Natural Alternatives International, Inc. (NAII) is a leading formulator, manufacturer, and marketer of customized nutritional supplements, with a strong focus on developing innovative and patented product offerings. The company's diverse portfolio encompasses both private-label contract manufacturing services and its proprietary CarnoSyn® Brands portfolio, which includes the recently introduced TriBsyn™ – a groundbreaking carnosine booster that addresses a significant unmet need in the sports nutrition and wellness categories.
BUSINESS OVERVIEW AND HISTORY
Natural Alternatives International, Inc. (NAI) was founded in 1980 and has since established itself as a trusted partner in the nutraceutical industry, providing high-quality custom formulations and manufacturing solutions to a wide range of customers. The company's headquarters and primary manufacturing facilities are located in Carlsbad, California, with an additional manufacturing site in Lugano, Switzerland.
NAI started as a private-label contract manufacturing business, providing products to companies that market and distribute nutritional supplements and other health care products. Over the years, the company has worked to diversify its business and revenue streams. In the early 2000s, NAI began commercializing its beta-alanine patent estate, selling the raw material and generating royalty and licensing income from the use of its CarnoSyn and SR CarnoSyn trademarks. This patent and trademark licensing segment has provided NAI with a higher margin revenue stream alongside its private-label contract manufacturing operations.
In 2021, NAI took a major step in expanding its manufacturing capabilities when it acquired a powder processing and warehouse facility in Carlsbad, California. The company spent 21 months retrofitting the space with efficient high-volume powder production and packaging equipment. However, NAI was forced to temporarily close this facility in October 2023 due to a significant reduction in customer orders.
Throughout its history, NAI has faced various challenges, including variations in customer orders, supply chain disruptions, and volatile raw material costs. In fiscal year 2023, the company recorded a significant one-time gain related to the Employee Retention Tax Credit, which helped offset losses in its core business. However, in recent quarters, NAI has struggled with declining sales and profitability, leading to net losses.
Despite these challenges, NAI has remained committed to investing in research and development to expand its portfolio of patented and proprietary ingredients, such as the launch of TriBsyn, a new carnosine booster that utilizes CarnoSyn beta-alanine. The company has also sought to diversify its customer base and expand its global reach, with a significant portion of its sales now coming from markets outside the United States.
FINANCIAL PERFORMANCE AND LIQUIDITY
Over the past three fiscal years, NAI has experienced fluctuations in its financial performance, reflecting the challenging conditions faced by the broader nutraceutical industry. In fiscal year 2022, the company reported net sales of $170.97 million and net income of $10.71 million, representing a strong year-over-year improvement. However, the following two fiscal years saw a decline in both top-line and bottom-line results, with net sales of $113.80 million and a net loss of $7.22 million in fiscal year 2024.
The company's private-label contract manufacturing segment, which accounts for the majority of its revenue, has been impacted by a combination of factors, including changes in customer order patterns, supply chain disruptions, and increased manufacturing costs. Meanwhile, the patent and trademark licensing division, which includes the CarnoSyn® Brands, has continued to contribute a sizable portion of NAI's overall sales, though the growth trajectory has moderated in recent periods.
For the six months ended December 31, 2024, NAI reported a 14% increase in net sales compared to the same period in the prior year. This growth was primarily driven by the private-label contract manufacturing segment, which contributed approximately 93.6% of total net sales during this period. The increase in private-label contract manufacturing net sales was mainly due to increased orders from one of NAI's larger customers and shipments to new customers, partially offset by decreased shipments to other existing customers.
The patent and trademark licensing segment, which accounted for approximately 6.4% of total net sales during the six months ended December 31, 2024, saw a 9% increase in revenue compared to the prior year. This growth was primarily attributed to decreased volume rebates, partially offset by a decrease in orders from existing customers.
Despite the overall revenue growth, NAI reported a net loss for the six-month period ended December 31, 2024. This was primarily due to higher selling, general and administrative expenses, increased legal costs associated with expanding the beta-alanine patent estate, and elevated manufacturing costs. The private-label contract manufacturing gross profit margin as a percentage of consolidated net sales decreased 0.4 percentage points during this period, mainly due to an unfavorable change in product sales mix and increased manufacturing costs impacted by higher labor, supplies, rent, and freight expenses.
In the most recent quarter (Q2 2024), NAI reported revenue of $34.08 million and a net loss of $2.19 million. The decrease in revenue and net loss compared to the prior year quarter was primarily due to a change in sales mix from the private-label contract manufacturing segment, increased legal costs associated with expanding the beta-alanine patent estate, and increased manufacturing and selling, general and administrative costs.
As of June 30, 2024, NAI reported a current ratio of 2.70, indicating a strong liquidity position, with $11.98 million in cash and cash equivalents. The company's balance sheet also reflected $60.29 million in total debt, including a $9.10 million term loan secured by its Carlsbad, California manufacturing facility and $5.00 million outstanding on its revolving credit facility.
As of December 31, 2024, NAI's liquidity position remained relatively stable, with a current ratio of 2.70 and a quick ratio of 1.64. The company had $10.80 million of borrowing capacity available on its $12.50 million credit facility, with $5.00 million outstanding. The debt-to-equity ratio stood at 0.60, reflecting a moderate level of leverage.
In December 2024, NAI was not in compliance with certain financial covenants related to its credit facility, including net income requirements and the fixed charge coverage ratio. The company is currently in negotiations with its lender, Wells Fargo, to secure a waiver or potential revision of the credit facility terms. While the outcome of these discussions remains uncertain, NAI's management team is actively working to address the situation and regain compliance.
OPERATIONAL HIGHLIGHTS AND STRATEGIC INITIATIVES
One of the key highlights for NAI in recent years has been the continued success and expansion of its CarnoSyn® Brands portfolio. The company's proprietary beta-alanine ingredients have gained widespread acceptance in the sports nutrition and wellness markets, with the CarnoSyn® and SR CarnoSyn® brands being utilized by a diverse range of supplements, functional foods, and beverage manufacturers.
To further strengthen its position in the beta-alanine market, NAI has invested significantly in research and development, with a focus on enhancing the bioavailability and user experience of its patented offerings. The introduction of TriBsyn™ in August 2024 represents the culmination of these efforts, as the new formulation addresses a longstanding challenge associated with beta-alanine supplementation – the occurrence of paresthesia. TriBsyn™ utilizes CarnoSyn beta-alanine and patent-pending technology to increase beta-alanine bioavailability and absorption while eliminating the paresthesia side effect. The company believes TriBsyn™ creates a new opportunity to reach untapped consumer segments.
In addition to its product innovation efforts, NAI has also focused on expanding its distribution channels and building strategic partnerships to drive the growth of its CarnoSyn® Brands. In 2024, the company announced a new distribution agreement with B&D Nutritional Ingredients, a renowned raw material distributor, to facilitate the distribution of TriBsyn™ in the U.S. market.
On the private-label contract manufacturing front, NAI has continued to leverage its state-of-the-art facilities and quality-centric approach to serve a diverse customer base. The company's temporary closure of its Carlsbad, California manufacturing site in 2023 due to a reduction in customer orders has been followed by the planned reopening of the facility in May 2024, as the company anticipates increased production demands.
NAI's products are sold both in the U.S. and in markets outside the U.S., including Europe, Canada, Australia, New Zealand, Mexico, and Asia. In the most recent quarter, 61% of net sales were to the U.S. market and 39% were to markets outside the U.S. Sales to the company's Swiss subsidiary NAIE accounted for 82% of net sales in markets outside the U.S.
RISKS AND CHALLENGES
Despite its strong market position and innovative product portfolio, NAI faces several risks and challenges that could impact its future performance:
1. Reliance on Key Customers: A significant portion of NAI's revenue is derived from a limited number of large private-label contract manufacturing customers. The loss of any of these customers or a significant decline in their orders could have a material adverse impact on the company's financial results.
2. Raw Material Availability and Pricing: NAI's business is dependent on the availability and cost of certain raw materials, including beta-alanine, which are sourced from a limited number of suppliers. Disruptions in the supply chain or volatility in raw material prices could affect the company's profitability.
3. Intellectual Property Protection: The company's ability to maintain and expand its CarnoSyn® Brands portfolio is heavily reliant on its ability to protect its patents, trademarks, and other intellectual property rights. Ongoing litigation and compliance efforts to defend these rights could result in significant expenses.
4. Regulatory Compliance: As a manufacturer of nutritional supplements, NAI must comply with various regulations, including the FDA's Good Manufacturing Practices (GMPs). Any failure to meet these standards could lead to regulatory actions, product recalls, and reputational damage.
5. Geopolitical Tensions and Trade Disputes: Ongoing geopolitical instability, including conflicts in Ukraine and the Middle East, as well as trade tensions between major economies, could disrupt NAI's global supply chain and impact the availability and pricing of key raw materials.
OUTLOOK AND CONCLUSION
Despite the recent challenges faced by NAI, the company's long-term growth prospects remain promising. The successful commercialization of TriBsyn™ and the continued expansion of the CarnoSyn® Brands portfolio present significant opportunities for the company to diversify its revenue streams and capture a larger share of the growing sports nutrition and wellness markets.
Furthermore, the company's strong liquidity position and ongoing efforts to address its credit facility compliance issues suggest that NAI is well-positioned to navigate the current industry headwinds and invest in strategic initiatives that could drive future growth and profitability.
NAI continues to focus on leveraging its facilities, expanding the commercialization of its beta-alanine products, and improving operational efficiencies to drive profitability going forward. The company's ability to maintain or increase its beta-alanine royalty and licensing revenue will depend on factors such as developing a market for its SR CarnoSyn and TriBsyn products, maintaining its patent rights, the availability and cost of the raw material beta-alanine, and continued compliance by third parties with its license agreements.
As NAI continues to leverage its innovative product development capabilities, strengthen its distribution channels, and optimize its manufacturing operations, the company is poised to unlock new avenues for long-term success. By capitalizing on the rising demand for effective and differentiated nutritional supplements, NAI has the potential to solidify its position as a leading player in the dynamic nutraceutical industry.