Business Context and Reporting Period
Company: Natural Alternatives International, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1995
Business Overview: The Company operates in the weight loss and nutrition industry, primarily through multi-level distribution. It includes wholly-owned subsidiaries Pro-Lean, Inc. and CellLife International, Inc.
Key Financial Metrics
| Metric | Q1 1995 (Unaudited) | Q1 1994 (Unaudited) |
|---|---|---|
| Net Sales | $10,353,801 | $5,873,747 |
| Gross Profit | $2,694,215 | $1,704,210 |
| Gross Margin | 26.0% | 29.0% |
| Operating Income | $976,670 | $202,976 |
| Net Earnings | $588,890 | $110,173 |
| Earnings Per Share (Primary) | $0.11 | $0.02 |
| Cash and Equivalents (End of Period) | $1,375,840 | $528,543 |
| Working Capital | $8,978,187 | N/A |
| Total Debt (Current + Long-term) | $1,178,405 | N/A |
Note: Total Debt calculated as Current installments of long-term debt ($200,567) + Current installments of capital lease obligations ($21,450) + Long-term debt ($977,840) + Capital lease obligations ($65,998).
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 76% to $10.4 million, driven by a 65% contribution from new customers acquired in the previous fiscal year's fourth quarter.
- Profitability: Net earnings increased 435% to $0.6 million. Operating income rose to $0.98 million from $0.20 million.
- Margin Compression: Gross margin decreased from 29.0% to 26.0%. Management attributes this to a normalization of sales mix compared to an unusually high-profit mix in the prior year.
- Expense Efficiency: Selling, general, and administrative (SG&A) expenses as a percentage of revenue dropped from 25.6% to 16.7% due to sales growth and cost controls.
- Cash Flow: Operating cash flow turned negative at $(992,248), a significant reversal from the $1.06 million positive flow in the prior year. This was primarily due to a $1.4 million increase in inventory and a $533,500 decrease in income taxes payable.
- Liquidity: Cash and cash equivalents decreased by $1.15 million during the quarter, though total working capital increased to $8.98 million.
Outlook, Risks, and Management Commentary
- Capital Expenditures: The Company has purchase commitments of approximately $400,000 for production equipment and plans to spend $125,000 on leasehold improvements. These are expected to be funded by operating cash flow and lines of credit.
- Real Estate Acquisition: An agreement is in place to acquire current office and production facilities from principal stockholders for $545,000 (appraised at $580,000). Funding is expected via conventional mortgage financing in the third quarter.
- Credit Facilities: The Company maintains revolving lines of credit up to $3,000,000 secured by business assets. No borrowings were outstanding as of September 30, 1995. The lines expire December 1, 1995, with management expecting renewal.
- Customer Concentration Risk: Four major customers accounted for 71% of total revenue in the quarter. The loss of any of these customers would have an adverse short-term impact.
- Legal Proceedings: The Company is involved in ordinary course legal actions, which management does not expect to have a material adverse impact.
Investor Verification Checklist
- Inventory Build-up: Verify the necessity of the $1.4 million increase in inventory against actual sales velocity to ensure no obsolescence risk.
- Cash Flow Sustainability: Assess the ability to fund the planned $525,000 in capital expenditures and facility acquisition given the negative operating cash flow for the quarter.
- Customer Concentration: Confirm the stability of the four major customers representing 71% of revenue.
- Debt Renewal: Monitor the renewal status of the $3 million credit lines expiring December 1, 1995.
- Margin Normalization: Evaluate if the 26.0% gross margin is sustainable or if further compression is likely as the sales mix continues to normalize.