NAII - and, for a bit more color from mgmt, here are mgmt remarks from the 10-Q just filed, p. 13:
ITEM 2. 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, 2016. You should read the following discussion and analysis together with our unaudi ted 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 2016 Annual Report and other reports and documents we file with the SEC. Our future financial condition and results of operations will vary from our historical financial condition and results of operations described below based on a variety of factors.
Executive Overview
The following overvi ew does not address all of the matters covered in the other sections of this Item 2 or other items in this report or contain all of the information that may be important to our stockholders or the investing public. You should read this overview in conjunction with the other sections of this Item 2 and this report.
Our primary business activity is providing private label contract manufacturing services to companies that market and distribute vitamins, minerals, herbs and other nutritional supplements, as wel l as other health care products, to consumers both within and outside the U.S. Historically, our revenue has been largely dependent on sales to one or two private label contract manufacturing customers and subject to variations in the timing of such customers’ orders, which in turn is impacted by such customers’ internal marketing programs, supply chain management, entry into new markets, new product introductions, the demand for such customers’ products, and general industry and economic conditions. Our revenue also includes raw material sales, royalty and licensing revenue generated from our patent estate pursuant to license and supply agreements with third parties for the distribution and use of the ingredient known as beta-alanine sold under our CarnoSyn® trademark.
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® trade names, contract manufacturing, and license agreements.
During the first six months of fiscal 2017, our net sales were 33% higher than in the first six months of fiscal 2016. Private label contract manufacturing sales increased 35% due primarily to the sale of higher volumes of existing products to existing customers and new product sales to new and existing customers. Our first half fiscal 2017 sales were favorably impacted due to the timing and shipments of orders and new product launches. Revenue concentration risk for our largest private label contract manufacturing customer as a percentage of our total net sales increased to 50% for the six months ended December 31, 2016 compared to 39% in the first six months of fiscal 2016. We expect our revenue concentration for this customer to remain relatively consistent at 50% for the remainder of fiscal 2017.
During the first six months of fiscal 2017, CarnoSyn® beta-alanine revenue increased 26% to $13.4 million as compared to $10.6 million for the first six months of fiscal 2016. The increase in beta-alanine revenue was primarily due to the addition of new customers and increased material shipments to existing customers.
On an annualized basis, we now expect our consolidated fiscal 2017 revenue growth percentage to be approximately 5% to 10% due to reductions in contract manufacturing orders and customer forecasts from Australia, Asia, and Europe. We expect a majority of this decline to occur in our third fiscal quarter ending March 31, 2017 and to a lesser extent in our fourth fiscal quarter. We believe this international revenue decline will be temporary in nature and will reverse as we enter fiscal 2018 beginning July 1, 2017. With respect to our CarnoSyn® beta-alanine business, we expect our current sales growth rate to continue for the balance of this fiscal year as we continue to expand our research, our patent estate and our client base.
To protect our CarnoSyn® business and its underlying patent estate, we incurred litigation and patent compliance expenses of approximately $2.0 million during the first six months of fiscal 2017 and $779,000 during the comparable period in fiscal 2016. The increase in these legal expenses on a year over year basis is due to our efforts to enforce compliance with our patents related to instant release CarnoSyn® and to protect our tradename in the marketplace against parties who are using it without our consent. We describe our efforts to protect our patent estate in more detail under Item 1 of Part II of our 2016 Annual Report. Our ability to maintain or further increase our beta-alanine royalty and licensing revenue will depend in large part on our ability to develop a market for our sustained release form of beta-alanine marketed under our SR Carnosyn® trademark, maintain our longer term patent rights, the availability of the raw material beta-alanine when and in the amounts needed, our ability to expand distribution of beta-alanine to new and existing customers, our ability to further commercialize our existing patents, and the continued compliance by third parties with our patent and trademark rights.
During the remainder of fiscal 2017, we plan to continue our focus on:
• Leveraging our state-of-the-art, certified facilities to increase the value of the goods and services we provide to our highly valued private-label contract manufacturing customers, and develop relationships with additional quality oriented customers;
• Expanding the commercialization of our beta-alanine patent estate through raw material sales, developing a market for our sustained release form of beta-alanine marketed under our SR Carnosyn® trademark, new contract manufacturing opportunities, license agreements and protecting our proprietary rights;
• Improving operational efficiencies and managing costs and business risks to improve profitability.
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