NAI(NAII) - 2020 Q3 - Quarterly Report

Forward-Looking Statements The report contains forward-looking statements regarding future events and financial performance, subject to various risks and uncertainties - Forward-looking statements address future financial results, patent licensing, new product acceptance, and operational efficiency, subject to risks and uncertainties including COVID-19 impact[8][9] PART I FINANCIAL INFORMATION Item 1. Financial Statements Unaudited condensed consolidated financial statements show a decrease in stockholders' equity and a net loss for Q3 FY2020, driven by lower sales and uncollectible accounts Condensed Consolidated Balance Sheets Total assets increased to $118.4 million due to lease assets and cash, while total liabilities rose to $47.6 million from lease liabilities and credit draw, decreasing equity to $70.7 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | June 30, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $33,315 | $25,040 | | Total current assets | $76,988 | $71,386 | | Operating lease right-of-use assets | $18,881 | $— | | Total assets | $118,355 | $93,490 | | Liabilities & Equity | | | | Line of credit – current | $10,000 | $— | | Total current liabilities | $25,805 | $14,250 | | Long-term liability – operating leases | $19,230 | $— | | Total liabilities | $47,606 | $17,406 | | Total stockholders' equity | $70,749 | $76,084 | Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income The company reported a net loss of $4.0 million for Q3 2020, a significant decline from prior year's net income, driven by 28% lower net sales and a $3.3 million provision for uncollectible accounts Key Income Statement Data (in thousands, except per share data) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $25,482 | $35,455 | $83,780 | $108,030 | | Gross profit | $2,894 | $6,327 | $12,339 | $19,926 | | (Loss) income from operations | $(4,223) | $1,835 | $(3,580) | $6,766 | | Net (loss) income | $(4,015) | $1,994 | $(3,443) | $6,734 | | Diluted EPS | $(0.61) | $0.27 | $(0.51) | $0.95 | - The quarterly loss was significantly impacted by a $3.28 million provision for uncollectible accounts receivable[12] Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased to $70.7 million due to a $3.4 million net loss and $3.5 million in common stock repurchases - The company repurchased 423,676 shares of common stock for $3.5 million during the nine months ended March 31, 2020[17] - A net loss of $3.4 million for the nine-month period directly reduced retained earnings[17] Condensed Consolidated Statements of Cash Flows Net cash from operations was $5.2 million, while financing activities provided $6.5 million from a $10.0 million credit draw, leading to an $8.3 million increase in cash to $33.3 million Cash Flow Summary (Nine Months Ended March 31, in thousands) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $5,164 | $7,580 | | Net cash used in investing activities | $(3,407) | $(2,630) | | Net cash provided by (used in) financing activities | $6,518 | $(903) | | Net increase in cash and cash equivalents | $8,275 | $4,047 | | Cash and cash equivalents at end of period | $33,315 | $27,660 | Notes to Condensed Consolidated Financial Statements Notes detail accounting policies, including ASC 842 adoption, revenue recognition, segment performance, customer dependency, debt, and COVID-19 impact, notably a $3.3 million reserve for a terminated customer's receivables - Adoption of ASC 842 (Leases) resulted in $20.7 million in right-of-use assets and $20.9 million in lease liabilities on the balance sheet[48][49] - A $3.3 million reserve for accounts receivable and $1.0 million for inventory was established due to the termination of the Kaged Muscle customer relationship[43][66] - The company drew $10 million from its credit facility as a precautionary liquidity measure due to COVID-19 uncertainty[62] - Two major customers represented 65.5% of gross accounts receivable as of March 31, 2020[65] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes a 22% net sales decrease to a 38% decline in sales to its largest customer and a 24% drop in licensing revenue, alongside a $4.3 million reserve for a terminated customer and a $10 million credit draw due to COVID-19 Executive Overview and Business Strategy The company focuses on private-label contract manufacturing and CarnoSyn® beta-alanine patent licensing, with a strategy to diversify customers, commercialize patents, and improve operational efficiencies - The primary business involves private-label contract manufacturing for the nutritional supplement industry[100] - Key revenue streams include raw material sales and licensing of CarnoSyn® and SR CarnoSyn® beta-alanine trademarks and patents[100] - Strategic focus includes diversifying the sales base, expanding beta-alanine patent commercialization, and improving operational efficiencies[101][116] Impact of COVID-19 on Our Business The COVID-19 pandemic creates significant uncertainty, with potential impacts on supply chains, employee availability, and customer demand, leading to a $10 million credit facility withdrawal - Facilities in the US and Europe continue to operate as essential and critical manufacturers[102] - Potential risks include limitations on suppliers, employees, carriers, and customer operations[105] - The company withdrew $10 million from its credit facility as a precautionary liquidity measure due to the pandemic[103] Results of Operations Q3 2020 saw total net sales fall 28% to $25.5 million, resulting in a 54% gross profit decline and a $4.2 million operating loss, driven by sales drops and a $3.3 million bad debt expense Results of Operations Summary (Three Months Ended March 31, in thousands) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Total net sales | $25,482 | $35,455 | (28)% | | Gross profit | $2,894 | $6,327 | (54)% | | Gross profit % | 11.4% | 17.8% | - | | SG&A expenses | $7,117 | $4,492 | 58% | | (Loss) income from operations | $(4,223) | $1,835 | (330)% | | Net (loss) income | $(4,015) | $1,994 | (301)% | - SG&A expenses increased primarily due to a $3.3 million bad debt expense for a former customer's receivable[121] - The contract manufacturing gross profit margin declined due to a $4.3 million total reserve for a former customer's receivables and inventory[126] Liquidity and Capital Resources Primary liquidity sources are cash from operations and a credit facility, with $33.3 million in cash and $5.2 million from operations, supplemented by a $10.0 million credit draw for COVID-19 precautions - Cash and cash equivalents totaled $33.3 million as of March 31, 2020[132] - Net cash provided by operating activities was $5.2 million for the nine months ended March 31, 2020, a decrease from the prior year[124] - A $10.0 million balance was outstanding on the loan facility as of March 31, 2020, drawn as a precautionary measure[130] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Natural Alternatives International, Inc. is exempt from providing this disclosure - The company is not required to provide Item 3 disclosure due to its qualification as a smaller reporting company[135] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2020[137] - No material changes to internal control over financial reporting occurred during the quarter[138] PART II OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings, with no material pending cases as of May 14, 2020, and no expected material adverse effects - The company engages in various claims and legal proceedings in the ordinary course of business[140] - As of May 14, 2020, no material pending legal proceedings involved the company or its subsidiary NAIE[141] Item 1A. Risk Factors The COVID-19 pandemic is a significant risk factor, causing supply chain disruptions and creating uncertainty regarding its full impact on operational and financial performance - The COVID-19 pandemic is a significant risk factor, impacting global economic conditions and potentially affecting company operations and business[143] - The duration and financial impact of pandemic-related disruptions remain uncertain and cannot be reasonably estimated[143][144] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company did not sell unregistered equity securities but repurchased 210,832 shares of common stock for $1.8 million during Q3 2020 under its repurchase plan Purchases of Equity Securities (Q3 2020) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2020 | 180,238 | $8.80 | | Feb 2020 | — | — | | Mar 2020 | 30,594 | $6.47 | | Total | 210,832 | - | Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported[148] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - This item is not applicable to the company[149] Item 5. Other Information No other information is required to be reported under this item - No other information is reported for this item[150] Item 6. Exhibits This section lists exhibits filed with Form 10-Q, including CEO and CFO certifications and XBRL data files - The report includes certifications from the CEO and CFO as required by Rule 13a-14(a)/15d-14(a)[152] - XBRL Instance Documents and related taxonomy files are filed with this report[152]