10-Q: Natural Alternatives International Reports Q2 2025 Results: Sales Up, but Losses Persist Amidst Credit Facility Concerns

Natural Alternatives International (NAII) saw a net sales increase in Q2 2025 but continues to experience losses and faces potential issues with its credit facility covenants.

Summary

• Natural Alternatives International, Inc. (NAII) reported its financial results for the second quarter of fiscal year 2025, ended December 31, 2024.
• Net sales increased by 35% to $34.08 million for the quarter and 14% to $67.23 million for the six months ended December 31, 2024, compared to $25.20 million and $59.17 million for the same periods in the prior year, respectively.
• The company experienced a net loss of $2.19 million, or $0.37 per share, for the quarter and $4.17 million, or $0.70 per share, for the six months ended December 31, 2024, compared to a net loss of $3.07 million, or $0.52 per share, and $3.77 million, or $0.64 per share, for the same periods in the prior year, respectively.
• The company's private-label contract manufacturing sales increased by 40% for the quarter and 14% for the six months ended December 31, 2024.
• Patent and trademark licensing revenue decreased by 18% for the quarter but increased by 9% for the six months ended December 31, 2024.
• NAII is currently negotiating a potential revised credit facility or waiver with Wells Fargo due to non-compliance with certain financial covenants.
• As of February 14, 2025, 6,198,778 shares of NAII's common stock were outstanding, net of 3,282,128 treasury shares.

Sentiment

Score: 4

Explanation: The document presents a mixed picture. While sales increased, the company is still experiencing losses and faces potential issues with its credit facility. This suggests a cautious outlook.

Positives

• Net sales increased by 35% for the quarter and 14% for the six months ended December 31, 2024, driven by growth in private-label contract manufacturing.
• Patent and trademark licensing revenue increased by 9% for the six months ended December 31, 2024.
• The company expects its annualized fiscal 2025 revenue concentration for its largest customer to be lower compared to fiscal 2024.
• NAII is investing in research and development for its CarnoSyn product offerings, including the new TriBsyn product.
• The company believes its available cash, cash equivalents, potential cash flows from operations, and line of credit will be sufficient to fund its current working capital needs and capital expenditures through at least the next 12 months.

Negatives

• The company experienced a net loss of $2.19 million for the quarter and $4.17 million for the six months ended December 31, 2024.
• NAII is not in compliance with certain financial covenants of its credit facility and is negotiating a potential revised agreement or waiver with Wells Fargo.
• The company anticipates it will not be in compliance with the financial covenants associated with the Fourth Amendment to its credit facility related to net income requirements and the fixed charge coverage ratio in the next two quarters of fiscal 2025.
• Manufacturing costs were negatively impacted by increased labor, foreign currency exchange rates, supplies, rent, and freight costs.

Risks

• The company's revenue is largely dependent on sales to two or three private-label contract manufacturing customers.
• The loss of any of these customers, or a significant decline in sales to these customers, could have a material adverse impact on net sales and net operating results.
• NAII buys certain products, including beta-alanine, from a limited number of raw material suppliers who meet its quality standards.
• The loss of any of these suppliers could have a material adverse impact on net sales and results of operations.
• Geopolitical instability, including conflicts in Ukraine and the Middle East, may adversely affect business operations.
• Increased trade tariffs may adversely impact the company's ability to adjust selling prices and forecast manufacturing and operating costs.
• The company's ability to maintain or further increase its beta-alanine royalty and licensing revenue will depend in large part on its ability to develop a market for its sustained release form of beta-alanine marketed under its SR CarnoSyn trademark and its new TriBsyn product, maintain its patent rights, the availability and the cost of the raw material when and in the amounts needed, the ability to expand distribution of beta-alanine to new and existing customers, and continued compliance by third parties with its license agreements and its patent, trademark and other intellectual property rights.

Future Outlook

Although the overall sales forecast for fiscal 2025 includes an increase in sales as compared to fiscal 2024, the company anticipates it will experience a net loss in the second half of fiscal 2025 and an overall net loss for the fiscal 2025 year.

Management Comments

• 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 trademarks, and our TriBsyn trade name, royalties from license agreements, and potentially additional contract manufacturing opportunities with licensees.
• 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.

Industry Context

The nutritional supplement industry is competitive and subject to changing consumer preferences, regulatory requirements, and economic conditions. NAII's focus on private-label contract manufacturing and patented ingredients like beta-alanine positions it within specific niches of this broader market. The company's efforts to diversify its customer base and expand its product offerings are consistent with strategies employed by other players in the industry to mitigate risk and capitalize on growth opportunities.

Comparison to Industry Standards

• It is difficult to compare NAII directly to industry standards without more specific information on its peer group.
• However, contract manufacturing margins typically range from 5% to 15%, so NAII's gross profit margin of 5.8% for the six months ended December 31, 2024, is at the lower end of this range.
• Companies like Nutra Manufacturing and Capstone Nutrition are also contract manufacturers in the nutraceutical space.
• Publicly available financial data on these companies would be needed for a more detailed comparison.
• In the beta-alanine market, competitors include companies that offer alternative ingredients or formulations.
• NAII's patent protection for CarnoSyn and SR CarnoSyn provides a competitive advantage, but the company must continue to innovate and defend its intellectual property to maintain its market position.

Stakeholder Impact

• Shareholders: The net loss and potential credit facility issues could negatively impact shareholder value.
• Employees: Potential cost-cutting measures to improve profitability could affect employees.
• Customers: The company's ability to maintain consistent supply and quality is important for customer relationships.
• Suppliers: The company's financial health could impact its ability to meet payment obligations to suppliers.
• Creditors: Wells Fargo is exposed to increased risk due to the company's non-compliance with financial covenants.

Next Steps

• The company will continue its sales and marketing activities to promote CarnoSyn, SR CarnoSyn, and TriBsyn beta-alanine products.
• NAII is currently negotiating a potential revised credit facility or waiver with Wells Fargo.
• The company will continue its focus on leveraging its facilities, expanding the commercialization of its beta-alanine patent estate, and improving operational efficiencies.

Key Dates