Natural Alternatives International, Inc. — Form 10-Q Summary
Period: Fiscal third quarter and first nine months ended March 31, 2020; filed May 14, 2020. The request metadata labels the period “2019 Q3,” but the filing covers fiscal 2020 Q3.
Business context and results
NAI manufactures private-label nutritional and health products and earns revenue from beta-alanine sales and licensing under its CarnoSyn and SR CarnoSyn brands. Amounts below are in millions, except per-share data.
| Metric | Three months 2020 | Three months 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $25.5 | $35.5 | $83.8 | $108.0 |
| Gross profit / margin | $2.9 / 11.4% | $6.3 / 17.8% | $12.3 / 14.7% | $19.9 / 18.4% |
| Operating income (loss) | ($4.2) | $1.8 | ($3.6) | $6.8 |
| Net income (loss) | ($4.0) | $2.0 | ($3.4) | $6.7 |
| Diluted EPS | ($0.61) | $0.27 | ($0.51) | $0.95 |
Financial position, cash flow and liquidity
- At March 31, 2020, cash and cash equivalents were $33.3 million; total assets were $118.4 million and stockholders’ equity was $70.7 million.
- NAI had $10.0 million outstanding on its Wells Fargo line of credit, drawn during the quarter as a precaution amid COVID-19 uncertainty. The $10.0 million facility had no remaining availability. It matures November 1, 2022; NAI reported compliance with its covenants.
- Current assets were $77.0 million and current liabilities $25.8 million. Operating lease right-of-use assets and lease liabilities were $18.9 million and $19.2 million, respectively.
- For the nine months, operating cash flow was $5.2 million, investing cash use was $3.4 million, and financing cash inflow was $6.5 million. Cash increased $8.3 million from fiscal year-end.
- Capital expenditures were $3.4 million. NAI repurchased $3.5 million of stock during the nine months, including $3.0 million under its repurchase plan.
Material changes versus prior comparable periods
- Quarterly sales fell 28%; nine-month sales fell 22%. Private-label manufacturing revenue declined 29% for the quarter and 22% year to date, primarily because of reduced sales to the largest customer. The largest customer represented 43% of nine-month sales, down from 54% a year earlier.
- Patent and trademark licensing revenue declined 23% for the quarter and 24% year to date. NAI attributed this to lower beta-alanine shipments and prices, seasonality, customer substitution of generic beta-alanine, and softer demand.
- Gross margin contracted, while SG&A rose 58% for the quarter and 21% year to date. A $3.3 million provision for an uncollectible receivable from former customer Kaged Muscle was the principal driver; NAI also recorded about $1.0 million of inventory reserves for that customer. The combined reserves were approximately $4.3 million.
- NAI terminated its Kaged Muscle relationship effective March 31, 2020 and was working to deliver completed products and transition relevant inventory to a replacement manufacturer.
- Operating cash flow declined from $7.6 million to $5.2 million year to date. The company adopted lease accounting standard ASC 842 on July 1, 2019, adding operating lease assets and liabilities to the balance sheet; prior-year balance-sheet figures were not restated.
Outlook, risks and notable items
- Management said it could not reasonably estimate the duration or financial impact of COVID-19. Facilities were operating as essential manufacturers at the time of filing, but supply, staffing, delivery, customer demand, and customer payment disruptions could adversely affect operations and results.
- Management believed available cash and expected operating cash flows would fund working capital and capital expenditures for at least the next 12 months. This assessment was made amid substantial pandemic uncertainty.
- Management’s priorities included diversifying contract-manufacturing customers, commercializing SR CarnoSyn and protecting intellectual property, and improving efficiency and cost control. No quantitative revenue or earnings guidance was provided.
- Customer concentration and receivable exposure remain significant: the two largest customers represented 65.5% of gross receivables at quarter-end. Certain qualified raw materials, including beta-alanine, are sourced from a limited number of suppliers.
- NAI reported approximately $1.7 million of litigation and patent-compliance expenses for the first nine months. It disclosed ordinary-course legal matters but did not believe their resolution would currently have a material adverse effect; outcomes remain uncertain.
- Foreign-currency forward contracts designated as cash-flow hedges had a notional amount of approximately $30.4 million and a net fair-value asset of $1.7 million at quarter-end.
Important facts for investors to verify
- Whether customer order trends, especially sales to the largest customer, continued to weaken or stabilized after March 31, 2020.
- Whether the Kaged Muscle receivable and inventory reserves adequately reflect recoveries, product transfers, or further losses.
- Whether COVID-19 caused material supply, operating, demand, or collection impacts after the reporting date, and whether management’s liquidity assessment remained valid.
- How the $10.0 million borrowing, covenant compliance, and absence of remaining credit availability affected liquidity in subsequent periods.
- Whether beta-alanine demand, pricing, licensing revenue, and customer use of generic alternatives changed, and whether SR CarnoSyn commercialization gained traction.