Quarterly Report for Quarter Ending September 30, 2025 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis are intended to help you understand our financial condition and results of operations for the three months ended September 30, 2025. You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to the condensed consolidated financial statements included under Item 1 in this Report, as well as the risk factors and other information included in our 2025 Annual Report and other reports and documents we file with the SEC. 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.

Executive Overview

The following overview does not address all of the matters covered in the other sections of this Item 2 or other items in this Report nor does it 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 2 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, and 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 the three months ended September 30, 2025, our net sales were 14% higher than in the three months ended September 30, 2024. Private-label contract manufacturing sales increased 18% primarily due to increased orders from several of our existing customers and shipments to new customers. Revenue concentration for our largest private-label contract manufacturing customer as a percentage of total net sales for the three months ended September 30, 2025 was 38%, and revenue concentration for our largest private-label contract manufacturing customer as a percentage of total net sales for the three months ended September 30, 2024 was 37%. We expect our annualized fiscal 2026 revenue concentration for our largest customer to be lower as compared to our revenue concentration for our largest customer in fiscal 2025.

During the three months ended September 30, 2025, patent and trademark licensing revenue decreased 34% to $1.7 million compared to revenue of $2.5 million for the three months ended September 30, 2024. The decrease in patent and trademark licensing revenue during the three months ended September 30, 2025, was primarily due to lower raw material sales partially offset by sales of our new TriBsyn™ product and increased royalty and licensing revenue.

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 $0.1 million during the three months ended September 30, 2025 and $0.2 million during the three months ended September 30, 2024. Our legal expense associated with our CarnoSyn® business has remained relatively low as we have no active litigation, and our 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 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 the remainder of 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.

Although we realized positive income from operations during the first quarter of fiscal 2026 as compared to a loss from operations during the first quarter of fiscal 2025, we recorded an overall net loss during the first quarter of fiscal 2026 due to increased interest expense and unfavorable foreign exchange activity. The improvement in our results from operations was primarily driven by increased sales and gross profit while selling, general, and administrative expenses remained relatively flat. The improvement in gross profit is primarily related to improved utilization of our factory capacities, increased new and existing customer sales, and lower volume rebates. We continue to anticipate that 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 the remainder of fiscal 2026, we plan to continue our focus on:

	•	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 developing relationships with additional quality-oriented customers;
	•	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 of Item 1 in Part I of this report and as disclosed in our 2025 Annual Report.

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 results of our operations for the three months ended September 30 were as follows (dollars in thousands):

		Three Months Ended
		September 30,
		2025				2024				% Change
Private label contract manufacturing		$	36,065			$	30,630				18	%
Patent and trademark licensing			1,665				2,520				(34	)%
Total net sales			37,730				33,150				14	%
Cost of goods sold			33,333				30,891				8	%
Gross profit			4,397				2,259				95	%
Gross profit %			11.7	%			6.8	%
Selling, general and administrative expenses			4,113				4,095				0	%
% of net sales			10.9	%			12.4	%
Income (loss) from operations			284				(1,836	)			(115	)%
% of net sales			0.8	%			(5.5	)%
Other expense			(483	)			(577	)			(16	)%
Loss before income taxes			(199	)			(2,413	)			(92	)%
% of net sales			(0.5	)%			(7.3	)%
Provision (benefit) for income taxes			92				(431	)			(121	)%
Net loss		$	(291	)		$	(1,982	)			(85	)%
% of net sales			(0.8	)%			(6.0	)%

Private-label contract manufacturing net sales increased 18% during the three months ended September 30, 2025 when compared to the same period in the prior year. The increase in net sales during the three months ended September 30, 2025 was primarily due to increased orders from several of our existing customers and shipments to new customers.

Net sales from our patent and trademark licensing segment decreased 34% during the three months ended September 30, 2025 when compared to the same period in the prior year. The decrease in patent and trademark licensing revenue during the three months ended September 30, 2025, was primarily due to decreased raw material orders from existing customers partially offset by sales of our new TriBsyn™ product and increased royalty and licensing revenue.

The change in gross profit margin for the three months ended September 30, 2025, was as follows:

		Three Months Ended
Contract manufacturing(1)			6.5	%
Patent and trademark licensing(2)			(1.6	)%
Total change in gross profit margin			4.9	%

1

Private-label contract manufacturing gross profit margin as a percentage of consolidated net sales increased 6.5 percentage points during the three months ended September 30, 2025, when compared to the comparable prior year period. The increase in gross profit as a percentage of net sales for private-label contract manufacturing during the three months ended September 30, 2025 is primarily related to an increase in sales volume which decreased our capacity underutilization, along with a favorable change in product sales mix and favorable foreign currency exchange rate fluctuations.

2

Patent and trademark licensing gross profit margin as a percentage of consolidated net sales decreased 1.6 percentage points during the three months ended September 30, 2025 when compared to the comparable prior year period. The decrease in margin contribution was primarily due to decreased patent and trademark licensing net sales in total and 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 remained consistent at $4.1 million during the three months ended September 30, 2025 and September 30, 2024.

Other expense, net decreased $0.1 million during the three months ended September 30, 2025 when compared to the comparable period during the prior year. The decrease is due to a reduction in foreign currency exchange losses.

Our provision for income taxes during the three-month period ended September 30, 2025 increased to an expense of approximately $0.1 million when compared to a benefit for income taxes of approximately $0.4 million during the three months ended September 30, 2024. The increase in our provision for income taxes is primarily due to income before income taxes from our Swiss subsidiary NAIE, while the loss before income taxes from our U.S operations had no impact on our provision for income taxes due to a full valuation allowance on the domestic deferred tax asset from our U.S. operations during the three months ended September 30, 2025.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash flows provided by operating activities and the availability of borrowing under our credit facilities. Net cash used in operating activities was $4.0 million for the three months ended September 30, 2025, compared to net cash used in operating activities of $3.4 million in the comparable period during the prior fiscal year.

For the three months ended September 30, 2025, changes in accounts receivable, consisting of amounts due from our private-label contract manufacturing customers and our patent and trademark licensing activities, used $4.3 million in cash compared to using $0.7 million of cash during the comparable three-month period in the prior year. The change in cash flow activity in accounts receivable during the three months ended September 30, 2025, primarily resulted from the timing of sales and related collections. Days sales outstanding was 41 days during the three months ended September 30, 2025, as compared to 48 days for the prior year period.

Changes in inventory used $5.8 million in cash during the three months ended September 30, 2025, compared to using $1.7 million in the comparable prior year period. The change in cash related to inventory during the three months ended September 30, 2025, was primarily related to the difference in the amount and timing of orders and anticipated sales as compared to the same period in the prior year. Changes in accounts payable and accrued liabilities provided $4.9 million in cash during the three months ended September 30, 2025, compared to using $2.3 million during the three months ended September 30, 2024. The change in cash flow activity related to accounts payable and accrued liabilities was primarily due to the timing of inventory receipts and payments.

Cash used in investing activities in the three months ended September 30, 2025, was $1.0 million compared to $0.3 million in the comparable prior year period. The increase during the three-months ended September 30, 2025 was related to increased capital expenditures primarily related to cost incurred to install solar energy generation equipment on our manufacturing facilities during the three months ended September 30, 2025 as compared to the three months ended September 30, 2024.

Cash provided by financing activities for the three months ended September 30, 2025, was $0.5 million compared to providing $1.9 million in the comparable prior year period. The change in financing activities is primarily due to decreased usage of our credit facility during the three-month period ended September 30, 2025 compared to the three-month period ended September 30, 2024.

As of September 30, 2025, we had $10.0 million of borrowing capacity available on our credit facility of which we had outstanding borrowing of $2.5 million. We also owed $8.9 million on a term loan secured by our Carlsbad, California powder processing and storage facility. As of June 30, 2025, we had outstanding borrowing of $1.9 million on our line of credit, and we also owed $8.9 million on our term loan.

On September 30, 2025, we had $7.7 million in cash and cash equivalents of which $7.5 million was held by NAIE. On October 15, 2025, NAIE paid a dividend of $3.1 million to NAI which is subject to a 5% Swiss withholding tax.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 were not in compliance with the maximum net loss and fixed charge coverage ratio covenants of our credit agreement for the first quarter of fiscal 2026, and we anticipate we will not be able to comply with all of the covenants required under the modified Credit Agreement in the second quarter of fiscal 2026, primarily related to the impact on the fixed charge coverage ratio calculation due to the unexpected recognition of litigation expenses and a valuation allowance on our net domestic 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, Item 1 of Part I of this report for terms of our current modified line of credit.

Off-Balance Sheet Arrangements

As of September 30, 2025, we did not have any 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 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 that would be material to investors.

Recent Accounting Pronouncements

Recent accounting pronouncements are discussed in the notes to our consolidated financial statements included under Item 1, Note A of Part I of this Report. Other than those pronouncements, we are not aware of any other pronouncements that materially affect our financial position or results of operations.