# Natural Alternatives International Inc: Form 10-Q for the period ended Sep 30, 2021

- Company: [Natural Alternatives International Inc](/companies/naii.md) (CIK 787253)
- Form: 10-Q
- Filed: 2021-11-09
- Accepted by EDGAR: Nov 9, 2021, 16:16 ET
- Period: 2021-09-30
- Accession: 0001437749-21-025928
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/787253/000143774921025928/naii20210930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/787253/000143774921025928/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-07-01 to 2021-09-30 | $38.3m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2021-07-01 to 2021-09-30 | $30.1m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2021-07-01 to 2021-09-30 | $8.3m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2021-07-01 to 2021-09-30 | $4.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2021-07-01 to 2021-09-30 | $4.2m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2021-07-01 to 2021-09-30 | $946.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-07-01 to 2021-09-30 | $3.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-07-01 to 2021-09-30 | $0.51 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-07-01 to 2021-09-30 | $0.52 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-07-01 to 2021-09-30 | 6,351,345 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2021-07-01 to 2021-09-30 | −$3.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2021-07-01 to 2021-09-30 | $18.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2021-07-01 to 2021-09-30 | $10.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2021-09-30 | $20.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-09-30 | $75.2m | us-gaap:AssetsCurrent |
| Total assets | at 2021-09-30 | $132.2m | us-gaap:Assets |
| Current liabilities | at 2021-09-30 | $20.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2021-09-30 | $47.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2021-09-30 | $84.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 20,586 characters.

The following discussion and analysis is intended to help you understand our financial condition and results of operations for the three months ended September 30, 2021. 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 2021 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 license and supply agreements with third parties, granting them the right to use our patents, trademarks and other intellectual property in connection with the distribution and use of the ingredient known as beta-alanine sold under our CarnoSyn® and SR CarnoSyn® 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® and SR CarnoSyn® trade names, royalties from license agreements, and potentially additional contract manufacturing opportunities with licensees.

During the first three months of fiscal 2022, our net sales were 3% lower than in the first three months of fiscal 2021. Private-label contract manufacturing sales decreased 9% primarily due to lower sales to our largest customer. Sales to this customer decreased 45% as compared to the same period in the prior year with a majority of the decrease associated with an inventory reduction program mostly related to their European business. The decrease in sales to our largest customer was mostly offset by increased sales from other existing customers and sales to a new customer. Revenue concentration risk for our largest private-label contract manufacturing customer as a percentage of our total net sales decreased from 60% to 35% for the three months ended September 30, 2021 compared to the three months ended September 30, 2020. We expect our annualized fiscal year 2022 revenue concentration for this customer to be lower than fiscal year 2021.

During the first three months of fiscal 2022, patent and trademark licensing revenue increased 77% to $4.7 million, compared to revenue of $2.7 million for the first three months of fiscal 2021. The increase in patent and trademark licensing revenue during the first quarter of fiscal 2022 was primarily due to increased shipments to existing customers related to athletic activities and gyms reopening in accordance with easing COVID-19 restrictions across the USA as compared to significant restrictions in athletic activities in the first quarter of fiscal 2021 combined with sales to new customers and higher average sales prices.

We continue to invest in research and development for our SR CarnoSyn® sustained release delivery system. We believe SR CarnoSyn® may provide a unique opportunity within the growing Wellness and Healthy Aging markets. We believe our recent efforts to refine our formulations and product offerings will be positively received and result in significant opportunity for increased SR CarnoSyn® sales.

To protect our CarnoSyn® business and our patents, trademarks and other intellectual property, we incurred litigation and patent compliance expenses of approximately $0.1 million during the first three months of fiscal 2022 as compared to $0.4 million during the comparable period in fiscal 2021. The decrease in these legal expenses on a year over year basis was primarily due to the successful resolution of several cases that were settled. 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, maintain our patent rights, obtain the raw material beta-alanine when and in the amounts needed, 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 2022, 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® and SR CarnoSyn® beta-alanine.

Based on our current sales order volumes and forecasts we have received from our customers, we now anticipate our fiscal 2022 consolidated net sales will increase between 7.0% and 10.0% as compared to fiscal 2021. We also now anticipate we will generate operating income between 10.0% and 13.0% of net sales for our fiscal year ending June 30, 2022. Sales and profitability during the first half of fiscal 2022 are anticipated to decline when compared to the same period of fiscal 2021. Our expectations for the first half of fiscal 2022 are being driven by continuing supply chain, labor and logistical constraints, all of which are expected to result in a backlog of existing orders that may not get fully cleared until the second half of fiscal 2022. We currently anticipate these manufacturing challenges will mostly resolve themselves during the second half of fiscal 2022. As a result, we expect sales and profitability in the second half of fiscal 2022 to exceed the comparable period in fiscal 2021, with the overall fiscal 2022 results reflecting an increase in both sales and profitability on a full year basis. There can be no assurance our expectations will result in the currently anticipated increase in net sales or operating income. Notwithstanding, we are also closely monitoring the impact of the COVID-19 pandemic. Currently, we cannot reasonably estimate the length of time or severity of the pandemic and cannot currently reliably estimate the impact this pandemic may have on our consolidated financial results for fiscal 2022 and beyond.

### Impact of COVID-19 on Our Business

The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption and has and will likely continue to affect our business. Significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. Our facilities, located both in the United States and Europe, continue to operate as an essential and critical manufacturer in accordance with applicable federal, state, and local regulations, however, there can be no assurance our facilities will continue to operate without interruption. Factors that derive from COVID-19 and the accompanying response, and that have or may negatively impact sales and gross margin in the future include, but are not limited to the following:

- Limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the materials included in the products we sell, or to meet delivery requirements and commitments;
- Limitations on the ability of our employees to perform their work due to illness caused by the pandemic or due to other restrictions on our employees to keep them safe and the increased cost of measures taken to ensure employee health and safety;
- Limitation on the availability of qualified individuals to adequately staff our manufacturing facilities;
- Limitations on the ability of carriers to deliver materials to us or deliver our products to customers;
- Limitations on the ability of our customers to conduct their business and purchase our products and services; and
- Limitations on the ability of our customers to pay us on a timely basis.

We will continue to actively monitor the situation and may take further actions to alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders. While we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we believe we will be able to remain operational and our working capital will be sufficient for us to remain operational even as the longer term consequences of this pandemic become known.

During the remainder of fiscal year 2022, we also 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 to assist us in developing relationships with additional quality oriented customers;
- Expanding the commercialization of our beta-alanine patent estate through raw material sales, developing a new sales distribution channel under the Wellness and Healthy Aging category for our sustained release form of beta-alanine marketed under our SR CarnoSyn® trademark, 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.

18

### 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 the Company’s financial condition and results, and that require management’s most subjective and complex judgments. Information regarding our other significant accounting estimates and policies are disclosed in Note 1 of Item 1 of this report and as disclosed in the 2021 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, 2021 | 2020 | % Change |
| --- | ---: | ---: | ---: |
| Private-label contract manufacturing | $33,594 | $37,047 | (9)% |
| Patent and trademark licensing | 4,746 | 2,679 | 77% |
| Total net sales | 38,340 | 39,726 | (3)% |
| Cost of goods sold | 30,059 | 33,721 | (11)% |
| Gross profit | 8,281 | 6,005 | 38% |
| Gross profit % | 21.6% | 15.1% |  |
| Selling, general and administrative expenses | 4,053 | 3,920 | 3% |
| % of net sales | 10.6% | 9.9% |  |
| Income from operations | 4,228 | 2,085 | 103% |
| % of net sales | 11.0% | 5.2% |  |
| Total other income (expense) | (26) | (321) | (92)% |
| Income before income taxes | 4,202 | 1,764 | 138% |
| % of net sales | 11.0% | 4.4% |  |
| Provision (benefit) for income taxes | 946 | (494) | 291% |
| Net income | $3,256 | $2,258 | 44% |
| % of net sales | 8.5% | 5.7% |  |

Private-label contract manufacturing net sales decreased 9% during the three months ended September 30, 2021 when compared to the same period in the prior year. The decrease was primarily due to lower sales to our largest customer. Sales to this customer decreased 45% as compared to the same period in the prior year with a majority of the decrease associated with their European business. The decrease in sales to our largest customer was mostly offset by increased sales from other existing customers and sales to a new customer.

Net sales from our patent and trademark licensing segment increased 77% during the three months ended September 30, 2021 when compared to the same period in the prior year. The increase in patent and trademark licensing revenue during the first quarter of fiscal 2022 was primarily due to increased shipments to existing customer related to athletic activities and gyms reopening in accordance with easing COVID-19 restrictions across the USA as compared to significant restrictions in athletic activities in the first quarter of fiscal 2021 combined with sales to new customers and higher average sales prices.

The change in gross profit margin for the three months ended September 30, 2021, was as follows:

|  | Three Months Ended |
| --- | ---: |
| Contract manufacturing(1) | 2.0% |
| Patent and trademark licensing(2) | 4.5 |
| Total change in gross profit margin | 6.5% |

1 Private-label contract manufacturing gross profit margin as a percentage of consolidated net sales increased 2.0 percentage points during the three months ended September 30, 2021 when compared to the comparable prior year period. The increase in gross profit as a percentage of sales for private-label contract manufacturing is primarily due to favorable sales mix partially offset by a marginal increase in per unit manufacturing costs.

2 Patent and trademark licensing gross profit margin as a percentage of consolidated net sales increased 4.5 percentage points during the three months ended September 30, 2021 when compared to the comparable prior year period. The increase in margin contribution was primarily due to increased patent and trademark licensing net sales as a percentage of total consolidated net sales along with favorable sales mix, higher average net sales prices per unit, and a change in estimate regarding certain volume rebate programs.

Selling, general and administrative expenses increased $0.1 million, or 3%, during the three months ended September 30, 2021, as compared to the comparable prior year period, primarily due to slightly increased compensation and bad debt expense partially offset by lower patent and trademark legal expenses.

Other income (expense), net, decreased $0.3 million during the three months ended September 30, 2021, when compared to the comparable prior year period. The decrease was primarily due to the favorable foreign exchange revaluation activity associated with our balance sheet and the fluctuations in unhedged foreign currency rates when compared to the same period in the prior fiscal year.

Our income tax expense increased $1.4 million, during the three months ended September 30, 2021 when compared to the same period in fiscal 2021. This increase was primarily related to a discrete tax benefit of $0.9 million recorded during the three months ended September 30, 2020 without a corresponding discrete item in the three months ended September 30, 2021. In addition, taxable income was higher in the first quarter of fiscal 2022 as compared to the first quarter in fiscal 2021.

### Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash flows provided by operating activities and the availability of borrowings under our credit facility. Net cash used by operating activities was $3.8 million for the three months ended September 30, 2021 compared to net cash provided by operating activities of $0.1 million in the comparable period in the prior fiscal year.

At September 30, 2021, changes in accounts receivable, consisting of amounts due from our private-label contract manufacturing customers and our patent and trademark licensing activities, used $2.4 million in cash compared to using $2.2 million of cash during the comparable three month period in the prior year. The increase in cash used by accounts receivable during the three months ended September 30, 2021 primarily resulted from the timing of sales and related collections. Days sales outstanding was 46 days during the three months ended September 30, 2021 as compared to 42 days for the prior year period.

Changes in inventory used $4.7 million in cash during the three months ended September 30, 2021 compared to using $7.2 million in the comparable prior year period. The change in cash related to inventory during the three months ended September 30, 2021 was primarily related to the difference in the amount and timing of orders and anticipated sales as compared to same period in the prior year. Changes in accounts payable and accrued liabilities provided $0.3 million in cash during the three months ended September 30, 2021 compared to providing $6.6 million during the three months ended September 30, 2020. 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, 2021 was $18.3 million compared to $1.5 million in the comparable prior year period. The primary reason for the change was due to the purchase of a new manufacturing and warehouse facility in Carlsbad, CA during the first quarter of fiscal 2022.

Cash provided by financing activities for the three months ended September 30, 2021, was $10.0 million, compared to $1.7 million used in the comparable prior year period. The difference is primarily due to borrowings related to the purchase of our new manufacturing and warehouse facility in Carlsbad, CA.

At September 30, 2021 we had $10.0 million due in connection with a term loan related to our recently acquired manufacturing and warehouse facility and we also had a $20.0 million working capital line of credit available to us under which we have no borrowings outstanding. During the three months ending September 30, 2021, we were in compliance with all of the financial and other covenants required under the Credit Agreement. Refer to Item 1, Note F., "Debt," in this Quarterly Report, for terms of our Credit Agreement.

As of September 30, 2021, we had $20.0 million in cash and cash equivalents. We believe our available cash, cash equivalents, credit facility and potential cash flows from operations will be sufficient to fund our current working capital needs, capital expenditures, and minimum debt and interest payments through the next 12 months. Our capital requirements for fiscal 2022 include amounts that will be required to complete our planned retrofit of the facility we purchased in August 2021 that is planned to become a powder blending, packaging, and storage facility.

### Off-Balance Sheet Arrangements

As of September 30, 2021, 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 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 this Report. Other than those pronouncements, we are not aware of any other pronouncements that materially affect our financial position or results of operations.

## Controls and procedures

As filed, 1,354 characters.

We maintain certain disclosure controls and procedures as defined under the Securities Exchange Act of 1934. They are designed to help ensure that material information is: (1) gathered and communicated to our management, including our principal executive and financial officers, in a manner that allows for timely decisions regarding required disclosures; and (2) recorded, processed, summarized, reported and filed with the SEC as required under the Securities Exchange Act of 1934 and within the time periods specified by the SEC.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (principal financial and accounting officer), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2021. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective for their intended purpose described above as of September 30, 2021.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarterly period ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 556 characters.

When evaluating our business and future prospects you should carefully consider the risks described under Item 1A of our 2021 Annual Report, as well as the other information in our 2021 Annual Report, this Report and other reports and documents we file with the SEC. If any of the identified risks actually occur, our business, financial condition and results of operations could be seriously harmed. In that event, the market price of our common stock could decline, and you could lose all or a portion of the value of your investment in our common stock.

Filed Nov 9, 2021.
Source: SEC EDGAR, the filing index for accession 0001437749-21-025928. Last ingested by Listed: Oct 24, 2026, 14:56 ET. No prices; not investment advice.