# Natural Alternatives International Inc: Form 10-Q for the period ended Sep 30, 2023

- Company: [Natural Alternatives International Inc](/companies/naii.md) (CIK 787253)
- Form: 10-Q
- Filed: 2023-11-09
- Accepted by EDGAR: Nov 9, 2023, 16:15 ET
- Period: 2023-09-30
- Accession: 0001437749-23-031262
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/787253/000143774923031262/naii20230930_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/787253/000143774923031262/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $34.0m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $30.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $3.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $3.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$544.0k | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | −$189.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$695.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.12 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.12 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 5,850,131 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-07-01 to 2023-09-30 | $4.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-07-01 to 2023-09-30 | $1.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2023-07-01 to 2023-09-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $16.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $57.8m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $160.3m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $15.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $71.4m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $88.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 18,962 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, 2023. 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 2023 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 three months ended September 30, 2023, our net sales were 21% lower than in the three months ended September 30, 2022. Private-label contract manufacturing sales decreased 23% primarily due to reduced orders from several of our larger customers associated with their efforts to reduce excess on-hand inventories. Revenue concentration for our largest private-label contract manufacturing customer as a percentage of total net sales for the three months ended September 30, 2023 was 36%, and revenue concentration for our largest private-label contract manufacturing customer as a percentage of total net sales for the three months ended September 30, 2022 was 35%. We expect our annualized fiscal 2024 revenue concentration for our largest customer to be flat to slightly lower as compared to our revenue concentration for our largest customer in fiscal 2023.

During the three months ended September 30, 2023, patent and trademark licensing revenue increased 32% to $1.8 million, compared to revenue of $1.4 million for the three months ended September 30, 2022. The increase in patent and trademark licensing revenue during the three months ended September 30, 2023, was primarily due to an increase in orders from existing customers and increased royalty income, partially offset by increased volume rebates.

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 legal expenses of approximately $71,000 during the first three months of fiscal 2024 as compared to approximately $30,000 during the comparable period in fiscal 2023. Our legal expense associated with our CarnoSyn® business has remained relatively low as we have not had any active litigation in recent periods, and our current run-rate of expenses is primarily related to maintenance 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, 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 2024, 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.

We experienced a loss from operations during the three months ended September 30, 2023. This was primarily due to a slowdown in sales across our private label contract manufacturing segment. On August 16, 2023, we announced the temporary closure of our high-speed powder processing facility in Carlsbad, California due to excess inventory on hand at one of our largest customers and their efforts to rebalance supply and demand. We now expect this facility will re-open and our prior level of operations will resume in our fourth fiscal quarter of 2024, but there can be no assurance this customer will resolve its supply and demand issues in the timeframe expected, what their future purchases may be, or what level of other business we may acquire that will utilize this facility. If this customer is unable to resolve its inventory issues in this timeframe, or our sales forecast is not realized, we will likely experience a continuing material decrease in revenues and profit during fiscal year 2024.

Subject to this uncertainty, and our overall sales forecast, we currently anticipate we will experience a net loss in the first half of fiscal 2024, net income in the second half and an overall net loss in fiscal 2024.

During fiscal 2024, we plan to continue our focus on:

- Leveraging our state-of-the-art, certified facilities to increase the value of the goods and services we provide to our highly valued private-label contract manufacturing customers, and 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.

19

### Impact of COVID-19 on Our Business

The COVID-19 pandemic resulted in significant economic disruption and may have some effect on our business in the future. Our facilities, located both in the United States and Europe, maintained operations throughout the duration of the COVID-19 pandemic, however, there can be no assurance our facilities will continue to operate without interruption.

### 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 is disclosed in Note 1 of Item 1 of this report and as disclosed in the 2023 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 months ended September 30 were as follows (dollars in thousands):

|  | Three Months Ended September 30, 2023 | 2022 | % Change |
| --- | ---: | ---: | ---: |
| Private label contract manufacturing | $32,189 | $41,776 | (23)% |
| Patent and trademark licensing | 1,780 | 1,351 | 32% |
| Total net sales | 33,969 | 43,127 | (21)% |
| Cost of goods sold | 30,832 | 37,756 | (18)% |
| Gross profit | 3,137 | 5,371 | (42)% |
| Gross profit % | 9.2% | 12.5% |  |
| Selling, general and administrative expenses | 3,681 | 3,829 | (4)% |
| % of net sales | 10.8% | 8.9% |  |
| (Loss) income from operations | (544) | 1,542 | (135)% |
| % of net sales | (1.6)% | 3.6% |  |
| Other expense | (340) | (224) | 52% |
| (Loss) income before income taxes | (884) | 1,318 | (167)% |
| % of net sales | (2.6)% | 3.1% |  |
| (Benefit) provision for income taxes | (189) | 265 | (171)% |
| Net (loss) income | $(695) | $1,053 | (166)% |
| % of net sales | (2.0)% | 2.4% |  |

20

Private-label contract manufacturing net sales decreased 23% during the three months ended September 30, 2023, when compared to the same period in the prior year. The decrease in sales during the three months ended September 30, 2023 was primarily due to reduced orders from several of our larger customers associated with their efforts to reduce excess on-hand inventories.

Net sales from our patent and trademark licensing segment increased 32% during the three months ended September 30, 2023, when compared to the same period in the prior year. The increase in patent and trademark licensing revenue during the three months ended September 30, 2023 was primarily due to an increase in orders from existing customers and increased royalty income, partially offset by increased volume rebates.

The change in gross profit margin for the three months ended September 30, 2023, was as follows:

|  | Three Months Ended |
| --- | ---: |
| Contract manufacturing(1) | (4.0)% |
| Patent and trademark licensing(2) | 0.7% |
| Total change in gross profit margin | (3.3)% |

1 Private-label contract manufacturing gross profit margin as a percentage of consolidated net sales decreased 4.0 percentage points during the three months ended September 30, 2023 when compared to the comparable prior year period. The decrease in gross profit as a percentage of sales for private-label contract manufacturing during the three months ended September 30, 2023 is primarily due to lower sales and unfavorable sales mix and increased overhead costs, partially offset by reduced labor and third party processing costs.

2 Patent and trademark licensing gross profit margin as a percentage of consolidated net sales increased 0.7 percentage points during the three months ended September 30, 2023 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, as patent and trademark licensing historically provides higher profit margins than our private-label contract manufacturing business.

Selling, general and administrative expenses decreased approximately $0.1 million, or 4%, during the three months ended September 30, 2023. The decrease during the three months ended September 30, 2023 as compared to the same period in the prior fiscal year is primarily related to reduced salary and wage expenses, and reduced advertising and marketing costs associated with our patent and trademark licensing segment.

Other expense increased $0.1 million during the three months ended September 30, 2023, when compared to the comparable period during the prior year. The increase in the three month period is primarily associated with increased expenses related to our CHF balance sheet hedge, currency revaluations and interest expense related to usage of our line of credit.

Our income tax (benefit) expense changed to reflect a benefit of $0.2 million for the three months ended September 30, 2023, when compared to an expense of $0.3 million in the same period in fiscal 2023. The change in tax amount is primarily due to recognition of a pretax loss in the first quarter of fiscal 2024 as compared to pretax income in fiscal 2023.

### 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 facilities. Net cash provided by operating activities was $4.5 million for the three months ended September 30, 2023, compared to net cash used in operating activities of $4.6 million in the comparable period during the prior fiscal year.

At September 30, 2023, changes in accounts receivable, consisting of amounts due from our private-label contract manufacturing customers and our patent and trademark licensing activities, used $2.7 million in cash compared to providing $2.6 million of cash during the comparable three month period in the prior year. The increase in cash used in accounts receivable during the three months ended September 30, 2023, primarily resulted from the timing of sales and related collections. Days sales outstanding was 23 days during the three months ended September 30, 2023, as compared to 34 days for the prior year period.

Changes in inventory provided $6.4 million in cash during the three months ended September 30, 2023, compared to using $7.5 million in the comparable prior year period. The change in cash related to inventory during the three months ended September 30, 2023, 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 $0.2 million in cash during the three months ended September 30, 2023, compared to providing $1.0 million during the three months ended September 30, 2022. 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, 2023, was $1.3 million compared to $7.8 million in the comparable prior year period. The increase during the first quarter of fiscal 2023 in capital purchases was associated with retrofitting our new powder manufacturing and warehouse facility. Construction on this new facility was completed during the fourth quarter of fiscal 2023. Capital equipment purchase activity during the first quarter of fiscal 2024 was primarily for manufacturing equipment and solar power generation equipment for our Vista and Carlsbad, California production facilities.

Cash used by financing activities for the three months ended September 30, 2023, was $0.1 million, compared to $2.8 million provided in the comparable prior year period. The difference is primarily due to borrowings on our line of credit during the first quarter of fiscal 2023 used to finance capital purchases associated with construction activities on our new manufacturing and warehousing facility in Carlsbad, California, while the first quarter of fiscal 2024 only included principal payments made to reduce the balance due on the term loan secured by our new manufacturing and warehouse facility.

At September 30, 2023, we had no outstanding balances due on our line of credit with $20.0 million available, and we owed $9.4 million on the term loan borrowed as part of the purchase of our Carlsbad, California manufacturing facility in August 2021. At June 30, 2023, we also had no outstanding balances due and $20.0 million available in connection with our line of credit.

As of September 30, 2023, we were in compliance with all of the financial and other covenants required under our Credit Agreement.

As of September 30, 2023, we had $16.7 million in cash and cash equivalents. Of these amounts, $14.2 million of cash and cash equivalents were held by NAIE. Overall, we believe our available cash, cash equivalents, potential cash flows from operations, and our credit facility will be sufficient to fund our current working capital needs and capital expenditures through at least the next 12 months. As a result of reduced sales overall, and the impact of temporary closure of our Carlsbad, California high-speed powder processing facility, we anticipate we will not be able to comply with all of the covenants required under the Credit Agreement in the second quarter of fiscal 2024. We have advised the lender and are currently negotiating a potential revised credit facility. There can be no assurance we will be able to successfully complete the negotiation of a revised credit facility, or if we do, what the differences in amount, cost and other factors may be. Please see Note F in Item 1 of this report for terms of our credit facility.

### Off-Balance Sheet Arrangements

As of September 30, 2023, 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, 1,338 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: (1) is 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, 2023. 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 as of September 30, 2023.

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, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 1,268 characters.

When evaluating our business and future prospects you should carefully consider the risks described under Item 1A of our 2023 Annual Report, as well as the other information in our 2023 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.

### Geopolitical Instability and Conflict in the Region

Our business operations may be adversely affected by ongoing geopolitical instability and conflict in Ukraine or the Middle East, particularly the Israel-Hammas conflict. These regional tensions may lead to increased political, economic, and security risks, including disruptions in the global supply chain, fluctuations in energy prices, and financial market volatility. Such uncertainties could impact our ability to operate efficiently, access markets, and secure resources. Our financial performance and results may be influenced by these external factors, and we cannot predict the future impact of geopolitical events on our business with certainty.

Filed Nov 9, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-031262. Last ingested by Listed: Oct 24, 2026, 14:56 ET. No prices; not investment advice.