# Natural Alternatives International Inc: Form 10-Q for the period ended Mar 31, 2022

- Company: [Natural Alternatives International Inc](/companies/naii.md) (CIK 787253)
- Form: 10-Q
- Filed: 2022-05-13
- Accepted by EDGAR: May 13, 2022, 06:03 ET
- Period: 2022-03-31
- Accession: 0001437749-22-012221
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/787253/000143774922012221/naii20220331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/787253/000143774922012221/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-01-01 to 2022-03-31 | $42.4m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Revenue | 9 months, 2021-07-01 to 2022-03-31 | $118.4m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2022-01-01 to 2022-03-31 | $35.0m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2021-07-01 to 2022-03-31 | $96.2m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-01-01 to 2022-03-31 | $7.4m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2021-07-01 to 2022-03-31 | $22.2m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-01-01 to 2022-03-31 | $4.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2021-07-01 to 2022-03-31 | $12.3m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-01-01 to 2022-03-31 | $3.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2021-07-01 to 2022-03-31 | $9.9m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-01-01 to 2022-03-31 | $682.0k | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2021-07-01 to 2022-03-31 | $2.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-01-01 to 2022-03-31 | $2.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2021-07-01 to 2022-03-31 | $7.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-01-01 to 2022-03-31 | $0.41 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2021-07-01 to 2022-03-31 | $1.22 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-01-01 to 2022-03-31 | $0.42 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2021-07-01 to 2022-03-31 | $1.23 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-01-01 to 2022-03-31 | 6,041,424 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2021-07-01 to 2022-03-31 | 6,216,422 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2021-07-01 to 2022-03-31 | $3.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2021-07-01 to 2022-03-31 | $21.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2021-07-01 to 2022-03-31 | $5.1m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2022-03-31 | $18.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-03-31 | $78.2m | us-gaap:AssetsCurrent |
| Total assets | at 2022-03-31 | $135.5m | us-gaap:Assets |
| Current liabilities | at 2022-03-31 | $24.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-03-31 | $50.4m | us-gaap:Liabilities |
| Shareholders' equity | at 2022-03-31 | $85.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 22,015 characters.

The following discussion and analysis is intended to help you understand our financial condition and results of operations for the three and nine months ended March 31, 2022. 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 nine months of fiscal 2022, our net sales were 12% lower than in the first nine months of fiscal 2021. Private-label contract manufacturing sales decreased 16% primarily due to lower sales to our largest customer. Sales to this customer decreased 44% 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 partially offset by increased sales to other existing customers and a new customer. Sales to our new customer are expected to increase during the fourth quarter of fiscal 2022 as compared to the quarter ended March 31, 2022, and the corresponding prior year fourth quarter. Revenue concentration risk for our largest private-label contract manufacturing customer as a percentage of our total net sales decreased from 54% for the first nine months of fiscal 2021 to 34% for the first nine months of fiscal 2022. We expect our annualized fiscal year 2022 revenue concentration for this customer to comparable to the first nine months of fiscal 2022.

During the first nine months of fiscal 2022, patent and trademark licensing revenue increased 42% to $13.5 million, compared to revenue of $9.6 million for the first nine months of fiscal 2021. The increase in patent and trademark licensing revenue during the first nine months of fiscal 2022 was primarily due to sales to new customers, higher average sales prices, and increased shipments to existing customers related in part to athletic activities and gyms reopening in accordance with easing COVID-19 restrictions across the USA as compared to significant restrictions in athletic activities primarily during the first nine months of fiscal 2021.

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 $0.3 million during the first nine months of fiscal 2022 as compared to $1.0 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, and despite the continued challenges with supply chain and staffing shortages, including challenges from COVID-19 employee absences, we now anticipate our consolidated net sales during the fourth quarter of fiscal 2022 will increase between 18.0% to 21.0% as compared to the fourth quarter of fiscal 2021. We also anticipate operating income as a percent of net sales will increase to between 9.0% and 12.0% for our fourth quarter ending June 30, 2022. The improvement in net sales and operating profitability is expected to be generated from continued growth from one of our newest customers, improved sales demand from our largest customer, improved sales mix and improved staffing levels which will increase our production capacities. There can be no assurance our expectations will result in the currently anticipated increase in net sales and operating income.

### 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 our suppliers to manufacture and meet timelines associated with capital improvement projects;
- 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.

23

### 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 and discounts, our estimates of future sales used to assess the volume rebate and discount 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 March 31, 2022 | 2021 | % Change | Nine Months Ended March 31, 2022 | 2021 | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Private label contract manufacturing | $37,623 | $42,196 | (11)% | $104,894 | $124,569 | (16)% |
| Patent and trademark licensing | 4,750 | 4,124 | 15% | 13,546 | 9,560 | 42% |
| Total net sales | 42,373 | 46,320 | (9)% | 118,440 | 134,129 | (12)% |
| Cost of goods sold | 34,980 | 39,484 | (11)% | 96,220 | 111,614 | (14)% |
| Gross profit | 7,393 | 6,836 | 8% | 22,220 | 22,515 | (1)% |
| Gross profit % | 17.4% | 14.8% |  | 18.8% | 16.8% |  |
| Selling, general and administrative expenses | 4,119 | 4,136 | (0)% | 12,317 | 12,338 | (0)% |
| % of net sales | 9.7% | 8.9% |  | 10.4% | 9.2% |  |
| Income from operations | 3,274 | 2,700 | 21% | 9,903 | 10,177 | (3)% |
| % of net sales | 7.7% | 5.8% |  | 8.4% | 7.6% |  |
| Other expense | (88) | (326) | (73)% | (123) | (1,453) | (92)% |
| Income before income taxes | 3,186 | 2,374 | 34% | 9,780 | 8,724 | 12% |
| % of net sales | 7.5% | 5.1% |  | 8.3% | 6.5% |  |
| Provision for income taxes | 682 | 458 | 49% | 2,173 | 918 | 137% |
| Net income | $2,504 | $1,916 | 31% | $7,607 | $7,806 | (3)% |
| % of net sales | 5.9% | 4.1% |  | 6.4% | 5.8% |  |

Private-label contract manufacturing net sales decreased 11% during the three months ended March 31, 2022 and 16% during the nine months ended March 31, 2022, when compared to the same periods in the prior year. The decrease in sales during the three months ended March 31, 2022 was primarily due to lower sales to our largest customer partially offset by sales to other existing customers and a new customer. Sales to our largest customer decreased 40% for the three months ended March 31, 2022 as compared to the same period in fiscal 2021 and was driven by an inventory reduction program mostly related to their European business. The decrease in sales during the first nine months of fiscal 2022 was primarily due to decreased sales from our largest customer partially offset by sales to other existing customers and a new customer. Sales to our largest customer decreased 44% for the nine months ended March 31, 2022 as compared to the same period in the prior year with a majority of the decrease associated with their European business.

Net sales from our patent and trademark licensing segment increased 15% during the three months ended March 31, 2022 and 42% during the nine months ended March 31, 2022, when compared to the same periods in the prior year. The increase in patent and trademark licensing revenue during the third quarter and the first nine months of fiscal 2022 was primarily due to increased shipments to existing customers in part 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 primarily impacting the first nine months of fiscal 2021. The increase in the nine months ended March 31, 2022 also included sales to new customers and higher average sales prices.

The change in gross profit margin for the three and nine months ended March 31, 2022, was as follows:

|  | Three Months Ended | Nine Months Ended |
| --- | ---: | ---: |
| Contract manufacturing(1) | 1.7% | (0.9)% |
| Patent and trademark licensing(2) | 0.9 | 2.9 |
| Total change in gross profit margin | 2.6% | 2.0% |

1 Private-label contract manufacturing gross profit margin as a percentage of consolidated net sales increased 1.7 percentage points during the three months ended March 31, 2022 and decreased 0.9 percentage points during the nine months ended March 31, 2022, when compared to the comparable prior year periods. The increase in gross profit as a percentage of sales for private-label contract manufacturing during the third quarter of fiscal 2022 is primarily due to favorable sales mix partially offset by a slight increase in per unit manufacturing costs. The decrease in gross profit as a percentage of sales for the first nine months of fiscal 2022 is primarily due to an increase in per unit manufacturing costs partially offset by favorable sales mix.

2 Patent and trademark licensing gross profit margin as a percentage of consolidated net sales increased 0.9 percentage points during the three months ended March 31, 2022 and 2.9 percentage points during the nine months ended March 31, 2022, when compared to the comparable prior year periods. The increase in margin contribution during the three and nine month periods ending March 31, 2022 was primarily due to increased patent and trademark licensing net sales as a percentage of total consolidated net sales. The first nine months of fiscal 2022 also included a change in estimate regarding certain volume rebate programs.

Selling, general and administrative expenses were flat during the three and nine months ended March 31, 2022 as compared to the comparable prior year periods.

Other expense, net, decreased $0.2 million during the three months ended March 31, 2022, and decreased $1.3 million during the nine months ended March 31, 2022, when compared to the comparable periods during the prior year. The decreases were primarily due to the favorable fiscal 2022 foreign exchange revaluation activity associated with our balance sheet and the fluctuations in unhedged foreign currency rates when compared to the same activity in fiscal 2021.

Our income tax expense increased $0.2 million during the three months ended March 31, 2022 and increased $1.3 million during the nine months ended March 31, 2022, when compared to the same periods in fiscal 2021. The increase in income tax expense during the third quarter of fiscal 2022 was primarily related to an increase in pre-tax income as compared to the same period in the prior year. The increase during the first nine months of fiscal 2022 was primarily related to a discrete tax benefit of $0.9 million recorded during the nine months ended March 31, 2021 without a corresponding discrete item in the nine months ended March 31, 2022 and an increase in taxes associated with higher pre-tax income and a marginally higher effective tax rate excluding the discrete item.

### 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 $3.1 million for the nine months ended March 31, 2022 compared to net cash provided by operating activities of $16.0 million in the comparable period in the prior fiscal year.

At March 31, 2022, changes in accounts receivable, consisting of amounts due from our private-label contract manufacturing customers and our patent and trademark licensing activities, provided $1.3 million in cash compared to providing $0.2 million of cash during the comparable nine month period in the prior year. The increase in cash provided by accounts receivable during the nine months ended March 31, 2022 primarily resulted from the timing of sales and related collections. Days sales outstanding was 40 days during the nine months ended March 31, 2022 as compared to 35 days for the prior year period.

Changes in inventory used $9.8 million in cash during the nine months ended March 31, 2022 compared to using $1.1 million in the comparable prior year period. The change in cash related to inventory during the nine months ended March 31, 2022 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 $4.4 million in cash during the nine months ended March 31, 2022 compared to providing $4.1 million during the nine months ended March 31, 2021. 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, 2022 was $21.4 million compared to $4.2 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 nine months ended March 31, 2022, was $4.8 million, compared to $14.1 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, offset by the difference in treasury stock repurchase activity.

At March 31, 2022 we had $9.9 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 had no borrowings outstanding. During the nine months ending March 31, 2022, 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 March 31, 2022, we had $18.6 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 March 31, 2022, 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, 1,342 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 March 31, 2022. 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 March 31, 2022.

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 March 31, 2022 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 May 13, 2022.
Source: SEC EDGAR, the filing index for accession 0001437749-22-012221. Last ingested by Listed: Oct 24, 2026, 14:56 ET. No prices; not investment advice.