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

Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion contains assumptions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under the heading "Cautionary Note Regarding Forward-Looking Statements," on page 1 of this Form 10-K, "Risk Factors" (Part I, Item 1A of this Form 10-K) and elsewhere in this Form 10-K. These risks could cause our actual results to differ materially from those anticipated in these forward-looking statements.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and related Notes thereto, which are included in Part II, Item 8 of this report. In the following Management's Discussion and Analysis of Financial Condition and Results of Operations, we have rounded many numbers to the nearest one thousand dollars. These numbers should be read as approximate.

Overview

We design, manufacture, and sell a broad range of restorative products for clinical use in physical therapy, rehabilitation, orthopedics, pain management, and athletic training. Through our distribution channels, we market and sell to orthopedists, physical therapists, chiropractors, athletic trainers, sports medicine practitioners, clinics, and hospitals.

Results of Operations

Fiscal Year 2025 Compared to Fiscal Year 2024

Net Sales

Net sales in fiscal year 2025 decreased $5,141,000 or 15.8%, to $27,393,000, compared to net sales of $32,534,000 in fiscal year 2024. The year-over-year decrease is primarily attributable to a reduction in overall volume for OEM customers and a general reduction in demand for the orthopedic soft bracing product category.

Gross Profit

Gross profit for the year ended June 30, 2025 decreased $1,624,000 or 21.3%, to $6,011,000 or 21.9% of net sales. By comparison, gross profit for the year ended June 30, 2024 was $7,635,000, or 23.5% of net sales. The decrease in gross profit as a percentage of net sales was driven by the reduction in net sales we previously discussed.

Selling, General, and Administrative Expenses

Selling, general, and administrative ("SG&A") expenses decreased $1,444,000, or 14.6%, to $8,464,000 for the year ended June 30, 2025, compared to $9,908,000 for the year ended June 30, 2024. The decrease in SG&A was driven primarily by a reduction in salaries and benefits and a reduction in other professional expenses.

Interest Expense, net

Interest expense, net decreased approximately $8,000, or 1.9%, to $410,000 for the year ended June 30, 2025, compared to $418,000 for the year ended June 30, 2024. The decrease in interest expense is primarily due to a lower average outstanding balance on our line of credit during the current period compared to the prior year.

Intangible Assets Impairment

During the annual assessment period, we recorded an impairment charge of $950,000 related to intangible assets for the year ended June 30, 2025 as the carrying value of certain assets was not recoverable. No impairment charge was recorded for the year ended June 30, 2024.

Goodwill Impairment

During the annual assessment period, we determined the carrying value of the Company's subsidiaries exceeded its estimated fair value. Accordingly, a goodwill impairment charge of $7,117,000 was recorded for the year ended June 30, 2025. No impairment charge was recorded for the year ended June 30, 2024.

Other Income (Expense), net

Other income, net increased approximately $47,000 to $41,000 for the year ended June 30, 2025, compared to other expense, net of $6,000 for the year ended June 30, 2024.

Loss Before Income Taxes

Pre-tax loss for the year ended June 30, 2025 was $10,889,000 compared to a loss of $2,698,000 for the year ended June 30, 2024. The change was primarily attributable to a decrease of $1,624,000 in gross profit, offset by a decrease of $1,444,000 in SG&A, an increase of $47,000 in other income (expense), net, a decrease in interest expense, net of $8,000, and the effects of $950,000 in intangible impairment charges and $7,117,000 in goodwill impairment charges and.

Net Loss

Net loss for the year ended June 30, 2025 was $10,902,000 compared to a net loss of $2,698,000 for the year ended June 30, 2024. The reasons for the change in net loss are the same as those given under the headings Loss Before Income Taxes in this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").

Net Loss Attributable to Common Stockholders

Net loss attributable to common stockholders was $11,604,000 ($1.43 per share) for the year ended June 30, 2025, compared to a net loss of $3,429,000 ($1.00 per share) for the year ended June 30, 2024. The change for the year is due primarily to a $8,175,000 increase in net loss, partially offset by a $29,000 increase in deemed dividends on convertible preferred stock and accretion of discounts.

Liquidity, Going Concern and Capital Resources

We have historically financed operations through cash from operating activities, available cash reserves, draws against the line of credit, and proceeds from the sale of our equity securities. As of June 30, 2025, we had $326,000 in cash and cash equivalents, compared to $484,000 as of June 30, 2024.

Working capital was $718,000 as of June 30, 2025, compared to working capital of $2,853,000 as of June 30, 2024. The current ratio was 1.1 to 1 as of June 30, 2025 and 1.4 to 1 as of June 30, 2024. Current assets were 58.0% of total assets as of June 30, 2025, and 40.7% of total assets as of June 30, 2024. The increase of 17.3% is largely attributable to non-cash intangible asset and goodwill impairment charges recorded as of June 30, 2025. These factors raised substantial doubt regarding the Company's ability to continue as a going concern as of June 30, 2025.

The Company has incurred significant recurring operating losses primarily driven by a continuous decline in revenues, recurring negative cash flows, and continued reduction in liquidity. The Company reported operating losses of $2,453,000 and $2,273,000 for the years ended June 30, 2025 and June 30, 2024, respectively. These events have raised substantial doubt about the Company's ability to continue as a going concern. The Company is in the process of creating a comprehensive plan to address these challenges to improve performance, including cost reduction initiatives, streamlining operational processes, pursuing new revenue streams through product diversification, and transitioning production of the majority of our therapeutic modalities from a contract manufacturer to internal operations. This shift to in-house production aims to reduce costs by eliminating third-party markups, enhance quality control with direct oversight of manufacturing processes, and improve supply chain reliability to mitigate risks of disruptions. The Company is also evaluating the current inventory position and working to reduce the amount of excess inventory exposure by promoting discounted prices to convert the excess inventory to cash. The Company will continue to look to add to its sales efforts to further improve revenue, consider additional options to improve operating efficiency, and enhance liquidity. The Company believes that if it successfully implements the foregoing strategic actions, it has a chance to mitigate the factors giving rise to substantial doubt; however, there is no guarantee that it will successfully implement these strategic actions. As a result, substantial doubt remains regarding the Company's ability to continue as a going concern.

In addition to the foregoing, recent tariff changes imposed by the U.S. and China have created increased risks and uncertainties surrounding the Company's future results of operations. The impact of tariffs in the first quarter of 2025 was not material. However, should universal tariffs be implemented as initially announced in April 2025, the Company anticipates a significant adverse impact on its future costs of revenue, which will impact its results of operations. Particularly, the U.S. import tariffs and the reciprocal measures by China, are expected to increase the Company's cost of goods sold. The Company anticipates that some of its suppliers will incur incremental tariff-related costs, which may be passed on to the Company. The extent and duration of the tariffs and the resulting impact on general economic conditions and on the business are uncertain and are expected to be impacted by various factors, such as negotiations between the U.S. and affected countries, the responses of other countries or regions, exemptions or exclusions that already exist or may be granted, availability and cost of alternative sources of the products and materials, and the Company's ability to offset the effects of any tariffs that might be imposed. In response to these risks and uncertainties, the Company has taken affirmative steps to stock adequate inventory of certain key products and components to service immediate orders and is proactively working with its suppliers to mitigate potential tariff-related costs.

Moreover, the continuing effects of uncertainties in the broader economic environment on the global supply chain, higher personnel costs, and changes to customer or product mix, could have an adverse effect on our liquidity and cash and we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. Additionally, we operate in a rapidly evolving and unpredictable business environment that may change the timing or amount of expected future cash receipts and expenditures. Accordingly, there can be no assurance that we will not be required to raise additional funds through the sale of assets, equity or debt securities or from credit facilities. Additional capital, if needed, may not be available on satisfactory terms, or at all.

Intangible Assets and Goodwill Impairment

During the fiscal year ended June 30, 2025, we evaluated our long-term assets for impairment due to indicators such as declining gross margins, sales, and negative enterprise-wide EBITDA, along with operational challenges. The impairment pertains to long-lived assets, including goodwill and intangible assets, assessed as groups with independent cash flows. We applied a multi-step process: identifying triggers, testing recoverability with undiscounted cash flows, and measuring fair value using discounted cash flows, corroborated by other methods. Shared costs were reallocated using an activity-based methodology to reflect stand-alone operations.

This resulted in impairment charges of approximately $950,000 related to intangible assets and $7,117,000 for goodwill where fair values fell below carrying values. The charge includes full write-offs of goodwill and partial write-offs of certain intangible assets with potential impacts on other assets due to negative adjusted EBITDA in certain areas, extended or non-recoverable periods, and low revenue intermingling. Changes in these accounting estimates involved updated forecasts assuming modest growth without major improvements and cost reallocations that reduced projected cash flows and affected fair values using market-based discount rates. These charges affected our results of operations, increasing net losses and reducing asset values. We plan to continue to monitor operations and consider strategies to enhance efficiency.

Line of Credit

On August 1, 2023, the Company entered into a Loan and Security Agreement (the "Loan Agreement") with Gibraltar Business Capital, LLC ("Lender"), to provide asset-based financing to the Company to be used for operating capital. Amounts available under the Loan Agreement (the "Revolving Loans") are subject to a borrowing base calculation of up to a maximum availability of $7,500,000 (the "Revolving Loan Commitment") and bear interest at SOFR plus 5.00%. The Company paid a closing fee of 1.00% of the Revolving Loan Commitment and the line is subject to a monthly unused line fee in an annualized amount equal to 0.50% on the difference between the Revolving Loan Commitment and the average outstanding principal balance of the Revolving Loans for such month. The maturity date is three years from the date of the promissory note evidencing the Revolving Loans, subject to extension in accordance with the terms of the Loan Agreement.

The Loan Agreement provides for revolving credit borrowings by the Company in an amount up to the lesser of the Revolving Loan Commitment and a borrowing base amount equal to the sum of stated percentages of eligible accounts receivable and inventory, less reserves, computed on a weekly basis.

The obligations of the Company under the Loan Agreement are secured by a first-priority security interest in substantially all of the assets of the Company (including, without limitation, accounts receivable, equipment, inventory and other goods, intellectual property, contract rights and other general intangibles, cash, deposit accounts, equity interests in subsidiaries and joint ventures, investment property, documents and instruments, and proceeds of the foregoing).

The Loan Agreement contains affirmative and negative covenants, including covenants that restrict the ability of the Company and its subsidiaries to, among other things, incur or guarantee indebtedness, incur liens, dispose of assets, engage in mergers and consolidations, make acquisitions or other investments, make changes in the nature of its business, and engage in transactions with affiliates. The Loan Agreement also contains financial covenants applicable to the Company and its subsidiaries, including a minimum fixed charge coverage ratio of 1.0 to 1.0 if excess availability is less than $1,000,000 of the borrowing base.

Cash, Cash Equivalents and Restricted Cash

Our cash, cash equivalents and restricted cash position decreased $157,000 to $377,000 as of June 30, 2025, compared to $534,000 as of June 30, 2024. Primary uses of cash in the year ended June 30, 2024 included $303,000 of principal payments on finance lease liabilities, $125,000 of repayments on the line of credit, and $30,000 of purchases of property and equipment. Primary sources of cash included $301,000 of net cash provided by operations.

Trade Accounts Receivable, net

Trade accounts receivable, net of allowance for credit losses, decreased approximately $644,000, or 18.7%, to $2,801,000 as of June 30, 2025, from $3,445,000 as of June 30, 2024. The decrease was driven primarily by a reduction in overall revenue and differences in the timing of collections around the end date of each respective quarter. Trade accounts receivable represents amounts due from our customers including dealers and distributors that purchase our products for redistribution, medical practitioners, clinics, hospitals, colleges, universities, and sports teams. We believe that our estimate of the allowance for credit losses is adequate based on our historical experience and relationships with our customers. Accounts receivable are generally collected within approximately 40 days of invoicing.

Inventories, net

Inventories, net of reserves, decreased $520,000 or 9.3%, to $5,074,000 as of June 30, 2025, compared to $5,594,000 as of June 30, 2024. The decrease was in line with sales trends as safety stock levels for key items are adjusted to sales trends. We believe that our estimate of the allowance for inventory obsolescence is adequate based on our analysis of inventory, sales trends, and historical experience.

Accounts Payable

Accounts payable increased approximately $692,000 or 25.5%, to $3,404,000 as of June 30, 2025, from $2,712,000 as of June 30, 2024. The increase was driven primarily by timing of payments.

Line of Credit

The outstanding balance of the line of credit was $1,997,000 as of June 30, 2025, compared to $2,122,000 as of June 30, 2024.

Finance Lease Liability

Finance lease liability as of June 30, 2025 and 2024 totaled approximately $1,429,000 and $1,732,000, respectively. Our finance lease obligations consist primarily of our Utah building lease. In conjunction with the sale and leaseback of our Utah building in August 2014, we entered into a 15-year lease, classified as a finance lease, originally valued at $3,800,000. The building lease asset is amortized on a straight-line basis over 15 years at approximately $252,000 per year. Total accumulated amortization related to the leased building is approximately $2,750,000 and $2,498,000 at June 30, 2025 and 2024, respectively. The sale generated a profit of $2,300,000, which is being recognized straight-line over the life of the lease at approximately $150,000 per year as an offset to amortization expense. The balance of the deferred gain is $627,000 and $777,000 as of June 30, 2025 and 2024, respectively. Lease payments, currently approximately $33,000, are payable monthly and increase annually by approximately 2% per year over the life of the lease. Imputed interest for the years ended June 30, 2025 and 2024 was approximately $86,000 and $102,000, respectively. In addition to the Utah building, we lease certain equipment pursuant to arrangements which have been determined to be finance leases. As of June 30, 2025, future minimum gross lease payments required under the finance leases were as follows:

2026	$	420,188
2027		428,200
2028		428,080
2029		424,800
2030		71,032
Total	$	1,772,300

Operating Lease Liability

Operating lease liability as of June 30, 2025 and 2024 totaled approximately $3,205,000 and $2,834,000, respectively. Our operating lease liability consists primarily of building leases for office, manufacturing, and warehouse space.

Inflation

Cost inflation including increases in ocean container rates, raw material prices, labor rates, and domestic transportation costs have impacted profitability. Continued imbalances between supply and demand for these resources may continue to exert upward pressure on costs. Our ability to recover these costs increased through price increases may continue to lag the cost increases, resulting in downward pressure on margins.

Stock Repurchase Plan

In 2011, our Board of Directors adopted a stock repurchase plan authorizing repurchases of shares in the open market, through block trades or otherwise. Decisions to repurchase shares under this plan are based upon market conditions, the level of our cash balances, general business opportunities, and other factors. The Board may periodically approve amounts for share repurchases under the plan. As of June 30, 2025, approximately $449,000 remained available under this authorization for purchases under the plan. No purchases have been made under this plan since 2011.

Critical Accounting Policies

This MD&A is based upon our Consolidated Financial Statements (see Part II, Item 8 below), which have been prepared in accordance with accounting principles generally accepted in ("US GAAP"). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. We regularly review our estimates and assumptions. The SEC has requested that all registrants address their most critical accounting policies. The SEC has indicated that a "critical accounting policy" is one which is both important to the representation of the registrant's financial condition and results and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We base our estimates on past experience and on various other assumptions our management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ, and may differ materially from these estimates under different assumptions or conditions. Additionally, changes in accounting estimates could occur in the future from period to period. Our management has discussed the development and selection of our most critical financial estimates with the audit committee of our Board of Directors. The following paragraphs identify our most critical accounting policies:

Inventories

The nature of our business requires that we maintain sufficient inventory on hand at all times to meet the requirements of our customers. We record finished goods inventory at the lower of standard cost, which approximates actual cost (first-in, first-out) or market. Raw materials are recorded at the lower of cost (first-in, first-out) or market. Inventory valuation reserves are maintained for the estimated impairment of the inventory. Impairment may be a result of slow-moving or excess inventory, product obsolescence or changes in the valuation of the inventory. In determining the adequacy of reserves, we analyze the following, among other things:

• Current inventory quantities on hand;

• Product acceptance in the marketplace;

• Customer demand;

• Historical sales;

• Forecast sales;

• Product obsolescence;

• Strategic marketing and production plans;

• Technological innovations; and

• Character of the inventory as a distributed item, finished manufactured item or raw material.

Any modifications to estimates of inventory valuation reserves are reflected in cost of goods sold within the statements of operations during the period in which such modifications are determined necessary by management. As of June 30, 2025 and 2024, our inventory valuation reserve balance was approximately $553,000 and $590,000, respectively, and our inventory balance was $5,074,000 and $5,594,000, net of reserves, respectively.

Revenue Recognition

Our sales force and distributors sell manufactured and distributed products to end users, including orthopedists, physical therapists, chiropractors, athletic trainers, sports medicine practitioners, clinics, and hospitals. Revenue is recognized when performance obligations under the terms of a contract with a customer are satisfied which occurs upon the transfer of control of a product. This occurs either upon shipment or delivery of goods, depending on whether the contract is FOB origin or FOB destination. Revenue is measured as the amount of consideration expected to be received in exchange for transferring products to a customer. Contracts sometimes allow for forms of variable consideration including rebates and incentives. In these cases, the Company estimates the amount of consideration to which it will be entitled in exchange for transferring products to customers utilizing the most likely amount method. Rebates and incentives are estimated based on contractual terms or historical experience and a liability is maintained for rebates and incentives that have been earned but are unpaid. Revenue is reduced by estimates of potential future contractual discounts including prompt payment discounts. Provisions for contractual discounts are recorded as a reduction to revenue in the period sales are recognized. Estimates are made of the contractual discounts that will eventually be incurred. Contractual discounts are estimated based on negotiated contracts and historical experience. Shipping and handling activities are accounted for as fulfillment activities. As such, shipping and handling are not considered promised services to our customers. Costs for shipping and handling of products to customers are recorded as cost of sales.

Allowance for Credit Losses

We must make estimates of the collectability of accounts receivable. In doing so, we analyze historical bad debt trends, customer credit worthiness, current economic trends and changes in customer payment patterns when evaluating the adequacy of the allowance for credit losses. Our accounts receivable balance was $2,800,900 and $3,445,000, net of allowance for credit losses of $60,000 and $49,000 as of June 30, 2025 and 2024, respectively.

Deferred Income Taxes

A valuation allowance is required when there is significant uncertainty as to the realizability of deferred tax assets. The realization of deferred tax assets is dependent upon our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. We have considered the following possible sources of taxable income when assessing the realization of our deferred tax assets:

●	future reversals of existing taxable temporary differences;
●	future taxable income or loss, exclusive of reversing temporary differences and carryforwards;

●	tax-planning strategies; and

●	taxable income in prior carryback years.

We considered both positive and negative evidence in determining the continued need for a valuation allowance, including the following:

Positive evidence:

• Current forecasts indicate that we will generate pre-tax income and taxable income in the future. However, there can be no assurance that our strategic plans will result in profitability; and

• A majority of our tax attributes have indefinite carryover periods.

Negative evidence:

• We have thirteen years of losses out of the last fourteen fiscal years as of June 30, 2025.

We place more weight on objectively verifiable evidence than on other types of evidence and management currently believes that available negative evidence outweighs the available positive evidence. We have therefore determined that we do not meet the "more likely than not" threshold that deferred tax assets will be realized. Accordingly, a valuation allowance is required. Any reversal of the valuation allowance in future periods will favorably impact our results of operations in the period of reversal. As of June 30, 2025 and 2024, we recorded a full valuation allowance against our net deferred income tax assets. As of June 30, 2025, the Company had federal and state operating loss carryforwards of $24.7 million and $12.6 million, respectively. The federal net operating loss carryforwards have carryforward periods that are indefinite or begin to expire in 2037. The state net operating loss carryforwards have carryforward periods that are indefinite or have various expirations.

Impairment of Goodwill and Long-Lived Assets

We test goodwill and long lived assets for impairment annually or upon triggers such as performance declines. Judgment includes identifying asset groups, allocating shared costs, and choosing valuation methods like discounted cash flows with projections over 10 years, assuming moderate growth and risk-adjusted discount rates. Fair values are sensitive to assumptions such as small changes in discount rates, margins, or growth, which could significantly impact estimates and trigger additional impairments. Implied returns may be below market rates in certain cases. In 2025, fair values of goodwill and certain intangible assets did not substantially exceed carrying values in impaired areas, leading to charges, while others approximated carrying values. Adverse deviations from these assumptions could require further impairment.

Recent Accounting Pronouncements

See Note 1 to the Consolidated Financial Statements included in Item 8 of the Form 10-K for a description of recent accounting pronouncements.

Off-Balance Sheet Financing

We have no off-balance sheet debt or similar obligations. We have no transactions or obligations with related parties that are not disclosed, consolidated into or reflected in our reported results of operations or financial position. We do not guarantee any third-party debt.

Business Plan and Outlook

This past year our focus has been on driving profitability in our business through continued business optimization initiatives and new product launches, while continuing to build our restorative products platform for long-term success.

We are confident that the steps we have taken will position the Company for success moving forward. In fiscal 2026, we are focused on executing our strategies as follows:

●	Drive sales through enhancing our partnerships with key strategic accounts, demand generation, and continuing to deliver a superior customer experience;

●	Increase our operating profitability through disciplined product portfolio management; and

●	Pursue merger and acquisition opportunities in our core markets through pipeline management, disciplined valuation, and superior execution.

We are actively pursuing an acquisition strategy to consolidate other manufacturers in our core markets (i.e. physical therapy, rehabilitation, orthopedics, pain management, and athletic training).