Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 


FORM 10-Q

 

QUARTERLY REPORT

pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

FOR THE QUARTERLY PERIOD ENDED MARCHDECEMBER 31, 2021

 

000-15701

(Commission file number)

 


 


NATURAL ALTERNATIVES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

84-1007839

(State of incorporation)

(IRS Employer Identification No.)

  

1535 Faraday Ave

Carlsbad, CA 92008

(760) 736-7700

(Address of principal executive offices)

(Registrants telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Trading Symbol(s)

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value per share

NAII

Nasdaq Stock Market

 

Indicate by check mark whether NAI (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that NAI was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes     ☐  No

☒  Yes     ☐  No

 

Indicate by check mark whether NAI has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that NAI was required to submit and post such files).    ☒  Yes     ☐  No

 

Indicate by check mark whether NAI is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.

 

Large accelerated filer

Accelerated filer

Emerging Growth Company

      

Non-accelerated filer

Smaller reporting company

  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether NAI is a shell company (as defined in Rule 12b-2 of the Exchange Act): ☐ Yes ☒ No

As of MayFebruary 9, 2021, 6,418,9782022, 6,121,478 shares of NAI's common stock were outstanding, net of 2,567,7972,882,887 treasury shares.

 

1

 

 

TABLE OF CONTENTS

 

  

Page

   

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

3

   

PART I

FINANCIAL INFORMATION

 
   

Item 1.

Financial Statements

 
   
 

Condensed Consolidated Balance Sheets

4

 

Condensed Consolidated Statements of Income and Comprehensive Income

5

 

Condensed Consolidated Statements of Stockholders’ Equity

6

 

Condensed Consolidated Statements of Cash Flows

8

 

Notes to Condensed Consolidated Financial Statements

9

   

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

18

23

   

Item 4.

Controls and Procedures

21

28

   

PART II

OTHER INFORMATION

 
   

Item 1.

Legal Proceedings

22

29

   

Item 1A.

Risk Factors

22

29

   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22

29

   

Item 3.

Defaults Upon Senior Securities

22

29

   

Item 5.

Other Information

22

29

   

Item 6.

Exhibits

23

30

   

SIGNATURES

24

31

 

2

 

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

Certain statements in this Form 10-Q quarterly report, (this “Report”)including information incorporated by reference, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect current views about future events and financial performance based on certain assumptions. Examples of forward-looking statementsThey include opinions, forecasts, intentions, plans, goals, projections, guidance, expectations, beliefs, or other statements that are not statements of historical fact. Words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “believe,” “anticipate,” “intend,” “estimate,” “approximate,” “predict,” “forecast,” “project,”, “future”, or “project,”“likely”, or the negative or other variation of such words, and similar expressions may each identify a statement as a forward-looking statement. Any statements contained herein that refer to projections of our future financial performance, our anticipated growth and trends in our business, our goals, strategies, focus and plans, and other characterizations of future events or circumstances, including statements expressing general optimism or pessimism about our future operating results, are forward-looking statements. Forward-looking statements in this Reportreport may include statements about:

 

our ability to develop market acceptance for and increase sales of new products, develop relationships with new customers and maintain or improve existing customer relationships;

 

the impact, of the Covid-19 Pandemic (“COVID-19”) and other external factors both within and outside of our control, on our business and results in operations including variations in our quarterly net sales, , our employees, supply chain, vendors and customers;

 

future financial and operating results, including projections of net sales, revenue, income or loss, net income or loss per share, profit margins, expenditures, liquidity, and other financial items;

 

our ability to maintain or increase our patent and trademark licensing revenues;

 

our ability to develop market acceptance forattract and increase sales of new products, develop relationships with new customersretain sufficient labor to successfully execute our business strategies and maintain or improve existing customer relationships;achieve our goals and objectives;

 

inventory levels, including the adequacy of quality raw material and other inventory levels to meet future customer demand, in particular assumptions regarding the impact of the COVID-19 pandemic;

our ability to price our products to achieve profit margin targets, especially in the current volatile raw material and labor environment;

 

our ability to protect our intellectual property;

 

future economic and political conditions, including implementation of new or increased tariffs;

 

our ability to improve operating efficiencies, manage costs and business risks, and improve or maintain profitability;

 

currency exchange rates and their effect on our results of operations (including amounts that we may reclassify as earnings), the availability of foreign exchange facilities, our ability to effectively hedge against foreign exchange risks and the extent to which we may seek to hedge against such risks;

 

the outcome of litigation, regulatory and tax matters we may become involved in, the costs associated with such matters and the effect of such matters on our business and results of operations;

 

sources, availability and quality of raw materials, including the limited number of suppliers of beta-alanine meeting our quality requirements;

 

the future adequacy and intended use of our facilities;

 

potential manufacturing and distribution channels, product returns, and potential product recalls;

 

future customer orders;

 

the impact of external factors on our business and results of operations, especially, for example, variations in quarterly net sales from seasonal and other external factors;

 

our ability to operate within the standards set by the U.S. Food and Drug Administration’s (FDA) Good Manufacturing Practices (GMPs);

 

our ability to successfully expand our operations, including outside the United States (U.S.);

 

the adequacy of our financial reserves and allowances;

 

the sufficiency of our available cash, cash equivalents, and potential cash flows from our operations to fund our working capital and capital expenditure needs through the next 12 months and longer;

 

the impact of accounting pronouncements and our adoption of certain accounting guidance; and

 

other assumptions described in this Report underlying or relating to any forward-looking statements.

 

Forward-looking statements in this Report speak only as of the date of this Report based on information available to us at that time and caution should be taken not to place undue reliance on any such forward-looking statements. Forward-looking statements are subject to certain future events, risks, and uncertainties that are or may be outside of our control. When considering forward-looking statements, you should carefully review the risks, uncertainties and other cautionary statements in this Report as they identify certain important factors that could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements. These factors include, among others, the risks described under Item 1A of Part II and elsewhere in this Report, as well as in other reports and documents we have filed and will file with the United States Securities and Exchange Commission (SEC).

 

3

 

PART I FINANCIAL INFORMATION

 

ITEM 1.     FINANCIAL STATEMENTS

 

NATURAL ALTERNATIVES INTERNATIONAL, INC.

Natural Alternatives International, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

 

 

March 31,

2021

  

June 30,

2020

 
 

(Unaudited)

      

December 31, 2021

  

June 30, 2021

 

Assets

         

(Unaudited)

   

Current assets:

         

Cash and cash equivalents

 $28,089  $30,478  $19,352  $32,133 

Accounts receivable - less allowance for doubtful accounts of $3,152 at March 31, 2021 and $3,240 at June 30, 2020

  16,882   17,001 

Accounts receivable – less allowance for doubtful accounts of $3,541 at December 31, 2021 and $3,527 at June 30, 2021

 15,065  17,946 

Inventories, net

  29,088   27,972  31,828  27,006 

Income tax receivable

  1,186   848  0  1,095 

Forward contracts

     450  1,831  0 

Prepaids and other current assets

  1,980   2,275   2,485   2,168 

Total current assets

  77,225   79,024  70,561  80,348 

Property and equipment, net

  22,456   21,523  39,741  22,271 

Operating lease right-of-use assets

  16,551   18,354  14,542  15,877 

Deferred tax asset – noncurrent

  680   196  0  214 

Other noncurrent assets, net

  1,549   1,106   2,514   1,571 

Total assets

 $118,461  $120,203  $127,358  $120,281 

Liabilities and Stockholders Equity

            

Current liabilities:

         

Accounts payable

 $15,299  $12,509  $10,137  $11,893 

Accrued liabilities

  2,918   1,627  1,521  2,441 

Accrued compensation and employee benefits

  3,371   2,660  2,633  4,584 

Customer deposits

 622  1,721 

Income taxes payable

 1,278  619 

Forward contracts

  954     0  814 

Income taxes payable

  862   1,010 

Lines of credit

     10,000 

Mortgage note payable, current portion

  298   0 

Total current liabilities

  23,404   27,806  16,489  22,072 
 

Long-term liability – operating leases

  17,026   18,782  15,151  16,481 

Noncurrent forward contracts

     195  0  4 

Long-term pension liability

  757   696  408  391 

Deferred tax liability

 157  0 

Mortgage note payable, net of current portion

 9,634  0 

Income taxes payable, noncurrent

  1,250   1,349   1,118   1,250 

Total liabilities

  42,437   48,828   42,957   40,198 

Commitments and contingencies (Note L)

        

Commitments and contingencies (Notes E, F, and L)

      

Stockholders’ equity:

         

Preferred stock; $.01 par value; 500,000 shares authorized; none issued or outstanding

      
      

Common stock; $.01 par value; 20,000,000 shares authorized; issued and outstanding (net of treasury shares) 6,419,389 at March 31, 2021 and 6,752,372 at June 30, 2020

  89   87 

Preferred stock; $.01 par value; 500,000 shares authorized; none issued or outstanding

 0  0 

Common stock; $.01 par value; 20,000,000 shares authorized at December 31, 2021 and June 30, 2021, issued and outstanding (net of treasury shares) 6,227,742 at December 31, 2021 and 6,436,568 at June 30, 2021

 88  88 

Additional paid-in capital

  29,022   27,992  29,923  29,456 

Retained earnings

  63,987   56,181  72,052  66,949 

Treasury stock, at cost, 2,567,386 shares at March 31, 2021 and 2,104,305 June 30, 2020

  (15,842

)

  (11,702

)

Accumulated other comprehensive loss

  (1,232

)

  (1,183

)

Treasury stock, at cost, 2,776,623 shares at December 31, 2021 and 2,567,797 at June 30, 2021

 (18,386

)

 (15,849

)

Accumulated other comprehensive income (loss)

  724   (561

)

Total stockholders’ equity

  76,024   71,375   84,401   80,083 

Total liabilities and stockholders’ equity

 $118,461  $120,203  $127,358  $120,281 

 

See accompanying notes to condensed consolidated financial statements.

 

4

 

NATURAL ALTERNATIVES INTERNATIONAL, INC.

Natural Alternatives International, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income

(In thousands, except share and per share data)

(Unaudited)

 

 

Three Months Ended

  

Nine Months Ended

  

Three Months Ended

 

Six Months Ended

 
 

March 31,

  

March 31,

  

December 31,

  

December 31,

 
 

2021

  

2020

  

2021

  

2020

  

2021

  

2020

  

2021

  

2020

 

Net sales

 $46,320  $25,482  $134,129  $83,780  $37,727  $48,083  $76,067  $87,809 

Cost of goods sold

  39,484   22,588   111,614   71,441   31,181   38,409   61,240   72,130 

Gross profit

  6,836   2,894   22,515   12,339  6,546  9,674  14,827  15,679 

Selling, general and administrative

  4,145   4,282   8,198   8,202 
                 

Other selling, general and administrative

  4,169   3,835   12,449   12,637 

(Recoveries) provision for uncollectible accounts receivable

  (33)  3,282   (111)  3,282 

Total selling, general and administrative

  4,136   7,117   12,338   15,919 
                

Income (loss) from operations

  2,700   (4,223

)

  10,177   (3,580

)

Income from operations

  2,401   5,392   6,629   7,477 
                 

Other (expense) income:

                 

Interest income

     47   1   176  0  1  0  1 

Interest expense

  (15

)

  (5

)

  (110

)

  (16

)

 (13

)

 (49

)

 (26

)

 (95

)

Foreign exchange loss

  (304

)

  (91

)

  (1,322

)

  (144

)

Foreign exchange gain (loss)

 11  (753

)

 5  (1,018

)

Other, net

  (7)  1   (22

)

  (11

)

  (7

)

  (5

)

  (14

)

  (15

)

Total other (expense) income

  (326

)

  (48

)

  (1,453

)

  5   (9

)

  (806

)

  (35

)

  (1,127

)

                 

Income (loss) before income taxes

  2,374   (4,271

)

  8,724   (3,575

)

Provision (benefit) for income taxes

  458   (256

)

  918   (132

)

Net income (loss)

 $1,916  $(4,015

)

 $7,806  $(3,443

)

Income before income taxes

 2,392  4,586  6,594  6,350 

Provision for income taxes

  545   954   1,491   460 

Net income

 $1,847  $3,632  $5,103  $5,890 
                 

Unrealized gain (loss) resulting from change in fair value of derivative instruments, net of tax

  1,925   335   (49

)

  (181

)

  331   (854

)

  1,285   (1,974

)

                 

Comprehensive income (loss)

 $3,841  $(3,680

)

 $7,757  $(3,624

)

Comprehensive income

 $2,178  $2,778  $6,388  $3,916 
                 

Net income (loss) per common share:

                

Net income per common share:

 

Basic

 $0.31  $(0.61

)

 $1.24  $(0.51

)

 $0.30  $0.58  $0.82  $0.93 

Diluted

 $0.30  $(0.61

)

 $1.22  $(0.51

)

 $0.30  $0.57  $0.81  $0.91 
                 

Weighted average common shares outstanding

                 

Basic

  6,200,712   6,564,765   6,296,408   6,733,781  6,211,954  6,270,419  6,249,791  6,344,256 

Diluted

  6,326,777   6,564,765   6,401,021   6,733,781  6,256,498  6,405,308  6,303,921  6,438,143 

 

See accompanying notes to condensed consolidated financial statements.

 

5

 

Natural Alternatives International, Inc.

Condensed Consolidated Statements Of StockholdersStockholders’ Equity

Three-Month PeriodsPeriod Ended MarchDecember 31, 2021 and 2020

(Dollars in thousands)

(Unaudited)

 

 

Common Stock

  

Additional
Paid-in

  

Retained

  

Treasury Stock

  

Accumulated
Other
Comprehensive

      

Common Stock

  

Additional
Paid-in

  

Retained

  

Treasury Stock

  

Accumulated
Other
Comprehensive

     
 

Shares

  

Amount

  

Capital

  

Earnings

  

Shares

  

Amount

  

Income (Loss)

  Total  

Shares

  

Amount

  

Capital

  

Earnings

  

Shares

  

Amount

  

Income (Loss)

  

Total

 

Balance, December 31, 2020

  8,887,119  $88  $28,689  $62,071   2,523,254  $(15,203

)

 $(3,157

)

 $72,488 

Issuance of common stock for restricted stock grants

  91,773   1   (1)               

Balance, September 30, 2021

 9,004,365  $88  $29,678  $70,205  2,584,821  $(15,859

)

 $393  $84,505 

Compensation expense related to stock compensation plans

   0  245  0    0  0  245 

Repurchase of common stock

 0  0  0  0  189,702  (2,527

)

 0  (2,527)

Forfeiture of restricted stock

 0  0  0  0  2,100  0  0  0 

Unrealized gain resulting from change in fair value of derivative instruments, net of tax

   0  0  0    0  331  331 

Net income

     0   0   1,847      0   0   1,847 

Balance, December 31, 2021

  9,004,365  $88  $29,923  $72,052   2,776,623  $(18,386

)

 $724  $84,401 
 

Balance, September 30, 2020

 8,856,677  $87  $28,353  $58,439  2,340,387  $(13,445

)

 $(2,303

)

 $71,131 

Compensation expense related to stock compensation plans

        334               334    0  337  0    0  0  337 

Repurchase of common stock

              44,132   (639

)

     (639

)

 0  0  0  0  182,867  (1,758

)

 0  (1,758)

Issuance of common stock for stock option exercise

  7,883                       30,442  1  (1) 0  0  0  0  0

 

Unrealized loss resulting from change in fair value of derivative instruments, net of tax

                    1,925   1,925    0  0  0    0  (854

)

 (854

)

Net income

           1,916            1,916      0   0   3,632      0   0   3,632 

Balance, March 31, 2021

  8,986,775  $89  $29,022  $63,987   2,567,386  $(15,842

)

 $(1,232

)

 $76,024 
                                

Balance, December 31, 2019

  8,856,677  $87  $27,172  $58,500   1,801,273  $(9,287

)

 $(352

)

 $76,120 

Compensation expense related to stock compensation plans

        459               459 

Repurchase of common stock

              264,008   (2,150

)

     (2,150

)

Unrealized gain resulting from change in fair value of derivative instruments, net of tax

                    335   335 

Net loss

           (4,015)           (4,015

)

Balance, March 31, 2020

  8,856,677  $87  $27,631  $54,485   2,065,281  $(11,437

)

 $(17

)

 $70,749 

Balance, December 31, 2020

  8,887,119  $88  $28,689  $62,071   2,523,254  $(15,203

)

 $(3,157

)

 $72,488 

 

See accompanying notes to condensed consolidated financial statements.

 

6

 

Natural Alternatives International, Inc.

Condensed Consolidated Statements Of StockholdersStockholders’ Equity

Nine-Month PeriodsSix-Month Period Ended MarchDecember 31, 2021 and 2020

(Dollars in thousands)

(Unaudited)

 

 

Common Stock

  

Additional
Paid-in

  

Retained

  

Treasury Stock

  

Accumulated
Other
Comprehensive

      

Common Stock

  

Additional
Paid-in

  

Retained

  

Treasury Stock

  

Accumulated
Other
Comprehensive

     
 

Shares

  

Amount

  

Capital

  

Earnings

  

Shares

  

Amount

  

Income (Loss)

  

Total

  

Shares

  

Amount

  

Capital

  

Earnings

  

Shares

  

Amount

  

Income (Loss)

  

Total

 

Balance, June 30, 2021

 9,004,365  $88  $29,456  $66,949  2,567,797  $(15,849

)

 $(561

)

 $80,083 

Compensation expense related to stock compensation plans

   0  467  0    0  0  467 

Repurchase of common stock

 0  0  0  0  190,394  (2,537

)

 0  (2,537

)

Forfeiture of restricted stock

 0  0  0  0  18,432  0  0  0 

Unrealized gain resulting from change in fair value of derivative instruments, net of tax

   0  0  0    0  1,285  1,285 

Net income

     0   0   5,103      0   0   5,103 

Balance, December 31, 2021

  9,004,365  $88  $29,923  $72,052   2,776,623  $(18,386

)

 $724  $84,401 
 

Balance, June 30, 2020

  8,856,677  $87  $27,992  $56,181   2,104,305  $(11,702

)

 $(1,183

)

 $71,375  8,856,677  $87  $27,992  $56,181  2,104,305  $(11,702

)

 $(1,183

)

 $71,375 

Issuance of common stock for restricted stock grants

  91,773   1   (1)               

Compensation expense related to stock compensation plans

        1,032               1,032    0  698  0    0  0  698 

Repurchase of common stock

              463,081   (4,140

)

     (4,140) 0  0  0  0  418,949  (3,501

)

 0  (3,501

)

Issuance of common stock for stock option exercise

  38,325   1   (1)                30,442  1  (1) 0  0  0  0  0

 

Unrealized loss resulting from change in fair value of derivative instruments, net of tax

                    (49

)

  (49

)

   0  0  0    0  (1,974

)

 (1,974)

Net income

           7,806            7,806      0   0   5,890      0   0   5,890 

Balance, March 31, 2021

  8,986,775  $89  $29,022  $63,987   2,567,386  $(15,842

)

 $(1,232

)

 $76,024 
                                

Balance, June 30, 2019

  8,851,677  $87  $26,280  $57,380   1,626,605  $(7,955

)

 $292  $76,084 

Issuance of common stock for restricted stock grants

  5,000                      

Compensation expense related to stock compensation plans

        1,351               1,351 

Repurchase of common stock

              423,676   (3,482

)

     (3,482)

Forfeiture of restricted stock

              15,000          

Cumulative-effect adjustment pursuant to adoption of ASU 2016-02

           420            420 

Reclassification pursuant to adoption of ASU 2018-02

           128         (128)   

Unrealized loss resulting from change in fair value of derivative instruments, net of tax

                    (181

)

  (181)

Net loss

           (3,443)           (3,443)

Balance, March 31, 2020

  8,856,677  $87  $27,631  $54,485   2,065,281  $(11,437

)

 $(17

)

 $70,749 

Balance, December 31, 2020

  8,887,119  $88  $28,689  $62,071   2,523,254  $(15,203

)

 $(3,157

)

 $72,488 

 

See accompanying notes to condensed consolidated financial statements.

 

7

 

NATURAL ALTERNATIVES INTERNATIONAL, INC.Natural Alternatives International, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands, except share and per share data)

(Unaudited)

 

 

Nine Months Ended

March 31,

  

Six Months Ended

December 31,

 
 

2021

  

2020

  

2021

  

2020

 

Cash flows from operating activities

            

Net income (loss)

 $7,806  $(3,443

)

Adjustments to reconcile net income to net cash provided by operating activities:

        

(Recovery of) provision for uncollectible accounts receivable

  (111

)

  3,282 

Net income

 $5,103  $5,890 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

Provision for uncollectible accounts receivable

 116  0 

Depreciation and amortization

  3,309   2,975  2,155  2,148 

Non-cash compensation

  1,032   1,351  467  698 

Non-cash lease expenses

  47   226  1,621  2,137 

Deferred income taxes

  (469

)

    0  (469

)

Loss on disposal of assets

  6   118 

Pension expense, net of contributions

  61   21  17  38 

Gain on disposal of assets

 (6

)

 (3

)

Changes in operating assets and liabilities:

         

Accounts receivable

  230   303  2,765  (61

)

Inventories, net

  (1,116

)

  (108

)

 (4,822

)

 (6,494

)

Prepaids and other assets

  (64

)

  (748

)

 (691

)

 (1,075

)

Accounts payable and accrued liabilities

  4,081   1,656  (3,775

)

 1,050 

Forward contracts

  1,061   354  (1,562

)

 1,270 

Accrued compensation and employee benefits

  711   (307

)

 (1,951

)

 (330

)

Operating lease liabilities

 (1,616

)

 (1,643)

Income taxes

  (585

)

  (516

)

  1,622   1,527 

Net cash provided by operating activities

  15,999   5,164 

Net cash (used in) provided by operating activities

  (557

)

  4,683 
         

Cash flows from investing activities

            

Proceeds from sale of property and equipment

 25  3 

Purchases of property and equipment

  (4,251

)

  (3,432

)

  (19,644

)

  (3,034

)

Proceeds from sale of property and equipment

  3   25 

Net cash used in investing activities

  (4,248

)

  (3,407

)

  (19,619

)

  (3,031

)

         

Cash flows from financing activities

            

Borrowings on long-term debt

 10,000  0 

Payments on long-term debt

 (68

)

 0 

Repurchase of common stock

  (4,140

)

  (3,482

)

  (2,537

)

  (3,501

)

(Payments) borrowings on lines of credit

  (10,000

)

  10,000 

Net cash (used in) provided by financing activities

  (14,140

)

  6,518 

Net cash provided by (used in) financing activities

  7,395   (3,501

)

         

Net (decrease) increase in cash and cash equivalents

  (2,389

)

  8,275 

Net decrease in cash and cash equivalents

 (12,781

)

 (1,849

)

Cash and cash equivalents at beginning of period

  30,478   25,040   32,133   30,478 

Cash and cash equivalents at end of period

 $28,089  $33,315  $19,352  $28,629 
         

Supplemental disclosures of cash flow information

            

Cash paid during the period for:

         

Interest

 $123  $16  $94  $91 

Taxes

 $1,549  $370  $953  $263 

 

See accompanying notes to condensed consolidated financial statements.

 

8

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(UNAUDITED)

 

 

A. Basis of Presentation and Summary of Significant Accounting Policies

 

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q10-Q and with applicable rules and regulations. Pursuant to such rules and regulations, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted. In management’s opinion, all adjustments necessary for a fair presentation of the financial position, results of operations, stockholders’ equity, and cash flows have been included and are of a normal, recurring nature. The results of operations for the three and ninesix months ended MarchDecember 31, 2021 are not necessarily indicative of the operating results for the full fiscal year or for any future periods.

 

You should read the financial statements and these notes, which notes are an integral part of the financial statements, together with our audited financial statements included in our Annual Report on Form 10-K10-K for the fiscal year ended June 30, 2020 (“20202021 (“2021 Annual Report”). The accounting policies used to prepare the financial statements included in this Report are the same policies described in the notes to the consolidated financial statements in our 20202021 Annual Report unless otherwise noted below.

 

Recently Adopted Accounting Pronouncements

 

On December 18, 2019, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No.2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This new standard eliminates certain exceptions in Accounting Standards Codification ("ASC") 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption permitted in any interim period within that year. We have adopted this ASU effective this first quarter of fiscal 2022. This ASU did not adopt any accounting pronouncements during the three or nine months ended March 31, 2021. have a material impact on our consolidated financial statements.

 

Recently Issued Accounting and Regulatory Pronouncements

 

In November 2020, the SEC issued Release No. 33-10825, Modernization of Regulation S-K Items 101, 103, and 105, which release amends and clarifies certain of our financial reporting requirements. This release will primarily impact risk factor disclosures in our future Annual Reports.

Other recently issued accounting pronouncements are not discussed in this Report as such pronouncements did not have, and are not believed by management to have, a material impact on our present or future financial statements.

 

9

Net Income (Loss) per Common Share

 

We compute net income per common share using the weighted average number of common shares outstanding during the period, and diluted net income (loss) per common share using the additional dilutive effect of all dilutive securities. The dilutive impact of stock options and unvested restricted shares account for the additional weighted average shares of common stock outstanding for our diluted net income per common share computation. We calculated basic and diluted net income (loss) per common share as follows (in thousands, except per share data):

 

  

Three Months Ended

  

Nine Months Ended

 
  

March 31,

  

March 31,

 
  

2021

  

2020

  

2021

  

2020

 

Numerator

                

Net income (loss)

 $1,916  $(4,015

)

 $7,806  $(3,443

)

                 

Denominator

                

Basic weighted average common shares outstanding

  6,201   6,565   6,296   6,734 

Dilutive effect of stock options and restricted stock

  126      105    

Diluted weighted average common shares outstanding

  6,327   6,565   6,401   6,734 
                 

Basic net income (loss) per common share

 $0.31  $(0.61

)

 $1.24  $(0.51

)

                 

Diluted net income (loss) per common share

 $0.30  $(0.61

)

 $1.22  $(0.51

)

  

Three Months Ended

  

Six Months Ended

 
  

December 31,

  

December 31,

 
  

2021

  

2020

  

2021

  

2020

 

Numerator

                

Net income

 $1,847  $3,632  $5,103  $5,890 
                 

Denominator

                

Basic weighted average common shares outstanding

  6,212   6,270   6,250   6,344 

Dilutive effect of stock options and restricted stock

  44   135   54   94 

Diluted weighted average common shares outstanding

  6,256   6,405   6,304   6,438 
                 

Basic net income per common share

 $0.30  $0.58  $0.82  $0.93 
                 

Diluted net income per common share

 $0.30  $0.57  $0.81  $0.91 

 

We excluded 91,773 shares ofdid not exclude any stock options or restricted stock and no shares related tofor the three or six months ended December 31, 2021 as none would have had an anti-dilutive impact. We did not exclude any stock options or restricted stock shares for the three months ended MarchDecember 31, 2021. 2020. During the ninesix months ended MarchDecember 31, 2021 2020, we excluded shares relating to stock options totaling 30,00090,000 and 69,477116,658 shares of unvested restricted stock, as their impact would have been anti-dilutive.

In periods where we have a net loss, stock options and restricted stock are excluded from our calculation of diluted net income (loss) per common share, as their inclusion would have an antidilutive effect. We excluded shares related to stock options totaling 130,000 for the three months and for the nine months ended March 31, 2020. We excluded shares related to restricted stock totaling 356,998 for the three months ended March 31, 2020. We excluded shares related to restricted stock totaling 388,988 for the nine months ended March 31, 2020.

 

9

Revenue Recognition

 

We record revenue based on a five-stepfive-step model thatwhich includes: (1)(1) identifying a contract with a customer; (2)(2) identifying the performance obligations in thatthe contract; (3)(3) determining the total transaction price; (4)(4) allocating thatthe transaction price among the performance obligations; and (5)(5) recognizing revenue as each of the various performance obligations are satisfied.

 

Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling one or more performance obligations. We identify purchase orders from customers as contracts. The amount of consideration expected to be received and thus revenue recognized includes estimates of variable consideration, including estimates for early payment discounts and volume rebates. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. We review and update these estimates at the end of each reporting period and the impact of any adjustments is recognized in the period thosethe adjustments are identified. In assessing whether collection of consideration from a customer is probable, we consider both the customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in the underlying customer contracts,agreement, which is typically 30 days from the invoice date. Invoices are generally issued on the date of transfer of control of the products ordered to the customer.

 

Revenue is recognized at the point in time that each of our performance obligations is fulfilled, and control of the ordered products is transferred to the customer. This transfer occurs when the product is shipped, or in some cases, when the product is delivered to the customer.

 

We provide early payment discounts to certain customers. Based on historical payment trends, we expect that these customers will continue to take advantage of these early payment discounts. The cost of these discounts is reported as a reduction to the transaction price of customer contracts.price. If the actual discounts differ from those estimated, the difference is also reported as a change in the transaction price. We require prepayment from certain customers. We record any payments received in advance of contracts fulfillment as a contract liability and classified as customer deposits on the consolidated balance sheet.

 

Except for product defects, no right of return exists on the sale of our products. We estimate returns based on historical experience and recognize a returns liability for any estimated returns. As of MarchDecember 31, 2021, we have no liability recorded for estimated0 known returns of products.liability.

 

10

We have an Exclusive Manufacturing Agreement with The Juice Plus+, as amended and restated on March 31, 2019, (the "JP Agreement” Company LLC (“Juice Plus+”). through August 6, 2025. Pursuant to the JPExclusive Manufacturing Agreement, Juice Plus+ has granted us exclusive rights to manufacture and supply them with certain of their products within 24 countries where Juice Plus+ currently sells those products. The JP Agreement is effective through August 6, 2025. As part of the JPPursuant to this Exclusive Manufacturing Agreement, we provide Juice Plus+ with a cash discount that is amortized ratably overdiscount. We recorded $0.3 million of “Cash Sales Discount” for the remaining life ofthree months ended December 31, 2021, and $0.7 during the JP Agreement based on the full value of the cash discount expectedsix months ended December 31, 2021, which was recorded as a reduction to be given over the same period.net sales. We recorded $0.4 million of cash sales discount during the three months ended MarchDecember 31, 2021 2020 and $1.2$0.8 million during the ninesix months ended MarchDecember 31, 2021. We recorded $0.4 million of cash sales discount during the three months ended March 31, 2020 and $1.2 million for the nine months ended March 31, 2020.

 

We currently own certain U.S. patents, and each such patent’s corresponding foreign patent applications. All of these patents and patent rights relate to the ingredient known as “beta-alanine”, which we marketbeta-alanine marketed and sellsold under our CarnoSyn® and SR CarnoSyn® trade names. We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of $4.1 million during the three months ended MarchDecember 31, 2021, and $9.6$8.8 million during the ninesix months ended MarchDecember 31, 2021. We similarly recorded $2.8 million during the three months ended MarchDecember 31, 2020 and $10.3$5.4 million during the ninesix months ended MarchDecember 31, 2020. These royalty income and raw material sale amounts resulted in royalty expense paid to the original patent holders from whom NAI acquired its patents and patent rights. We recognized royalty expense as a component of cost of goods sold in the amount of $0.2 million during the three months ended MarchDecember 31, 2021, and $0.4 million during the ninesix months ended MarchDecember 31, 2021. We recognizedrecorded $0.1 million of royalty expense during the three months ended March 31, 2020 and $0.5 million during the ninethree months ended MarchDecember 31, 2020 and $0.3 million during the six months ended December 31, 2020.

 

Stock-Based Compensation

 

We had an omnibus equity incentive plan that was approved by our Board of Directors effective October 15, 2009 and approved by our stockholders at the Annual Meeting of Stockholders held on November 30, 2009 (the "2009 Plan"). The 2009 Plan expired on October 15, 2019. The Board of Directors approved a new omnibus equity incentive plan that became effective January 1, 2021 (the “2020(the “2020 Plan”), which was approved by our stockholders at the Annual Meeting of Stockholders on December 4, 2020. Under the 2020 Plan, we may grant nonqualified and incentive stock options, restricted stock grants, restricted stock units, stock appreciation rights, and other stock-based awards to employees, non-employee directors and consultants.

 

We did not grant any options during each of the three or nine and six month periods ended Marchending December 31, 2021 and MarchDecember 31, 2020. All remaining outstanding stockNaN options are fully vested. were exercised during the three and six month periods ending December 31, 2021. During the three and six months ended MarchDecember 31, 2021, 10,000 stock options were exercised. During the nine months ended March 31, 2021, 110,0002020, 100,000 stock options were exercised. These exercises were cashless net exercises resulting in the issuance of 7,883 shares for the three months ended March 31, 2021 and 38,325 shares for the nine months ended March 31, 2021. No options were exercised during the three and nine month periods ended March 31, 2020.30,442 shares. There were no option forfeitures during the three and ninesix month periods ended MarchDecember 31, 2021 or the three and nine month periods ended MarchDecember 31, 2020.As of December 31, 2021, we did not have any stock options outstanding.

 

During the three and nine months ended March 31, 2021, we granted a total of 91,773 restricted stock shares to members of our Board of Directors and certain key members of our management team. During the three months ended March 31, 2020 weWe did not grant any restricted stock shares. shares during the three or six months ending December 31, 2021 or December 31, 2020. During the ninethree months ended MarchDecember 31, 2020, we granted 5,000 shares of2021, 2,100 restricted stock shares to a new member of our management team. Nowere forfeited. During the six months ended December 31, 2021, 18,432 restricted stock shares were forfeited. NaN restricted stock shares were forfeited during the three or nine month periods ended March 31, 2021. During the threesix months ended March 31, 2020, there were no restricted stock forfeitures. During the nine months ended March 31, 2020, 15,000 restricted stock shares were forfeited. Our net income included stock based compensation expense in connection with prior restricted stock grants of approximately $0.3 million for the three months ended March 31, 2021 and $1.0 million for the nine months ended March 31, 2021. Our net loss included stock based compensation expense of approximately $0.5 million for the three months ended March 31, 2020, and $1.4 million for the nine months ended March 31,December 30, 2020.

 

10

Deferred Compensation Plan

 

Effective July 16, 2020, the Board of Directors approved and adopted a Non-Qualified Incentive Plan (the “Incentive Plan”). Pursuant to the Incentive Plan, the Human Resources Committee and the Board of Directors may make deferred cash payments or other cash awards (“Awards”) to directors, officers, employees and eligible consultants of NAI, (“Participants”). These Awards are made subject to conditions precedent that must be met before NAI is obligated to make the payment. The purpose of the Incentive Plan is to enhance the long-term stockholder value of NAI by providing the Human Resources Committee and the Board of Directors the ability to make deferred cash payments or other cash awards to encourage Participants to serve NAI or to remain in the service of NAI, or to assist NAI to achieve results determined by the Human Resources Committee or the Board of Directors to be in NAI's best interest.

 

The Incentive Plan authorizes the Human Resources Committee or the Board of Directors to grant to, and administer, unsecured and deferred cash Awards to Participants and to subject each Award to whatever conditions are determined appropriate by the Human Resources Committee or the Board of Directors. The terms of each Award, including the amount and any conditions that must be met to be entitled to payment of the Award are set forth in an Award Agreement between each Participant and NAI. The Incentive Plan provides the Board of Directors with the discretion to set aside assets to fund the Incentive Plan although that has not been done to date.

 

There were 0 deferred cash awards granted during the three and six months ended December 31, 2021. There were no deferred cash awards granted during the three months ended December 31, 2020. During the threesix months ended MarchDecember 31, 2021, 2020, we granted a total of $0.5$1.0 million in deferred cash awards to members of our Board of Directors and certain key members of our management team. During the nine months ended March 31, 2021, we granted a total of $1.5 million inNaN deferred cash awards to members of our Board of Directorswere forfeited during the three months ended December 31, 2021. Awards totaling $191,000 were forfeited during the six months ended December 31, 2021. NaN awards were forfeited during the three and certain key members of our management team.

six months ended December 31, 2020. Each deferred cash award provides for three equal cash payments to the applicable Participant to be paid on the one year, two year, and three year anniversaries of the date of the grant of such Awards, (the “Award Date”); provided on the date of each payment (the “Payment Date”), the Participant has been since Award Date, and continues to be through the Payment Date, a member of our Board of Directors or an employee of NAI. In the event a Participant ceases to be an employee of NAI or a member of our Board of Directors prior to any Payment Date, no further payments shall be made in connection with the Award.

 

11

Fair Value of Financial Instruments

 

Except for cash and cash equivalents, as of MarchDecember 31, 2021 and June 30, 2020, 2021, we did not have any financial assets or liabilities classified as Level 1.

We classify derivative forward exchange and interest rate swap contracts as Level 2 assets and liabilities. The fair value of our forward exchange contracts as of March 31, 2021 was a net liability of $0.9 million. The fair value of our forward exchange contracts as of June 30, 2020 included a net asset of $0.3 million. The fair values were determined by obtaining pricing from our bank and corroborating those values with a third party bank.bank or pricing service.

Fair value of derivative instruments classified as Level 2 assets and liabilities consisted of the following (in thousands):

  

December 31,

2021

  

June 30,

2021

 

Euro Forward Contract– Current Assets

 $1,783  $0 

Swiss Franc Forward Contract – Current Assets

  48   0 

Total Derivative Contracts – Current Assets

  1,831   0 
         

Interest Swap – Other noncurrent Assets

  62   0 

Euro Forward Contract– Other noncurrent Assets

  507   0 

Total Derivative Contracts – Other noncurrent Assets

  569   0 
         

Euro Forward Contract–Current Liabilities

  0   (630)

Swiss Franc Forward Contract – Current Liabilities

  0   (184)

Total Derivative Contracts – Current Liabilities

  0   (814)
         

Euro Forward Contract – Noncurrent Liabilities

  0   (4)
         

Fair Value Net Asset (Liability) – all Derivative Contracts

 $2,400  $(818)

 

We also classify any outstanding line of credit and term loan balance as a Level 2 liability, as the fair value is based on inputs that can be derived from information available in publicly quoted markets. As of MarchDecember 31, 2021, and June 30, 2020, 2021, we did not have any financial assets or liabilities classified as Level 3.

We did not transfer any assets or liabilities between these levels during fiscal 2021 or the three and ninesix months ended MarchDecember 31, 2021 or the three and nine months ended March 31, 2020. 2021. 

 

COVID-19 Pandemic

Reclassification of Prior Year Presentation 

 

We continue to monitor and evaluateCertain prior year amounts have been reclassified for consistency with the risks to public health andcurrent year presentation. These reclassifications had no effect on the impact on overall global business activity related to the COVID-19 pandemic, including its potential impacts on our employees, customers, suppliers and financial results. As the situation remains fluid, it is difficult to predict the duration and scopereported results of the pandemic and its impact on our business. However, it may result in a material adverse impact to our financial position, operations and cash flows if conditions persist or worsen.operations. 

 

 

B. Inventories, net

 

Inventories, net consisted of the following (in thousands):

 

  

March 31,

2021

  

June 30,

2020

 

Raw materials

 $23,093  $20,863 

Work in progress

  3,998   3,447 

Finished goods

  3,110   4,936 

Reserve

  (1,113

)

  (1,274

)

  $29,088  $27,972 

The inventory reserve includes $0.5 million as of March 31, 2021 and $1.0 million as of June 30, 2020 related to one of our former customers, Kaged Muscle. We continue working with this former customer and their replacement manufacturer, including the transfer of inventory items we hold specific to this customer. However, due to the uncertainty regarding the future operations of this former customer, we recorded a reserve against inventory specific to this customer equal to the estimated net realizable value of those items. Since establishing the reserve, we have reduced the reserve due to amounts purchased by the former customer and their new contract manufacturer. During the three months ended March 31, 2021, we reduced our inventory reserve related to this customer by $50,000. During the nine months ended March 31, 2021, we reduced our inventory reserve related to this customer by $0.5 million.

  

December 31,

2021

  

June 30,

2021

 

Raw materials

 $24,425  $20,530 

Work in progress

  2,409   3,765 

Finished goods

  5,660   3,056 

Reserve

  (666

)

  (345

)

  $31,828  $27,006 

 

11
12

 

 

C. Property and Equipment

 

Property and equipment consisted of the following (in thousands):

 

 

Depreciable Life

In Years

  

March 31,

2021

  

June 30,

2020

  

Depreciable Life

In Years

  

December 31,

2021

  

June 30,

2021

 

Land

 

NA

  $1,200  $1,200   

NA

   $7,645  $1,200 

Building and building improvements

 739   3,748   3,743  7 -39  15,023  3,757 

Machinery and equipment

 312   36,830   33,405  3 -12  36,424  35,458 

Office equipment and furniture

 35   5,564   5,318  3 -5  5,906  5,712 

Vehicles

  3    255   255   3   211  255 

Leasehold improvements

 115   18,207   18,031  1 -15   20,971   20,236 

Total property and equipment

       65,804   61,952       86,180  66,618 

Less: accumulated depreciation and amortization

       (43,348

)

  (40,429

)

       (46,439

)

  (44,347

)

Property and equipment, net

      $22,456  $21,523       $39,741  $22,271 

On August 20, 2021, we acquired a manufacturing and warehouse property in Carlsbad California from an unrelated party for $17.5 million. The approximately 54,154 square foot building includes environmentally controlled warehouse space, office space and additional non-environmentally controlled warehouse space. We intend to retrofit a significant portion of the building into a dedicated high-volume powder blending and packaging facility. This new facility will also provide us with additional raw material storage capacity, and additional office space.

 

 

D. Other Comprehensive LossIncome (Loss)

 

Other comprehensive (loss) income (“OCL” and “OCI”) consisted of the following during the three and nine months ended MarchDecember 31, 2021 and MarchDecember 31, 2020 (in(in thousands):

 

 

Three Months Ended

  

Nine Months Ended

 
 

March 31, 2021

  

March 31, 2021

  

Three Months Ended

    
     

Unrealized

          

Unrealized

      

December 31, 2021

    
 

Defined

  

Gains

      

Defined

  

Gains

      

Defined

 

Unrealized Gains

 

Unrealized Gains

    
 

Benefit

  

(Losses) on

      

Benefit

  

(Losses) on

      

Benefit

 

(Losses) on

 

(Losses) on

    
 

Pension

  

Cash Flow

      

Pension

  

Cash Flow

      

Pension

 

Cash Flow

 

Swap

    
 

Plan

  

Hedges

  

Total

  

Plan

  

Hedges

  

Total

  

Plan

  

Hedges

  

Derivative

  Total 

Beginning Balance

 $(888

)

 $(2,269

)

 $(3,157) $(888

)

 $(295

)

 $(1,183

)

 $(538

)

 $931  0  $393 

OCI/OCL before reclassifications

  -   1,639   1,639   -   (2,274

)

  (2,274

)

 0  855  62  917 

Amounts reclassified from OCI

  -   868   868   -   2,209   2,209 

Amounts reclassified from OCI to Sales

 0  (504) 0  (504

)

Tax effect of OCI activity

  -   (582

)

  (582

)

  -   16   16   0   (82

)

  0   (82

)

Net current period OCI/OCL

  -   1,925   1,925   -   (49

)

  (49

)

  0   269   62   331 
             
                        

Ending Balance

 $(888

)

 $(344

)

 $(1,232) $(888

)

 $(344

)

 $(1,232) $(538

)

 $1,200  $62  $724 

 

  

Three Months Ended

  

Nine Months Ended

 
  

March 31, 2020

  

March 31, 2020

 
      

Unrealized

          

Unrealized

     
  

Defined

  

Gains

      

Defined

  

Gains

     
  

Benefit

  

(Losses) on

      

Benefit

  

(Losses) on

     
  

Pension

  

Cash Flow

      

Pension

  

Cash Flow

     
  

Plan

  

Hedges

  

Total

  

Plan

  

Hedges

  

Total

 

Beginning Balance

 $(565

)

 $213  $(352

)

 $(491

)

 $783  $292 

ASU 2018-02 Adjustment

  -   -   -   (74

)

  (54

)

  (128

)

OCI/OCL before reclassifications

  -   990   990   -   1,922   1,922 

Amounts reclassified from OCI

  -   (554

)

  (554

)

  -   (2,166

)

  (2,166

)

Tax effect of OCI activity

  -   (101

)

  (101

)

  -   63   63 

Net current period OCI/OCL

  -   335   335   (74)  (235

)

  (309

)

                         

Ending Balance

 $(565

)

 $548  $(17) $(565

)

 $548  $(17)

ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, allowed for a reclassification from accumulated other comprehensive income (OCI) to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act. Under this ASU, we reclassified $0.1 million of gains from OCI to retained earnings for the nine months ended March 31, 2020.

  

Six Months Ended

     
  

December 31, 2021

     
  

Defined

  

Unrealized Gains

  

Unrealized Gains

     
  

Benefit

  

(Losses) on

  

(Losses) on

     
  

Pension

  

Cash Flow

  

Swap

     
  

Plan

  

Hedges

  

Derivative

  Total 

Beginning Balance

 $(538

)

 $(23)  0  $(561)

OCI/OCL before reclassifications

  0   2,244   62   2,306 

Amounts reclassified from OCI to Sales

  0   (650)  0   (650

)

Tax effect of OCI activity

  0   (371

)

  0   (371

)

Net current period OCI/OCL

  0   1,223   62   1,285 

Ending Balance

 $(538

)

 $1,200  $62  $724 

 

1213

 
  

Three Months Ended

 
  

December 31, 2020

 
      

Unrealized

     
  

Defined

  

Gains

     
  

Benefit

  

(Losses) on

     
  

Pension

  

Cash Flow

     
  

Plan

  

Hedges

  

Total

 

Beginning Balance

 $(888

)

 $(1,415

)

 $(2,303

)

OCI/OCL before reclassifications

  0   (1,850

)

  (1,850

)

Amounts reclassified from OCI to Sales

  0   737   737 

Tax effect of OCI activity

  0   259   259 

Net current period OCI/OCL

  0   (854

)

  (854

)

             

Ending Balance

 $(888

)

 $(2,269

)

 $(3,157)

  

Six Months Ended

 
  

December 31, 2020

 
      

Unrealized

     
  

Defined

  

Gains

     
  

Benefit

  

(Losses) on

     
  

Pension

  

Cash Flow

     
  

Plan

  

Hedges

  

Total

 

Beginning Balance

 $(888

)

 $(295

)

 $(1,183

)

OCI/OCL before reclassifications

  0   (3,913

)

  (3,913

)

Amounts reclassified from OCI to Sales

  0   1,341   1,341 

Tax effect of OCI activity

  0   598   598 

Net current period OCI/OCL

  0   (1,974

)

  (1,974

)

             

Ending Balance

 $(888

)

 $(2,269

)

 $(3,157)

 

 

E. Leases

 

On July 1, 2019, we adopted FASB Accounting Standards Codification (“ASC”), Topic 842, Leases, or ASC 842, which requires the recognition of the “Right of Use Assets”We currently lease our Vista, CA and related operating and finance lease liabilities on the balance sheet. As permitted by ASC 842, we elected the adoption date of July 1, 2019, which is the date of initial application. Under ASC 842, all leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in the income statement. Operating lease expenses are recorded entirely in operating expenses. Finance lease charges are split, where amortization of the Right of Use Asset is recorded in operating expenses and an implied interest component is recorded in interest expense. The expense recognition for operating leases and finance leases under ASC 842 is substantially consistent with ASC 840. As a result, there is no material difference in our results of operations presented in our Condensed Consolidated Statement of Income and Comprehensive Income for each period presented.

We adopted ASC 842 using a modified retrospective approach for all leases existing at July 1, 2019. The adoption of ASC 842 had a substantial impact on our balance sheet. The most significant impact was the recognition of the operating lease Right of Use Assets and the liability for operating leases. Upon adoption, leases that were previously classified as operating leases under ASC 840 were classified as operating leases under ASC 842, and we recorded an adjustment of $20.7 million to operating lease Right of Use Assets and an adjustment of $20.9 million to the related lease liability. The lease liability is based on the present value of the remaining minimum lease payments, determined under ASC 840, discounted using our secured incremental borrowing rate at the effective date of July 1, 2019, and using the expected lease term(s), including any optional renewals, as the length of time over which to discount payments. As permitted under ASC 842, we elected several practical expedients that permit us to not reassess (1) whether existing contracts are or contain a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. The application of the practical expedients did not have a significant impact on the measurement of the operating lease liability.

Other information related to leases was as follows (in thousands):

  

Three Months Ended

  

Nine Months Ended

 

Supplemental Cash Flows Information

 

March 31,

2021

  

March 31,

2020

  

March 31,

2021

  

March 31,

2020

 

Cash paid for amounts included in the measurement of operating lease liabilities

 $821  $786  $2,467  $2,352 

Operating lease liabilities arising from obtaining Right of Use Assets for new leases

  187      187    

Operating lease liabilities arising from recording Right of Use Assets upon adoption of ASC 842

     20,897      20,897 

We lease substantially all of ourLugano, Switzerland product manufacturing and manufacturing support office space used to conduct our business. For contracts entered into on or after July 1, 2019, atfacilities. At the inception of a contract we assess whether the contract is, or contains, a lease. Our assessment is based on: (1)(1) whether the contract involves the use of a distinct identified asset, (2)(2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period of the contract, and (3)(3) whether we have the right to direct the use of the asset during such time period. At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.

 

Leases are classified as either finance leases or operating leases. A lease must be classified as a finance lease if any of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any of these criteria. Substantially all our operating leases are comprised of payments for the use of manufacturing and office space. We have no leases classified as finance leases. As of MarchDecember 31, 2021, the weighted average remaining lease term for our operating leases was 6.5 years and the5.8 years. The weighted average discount rate for our operating leases was 3.24%. As of June 30, 2020, 2021, the weighted average remaining lease term for our operating leases was 7.26.3 years and the weighted average discount rate was 3.24%.

 

For all leases at the lease commencement date, a Right of Use Assetright-of-use asset and a lease liability are recognized. The Right of Use Assetright-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease.

 

The Right of Use Assetright-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All Right of Use Assetsright-of-use assets are reviewed for impairment. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, our secured incremental borrowing rate for the same term as the underlying lease. For our real estate and other operating leases, we use our secured incremental borrowing rate.

 

Lease payments included in the measurement of the lease liability comprise the following: the fixed noncancelable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.

 

Some of our manufacturing leases contain variable lease payments, including payments based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease commencement and separated into lease and non-lease components based on the initial amount stated in the lease or standalone selling prices. Lease components are included in the measurement of the initial lease liability. Additional payments based on the change in an index or rate, or payments based on a change in our portion of the operating expenses, including real estate taxes and insurance, are recorded as a period expense when incurred. Lease modifications result in remeasurement of the lease liability.

 

14

Lease expense for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Lease expense for finance leases consists of the amortization of the Right of Use Assetright-of-use asset on a straight-line basis over the lease term and interest expense determined on an amortized cost basis. The lease payments are allocated between a reduction of the lease liability and interest expense.

 

We have elected not to recognize Right of Use Assetsright-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less. The effect of short-term leases if we had used Right of Use Assetson our right-of-use asset and lease liabilities would liability was not have been material.

 

13

December 31, 2021 was as follows (in thousands):

Supplemental Cash Flows Information

 

Six Months Ended

December 31, 2021

  

Six Months Ended

December 31, 2020

 

Cash paid for amounts included in the measurement of operating lease liabilities

 $1,620  $1,646 

For the three months and six months ended December 31, 2021 and December 31, 2020 we did not have any operating lease liabilities arise from obtaining right of use assets.

 

 

F. Debt

 

On July 1, 2019, May 24, 2021, we executed an amendment to ourentered into a new credit facility with Wells Fargo Bank, N.A.N.A (“Wells Fargo”) to extend the maturity date for our working line of credit from February 1, 2021, to November 1, 2022.2022, to May 24, 2024. This new credit facility provides total lending capacity of up to $20.0 million and allows us to use the credit facility for working capital as well as potential acquisitions. On August 18, 2021, we entered into an amendment of our credit facility with Wells Fargo. The amended credit facility added a $10.0 million term loan to the existing $20.0 million credit facility, and permitted us to use the $10.0 million term loan as part of the $17.5 million purchase consideration for the acquisition of our new manufacturing and warehouse property in Carlsbad, California. The amended credit agreement also increased the allowed capital expenditures from $10.0 million to $15.0 million for fiscal 2022, (exclusive of the amount paid for the acquisition of the new Carlsbad property noted above). In addition, the new credit notes now reflect a change in the interest rate reference from LIBOR to SOFR. The Credit Agreement provides us withwas amended and a credit linenew Revolving Line of upCredit Note, and Security Agreement were entered into. A Term Note and real property security documents were added to $10.0 million. The line of credit may be used to finance working capital requirements. There was no commitment fee required as part of this amendment.secure the Term Note by the new Carlsbad property.

 

Under the terms of the Credit Agreement, borrowings are subject to eligibility requirements including maintaining (i) a ratio of total liabilities to tangible net worth of not greater than 1.251.50 to 1.0 at any time; and (ii) a ratio of total current assets to total current liabilities of not less than 1.75 to 1.0 at each fiscal quarter end (iii) net income after taxes not less than $1.00, determined on a trailing four quarter basis with notwo consecutive quarterly losses, determined as of each quarter end and (iv) a rolling 4-quarter fixed charge coverage ratio not less than 1.25 to 1.0 as of each fiscal quarter end. The credit agreement also includes a limitation on the amount of capital expenditures that can be made in a given fiscal year, with such limitation set at $15.0 million for our fiscal year ending June 30, 2022 and $7.5 million for all fiscal years thereafter. Any amounts outstanding under the line of credit will bear interest at a fixed or fluctuating interest rate as elected by us from time to time; provided, however, that if the outstanding principal amount is less than $100,000 such amount shall bear interest at the then applicable fluctuating rate of interest. If elected, the fluctuating rate per annum would be equal to 1.25%1.29% above the daily one month LIBORsimple SOFR rate as in effect from time to time. If a fixed rate is elected, it would equal a per annum rate of 1.25%1.29% above the LIBORSOFR rolling 30-day average rate in effect on the first day of the applicable fixed rate term. Any amounts outstanding under the line of credit must be paid in full on or before the maturity date. Amounts outstanding that are subject to a fluctuating interest rate may be prepaid at any time without penalty. Amounts outstanding that are subject to a fixed interest rate may be prepaid at any time in minimum amounts of $100,000, subject to a prepayment fee equal to the sum of the discounted monthly differences between payment under a fixed rate versus payment under the variable rate for each month from the month of prepayment through the month in which the then applicable fixed rate term matures. During the nine months ended March 31, 2021, we were in compliance with allThere is an unused commitment fee of 0.125% required as part of the financial and other covenants required under the Credit Agreement.line of credit.

 

The Term Note used as part of the purchase consideration of our new manufacturing and warehouse property in Carlsbad California referenced above, is for the original principal amount of $10.0 million, and is a seven year term note with payments fully amortized based on a twenty five year assumed term. Installment payments under this loan commenced October 1, 2021 and continue through August 1, 2028 with a final installment consisting of all remaining amounts due to be paid in full on September 1, 2028. Amounts outstanding on this note during the term of the agreement will bear interest equal to 1.8% above the SOFR rolling 30-day average. In connection with our term loan, we entered into an interest rate swap with Wells Fargo that effectively fixes our interest rate on our term loan at 2.4% for the firstthree years of the term of the note.

15

Our obligations under the Credit Agreement are secured by our accounts receivable and other rights to payment, general intangibles, inventory, equipment and fixtures. We also have credit approval with Wells Fargo Bank, N.A. which allows us to hedge foreign currency exposures up to 30 months in the future. We also have credit approval with Bank of America which allows us to hedge foreign currency exposures up to 24 months in the future.

 

In lightOn December 31, 2021, we were in compliance with all of the global economic uncertainty related to COVID-19financial and as a preventative measure to provide our business with potentially necessary liquidity, and outother covenants required under the Amended Credit Agreement.

As of an abundance of caution, December 31, 2021, we withdrew $10.0had $20.0 million fromavailable for borrowing under our credit facility with Wells Fargo during the fiscal year ended June 30, 2020. While we have not yet experienced any significant negative effects related to COVID-19 and notwithstanding our belief that our cash position and working capital excluding this $10.0 million borrowing is sufficient to support our ongoing operations, we deemed it prudent to borrow against our line of credit to ensure that such funds would be available to us if and when we need them. 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 under our credit facilities to $10.0 million.Bank.

 

As of MarchDecember 31, 2021, we did not owe anything against our linehad $9.9 million outstanding under the Term Note used in the purchase of credit and the entire $10.0 million amount was available for us to borrow.warehouse in August 2021.

 

 

G. Economic Dependency

 

We had substantial net sales to certain customers during the periods shown in the following table. The loss of any of these customers, or a significant decline in (i) sales to these customers, (ii) the growth rate of sales to these customers, or (iii) these customers’ ability to make payments when due, each individually could have a material adverse impact on our net sales and net income. Net sales to any one customer representing 10% or more of the respective period's consolidated net sales were as follows (in thousands):

 

  

Three Months Ended

March 31,

  

Nine Months Ended

March 31,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Customer 1

 $23,215  $9,271  $72,001  $36,047 

Customer 2

  5,811  

(a)

  

(a)

  

(a)

 

Customer 3

 

(a)

   7,599   16,288   17,108 
  $29,026  $16,870  $88,289  $53,155 
16

 
  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Customer 1

 $12,966  $24,827  $26,264  $48,785 

Customer 2

  8,595   8,910   15,988   11,716 

Customer 3

  4,773  

(a)

   9,121  

(a)

 
  $26,334  $33,737  $51,373  $60,501 

 

(a)

Sales were less than 10% of the respective period’s total net sales.

 

We buy certain products, including beta-alanine, from a limited number of raw material suppliers who meet our quality standards. The loss of any of these suppliers could have a material adverse impact on our net sales and net income. Raw material purchases from any one supplier representing 10% or more of the respective period’s total raw material purchases were as follows (dollars in thousands):

 

  

Three Months Ended

March 31,

  

Nine Months Ended

March 31,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Supplier 1

 $5,978   1,930  $15,765  

(a)

 
  $5,978   1,930  $15,765    
  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Supplier 1

 $4,485   6,412  $7,854   9,787 
  $4,485   6,412  $7,854   9,787 

 

(a)

Purchases were less than 10% of the respective period’s total raw material purchases.

 

Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We place our cash and cash equivalents with highly rated financial institutions. Credit risk with respect to receivables is concentrated with two2 of our largest customers, whose receivable balances collectively represented 52.1%59.6% of gross accounts receivable at MarchDecember 31, 2021 and 65.7%64.8% at June 30, 2020.2021. As of MarchDecember 31, 2021 we had a receivable balance of $3.2$3.5 million and as of at June 30, 2020 2021 we had a receivable balance of $3.3$3.4 million fromrelated to a former contract manufacturing customer that wecustomer. We have recorded a bad debt reserve equal to 100% of thethis outstanding balance and thus did not reflect it in the percentages listed above.

Additionally, amounts due related to our beta-alanine raw material sales were 7.4%7.0% of gross accounts receivable at MarchDecember 31, 2021, and 2.5%8.6% of gross accounts receivable at June 30, 2020. 2021. Concentrations of credit risk related to the remaining accounts receivable balances are limited due to the number of customers comprising ourresponsible for the remaining customer base.accounts receivable.

 

14
17

 

 

H. Segment Information

 

Our business consists of two2 segments for financial reporting purposes. The two segments are identified as (i) private-label contract manufacturing, which primarily relates to the provision of private-label contract manufacturing services to companies that market and distribute nutritional supplements and other health care products, and (ii) patent and trademark licensing, which primarily includes direct raw material sales and royalty income from our license and supply agreements associated with the sale and use of beta-alanine under our CarnoSyn® and SR CarnoSyn® trade names.

 

We evaluate performance of these segments based on a number of factors. The primary performance measures for each segment are net sales and income or loss from operations before the allocation of certain corporate level expenses. Operating income or loss for each segment does not include corporate general and administrative expenses, interest expense and other miscellaneous income and expense items. Corporate general and administrative expenses include, but are not limited to human resources, corporate legal, finance, information technology, and other corporate level related expenses, which are not allocated to any segment. Transfers of raw materials between segments are recorded at cost. The accounting policies of our segments are the same as those described in the summary of significant accounting policies in Note A.A above and in the consolidated financial statements included in our 20202021 Annual Report.

 

Our operating results by business segment were as follows (in thousands):

 

 

Three Months Ended

March 31,

  

Nine Months Ended

March 31,

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
 

2021

  

2020

  

2021

  

2020

  

2021

  

2020

  

2021

  

2020

 

Net Sales

                        

Private label contract manufacturing

 $42,196  $22,650  $124,569  $73,490  $33,677  $45,326  $67,271  $82,373 

Patent and trademark licensing

  4,124   2,832   9,560   10,290   4,050   2,757   8,796   5,436 

Total Net Sales

 $46,320  $25,482  $134,129  $83,780  $37,727  $48,083  $76,067  $87,809 

 

 

Three Months Ended

March 31,

  

Nine Months Ended

March 31,

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
 

2021

  

2020

  

2021

  

2020

  

2021

  

2020

  

2021

  

2020

 

Income (Loss) from Operations

                

Income from Operations

        

Private label contract manufacturing

 $3,241  $(3,123

)

 $13,511  $187  $2,761  $6,843  $6,461  $10,270 

Patent and trademark licensing

  1,541   813   2,740   1,870   1,757   529   4,393   1,199 

Income (loss) from operations of reportable segments

  4,782   (2,310

)

  16,251   2,057 

Income from operations of reportable segments

  4,518   7,372   10,854   11,469 

Corporate expenses not allocated to segments

  (2,082

)

  (1,913

)

  (6,074

)

  (5,637

)

  (2,117

)

  (1,980

)

  (4,225

)

  (3,992

)

Total Income (Loss) from Operations

 $2,700  $(4,223

)

 $10,177  $(3,580

)

Total Income from Operations

 $2,401  $5,392  $6,629  $7,477 

 

 

March 31,

2021

  

June 30,

2020

  

December 31,

2021

  

June 30,

2021

 

Total Assets

            

Private-label contract manufacturing

 $95,502  $100,094  $99,746  $95,324 

Patent and trademark licensing

  22,959   20,109   27,612   24,957 
 $118,461  $120,203  $127,358  $120,281 

 

Our private-label contract manufacturing products are sold both in the U.S. and in markets outside the U.S., including Europe, Canada, Australia, New Zealand, Mexico and Asia. Our primary markets outside the U.S. are Europe and Asia. Our patent and trademark licensing activities are primarily based in the U.S.

 

18

Net sales by geographic region, based on the customers’ location, were as follows (in thousands):

 

 

Three Months Ended

March 31,

  

Nine Months Ended

March 31,

  

Three Months Ended

December 31,

  

Six Months Ended

December 31,

 
 

2021

  

2020

  

2021

  

2020

  

2021

  

2020

  

2021

  

2020

 
                 

United States

 $27,674  $12,908  $70,534  $48,682  $25,402  $23,074  $48,897  $42,860 

Markets outside of the United States

  18,646   12,574   63,595   35,098   12,325   25,009   27,170   44,949 

Total

 $46,320  $25,482  $134,129  $83,780  $37,727  $48,083  $76,067  $87,809 

 

Products manufactured by our Swiss subsidiary ("NAIE") accounted for 65%89% of net sales in markets outside the U.S. for the three months ended MarchDecember 31, 2021 and 79%84% for the ninesix months ended MarchDecember 31, 2021. Products manufactured by NAIEour Swiss subsidiary ("NAIE") accounted for 88%83% of net sales in markets outside the U.S. for the three months ended MarchDecember 31, 2020 and 90%85% for the ninesix months ended MarchDecember 31, 2020. NoNaN products manufactured by NAIE were sold in U.S. markets during the three or nine and six month periods ended MarchDecember 31, 2021 and 2020.

 

Long-lived assets by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):

 

  

March 31, 2021

  

June 30, 2020

 

United States

 $21,325  $21,769 

Europe

  17,682   18,108 

Total Long-Lived Assets

 $39,007  $39,877 

  

December 31, 2021

  

June 30, 2021

 

United States

 $38,976  $21,109 

Europe

  15,307   17,039 

Total Long-Lived Assets

 $54,283  $38,148 

 

Total assets by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):

 

 

March 31, 2021

  

June 30, 2020

  

December 31, 2021

  

June 30, 2021

 

United States

 $67,624  $66,489  $74,290  $67,307 

Europe

  50,837   53,714   53,068   52,974 

Total Assets

 $118,461  $120,203  $127,358  $120,281 

 

Capital expenditures by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):

 

  

Nine Months Ended

 
       
  

March 31, 2021

  

March 31, 2020

 

United States

 $1,788  $1,110 

Europe

  2,463   2,322 

Total Capital Expenditures

 $4,251  $3,432 

  

Six Months Ended

December 31,

 
  

2021

  

2020

 

United States

 $19,250  $1,033 

Europe

  394   2,001 

Total Capital Expenditures

 $19,644  $3,034 

 

 

I. Income Taxes

Our effective tax rate for the three months ended March 31, 2021 was 19.3% and the effective rate for the nine months ended March 31, 2021 was 10.5%. Our effective rate for the nine months ended March 31, 2021, differed from the fiscal 2021 U.S. federal statutory rate of 21% primarily due to a discrete tax benefit discussed below. The effective tax rate for the three months ended March 31, 2020 was a benefit of 6.0% and the effective tax rate for the nine months ended March 31, 2020 was a benefit of 3.7%.

 

To determine our quarterly provision for income taxes, we use an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions to which we are subject. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rate from quarter to quarter. We recognize interest and penalties related to uncertain tax positions, if any, as an income tax expense.

 

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States. The CARES Act and related notices include several significant provisions, including delaying certain payrollOur effective tax payments, mandatory transition tax payments under the Tax Cuts and Jobs Act (“TCJ Act”), and estimated income tax payments. The CARES Act also allows net operating losses (NOL) to be carried back five years. We expect to use this carryback periodrate for the NOL generated with our June 30,three months ended December 31, 2021 was 22.8% and the effective tax rate for the six months ended December 31, 2021 was 22.6%. Our effective rates differ from the fiscal 2022 U.S. federal statutory rate of 21% primarily due to state income taxes. Our effective tax rate for the three months ended December 31, 2020 federal tax return,was 20.8% and have recorded athe effective rate for the six months ended December 31, 2020 was 7.2%, primarily due to the discrete tax benefit in the current fiscal year, as discussed below.

 

19

On July 23, 2020, the Department of Treasury issued final regulations which provide an exclusion to the global intangible low-taxed income (GILTI) calculation on an elective basis. These regulations were effective September 21, 2020 and maycould be retroactively applied. Under these new regulations, we are able to exclude the GILTI calculation from our domestic taxable income if the deemed effective tax rate at our foreign subsidiary is greater than 18.9%. We assessed this rate, including the implementation of certain tax strategies, and we have determined that our effective rate at NAIE isour foreign subsidiary was greater than 18.9% as of the year ending June 30, 2020. WeDuring the first quarter of fiscal 2021, we reassessed our estimated taxes for fiscal 2020 and in the ninethree months ended March 31, 2021 September 30, 2020 we recorded a reduction to our fiscal 2020 estimated taxes of $0.4 million as a discrete benefit. As a result of this adjustment, we now expect our domestic tax return for fiscal 2020 will was expected to reflect a net operating loss and,which, in accordance with the CARES ACT, we plan on carrying thisAct, allowed us to carry the loss back to fiscal 2015 which reflected and fiscal 2016. Such carryback resulted in a higher federal tax rate. Due to this rate differential we have recordedthat resulted in the recognition of a permanent discrete tax benefit of $0.3 million during the ninesix months ended MarchDecember 31, 2021. For NAIE the result of this tax planning during the nine months ended March 31, 2021 was an additional foreign estimated tax expense of $0.4 million and a reversal of our deferred tax liability of $0.5 million.

There were no other significant discrete items for the three and nine months ended March 31, 2021, or the three and nine months ended March 31, 2020.

 

We record valuation allowances to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. During the three and ninesix months ended MarchDecember 31, 2021, there was no change to our valuation allowance for our deferred tax assets.

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates for each of the jurisdictions in which we operate. Deferred tax assets and liabilities are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled using the tax rates then in effect. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date for such new rates.

 

We are subject to taxation in the U.S., Switzerland and in the U.S. at the federal level and in various state jurisdictions. Our U.S. tax yearsreturns for the fiscal year ended June 30, 2017 2015 and forward are subject to examination by the U.S. tax authorities. Our state tax yearsreturns for the fiscal years ended June 30, 2017 and forward are subject to examination by the state tax authorities. Our Swiss tax yearsreturns for the fiscal year ended June 30, 2019 2020 and forward are subject to examination by the Swiss tax authorities.

 

It is our policy to establish reserves based on management’s assessment of exposure for certain positions taken in previously filed tax returns that may become payable upon auditexamination by tax authorities. Our tax reserves are analyzed quarterly, and adjustments are made as events occur that we believe warrant adjustments to those reserves. There were no0 adjustments to reserves in the three and ninesix month periodsperiod ended MarchDecember 31, 2021.

 

J. Treasury Stock

 

On September 18, 2020, the Board of Directors authorized a $2.0 million increase to our stock repurchase plan (“Repurchase Plan”), thus bringing the total authorized repurchase amount to $12.0 million. On March 12, 2021, the Board of Directors authorized an additional $3.0 million increase to the Repurchase Plan, thus bringing the total authorized repurchase amount to $15.0 million. On January 14, 2022, the Board of Directors authorized an additional $3.0 million increase to the Repurchase Plan, thus bringing the total authorized repurchase amount to $18.0 million. Under the Repurchase Plan, we may, from time to time, purchase shares of our common stock, depending upon market conditions, in open market or privately negotiated transactions.

 

Stock repurchases for the three months ended December 31, 2021 were as follows:

  

Shares

  

Average Cost

  

Total Cost (in thousands)

 

Shares purchased under Repurchase Plan

  189,702  $13.32  $2,527 

Shares acquired in connection with stock option exercises

  0   0   0 

Shares acquired from employees for restricted stock vesting

  0   0   0 

Total

  189,702   0  $2,527 

Stock repurchases for the six months ended December 31, 2021 were as follows:

  

Shares

  

Average Cost

  

Total Cost (in thousands)

 

Shares purchased under Repurchase Plan

  189,702  $13.32  $2,527 

Shares acquired in connection with stock option exercises

  0   0   0 

Shares acquired from employees for restricted stock vesting

  692   14.20   10 

Total

  190,394      $2,537 

During the three months ended March 31, 2021 we repurchased 5,751 shares at a weighted average cost of $10.60 per share and a total cost of $0.1 million under this Repurchase Plan. During the nine months ended March 31, 2021 we repurchased 416,264 shares at a weighted average cost of $8.40 per share and a total cost of $3.5 million under this Repurchase Plan. Included in theStock repurchases for the ninethree months ended MarchDecember 31, 2021, was 30,442 shares2020 were as follows:

  

Shares

  

Average Cost

  

Total Cost (in thousands)

 

Shares purchased under Repurchase Plan

  144,681  $9.67  $1,398 

Shares acquired in connection with stock option exercises

  30,442   9.95   303 

Shares acquired from employees for restricted stock vesting

  7,744   7.40   57 

Total

  182,867   0  $1,758 

Stock repurchases for the three months ended December 31, 2020 were as follows:

  

Shares

  

Average Cost

  

Total Cost (in thousands)

 

Shares purchased under Repurchase Plan

  380,071  $8.25  $3,136 

Shares acquired in connection with stock option exercises

  30,442   9.95   303 

Shares acquired from employees for restricted stock vesting

  8,436   7.34   62 

Total

  418,949   0  $3,501 

Stock repurchase costs include commissions and fees.

Shares acquired from employees and directors in connection with exercises of stock options. During the three months ended March 31, 2020 we repurchased 210,832 shares at a weighted average cost of $8.46 and a total cost of $1.8 million under this Repurchase Plan. During the nine months ended March 31, 2020 we repurchased 362,170 shares at weighted average cost of $8.40 and a total cost of $3.0 million under this Repurchase Plan.

During the three months ended March 31, 2021, we acquired 38,381 shares from employees in exchange for payment of income to withholding of the employees in connection with restricted stock shares that vested during that period at a weighted average cost of $15.05 per sharevesting and a total cost of $0.6 million. During the nine months ended March 31, 2021, we acquired 46,817 shares from employees in exchange for payment of income to withholding of the employees in connection with restricted stock shares that vested during that period at a weighted average cost of $13.66 per share and a total cost of $0.6 million. During the three months ended March 31, 2020 we acquired 53,176 shares from employees in exchange for payment of income to withholding of the employees in connection with restricted stock shares that vested during that period at a weighted average cost of $6.91 per share and a total cost of $0.4 million. During the nine months ended March 31, 2020, we acquired 61,506 shares from employees in exchange for payment of income to withholding of the employees in connection with restricted stock shares that vested during that period at a weighted average cost of $7.14 per share and a total cost of $0.4 million. These sharesoptions exercises were returned to us by the subjectrelated employees and in exchangereturn we paid each employee’s required tax withholding liability incurred due toresulting from the vesting of their restricted stock shares during that period.shares. The valuation of the shares we acquired and thereby the number of shares returned to us was calculated based on the closing share price on the date the shares vested.

 

 

K. Derivatives and Hedging

 

We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to forecasted product sales and expenditures denominated in foreign currencies and to other transactions of NAIE, our foreign subsidiary. As part of our overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, we may use foreign exchange contracts in the form of forward contracts. To the extent we enter into such contracts, there can be no guarantee any such contracts will be effective hedges against our foreign currency exchange risk.

 

As of MarchDecember 31, 2021, we had forward contracts designated as cash flow hedges primarily to protect against the foreign exchange risks inherent in our forecasted sales of products at prices denominated in currencies other than the U.S. Dollar. These contracts are expected to be settled through August 2022. 2023. For derivative instruments that are designated and qualify as cash flow hedges, we record the effective portion of the gain or loss on the derivative in accumulated other comprehensive income (“OCI”) as a separate component of stockholders’ equity and subsequently reclassify these amounts into earnings in the period during which the hedged transaction is recognized in earnings.

 

For foreign currency contracts designated as cash flow hedges, hedge effectiveness is measured using the spot rate. Changes in the spot-forward differential are excluded from the test of hedge effectiveness and are recorded currently in earnings as part of net sales.revenue. We measure effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item. No hedging relationships were terminated as a result of ineffective hedging for the three or nine and six months ended MarchDecember 31, 2021 and MarchDecember 31, 2020.

 

We monitor the probability of forecasted transactions as part of the hedge effectiveness testing on a quarterly basis. During the three and nine month periodssix months ended MarchDecember 31, 2021 and the three and nine month periods ended MarchDecember 31, 2020, we did not have any losses or gains related to the ineffective portion of our hedging instruments.

 

As of MarchDecember 31, 2021, the notional amounts of our foreign exchange contracts designated as cash flow hedges were approximately $52.5$55.7 million (EUR 45.246.5 million). As of MarchDecember 31, 2021, a net lossgain of approximately $0.5$1.6 million, offset by $0.4 million of deferred taxes, related to derivative instruments designated as cash flow hedges was recorded in OCI. It is expected that $0.5$1.1 million will be reclassified into earnings in the next 12 months along with the earnings effects of the related forecasted transactions.

 

As of March 31, 2021, $0.8 million of the fair value of our cash flow hedges was classified as a current liability, and $84,000 was classified as part of other noncurrent assets, net in our Consolidated Balance Sheets. During the three months ended March 31, 2021, we recognized $1.6 million of net gain in OCI, and reclassified $0.9 million of losses and forward point amortization from OCI to Sales. During the nine months ended March 31, 2021, we recognized $2.3 million of net losses in OCI, and reclassified $2.2 million of losses and forward point amortization from OCI to Sales. As of June 30, 2020, $0.5 million of the fair value of our cash flow hedges was classified as a current asset, and $0.2 million was classified as a long-term liability in our Consolidated Balance Sheets. During the three months ended March 31, 2020, we recognized $1.0 million of net gains in OCI, and reclassified $0.5 million of gains and forward point amortization from OCI to Sales. During the nine months ended March 31, 2020, we recognized $1.9 million of net gains in OCI, reclassified $2.1 million of gains and forward point amortization from OCI to Sales, and reclassified $54,000 of gains from OCI to Other Income.

For foreign currency contracts not designated as cash flow hedges, changes in the fair value of the hedge are recorded directly to foreign exchange gain or loss in other income in an effort to offset the change in valuation of the underlying hedged item. During the ninethree and six months ended MarchDecember 31, 2021 we entered into a forward contractcontracts in order theto hedge foreign exchange risk associated with our lease liability at NAIE, which is denominated in Swiss Francs (CHF). As of MarchDecember 31, 2021, the notional amounts of our foreign exchange contracts not designated as cash flow hedges were approximately $6.0$5.4 million (CHF 5.55.0 million). As

21

We are exposed to interest rate fluctuations related to our $10 million Term Note with Wells Fargo, which carries a variable interest rate of 1.80% above the SOFR rolling 30-day average. To manage our exposure to this variable rate, on August 23, 2021, $0.1 millionwe entered into a floored interest rate swap that fixes our all-in rate on this loan to 2.4% for the firstthree years of the fair valueterm loan. Fluctuations in the relation of our foreign exchange contracts not designatedcontractual swap rate to current market rates are recorded as cash flow hedges was classified as a currentan asset or liability inwith an offset to OCI at the end of each reporting period. Interest expense is adjusted for the difference between the actual SOFR spread and the swap contractual rate such that our Consolidated Balance Sheets.effective interest expense for each period is equal to our hedged rate of 2.4%.

 

 

L. Contingencies

 

From time to time, we become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters may relate to product liability, employment, intellectual property, regulatory, contract or other matters. The resolution of these matters as they arise may be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. While unfavorable outcomes are possible, based on available information, we currently do not believe the resolution of these matters will result in a material adverse effect on our business, consolidated financial condition, or results of operations. However, a settlement payment or unfavorable outcome could be greater than we currently anticipate and if so, could adversely impact our results of operations. Our evaluation of the likely impact of these actions could change in the future and we could have unfavorable outcomes we do not expect.

 

COVID-19 Pandemic

We continue to monitor and evaluate the risks to public health and the impact on overall global business activity related to the COVID-19 pandemic, including its potential impacts on our employees, customers, suppliers and financial results. As the situation remains fluid, it is difficult to predict the duration and scope of the pandemic and its impact on our business. However, it may result in a material adverse impact to our financial position, operations and cash flows if conditions persist or worsen.

 

M. Subsequent Event

On January 14, 2022, the Board of Directors authorized an additional $3.0 million increase to the Repurchase Plan, thus bringing the total authorized repurchase amount to $18.0 million. Under the Repurchase Plan, we may, from time to time, purchase shares of our common stock, depending upon market conditions, in open market or privately negotiated transactions.

On February 8, 2022, we entered into a second amendment to our credit facility with Wells Fargo that is effective January 31, 2022 and modifies the annual limit imposed upon the company’s ability to repurchase stock are issue dividends.  This amendment increased this limit from $5.0 million annually to $7.0 million annually.

22
17

 

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 ninesix months ended MarchDecember 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 20202021 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 overview does not address all of the matters covered in the other sections of this Item 2 or other items in this Report nor does it 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, herbal and other nutritional supplements, as well as other health care products, to consumers both within and outside the U.S. Historically, our revenue has been largely dependent on sales to two or three 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 and royalty and licensing revenue generated from license and supply agreements with third parties, granting them the right to use our patents, trademarks and other intellectual property in connection with the distribution and use of the ingredient known as beta-alanine sold under our CarnoSyn® and SR CarnoSyn® trademarks.

 

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

 

During the first ninesix months of fiscal 2021,2022, our net sales were 60% higher13% lower than in the first ninesix months of fiscal 2020.2021. Private-label contract manufacturing sales increased 70%decreased 18% primarily due to higherlower sales fromto our largest customer. Sales to this customer decreased 46% as compared to the same period in the prior year with a majority of the decrease associated with an inventory reduction program mostly related to their European business. The decrease in sales to 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 increaselargest customer was partially offset by increased sales from other existing customers and sales to a reduction in sales as a result of a discontinued customer relationship.new customer. Revenue concentration risk for our largest private-label contract manufacturing customer as a percentage of our total net sales increaseddecreased from 43%56% for the first ninesix months of fiscal 20202021 to 54%35% for the first ninesix months of fiscal 2021.2022. We expect our annualized fiscal year 20212022 revenue concentration for this customer to be higherlower than fiscal year 2020.2021.

 

During the first ninesix months of fiscal 2021, CarnoSyn® beta-alanine2022, patent and trademark licensing revenue decreased 7%increased 62% to $9.6$8.8 million, compared to revenue of $10.3$5.4 million for the first ninesix months of fiscal 2020.2021. The decreaseincrease in beta-alaninepatent and trademark licensing revenue during the first six months of fiscal 2022 was primarily due to decreased materialincreased shipments primarily resulting from certain of our formerto existing 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 duerelated to limitations on athletic activities and gyms. However, a majority of this decline occurred duringgyms reopening in accordance with easing COVID-19 restrictions across the USA as compared to significant restrictions in athletic activities in the first nine months of fiscal 2021 while sales from this channel during the thirdand second quarter of fiscal 2021 included a 46% year over year increase, primarily duecombined with sales to easing COVID-19 restrictions throughout the country, especially for athletic activitiesnew customers and gyms.higher average sales prices.

 

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 ongoingrecent efforts to refine our formulations and product offerings will be positively received and result in further opportunitiessignificant 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 $1.0$0.2 million during the first ninesix months of fiscal 20212022 as compared to $1.7$0.7 million during the comparable period in fiscal 2020.2021. 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. 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 patent rights, obtain the raw material beta-alanine when and in the amounts needed, expand distribution of beta-alanine to new and existing customers, and on the continued compliance by third parties with our license agreements and our patent, trademark and other intellectual property rights. During the remainder of fiscal 2021,2022, 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.

 

23

Based on our current sales order volumes and future period sales forecasts we have received from our customers, along with the continued challenges with supply chain and staffing shortages, including challenges from COVID-19 absences, we now expectanticipate our annualized fiscal 20212022 consolidated net sales will be flat to increase between 45% and 55%slightly up as compared to fiscal 2020.2021. We also expect toanticipate we will generate operating income between 7%8.0% and 9%11.0% of net sales for our fiscal year ending June 30, 2021.2022. As we previously estimted it would, sales and profitability during the first half of fiscal 2022 declined when compared to the same period of fiscal 2021 primarily related to lower sales to our largest contract manufacturing customer. During the second half of fiscal 2022, we expect net sales to increase 10.0% to 13.0% as compared to the same period in fiscal 2021, and operating income to increase to between 8.0% to 11.0% of net sales. The improvement in net sales and operating profitability is expected to be generated from continued growth from sales and improved sales mix and staffing levels. There can be no assurance our expectations will result in the currently anticipated increase in net sales, or operating income. Notwithstanding, we are also closely monitoring the impact of the COVID-19 pandemic. Currently, we cannot reliablyreasonably estimate the length of time or severity of the pandemic and cannot currently reliably estimate the total impact this pandemic may have on our consolidated financial results for the remainder of fiscal 20212022 and beyond.

18

 

Impact of COVID-19 on Our Business

 

On March 11, 2020, the World Health Organization classified the novel coronavirus, or COVID-19, as a pandemic. The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption and has and will likely continue to affect our business. Significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. Our facilities, located both in the United States and Europe, continue to operate as an essential and critical manufacturer in accordance with applicable federal, state, and local regulations, however, there can be no assurance our facilities will continue to operate without interruption. Factors that derive from COVID-19 and the accompanying regulatory and market response, and that have or may negatively impact sales and gross margin in the future include, but are not limited to the following:

 

 

Limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the materials included in the products we sell, or to meet delivery requirements and commitments;

 

Limitations on the ability of our employees to perform their work due to illness caused by the pandemic or due to other restrictions on our employees to keep them safe and the increased cost of measures taken to ensure employee health and safety;

 

Local, state, or federal orders requiring employeesLimitation on the availability of qualified individuals to remain at home;adequately staff our manufacturing facilities;

 

Limitations on the ability of carriers to deliver materials need for productionto us or for delivery ofdeliver our products to customers;Limitations on the ability of our suppliers to manufacture and meet timelines associated with capital improvement projects;

 

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

 

Limitations on the ability of our customers to pay us on a timely basis.

 

We will continue to actively monitor the situation and may take further actions to alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders. While we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we believe we will be able to remain operational and our working capital will be sufficient for us to remain operational even as the longer term consequences of this pandemic become known.

 

During the remainder of fiscal year 2021,2022, we also 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 to assist us in developing relationships with additional quality oriented customers;

Expanding the commercialization of our beta-alanine patent estate through raw material sales, developing a new sales distribution channel under the Wellness and Healthy Aging category for our sustained release form of beta-alanine marketed under our SR CarnoSyn® trademark, exploiting new contract manufacturing opportunities license and royalty agreements, and protecting our proprietary rights; and

  

 

 

Expanding the commercialization of our beta-alanine patent estate through raw material sales, developing a new sales distribution channel under the WellnessImproving operational efficiencies and Healthy Aging category for our sustained release form of beta-alanine marketed under our SR CarnoSyn® trademark, exploiting new contract manufacturing opportunities licensemanaging costs and royalty agreements, and protecting our proprietary rights; andbusiness risks to improve profitability.

Improving operational efficiencies and managing costs and business risks to improve profitability.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires we make estimates and assumptions that affect the amounts reported in our financial statements and the accompanying notes. We have identified certain policies we believe are important to the accurate and complete portrayal of our financial condition and results of operations. These policies require the application of significant judgment by our management. We base our estimates on our historical experience, industry standards, and various other assumptions we believe are reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. An adverse effect on our financial condition, changes in financial condition, and results of operations could occur if circumstances change that alter the various assumptions or conditions used in such estimates or assumptions.

Our critical accounting policies are discussed under Item 7 of our 2020 Annual Report and recently adopted and issued accounting pronouncements are discussed under Item 1, Note A to our Notes to Condensed Consolidated Financial Statements contained in this Report.

 

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24

 

Discussion of Critical Accounting Estimates

We have identified the following as our most critical accounting estimates, which are those that are most important to the portrayal of the Company’s financial condition and results, and that require management’s most subjective and complex judgments. Information regarding our other significant accounting estimates and policies are disclosed in Note 1 of Item 1 of this report and as disclosed in the 2021 Annual Report.

Revenue Recognition — Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling one or more performance obligations. For certain contracts with volume rebates and discounts, our estimates of future sales used to assess the volume rebate and discount estimates are subject to a high degree of judgement and may differ from actual sales due to, among other things, changes in customer orders and raw material availability. 

Results of Operations

 

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

 

  

Three Months Ended

  

Nine Months Ended

 
  

March 31,

  

March 31,

 
  

2021

  

2020

  

% Change

  

2021

  

2020

  

% Change

 

Private label contract manufacturing

 $42,196  $22,650   86

%

 $124,569  $73,490   70

%

Patent and trademark licensing

  4,124   2,832   46

%

  9,560   10,290   (7

)%

Total net sales

  46,320   25,482   82

%

  134,129   83,780   60

%

Cost of goods sold

  39,484   22,588   75

%

  111,614   71,441   56

%

Gross profit

  6,836   2,894   136

%

  22,515   12,339   82

%

Gross profit %

  14.8

%

  11.4

%

      16.8

%

  14.7

%

    
                         

Selling, general and administrative expenses

  4,136   7,117   (42

)%

  12,338   15,919   (22

)%

% of net sales

  8.9

%

  27.9

%

      9.2

%

  19.0

%

    
                         

Income from operations

  2,700   (4,223

)

  164

%

  10,177   (3,580

)

  384

%

% of net sales

  5.8

%

  (16.6

)%

      7.6

%

  (4.3

)%

    
                         

Total other (loss) income

  (326

)

  (48

)

  (579

)%

  (1,453

)

  5   (29,160

)%

Income before income taxes

  2,374   (4,271

)

  156

%

  8,724   (3,575

)

  344

%

% of net sales

  5.1

%

  (16.8

)%

      6.5

%

  (4.3

)%

    
                         

Provision (benefit) for income taxes

  458   (256

)

     918   (132

)

   

Net income (loss)

 $1,916  $(4,015

)

  148

%

 $7,806  $(3,443

)

  327

%

% of net sales

  4.1

%

  (15.8

)%

      5.8

%

  (4.1

)%

    

  

Three Months Ended

  

Six Months Ended

 
  

December 31,

  

December 31,

 
  

2021

  

2020

  

% Change

  

2021

  

2020

  

% Change

 

Private label contract manufacturing

 $33,677  $45,326   (26

)%

 $67,271  $82,373   (18

)%

Patent and trademark licensing

  4,050   2,757   47

%

  8,796   5,436   62

%

Total net sales

  37,727   48,083   (22

)%

  76,067   87,809   (13

)%

Cost of goods sold

  31,181   38,409   (19

)%

  61,240   72,130   (15

)%

Gross profit

  6,546   9,674   (32

)%

  14,827   15,679   (5

)%

Gross profit %

  17.4

%

  20.1

%

      19.5

%

  17.9

%

    
                         

Selling, general and administrative expenses

  4,145   4,282   (3

)%

  8,198   8,202   (0

)%

% of net sales

  11.0

%

  8.9

%

      10.8

%

  9.3

%

    
                         

Income from operations

  2,401   5,392   (55

)%

  6,629   7,477   (11

)%

% of net sales

  6.4

%

  11.2

%

      8.7

%

  8.5

%

    
                         

Other expense

  (9

)

  (806

)

  (99

)%

  (35

)

  (1,127)  (97

)%

Income before income taxes

  2,392   4,586   (48

)%

  6,594   6,350   4

%

% of net sales

  6.3

%

  9.5

%

      8.7

%

  7.2

%

    
                         

Provision for income taxes

  545   954   (43

)%

  1,491   460   224

%

Net income

 $1,847  $3,632   (49)% $5,103  $5,890   (13

)%

% of net sales

  4.9

%

  7.6

%

      6.7

%

  6.7

%

    

 

Private-label contract manufacturing net sales increased 86%decreased 26% during the three months ended MarchDecember 31, 2021 and 70%18% during the ninesix months ended MarchDecember 31, 2021, when compared to the same periods in the prior year. The decrease in sales during the three months ended December 31, 2022 was primarily due to lower sales to our largest customer. Sales to our largest customer decreased 48% for the three months ended December 31, 2021 as compared to the same period in fiscal 2021 and was driven by an inventory reduction program mostly related to their European business. The decrease in sales during the first six months of fiscal 2022 was primarily due to decreased sales from our largest customer partially offset by increased sales from other existing customers and sales to a new customer. Sales to our largest customer decreased 46% for the six months ended December 31, 2021 as compared to the same period in the prior year. The increase was due primarily to salesyear with a majority of new products to new and existing customers and higher salesthe decrease associated with their European business.

25

 

Net sales from our patent and trademark licensing segment increased 46%47% during the three months ended MarchDecember 31, 2021 and decreased 7%62% during the ninesix months ended MarchDecember 31, 2021, when compared to the same periodperiods in the prior year. The increase forin patent and trademark licensing revenue during the threesecond quarter and the first six months ended March 31, 2021of fiscal 2022 was primarily due to an increase in materialincreased shipments primarily resulting from higher sales to existing customers and the increase inrelated to athletic activities asand gyms and athletic facilities began to reopenreopening in accordance with easing COVID-19 guidelines for various cities and statesrestrictions across the USA. ThisUSA as compared to significant restrictions in athletic activities in the second quarter and first six months of fiscal 2021. The increase was partially offset by lowerin the three and six months ended December 31, 2021 also included sales to new customers and higher 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 ninesix months ended MarchDecember 31, 2021, was as follows:

 

  

Three Months

  

Nine Months

 
  

Ended

  

Ended

 
         

Contract manufacturing(1)

  5.3

%

  5.0

%

Patent and trademark licensing(2)

  (1.9

)

  (2.9

)

Total change in gross profit margin

  3.4

%

  2.1

%

  

Three Months

  

Six Months

 
  

Ended

  

Ended

 
         

Contract manufacturing(1)

  (5.9

)%

  (2.3

)%

Patent and trademark licensing(2)

  3.2   3.9 

Total change in gross profit margin

  (2.7

)%

  1.6

%

 

1

Private-label contract manufacturing gross profit margin as a percentage of consolidated net sales increased 5.3decreased 5.9 percentage points during the three months ended MarchDecember 31, 2021 and 5.02.3 percentage points during the ninesix months ended MarchDecember 31, 2021, when compared to the comparable prior year periods. The increasedecrease in gross profit as a percentage of sales for private-label contract manufacturing during the second quarter of fiscal 2022 is primarily due to a decreaseunfavorable sales mix and an increase in per unit manufacturing costscosts. The decrease in gross profit as a percentage of sales for the first six months of fiscal 2022 is primarily due to increased sales as well as a $1.0 million inventory reserve recordedan increase 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.per unit manufacturing costs.

 

2

Patent and trademark licensing gross profit margin as a percentage of consolidated net sales decreased 1.9increased 3.2 percentage points during the three months ended MarchDecember 31, 2021 and 2.93.9 percentage points during the ninesix months ended MarchDecember 31, 2021, when compared to the comparable prior year period.periods. The decreaseincrease in margin contribution during the three and nine months ended Marchsix month periods ending December 31, 2021 was primarily due to decreasedincreased patent and trademark licensing net sales as a percentage of total consolidated net sales.sales along with favorable sales mix, and higher average net sales prices per unit. The decrease during the threefirst six months ended March 31, 2021of fiscal 2022 also include lower average sales prices.included a change in estimate regarding certain volume rebate programs.

 

Selling, general and administrative expenses decreased $3.0$0.2 million, or 42%3%, during the three months ended MarchDecember 31, 2021, and decreased $3.6 million, or 22%,remained flat during the ninesix months ended MarchDecember 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.periods.

20

 

Other income,expense, net, decreased $0.3$0.8 million during the three months ended MarchDecember 31, 2021, and decreased $1.5$1.1 million during the ninesix months ended MarchDecember 31, 2021, when compared to the comparable periods during the prior year. The decreases were primarily due to the unfavorablefavorable fiscal 2022 foreign exchange revaluation activity due to volatility in the Euro and Swiss Franc impactingassociated with our balance sheet.sheet and the fluctuations in unhedged foreign currency rates when compared to the same activity in fiscal 2021.

 

Our income tax provision (benefit) increased $0.7expense decreased $0.4 million during the three months ended MarchDecember 31, 2021 and increased $1.1$1.0 million during the ninesix months ended MarchDecember 31, 2021, when compared to the same periods in fiscal 2021. The increase fordecrease in income tax expense during the three months ended March 31, 2021second quarter of fiscal 2022 was primarily related to an increase indecrease pre-tax income as compared to the three months ended March 31, 2020.same period in the prior year. The increase forduring the first ninesix months of fiscal year 2021 as compared to the comparable period in fiscal year 20202022 was primarily related to an increase in pre-tax income, partially offset by a discrete tax benefit of $0.9 million recorded during the ninesix months ended MarchDecember 31, 2021.2020 without a corresponding discrete item in the six months ended December 31, 2021 and an increase in taxes associated with slightly higher pre-tax income and a marginally higher effective tax rate excluding the discrete item.

 

26

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 providedused by operating activities was $16.0$0.6 million for the ninesix months ended MarchDecember 31, 2021 compared to net cash provided by operating activities of $5.2$4.7 million in the comparable period in the prior fiscal year.

 

At MarchDecember 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$2.8 million in cash compared to providing $0.3 millionusing $61,000 of cash during the comparable ninesix month period in the prior year. The decreaseincrease in cash providedused by accounts receivable during the ninesix months ended MarchDecember 31, 2021 primarily resulted from the timing of sales and related collections. Days sales outstanding was 3540 days during the ninesix months ended MarchDecember 31, 2021 as compared to 4736 days for the same period during the prior year.year period.

 

Changes in inventory used $1.1$4.8 million in cash during the ninesix months ended MarchDecember 31, 2021 compared to using $0.1$6.5 million in the comparable prior year period. The change in cash related to inventory during the ninesix months ended MarchDecember 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 $4.1used $3.8 million in cash during the ninesix months ended MarchDecember 31, 2021 compared to providing $1.7$1.1 million during the ninesix months ended MarchDecember 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 duringin the ninesix months ended MarchDecember 31, 2021 was $4.2$19.6 million compared to $3.4$3.0 million in the comparable period during the prior year.year period. The primary reason for the change was due to increased capital equipment purchasesthe purchase of a new manufacturing and warehouse facility in Carlsbad, CA during the nine months ended March 31, 2021 as compared to the nine months ended March 31, 2020. Capital expenditures duringfirst quarter of fiscal 2021 and fiscal 2020 were primarily for manufacturing equipment used in our Vista, California and Manno, Switzerland facilities.2022.

 

Cash used inprovided by financing activities for the ninesix months ended MarchDecember 31, 2021, was $14.1$7.4 million, compared to providing $6.5$3.5 million used in the comparable period during the prior year. This changeyear period. The difference is primarily due to $10.0borrowings related to the purchase of our new manufacturing and warehouse facility in Carlsbad, CA, offset by the difference in treasury stock repurchase activity.  

At December 31, 2021 we had $9.9 million due in proceeds fromconnection with a term loan related to our recently acquired manufacturing and warehouse facility and we also had a $20.0 million working capital line of credit withdrawn as a measureavailable 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,us under 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.had no borrowings outstanding. During the ninesix months ended Marchending December 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. Agreement.         

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

As of March 31, 2021, we had $28.1$19.4 million in cash and cash equivalents. We believe our available cash, cash equivalents, credit facility and potential cash flows from operations will be sufficient to fund our current working capital needs, and capital expenditures, and minimum debt and interest payments through the next 12 months. Our capital requirements for fiscal 2022 include amounts that will be required to complete our planned retrofit of the facility we purchased in August 2021 that is planned to become a powder blending, packaging, and storage facility.

 

Off-Balance Sheet Arrangements

 

As of MarchDecember 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

 

Recent accounting pronouncements are discussed in the notes to our consolidated financial statements included under Item 1, Note A. of this Report. Other than those pronouncements, we are not aware of any other pronouncements that materially affect our financial position or results of operations.

27

 

ITEM 4.     CONTROLS AND PROCEDURES

 

We maintain certain disclosure controls and procedures as defined under the Securities Exchange Act of 1934. They are designed to help ensure that material information is: (1) gathered and communicated to our management, including our principal executive and financial officers, in a manner that allows for timely decisions regarding required disclosures; and (2) recorded, processed, summarized, reported and filed with the SEC as required under the Securities Exchange Act of 1934 and within the time periods specified by the SEC.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (principal financial and accounting officer), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of MarchDecember 31, 2021. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective for their intended purpose described above as of MarchDecember 31, 2021.

 

There were no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarterly period ended MarchDecember 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

21
28

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, we become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters may relate to intellectual property, product liability, employment, tax, regulation, contract or other matters. The resolution of these matters as they arise will be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. While unfavorable outcomes are possible, based on available information, we currently do not believe the resolution of these matters, even if unfavorable, will result in a material adverse effect on our business, consolidated financial condition, or results of operations. However, a settlement payment or unfavorable outcome could adversely impact our results of operations. Our evaluation of the likely impact of these actions could change in the future and we could have unfavorable outcomes we do not expect. An unexpected settlement expense or an unexpected unfavorable outcome of a matter could adversely impact our results of operations.

 

As of May 13, 2021,February 9, 2022, neither NAI nor NAIE were a party to any material pending legal proceeding nor was any of our property the subject of any material pending legal proceeding. We are currently involved in several matters in the ordinary course of our business. 

 

There is no assurance NAI will prevail in these litigation matters or in similar proceedings NAI or others may initiate or that litigation expenses will not be greater than anticipated.

 

ITEM 1A. RISK FACTORS

 

When evaluating our business and future prospects you should carefully consider the risks described under Item 1A of our 20202021 Annual Report, as well as the other information in our 20202021 Annual Report, this Report and other reports and documents we file with the SEC. If any of the identified risks actually occur, our business, financial condition and results of operations could be seriously harmed. In that event, the market price of our common stock could decline, and you could lose all or a portion of the value of your investment in our common stock.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

We did not sell any unregistered equity securities during the three and six month periods ended MarchDecember 31, 2021 and MarchDecember 31, 2020.

 

Repurchases

 

During the three months ended MarchDecember 31, 2021 we repurchased 5,751189,702 shares of our common stock at a total cost of $0.1$2.5 million (including commissions and transaction fees) as set forth below:

 

Period

 

Total Number

of

Shares

Purchased

  

Average Price

Paid per Share

(1)

  

Total Number of Shares

Purchased as Part of

Publicly Announced

Plans or Programs

  

Maximum Number (or

Approximate Dollar Value) of

Shares that May Yet Be

Purchased

Under the Plans or Programs

(as of

March 31, 2021)

(in thousands)

 

January 1, 2021 to January 31, 2021

  5,751  $10.60   5,751    

February 1, 2021 to February 28, 2021

            

March 1, 2021 to March 31, 2021

            

Total

  5,751       5,751  $3,199 

Period

 

Total Number of

Shares Purchased

  

Average Price

Paid per Share (1)

  

Total Number of Shares

Purchased as Part of

Publicly Announced

Plans or Programs

  

Maximum Number (or

Approximate Dollar Value) of

Shares that May Yet Be Purchased

Under the Plans or Programs (as of

December 31, 2021)

(in thousands)

 

October 1, 2021 to October 31, 2021

  52,359  $13.81   52,359    

November 1, 2021 to November 30, 2021

  43,715  $13.77   43,715    

December 1, 2021 to December 31, 2021

  93,628  $12.84   93,628    

Total

  189,702       189,702  $671 

(1) Average price paid per share includes costs associated with the repurchases

 

Refer to Note J, "Treasury Stock," in this Quarterly Report, for terms of repurchase plan and additional information.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

22
29

 

ITEM 6.    EXHIBITS

 

The following exhibit index shows those exhibits filed with this Report and those incorporated by reference:

 

EXHIBIT INDEX

Exhibit

Number

Description

 

Incorporated By Reference To

    

3(i)

Amended and Restated Certificate of Incorporation of Natural Alternatives International, Inc. filed with the Delaware Secretary of State on January 14, 2005

 

Exhibit 3(i) of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004, filed with the commission on February 14, 2005

3(ii)

Amended and Restated By-laws of Natural Alternatives International, Inc. dated as of February 9, 2009

 

Exhibit 3(ii) of NAI’s Current Report on Form 8-K dated February 9, 2009, filed with the commission on February 13, 2009

4(i)

Form of NAIsNAI’s Common Stock Certificate

 

Exhibit 4(i) of NAI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005, filed with the commission on December 8, 2005

10.33Second Amendment to the Credit Agreement by and between NAI and Wells Fargo Bank, N.A. effective as of January 31, 2022Filed herewith

31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

 

Filed herewith

31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

 

Filed herewith

32

Section 1350 Certification

 

Filed herewith

101.INS

Inline XBRL Instance Document

 

Filed herewith

101.SCH

Inline XBRL Taxonomy Extension Schema Document

 

Filed herewith

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

Filed herewith

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

Filed herewith

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

 

Filed herewith

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

Filed herewith

104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

23
30

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, Natural Alternatives International, Inc., the registrant, has duly caused this Report to be signed on its behalf by the undersigned, duly authorized officers.

 

 

Date: May 13, 2021February 9, 2022

 

 

 

NATURAL ALTERNATIVES

INTERNATIONAL, INC.

By:

/s/ Mark A. LeDoux

Mark A. LeDoux, Chief Executive Officer

(principal executive officer)

 
    
 

By:

/s/ Mark A. LeDouxMichael E. Fortin 
  

Mark A. LeDoux,Michael E. Fortin, Chief ExecutiveFinancial Officer

 
  

(principal executivefinancial and accounting officer)

 

By:

/s/ Michael E. Fortin

Michael E. Fortin, Chief Financial Officer

(principal financial and accounting officer)

 

2431