Quarterly Report for Quarter Ending March 31, 2026 (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 and nine months ended March 31, 2026. 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 nine months ended March 31, 2026, our net sales were 13% higher than in the nine months ended March 31, 2025. Private-label contract manufacturing sales increased 14% primarily due to increased orders from one of our largest customers and several of our other existing customers and shipments to new customers, partially offset by reduced orders from other existing customers. Revenue concentration for our largest private-label contract manufacturing customer as a percentage of total net sales for the nine months ended March 31, 2026 was 27%, and revenue concentration for our largest private-label contract manufacturing customer as a percentage of total net sales for the nine months ended March 31, 2025 was 35%. 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 nine months ended March 31, 2026, patent and trademark licensing revenue decreased 11% to $5.3 million compared to revenue of $6.0 million for the nine months ended March 31, 2025. The decrease in patent and trademark licensing revenue during the nine months ended March 31, 2026 was primarily due to lower instant release CarnoSyn® raw material sales and lower royalty and licensing revenue, partially offset by sales of our new TriBsyn® product.

We continue to invest in research and development for the expansion of our CarnoSyn® Brands product offerings. In August 2024, we announced our new product called TriBsyn® which is a clinically supported carnosine booster designed for daily wellness, delivering the benefits of beta-alanine without the paresthesia commonly associated with traditional forms. We believe TriBsyn® and its patent-pending formulation will allow us to better penetrate the Wellness and Healthy Aging channel. On April 20, 2026, we launched a new product called CarnoSyn® 4X, the most advanced sports nutrition CarnoSyn® beta-alanine formulation to date. This new ingredient delivers more than four times the bioavailability of standard beta-alanine without paresthesia utilizing the same microencapsulation technology as TriBsyn® and is positioned for the Sports Nutrition channel. On May 4, 2026, we announced expanded market applications for TriBsyn®, unlocking new opportunities across beverage, dairy, and medical nutrition categories. With these expanded capabilities, TriBsyn® is now ideally suited for ready-to-drink beverages, protein drinks, and dairy-based products, as well as gummies and medical nutrition applications. These groundbreaking products utilize CarnoSyn® beta-alanine and other proprietary technology to increase beta-alanine bioavailability and absorption while effectively eliminating beta-alanine related paresthesia. These products are available as 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 and patent pending products.

To protect and grow our CarnoSyn® product offerings, we incurred litigation and patent compliance expenses of approximately $0.3 million during the nine months ended March 31, 2026 and nine months ended March 31, 2025. 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 expand the market for our sustained release form of beta-alanine marketed under our SR CarnoSyn® trademark and our new beta-alanine products marketed under our TriBsyn® and CarnoSyn® 4X trademarks, 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®, CarnoSyn® 4X and TriBsyn® beta-alanine products.

While we grew our net sales during the three and nine months ended March 31, 2026, we experienced a loss from operations during the first nine months of fiscal 2026 primarily due to underutilization of our factory capacities. The growth in net sales is primarily related to increased new and existing private label contract manufacturing customer sales that also drove improved factory utilization partially offset by a decrease in patent and trademark licensing net sales. The improvement in gross profit during the first nine months of fiscal 2026 related to increased new and existing customer sales that also drove improved factory utilization. Selling, general and administrative expenses increased as compared to the prior year primarily related to an increase in compensation expense related to increased headcount required to support the growth in sales and an increase in advertising expense to promote our TriBsyn® product offerings. We anticipate our sales revenue for the fourth quarter of fiscal 2026 will increase as compared to fiscal 2025 and the third quarter of fiscal 2026. We also anticipate we will experience a net loss for the fourth quarter of fiscal 2026 and an overall net loss for the full year of fiscal 2026.

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 and trademark estate in Sports Nutrition, Wellness and Healthy Aging and Medical food channels with our CarnoSyn®, SR CarnoSyn®, CarnoSyn® 4X, 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 and nine months ended March 31 were as follows (dollars in thousands):

		Three Months Ended												Nine Months Ended
		March 31,												March 31,
		2026				2025				% Change				2026				2025				% Change
Private label contract manufacturing		$	33,809			$	27,075				25	%		$	102,678			$	90,021				14	%
Patent and trademark licensing			1,673				1,691				(1	)%			5,329				5,973				(11	)%
Total net sales			35,482				28,766				23	%			108,007				95,994				13	%
Cost of goods sold			35,099				26,940				30	%			100,736				90,240				12	%
Gross profit			383				1,826				(79	)%			7,271				5,754				26	%
Gross profit %			1.1	%			6.3	%							6.7	%			6.0	%
Selling, general and administrative expenses			4,397				3,926				12	%			12,848				12,470				3	%
% of net sales			12.4	%			13.6	%							11.9	%			13.0	%
Loss from operations			(4,014	)			(2,100	)			91	%			(5,577	)			(6,716	)			(17	)%
% of net sales			(11.3	)%			(7.3	)%							(5.2	)%			(7.0	)%
Other expense			(229	)			(542	)			(58	)%			(1,194	)			(1,205	)			(1	)%
Loss before income taxes			(4,243	)			(2,642	)			61	%			(6,771	)			(7,921	)			(15	)%
% of net sales			(12.0	)%			(9.2	)%							(6.3	)%			(8.3	)%
Provision (benefit) for income taxes			68				(456	)			(115	)%			384				(1,562	)			(125	)%
Net loss		$	(4,311	)		$	(2,186	)			97	%		$	(7,155	)		$	(6,359	)			13	%
% of net sales			(12.1	)%			(7.6	)%							(6.6	)%			(6.6	)%

Private-label contract manufacturing net sales increased 25% during the three months ended March 31, 2026, and increased 14% during the nine months ended March 31, 2026, when compared to the same periods in the prior year. The increase in net sales during the three and nine months ended March 31, 2026 was primarily due to increased orders from one of our largest customers and shipments to new customers, which was partially offset by a net decrease in shipments to other existing customers.

Net sales from our patent and trademark licensing segment decreased 1% during the three months ended March 31, 2026, and decreased 11% during the nine months ended March 31, 2026, when compared to the same periods in the prior year. The decrease in patent and trademark licensing revenue during the three months ended March 31, 2026, was primarily due to lower instant release CarnoSyn® raw material sales partially offset by an increase in royalty and licensing revenue. The decrease in patent and trademark licensing revenue during the nine months ended March 31, 2026, was primarily due to lower instant release CarnoSyn® raw material sales and lower royalty and licensing revenue, partially offset by TriBsyn® product sales.

The change in gross profit margin for the three and nine months ended March 31, 2026, was as follows:

		Three Months Ended				Nine Months Ended
Contract manufacturing(1)			(4.5	)%			1.6	%
Patent and trademark licensing(2)			(0.7	)%			(0.9	)%
Total change in gross profit margin			(5.2	)%			0.7	%

1

Private-label contract manufacturing gross profit margin as a percentage of consolidated net sales decreased 4.5 percentage points during the three months ended March 31, 2026 and increased 1.6 percentage points during the nine months ended March 31, 2026, when compared to the comparable prior year periods. The decrease in gross profit as a percentage of net sales for private-label contract manufacturing during the three months ended March 31, 2026 is primarily related to an unfavorable shift in product sales mix partially offset by favorable foreign currency exchange rate fluctuations. The increase in gross profit as a percentage of net sales for private-label contract manufacturing during the nine months ended March 31, 2026 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 0.7 percentage points during the three months ended March 31, 2026 when compared to the comparable prior year period. The decrease in margin contribution was primarily due to a decrease in raw material sales partially offset by an increase in royalty and licensing revenue. During the nine months ended March 31, 2026, patent and trademark licensing margin contribution decreased 0.9 percentage points when compared to the comparable prior year period. The decrease in margin contribution was primarily due to a decrease in patent and trademark licensing net sales in total and as a percentage of total consolidated net sales, as patent and trademark licensing revenue historically provides higher profit margins than our private-label contract manufacturing business.

Selling, general and administrative expenses increased approximately $0.5 million, or 12%, during the three months ended March 31, 2026 and increased approximately $0.4 million or 3% during the nine months ended March 31, 2026 when compared to the comparable periods in the prior year. Both increases compared to the same periods in the prior year are primarily related to increases in compensation expenses primarily due to increased headcount required to support the increase in private label contract manufacturing sales and increased marketing and advertising expenses related to our TriBsyn® product line.

Other expense, net decreased $0.3 million during the three months ended March 31, 2026 primarily due to favorable net foreign exchange activity. Other expense, net during the nine months ended March 31, 2026 was consistent with Other expense, net during the nine months ended March 31, 2025.

Our provision for income taxes during the three-month period ended March 31, 2026 increased to an expense of approximately $0.1 million when compared to a benefit for income taxes of approximately $0.5 million during the three months ended March 31, 2025. Our provision for income taxes during the nine months ended March 31, 2026 increased to $0.4 million compared to a tax benefit of $1.6 million in the comparable period during the prior fiscal year. The increase in our provision for income taxes during the three and nine months ended March 31, 2026 is primarily due to a 5% Swiss withholding tax on a dividend paid by NAIE to NAI as well as income before income taxes from NAIE. 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 net deferred tax asset from our U.S. operations during the three and nine months ended March 31, 2026.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash flows from operating activities and the availability of borrowings under our credit facilities. Net cash used in operating activities was $7.9 million for the nine months ended March 31, 2026, compared to net cash provided by operating activities of $2.6 million in the comparable period during the prior fiscal year.

For the nine months ended March 31, 2026, changes in accounts receivable, consisting of amounts due from our private-label contract manufacturing customers and our patent and trademark licensing activities, used $5.9 million in cash compared to providing $5.2 million of cash during the comparable nine-month period in the prior year. The change in cash flow activity in accounts receivable during the nine months ended March 31, 2026, primarily resulted from the timing of sales and related collections. Days sales outstanding was 45 days during the nine months ended March 31, 2026, as compared to 41 days for the prior year period.

Changes in inventory used $5.1 million in cash during the nine months ended March 31, 2026, compared to using $2.7 million in the comparable prior year period. The change in cash related to inventory during the nine months ended March 31, 2026, 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 $2.6 million in cash during the nine months ended March 31, 2026, compared to providing $1.0 million during the nine months ended March 31, 2025. 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 nine months ended March 31, 2026, was $3.1 million compared to $2.2 million in the comparable prior year period. The increase during the nine months ended March 31, 2026 was related to increased capital expenditures primarily related to costs incurred to install solar energy generation equipment on our manufacturing facilities during the nine months ended March 31, 2026 as compared to the nine months ended March 31, 2025.

Cash provided by financing activities for the nine months ended March 31, 2026, was $7.8 million compared to using $1.8 million in the comparable prior year period. The change in financing activities is primarily due to increased usage of our credit facility during the nine-month period ended March 31, 2026 compared to the nine-month period ended March 31, 2025.

As of March 31, 2026, we had $10.0 million of borrowing capacity available on our credit facility of which we had outstanding borrowings of $10.0 million. We also owed $8.7 million on a term loan secured by our Carlsbad, California powder processing and storage facility. As of June 30, 2025, we had outstanding borrowings of $1.9 million on our line of credit, and we also owed $8.9 million on our term loan.

On March 31, 2026, we had $9.2 million in cash and cash equivalents of which $7.0 million was held by NAIE. On October 15, 2025, NAIE paid a dividend of $3.1 million to NAI which was subject to a 5% Swiss withholding tax.

On May 18, 2026, we entered into a new Loan and Security Agreement with Legacy Corporate Lending, LLC ("Legacy") with a maturity date of May 18, 2029. This new credit facility includes a new term loan for $11.0 million and a working capital line of credit with a maximum borrowing capacity of $20.0 million. This new credit facility refinances the credit line and Term Note previously held by Wells Fargo and will be secured by all of the domestic assets of the Company. With this new credit facility, 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. Please see Note F, Item 1 of Part I of this Report for additional information regarding the terms of new line of credit.

After careful consideration of the Company's current financial position and strategic objectives, management has determined the sale of the Company's corporate headquarters building is in the best interests of the Company and its stockholders. The Board of Directors has concluded that divesting this real property asset will provide the Company with enhanced financial flexibility and additional liquidity needed to pursue business opportunities. In light of the Company's recent operating challenges, management believes unlocking the capital currently held in the headquarters facility will allow the Company to redeploy those proceeds toward new initiatives, fund working capital needs, and better position the Company for sustainable growth. Management believes much of the personnel and systems at the corporate headquarters can be effectively relocated to the Company's other California properties and to the extent required additional facilities can be rented nearby at costs that will be competitive.

Off-Balance Sheet Arrangements

As of March 31, 2026, 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.