NAI(NAII) - 2024 Q2 - Quarterly Report

Forward-Looking Statements This report contains forward-looking statements about future events and financial performance, subject to risks and uncertainties - This report contains forward-looking statements regarding future events and financial performance. These statements are based on current views and assumptions and are subject to risks and uncertainties. Readers are cautioned not to place undue reliance on these statements[7] - Key areas covered by forward-looking statements include, but are not limited to: future financial results (net sales, income), customer relationships, sufficiency of cash flow, patent licensing revenues, inventory levels, operating efficiencies, and the impact of external factors like economic conditions[8] PART I: FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for Q2 FY2024, including Balance Sheets, Statements of Operations, and Cash Flows Condensed Consolidated Balance Sheets Total assets increased to $155.7 million, driven by operating lease assets, while liabilities also rose significantly Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Dec 31, 2023 | June 30, 2023 | | :--- | :--- | :--- | | Total Assets | $155,733 | $134,152 | | Cash and cash equivalents | $16,595 | $13,604 | | Inventories, net | $19,596 | $29,694 | | Operating lease right-of-use assets | $44,994 | $20,369 | | Total Liabilities | $70,278 | $45,380 | | Long-term liability – operating leases | $46,701 | $18,965 | | Total Stockholders' Equity | $85,455 | $88,772 | Condensed Consolidated Statements of Operations Net sales for Q2 FY2024 decreased 40% year-over-year, resulting in a net loss of $3.1 million for the quarter Statement of Operations Summary (in thousands, except per share data) | Metric | Q2 FY2024 (3 months ended Dec 31, 2023) | Q2 FY2023 (3 months ended Dec 31, 2022) | YTD FY2024 (6 months ended Dec 31, 2023) | YTD FY2023 (6 months ended Dec 31, 2022) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $25,202 | $42,295 | $59,171 | $85,422 | | Gross Profit | $387 | $6,214 | $3,524 | $11,585 | | (Loss) Income from Operations | $(3,513) | $2,485 | $(4,057) | $4,027 | | Net (Loss) Income | $(3,070) | $1,813 | $(3,765) | $2,866 | | Diluted EPS | $(0.52) | $0.31 | $(0.64) | $0.49 | Condensed Consolidated Statements of Cash Flows Operating cash flow improved to $4.8 million due to inventory reduction, with lower investing activities Cash Flow Summary (Six Months Ended Dec 31, in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $4,844 | $3,735 | | Net cash used in investing activities | $(1,707) | $(11,598) | | Net cash used in financing activities | $(146) | $(1,197) | | Net increase (decrease) in cash | $2,991 | $(9,060) | Notes to Condensed Consolidated Financial Statements Notes detail inventory changes, lease extensions, credit facility amendments, and customer concentration - Revenue from beta-alanine raw material sales and royalty/licensing income was $3.9 million for the six months ended Dec 31, 2023, up from $2.8 million in the prior-year period[38] Inventories, net (in thousands) | Category | Dec 31, 2023 | June 30, 2023 | | :--- | :--- | :--- | | Raw materials | $14,443 | $20,946 | | Work in progress | $2,474 | $4,504 | | Finished goods | $3,485 | $4,928 | | Total | $19,596 | $29,694 | - On July 18, 2023, the company amended its Vista, CA manufacturing facility lease, extending it by over ten years. This resulted in an increase of approximately $25.9 million to both the lease liability and the Right of Use asset[53] - The company was not in compliance with certain financial covenants of its credit facility as of December 31, 2023. Subsequently, on February 13, 2024, it entered into a Fourth Amendment and Waiver with Wells Fargo, which waived non-compliance, reduced borrowing capacity to $12.5 million, increased the interest rate, modified covenants, and suspended share repurchases[63][92] Customer Sales Concentration (in thousands) | Period | Customer 1 | Customer 2 | Customer 3 | Total from Top Customers | | :--- | :--- | :--- | :--- | :--- | | 6 Months Ended Dec 31, 2023 | $23,965 | $12,131 | <10% | $36,096 | | 6 Months Ended Dec 31, 2022 | $29,265 | $30,987 | $10,831 | $71,083 | Segment Performance (Six Months Ended Dec 31, in thousands) | Segment | Net Sales 2023 | Net Sales 2022 | (Loss) Income from Ops 2023 | Income from Ops 2022 | | :--- | :--- | :--- | :--- | :--- | | Private-label contract manufacturing | $55,239 | $82,615 | $(1,360) | $7,510 | | Patent and trademark licensing | $3,932 | $2,807 | $1,391 | $694 | Management's Discussion and Analysis (MD&A) MD&A discusses a 31% sales decline due to reduced manufacturing, offset by licensing growth, and liquidity Executive Overview Net sales fell 31% due to manufacturing decline, partially offset by licensing growth, with a net loss expected for FY2024 - For the six months ended December 31, 2023, net sales were 31% lower than the prior year period, with private-label contract manufacturing sales decreasing 33% and patent/trademark licensing revenue increasing 40%[98][99] - The company announced the temporary closure of its Carlsbad, California powder processing facility in August 2023 due to a large customer's efforts to rebalance inventory. The facility is now expected to re-open late in the fourth fiscal quarter of 2024[103] - Management anticipates the company will experience a net loss in the second half of fiscal 2024 and an overall net loss for the full fiscal year 2024[104] Results of Operations Q2 FY2024 net sales dropped 40%, leading to a significant gross profit margin collapse and operating loss Results of Operations Highlights (in thousands) | Metric | Q2 FY2024 | Q2 FY2023 | % Change | YTD FY2024 | YTD FY2023 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total net sales | $25,202 | $42,295 | (40)% | $59,171 | $85,422 | (31)% | | Gross profit | $387 | $6,214 | (94)% | $3,524 | $11,585 | (70)% | | Gross profit % | 1.5% | 14.7% | - | 6.0% | 13.6% | - | | (Loss) income from operations | $(3,513) | $2,485 | (241)% | $(4,057) | $4,027 | (201)% | | Net (loss) income | $(3,070) | $1,813 | (269)% | $(3,765) | $2,866 | (231)% | | Diluted EPS | $(0.52) | $0.31 | $(0.64) | $0.49 | - The decrease in private-label contract manufacturing sales was primarily due to reduced orders from several larger customers working to lower their excess on-hand inventories[110] - The increase in patent and trademark licensing revenue was driven by more orders from existing customers and higher royalty income[111] Liquidity and Capital Resources Cash from operations improved to $4.8 million due to inventory reduction, with sufficient liquidity for 12 months - Net cash provided by operating activities was $4.8 million for the six months ended Dec 31, 2023, compared to $3.7 million in the prior year period[116] - A reduction in inventory provided $10.1 million in cash during the first six months of fiscal 2024, compared to using $3.6 million in the prior year period[118] - As of February 13, 2024, a Fourth Amendment and Waiver to the credit facility waived prior non-compliance, decreased total borrowing capacity to $12.5 million, and required the company to suspend share repurchase and dividend activity[122] - The company believes its available cash of $16.6 million, potential cash flows, and credit facility will be sufficient to fund working capital and capital expenditures for at least the next 12 months[123] Controls and Procedures Management concluded disclosure controls and procedures were effective as of December 31, 2023 - Based on an evaluation as of December 31, 2023, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[127] - No changes occurred in internal control over financial reporting during the quarter ended December 31, 2023, that have materially affected, or are reasonably likely to materially affect, these controls[128] PART II: OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, not expected to have a material adverse effect - The company is party to various investigations, claims, and legal proceedings arising in the ordinary course of business but does not currently believe their resolution will result in a not material adverse effect[131] Risk Factors New risk factors include geopolitical instability, potentially disrupting supply chains and financial performance - A new risk factor has been identified related to geopolitical instability. Ongoing conflicts in Ukraine and the Middle East (Israel-Hamas conflict) may lead to increased political, economic, and security risks, potentially disrupting global supply chain and impacting financial performance[134] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered equity securities were sold during the three-month periods ended September 30 and December 31, 2023 - There were no sales of unregistered equity securities during the quarter[135] Exhibits This section indexes filed exhibits, including the Fourth Amendment to the Credit Agreement with Wells Fargo - The report includes several filed exhibits, most notably the Fourth Amendment and Waiver of Events of Default to the Credit Agreement with Wells Fargo, effective February 13, 2024[138] Signatures The report was duly signed on February 13, 2024, by the CEO and CFO - The report was duly signed on February 13, 2024, by Mark A. LeDoux, Chief Executive Officer, and Michael E. Fortin, Chief Financial Officer[139][140][142]