales was 33% in fiscal 2025, and revenue concentration from our largest private-label contract manufacturing customer as a percentage of total net sales in fiscal 2024 was 42%.

During fiscal 2025, patent and trademark licensing revenue decreased 4% to $8.1 million as compared to $8.4 million for fiscal 2024. The decrease in patent and trademark licensing revenue was primarily due to decreased material sales from existing customers partially offset by decreased volume rebates and increased royalty income.

We continue to invest in research and development for the expansion of our CarnoSyn® product offerings. We believe SR CarnoSyn® may provide a unique opportunity within the growing Wellness and Healthy Aging markets but acceptance of this product offering has been limited as we only offer this product in tablet form. In August 2024, we announced our new product called TriBsyn™. We believe TriBsyn™ and its patent-pending formulation will allow us to better penetrate the Wellness and Healthy Aging channel. This groundbreaking product is a carnosine booster that utilizes CarnoSyn® beta-alanine and other proprietary technology to increase beta-alanine bioavailability and absorption while effectively eliminating beta-alanine related paresthesia. This product is available as a raw material powder, which allows formulation flexibility for our customers. The elimination of paresthesia while maintaining efficacy of dosage creates a new opportunity to reach segments of the market that to date have been untapped, including older adults, vegetarians, and vegans. We believe our efforts to refine our formulations and product offerings will be positively received and result in significant opportunity for increased sales of our patented products. We are also working on several additional innovations we believe could lead to new patentable products for CarnoSyn® Brands in the future.

To protect and grow our CarnoSyn® product offerings, we incurred litigation and patent compliance expenses of approximately $0.4 million during fiscal 2025 and $0.2 million during fiscal 2024. Our legal expense associated with our CarnoSyn® business has remained relatively low as we have no active litigation, and the current run-rate of expenses is primarily related to maintenance and expansion of our patent and trademark estate. Our ability to maintain or further increase our beta-alanine royalty and licensing revenue will depend in large part on our ability to develop a market for our sustained release form of beta-alanine marketed under our SR CarnoSyn® trademark and our new beta-alanine product marketed under our TriBsyn™ trademark, maintain our patent rights, the availability and the cost of the raw material when and in the amounts needed, the ability to expand distribution of beta-alanine to new and existing customers, and continued compliance by third parties with our license agreements and our patent, trademark and other intellectual property rights. During fiscal 2026, we will continue our sales and marketing activities to consumers, customers, potential customers, and brand owners on multiple platforms to promote and reinforce the features and benefits of utilizing CarnoSyn®, SR CarnoSyn® and TriBsyn™ beta-alanine products.

We experienced a loss during fiscal 2025 that was primarily due to underutilization of our available factory capacities, a valuation allowance against our domestic net deferred income tax assets and the accrual of a litigation settlement associated with a PAGA claim. Although our overall sales forecast for fiscal 2026 includes a significant increase in sales as compared to fiscal 2025, we currently anticipate we will experience a net loss in the first half of fiscal 2026, net income in the second half of fiscal 2026, and net income for the full fiscal 2026 year.

During fiscal 2026, we plan to continue our focus on:

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Leveraging our state-of-the-art, certified facilities to increase the value of the goods and services we provide to our highly valued private-label contract manufacturing customers, and assist us in developing relationships with additional quality-oriented customers;

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Expanding the commercialization of our beta-alanine patent estate through raw material sales, developing sales distribution channels in Sports Nutrition, Wellness and Healthy Aging and Medical foods for our SR CarnoSyn® and TriBsyn™ beta-alanine product lines, exploiting new contract manufacturing opportunities, license and royalty agreements, and protecting our proprietary rights; and

•

Improving operational efficiencies and managing costs and business risks to improve profitability.

Discussion of Critical Accounting Estimates

We have identified the following as our most critical accounting estimates, which are those that are most important to the portrayal of our financial condition and results, and that require management's most subjective and complex judgments. Information regarding our other significant accounting estimates and policies is disclosed in Note A, Organization and Summary of Significant Accounting Policies, of the notes to the consolidated financial statements.

Revenue Recognition - Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling one or more performance obligations. For certain contracts with volume rebates, our estimates of future sales used to assess the volume rebate estimates are subject to a high degree of judgement and may differ from actual sales due to, among other things, changes in customer orders and raw material availability.

Results of Operations

The following table sets forth selected consolidated operating results for each of the last two fiscal years, presented as a percentage of net sales (dollars in thousands).

		Fiscal Year Ended
		June 30, 2025								June 30, 2024								Increase (Decrease)
Private-label contract manufacturing		$	121,779				94	%		$	105,358				93	%		$	16,421				16	%
Patent and trademark licensing			8,081				6	%			8,438				7	%			(357	)			(4	)%
Total net sales			129,860				100	%			113,796				100	%			16,064				14	%
Cost of goods sold			120,571				93	%			106,931				94	%			13,640				13	%
Gross profit			9,289				7	%			6,865				6	%			2,424				35	%
Other selling, general & administrative expenses			16,549				13	%			15,399				14	%			1,150				7	%
Settlement of legal proceeding and associated expense			1,400				1	%			-				0	%			1,400				100	%
Loss from operations			(8,660	)			(7	)%			(8,534	)			(7	)%			(126	)			1	%
Other loss, net			(2,080	)			(2	)%			(930	)			(1	)%			(1,150	)			124	%
Loss before income taxes			(10,740	)			(8	)%			(9,464	)			(8	)%			(1,276	)			13	%
Provision (benefit) for income taxes			2,835				2	%			(2,247	)			(2	)%			5,082				(226	)%
Net loss		$	(13,575	)			(10	)%		$	(7,217	)			(6	)%		$	(6,358	)			88	%

Private-label contract manufacturing sales increased 16% primarily due to increased orders from two of our larger customers and shipments to new customers partially offset by lower sales from our largest customer. Revenue concentration from our largest private-label contract manufacturing customer as a percentage of our total net sales was 33% in fiscal 2025, and revenue concentration from our largest private-label contract manufacturing customer as a percentage of total net sales in fiscal 2024 was 42%.

Net sales from our patent and trademark licensing segment decreased 4% during fiscal 2025. The decrease in patent and trademark licensing revenue was primarily due to decreased orders from existing customers partially offset by decreased volume rebates and increased royalty income.

The change in gross profit margin for the year ended June 30, 2025, was as follows:

		Percentage
		Change
Contract manufacturing (1)			1.4
Patent and trademark licensing (2)			(0.2	)
Total change in gross profit margin			1.2

1

Private-label contract manufacturing gross profit margin contribution increased 1.4 percentage points in fiscal 2025 as compared to fiscal 2024. The increase in gross profit as a percentage of sales for private-label contract manufacturing is primarily due to a favorable change in product sales mix, partially offset by a marginal increase in manufacturing overhead costs.

2

During fiscal 2025, patent and trademark licensing gross profit margin contribution decreased 0.2 percentage points as compared to fiscal 2024. The decrease in margin contribution during the year ended June 30, 2025 was primarily due to decreased patent and trademark licensing net sales as a percentage of total consolidated net sales, as patent and trademark licensing historically provides higher profit margins than our private-label contract manufacturing business.

Selling, general and administrative expenses, excluding litigation settlement expenses, increased $1.2 million, or 7% to $16.5 million in fiscal 2025 as compared to $15.4 million in fiscal 2024. This increase is primarily due to increased compensation and benefits costs, legal expenses associated with new patent and tradename registrations, rent, and outside sales commissions. Fiscal 2025 results of operations also included a $1.4 million expense associated with an accrued litigation settlement and related legal costs associated with a PAGA claim.

Other expense, net, increased $1.2 million during fiscal 2025 as compared to fiscal 2024. The increase is primarily due to unfavorable foreign currency exchange volatility and increased interest expense due to increased interest rates and usage of our credit facility.

We recorded an income tax provision of $2.8 million during fiscal 2025 as compared to a tax benefit of $2.2 million in fiscal 2024. The change in our income tax provision in fiscal 2025 compared to the benefit recorded in fiscal 2024 is primarily driven by a $4.8 million valuation allowance that was recognized in fiscal 2025 against our net domestic deferred income tax asset.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash flows provided by operating activities and the availability of borrowings under our credit facilities. Net cash provided by operating activities was $5.9 million in fiscal 2025 compared to net cash used in operating activities of $1.5 million in fiscal 2024.

For the year ended June 30, 2025, changes in accounts receivable provided $2.2 million in cash compared to using $9.9 million in fiscal 2024. The increase in cash provided by accounts receivable during fiscal 2025 primarily resulted from timing of sales and the related collections. Days sales outstanding increased to 44 days during fiscal 2025 compared to 38 days during fiscal 2024, primarily due to customer sales mix and timing of sales and the related collections.

Inventory used $0.6 million in cash during fiscal 2025 compared to providing $5.4 million in fiscal 2024. The change in cash activity from inventory was primarily related to the difference in the amount and timing of orders and anticipated sales in fiscal year 2025 as compared to fiscal year 2024. Changes in accounts payable and accrued liabilities provided $2.9 million in cash during fiscal 2025 compared to providing $5.4 million during fiscal 2024. The change in cash flow activity related to accounts payable and accrued liabilities is primarily due to the timing of inventory receipts and payments.

Cash used in investing activities in fiscal 2025 was $3.6 million compared to $3.0 million in fiscal 2024. The primary reason for this change is due to increased capital expenditures. Capital expenditures in fiscal 2025 included costs incurred to install solar energy generation equipment on our manufacturing facilities. Capital expenditures in fiscal 2024 included normal expenditures to support equipment and activities in our facilities in California and Switzerland.

Cash used in financing activities in fiscal 2025 was $2.0 million, compared to $2.9 million provided in fiscal 2024. The change in financing activities includes net payments of $1.5 million on outstanding short-term borrowings on our line of credit in fiscal 2025 compared to a $3.4 million increase in short-term net borrowings on our line of credit in fiscal 2024.

At June 30, 2025, we had $9.9 million of borrowing capacity available on our credit facility of which we had outstanding borrowings of $1.9 million. We also owed $8.9 million on a term loan that was borrowed as part of the purchase of our Carlsbad, California manufacturing facility in August 2021. At June 30, 2024, we had $12.0 million of borrowing capacity available on our credit facility of which we had outstanding borrowings of $3.4 million. We also owed $9.2 million on the term loan.

For the quarter ended June 30, 2025, we were not in compliance with the minimum net income and fixed charge coverage ratio covenants of our credit agreement, but these defaults were prospectively waived by the Sixth Amendment to our credit facility, as discussed below.

As of June 30, 2025, we had $12.3 million in cash and cash equivalents of which $11.9 million was held by NAIE. Overall, we believe our available cash, cash equivalents, potential cash flows from operations, and our line of credit will be sufficient to fund our current working capital needs and capital expenditures through at least the next 12 months. On June 20, 2025, we entered into an amended credit facility with Wells Fargo Bank, National Association ("Wells Fargo"). The amended credit facility extended the maturity date of our credit facility to December 31, 2026, decreased the maximum principal amount that can be borrowed from $12.5 million to $10.0 million, waived all prior events of default, prospectively waived the anticipated covenant violations for the quarter ending June 30, 2025, and modified the financial covenants for the first quarter of fiscal 2026 and beyond. We anticipate we will not be able to comply with all of the covenants required under the modified Credit Agreement in the first half of fiscal 2026, primarily related to the impact on the fixed charge coverage ratio calculation due to the unexpected recognition of the litigation expense and valuation allowance on our net deferred tax assets during the fourth quarter of fiscal 2025. We have advised our lender and are currently negotiating a potential revision to our credit agreement. There can be no assurance we will be able to successfully complete the negotiation of a revised credit facility, or what the differences in amount, cost and other factors may be. Please see Note F in Item 8 of this report for terms of our current modified line of credit.

Off-Balance Sheet Arrangements

As of June 30, 2025, we did not have any significant off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons, in each case that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses material to investors.

Inflation

During fiscal 2025, we experienced continued price increases for product raw material, and other increased operational costs related to inflationary pressure though to a lesser degree than in fiscal 2024. We currently believe increasing raw material and product cost pricing pressures will continue throughout fiscal 2026 as a result of limited supplies of various ingredients, the effects of higher labor and transportation costs, interest rates, tariffs, and global fuel and energy costs. We anticipate current inflation rates will have a negative impact on our fiscal 2026 operations, and we are monitoring the drivers and working with suppliers and customers to mitigate the impact on our results.

Recent Accounting Pronouncements

A discussion of recent accounting pronouncements is included under Note A in the notes to our consolidated financial statements which are included under Item 8 of this report.