NATURAL ALTERNATIVES INTERNATIONAL INC

Previous wording

The following discussion and analysis are intended to help you understand our financial condition and results of operations for the three and six months ended December 31, 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.

Current wording

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.

Previous wording

During the six months ended December 31, 2025, our net sales were 8% higher than in the six months ended December 31, 2024. Private-label contract manufacturing sales increased 9% primarily due to increased orders from several of our 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 six months ended December 31, 2025 was 31%, and revenue concentration for our largest private-label contract manufacturing customer as a percentage of total net sales for the six months ended December 31, 2024 was 34%. 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.

Current wording

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.

Previous wording

During the six months ended December 31, 2025, patent and trademark licensing revenue decreased 15% to $3.7 million compared to revenue of $4.3 million for the six months ended December 31, 2024. The decrease in patent and trademark licensing revenue during the six months ended December 31, 2025 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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

To protect and grow our CarnoSyn® product offerings, we incurred litigation and patent compliance expenses of approximately $0.2 million during the six months ended December 31, 2025 and $0.3 million during the six months ended December 31, 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.

Current wording

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.

Previous wording

While we grew our net sales, expanded our gross margins and reduced selling, general and administrative costs during the three and six months ended December 31, 2025, we experienced a loss from operations during the first six months of fiscal 2026 primarily due to underutilization of our factory capacities. The improvement in gross profit is primarily related to increased new and existing customer sales that also drove improved factory utilization. Selling, general and administrative expenses decreased slightly as compared to the prior year primarily related to a reduction in legal fees associated with our patent estate and a customer credit loss in the prior year. Although we anticipate we will increase our sales revenue during the remaining two quarters of fiscal 2026 as compared to the prior year periods and the first half of this year, we now believe that we will experience a net loss in the second half of fiscal 2026, and a net loss for the full fiscal 2026 year due to declines in our customer’s forecasted sales along with delayed new product launches.

Current wording

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.

Previous wording

The results of our operations for the three and six months ended December 31 were as follows (dollars in thousands):

Current wording

The results of our operations for the three and nine months ended March 31 were as follows (dollars in thousands):

Previous wording

Private-label contract manufacturing net sales increased 2% during the three months ended December 31, 2025, and increased 9% during the six months ended December 31, 2025, when compared to the same periods in the prior year. The increase in net sales during the three and six months ended December 31, 2025 was primarily due to increased orders from several of our existing customers and shipments to new customers, which was partially offset by decreased shipments to other existing customers.

Current wording

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.

Previous wording

Net sales from our patent and trademark licensing segment increased 13% during the three months ended December 31, 2025, and decreased 15% during the six months ended December 31, 2025, when compared to the same periods in the prior year. The increase in patent and trademark licensing revenue during the three months ended December 31, 2025, was primarily due to increased raw material orders from existing customers partially offset by a decrease in royalty and licensing revenue. The decrease in patent and trademark licensing revenue during the six months ended December 31, 2025, was primarily due to decreased raw material orders from existing customers and decreased royalty and licensing revenue, partially offset by sales of our new TriBsyn™ product.

Current wording

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.

Previous wording

The change in gross profit margin for the three and six months ended December 31, 2025, was as follows:

Current wording

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

Previous wording

Selling, general and administrative expenses decreased approximately $0.1 million, or 2%, during the three months ended December 31, 2025 and $0.1 million or 1% during the six months ended December 31, 2025 when compared to the comparable periods in the prior year. Both decreases compared to the same periods in the prior year are primarily related to decreases in allowance for credit losses and legal expenses associated with our patent estate, partially offset by increases in compensation and benefits expenses and new product promotional expenses related to the new TriBsyn™ product.

Current wording

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.

Previous wording

Our provision for income taxes during the three-month period ended December 31, 2025 increased to an expense of approximately $0.2 million when compared to a benefit for income taxes of approximately $0.7 million during the three months ended December 31, 2024. Our provision for income taxes during the six-month period ended December 31, 2025 increased to $0.3 million compared to a tax benefit of $1.1 million in the comparable period during the prior fiscal year. The increase in our provision for income taxes during the three and six months ended December 31, 2025 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 six months ended December 31, 2025.

Current wording

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.

Previous wording

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 $10.4 million for the six months ended December 31, 2025, compared to net cash used in operating activities of $3.4 million in the comparable period during the prior fiscal year.

Current wording

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.

Previous wording

For the six months ended December 31, 2025, changes in accounts receivable, consisting of amounts due from our private-label contract manufacturing customers and our patent and trademark licensing activities, used $3.1 million in cash compared to using $0.1 million of cash during the comparable six-month period in the prior year. The change in cash flow activity in accounts receivable during the six months ended December 31, 2025, primarily resulted from the timing of sales and related collections. Days sales outstanding was 41 days during the six months ended December 31, 2025, as compared to 46 days for the prior year period.

Current wording

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.

Previous wording

Changes in inventory used $8.6 million in cash during the six months ended December 31, 2025, compared to providing $1.2 million in the comparable prior year period. The change in cash related to inventory during the six months ended December 31, 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 $0.9 million in cash during the six months ended December 31, 2025, compared to using $3.5 million during the six months ended December 31, 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.

Current wording

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.

Previous wording

Cash used in investing activities in the six months ended December 31, 2025, was $2.0 million compared to $1.4 million in the comparable prior year period. The increase during the six months ended December 31, 2025 was related to increased capital expenditures primarily related to costs incurred to install solar energy generation equipment on our manufacturing facilities during the six months ended December 31, 2025 as compared to the six months ended December 31, 2024.

Current wording

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.

Previous wording

Cash provided by financing activities for the six months ended December 31, 2025, was $3.7 million compared to providing $1.4 million in the comparable prior year period. The change in financing activities is primarily due to increased usage of our credit facility during the six-month period ended December 31, 2025 compared to the six-month period ended December 31, 2024.

Current wording

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.

Previous wording

As of December 31, 2025, we had $10.0 million of borrowing capacity available on our credit facility of which we had outstanding borrowing of $5.8 million. We also owed $8.8 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.

Current wording

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.

Previous wording

On December 31, 2025, we had $3.8 million in cash and cash equivalents all of which 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. 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. On December 12, 2025, we received a waiver from Wells Fargo related to covenant violations for the three months ended September 30, 2025. We have advised our lender that we are not in compliance with our covenants as of December 31, 2025 and that we do not expect to be in compliance with the covenants for the third quarter of fiscal 2026. We are in discussions with the lender regarding an additional waiver for these events of non-compliance, and they have indicated they will not exercise their option to terminate the agreement. Concurrently, we are in active discussions with a potential new asset-based lender that we believe will provide an increased borrowing facility to support our expected business growth and provide greater flexibility in working capital availability and covenant requirements. There can be no assurance we will be able to successfully complete the negotiation of a new 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.

Current wording

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.