What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-13 compared with 2021-02-09 · 54 added, 45 removed, 77 unchanged (56% of the section changed)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to help you understand our financial condition and results of operations for the three and six months ended December 31, 2020.

The following discussion and analysis is intended to help you understand our financial condition and results of operations for the three and nine months ended March 31, 2021.

You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to the condensed consolidated financial statements included under Item 1 in this Report, as well as the risk factors and other information included in our 2020 Annual Report and other reports and documents we file with the SEC.

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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® trade names, royalties from license agreements, and potentially additional contract manufacturing opportunities with licensees.

During the first six months of fiscal 2021, our net sales were 51% higher than in the first six months of fiscal 2020.

Private-label contract manufacturing sales increased 62% due to higher sales from a majority of our distribution channels worldwide primarily due to increased shipments of existing products and sales of newly awarded products.

During the first nine months of fiscal 2021, our net sales were 60% higher than in the first nine months of fiscal 2020.

Private-label contract manufacturing sales increased 70% due to higher sales from a majority of our distribution channels worldwide primarily due to increased shipments of existing products and sales of newly awarded products to new and existing customers.

This sales increase was partially offset by a reduction in sales as a result of a discontinued customer relationship.

Revenue concentration risk for our largest private-label contract manufacturing customer as a percentage of our total net sales increased from 46% for the first six months of fiscal 2020 to 56% for the first six months of fiscal 2021.

Revenue concentration risk for our largest private-label contract manufacturing customer as a percentage of our total net sales increased from 43% for the first nine months of fiscal 2020 to 54% for the first nine months of fiscal 2021.

We expect our annualized fiscal year 2021 revenue concentration for this customer to be higher than fiscal year 2020.

During the first six months of fiscal 2021, CarnoSyn® beta-alanine revenue decreased 27% to $5.4 million, compared to revenue of $7.5 million for the first six months of fiscal 2020.

The decrease in beta-alanine revenue was due to decreased material shipments primarily resulting from certain of our former customers discontinuing the use of CarnoSyn® beta-alanine in favor of generic beta-alanine and the negative impact COVID-19 has had on the sports nutrition industry due to continued limitations on athletic activities and gyms, with such decrease being partially offset by higher average sales prices.

During the first nine months of fiscal 2021, CarnoSyn® beta-alanine revenue decreased 7% to $9.6 million, compared to revenue of $10.3 million for the first nine months of fiscal 2020.

However, a majority of this decline occurred during the first nine months of fiscal 2021 while sales from this channel during the third quarter of fiscal 2021 included a 46% year over year increase, primarily due to easing COVID-19 restrictions throughout the country, especially for athletic activities and gyms.

We continue to invest in research and development for our SR CarnoSyn® sustained release delivery system.

We believe SR CarnoSyn® may provide a unique opportunity within the growing Wellness and Healthy Aging markets.

We believe our ongoing efforts to refine our formulations and product offerings will be positively received and result in significant opportunity for increased SR CarnoSyn® sales.

To protect our CarnoSyn® business and our patents, trademarks and other intellectual property, we incurred litigation and patent compliance expenses of approximately $0.7 million during the first six months of fiscal 2021 as compared to $1.4 million during the comparable period in fiscal 2020.

We believe our ongoing efforts to refine our formulations and product offerings will be positively received and result in further opportunities for increased SR CarnoSyn® sales.

To protect our CarnoSyn® business and our patents, trademarks and other intellectual property, we incurred litigation and patent compliance expenses of approximately $1.0 million during the first nine months of fiscal 2021 as compared to $1.7 million during the comparable period in fiscal 2020.

The decrease in these legal expenses on a year over year basis was primarily due to the successful resolution of several cases that were settled.

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During the remainder of fiscal 2021, we will continue our sales and marketing activities to consumers, customers, potential customers, and brand owners on multiple platforms to promote and reinforce the features and benefits of utilizing CarnoSyn® and SR CarnoSyn® beta-alanine.

Based on our current sales order volumes and future period sales forecasts received from our customers, we continue to expect our annualized fiscal 2021 net sales to increase between 30% and 50% as compared to fiscal 2020.

Based on our current sales order volumes and future period sales forecasts received from our customers, we now expect our annualized fiscal 2021 net sales to increase between 45% and 55% as compared to fiscal 2020.

We also expect to generate operating income between 7% and 9% of net sales for our fiscal year ending June 30, 2021.

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Local, state, or federal orders requiring employees to remain at home;

Limitations on the ability of carriers to deliver our products to customers;

Limitations on the ability of carriers to deliver materials need for production or for delivery of our products to customers;

Limitations on the ability of our customers to conduct their business and purchase our products and services;

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Results of Operations

The results of our operations for the three and six months ended December 31 were as follows (dollars in thousands):

The results of our operations for the three and nine months ended March 31 were as follows (dollars in thousands):

Three Months Ended

Six Months Ended

Nine Months Ended

Private label contract manufacturing

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% of net sales

Provision for income taxes

Provision (benefit) for income taxes

Net income (loss)

% of net sales

Private-label contract manufacturing net sales increased 83% during the three months ended December 31, 2020 and 62% during the six months ended December 31, 2020, when compared to the same period in the prior year.

Private-label contract manufacturing net sales increased 86% during the three months ended March 31, 2021 and 70% during the nine months ended March 31, 2021, when compared to the same period in the prior year.

The increase was due primarily to sales of new products to new and existing customers and higher sales of existing product to existing customers, partially offset by a reduction due to a discontinued customer relationship.

Net sales from our patent and trademark licensing segment decreased 35% during the three months ended December 31, 2020 and 27% during the six months ended December 31, 2020, when compared to the same period in the prior year.

The decrease in beta-alanine sales during the three and six months ended December 31, 2020 was due to decreased material shipments primarily resulting from certain of our former customers discontinuing the use of CarnoSyn® beta-alanine in favor of generic beta-alanine and the negative impact COVID-19 has had on the sports nutrition industry due to continued limitations on athletic activities and gyms, partially offset by an increase in average sales price.

The change in gross profit margin for the three and six months ended December 31, 2020, was as follows:

Net sales from our patent and trademark licensing segment increased 46% during the three months ended March 31, 2021 and decreased 7% during the nine months ended March 31, 2021, when compared to the same period in the prior year.

The increase for the three months ended March 31, 2021 was primarily due to an increase in material shipments primarily resulting from higher sales to existing customers and the increase in athletic activities as gyms and athletic facilities began to reopen in accordance with easing COVID-19 guidelines for various cities and states across the USA.

This increase was partially offset by lower average sales prices.

The decrease in beta-alanine sales during the nine months ended March 31, 2021 was primarily due to decreased material shipments resulting from certain of our former customers discontinuing the use of CarnoSyn® beta-alanine in favor of generic beta-alanine and the negative impact COVID-19 has had on the sports nutrition industry due to continued limitations on athletic activities and gyms in the early portion of our fiscal year.

The change in gross profit margin for the three and nine months ended March 31, 2021, was as follows:

Contract manufacturing (1)

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Total change in gross profit margin

Private-label contract manufacturing gross profit margin as a percentage of consolidated net sales increased 7.6 percentage points during the three months ended December 31, 2020 and 5.2 percentage points during the six months ended December 31, 2020, when compared to the comparable prior year period.

The increase in gross profit as a percentage of sales for private-label contract manufacturing is primarily due to a marginal decrease in per unit manufacturing costs due to increased sales and a favorable shift in sales mix.

Patent and trademark licensing gross profit margin as a percentage of consolidated net sales decreased 4.9 percentage points during the three months ended December 31, 2020 and 3.5 percentage points during the six months ended December 31, 2020, when compared to the comparable prior year period.

The decrease was primarily due to decreased patent and trademark licensing net sales as a percentage of total consolidated net sales.

Selling, general and administrative expenses decreased $0.1 million, or 2%, during the three months ended December 31, 2020, and decreased $0.6 million, or 7%, during the six months ended December 31, 2020, as compared to the comparable prior year period.

Selling, general, and administrative expenses decreased primarily due to reduced litigation costs associated with our patent and trademark licensing business.

Other income, net, decreased $0.7 million during the three months ended December 31, 2020, and decreased $1.2 million during the six months ended December 31, 2020, when compared to the comparable period during the prior year.

The decrease was primarily due to the unfavorable foreign exchange revaluation activity associated with our balance sheet and the fluctuations in unhedged foreign currency rates.

Our income tax expense increased $0.9 million during the three months ended December 31, 2020, and increased $0.4 million during the six months ended December 31, 2020.

The increase for the three months ended December 31, 2020 was primarily related to an increase in pre-tax income, as compared to the three months ended December 31, 2019.

The increase for the first six months of fiscal year 2021 as compared to the comparable period in fiscal year 2020 was primarily related to an increase in pre-tax income that was partially offset by a discrete tax benefit of $0.9 million recorded during the six months ended December 31, 2020.

Private-label contract manufacturing gross profit margin as a percentage of consolidated net sales increased 5.3 percentage points during the three months ended March 31, 2021 and 5.0 percentage points during the nine months ended March 31, 2021, when compared to the comparable prior year periods.

The increase in gross profit as a percentage of sales for private-label contract manufacturing is primarily due to a decrease in per unit manufacturing costs due to increased sales as well as a $1.0 million inventory reserve recorded in the three and nine months ended March 31, 2020, with no such comparable reserve in the three and nine months ended March 31, 2021.

These decreases were partially offset by unfavorable product and customer sales mix.

Patent and trademark licensing gross profit margin as a percentage of consolidated net sales decreased 1.9 percentage points during the three months ended March 31, 2021 and 2.9 percentage points during the nine months ended March 31, 2021, when compared to the comparable prior year period.

The decrease in margin contribution during the three and nine months ended March 31, 2021 was primarily due to decreased patent and trademark licensing net sales as a percentage of total consolidated net sales.

The decrease during the three months ended March 31, 2021 also include lower average sales prices.

Selling, general and administrative expenses decreased $3.0 million, or 42%, during the three months ended March 31, 2021, and decreased $3.6 million, or 22%, during the nine months ended March 31, 2021, as compared to the comparable prior year period.

Selling, general, and administrative expenses decreased primarily due to $3.3 million of bad debt expense recorded during the three and nine months ended March 31, 2020 related to a receivable from a former customer with no such comparable reserve during the three and nine months ended March 31, 2021.

During the three months ended March 31, 2021, the reduction related to bad debt expense was partially offset by increased compensation expense.

During the nine months ended March 31, 2021, the decrease in selling, general, and administrative expenses also included reduced litigation costs associated with our patent and trademark licensing business.

Other income, net, decreased $0.3 million during the three months ended March 31, 2021, and decreased $1.5 million during the nine months ended March 31, 2021, when compared to the comparable periods during the prior year.

The decreases were primarily due to the unfavorable foreign exchange revaluation activity due to volatility in the Euro and Swiss Franc impacting our balance sheet.

Our income tax provision (benefit) increased $0.7 million during the three months ended March 31, 2021, and increased $1.1 million during the nine months ended March 31, 2021.

The increase for the three months ended March 31, 2021 was primarily related to an increase in pre-tax income as compared to the three months ended March 31, 2020.

The increase for the first nine months of fiscal year 2021 as compared to the comparable period in fiscal year 2020 was primarily related to an increase in pre-tax income, partially offset by a discrete tax benefit of $0.9 million recorded during the nine months ended March 31, 2021.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash flows provided by operating activities and the availability of borrowings under our credit facility.

Net cash provided by operating activities was $4.7 million for the six months ended December 31, 2020 compared to net cash provided by operating activities of $4.8 million in the comparable period in the prior fiscal year.

At December 31, 2020, changes in accounts receivable, consisting of amounts due from our private-label contract manufacturing customers and our patent and trademark licensing activities, used $0.1 million in cash compared to providing $1.7 million of cash during the comparable six month period in the prior year.

The decrease in cash provided by accounts receivable during the six months ended December 31, 2020 primarily resulted from increased sales and the timing of sales and related collections.

Days sales outstanding was 36 days during the six months ended December 31, 2020 as compared to 48 days for the same period during the prior year.

Changes in inventory used $6.5 million in cash during the six months ended December 31, 2020 compared to providing $3.4 million in the comparable prior year period.

The change in cash related to inventory during the six months ended December 31, 2020 was primarily related to the difference in the amount and timing of orders and anticipated sales as compared to same period in the prior year.

Changes in accounts payable and accrued liabilities provided $1.0 million in cash during the six months ended December 31, 2020 compared to using $2.7 million during the three months ended December 31, 2019.

Net cash provided by operating activities was $16.0 million for the nine months ended March 31, 2021 compared to net cash provided by operating activities of $5.2 million in the comparable period in the prior fiscal year.

At March 31, 2021, changes in accounts receivable, consisting of amounts due from our private-label contract manufacturing customers and our patent and trademark licensing activities, provided $0.2 million in cash compared to providing $0.3 million of cash during the comparable nine month period in the prior year.

The decrease in cash provided by accounts receivable during the nine months ended March 31, 2021 primarily resulted from timing of sales and related collections.

Days sales outstanding was 35 days during the nine months ended March 31, 2021 as compared to 47 days for the same period during the prior year.

Changes in inventory used $1.1 million in cash during the nine months ended March 31, 2021 compared to using $0.1 million in the comparable prior year period.

The change in cash related to inventory during the nine months ended March 31, 2021 was primarily related to the difference in the amount and timing of orders and anticipated sales as compared to same period in the prior year.

Changes in accounts payable and accrued liabilities provided $4.1 million in cash during the nine months ended March 31, 2021 compared to providing $1.7 million during the nine months ended March 31, 2020.

The change in cash flow activity related to accounts payable and accrued liabilities was primarily due to the timing of inventory receipts and payments.

Cash used in investing activities during the six months ended December 31, 2020 was $3.0 million compared to $1.6 million in the comparable period during the prior year.

The primary reason for the change was due to increased capital equipment purchases during the six months ended December 31, 2020 as compared to the six months ended December 31, 2019.

Cash used in investing activities during the nine months ended March 31, 2021 was $4.2 million compared to $3.4 million in the comparable period during the prior year.

The primary reason for the change was due to increased capital equipment purchases during the nine months ended March 31, 2021 as compared to the nine months ended March 31, 2020.

Capital expenditures during fiscal 2021 and fiscal 2020 were primarily for manufacturing equipment used in our Vista, California and Manno, Switzerland facilities.

Cash used in financing activities for the six months ended December 31, 2020, was $3.5 million, compared to $1.3 million used in the comparable period during the prior year.

This is due to increased repurchases of our stock.

At December 31, 2020 we had $10.0 million due in connection with our loan facility.

During the six months ended December 31, 2020, we were in compliance with all of the financial and other covenants required under the Credit Agreement.

Refer to Item 1, Note F., "Debt," in this Quarterly Report, for terms of our Credit Agreement and additional information.

As of December 31, 2020, we had $28.6 million in cash and cash equivalents.

We believe our available cash, cash equivalents and potential cash flows from operations will be sufficient to fund our current working capital needs and capital expenditures through the next 12 months.

Cash used in financing activities for the nine months ended March 31, 2021 was $14.1 million compared to providing $6.5 million in the comparable period during the prior year.

This change is primarily due to $10.0 million in proceeds from our line of credit, withdrawn as a measure to provide our business with liquidity out of an abundance of caution due to the COVID-19 pandemic during the third quarter of fiscal 2020, which was repaid in the third quarter of fiscal 2021.

Our stock repurchase activity also increased to $4.3 million in the first nine months of fiscal 2021 as compared to $3.4 million in the first nine months of fiscal 2020.

On February 2, 2021 we repaid the entire balance of our $10.0 million credit line with Wells Fargo Bank, N.A.

bringing our outstanding debt under the line to zero and increasing our amount available for borrowing to $10.0 million.

During the nine months ended March 31, 2021, we were in compliance with all of the financial and other covenants required under the Credit Agreement.

Refer to Item 1, Note F., "Debt," in this Quarterly Report, for terms of our Credit Agreement and additional information.

As of March 31, 2021, we had no outstanding balances due in connection with our loan facility.

As of March 31, 2021, we had $28.1 million in cash and cash equivalents.

We believe our available cash, cash equivalents and cash flows from operations will be sufficient to fund our current working capital needs and capital expenditures through the next 12 months.

Off-Balance Sheet Arrangements

As of December 31, 2020, we did not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses material to investors.

As of March 31, 2021, we did not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses material to investors.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis