Natural Alternatives International, Inc. — Fiscal 2024 Second-Quarter 10-Q
Business and period: The company manufactures nutritional supplements and related products for private-label customers and earns revenue from beta-alanine sales, royalties, and licensing. This report covers the quarter and six months ended December 31, 2023; comparisons are with the prior-year periods.
Financial results and liquidity
| Metric | Quarter ended Dec. 31, 2023 | Six months ended Dec. 31, 2023 | Prior-year comparison |
|---|---|---|---|
| Net sales | $25.2 million | $59.2 million | Down 40% and 31%, respectively |
| Gross profit / margin | $0.4 million / 1.5% | $3.5 million / 6.0% | Margins were 14.7% and 13.6% |
| Operating income (loss) | $(3.5) million | $(4.1) million | Prior-year income of $2.5 million and $4.0 million |
| Net income (loss) | $(3.1) million; $(0.52) per share | $(3.8) million; $(0.64) per share | Prior-year income of $1.8 million and $2.9 million |
| Operating cash flow | $4.8 million for the six-month period | Prior-year period: $3.7 million |
Cash and cash equivalents were $16.6 million at December 31, 2023, versus $13.6 million at June 30, 2023. Current assets were $54.4 million and current liabilities $13.4 million. The company generated operating cash in a loss-making period, helped by a $10.1 million inventory reduction; accounts receivable used $3.4 million of cash.
At quarter-end, the company had no balance drawn on its Wells Fargo revolving facility and reported $20.0 million of availability under the then-existing terms. It owed $9.4 million on its term loan. The term loan is secured and has scheduled payments through 2028. Total liabilities were $70.3 million, including $47.9 million of operating lease liabilities.
Changes versus the prior comparable periods
- Private-label contract manufacturing sales fell 44% in the quarter and 33% for the six months, reflecting reduced orders from larger customers managing excess inventory.
- Patent and trademark licensing sales rose 48% in the quarter and 40% for the six months, to $2.2 million and $3.9 million, respectively.
- Lower sales, unfavorable product mix, and higher per-unit manufacturing costs—including labor, rent, and utilities—compressed gross margins. Segment operating results show the pressure was concentrated in contract manufacturing.
- Six-month capital spending fell to $1.7 million from $11.6 million, following completion of the new Carlsbad facility project in fiscal 2023.
Outlook, management commentary, and risks
- Management expects a net loss in the second half of fiscal 2024 and an overall net loss for the fiscal year, subject to customer orders and the sales forecast.
- The Carlsbad high-speed powder-processing facility was temporarily closed in October 2023 amid a major customer’s inventory rebalancing. Management expects it to reopen late in fiscal Q4 2024 to support anticipated orders in fiscal Q1 2025, but cautions that the timing and future customer purchases are uncertain.
- One customer represented 41% of six-month sales, up from 36% in the prior-year period. The company warns that customer concentration and reliance on a limited number of qualified suppliers, including beta-alanine suppliers, could materially affect results.
- As of December 31, 2023, the company was not compliant with specified credit-facility financial covenants. A February 13, 2024 amendment waived prior non-compliance, reduced maximum revolving capacity to $12.5 million, increased the borrowing spread to 2.25% above daily simple SOFR, revised covenant requirements, and restricted permitted uses. It also caps capital expenditures at $6.5 million and requires suspension of share repurchases and dividends. The amendment includes a 10% availability reserve until the company returns to profitability.
- The company says available cash, expected operating cash flow, and the amended facility should fund working capital and capital expenditures for at least 12 months. This outlook is subject to performance and compliance with revised facility terms.
- Other stated risks include foreign-exchange volatility, geopolitical disruption and potential impacts on Israeli-sourced materials, legal matters, and the ability to sustain or grow CarnoSyn and SR CarnoSyn sales. Management reports no expected material adverse effect from ordinary-course legal matters based on information currently available.
- A July 2023 Vista lease extension added ten years and five months beginning April 2024 and increased lease assets and liabilities by approximately $25.9 million. The company also plans facility improvements, including a solar system, with landlord reimbursement of up to $1.1 million.
Key facts for investors to verify
- Whether the large customer’s inventory correction ends on schedule, the Carlsbad facility reopens as expected, and anticipated orders materialize.
- Whether sales concentration declines and contract-manufacturing volumes and margins recover.
- Progress toward revised credit covenants, the actual borrowing base and availability under the amended facility, and the cost of borrowing.
- Cash conversion, especially collections from major customers and the sustainability of inventory reductions.
- Whether beta-alanine licensing growth and SR CarnoSyn commercialization can offset weakness in contract manufacturing.