10-Q: Natural Alternatives International Q1 2026: Sales Up, Net Loss Narrows

Natural Alternatives International reported a 14% increase in net sales for Q1 fiscal 2026, driven by private-label contract manufacturing, despite a net loss of $0.291 million.

Summary

• Net sales increased 14% to $37.730 million for the three months ended September 30, 2025 (Q1 FY2026), compared to $33.150 million in the prior year period.
• Private-label contract manufacturing sales rose 18% due to increased orders from existing customers and shipments to new customers.
• Patent and trademark licensing revenue decreased 34% to $1.665 million, primarily due to lower raw material sales, partially offset by sales of the new TriBsyn product and increased royalty and licensing revenue.
• Gross profit surged 95% to $4.397 million, with the gross profit margin improving from 6.8% to 11.7%.
• The company achieved income from operations of $0.284 million, a significant improvement from a loss of $1.836 million in Q1 FY2025.
• Net loss narrowed by 85% to $0.291 million ($0.05 per basic and diluted share) from $1.982 million ($0.33 per basic and diluted share) in Q1 FY2025.
• Cash and cash equivalents decreased to $7.744 million at September 30, 2025, from $12.325 million at June 30, 2025.
• The company was not in compliance with the maximum net loss and fixed charge coverage ratio covenants of its credit agreement for Q1 FY2026 and anticipates non-compliance for Q2 FY2026.
• A tentative settlement agreement was reached for a class action lawsuit with former employees for a maximum of $1.25 million, plus estimated legal fees of approximately $0.15 million.

Sentiment

Score: 6

Explanation: The company showed significant operational improvements, narrowing its net loss and increasing sales and gross profit. However, ongoing covenant non-compliance with its credit facility, declining patent licensing revenue, and decreasing cash reserves temper the positive sentiment, indicating a mixed financial picture.

Positives

• Net sales increased 14% year-over-year to $37.730 million.
• Private-label contract manufacturing sales increased 18% due to increased orders and new customers.
• Gross profit increased 95% to $4.397 million, with gross profit margin improving from 6.8% to 11.7%.
• Transitioned from an operating loss of $1.836 million to an operating income of $0.284 million.
• Net loss significantly narrowed by 85% from $1.982 million to $0.291 million.
• Successful launch and sales of the new TriBsyn product, targeting Wellness and Healthy Aging markets.
• Reduced foreign currency exchange losses by $0.1 million compared to the prior year.
• Days sales outstanding improved to 41 days from 48 days.
• Collected $2.9 million in Employee Retention Tax Credit (ERTC) refunds for Q1 and Q2 calendar year 2021.

Negatives

• Reported an overall net loss of $0.291 million for the quarter.
• Patent and trademark licensing revenue decreased 34% to $1.665 million.
• Cash and cash equivalents decreased by $4.581 million during the quarter.
• Non-compliance with credit agreement covenants (maximum net loss and fixed charge coverage ratio) for Q1 FY2026 and anticipated non-compliance for Q2 FY2026.
• Increased interest expense compared to the prior year.
• Significant customer concentration risk, with three customers accounting for $23.115 million (61.2%) of net sales for the quarter.
• Dependency on a limited number of raw material suppliers.
• A valuation allowance of $0.1 million was recorded against domestic deferred income tax assets for Q1 FY2026, resulting in a net deferred tax asset of $0 for U.S. operations.
• Ongoing legal proceedings with a tentative settlement of $1.25 million plus $0.15 million in legal fees.
• IRS denial of ERTC claim for Q3 calendar 2021, which the company is contesting.

Risks

• Ability to develop market acceptance for and increase sales of new products, develop relationships with new customers, and maintain or improve existing customer relationships.
• Future financial and operating results, including projections of net sales, revenue, income or loss, net income or loss per share, profit margins, expenditures, liquidity, and other financial items.
• Sufficiency of available cash and cash equivalents, including continued access to borrowing under credit facilities, and potential cash flows from operations to fund working capital and capital expenditure needs.
• Inventory levels, including the adequacy of quality raw material and other inventory levels to meet future customer demand.
• Sources, availability, and quality of raw materials, including the limited number of suppliers of beta-alanine meeting quality requirements.
• Ability to price products to achieve profit margin targets, especially in the current volatile raw material environment and potential for new tariffs.
• Ability to maintain or increase patent and trademark licensing revenues.
• Ability to improve operating efficiencies, manage costs and business risks, and improve or maintain profitability.
• Ability to protect intellectual property.
• Future economic and political conditions.
• Currency exchange rates and their effect on results of operations, availability of foreign exchange facilities, and ability to effectively hedge against foreign exchange risks.
• Outcome of litigation, regulatory, and tax matters, associated costs, and effect on business and results of operations.
• Potential manufacturing and distribution channels, product returns, and potential product recalls.
• Impact of external factors on business and results of operations, especially variations in quarterly net sales from seasonal and other external factors.
• Ability to operate within FDA Good Manufacturing Practices (GMPs) standards.
• Adequacy of financial reserves and allowances.
• Impact of accounting pronouncements and adoption of certain accounting guidance.
• Dependence on a few large customers; loss or decline in sales to these customers could have a material adverse impact on net sales and net operating results.
• Dependence on a limited number of raw material suppliers; the loss of any of these suppliers could have a material adverse impact on net sales and results of operations.
• Inability to successfully complete negotiation of a revised credit facility with Wells Fargo Bank, or what the differences in amount, cost, and other factors may be.
• Geopolitical uncertainty, including the war in Ukraine, ceasefire in Gaza, conflicts in Lebanon, Syria, and Sudan, and potential economic effects, particularly regarding sourcing raw materials from Israel.
• Government trade tariffs, including potential new or increased tariffs on products or ingredients like beta-alanine, which could adversely impact customers, raw material availability, licensing, and sales.
• Uncertainty regarding the IRS's final decision on the Employee Retention Tax Credit claim for Q3 calendar 2021.

Future Outlook

The company anticipates a net loss in the first half of fiscal 2026, followed by net income in the second half of fiscal 2026, leading to net income for the full fiscal 2026 year. It expects annualized fiscal 2026 revenue concentration for its largest customer to be lower compared to fiscal 2025. Management believes new products like SR CarnoSyn and TriBsyn will provide significant opportunities in the growing Wellness and Healthy Aging markets, with ongoing investment in R&D for CarnoSyn product offerings. The company plans to continue sales and marketing activities to promote its beta-alanine products. Available cash, cash equivalents, potential cash flows from operations, and the line of credit are expected to be sufficient to fund working capital and capital expenditures for at least the next 12 months.

Management Comments

• "We continue to anticipate that we will experience a net loss in the first half of fiscal 2026, net income in the second half of fiscal 2026, and net income for the full fiscal 2026 year."
• "We believe SR CarnoSyn may provide a unique opportunity within the growing Wellness and Healthy Aging markets but acceptance of this product offering has been limited as we only offer this product in tablet form."
• "We believe TriBsyn and its patent-pending formulation will allow us to better penetrate the Wellness and Healthy Aging channel."
• "The elimination of paresthesia while maintaining efficacy of dosage creates a new opportunity to reach segments of the market that to date have been untapped, including older adults, vegetarians, and vegans."
• "We believe our efforts to refine our formulations and product offerings will be positively received and result in significant opportunity for increased sales of our patented products."
• "We are also working on several additional innovations we believe could lead to new patentable products for CarnoSyn Brands in the future."
• "Overall, we believe our available cash, cash equivalents, potential cash flows from operations, and our line of credit will be sufficient to fund our current working capital needs and capital expenditures through at least the next 12 months."

Industry Context

The company operates in the nutritional supplements and health care products market, focusing on private-label contract manufacturing and patent/trademark licensing for beta-alanine. It is strategically targeting the growing Wellness and Healthy Aging markets with new product formulations like TriBsyn, which aims to overcome common user experience issues (paresthesia) with beta-alanine, potentially expanding its market reach to previously untapped demographics such as older adults, vegetarians, and vegans. The industry faces challenges from volatile raw material costs, potential new trade tariffs, and broader geopolitical uncertainties that could impact supply chains and consumer purchasing behavior.

Corporate Governance

Legal Proceedings

• A tentative settlement agreement was reached on July 3, 2025, for two consolidated lawsuits (a putative class action and a California Private Attorney General Act action) brought by three former employees. The company agreed to contribute a maximum of $1.25 million, plus estimated legal fees of approximately $0.15 million. The court approval process is estimated to take about one year.
• The IRS sent a 105c letter on December 9, 2024, denying the Employee Retention Tax Credit claim for the third quarter of calendar 2021, which the company is contesting. The company has not yet received additional correspondence from the IRS regarding this appeal.

Stakeholder Impact

• Shareholders: Potential for future dilution if the 2020 Plan amendment is approved and more shares are issued. Potential impact from credit covenant non-compliance and legal settlement costs. Potential benefits from improved operational performance and new product growth.
• Employees: Involved in the class action lawsuit settlement. Potential benefits from stock compensation plans and deferred compensation awards.
• Customers: Increased orders for private-label contract manufacturing. Potential impact from trade tariffs and raw material availability affecting product costs and demand.
• Suppliers: Dependency on a limited number of raw material suppliers creates supply chain risk. Potential impact from trade tariffs affecting raw material costs.
• Creditors (Wells Fargo): The company is not in compliance with credit agreement covenants, leading to ongoing negotiations that could impact lending terms or availability of funds.

Next Steps

• Negotiate a revision to the credit agreement with Wells Fargo Bank due to covenant non-compliance for Q1 FY2026 and anticipated non-compliance for Q2 FY2026.
• Continue sales and marketing activities to consumers, customers, potential customers, and brand owners to promote and reinforce the features and benefits of CarnoSyn, SR CarnoSyn, and TriBsyn beta-alanine products.
• Invest in research and development for the expansion of CarnoSyn product offerings and to develop new patentable products.
• Stockholders will vote on December 5, 2025, on an Amendment to the 2020 Omnibus Stock Incentive Plan to extend its term and increase reserved shares.
• Continue evaluating options for alternative ingredient sources and/or holding safety stock of impacted materials to limit any impact from geopolitical tensions.
• Continue evaluating the impact of imposed trade tariffs on customers, suppliers, and operations.
• Await further correspondence from the IRS associated with the appeal related to the Q3 calendar 2021 Employee Retention Tax Credit claim.
• Complete the court approval process for the tentative legal settlement with former employees.

Key Dates

Recommendation

While Natural Alternatives International demonstrated strong operational improvements in Q1 FY2026, significantly narrowing its net loss and increasing sales and gross profit, several critical factors warrant a 'Hold' recommendation. The company's non-compliance with credit agreement covenants and the need for ongoing negotiations with Wells Fargo introduce significant financial uncertainty. The decline in the higher-margin patent and trademark licensing segment is a concern, despite new product introductions. Cash reserves have decreased, and the company faces ongoing risks from customer concentration, supplier dependency, geopolitical events, and trade tariffs. The positive trajectory in core manufacturing is encouraging, but the unresolved financial and operational challenges suggest a cautious approach until more clarity emerges on debt restructuring and sustained profitability.

Keywords

Nutritional Supplements, Contract Manufacturing, Beta-Alanine, CarnoSyn, SR CarnoSyn, TriBsyn, SEC Filing, 10-Q, Financial Results, Health Care Products, Vitamins, Minerals, Herbal Supplements, Intellectual Property, Patent Licensing, Trademark Licensing, Corporate Governance, Risk Management, Financial Reporting, Supply Chain, Foreign Exchange Risk, Credit Covenants, Litigation, Employee Retention Tax Credit, Geopolitical Risk, Trade Tariffs