NATURAL ALTERNATIVES
INTERNATIONAL, INC.
CUSTOM CONTRACT MANUFACTURING
OF SUPPLEMENTS SINCE 1980
2016
ANNUAL REPORT
Fiscal year ended June 30, 2016
Natural Alternatives International, Inc.
Carlsbad, California
Dear Shareholder,
The fiscal year of 2016 will go down as a landmark year for the company with sales exceeding
$114.2 million dollars versus sales of $79.5 million in the prior year. The diluted earnings per share for
the year of $1.44 compare quite favorably with the prior year results of $0.49 per diluted share. We
look forward to continued growth in the coming fiscal year.
This result was achieved through the hard work of many team members of the company and by
executing our business plan with disciplined focus. We remain a debt‐free company with an
exceptionally strong balance sheet and continue to seek ways of expanding our presence both
domestically and internationally by leading by example. We have concluded the build‐out of our state
of the art facilities in Lugano, Switzerland and are now open for even more business involving powdered
supplement products as well as solid dosage forms of complex nutritional products. We remain ever
vigilant to leverage our various prestigious certifications for our two international manufacturing sites,
in Switzerland and in the County of San Diego in California. Our new corporate offices in Carlsbad,
California are now open and occupied with various disciplines and departments to work in a more
collegial atmosphere, and we continue to invest in essential research as we bolster our intellectual
property estate and enhance the value propositions for our clients.
We are undertaking expansion of our solid dose coating systems in California to address the
growth potential for markets that demand highest quality products made in that format. We have also
increased our encapsulation capacities with additional state of the art high speed encapsulation
equipment.
In August of this year we were once again audited by the Therapeutic Goods Administration of
Australia (TGA) and while the audit was robust, it was also obvious to the auditor that NAI is truly
focused on product and process excellence. The recommendation from the TGA is for another three
year extension of our license, which will take us to 20 consecutive years of TGA licensure to create
complimentary medicines, which is their category for dietary supplements. This is important because as
signators to the PIC/S (The Pharmaceutical Inspection Co‐operation Scheme) system, this certification
Fiscal year ended June 30, 2016
Natural Alternatives International, Inc.
Carlsbad, California
opens the door to fast‐track registration of products in over 48 countries around the world, thereby
accelerating speed to market, which is a mission‐critical component of our service levels to our
esteemed customer partners.
Recently I was named as President of the venerable Natural Products Association, based in
Washington D.C., an 80 year old not‐for‐profit trade organization representing thousands of retailers
and suppliers of our industry, so I have been championing legislative and regulatory changes to help
foster continued research, development and growth of natural products to help combat the combined
epidemics of obesity and diabetes in America and other parts of the globe.
I am deeply gratified as the founder of this firm to be able to join my colleagues in presenting
this excellent and record setting annual report of our results for the fiscal year concluded June 30 of
2016, and thank you, our loyal shareholders, for your continued support and encouragement of our
activities. We look forward to continuing our growth in the coming fiscal year.
Sincerely,
Mark A. Le Doux
Chairman, Founder and Chief Executive Officer
Natural Alternatives International, Inc.
Carlsbad, California
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2016
000-15701
(Commission file number)
NATURAL ALTERNATIVES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
84-1007839
(IRS Employer Identification No.)
1535 Faraday Ave
Carlsbad, CA 92008
(Address of principal executive offices)
(760) 744-7340
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value per share
Name of exchange on which registered
Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if Natural Alternatives International, Inc. (NAI) is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act of 1933. ☐ Yes ☒ No
Indicate by check mark if NAI is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934. ☐ Yes ☒ No
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
Indicate by check mark whether NAI has submitted electronically and posted on its corporate Web site, if any, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of NAI’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether NAI is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer ☐
Non-accelerated filer ☐
Accelerated filer
Smaller reporting company
☐
☒
Indicate by check mark whether NAI is a shell company (as defined in Rule 12b-2 of the Exchange Act): ☐ Yes ☒ No
The aggregate market value of NAI’s common stock held by non-affiliates of NAI as of the last business day of NAI’s most recently
completed second fiscal quarter (December 31, 2015) was approximately $54,798,557 (based on the closing sale price of $10.34 reported
by Nasdaq on December 31, 2015). For this purpose, all of NAI’s officers and directors and their affiliates were assumed to be affiliates of
NAI.
As of September 8, 2016, 6,868,628 shares of NAI’s common stock were outstanding, net of 958,049 treasury shares.
Part III (Items 10, 11, 12, 13 and 14) of this Form 10-K incorporates by reference portions of NAI’s definitive proxy statement for its
Annual Meeting of Stockholders to be held December 2, 2016, to be filed on or before October 28, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS .................................................................
Page
1
TABLE OF CONTENTS
PART I
Item 1.
Business ......................................................................................................................................................
Item 1A. Risk Factors ................................................................................................................................................
Item 2.
Properties ....................................................................................................................................................
Item 3.
Legal Proceedings .......................................................................................................................................
Item 4. Mine Safety Disclosures .............................................................................................................................
PART II
Item 5. Market for Our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities .................................................................................................................................................
Item 6.
Selected Financial Data ..............................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .....................
Item 8.
Financial Statements and Supplementary Data ...........................................................................................
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .....................
Item 9A. Controls and Procedures .............................................................................................................................
Item 9B. Other Information .......................................................................................................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance ..........................................................................
Item 11. Executive Compensation ............................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...
Item 13. Certain Relationships and Related Transactions, and Director Independence ............................................
Item 14. Principal Accountant Fees and Services .....................................................................................................
PART IV
Item 15. Exhibits and Financial Statement Schedules .............................................................................................
SIGNATURES ............................................................................................................................................................
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(i)
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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Certain statements in 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. They 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,” “expects,” “plans,” “believes,” “anticipates,” “intends,” “estimates,” “approximates,” “predicts,”
“forecasts,” or “projects,” or the negative or other variation of such words, and similar expressions may identify a statement
as a forward-looking statement. Any statements 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 about future operating results, are forward-looking
statements. Forward-looking statements in this report may include statements about:
•
•
•
•
•
•
•
•
•
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 new products, develop relationships with new customers and maintain or improve existing
customer relationships;
our ability to protect our intellectual property;
our ability to improve operation efficiencies, manage costs and business risks and improve or maintain
profitability;
currency exchange rates, their effect on our results of operations, including amounts that may be reclassified 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;
future levels of our revenue concentration risk;
sources and availability of raw materials, including the limited number of suppliers of beta-alanine;
inventories, including the adequacy of raw material and other inventory levels to meet future customer demand
and the adequacy and intended use of our facilities;
• manufacturing and distribution channels, product sales and performance, and timing of product shipments;
•
•
•
•
•
•
•
current or future customer orders, product returns, and potential product recalls;
the impact on our business and results of operations and variations in quarterly net sales from seasonal and other
factors;
our ability to operate within the standards set by the U.S. Food and Drug Administration’s (FDA) Good
Manufacturing Practices (GMP);
our ability to successfully expand our operations, including outside the United States (U.S.);
the adequacy of our reserves and allowances;
the outcome of currently pending litigation, regulatory and tax matters, the costs associated with such matters and
the effect of such matters on our business and results of operations;
the sufficiency of our available cash, cash equivalents, and potential cash flows from operations to fund our
current working capital needs and capital expenditures through the next 12 months;
•
current and future economic and political conditions;
1
•
•
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.
The forward-looking statements in this report speak only as of the date of this report and caution should be taken not to place
undue reliance on any such forward-looking statements. Forward-looking statements are subject to certain events, risks, and
uncertainties that 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 I and elsewhere in this report, as well as in other reports and
documents we file with the United States Securities and Exchange Commission (SEC).
2
PART I
ITEM 1.
BUSINESS
General
Our vision is to enrich the world through the best of nutrition.
We are a leading formulator, manufacturer and marketer of nutritional supplements. Our comprehensive strategic partnerships
with our customers offer a wide range of innovative nutritional products and services to our clients including the following:
scientific research, clinical studies, proprietary ingredients, customer-specific nutritional product formulation, product testing
and evaluation, marketing management and support, packaging and delivery system design, regulatory review, and
international product registration assistance.
As our primary business activity, we provide 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. We also own a patent estate related to the ingredient known as beta-alanine, which is
primarily commercialized through the direct sale of this raw material under our CarnoSyn® trademark.
History
Originally founded in 1980, Natural Alternatives International, Inc. reorganized as a Delaware corporation in 1989. Our
principal executive offices were located at 1185 Linda Vista Drive, San Marcos, California, 92078 until relocating to 1535
Faraday Ave, Carlsbad, CA 92008 during August 2016.
In January 1999, we formed Natural Alternatives International Europe S.A. (NAIE) as our wholly owned subsidiary, based
in Manno, Switzerland. In September 1999, NAIE opened its manufacturing facility which has grown over the ensuing years
and currently possesses manufacturing capability in encapsulation, powders, and tablets, finished goods packaging, quality
control, laboratory testing, warehousing, distribution and administration.
Historically, as part of our business strategy, we have sought to commercialize our patent estate through contract
manufacturing, royalty and license agreements. From March 2009 through March 31, 2015, we had an agreement with
Compound Solutions, Inc. (CSI) to grant a license to manufacture, offer for sale and/or sell products incorporating, using or
made in accordance with our patent rights to CSI and customers of CSI who purchased beta-alanine from CSI under the
CarnoSyn® trademark. During the term of this relationship, we received a fee from CSI that varied based on the quantity and
source of beta-alanine sold by CSI. We terminated our relationship with CSI effective April 1, 2015 and began directly selling
beta-alanine, and licensing our related patent and trademark rights, in order to take advantage of strategic opportunities,
including opportunities to provide additional contract manufacturing services, further commercialize our patent estate, and
to increase our top-line revenue and profit profile.
Additionally, we have historically developed, manufactured and marketed our own branded products under the Pathway to
Healing® product line, which was aimed at restoring, maintaining and improving the health of the users. However, due to the
steady decline in sales of this product line over the prior several years, we decided to discontinue the product line. All
termination activities related to the Pathway to Healing® product line were substantially completed by December 31, 2014.
We did not change the financial presentation in this report to reflect the branded products segment as “Discontinued
Operations” as the wind down of this product line did not meet the criteria for discontinued operations presentation as
prescribed by applicable accounting regulations (ASC 205-20).
Unless the context requires otherwise, all references in this report to the “Company,” “NAI,” “we,” “our,” and “us” refer to
Natural Alternatives International, Inc. and, as applicable, and NAIE.
Overview of our Facilities and Operations
Our U.S.-based operations are located in Vista and Carlsbad, California and include manufacturing and distribution, sales
and marketing, in-house formulation, laboratory, and other research and development services. Our manufacturing facilities
were recertified on December 20, 2012 by the Therapeutic Goods Administration (TGA) of Australia after its audit of our
GMP. TGA evaluates new therapeutic products, prepares standards, develops testing methods and conducts testing programs
to ensure that products are high in quality, safe and effective. TGA also conducts a range of assessment and monitoring
activities including audits of the manufacturing practices of companies who export and sell products to Australia. TGA
certification enables us to manufacture products for export into countries that have signed the Pharmaceutical Inspection
3
Convention, which include most European countries as well as several Pacific Rim countries. TGA certifications are generally
reviewed every eighteen to thirty six months. During August 2016, TGA completed an inspection of our facility and quality
systems for compliance with good manufacturing practices, and a renewed 36 months GMP clearance is expected in the
coming months.
Our California facilities also have been awarded GMP registration annually since October 2002 by NSF International (NSF)
through the NSF Dietary Supplements Certification Program and received “GMP for Sport” NSF Certified registration on
February 16, 2009. GMP requirements are regulatory standards and guidelines establishing necessary processes, procedures
and documentation for manufacturers in an effort to assure the products produced by that manufacturer have the identity,
strength, composition, quality and purity they are represented to possess. The NSF Certified for Sport program focuses on
minimizing the risk that a dietary supplement or sports nutrition product contains banned substances and was developed due
to growing demand from athletes and coaches concerned about banned substances in sports supplements. The program
focuses primarily on manufacturing and sourcing processes, embedding preventative measures throughout. NAI’s
participation in the program allows us to produce products bearing the NSF Sport logo.
Our U.S. operations have also been certified by Health Canada as compliant with GMP requirements as outlined in Part 3 of
the Canadian Natural Health Products Regulations. Health Canada is the department of the Canadian government with
responsibility for national public health. Health Canada has initiated work to modernize its regulatory system for food and
health products. Health Canada plays an active role in ensuring access to safe and effective drugs and health products while
giving high priority to public safety and striving to provide information needed to make healthy choices and informed
decisions regarding one’s health. NAI was issued its initial certification in December 2011 and received its most recent
renewal in November 2015. Not only does this approval demonstrate another level of regulatory compliance for NAI, it may
also ease the approval process for our customers who import products into Canada.
During March 2015, our California facilities became certified as Organic Processor and Handler by Natural Food Certifiers
(NFC). This certification demonstrates that we meet the USDA National Organic Program standards and allows us to expand
our contract manufacturing and packaging services to include Organic labeled products. The certification requires annual
renewal and we believe we will obtain renewals annually. We are registered with the State of California, Department of
Public Health Food and Drug Branch as an organic processor. Additionally, we are certified by various Rabbinical and Halal
authorities to produce Kosher and Halal certified products. These certifications guarantee that the facility, processes, and
ingredients of certified products have been reviewed and found to be in compliance with the strict dietary laws of the
respective Jewish and Muslim communities
NAIE also operates a manufacturing, warehousing, packaging and distribution facility in Manno, Switzerland. In January
2004, NAIE obtained a pharmaceutical license to process pharmaceuticals for packaging, import, export and sale within
Switzerland and other countries from the Swissmedic Authority of Bern, Switzerland. In March 2007, following the
expansion of NAIE’s manufacturing facilities to include powder filling capabilities, NAIE obtained an additional
pharmaceutical license from the Swissmedic Authority certifying that NAIE’s expanded facilities conform to GMP. In
January 2013, following the additional upgrade of NAIE’s manufacturing facilities to include the manufacture of
pharmaceuticals, NAIE obtained an additional pharmaceutical approval from the Swissmedic Authority certifying that
NAIE’s upgraded facilities conform to GMP. We believe these licenses and NAIE’s manufacturing capabilities help
strengthen our relationships with existing customers and improve our ability to develop relationships with new customers.
Our Swissmedic licenses are valid until February 2019.
In addition to our operations in the U.S. and Switzerland, we have had a representative in Japan for many years who provides
a range of services to our customers currently present in or seeking to expand into the Japanese market and other markets in
the Pacific Rim. These services include regulatory and marketing assistance along with guidance and support in adapting
products to these markets.
Business Strategy
Our goals are to achieve long-term growth and profitability and to diversify our sales base. To accomplish these goals, we
have and intend to continue to seek to do the following:
•
leverage 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 assist in developing relationships with
additional quality oriented customers;
4
•
•
expand the commercialization of our beta-alanine patent estate through raw material sales, introduction of new
products, new contract manufacturing opportunities, license and sub-license agreements, and protecting our
proprietary rights;
provide strategic partnering services to our private-label contract manufacturing customers, as described below
under “Products, Principal Markets and Methods of Distribution”; and
•
improve operational efficiencies and manage costs and business risks to improve profitability.
Overall, we believe there is an opportunity to enhance consumer confidence in the quality of our nutritional supplements and
their adherence to label claims through the education provided by direct sales and direct-to-consumer marketing programs.
We believe our GMP and TGA certified manufacturing operations, science based product formulations, peer-reviewed
clinical studies and regulatory expertise provide us with a sustainable competitive advantage by providing our customers with
a high degree of confidence in the products we manufacture.
While today’s consumer may have access to a variety of information, we believe many consumers remain uneducated about
nutrition and nutritional supplementation, uncertain about the relevance or reliability of the information available to them, or
confused about conflicting claims or information. We believe this state of the market creates a significant opportunity for the
direct sales marketing channel. The direct sales marketing channel has proved, and we believe will continue to prove, to be
a highly effective method for marketing high-quality nutritional supplements as associates or other individuals educate
consumers on the benefits of science based nutritional supplements. Our largest customers operate in the direct sales
marketing channel. Thus, the majority of our business has relied primarily on the effectiveness of our customers in this
marketing channel.
We also believe there is significant opportunity with the commercialization of our patent estate through the introduction of
CarnoSyn® beta-alanine into additional markets and with the introduction of new beta-alanine product offerings. Currently,
a majority of our sales of CarnoSyn® are to companies that operate in the sports nutrition channel and are focused on products
containing the instant release form of beta-alanine. We believe that there are several other markets and distribution channels
that represent growth opportunities for the distribution of CarnoSyn® beta-alanine. We have also recently introduced SR
CarnoSyn®, which we believe is a superior form of beta-alanine based on its sustained release profile that allows for increased
daily dosing and improved muscle retention of carnosine. We believe the introduction of SR CarnoSyn® beta-alanine is an
important step in the further commercialization of our patent estate and is even more important because our patents related
to instant release beta-alanine expire in August 2017 while our patents for SR CarnoSyn® extend through 2026.
We believe our comprehensive approach to customer service is unique within our industry. We believe this comprehensive
approach, together with our commitment to high quality, product development and manufacturing capabilities, will provide
the means to implement our strategies and achieve our goals. There can be no assurance, however, that we will successfully
implement any of our business strategies or that we will increase or diversify our sales, successfully commercialize our patent
estate, or improve our overall financial results.
Products, Principal Markets and Methods of Distribution
Our primary business activity is to provide private-label contract manufacturing services to companies that market and
distribute vitamins, minerals, herbs, and other nutritional supplements, as well as other health care products, to consumers
both within and outside the U.S. Our private-label contract manufacturing customers include companies that market
nutritional supplements through direct sales marketing channels, direct response television and retail stores. We manufacture
products in a variety of forms, including capsules, tablets, chewable wafers, and powders to accommodate a variety of our
customer’s preferences.
We provide strategic partnering services to our private-label contract manufacturing customers, including the following:
•
•
customized product formulation;
clinical studies;
• manufacturing;
• marketing support;
•
international regulatory and label law compliance;
5
•
•
international product registration; and
packaging in multiple formats and labeling design.
We also seek to commercialize our patent and trademark through direct distribution and sale of CarnoSyn® and SR
CarnoSyn®, new contract manufacturing opportunities, and various license and similar arrangements.
For the last two fiscal years ended June 30, our net sales were derived from the following (in thousands):
Private-label Contract Manufacturing .................. $
Patent and Trademark Licensing ..........................
Branded Products .................................................
Total Net Sales .......................................... $
Research and Development
2016
$
92,420
21,781
-
114,201
%
$
%
2015
81 $
19
-
100 $
69,670
9,140
698
79,508
88
11
1
100
We are committed to quality research and development. We focus on the development of new science based products and
the improvement of existing products. We periodically test and validate our products to help ensure their stability, potency,
efficacy and safety. We maintain quality control procedures to verify that our products comply with applicable specifications
and standards established by the FDA and other regulatory agencies. We also direct and participate in clinical research studies,
often in collaboration with scientists and research institutions, to validate the benefits of a product and provide scientific
support for product claims and marketing initiatives. We believe our commitment to research and development, as well as
our facilities and strategic alliances with our suppliers and customers, allow us to effectively identify, develop and market
high-quality and innovative products.
As part of the services we provide to our private-label contract manufacturing customers, we may perform, but are not
required to perform, certain research and development activities related to the development or improvement of their products.
While our customers often do not pay directly for this service, the cost of this service is included as a component of the price
we charge to manufacture and deliver their products. Research and development costs, which include costs associated with
international regulatory compliance services we provide to our customers, are expensed as incurred.
Our research and development expenses for the last two fiscal years ended June 30 remained consistent at $1.1 million in
each fiscal period.
Sources and Availability of Raw Materials
We use raw materials in our operations including powders, excipients, empty capsules, and components for packaging and
distributing our finished products. In addition, the commercialization of our beta-alanine patent estate depends on the
availability of the raw material beta-alanine. We conduct identity testing for all raw materials we purchase and, on a
predetermined testing protocol basis, we evaluate raw materials to ensure their quality, purity and potency before we use
them in our products. We typically buy raw materials in bulk from qualified vendors located both within and outside the U.S.
During fiscal 2016, we did not have any suppliers that represented more than 10% of our total raw material purchases.
Our contract manufacturing business did not experience any significant shortages or difficulties obtaining adequate supplies
of raw materials during fiscal 2016. However, there continues to be significant pricing pressures associated with various
vitamins, minerals and herbs in the raw material marketplace. In early March 2011, the factory that produces the major supply
of beta-alanine sold under our CarnoSyn® trade name was damaged as a result of the massive earthquake off the coast of
Sendai, Japan resulting in a significant beta-alanine supply interruption. While this Japanese factory resumed operations in
June 2011 and was able to produce beta-alanine at historical levels during fiscal 2012, there is no assurance this or any other
facility will not incur future production interruptions as a result of causes outside our control. Throughout fiscal 2017, we
expect to continue to experience difficulties in sourcing various raw materials as a result of worldwide shortages, and other
supply constraints. We also believe raw material and product cost pricing pressures will continue throughout fiscal 2017 as
a result of limited supplies of various ingredients and the effects of higher labor and transportation costs.
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Customers
We have two private-label contract manufacturing customers that individually represent more than 10% of our consolidated
net sales. The loss of any one of these customers could result in a significant negative impact to our financial position and
results of operations. We continue to focus on obtaining new private-label contract manufacturing customers to reduce the
risks associated with deriving a significant portion of our sales from a limited number of customers.
Competition
We compete with other manufacturers, distributors and marketers of vitamins, minerals, herbs, and other nutritional
supplements both within and outside the U.S. The nutritional supplement industry is highly fragmented and competition for
the sale of nutritional supplements comes from many sources. These products are sold primarily through retailers (drug store
chains, supermarkets, and mass market discount retailers), health and natural food stores, and direct sales channels (network
marketing, internet marketing and mail order).
We believe private-label contract manufacturing competition in our industry is based on, among other things, customized
services offered, product quality and safety, innovation, price and customer service. We believe we compete favorably with
other companies because of our ability to provide comprehensive solutions for customers, our certified manufacturing
operations, our commitment to quality and safety, and our research and development activities.
Our future competitive position for private-label contract manufacturing and patent and trademark licensing will likely
depend on, but not be limited to, the following:
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the continued acceptance of our products by our customers and consumers;
our ability to protect our proprietary rights in our patent estate and the continued validity of such patents;
our ability to successfully expand our product offerings related to our patent and trademark estate;
our ability to maintain adequate inventory levels to meet our customer’s demands;
our ability to expand;
our ability to continue to manufacture high quality products at competitive prices;
our ability to attract and retain qualified personnel;
the effect of any future governmental regulations on our products and business;
the results of, and publicity from, product safety and performance studies performed by governments and other
research institutions;
the continued growth of the global nutrition industry; and
our ability to respond to changes within the industry and consumer demand, financially and otherwise.
The nutritional supplement industry is highly competitive and we expect the level of competition to remain high over the
near term. We do not believe it is possible to accurately estimate the total number or size of our competitors. The nutritional
supplement industry has undergone consolidation in the recent past and we expect that trend may continue in the near term.
Government Regulation
Our business is subject to varying degrees of regulation by a number of government authorities in the U.S., including the
FDA, the Federal Trade Commission (FTC), the Consumer Product Safety Commission, the U.S. Department of Agriculture,
and the Environmental Protection Agency. Various state and local agencies where we operate and in which our products are
sold also regulate our business, such as the California Department of Health Services, Food and Drug Branch. The areas of
our business these and other authorities regulate include, among others:
•
product claims and advertising;
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•
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•
product labels;
product ingredients; and
how we manufacture, package, distribute, import, export, sell and store our products.
The FDA, in particular, regulates the formulation, manufacturing, packaging, storage, labeling, promotion, distribution and
sale of vitamins and other nutritional supplements in the U.S., while the FTC regulates marketing and advertising claims. In
August 2007, a new rule issued by the FDA went into effect requiring companies that manufacture, package, label, distribute
or hold nutritional supplements to meet certain GMP’s to ensure such products are of the quality specified and are properly
packaged and labeled. We are committed to meeting or exceeding the standards set by the FDA and believe we are currently
operating within the FDA mandated GMP.
The FDA also regulates the labeling and marketing of dietary supplements and nutritional products, including the following:
•
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the identification of dietary supplements or nutritional products and their nutrition and ingredient labeling;
requirements related to the wording used for claims about nutrients, health claims, and statements of nutritional
support;
labeling requirements for dietary supplements or nutritional products for which “high potency” and “antioxidant”
claims are made;
notification procedures for statements on dietary supplements or nutritional products; and
premarket notification procedures for new dietary ingredients in nutritional supplements.
The Dietary Supplement Health and Education Act of 1994 (DSHEA) revised the provisions of the Federal Food, Drug and
Cosmetic Act concerning the composition and labeling of dietary supplements and defined dietary supplements to include
vitamins, minerals, herbs, amino acids and other dietary substances. DSHEA generally provides a regulatory framework to
help ensure safe, quality dietary supplements and the dissemination of accurate information about such products. The FDA
is generally prohibited from regulating active ingredients in dietary supplements as drugs unless product claims, such as
claims that a product may heal, mitigate, cure or prevent an illness, disease or malady, trigger drug status.
In December 2006, the Dietary Supplement and Nonprescription Drug Consumer Protection Act was passed, which further
revised the provisions of the Federal Food, Drug and Cosmetic Act. Under the act, manufacturers, packers or
distributors whose name appears on the product label of a dietary supplement or nonprescription drug are required to include
contact information on the product label for consumers to use in reporting adverse events associated with the product’s use
and for us to notify the FDA of any serious adverse event report within 15 business days of receiving such report. Events
reported to the FDA would not be considered an admission from a company that its product caused or contributed to the
reported event. We are committed to meeting or exceeding the requirements of this Act.
We are also subject to a variety of other regulations in the U.S., including those relating to bioterrorism, taxes, labor and
employment, import and export, the environment and intellectual property. All of these regulations require significant
financial and operational resources to ensure compliance, and we cannot assure you we will always be in compliance despite
our best efforts to do so.
Our operations outside the U.S. are similarly regulated by various agencies and entities in the countries in which we operate
and in which our products are sold. The regulations of these countries may conflict with those in the U.S. and may vary from
country to country. The sale of our products in certain European countries is subject to the rules and regulations of the
European Union, which may be interpreted differently among the countries within the European Union. In other markets
outside the U.S., we may be required to obtain approvals, licenses or certifications from a country’s ministry of health or
comparable agency before we begin operations or the marketing of products in that country. Approvals or licenses may be
conditioned on reformulation of our products for a particular market or may be unavailable for certain products or product
ingredients. These regulations may limit our ability to enter certain markets outside the U.S. As with the costs of regulatory
compliance in the U.S., foreign regulations require significant financial and operational resources to ensure compliance, and
we cannot assure you we will always be in compliance despite our best efforts to do so. Our failure to maintain regulatory
compliance within and outside the U.S. could impact our ability to sell our products and thus, adversely impact our financial
position and results of operations.
8
Intellectual Property
Trademarks. We have developed and use registered trademarks in our business, particularly relating to corporate, brand and
product names. We own 30 trademark registrations, including thirteen incontestable registrations, in the U.S. Federal
registration of a trademark affords the owner nationwide exclusive trademark rights in the registered mark and the ability to
prevent others from using the same or similar marks. However, to the extent a common law user has made prior use of the
mark in connection with similar goods or services in a particular geographic area, the nationwide rights conferred by federal
registration can be subject to that user’s rights in that geographic area.
We have sixteen foreign trademark registrations. One trademark is registered with the Australian Patent and Trademark
Office, two with the Canadian Patent and Trademark Office, two with the Chinese Patent and Trademark Office, two with
the Trademarks and Designs Registration Office of the European Union, two with the Hong Kong Patent and Trademark
Office, three with the Japanese Patent and Trademark Office, two with the South Korean Patent and Trademark Office, and
two with the Swiss Patent and Trademark Office. We currently have no additional trademark applications pending in any
other jurisdictions outside of the United States. We also claim common law ownership and protection of certain unregistered
trademarks and service marks. Trademark rights are based on use of a mark. Common law use of a mark offers protection of
a mark within the particular geographic area in which it is used. We believe our registered and unregistered trademarks
constitute valuable assets, adding to the recognition of our products and services in the marketplace. These and other
proprietary rights have been and will continue to be important in enabling us to compete; however, we cannot assure you that
our future trademark applications will be granted or our current trademarks will be maintained.
Trade Secrets. We own certain intellectual property, including trade secrets, which we seek to protect, in part, through
confidentiality agreements with employees and other parties. We regard our proprietary technology, trade secrets, trademarks
and similar intellectual property as critical to our success, and we rely on a combination of trade secrets, contract, patent,
copyright and trademark law to establish and protect the rights in our products and technology. The laws of certain foreign
countries may not protect our intellectual property rights to the same extent as the laws of the U.S.
Patents and Patent Licenses. We currently own fourteen U.S. patents and thirty-two corresponding patents registered in
countries throughout North America, Europe and Asia. We also have pending applications in several countries. All of these
patents and patent rights relate to the ingredient known as beta-alanine. Certain of these patents were assigned to NAI and
we make certain ongoing royalty payments to the prior owners of the patents. We also license rights to certain uses that are
covered by the patents to the prior owners. The royalty payments and license continue until the expiration of the patents. We
also sell beta-alanine, and license our patent and trademark rights related to beta-alanine. Twenty-four of our patents expire
in 2017, 1 patent expires in 2024 and twenty-one patents expire in 2026.
Beginning in fiscal 2009, the licensing, raw material sales, and revenues we have received associated with the sale and license
of beta-alanine under the CarnoSyn® trade name have grown steadily from $515,000 in fiscal 2009 to $21.8 million in fiscal
2016. During fiscal 2016, our revenues included $235,000 of royalties and $21.6 million related to the direct sale of beta-
alanine. We incurred intellectual property litigation and patent compliance expenses of approximately $2.0 million during
fiscal 2016 primarily in connection with our efforts to protect our proprietary rights and patent estate. We expect to continue
to incur these types of litigation expenses during fiscal 2017.
Employees
As of June 30, 2016, we employed 177 full-time employees in the U.S., three of whom held executive management positions.
Of the remaining full-time employees, 39 were employed in research, laboratory and quality control, 16 in sales and
marketing, and 119 in manufacturing and administration. From time to time we use temporary personnel to help us meet
short-term operating requirements. These positions typically are in manufacturing and manufacturing support. As of June 30,
2016, we had 39 temporary personnel.
As of June 30, 2016, NAIE employed an additional 42 full-time employees and 27 temporary personnel. Most of these
positions were in the areas of manufacturing and manufacturing support.
Our employees are not represented by a collective bargaining agreement and we have not experienced any work stoppages
as a result of labor disputes. We believe our relationship with our employees is good.
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Seasonality
Although we believe there is little if any material impact on our business or results of operations from seasonal factors, we
have experienced and expect to continue to experience variations in quarterly net sales due to the timing of private-label
contract manufacturing and CarnoSyn® beta-alanine raw material orders.
Financial Information about Our Business Segments and Geographic Areas
Our operations are comprised of three reportable segments:
•
Private-label contract manufacturing, in which we primarily provide manufacturing services to companies that
market and distribute nutritional supplements and other health care products.
• Royalty, licensing, and raw material sales associated with the sale and license of beta-alanine under our
CarnoSyn® trademark.
• Branded products, in which we marketed and distributed branded nutritional supplements through direct-to-
consumer marketing programs, and under which we developed, manufactured and marketed our own products
and worked with nationally recognized persons to develop brand name products that reflected their individual
approach to restoring, maintaining or improving health. We discontinued the sole remaining product line in this
segment effective September 15, 2014. All termination activities related to the last remaining product line were
substantially completed by December 31, 2014. We did not change the financial presentation in this report to
reflect the branded products segment as “Discontinued Operations” as the wind down of this product line did not
meet the criteria for discontinued operations presentation as prescribed by applicable accounting regulations
(ASC 205-20).
Our private-label contract manufacturing products are sold both in the U.S. and in markets outside the U.S., including Europe,
Australia and Asia, as well as Canada, Mexico and South Africa. Our primary market outside the U.S. is Europe. Our patent
and trademark licensing activities are primarily based in the U.S.
For additional financial information, including financial information about our business segment and geographic areas, please
see the consolidated financial statements and accompanying notes to the consolidated financial statements included under
Item 8 of this report.
Our activities in markets outside the U.S. are subject to political, economic and other risks in the countries in which our
products are sold and in which we operate. For more information about these and other risks, please see Item 1A in this
report.
ITEM 1A.
RISK FACTORS
You should carefully review and consider the risks described below, as well as the other information in this report and in
other reports and documents we file with the SEC when evaluating our business and future prospects. The risks and
uncertainties described below are not the only ones we face. Additional risks and uncertainties, not presently known to us,
or that we currently see as immaterial, may also occur. If any of the following risks or any additional risks and uncertainties
actually occur or become material, 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. You should not draw any inference as to the magnitude of any particular risk from its
position in the following discussion.
Because we derive a significant portion of our revenues from a limited number of customers, our revenues would be
adversely affected by the loss of a major customer or a significant change in its business, personnel or the timing or
amount of its orders.
We have in the past and expect to continue to derive a significant portion of our revenues from a relatively limited number
of customers. During the fiscal year ended June 30, 2016, sales to our largest customer, The Juice Plus+ Company, were
approximately 43% of our consolidated net sales. We also have one other private-label contract manufacturing customer that
represented 12% of our consolidated net sales. No other customers represented more than 10% of our consolidated net sales.
The loss of one of these customers or other major customers, a significant decrease in sales to these customers, or a significant
change in their business or personnel, could materially affect our financial condition and results of operations. Furthermore,
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the timing of our customers’ orders is impacted by, among others, their marketing programs, customer demand, supply chain
management, entry into new markets and new product introductions, all of which are outside of our control. All of these
attributes have had and are expected to have a significant impact on our business.
Our future growth and stability depends, in part, on our ability to diversify our sales. Our efforts to establish new sales
from existing customers and new customers could require significant initial investments, which may or may not result in
higher sales and improved financial results.
Our business strategy depends in large part on our ability to develop new product sales from current and new customer
relationships. These activities often require a significant up-front investment including, among others, customized
formulations, regulatory compliance, product registrations, package design, product testing, pilot production runs, and the
build-up of initial inventory. We may experience significant delays from the time we increase our operating expenses and
make investments in inventory until the time we generate net sales from new products or customers, and it is possible that
we may not generate material revenue from new products or customers after incurring such expenditures. If we incur
significant expenses and investments in inventory that we are not able to recover, and we are not able to compensate for those
expenses, our operating results could be adversely affected.
We currently derive significant revenues and income from sales of beta-alanine and licensing our patents that expire in
August 2017. Our ability to maintain or grow our sales of beta-alanine and license revenue from our other patents is
contingent on our ability to commercialize the sale of beta-alanine under our SR Carnosyn® trademark and maintain or
grow our license revenue from our other patents, which does not expire until 2026.
We own multiple patents and trademarks related to the use of beta-alanine in food and nutritional supplements. A majority
of our revenue and income from this segment is currently derived from activity related to licensing our patents associated
with instant release beta-alanine, sold under our trade name CarnoSyn®. Our patents related to instant release CarnoSyn®
expire in August 2017. While we believe there will be a certain portion of the market that still sees value in utilizing our
CarnoSyn® trade name, we anticipate we will be required to reduce our sales price, and license fees in order to compete with
generic beta-alanine sources.
We have recently introduced SR CarnoSyn®, which we believe is a superior form of beta-alanine based on its sustained
release profile that allows for increased daily dosing and improved muscle retention of carnosine. Our patents related to SR
CarnoSyn® extend through 2026 and we believe the introduction of SR CarnoSyn® beta-alanine is an important step in the
further commercialization of our patent estate. There can be no assurance we will be successful in getting the market to
transition to this new form of beta-alanine or we will be successful launching new products utilizing SR CarnoSyn® beta-
alanine in former and new product channels and markets. If we are not successful it could have a material adverse effect on
our business, results of operations, and financial condition.
We have incurred, and may continue to incur significant costs defending our intellectual property. We may be unable to
protect our intellectual property rights or may inadvertently infringe on the intellectual property rights of others.
We possess and may possess in the future certain proprietary technology, trade secrets, trademarks, trade names, licenses,
patents and similar intellectual property. We may continue to incur significant patent and trademark litigation costs associated
with defending this intellectual property. During fiscal 2016, we incurred approximately $2.0 million in patent litigation and
prosecution expense and may incur significant similar expenses during fiscal 2017. These efforts are described in more detail
under Item 3 of this report. There is no assurance we will be able to protect our intellectual property adequately or that our
intellectual property rights will be upheld. If pending legal proceedings to invalidate our patent rights are successful, they
could have a material adverse impact upon our financial condition and results of operations. Furthermore, the laws of certain
foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. Additional
litigation in the U.S. or abroad may be necessary to enforce our intellectual property rights, to determine the validity and
scope of the proprietary rights of others or to defend against claims of infringement. Such litigation, even if successful, could
result in substantial additional costs and diversion of resources and could have a material adverse effect on our business,
results of operations and financial condition. If such infringement claims are asserted against us, we may seek to obtain a
license under the third party’s intellectual property rights. There can be no assurance a license would be available on terms
acceptable or favorable to us, if at all.
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Our operating results will vary. We have experienced a decline in net sales and incurred losses in past years and there is
no guarantee our sales will improve or we will earn a profit in future years. Fluctuations in our operating results may
adversely affect the share price of our common stock.
Our net sales increased during fiscal 2016 as compared to fiscal 2015 but there can be no assurance our net sales will continue
to improve in the near term, or we will earn a profit in any given year. We have experienced net losses in the past and may
incur losses in the future. Our operating results may fluctuate from year to year and/or from quarter to quarter due to various
factors including differences related to the timing of revenues and expenses for financial reporting purposes and other factors
described in this report. At times, these fluctuations may be significant. We anticipate generating positive net income in fiscal
2017, although there is no assurance we will be able to do so. Fluctuations in our operating results may adversely affect the
share price of our common stock.
Our products and manufacturing activities are subject to extensive government regulation, which could limit or prevent
the sale of our products in some markets and could increase our costs.
The manufacturing, packaging, labeling, advertising, promotion, distribution, and sale of our products are subject to
regulation by numerous national and local governmental agencies in the U.S. and in other countries. For example, we are
required to comply with certain GMP and incur costs associated with the audit and certification of our facilities. Failure to
comply with governmental regulations may result in, among other things, injunctions, product withdrawals, recalls, product
seizures, fines, and criminal prosecutions. Any action of this type by a governmental agency could materially adversely affect
our ability to successfully market our products and services. In addition, if the governmental agency has reason to believe the
law is being violated (for example, if it believes we do not possess adequate substantiation for product claims), it can initiate
an enforcement action. Governmental agency enforcement could result in orders requiring, among other things, limits on
advertising, consumer redress, divestiture of assets, rescission of contracts, and such other relief as may be deemed necessary.
Violation of these orders could result in substantial financial or other penalties. Any action by a governmental agency could
materially adversely affect our ability and our customers’ ability to successfully market and continue selling those products.
Before commencing operations of marketing our products in markets outside the U.S., we may be required to obtain
approvals, licenses, or certifications from a country’s ministry of health or comparable agency. Approvals or licensing may
be conditioned on reformulation of products or may be unavailable with respect to certain products or product ingredients.
We must also comply with product labeling and packaging regulations that vary from country to country. Furthermore, the
regulations of these countries may conflict with those in the U.S. and with each other. The sale of our products in certain
European countries is subject to the rules and regulations of the European Union, which may be interpreted differently among
the countries within the European Union. The cost of complying with these various and potentially conflicting regulations
can be substantial and could adversely affect our results of operations.
We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what
effect additional governmental regulations, when and if adopted, would have on our business. They could include
requirements for the reformulation of certain products to meet new standards, the recall or discontinuance of certain products,
additional compliance costs or record keeping requirements, expanded or different labeling, and additional scientific
substantiation. Any or all of these requirements could have a material adverse effect on our operations.
A significant or prolonged economic downturn, such as the one the global economy has recently experienced, could have,
and recently has had, a material adverse effect on our results of operations.
Our results of operations are affected by the level of business activity of our customers and licensees, which in turn is affected
by the level of consumer demand for their products. A significant or prolonged economic downturn may adversely affect the
disposable income of many consumers and may lower demand for the products we produce for our private-label contract
manufacturing customers and products sold or manufactured by others using our licensed patent rights. Any decline in
economic conditions in the U.S. and the various foreign markets in which our customers operate could negatively impact our
customers’ businesses and our operations. A renewed or further decline in consumer demand and the level of business activity
of our customers due to economic conditions could have a material adverse effect on our revenues and profit margins.
The failure of our suppliers to supply quality materials in sufficient quantities, at a favorable price, and in a timely fashion
could adversely affect the results of our operations.
We buy our raw materials from a limited number of suppliers. During fiscal 2016 and fiscal 2015, we did not have any
suppliers that represented more than 10% of our raw material purchases. Still, the loss of any of our major suppliers or of a
supplier that provides any hard to obtain materials could adversely affect our business operations. Although we believe we
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could establish alternate sources for most of our raw materials, any delay in locating and establishing relationships with other
sources could result in product shortages, with a resulting loss of sales and customers. In certain situations we may be required
to alter our products or with our customer’s consent to substitute different materials from alternative sources.
A shortage of raw materials or an unexpected interruption of supply could also result in higher prices for those materials.
Since fiscal 2009, we have experienced increases in various raw material costs, transportation costs and the cost of petroleum
based raw materials and packaging supplies used in our business. Increasing raw material and product cost pricing pressures
have continued throughout fiscal 2016 as a result of limited supplies of various ingredients and the effects of higher labor
and transportation costs. We expect these pressures to continue through fiscal 2017. Although we may be able to raise our
prices in response to significant increases in the cost of raw materials, we may not be able to raise prices sufficiently or
quickly enough to offset negative effects of cost increases on our results of operations or financial condition.
There can be no assurance suppliers will provide the quality raw materials needed by us in the quantities requested or at a
price we are willing to pay. Because we do not control the actual production of these raw materials, we are also subject to
delays caused by interruption in production of materials based on conditions outside of our control, including weather,
transportation interruptions, strikes, natural disasters, or other catastrophic events.
In addition, our efforts to commercialize our patent estate and the revenues we receive from related supply agreements, are
substantially dependent on the availability of the raw material beta-alanine and sales of such raw material or products
incorporating such raw material. The availability of beta-alanine, and thus sales of such raw material and products using such
material, would be negatively impacted by any shortages, interruptions and similar risks described above, which could in turn
adversely affect the amount of revenue and product margin we earn from the sale of beta-alanine. In early March 2011, the
factory that produces a major supply of beta-alanine sold under our CarnoSyn® trade name was damaged as a result of the
massive earthquake off the coast of Sendai, Japan resulting in a significant beta-alanine supply interruption. As a result, our
fiscal 2011 fourth quarter beta-alanine licensing revenue declined 85% from the preceding quarter ended March 31, 2011.
While this Japanese factory resumed operations in June 2011 and is producing beta-alanine at historical levels, there is no
assurance this or any other facility will not incur future production interruptions as a result of additional environmental or
other causes outside our control.
Our industry is highly competitive and we may be unable to compete effectively. Increased competition could adversely
affect our financial condition.
The market for our products, and those of our customers, is highly competitive. Many of our competitors are substantially
larger and have greater financial resources and broader name recognition than we do. Our larger competitors may be able to
devote greater resources to research and development, marketing and other activities that could provide them with a
competitive advantage. Our market has relatively low entry barriers and is highly sensitive to the introduction of new products
that may rapidly capture a significant market share. Our competitors may not stress the level of quality we provide and could
manufacture at lower costs, they are largely private and not subject to the same disclosure requirements of us as a publicly
traded company. Increased competition could result in price reductions, reduced gross profit margins or loss of market share,
any of which could have a material adverse effect on our financial condition and results of operations. There can be no
assurance that we will be able to compete in this intensely competitive environment.
We could be exposed to product liability claims or other litigation, which may be costly and could materially adversely
affect our operations.
We could face financial liability due to product liability claims if the use of our products results in significant loss or injury.
Additionally, the manufacture and sale of our products involves the risk of injury to consumers from tampering by
unauthorized third parties or product contamination. We could be exposed to future product liability claims that, among
others: our products contain contaminants; we provide consumers with inadequate instructions about product use; or we
provide inadequate warning about side effects or interactions of our products with other substances. Even if we were to
prevail in any such claims, the cost of litigation and settlement could be significant.
We maintain product liability insurance coverage, including primary product liability and excess liability coverage. The cost
of this coverage has increased dramatically in recent years, while the availability of adequate insurance coverage has
decreased. While we expect to be able to continue our product liability insurance, there can be no assurance we will in fact
be able to continue such insurance coverage, or that our insurance will be adequate to cover any liability we may incur, or
our insurance will continue to be available at an economically reasonable cost.
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Additionally, it is possible one or more of our insurers could exclude from our coverage certain ingredients used in our
products. In such event, we may have to stop using those ingredients or rely on indemnification or similar arrangements with
our customers who wish to continue to include those ingredients in their products. A substantial increase in our product
liability risk or the loss of customers or product lines could have a material adverse effect on our results of operations and
financial condition.
If we or our private-label contract manufacturing customers expand into additional markets outside the U.S. or our or
their sales in markets outside the U.S. increase, our business could become increasingly subject to political, economic,
regulatory and other risks in those markets, which could adversely affect our business.
Our future growth may depend, in part, on our ability and the ability of our private-label contract manufacturing customers
to expand into additional markets outside the U.S. or to improve sales in markets outside the U.S. There can be no assurance
we or our customers will be able to expand in existing markets outside the U.S. or enter new markets on a timely basis, or
that new markets outside the U.S. will be profitable. There are significant regulatory and legal barriers in markets outside the
U.S. that must be overcome to operate in such markets. We will be subject to the burden of complying with a wide variety of
national and local laws, including multiple and possibly overlapping and conflicting laws. We also may experience difficulties
adapting to new cultures, business customs and legal systems. Our sales and operations outside the U.S. are subject to
political, economic and social uncertainties including, among others:
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changes and limits in import and export controls;
increases in custom duties and tariffs;
changes in government regulations and laws;
coordination of geographically separated locations;
absence in some jurisdictions of effective laws to protect our intellectual property rights;
changes in currency exchange rates;
economic and political instability; and
currency transfer and other restrictions and regulations that may limit our ability to sell certain products or
repatriate profits to the U.S.
Any changes related to these and other factors could adversely affect our business, profitability and growth prospects. If we
or our customers expand into additional markets outside the U.S. or improve sales in markets outside the U.S., these and
other risks associated with operations outside the U.S. may increase.
Our business is subject to the effects of adverse publicity, which could negatively affect our sales and revenues.
Our business can be affected by adverse publicity or negative public perception about our industry, our competitors, our
customers, or our industry generally. Adverse publicity may include publicity about the nutritional supplements industry
generally, the efficacy, safety and quality of nutritional supplements and other health care products or ingredients in general
or our products or ingredients specifically, and regulatory investigations, regardless of whether these investigations involve
us or the business practices or products of our competitors, or our customers. Any adverse publicity or negative public
perception could have a material adverse effect on our business, financial condition and results of operations. Our business,
financial condition and results of operations could be adversely affected if any of our products or any similar products
distributed by other companies are alleged to be or are proved to be harmful to consumers or to have unanticipated and
unwanted health consequences.
If we are unable to attract and retain qualified management personnel, our business may suffer.
Our executive officers and other management personnel are primarily responsible for our day-to-day operations. We believe
our success depends largely on our ability to attract, maintain and motivate highly qualified management personnel.
Competition for qualified individuals can be intense, has been increasing in recent years, and we may not be able to hire
additional qualified personnel in a timely manner or on terms that would not substantially increase our costs. Our inability to
retain a skilled professional management team could adversely affect our ability to successfully execute our business
strategies and achieve our goals.
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Our manufacturing and third party fulfillment activities are subject to certain risks.
We manufacture the vast majority of our products at our manufacturing facility in California. As a result, we are dependent
on the uninterrupted and efficient operation of this facility. Our manufacturing operations are subject to power failures,
blackouts, the breakdown, failure or substandard performance of our leased facilities, our equipment, the improper installation
or operation of equipment, natural or other disasters, and the need to comply with the requirements or directives of
governmental agencies, including the FDA. In addition, we may in the future determine to expand or relocate our facilities,
which may result in slowdowns or delays in our operations. While we have implemented and are evaluating various
emergency, contingency and disaster recovery plans and maintain business interruption insurance, there can be no assurance
the occurrence of these or any other operational problems at our facilities in California or at NAIE’s facility in Switzerland
would not have a material adverse effect on our business, financial condition and results of operations. Furthermore, there
can be no assurance our contingency plans will prove to be adequate or successful if needed or our insurance will continue
to be available at a reasonable cost or, if available, will be adequate to cover any losses that we may incur from an interruption
in our manufacturing and distribution operations.
We outsource our beta-alanine fulfillment and distribution activities. The operation of the third party service provider’s
facilities is subject to the interruption and similar risks described above for our facilities and there can be no assurance these
interruptions or any other operational problem at such third party’s facilities would not have a material adverse effect on our
business, financial condition and results of operations.
We may pursue acquisitions of other companies that, if not successful, could adversely affect our business, financial
condition and results of operations.
We may pursue acquisitions of companies we believe could complement or expand our business, augment our market
coverage, provide us with important relationships or otherwise offer us growth opportunities. Acquisitions involve numerous
risks, including the following:
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potential difficulties related to integrating the products, personnel and operations of the acquired company;
failure to operate as a combined organization utilizing common information and communication systems,
operating procedures, financial controls and human resources practices;
diverting management’s attention from the other daily operations of the business;
entering markets in which we have no or limited prior direct experience and where competitors in such markets
have stronger market positions;
potential loss of key employees of the acquired company;
potential inability to achieve cost savings and other potential benefits expected from the acquisition;
an uncertain sales and earnings stream from the acquired company; and
potential impairment charges, which may be significant, against goodwill and purchased intangible assets
acquired in the acquisition due to changes in conditions and circumstances that occur after the acquisition, many
of which may be outside of our control.
There can be no assurance that acquisitions we may pursue will be successful. If we pursue an acquisition but are not
successful in completing it, or if we complete an acquisition but are not successful in integrating the acquired company’s
employees, products or operations successfully, our business, financial position or results of operations could be adversely
affected.
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Collectively, our officers and directors own a significant amount of our common stock, giving them influence over
corporate transactions and other matters and potentially limiting the influence of other stockholders on important policy
and management issues.
Our officers and directors, together with their families and affiliates, beneficially owned approximately 23% of our
outstanding shares of common stock as of June 30, 2016, including approximately 17% of our outstanding shares of common
stock beneficially owned by Mark LeDoux, our Chief Executive Officer and Chairman of the Board, and his family and
affiliates. As a result, our officers and directors, and in particular Mr. LeDoux, could influence such business matters as the
election of directors and approval of significant corporate transactions.
Various transactions could be delayed, deferred, or prevented without the approval of stockholders, including the following:
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transactions resulting in a change in control;
• mergers and acquisitions;
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tender offers;
election of directors; and
proxy contests.
There can be no assurance that conflicts of interest will not arise with respect to the officers and directors who own shares of
our common stock or that conflicts will be resolved in a manner favorable to us or our other stockholders.
Business interruptions could limit our ability to operate our business.
Our operations, including those of our suppliers, are vulnerable to damage or interruption from computer viruses, human
error, natural disasters, telecommunications failures, intentional acts of vandalism, and similar events. While we have
established a formal disaster recovery plan, our back-up operations and our business interruption insurance may not be
adequate to compensate us for losses that occur. A significant business interruption could result in losses or damages incurred
by us and require us to cease or curtail our operations.
We may not be able to raise additional capital or obtain additional financing if needed.
It is possible our cash from operations could become insufficient to meet our working capital needs and/or to implement our
business strategies. In such an event there can be no assurance our existing line of credit would be sufficient to meet our
working capital needs. Furthermore, if we fail to maintain certain loan covenants we may no longer have access to our credit
line. Our credit line terminates in January 2019 and there is no guarantee we will be able to extend or renew this credit line
on favorable terms or at all.
We may consider issuing additional debt or equity securities in the future to fund potential acquisitions or investments, to
refinance existing debt, or for general corporate purposes. If we issue equity or convertible debt securities to raise additional
funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences
and privileges senior to those of our existing stockholders. If we incur additional debt, it may increase our leverage relative
to our earnings or to our equity capitalization, requiring us to pay additional interest expenses and potentially lower our credit
ratings. We may not be able to market such issuances on favorable terms, or at all, in which case, if we did not have any
alternate funds we might not be able to develop or enhance our products, execute our business plan, take advantage of future
opportunities, respond to competitive pressures or meet unanticipated customer requirements.
At any given time it could be difficult for us to raise capital due to a variety of factors, some of which may be outside a our
control, including a tightening of credit markets, overall poor performance of stock markets, and/or an economic slowdown
in the U.S. or other countries, or in the businesses of our customers. Thus, there is no assurance we would be able to raise
additional capital if needed. To the extent we do raise additional capital the ownership position of existing stockholders would
be diluted. Similarly, there can be no assurance additional financing will be available if needed or that it will be available on
favorable terms. Under the terms of our credit facility, there are limits on our ability to create, incur or assume additional
indebtedness without the approval of our lender.
16
Our inability to raise additional capital or to obtain additional financing if needed could negatively affect our ability to
implement our business strategies and meet our goals. This, in turn, could adversely affect our financial condition and results
of operations.
If certain provisions of our Certificate of Incorporation, Bylaws and Delaware law are triggered, the market for our shares
may decrease.
Certain provisions in our Certificate of Incorporation, Bylaws and Delaware corporate law may discourage unsolicited
proposals to acquire our business, even if the proposal would benefit our stockholders. Those provisions include one that
authorizes our Board of Directors, without stockholder approval, to issue up to 500,000 shares of preferred stock having such
rights, preferences, and privileges, including voting rights, as the Board of Directors designates. The rights of our common
stockholders will be subject to, and may be adversely affected by, the rights of holders of any preferred stock that may be
issued in the future. Any or all of these provisions could delay, deter or prevent a takeover of our company and could limit
the price investors are willing to pay for our common stock and the number of investors willing to own our common stock.
Our stock price could fluctuate significantly.
Stock prices in general can be volatile and ours is no different. The trading price of our stock may fluctuate in response to
the following, as well as other, factors:
•
•
•
•
•
•
•
•
broad market fluctuations and general economic and/or political conditions;
fluctuations in our financial results;
relatively low trading volumes;
future offerings of our common stock or other securities;
the general condition of the nutritional supplement industry;
increased competition;
regulatory action;
adverse publicity;
• manipulative or illegal trading practices by third parties; and
•
product and other public announcements.
The stock market has historically experienced significant price and volume fluctuations. There can be no assurance that an
active market in our stock will continue to exist or that the price of our common stock will not decline. Our future operating
results may be below the expectations of securities analysts and investors. If this were to occur, the price of our common
stock could decline, perhaps substantially.
From time to time our shares may be listed for trading on one or more foreign exchanges, with or without our prior knowledge
or consent. Certain foreign exchanges may have less stringent listing requirements, rules and enforcement procedures than
the Nasdaq Global Market or other markets in the U.S., which may increase the potential for manipulative trading practices
to occur. These practices, or the perception by investors that such practices could occur, may increase the volatility of our
stock price or result in a decline in our stock price, which in some cases could be significant.
17
ITEM 2.
PROPERTIES
This table summarizes our facilities as of June 30, 2016. We believe our facilities are adequate to meet our operating
requirements for the foreseeable future.
Location
San Marcos, CA USA(1) .... NAI corporate headquarters, previous
Vista, CA USA(2),(3) .......... Manufacturing, warehousing, packaging and
Nature of Use
distribution
Manno, Switzerland(4) ....... Manufacturing, warehousing, packaging and
Carlsbad, CA USA(5) ......... NAI corporate headquarters, new
distribution
Square
Feet
How Held
29,500 Leased
Lease
Expiration
Date
August 2016
162,000 Leased
March 2024
94,217 Leased
20,981 Owned
June 2019
N/A
(1) This facility was previously owned and sold during February 2016, and was leased though a sale-leaseback agreement
through August 2016. The property was vacated during August 2016
(2) This facility is used by NAI primarily for its private-label contract manufacturing segment.
(3) We use approximately 93,000 square feet for production, 60,000 square feet for warehousing and 9,000 square feet for
administrative functions.
(4) This facility is used by NAIE, our wholly owned Swiss subsidiary, in connection with our private-label contract
manufacturing segment.
(5) We purchased the Carlsbad facility in March 2016 and began to occupy as our new corporate headquarters during
August 2016.
ITEM 3.
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 generally 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 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.
As of September 19, 2016, except as described below, neither NAI nor its subsidiary were a party to any material pending
legal proceeding nor was any of our property the subject of any material pending legal proceeding.
In 2011, NAI filed a lawsuit against Woodbolt Distribution, LLC, also known as Cellucor (“Woodbolt”), and both NAI and
Woodbolt filed additional lawsuits and countersuits against each other. NAI and Woodbolt subsequently settled all of the
lawsuits between them, but not before the United States Patent and Trademark Office (“USPTO”) at Woodbolt’s request
rejected the claims of one NAI patent. The ruling rejecting the claims of one NAI patent was subsequently confirmed by the
Patent Trial and Appeal Board (PTAB) at the USPTO, and that confirmation is presently subject to a request by NAI for a
rehearing. The NAI Patent rejected by the USPTO expires in August 2017.
On September 18, 2015, the Company filed a complaint against Creative Compounds, Inc., alleging various claims including
(1) violation of Section 43 of the Lanham Act, (2) violation of California's Unfair Competition Law, (3) violation of
California's False Advertising Law, (4) Trade Libel and Business Disparagement and (5) Intentional Interference with
Prospective Economic Advantage. On October 23, 2015, Creative Compounds filed its answer to the Company's complaint
denying the Company's allegations. A trial date of September 18, 2017 has been set by the Court. The parties are currently
engaged in fact discovery. On August 24, 2016, the Company filed a separate complaint against Creative Compounds, Inc.,
alleging infringement of U.S. patent 7,825,084. No answer has been filed.
18
On July 1, 2016, the Company filed a complaint in U.S. District Court for the Southern District of California against
Cenegenics, LLC, alleging infringement of U.S. patents 7,504,376 and 7,825,084. On August 3, 2016, the Company filed an
amended complaint to assert infringement of the same patents against Cenegenics' contract manufacturer, Atlantic-Pro
Nutrients d/b/a Xymogen, LLC. No answer has been filed by either defendant to date.
On July 6, 2016, the Company filed a complaint against Allmax Nutrition, Inc. in U.S. District Court for the Southern District
of California, alleging (1) infringement of U.S. patents 5,965,596, 6,172,098, 7,825,084 and RE 45,947, (2) violation of
Section 32 of the Lanham Act, and (3) copyright infringement. No answer has been filed by Allmax to date.
On August 2, 2016, the Company filed a complaint against Muscle Sports Products, LLC in U.S. District Court for the
Southern District of California, alleging infringement of its CarnoSyn® and CarnoSyn Beta Alanine® trademarks. No answer
has been filed to date.
Although we believe the above litigation matters are supported by valid claims, there is no assurance NAI will prevail in
these litigation matters or in similar proceedings it may initiate or that litigation expenses will be as anticipated
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
19
PART II
ITEM 5.
MARKET FOR OUR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock trades on the Nasdaq Global Market under the symbol “NAII.” Below are the high and low sales prices
of our common stock as reported on the Nasdaq Global Market for each quarter of the fiscal years ended June 30, 2016 and
2015:
First Quarter .......................................................... $
Second Quarter ...................................................... $
Third Quarter ......................................................... $
Fourth Quarter ....................................................... $
6.41 $
10.74 $
13.80 $
14.50 $
5.60 $
5.40 $
6.72 $
10.05 $
6.70 $
6.63 $
5.72 $
5.88 $
4.95
5.00
5.02
5.31
Fiscal 2016
Fiscal 2015
High
Low
High
Low
Holders
As of September 8, 2016, there were approximately 220 stockholders of record of our common stock. On that same date, the
last sales price of our common stock as reported on Nasdaq was $10.89 per share.
Dividends
We have never paid a dividend on our common stock and we do not intend to pay a dividend in the foreseeable future. Our
current policy is to retain all earnings to provide funds for operations and future growth. Additionally, under the terms of our
credit facility, we are precluded from paying a dividend while such facility is in place.
Recent Sales of Unregistered Securities
During the fiscal year ended June 30, 2016, we did not sell or otherwise issue any unregistered securities.
Repurchases
During the quarter ended June 30, 2016, we did not repurchase any shares of our common stock.
20
Equity Compensation Plan Information
The following table sets forth information regarding outstanding options and shares reserved for future issuance under our
existing equity compensation plans as of June 30, 2016:
Number of
Shares
to be Issued
Upon
Exercise of
Outstanding
Options,
Warrants,
and Rights
Weighted-
Average
Exercise
Price
of
Outstanding
Options,
Warrants,
and Rights
Weighted-
Average
Exercise
Price of
Outstanding
Restricted
Stock
Number of
Shares of
Outstanding
Restricted
Stock
Number of
Shares
Remaining
Available
for Future
Issuance
Under Equity
Compensation
Plans
(Excluding
Shares
Reflected in
Column
(a) and (c))
Plan Category
(a)
(b)
(c)
(d)
(e)
Equity compensation plans approved by
stockholders ...........................................
140,000 $
6.36
310,321
N/A
508,104
Equity compensation plans not approved
by stockholders ......................................
Total ...........................................................
N/A
140,000 $
N/A
6.36
N/A
310,321
N/A
N/A
N/A
508,104
ITEM 6.
SELECTED FINANCIAL DATA
As a smaller reporting company, we are not required to provide Item 6 disclosure in this Annual Report.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion and analysis is intended to help you understand our financial condition and results of operations as
of June 30, 2016 and 2015 and for each of the last two fiscal years then ended. You should read the following discussion and
analysis together with our audited consolidated financial statements and the notes to the consolidated financial statements
included under Item 8 in this report. 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. You should carefully review the
risks described under Item 1A and elsewhere in this report, which identify certain important factors that could cause our
future financial condition and results of operations to vary.
Executive Overview
The following overview does not address all of the matters covered in the other sections of this Item 7 or other items in this
report or contain all of the information that may be important to our stockholders or the investing public. You should read
this overview in conjunction with the other sections of this Item 7, the financial statements and accompanying notes, and this
report.
Our primary business activity is providing private-label contract manufacturing services to companies that market and
distribute vitamins, minerals, herbs and other nutritional supplements, as 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 one or two private-label
contract manufacturing customers and subject to variations in the timing of such customers’ orders, which in turn is impacted
by such customers’ internal marketing programs, supply chain management, entry into new markets, new product
introductions, the demand for such customers’ products, and general industry and economic conditions. Our revenue also
includes raw material sales, royalty and licensing revenue generated from our patent estate pursuant to license and supply
agreements with third parties for the distribution and use of the ingredient known as beta-alanine sold under our CarnoSyn®
trademark.
21
A cornerstone of our business strategy is to achieve long-term growth and profitability and to diversify our sales base. We
have sought and expect to continue to seek to diversify our sales by developing relationships with additional, quality-oriented,
private-label contract manufacturing customers, and commercializing our patent estate through sales of beta-alanine under
our Carnosyn® and SR Carnosyn® trade names, contract manufacturing and license agreements.
We have historically developed, manufactured and marketed our own branded products, most recently under the Pathway to
Healing® product line. However, due to the steady decline in sales of this product line over the prior several years, we decided
to discontinue the product line. All termination activities related to the Pathway to Healing® product line were substantially
complete by December 31, 2014. We did not change the financial presentation in this report to reflect the branded products
segment as “Discontinued Operations” as the wind down of this product line did not meet the criteria for discontinued
operations presentation as prescribed by applicable accounting regulations (ASC 205-20).
During fiscal 2016, our net sales were 44% higher than in fiscal 2015. Private-label contract manufacturing sales increased
33% due primarily to the sale of higher volumes of existing products to existing customers and new product sales to new and
existing customers, partially offset by unfavorable foreign exchange rates as compared to the prior year period. Our foreign
exchange rates as applied to sales denominated in Euro deceased to a weighted average of 1.11 EUR/USD in fiscal 2016
from a weighted average of 1.31 EUR/USD during fiscal 2015. Revenue concentration from our largest private-label contract
manufacturing customer as a percentage of our total net sales increased to 43% in fiscal 2016 from 37% for fiscal 2015. We
expect our fiscal 2017 revenue concentration as a percentage of consolidated net sales for this customer to be consistent with
fiscal 2016.
During fiscal 2016, CarnoSyn® beta-alanine revenue increased 138% to $21.8 million as compared to $9.1 million for fiscal
2015. The increase in beta-alanine revenue was primarily due to the increase in raw material sales as a result of taking over
the direct sale and distribution of beta-alanine raw materials effective April 1, 2015. We had raw material sales of beta-
alanine totaling $21.6 million for fiscal 2016 and $4.4 million raw material sales during fiscal 2015. We expect our beta-
alanine raw material sales during fiscal 2017 will be consistent with our fiscal 2016 sales.
During fiscal 2016, twelve new beta-alanine patents were issued to NAI. This new intellectual property related to a broad
range of beta-alanine method and composition claims which covered sustained release formulations for beta-alanine. As of
June 30, 2016, NAI possessed twenty-six beta-alanine patents and twenty sustained release beta-alanine patents.
To protect our CarnoSyn® business and its underlying patent estate, we incurred litigation and patent compliance expenses
of approximately $2.0 million during fiscal 2016 and $1.6 million during fiscal 2015. The majority of our litigation activity
was related to litigation with Woodbolt Distribution, LLC, also known as Cellucor (Woodbolt), which was settled during the
third quarter of 2016 and we do not expect costs related to this case to continue. We describe our efforts to protect our patent
estate in more detail under Item 1 of Part II of this report. Our ability to maintain or further increase our beta-alanine royalty
and licensing revenue will depend in large part on our ability to develop a market for our sustained release form of beta-
alanine marketed under our SR Carnosyn® trademark, maintain our patent rights, the availability of the raw material beta-
alanine when and in the amounts needed, the ability to expand distribution of beta-alanine to new and existing customers, the
ability to further commercialize our existing patents, and the continued compliance by third parties with our patent and
trademark rights.
Net sales from our branded products declined 100% in fiscal 2016 as compared to fiscal 2015 due to our product line
discontinuation efforts described above.
During fiscal 2017, we plan to continue our focus on:
• Leveraging our state-of-the-art, certified facilities to increase the value of the goods and services we provide to
our highly valued private-label contract manufacturing customers, and 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
market for our sustained release form of beta-alanine marketed under our SR Carnosyn® trademark, new contract
manufacturing opportunities, license agreements and protecting our proprietary rights;
•
Improving operational efficiencies and managing costs and business risks to improve profitability.
22
Critical Accounting Policies and Estimates
Our consolidated financial statements included under Item 8 in this report have been prepared in accordance with U.S.
generally accepted accounting principles (GAAP). Our significant accounting policies are described in the notes to our
consolidated financial statements. The preparation of financial statements in accordance with GAAP requires that we make
estimates and assumptions that affect the amounts reported in our financial statements and their accompanying notes. We
have identified certain policies that we believe are important to the 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 that we believe are reasonable under the
circumstances. Actual results could differ from these estimates. 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. Some of our critical accounting policies include those listed below.
Revenue Recognition
To recognize revenue, four basic criteria must be met: 1) there is evidence that an arrangement exists; 2) delivery has
occurred; 3) the fee is fixed or determinable; and 4) collectability is reasonably assured. Revenue from sales transactions
where the buyer has the right to return the product is recognized at the time of sale only if (a) the seller’s price to the buyer
is substantially fixed or determinable at the date of sale; (b) the buyer has paid the seller, or the buyer is obligated to pay the
seller and the obligation is not contingent on resale of the product; (c) the buyer’s obligation to the seller would not be
changed in the event of theft or physical destruction or damage of the product; (d) the buyer acquiring the product for resale
has economic substance apart from that provided by the seller; (e) the seller does not have significant obligations for future
performance to directly bring about resale of the product by the buyer; and (f) the amount of future returns can be reasonably
estimated. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are
usually met at the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title
passes upon delivery is deferred until the shipment has been delivered.
We record reductions to gross revenue for estimated returns of private-label contract manufacturing products and branded
products. The estimated returns are based on the trailing six months of private-label contract manufacturing gross sales and
our historical experience for both private-label contract manufacturing and branded product returns. However, the estimate
for product returns does not reflect the impact of a potential large product recall resulting from product nonconformance or
other factors as such events are not predictable nor is the related economic impact estimable.
We currently own certain U.S. patents, and each patent’s corresponding foreign patent applications. All of these patents and
patent rights relate to the ingredient known as beta-alanine marketed and sold by us under our CarnoSyn® and SR Carnosyn®
trademarks, and combined with a license to our patent estate. We recorded beta-alanine raw material sales and royalty and
licensing income as a component of revenue in the amount of $21.8 million during fiscal 2016 and $9.1 million during fiscal
2015. 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 $865,000 during fiscal 2016 and $806,000 during fiscal 2015.
Inventory Reserve
We operate primarily as a private-label contract manufacturer and build products based upon anticipated demand or following
receipt of customer specific purchase orders. From time to time, we build inventory for private-label contract manufacturing
customers under a specific purchase order with delivery dates that may subsequently be rescheduled or canceled at the
customer’s request. We value inventory at the lower of cost or market on an item-by-item basis and establish reserves equal
to all or a portion of the related inventory to reflect situations in which the cost of the inventory is not expected to be recovered.
This requires us to make estimates regarding the market value of our inventory, including an assessment for excess and
obsolete inventory. Once we establish an inventory reserve amount in a fiscal period, the reduced inventory value is
maintained until the inventory is sold or otherwise disposed. In evaluating whether inventory is stated at the lower of cost or
market, management considers such factors as the amount of inventory on hand, the estimated time required to sell such
inventory, the remaining shelf life and efficacy, the foreseeable demand within a specified time horizon and current and
expected market conditions. Based on this evaluation, we record adjustments to cost of goods sold to adjust inventory to its
net realizable value. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from
actual requirements if future economic conditions, customer demand or other factors differ from expectations.
23
Accounting for Income Taxes
We account for uncertain tax positions using the more-likely-than-not recognition threshold. Our practice is to recognize
interest and/or penalties related to income tax matters in income tax expense. As of June 30, 2016 and June 30, 2015, we had
not recorded any tax liabilities for uncertain tax positions.
We estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current
tax exposure, together with assessing temporary differences resulting from differing treatment of items, such as property and
equipment depreciation, for tax and financial reporting purposes. Actual income taxes could vary from these estimates due
to future changes in income tax law or results from final tax examination reviews.
We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be
realized. We consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing
the need for a valuation allowance. If we determine that it is more likely than not that we will not realize all or part of our
deferred tax assets in the future, we will record an adjustment to the carrying value of the deferred tax asset, which would be
reflected as income tax expense. Conversely, if we determine we will realize a deferred tax asset, which currently has a
valuation allowance, we will reverse the valuation allowance, which would be reflected as an income tax benefit.
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 fourth
quarter of fiscal 2016, we concluded that it was more likely than not that we would be able to realize the benefit of our federal
and state deferred tax assets in the future. We based this conclusion on historical and projected operating performance, as
well as our expectation that our operations will generate sufficient taxable income in future periods to realize the tax benefits
associated with the deferred tax assets. As a result, we reduced the valuation allowance on our net deferred tax assets by
$193,000 at June 30, 2016. We will continue to assess the need for a valuation allowance on the deferred tax assets by
evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation
allowance would be recorded in the income statement for the period that the adjustment is determined to be required.
We have not recorded U.S. income tax expense for NAIE’s retained earnings that we have declared as indefinitely reinvested
offshore, thus reducing our overall income tax expense. The earnings designated as indefinitely reinvested in NAIE are based
on the actual deployment of such earnings in NAIE’s assets and our expectations of the future cash needs of NAIE and NAI.
Income tax laws also are a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore.
We carefully review several factors that influence the ultimate disposition of NAIE’s retained earnings declared as reinvested
offshore, and apply stringent standards to overcome the presumption of repatriation. Despite this approach, because the
determination involves our future plans and expectations of future events, the possibility exists that amounts declared as
indefinitely reinvested offshore may ultimately be repatriated. For instance, NAI’s actual cash needs may exceed our current
expectations or NAIE’s actual cash needs may be less than our current expectations. Additionally, changes may occur in tax
laws and/or accounting standards that could change our determination of the status of NAIE’s retained earnings. This would
result in additional income tax expense in the fiscal year in which we determine that amounts are no longer indefinitely
reinvested offshore.
On an interim basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax
provision in accordance with the anticipated annual rate. As the fiscal year progresses, we refine our estimate based upon
actual events and earnings by jurisdiction during the year. This continual estimation process periodically results in a change
to our expected effective tax rate for the fiscal year. When this occurs, we adjust the income tax provision during the quarter
in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate.
Derivative Financial Instruments
We may use derivative financial instruments in the management of our foreign currency exchange risk inherent in our
forecasted transactions denominated in Euros. We may hedge our foreign currency exposures by entering into offsetting
forward exchange contracts and currency options. To the extent we use derivative financial instruments, we account for them
using the deferral method, when such instruments are intended to hedge identifiable, firm foreign currency commitments or
anticipated transactions and are designated as, and effective as, hedges. Foreign exchange exposures arising from certain
transactions that do not meet the criteria for the deferral method are marked-to-market.
24
We recognize any unrealized gains and losses associated with derivative instruments in income in the period in which the
underlying hedged transaction is realized. In the event the derivative instrument is deemed ineffective we would recognize
the resulting gain or loss in income at that time. As of June 30, 2016, we held derivative 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. As of June 30, 2016, the notional amounts of our foreign exchange
contracts were $19.0 million (EUR 16.8 million). These contracts will mature over the next 12 months.
Results of Operations
The following table sets forth selected consolidated operating results for each of the last two fiscal years, presented as a
percentage of net sales (dollars in thousands).
Fiscal Year Ended
Private-label contract manufacturing $
Patent and trademark licensing.........
Branded products .............................
Total net sales ...................................
Cost of goods sold ............................
Gross profit ......................................
Selling, general & administrative
expenses .......................................
Income from operations ...................
Other income, net .............................
Income before income taxes .............
Provision for income taxes ...............
Net income ....................................... $
June 30, 2016
92,420
21,781
–
114,201
88,943
25,258
13,000
12,258
1,314
13,572
4,026
9,546
81% $
19%
–%
100%
78%
22%
11%
11%
1%
12%
4 %
8% $
June 30, 2015
69,670
9,140
698
79,508
65,169
14,339
Increase (Decrease)
22,750
12,641
(698)
34,693
23,774
10,919
88% $
11%
1%
100%
82%
18%
33%
138%
(100)%
44%
37%
76%
10,180
4,159
148
4,307
961
3,346
13%
5%
0%
5%
1%
4% $
2,820
8,099
1,166
9,265
3,065
6,200
28%
193%
785%
213 %
319%
185%
Private-label contract manufacturing net sales increased 33% primarily due to the sale of higher volumes of existing products
to existing customers and new product sales to new and existing customers, partially offset by unfavorable foreign exchange
rates as compared to the prior year period. Our foreign exchange rates as applied to sales denominated in Euro deceased to a
weighted average of 1.11 EUR/USD in fiscal 2016 from a weighted average of 1.31 EUR/USD during fiscal 2015. Net sales
to our largest customer represented a majority of our increase in private-label contract manufacturing sales, which included
an increase in international sales of 45% and an increase in domestic sales of 90%. The increase in international sales during
fiscal 2016 is primarily due to increased consumer demand, partially offset by the decreased Euro foreign exchange rate as
compared to fiscal 2015. The domestic increase is primarily due to sales of a new product we were awarded in fiscal 2016,
partially offset by a decrease in shipments of existing products in fiscal 2016 as compared to fiscal 2015 related to the timing
of orders.
Net sales from our patent and trademark licensing segment increased 138% during fiscal 2016. During fiscal 2016, patent
and trademark licensing sales included $0.2 million of royalty income, $21.6 million in direct beta-alanine raw material sales,
and zero license fees. During fiscal 2015, patent and trademark licensing sales included $4.7 million of royalty income, $4.4
million in direct beta-alanine raw material sales, and zero license fees. The increase in beta-alanine raw material sales was a
result of our decision to take over the direct sale and distribution of beta-alanine effective April 1, 2015. As part of this
decision, we allowed our former agreement with CSI to expire as of March 31, 2015, which also discontinued our royalty
income stream.
Net sales from our branded products declined 100% in fiscal 2016 as compared to fiscal 2015 due to the discontinuation of
our Pathway to Healing® product line. All termination activities related to the Pathway to Healing® product line were
substantially complete by December 31, 2014.
25
Consolidated gross profit margin increased 4.1 percentage points during fiscal 2016 primarily due to the following:
Contract manufacturing:
Shift in sales mix and material cost .....................................................................................................
Overhead expenses ..............................................................................................................................
Incremental direct and indirect labor ...................................................................................................
Patent and trademark licensing ...............................................................................................................
Branded products ....................................................................................................................................
Total ........................................................................................................................................................
Percentage
Change
(4.6)(1)
4.8 (1)
2.7 (1)
1.7 (2)
(0.5)(3)
4.1
1 Private-label contract manufacturing gross profit margin contribution increased 2.9 percentage points in fiscal 2016 as
compared to fiscal 2015. The increase in gross profit as a percentage of sales in fiscal 2016 was primarily driven by
improved operational throughput and lower per unit manufacturing costs partially offset by the shift in sales and material
mix between the periods, including lower average Euro exchange rates.
2 During fiscal 2016, patent and trademark licensing gross profit margin contribution increased 1.7 percentage points due
primarily to patent and trademark revenue representing a higher percentage of consolidated net sales on a period over
period basis. In addition, we took over the raw material sale and distribution activities for beta-alanine in the fourth
quarter of fiscal 2015, which resulted in additional profit contribution per sales dollar during fiscal 2016.
3 Branded products gross profit margin contribution as a percentage of consolidated net sales decreased 0.5 percentage
points during fiscal 2016 due to the discontinuation of our Pathway to Healing® product line.
Selling, general and administrative expenses increased $2.8 million, or 28%, during fiscal 2016 as compared to fiscal 2015.
This increase was primarily due to increased employee compensation costs, increased litigation and patent compliance
expenses, and sales and marketing expenses associated with our patent and trademark licensing segment. The increase in
expenses associated with our patent and trademark licensing segment are primarily associated with taking over the direct sale
and distribution of beta-alanine effective April 1, 2015 and with our efforts to further commercialize our CarnoSyn® beta-
alanine patent estate. Our efforts to further commercialize our CarnoSyn® patent estate included marketing efforts designed
to increase CarnoSyn® brand awareness and R&D efforts to develop our recently launched SR CarnoSyn® beta-alanine
products. We expect to continue these efforts during fiscal 2017 as we launch SR CarnoSyn® in existing and new markets.
Other income, net increased $1.2 million during fiscal 2016 as compared to fiscal 2015. The increase for fiscal 2016 is due
primarily to the sale of our domestic corporate headquarters in San Marcos, CA which resulted in a one-time pre-tax gain of
$1.6 million.
Our income tax expense increased $3.1 million during fiscal 2016 as compared to fiscal 2015. The increase is primarily due
to increased consolidated pre-tax income and a higher effective tax rate due to domestic operations representing a larger
portion of consolidated pre-tax income.
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 facilities. Net cash provided by operating activities was $9.3 million in fiscal 2016 compared to
net cash provided by operating activities of $2.7 million in fiscal 2015.
Net income increased by $6.2 million to $9.5 million during fiscal 2016 as compared to net income of $3.3 million in the
prior fiscal year. At June 30, 2016, changes in accounts receivable, consisting primarily of amounts due from our private-
label contract manufacturing customers and our patent and trademark raw material sales activities, used $3.3 million in cash
compared to using $3.1 million in fiscal 2015. The increase in cash used by accounts receivable during fiscal 2016 was
primarily due to increased amounts due associated with our patent and trademark business primarily due to timing of sales
year over year. The average number of days our accounts receivable were outstanding was 37 days during fiscal 2016, as
compared to 38 days for fiscal 2015.
26
Increases in inventory used $8.2 million in cash during fiscal 2016 compared to providing $276,000 in fiscal 2015. The
change in cash activity from inventory during fiscal 2016 was primarily related to inventory purchased to support growing
private-label contract manufacturing demand, as well as inventory purchased to support our patent and trademark licensing
business as a result of taking over the direct sales and distribution activities as of April 1, 2015. Changes in accounts payable
and accrued liabilities provided $8.0 million in cash during fiscal 2016 compared to using $520,000 during fiscal 2015. The
change in cash flow activity related to accounts payable and accrued liabilities is primarily due to the timing of inventory
receipts and payments.
Approximately $2.2 million of our operating cash flow was generated by NAIE in fiscal 2016. As of June 30, 2016, NAIE’s
undistributed retained earnings of $17.8 million were considered indefinitely reinvested.
Cash used in investing activities in fiscal 2016 was $7.4 million compared to $1.6 million in fiscal 2015. Capital expenditures
were $10.4 million during fiscal 2016 compared to $1.7 million in fiscal 2015. Capital expenditures during fiscal 2016 and
fiscal 2015 were primarily for manufacturing equipment in our Vista, California and Manno, Switzerland facilities and for
the purchase of our new corporate headquarters in Carlsbad, California. The capital expenditures during fiscal 2016 were
partially offset by proceeds from the sale of equipment and sale of our former headquarters of $3.0 million as compared to
$90,000 in fiscal 2015.
At June 30, 2016 and June 30, 2015, on a consolidated basis, we had no outstanding debt balances.
On February 1, 2016, we executed a new Credit Agreement with Wells Fargo Bank, N.A. The Credit Agreement replaces the
previous credit facility and provides us with a line of credit of up to $10.0 million. There was no commitment fee required as
part of this agreement. There are no amounts currently drawn under the line of credit.
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 1.25 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. Any amounts outstanding under the line of credit will
bear interest at a fixed or fluctuating interest rate as elected by NAI 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% above the daily one month LIBOR rate as in effect
from time to time. If a fixed rate is elected, it would equal a per annum rate of 1.25% above the LIBOR 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
January 31, 2019. 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 for each month from the month
of prepayment through the month in which the then applicable fixed rate term matures.
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 a foreign exchange facility with Wells Fargo in effect until
January 31, 2019, and with Bank of America, N.A. in effect until August 15, 2017.
On June 30, 2016, we were in compliance with all of the financial and other covenants required under the Credit Agreement.
On September 22, 2006, NAIE, our wholly owned subsidiary, entered into a credit facility with Credit Suisse to provide
NAIE with a credit line of up to CHF 1.3 million, or approximately $1.3 million, which was the initial maximum aggregate
amount that could be outstanding at any one time under the credit facility. This maximum amount is reduced annually by
CHF 160,000, or approximately $163,000. On February 19, 2007, NAIE amended its credit facility to provide that the
maximum aggregate amount that may be outstanding under the facility cannot be reduced below CHF 500,000, or
approximately $510,000. As of June 30, 2016, there was no outstanding balance under this credit facility.
Under its credit facility, NAIE may draw amounts either as current account loan credits to its current or future bank accounts
or as fixed loans with a maximum term of 24 months. Current account loans will bear interest at the rate of 5% per annum.
Fixed loans will bear interest at a rate determined by the parties based on current market conditions and must be repaid
pursuant to a repayment schedule established by the parties at the time of the loan. If a fixed loan is repaid early at NAIE’s
election or in connection with the termination of the credit facility, NAIE will be charged a pre-payment penalty equal to
0.1% of the principal amount of the fixed loan or CHF 1,000 (approximately $1,020), whichever is greater. The bank reserves
the right to refuse individual requests for an advance under the credit facility, although its exercise of such right will not have
the effect of terminating the credit facility as a whole.
27
As of June 30, 2016, we had $19.7 million in cash and cash equivalents and $10.5 million available under our credit facilities.
Of these amounts, $6.7 million of cash and cash equivalents and $510,000 of the amount available under our credit facilities
were held by NAIE. Our intent is to permanently reinvest all of our earnings from foreign operations, and we do not currently
anticipate that we will need funds generated from foreign operations to fund our domestic operations. In the event funds from
foreign operations are needed to fund our U.S. operations, we may be required to accrue and pay additional U.S. taxes to
repatriate any such funds. Overall, we believe our available cash, cash equivalents and potential cash flows from operations
will be sufficient to fund our current working capital needs and capital expenditures through at least the next 12 months.
Off-Balance Sheet Arrangements
As of June 30, 2016, we did not have any significant 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.
Inflation
During fiscal 2015 and 2016, we did not experience any significant increases in product raw material or operational costs
due to inflationary factors. We currently believe increasing raw material and product cost pricing pressures will exist
throughout fiscal 2017 as a result of limited supplies of various ingredients, including beta-alanine, and the effects of higher
labor and transportation costs. We do not believe current inflation rates will have a material impact on our fiscal 2017
operations or profitability.
Recent Accounting Pronouncements
A discussion of recent accounting pronouncements is included under Note A in the notes to our consolidated financial
statements included under Item 8 of this report.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide Item 7A disclosure in this Annual Report.
28
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Natural Alternatives International, Inc.
We have audited the accompanying consolidated balance sheets of Natural Alternatives International, Inc. (the “Company”)
as of June 30, 2016 and 2015, and the related consolidated statements of operations and comprehensive income, stockholders’
equity, and cash flows for the years then ended. The Company’s management is responsible for these consolidated financial
statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Natural Alternatives International, Inc. as of June 30, 2016 and 2015, and the consolidated results of its operations
and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States
of America.
San Diego, California
September 19, 2016
/s/ Haskell & White LLP
HASKELL & WHITE LLP
29
Natural Alternatives International, Inc.
Consolidated Balance Sheets
As of June 30
(Dollars in thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents ...................................................................................... $
Accounts receivable – less allowance for doubtful accounts of $45 at June 30,
2016 and $20 at June 30, 2015 ............................................................................
Inventories, net .......................................................................................................
Deferred income taxes ............................................................................................
Income tax receivable .............................................................................................
Prepaids and other current assets ............................................................................
Total current assets ......................................................................................
Property and equipment, net ..............................................................................................
Deferred income taxes .......................................................................................................
Other noncurrent assets, net ..............................................................................................
Total assets ................................................................................................... $
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable .................................................................................................... $
Accrued liabilities ..................................................................................................
Accrued compensation and employee benefits .......................................................
Income taxes payable ..............................................................................................
Total current liabilities .................................................................................
Long-term pension liability ...............................................................................................
Deferred rent .....................................................................................................................
Other noncurrent liabilities, net .........................................................................................
Total liabilities .............................................................................................
2016
2015
19,747 $
18,551
13,217
20,768
–
14
2,136
55,882
15,167
2,227
899
74,175 $
12,821 $
2,242
2,802
1,340
19,205
758
486
–
20,449
9,895
12,564
367
316
1,907
43,600
7,633
1,663
920
53,816
4,647
2,495
1,462
489
9,093
439
403
21
9,956
Commitments and contingencies
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 at June 30, 2016
and June 30, 2015, issued and outstanding (net of treasury shares) 6,868,628 at
June 30, 2016 and 6,743,093 at June 30, 2015 ....................................................
Additional paid-in capital .......................................................................................
Accumulated other comprehensive loss ................................................................
Retained earnings ...................................................................................................
Treasury stock, at cost, 958,049 shares at June 30, 2016 and 875,584 at June 30,
2015 ....................................................................................................................
Total stockholders’ equity ............................................................................
Total liabilities and stockholders’ equity ..................................................... $
77
21,138
(680)
38,553
(5,362)
53,726
74,175 $
75
20,258
(766)
29,007
(4,714)
43,860
53,816
See accompanying notes to consolidated financial statements.
30
Natural Alternatives International, Inc.
Consolidated Statements Of Operations And Comprehensive Income
For the Years Ended June 30
(Dollars in thousands, except share and per share data)
2016
2015
Net sales .......................................................................................................................... $
Cost of goods sold ...........................................................................................................
Gross profit ......................................................................................................................
Selling, general and administrative expenses ..................................................................
Income from operations ...................................................................................................
Other income (expense):
Interest income .....................................................................................................
Interest expense ....................................................................................................
Foreign exchange gain (loss) ................................................................................
Other, net ..............................................................................................................
Income before income taxes ............................................................................................
Provision for income taxes ..............................................................................................
Net income ...................................................................................................................... $
Change in minimum pension liability, net of tax ............................................................ $
Unrealized loss resulting from change in fair value of derivative instruments, net of
tax ................................................................................................................................
Comprehensive income ................................................................................................... $
Net income per common share:
Basic ..................................................................................................................... $
Diluted .................................................................................................................. $
Weighted average common shares outstanding:
114,201 $
88,943
25,258
13,000
12,258
131
2
(425)
1,606
1,314
13,572
4,026
9,546 $
(132) $
218
9,632 $
1.46 $
1.44 $
79,508
65,169
14,339
10,180
4,159
36
(12)
127
(3)
148
4,307
961
3,346
(141)
(156)
3,049
0.50
0.49
Basic .....................................................................................................................
Diluted ..................................................................................................................
6,523,555
6,640,728
6,753,239
6,806,385
See accompanying notes to consolidated financial statements.
31
Natural Alternatives International, Inc.
Consolidated Statements Of Stockholders’ Equity
For the Years Ended June 30
(Dollars in thousands)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Treasury Stock
Comprehensive
Accumulated
Other
Shares
Amount Income (Loss)
Total
74 $
19,865 $
25,661
515,923 $
(2,693) $
(469) $
42,438
1
—
—
—
(1)
—
—
—
—
—
390
—
—
—
—
390
—
4
—
359,661
(2,021)
—
(2,021)
—
—
—
—
4
—
—
—
—
—
—
(141)
(141)
—
—
75
2
—
—
—
—
—
20,258
—
3,346
29,007
—
—
875,584
—
—
(4,714)
(156)
—
(766)
(156)
3,346
43,860
(2)
—
—
—
—
—
724
—
158
—
—
—
—
724
—
82,465
(648)
—
(648)
—
—
—
—
158
Balance, June 30, 2014 ... 7,513,677 $
Issuance of common
stock for restricted
stock grants ................
105,000
Compensation expense
related to stock
compensation plans ....
Repurchase of common
stock ...........................
Tax effect of stock
compensation .............
Change in minimum
pension liability, net
of tax ...........................
Unrealized loss resulting
from change in fair
value of derivative
—
instruments, net of tax
Net income ......................
—
Balance, June 30, 2015 ... 7,618,677
Issuance of common
stock for restricted
stock grants ................
208,000
Compensation expense
related to stock
compensation plans ....
Repurchase of common
stock ...........................
Tax effect of stock
compensation .............
Change in minimum
pension liability, net
of tax ...........................
—
—
—
—
—
—
—
—
—
—
—
—
(132)
(132)
Unrealized gain resulting
from change in fair
value of derivative
—
instruments, net of tax
Net income ......................
—
Balance, June 30, 2016 ... 7,826,677 $
—
—
77 $
—
—
21,138 $
—
9,546
38,553
—
—
958,049 $
—
—
(5,362) $
218
—
(680) $
218
9,546
53,726
See accompanying notes to consolidated financial statements.
32
Natural Alternatives International, Inc.
Consolidated Statements Of Cash Flows
For the Years Ended June 30
(in thousands)
2016
2015
Cash flows from operating activities
Net income ..................................................................................................................... $
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for uncollectible accounts receivable ..................................................
Depreciation and amortization .............................................................................
Non-cash equipment impairment charge .............................................................
Deferred income taxes .........................................................................................
Non-cash compensation .......................................................................................
Pension expense ...................................................................................................
Gain on disposal of assets ....................................................................................
Changes in operating assets and liabilities:
Accounts receivable .............................................................................................
Inventories ...........................................................................................................
Prepaids and other assets .....................................................................................
Accounts payable and accrued liabilities .............................................................
Income taxes ........................................................................................................
Accrued compensation and employee benefits ....................................................
Net cash provided by operating activities .......................................................................
Cash flows from investing activities
Purchases of property and equipment .............................................................................
Proceeds from sale of property and equipment ..............................................................
Net cash used in investing activities ...............................................................................
Cash flows from financing activities
Repurchase of common stock .........................................................................................
Net cash used in financing activities ..............................................................................
Net increase (decrease) in cash and cash equivalents .....................................................
Cash and cash equivalents at beginning of year .............................................................
Cash and cash equivalents at end of year ....................................................................... $
Supplemental disclosures of cash flow information
Cash paid during the year for:
Taxes ................................................................................................................... $
Interest ................................................................................................................. $
Disclosure of non-cash activities:
Change in minimum pension liability, net of tax ................................................. $
Change in unrealized (loss) gain resulting from change in fair value of
derivative instruments, net of tax ..................................................................... $
See accompanying notes to consolidated financial statements.
9,546 $
9
1,772
–
(197)
724
106
(1,866)
(3,331)
(8,204)
131
7,983
1,272
1,340
9,285
(10,441)
3,000
(7,441)
(648)
(648)
1,196
18,551
19,747 $
3,359 $
– $
132 $
(218) $
3,346
7
2,431
417
(93)
390
31
(62)
(3,067)
276
(875)
(520)
173
224
2,678
(1,708)
90
(1,618)
(2,021)
(2,021)
(961)
19,512
18,551
888
10
141
156
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization and Summary of Significant Accounting Policies
Organization
We provide private-label contract manufacturing services to companies that market and distribute vitamins, minerals, herbs,
and other nutritional supplements, as well as other health care products, to consumers both within and outside the U.S. We
also seek to commercialize our patent and trademark estate related to the ingredient known as beta-alanine through direct raw
material sales and various license and similar arrangements.
Subsidiaries
On January 22, 1999, Natural Alternatives International Europe S.A. (NAIE) was formed as our wholly owned subsidiary,
based in Manno, Switzerland. In September 1999, NAIE opened its manufacturing facility and possesses manufacturing
capability in encapsulation, powders, tablets, finished goods packaging, quality control laboratory testing, warehousing,
distribution and administration.
Principles of Consolidation
The consolidated financial statements include the accounts of Natural Alternatives International, Inc. (NAI) and our wholly
owned subsidiary, NAIE. All intercompany accounts and transactions have been eliminated. The functional currency of
NAIE, our foreign subsidiary, is the U.S. Dollar. The financial statements of NAIE have been translated at either current or
historical exchange rates, as appropriate, with gains and losses included in the consolidated statements of operations.
Recent Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (“FASB”), issued Accounting Standards Update No.
2015-17, Balance Sheet Classification of Deferred Taxes (Topic 740) (ASU 2015-17), which amends existing standards for
deferred taxes to present all deferred tax assets and liabilities as noncurrent. We adopted the ASU effective June 30, 2016,
applied prospectively, and it did not have a significant impact on our financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), which
amends existing standards for leases to increase transparency and comparability among organizations by requiring recognition
of lease assets and liabilities on the balance sheet and requiring disclosure of key information about such arrangements. ASU
2016-02 will be effective for us beginning in our first quarter of fiscal 2020, early adoption is permitted. We are currently
evaluating the impact of adopting the new standard on our consolidated financial statements and the timing and presentation
of our adoption.
In March 2016, the FASB issued Accounting Standards Update No. 2016-05, Derivatives and Hedging (Topic 815) (ASU
2016-05), which provides guidance related to the replacement of a counterparty of an existing designated hedging instrument.
The guidance stipulates that the replacement of a counterparty does not in itself constitute a termination of the hedging
instrument. ASU 2016-05 will be effective for us beginning in our first quarter of fiscal 2018, early adoption is permitted.
We do not expect the new standard to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic
718) (ASU 2016-09), which provides guidance improvements to employee share-based payment accounting. The standard
amends several aspects of current employee share-based payment accounting including income taxes, forfeitures, and
statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 will be effective
for us beginning in our first quarter of fiscal 2018, early adoption is permitted. We are currently evaluating the impact of
adopting the new standard on our consolidated financial statements and the timing and presentation of our adoption.
In April 2016, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic
606)(ASU 2016-10), which amends and adds clarity to certain aspects of the guidance set forth in the upcoming revenue
standard (ASU 2014-09) related to identifying performance obligations and licensing. In May 2016, the FASB issued
Accounting Standards Update No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815)
(ASU 2016-11), which amends and rescinds certain revenue recognition guidance previously released within ASU 2014-09.
In May 2016 the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic
606) (ASU 2016-12), which provides narrow scope improvements and practical expedients related to ASU 2014-09. We are
34
currently evaluating the impact of adopting these new standards on our consolidated financial statements. All of these new
standards will be effective for us concurrently with ASU 2014-09, beginning in our first quarter of fiscal 2019, early adoption
is not permitted.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit
price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants at the measurement date. We use a three-level hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when
available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market
data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the inputs that
market participants would use in pricing the asset or liability and are developed based on the best information available under
the circumstances.
The fair value hierarchy is broken down into three levels based on the source of inputs. In general, fair values determined by
Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the
ability to access. We classify cash, cash equivalents, and marketable securities balances as Level 1 assets. Fair values
determined by Level 2 inputs are based on quoted prices for similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable
or can be corroborated, either directly or indirectly by observable market data. Level 3 inputs are unobservable inputs for the
asset or liability, and include situations where there is little, if any, market activity for the asset or liability. These include
certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
As of June 30, 2016 and June 30, 2015, we did not have any financial assets or liabilities classified as Level 1, except for
assets and liabilities related to our pension plan. We classify derivative forward exchange contracts as Level 2 assets. The
fair value of our forward exchange contracts as of June 30, 2016 was a net asset of $250,000 and the value as of June 30,
2015 was a net asset of $474,000. The fair values were determined based on obtaining pricing from our bank and corroborating
those values with a third party bank. As of June 30, 2016 and June 30, 2015, we did not have any financial assets or liabilities
classified as Level 3. We did not transfer any assets or liabilities between any levels during fiscal 2016.
Accounts Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits based on payment history and customer
credit-worthiness. An allowance for estimated doubtful accounts is maintained based on historical experience and identified
customer credit issues. We monitor collections regularly and adjust the allowance for doubtful accounts as necessary to
recognize any changes in credit exposure. Upon conclusion that a receivable is uncollectible, we record the respective amount
as a charge against allowance for doubtful accounts. To date, such doubtful accounts reserves, in the aggregate, have been
adequate to cover collection losses.
Inventories
We operate primarily as a private-label contract manufacturer that builds products based upon anticipated demand or
following receipt of customer specific purchase orders. From time to time, we build inventory for private-label contract
manufacturing customers under a specific purchase order with delivery dates that may subsequently be rescheduled or
canceled at the customer’s request. We value inventory at the lower of cost (first-in, first-out) or market (net realizable value)
on an item-by-item basis, including costs for raw materials, labor and manufacturing overhead. We establish reserves equal
to all or a portion of the related inventory to reflect situations in which the cost of the inventory is not expected to be recovered.
This requires us to make estimates regarding the market value of our inventory, including an assessment for excess and
obsolete inventory. Once we establish an inventory reserve in a fiscal period, the reduced inventory value is maintained until
the inventory is sold or otherwise disposed of. In evaluating whether inventory is stated at the lower of cost or market,
management considers such factors as the amount of inventory on hand, the estimated time required to sell such inventory,
the remaining shelf life and efficacy, the foreseeable demand within a specified time horizon and current and expected market
conditions. Based on this evaluation, we record adjustments to cost of goods sold to adjust inventory to its net realizable
value.
35
Property and Equipment
We state property and equipment at cost. Depreciation of property and equipment is provided using the straight-line method
over their estimated useful lives, generally ranging from 1 to 39 years. We amortize leasehold improvements using the
straight-line method over the shorter of the life of the improvement or the term of the lease. Maintenance and repairs are
expensed as incurred. Significant expenditures that increase economic useful lives are capitalized.
Impairment of Long-Lived Assets
We periodically evaluate the carrying value of long-lived assets to be held and used when events and circumstances indicate
that the carrying amount of an asset may not be recovered. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell. We did not recognize any impairment losses during fiscal 2016. During fiscal 2015, we recorded an
impairment loss of $417,000 related to manufacturing equipment and related tooling that was determined to be obsolete.
Derivative Financial Instruments
We currently may use derivative financial instruments in the management of our foreign currency exchange risk inherent in
our forecasted transactions denominated in Euros. We may hedge our foreign currency exposures by entering into offsetting
forward exchange contracts and currency options. To the extent we use derivative financial instruments, we account for them
using the deferral method, when such instruments are intended to hedge identifiable, firm foreign currency commitments or
anticipated transactions and are designated as, and effective as, hedges. Foreign exchange exposures arising from certain
transactions that do not meet the criteria for the deferral method are marked-to-market through the Consolidated Statements
of Operations and Comprehensive Income.
We recognize any unrealized gains and losses associated with derivative instruments in income in the period in which the
underlying hedged transaction is realized. In the event the derivative instrument is deemed ineffective we would recognize
the resulting gain or loss in income at that time. As of June 30, 2016, we held derivative 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. As of June 30, 2016, the notional amounts of our foreign exchange
contracts were $19.0 million (EUR 16.8 million). These contracts will mature over the next 14 months.
Defined Benefit Pension Plan
We formerly sponsored a defined benefit pension plan. Effective June 21, 1999, we adopted an amendment to freeze benefit
accruals to the participants. The plan obligation and related assets of the plan are presented in the notes to the consolidated
financial statements. Plan assets, which consist primarily of marketable equity and debt instruments, are valued based upon
third party market quotations. Independent actuaries, through the use of a number of assumptions, determine plan obligation
and annual pension expense. Key assumptions in measuring the plan obligation include the discount rate and estimated future
return on plan assets. In determining the discount rate, we use an average long-term bond yield. Asset returns are based on
the historical returns of multiple asset classes to develop a risk free rate of return and risk premiums for each asset class. The
overall rate for each asset class was developed by combining a long-term inflation component, the risk free rate of return and
the associated risk premium. A weighted average rate is developed based on the overall rates and the plan’s asset allocation.
Revenue Recognition
To recognize revenue, four basic criteria must be met: 1) there is evidence that an arrangement exists; 2) delivery has occurred;
3) the fee is fixed or determinable; and 4) collectability is reasonably assured. Revenue from sales transactions where the
buyer has the right to return the product is recognized at the time of sale only if (a) the seller’s price to the buyer is substantially
fixed or determinable at the date of sale; (b) the buyer has paid the seller, or the buyer is obligated to pay the seller and the
obligation is not contingent on resale of the product; (c) the buyer’s obligation to the seller would not be changed in the event
of theft or physical destruction or damage of the product; (d) the buyer acquiring the product for resale has economic
substance apart from that provided by the seller; (e) the seller does not have significant obligations for future performance to
directly bring about resale of the product by the buyer; and (f) the amount of future returns can be reasonably estimated. We
recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at
the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon
delivery is deferred until the shipment has been delivered.
36
We record reductions to gross revenue for estimated returns of private-label contract manufacturing products and branded
products. The estimated returns are based on the trailing six months of private-label contract manufacturing gross sales and
our historical experience for both private-label contract manufacturing and branded product returns. However, the estimate
for product returns does not reflect the impact of a potential large product recall resulting from product nonconformance or
other factors as such events are not predictable nor is the related economic impact estimable.
We currently own certain U.S. patents, and each patent’s corresponding foreign patent applications. All of these patents and
patent rights relate to the ingredient known as beta-alanine marketed and sold under the CarnoSyn® trade name. From March
2009 to April 2015, we had an agreement with Compound Solutions, Inc. (CSI) to grant a license to manufacture, offer for
sale and/or sell products incorporating, using or made in accordance with our patent rights to customers of CSI who purchase
beta-alanine under the CarnoSyn® trade name from CSI. We received a fee from CSI that varied based on the quantity and
source of beta-alanine sold by CSI. Effective April 1, 2015, we began directly selling beta-alanine, and licensing the related
patent and trademark rights, in order to take advantage of strategic opportunities, including opportunities to provide additional
contract manufacturing services, and to increase our top-line revenue and profit profile.
We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of
$21.8 million during fiscal 2016 and $9.1 million during fiscal 2015. 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 $865,000 during fiscal 2016 and $806,000
during fiscal 2015.
Cost of Goods Sold
Cost of goods sold includes raw material, labor, manufacturing overhead, and royalty expense.
Shipping and Handling Costs
We include fees earned on the shipment of our products to customers in sales and include costs incurred on the shipment of
product to customers in costs of goods sold.
Research and Development Costs
As part of the services we provide to our private-label contract manufacturing customers, we may perform, but are not
obligated to perform, certain research and development activities related to the development or improvement of their products.
While our customers typically do not pay directly for this service, the cost of this service is included as a component of the
price we charge to manufacture and deliver their products. We also direct and participate in clinical research studies, often in
collaboration with scientists and research institutions, to validate the benefits of a product and provide scientific support for
product claims and marketing initiatives. We believe our commitment to research and development, as well as our facilities
and strategic alliances with our suppliers and customers, allow us to effectively identify, develop and market high-quality
and innovative products.
Research and development costs are expensed when incurred. Our research and development expenses for the last two fiscal
years ended June 30 were $1.1 million for 2016 and $1.1 million for 2015. These costs were included in selling, general and
administrative expenses and cost of goods sold.
Advertising Costs
We expense the production costs of advertising the first time the advertising takes place. We incurred and expensed
advertising costs in the amount of $334,000 during the fiscal year ended June 30, 2016 and $69,000 during fiscal 2015. These
costs were included in selling, general and administrative expenses.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax
assets and liabilities are measured using enacted tax rates, for each of the jurisdictions in which we operate, expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment
date.
37
We account for uncertain tax positions using the more-likely-than-not recognition threshold. Our practice is to recognize
interest and/or penalties related to income tax matters in income tax expense. As of June 30, 2016 and June 30, 2015, we had
not recorded any tax liabilities for uncertain tax positions.
We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be
realized. We consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing
the need for a valuation allowance. If we determine that it is more likely than not that we will not realize all or part of our
deferred tax assets in the future, we will record an adjustment to the carrying value of the deferred tax asset, which would be
reflected as income tax expense. Conversely, if we determine we will realize a deferred tax asset, which currently has a
valuation allowance, we will reverse the valuation allowance, which would be reflected as an income tax benefit.
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 fourth
quarter of fiscal 2016, we concluded that it was more likely than not that we would be able to realize the benefit of our federal
and state deferred tax assets in the future. We based this conclusion on historical and projected operating performance, as
well as our expectation that our operations will generate sufficient taxable income in future periods to realize the tax benefits
associated with the deferred tax assets. As a result, we reduced the valuation allowance on our net deferred tax assets by
$193,000 at June 30, 2016. We will continue to assess the need for a valuation allowance on the deferred tax assets by
evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation
allowance would be recorded in the income statement for the period that the adjustment is determined to be required.
We do not record U.S. income tax expense for NAIE’s retained earnings that are declared as indefinitely reinvested offshore,
thus reducing our overall income tax expense. The amount of earnings designated as indefinitely reinvested in NAIE is based
on the actual deployment of such earnings in NAIE’s assets and our expectations of the future cash needs of our U.S. and
foreign entities. Income tax laws are also a factor in determining the amount of foreign earnings to be indefinitely reinvested
offshore.
Stock-Based Compensation
We have an omnibus incentive plan that was approved by our Board of Directors effective as of October 15, 2009 and
approved by our stockholders at the Annual Meeting of Stockholders held on November 30, 2009. Under the plan, we may
grant nonqualified and incentive stock options and other stock-based awards to employees, non-employee directors and
consultants. Our prior equity incentive plan was terminated effective as of November 30, 2009.
We estimate the fair value of stock option awards at the date of grant using the Black-Scholes option valuation model. The
Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions. Black-
Scholes uses assumptions related to volatility, the risk-free interest rate, the dividend yield (which we assume to be zero, as
we have not paid any cash dividends) and employee exercise behavior. Expected volatilities used in the model are based on
the historical volatility of our stock price. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect in
the period of grant. The expected life of stock option grants is derived from historical experience. The fair value of restricted
stock shares granted is based on the market price of our common stock on the date of grant. We amortize the estimated fair
value of our stock awards to expense over the related vesting periods.
The Company did not grant any options during fiscal 2016 or 2015.
We did not have any options exercised during fiscal 2016 or fiscal 2015. All remaining outstanding stock options are fully
vested and all related compensation cost was fully recognized at June 30, 2014. No options vested during the fiscal years
ended June 30, 2016 and June 30, 2015.
On March 19, 2015, we granted 105,000 restricted stock shares to the members of our Board of Directors and certain key
members of our management team pursuant to our 2009 Omnibus Incentive plan. These restricted shares partially vested, and
the remainder will continue to vest over three years and the unvested portion of these shares cannot be sold or otherwise
transferred and the rights to receive dividends, if declared by our Board of Directors, are forfeitable until the shares become
vested. During fiscal 2016, we granted a total of 208,000 restricted stock shares to the members of our Board of Directors
and certain key members of our management team pursuant to our 2009 Omnibus Incentive plan. These restricted stock grants
will vest over three or five years from the date of grant and the unvested shares cannot be sold or otherwise transferred and
the rights to receive dividends, if declared by our Board of Directors, are forfeitable until the shares become vested. There
were 193,012 vested restricted stock shares as of June 30, 2016 and there were 93,866 vested restricted stock shares as of
38
June 30, 2015. The total remaining unrecognized compensation cost related to unvested restricted stock shares amounted to
$2.3 million at June 30, 2016 and the weighted average remaining requisite service period of unvested restricted stock shares
was 1.6 years. The weighted average fair value of restricted stock shares granted during fiscal 2016 was $9.86. The weighted
average fair value of restricted stock shares granted during fiscal 2015 was $5.51.
Use of Estimates
Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenue
and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in
conformity with GAAP. Actual results could differ from those estimates.
Net Income per Common Share
We compute basic net income per common share using the weighted average number of common shares outstanding during
the period, and diluted net income per common share using the additional dilutive effect of all dilutive securities. The dilutive
impact of stock options and 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 per common share as
follows (in thousands, except per share data):
Numerator
Net income .............................................................................................................. $
Denominator
Basic weighted average common shares outstanding ..............................................
Dilutive effect of stock options and restricted stock shares.....................................
Diluted weighted average common shares outstanding ...........................................
Basic net income per common share ....................................................................... $
Diluted net income per common share .................................................................... $
No shares related to stock options were excluded for the year ended June 30, 2016.
For the Years Ended June 30,
2016
2015
9,546 $
6,524
117
6,641
1.46 $
1.44 $
3,346
6,753
53
6,806
0.50
0.49
We excluded shares related to stock options totaling 151,000 shares of common stock for the year ended June 30, 2015, from
the calculation of diluted net income per common share, as the effect of their inclusion would have been anti-dilutive.
Concentrations of Credit Risk
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 our two largest customers, whose receivable balances collectively represented 61.1% of
gross accounts receivable at June 30, 2016 and 25.8% at June 30, 2015. Additionally, amounts due related to our beta-alanine
raw material sales were 14.6% of gross accounts receivable at June 30, 2016, and 26.0% of gross accounts receivable at
June 30, 2015. Concentrations of credit risk related to the remaining accounts receivable balances are limited due to the
number of customers comprising our remaining customer base.
B. Inventories
Inventories, net, consisted of the following at June 30 (in thousands):
Raw materials ......................................................................................... $
Work in progress ....................................................................................
Finished goods .......................................................................................
Reserve ...................................................................................................
$
14,751 $
3,487
2,832
(302)
20,768 $
9,744
1,552
1,603
(335)
12,564
2016
2015
39
C. Property and Equipment
Property and equipment consisted of the following at June 30 (dollars in thousands):
Land........................................................................................................
Building and building improvements .....................................................
Machinery and equipment ......................................................................
Office equipment and furniture ..............................................................
Vehicles ..................................................................................................
Leasehold improvements ........................................................................
Total property and equipment ................................................................
Less: accumulated depreciation and amortization ..................................
Property and equipment, net ...................................................................
D. Other comprehensive loss
Depreciable
Life
In Years
NA
7 – 39
3 – 12
3 – 5
3
1 – 15
$
$
2016
2015
1,200 $
3,324
23,846
2,994
209
15,261
46,834
(31,667)
15,167 $
393
2,793
26,444
3,168
209
11,244
44,251
(36,618)
7,633
Other comprehensive (loss) income consisted of the following at June 30 (dollars in thousands):
Year Ended June 30, 2016
Unrealized
Losses on Cash
Flow Hedges
Defined Benefit
Pension Plan
Total
Balance as of June 30, 2015 ................................................. $
Other comprehensive loss before reclassifications ...............
Amounts reclassified from OCI ...........................................
Tax effect of OCI activity ....................................................
Other comprehensive loss ....................................................
Balance as of June 30, 2016 ................................................. $
(643) $
(232)
19
81
(132)
(775) $
(123) $
414
(74)
(122)
218
95 $
Year Ended June 30, 2015
Unrealized
Losses on Cash
Flow Hedges
Defined Benefit
Pension Plan
Total
Balance as of June 30, 2014 ................................................. $
Other comprehensive loss before reclassifications ...............
Amounts reclassified from OCI ...........................................
Tax effect of OCI activity ....................................................
Other comprehensive loss ....................................................
Balance as of June 30, 2015 ................................................. $
(502) $
(176)
(49)
84
(141)
(643) $
33 $
2,228
(2,461)
77
(156)
(123) $
E. Debt
(766)
182
(55)
(41)
86
(680)
(469)
2,052
(2,510)
161
(297)
(766)
On February 1, 2016, we executed a new Credit Agreement with Wells Fargo Bank, N.A. The Credit Agreement replaces the
previous credit facility and increases our credit line from $5.0 million 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 agreement. There are no amounts
currently drawn under the line of credit.
40
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 1.25 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. Any amounts outstanding under the line of credit will
bear interest at a fixed or fluctuating interest rate as elected by NAI 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% above the daily one month LIBOR rate as in effect
from time to time. If a fixed rate is elected, it would equal a per annum rate of 1.25% above the LIBOR 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
January 31, 2019. 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 for each month from the month
of prepayment through the month in which the then applicable fixed rate term matures.
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 a foreign exchange facility with Wells Fargo Bank, N.A. in
effect until January 31, 2019, and with Bank of America, N.A. in effect until August 15, 2017.
On June 30, 2016, we were in compliance with all of the financial and other covenants required under the Credit Agreement.
On September 22, 2006, NAIE, our wholly owned subsidiary, entered into a credit facility with Credit Suisse to provide
NAIE with a credit line of up to CHF 1.3 million, or approximately $1.3 million, which was the initial maximum aggregate
amount that could be outstanding at any one time under the credit facility. This maximum amount is reduced annually by
CHF 160,000, or approximately $163,000. On February 19, 2007, NAIE amended its credit facility to provide that the
maximum aggregate amount that may be outstanding under the facility cannot be reduced below CHF 500,000, or
approximately $510,000. As of June 30, 2016, there was no outstanding balance under this credit facility.
Under its credit facility, NAIE may draw amounts either as current account loan credits to its current or future bank accounts
or as fixed loans with a maximum term of 24 months. Current account loans will bear interest at the rate of 5% per annum.
Fixed loans will bear interest at a rate determined by the parties based on current market conditions and must be repaid
pursuant to a repayment schedule established by the parties at the time of the loan. If a fixed loan is repaid early at NAIE’s
election or in connection with the termination of the credit facility, NAIE will be charged a pre-payment penalty equal to
0.1% of the principal amount of the fixed loan or CHF 1,000 (approximately $1,020), whichever is greater. The bank reserves
the right to refuse individual requests for an advance under the credit facility, although its exercise of such right will not have
the effect of terminating the credit facility as a whole.
We did not use our working capital line of credit nor did we have any long-term debt outstanding during the year ended
June 30, 2016. As of June 30, 2016, we had $10.5 million available under our credit facilities.
F. Income Taxes
During fiscal 2016, we recorded U.S.-based domestic tax expense of $3.6 million on U.S.-based income from continuing
operations, which was offset by the release of our deferred tax asset valuation of $193,000 resulting in a net domestic tax
expense of $3.4 million. We released our deferred tax asset valuation based on historical and projected operating performance,
as well as our expectation that our operations will generate sufficient taxable income in future periods to realize the tax
benefits associated with the deferred tax assets. The valuation allowance activity did not have any impact on the tax expense
and related liability recorded for operating income recognized by NAIE during the years ended June 30, 2016 or June 30,
2015.
41
The provision for income taxes for the years ended June 30 consisted of the following (in thousands):
2016
2015
Current:
Federal ................................................................................................ $
State ....................................................................................................
Foreign ................................................................................................
Deferred:
Federal ................................................................................................
State ....................................................................................................
Valuation allowance ...........................................................................
Provision for income taxes ............................................................................ $
3,339 $
138
629
4,106
46
67
(193)
(80)
4,026 $
Net deferred tax assets and deferred tax liabilities as of June 30 were as follows (in thousands):
2016
2015
Deferred tax assets:
Inventory capitalization ...................................................................... $
Pension liability ..................................................................................
Accrued bonus ....................................................................................
Net operating loss carry forward ........................................................
Deferred rent .......................................................................................
Accumulated depreciation and amortization ......................................
Stock-based compensation..................................................................
Tax credit carry forward .....................................................................
Accrued vacation expense ..................................................................
Other, net ............................................................................................
Total gross deferred tax assets .......................................................................
Deferred tax liabilities:
Prepaid expenses ................................................................................
Other ...................................................................................................
Deferred tax liabilities ...................................................................................
Valuation allowance ......................................................................................
Net deferred tax assets ................................................................................... $
576 $
403
391
298
175
158
154
138
130
64
2,487
(260)
—
(260)
–
2,227 $
396
41
450
887
125
(51)
—
74
961
167
322
107
439
143
897
130
88
106
13
2,412
(189)
—
(189)
(193)
2,030
At June 30, 2016, we had state tax net operating loss carry forwards of approximately $5.1 million. Under California tax law,
net operating loss deductions were suspended for tax years beginning in 2008, 2009, 2010 and 2011 and the carry forward
periods of any net operating losses not utilized due to such suspension were extended. Our state tax loss carry forwards will
begin to expire in fiscal 2022, unless used before their expiration.
Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), the annual use of the net operating
loss carry forwards and research and development tax credits could be limited by any greater than 50% ownership change
during any three-year testing period. We did not have any ownership changes that met this criterion during the fiscal years
ended June 30, 2016 and June 30, 2015.
We are subject to taxation in the U.S., Switzerland and various state jurisdictions. Our tax years for the fiscal year ended
June 30, 2013 and forward are subject to examination by the U.S. tax authorities and our years for the fiscal year ended
June 30, 2008 and forward are subject to examination by the state tax authorities. Our tax years for the fiscal year ended
June 30, 2015 and forward are subject to examination by the Switzerland tax authorities.
NAIE’s effective tax rate for Swiss federal, cantonal and communal taxes is approximately 18.7%. NAIE had net income of
$2.7 million for the fiscal year ended June 30, 2016. Undistributed earnings of NAIE amounted to approximately $17.8
million at June 30, 2016. These earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S.
federal taxes has been provided thereon.
42
A reconciliation of income tax provision computed by applying the statutory federal income tax rate of 34% to net income
before income taxes for the year ended June 30 is as follows (dollars in thousands):
2016
2015
Income taxes computed at statutory federal income tax rate ........................ $
State income taxes, net of federal income tax expense ................................
Expenses not deductible for tax purposes.....................................................
Foreign tax rate differential ..........................................................................
Adjust state deferred due to change in apportionment .................................
Change in valuation allowance .....................................................................
Other, net ......................................................................................................
Income tax provision as reported ................................................................. $
Effective tax rate ..........................................................................................
G. Employee Benefit Plans
$
4,614
179
19
(514)
(18)
(193)
(61)
$
29.7%
4,026
1,463
7
13
(451)
(25)
—
(46)
961
22.3%
We have a profit sharing plan pursuant to Section 401(k) of the Code, whereby participants may contribute a percentage of
compensation not in excess of the maximum allowed under the Code. All employees with six months of continuous
employment are eligible to participate in the plan. Effective January 1, 2004, the plan was amended to require that we match
100% of the first 3% and 50% of the next 2% of a participant’s compensation contributed to the plan. Effective January 1,
2009, we elected to temporarily discontinue the company match program. The match program was reinstated effective
July 15, 2011. The total contributions under the plan charged to income from operations totaled $229,000 for fiscal 2016 and
$225,000 for fiscal 2015.
We have a “Cafeteria Plan” pursuant to Section 125 of the Code, whereby health care benefits are provided for active
employees through insurance companies. Substantially all active full-time employees are eligible for these benefits. We
recognize the cost of providing these benefits by expensing the annual premiums, which are based on benefits paid during
the year. The premiums expensed to operating income for these benefits totaled $847,000 for the fiscal year ended June 30,
2016 and $1.1 million for fiscal 2015.
We formerly sponsored a defined benefit pension plan, which provides retirement benefits to employees based generally on
years of service and compensation during the last five years before retirement. Effective June 21, 1999, we adopted an
amendment to freeze benefit accruals to the participants. We contribute an amount not less than the minimum funding
requirements of the Employee Retirement Income Security Act of 1974 nor more than the maximum tax-deductible amount.
43
Disclosure of Funded Status
The following table sets forth the defined benefit pension plan’s funded status and amount recognized in our consolidated
balance sheets at June 30 (in thousands):
2016
2015
Change in Benefit Obligation:
Benefit obligation at beginning of year ......................................................... $
Interest cost ....................................................................................................
Actuarial loss .................................................................................................
Benefits paid ..................................................................................................
Benefit obligation at end of year ....................................................................... $
Change in Plan Assets:
Fair value of plan assets at beginning of year ................................................ $
Actual return on plan assets ...........................................................................
Benefits paid ..................................................................................................
Plan expenses .................................................................................................
Fair value of plan assets at end of year .............................................................. $
Reconciliation of Funded Status:
Difference between benefit obligation and fair value of plan assets .............. $
Unrecognized net actuarial loss in accumulated other comprehensive
income ........................................................................................................
Net amount recognized ...................................................................................... $
Projected benefit obligation ............................................................................... $
Accumulated benefit obligation ........................................................................ $
Fair value of plan assets .................................................................................... $
2,080 $
87
272
(110)
2,329 $
1,642 $
74
(112)
(33)
1,571 $
(758) $
1,117
359 $
2,329 $
2,329 $
1,571 $
1,901
80
144
(45)
2,080
1,719
(5)
(45)
(27)
1,642
(438)
904
466
2,080
2,080
1,642
The weighted-average discount rate used for determining the projected benefit obligations for the defined benefit pension
plan was 3.6% during the year ended June 30, 2016 and 4.4% for the year ended June 30, 2015.
Net Periodic Benefit Cost
The components included in the defined benefit pension plan’s net periodic benefit expense for the fiscal years ended June 30
were as follows (in thousands):
Interest cost ......................................................................................... $
Expected return on plan assets ............................................................
Recognized actuarial loss ...................................................................
Settlement loss ....................................................................................
Net periodic benefit expense ......................................................................... $
2016
2015
87 $
(105)
68
55
105 $
80
(115)
46
20
31
We did not make any contributions to our defined benefit pension plan in fiscal 2016 and do not expect to make any
contributions in fiscal 2017.
The following is a summary of changes in plan assets and benefit obligations recognized in other comprehensive income (in
thousands):
Net loss ............................................................................................... $
Settlement loss ....................................................................................
Amortization of net loss .....................................................................
Plan expenses ......................................................................................
Total recognized in other comprehensive income (loss) .............................. $
Total recognized in net periodic benefit cost and other comprehensive
income ....................................................................................................... $
2016
2015
304 $
(55)
(68)
32
213 $
318 $
265
(20)
(47)
27
225
256
44
The estimated net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive
income into net periodic benefit cost over the next fiscal year is $68,000. We do not have any transition obligations or prior
service costs recorded in accumulated other comprehensive income.
The following benefit payments are expected to be paid (in thousands):
2017 ......................................................................................................................................................... $
2018 .........................................................................................................................................................
2019 .........................................................................................................................................................
2020 .........................................................................................................................................................
2021 .........................................................................................................................................................
2022-2026 ...............................................................................................................................................
$
55
74
113
124
123
705
1,194
The weighted-average rates used for the years ended June 30 in determining the defined benefit pension plan’s net pension
costs, were as follows:
Discount rate ...................................................................................................
Expected long-term rate of return ....................................................................
Compensation increase rate .............................................................................
2016
2015
3.61%
7.00%
N/A
4.33%
7.00%
N/A
Our expected rate of return is determined based on a methodology that considers historical returns of multiple classes analyzed
to develop a risk free real rate of return and risk premiums for each asset class. The overall rate for each asset class was
developed by combining a long-term inflation component, the risk free real rate of return, and the associated risk premium.
A weighted average rate was developed based on those overall rates and the target asset allocation of the plan.
Our defined benefit pension plan’s weighted average asset allocation at June 30 and weighted average target allocation were
as follows:
Equity securities ....................................................................
Debt securities .......................................................................
Commodities .........................................................................
Cash and money market funds ..............................................
2016
2015
Target
Allocation
50 %
47%
—
3%
100%
53%
45%
—
2%
100%
49%
46%
2%
3%
100%
The underlying basis of the investment strategy of our defined benefit pension plan is to ensure that pension funds are
available to meet the plan’s benefit obligations when due. Our investment strategy is a long-term risk controlled approach
using diversified investment options with relatively minimal exposure to volatile investment options like derivatives.
The fair values by asset category of our defined benefit pension plan at June 30, 2016 were as follows (in thousands):
Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Cash and money market funds ...................... $
Equity securities(1) ....................... $
Debt securities(2) .................. $
Total ........................... $
41 $
785 $
745 $
1,571 $
41 $
785 $
745 $
1,571 $
— $
— $
— $
— $
—
—
—
—
(1) This category is comprised of publicly traded funds, of which 47% are large-cap funds, 28% are mid-cap and small-
cap, 8% are emerging markets equity funds, and 17% are international equity funds.
(2) This category is comprised of publicly traded funds, of which 6% are long-term fixed income funds,14% are high-yield
fixed income funds, 38% are intermediate fixed income funds, 27% are REITs and MLPs funds, and 15% are
international/emerging markets funds.
45
H. Stockholders’ Equity
Treasury Stock
On June 2, 2011, the Board of Directors authorized the repurchase of up to $2.0 million of our common stock. On
February 6, 2015, the Board of Directors authorized a $1.0 million increase to our stock repurchase plan bringing the total
authorized repurchase amount to $3.0 million. On May 11, 2015, the Board of Directors authorized a $2.0 million increase
to our stock repurchase plan bringing the total authorized repurchase amount to $5.0 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. During the twelve months ended June 30, 2016, we purchased 52,603 shares at a weighted average
cost of $6.26 per share and a total cost of $0.3 million including commissions and fees. During the twelve months ended
June 30, 2015, we purchased 342,121 shares at a weighted average cost of $5.63 per share and a total cost of $1.9 million
including commissions and fees.
During fiscal 2016 we acquired 27,195 shares from employees in connection with restricted stock shares that vested during
the year and during fiscal 2015 we acquired 17,540 shares in connection with restricted stock shares that vested during that
year. These shares were returned to the Company by the related employees and in return the Company paid each employee’s
required tax withholding. The valuation of the shares acquired and thereby the amount of shares returned to the Company
was calculated based on the closing share price on the date the shares vested.
Stock Option Plans
On December 6, 1999, our stockholders approved the adoption of the 1999 Omnibus Equity Incentive Plan (the “1999 Plan”).
The 1999 Plan was terminated effective as of November 30, 2009, and there are no more options outstanding under this plan.
Effective as of October 15, 2009, our Board of Directors approved an omnibus incentive plan (the “2009 Plan”). The 2009
Plan was approved by our stockholders at the Annual Meeting of Stockholders held on November 30, 2009. Under the plan,
we may grant nonqualified and incentive stock options and other stock-based awards to employees, non-employee directors
and consultants. As of June 30, 2016, a total of 1.1 million shares of common stock were reserved under the 2009 Plan for
issuance to our employees, non-employee directors and consultants.
Stock option activity for the year ended June 30, 2016 was as follows:
2009
Plan
Weighted
Average
Exercise Price
Weighted
Average
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
Exercised ................................................
Forfeited .................................................
Granted ...................................................
Outstanding at June 30, 2015 ............................ 185,000 $
— $
(45,000) $
— $
Outstanding at June 30, 2016 ............................ 140,000 $
Vested and exercisable at June 30, 2016 ........... 140,000 $
6.74
—
7.90
—
6.36
6.36
Restricted stock activity for the year ended June 30, 2016 was as follows (2009 Plan):
4.58
4.58
$
$
805,000
805,000
Number of
Shares
Weighted Average
Grant Date Fair
Value
Nonvested at June 30, 2015 ............................................................................
Granted .................................................................................................
Vested ...................................................................................................
Forfeited ...............................................................................................
Nonvested at June 30, 2016 ............................................................................
204,134 $
208,000 $
(99,146) $
(2,667) $
310,321 $
5.42
9.86
5.31
5.51
8.43
As of June 30, 2016, there were 508,104 shares available for grant under the 2009 Plan.
46
I. Commitments
We lease a total of 162,000 square feet at our manufacturing facility in Vista, California from an unaffiliated third party under
a non-cancelable operating lease. On July 31, 2013, we executed a third amendment to the lease for our manufacturing facility
in Vista, CA. As a result of this amendment, our facility lease has been extended for an additional 10 year term through March
2024.
During February 2016, we sold our former corporate headquarters in San Marcos, CA and the property was leased though a
sale-leaseback agreement through August 2016. The property was vacated during August 2016. We purchased the Carlsbad
facility in March 2016 and began to occupy as our new corporate headquarters during August 2016.
NAIE leases facility space in Manno, Switzerland. The leased space totals approximately 94,217 square feet. We primarily
use the facilities for manufacturing, packaging, warehousing and distributing nutritional supplement products for the
European marketplace. Effective July 1, 2014, NAIE entered into a new lease with its current landlord. The new lease
replaced, extended, and enlarged an existing lease between the same parties for the same building in Manno Switzerland.
NAIE intends to improve portions of the additional space acquired by the new lease, and will continue to use the entire leased
premises for offices, laboratory, warehouse and production. The new lease has a term of five years with a right for NAIE to
extend the lease for an additional five years. The initial five year term expires on June 30, 2019.
Minimum rental commitments (exclusive of property tax, insurance and maintenance) under all non-cancelable operating
leases with initial or remaining lease terms in excess of one year, including the lease agreements referred to above, are set
forth below as of June 30, 2016 (in thousands):
Gross minimum rental commitments $
2,826 $
2,781 $
2,778 $
1,394 $ 1,429 $
4,114 $ 15,322
2017
2018
2019
2020
2021
There-
after
Total
Rental expense totaled $3.1 million for the fiscal year ended June 30, 2016 and $3.0 million for fiscal 2015.
J. Economic Dependency
We had substantial net sales to certain customers during the fiscal years ended June 30 shown in the following table. The loss
of any of these customers, or a significant decline in sales or the growth rate of sales to these customers, or in their ability to
make payments when due, 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 year’s consolidated net sales were as follows (dollars in thousands):
Customer 1 .................................................................................................... $
Customer 2 ....................................................................................................
Customer 3 ....................................................................................................
$
Fiscal 2016
Fiscal 2015
49,442 $
13,952
(a)
63,394 $
29,724
8,090
11,018
48,832
(a) Sales were less than 10% of the respective period’s consolidated net sales.
Accounts receivable from these customers totaled $8.1 million at June 30, 2016 and $4.6 million at June 30, 2015.
We buy certain products, including beta-alanine, from a limited number of raw material suppliers. The loss of any of these
suppliers could have a material adverse impact on our net sales and net income. During fiscal 2016 and 2015, we did not have
any suppliers that individually represented greater than 10% of our raw material purchases.
K. Derivatives and Hedging
We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to forecasted
product sales denominated in foreign currencies and 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. There can be no guarantee any such contracts, to the extent we enter into
such contracts, will be effective hedges against our foreign currency exchange risk.
47
During the year ended June 30, 2016 and prior, we entered into 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 2017. 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
interest expense. We measure effectiveness by comparing the cumulative change in the hedge contract with the cumulative
change in the hedged item. During the year ended June 30, 2016, we did not have any losses or gains related to the ineffective
portion of our hedging instruments. No hedging relationships were terminated as a result of ineffective hedging or forecasted
transactions no longer probable of occurring for foreign currency forward contracts. We monitor the probability of forecasted
transactions as part of the hedge effectiveness testing on a quarterly basis.
As of June 30, 2016, the notional amounts of our foreign exchange contracts were $19.0 million (EUR 16.8 million). As of
June 30, 2016, a net asset of approximately $149,000, offset by $54,000 of deferred taxes, related to derivative instruments
designated as cash flow hedges was recorded in OCI. As of June 30, 2015, a net loss of approximately $191,000, offset by
$68,000 of deferred taxes, related to derivative instruments designated as cash flow hedges was recorded in OCI. It is expected
that $149,000 of the gross loss, as of June 30, 2016, will be reclassified into earnings in the next 12 months along with the
earnings effects of the related forecasted transactions.
As of June 30, 2016, $226,000 of the fair value of our cash flow hedges was classified in prepaids and other current assets,
$24,000 was classified other noncurrent assets, net in our Consolidated Balance Sheets. During the year ended June 30, 2016,
we recognized $413,000 of losses in OCI and reclassified $74,000 of gains from OCI to revenue. During the year ended
June 30, 2015, we recognized $2.2 million of gains in OCI and reclassified $2.4 million of gains from OCI to revenue.
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, 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 generally do not believe the resolution of these matters
will result in a material adverse effect on our business, consolidated financial condition, or results of operation. However, a
settlement payment or unfavorable outcome could adversely impact our results of operation. Our evaluation of the likely
impact of these actions could change in the future and we could have unfavorable outcomes that we do not expect.
M. Segment Information
Our business consists of three segments for financial reporting purposes. The three 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® trade mark, and (iii) branded products, which relates
to the marketing and distribution of our branded nutritional supplements and consists primarily of the products sold under
our Pathway to Healing® product line.
Due to the steady decline in sales of our Pathway to Healing® product line over the prior several years, we decided to
discontinue the product line. All termination activities related to the Pathway to Healing® product line were substantially
completed by December 31, 2014. We did not change the financial presentation in this report to reflect the branded products
segment as “Discontinued Operations” as the wind down of this product line did not meet the criteria for discontinued
operations presentation as prescribed by applicable accounting regulations (ASC 205-20).
We evaluate performance based on a number of factors. The primary performance measures for each segment are net sales
and income or loss from operations before corporate allocations. 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. The accounting
policies of our segments are the same as those described in the summary of significant accounting policies in Note A.
48
Our operating results by business segment for the years ended June 30 were as follows (in thousands):
Net Sales
Private-label contract manufacturing .................................................. $
Patent and trademark licensing ...........................................................
Branded products ................................................................................
$
92,420 $
21,781
–
114,201 $
2016
2015
Operating Income
Private-label contract manufacturing .................................................. $
Patent and trademark licensing ...........................................................
Branded products ................................................................................
Income from operations of reportable segments .................................
Corporate expenses not allocated to segments ....................................
$
12,184 $
6,153
–
18,337
(6,079)
12,258 $
2016
2015
Total Assets
Private-label contract manufacturing .................................................. $
Patent and trademark licensing ...........................................................
$
66,375 $
7,800
74,175 $
2016
2015
69,670
9,140
698
79,508
5,172
3,811
248
9,231
(5,072)
4,159
50,313
3,503
53,816
Our private-label contract manufacturing products are sold both in the U.S. and in markets outside the U.S., including Europe,
Canada, Mexico, Australia, South Africa and Asia. Our primary market outside the U.S. is Europe. Our patent and trademark
licensing activities are primarily based in the U.S. and our branded products are only sold in the U.S.
Net sales by geographic region, based on the customers’ location, for the two years ended June 30 were as follows (in
thousands):
United States ................................................................................................. $
Markets outside the United States .................................................................
Total net sales ..................................................................................... $
50,575 $
63,626
114,201 $
43,671
35,837
79,508
2016
2015
Products manufactured by NAIE accounted for 61% of net sales in markets outside the U.S. in fiscal 2016 and 74% in fiscal
2015. No products manufactured by NAIE were sold in the U.S. during the fiscal years ended June 30, 2016 and 2015.
Assets and capital expenditures by geographic region, based on the location of the company or subsidiary at which they were
located or made, for the two years ended June 30 were as follows (in thousands):
2016
United States ........................................................................ $
Europe ..................................................................................
$
Long-Lived
Assets
Total
Assets
Capital
Expenditures
9,678 $
5,489
15,167 $
49,755 $
24,420
74,175 $
6,423
4,018
10,441
2015
United States ........................................................................ $
Europe ..................................................................................
$
Long-Lived
Assets
Total
Assets
Capital
Expenditures
5,525 $
2,108
7,633 $
34,988 $
18,828
53,816 $
1,071
637
1,708
49
N. Subsequent Events
On July 14, 2016, we purchased 24 forward contracts designated and effective as cash flow hedges to protect against the
foreign currency exchange risk inherent in a portion of our forecasted sales transactions denominated in Euros. The 24
contracts expire monthly beginning September 2016 and ending August 2017. The forward contracts had a notional amount
of 30.5 million Euros and a weighted average forward rate of $1.12.
50
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure 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, evaluated the
effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2016. Based on such
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
were effective as of June 30, 2016.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the
Company, and for performing an assessment of the effectiveness of internal control over financial reporting as of June 30,
2016. For this purpose, internal control over financial reporting refers to a process designed by, or under the supervision of,
the Company’s principal executive and financial officers and effected by the Company’s board of directors, management and
other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of
the Company are being made only in accordance with authorizations of management and directors of the Company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of
the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of
June 30, 2016 based upon criteria in an Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this assessment, management believes the Company’s
internal control over financial reporting was effective as of June 30, 2016 based on the criteria issued by COSO.
This report does not include an attestation report of the Company’s independent registered public accounting firm regarding
internal control over financial reporting. Management’s report was not required to be attested to by the Company’s
independent registered public accounting firm pursuant to applicable law and rules that permit the Company to provide only
management’s report in this report.
(c) Changes in Internal Control Over Financial Reporting
There were no changes to our internal control over financial reporting during the fourth quarter ended June 30, 2016 that
have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
51
The information called for under Items 10- 14 of this Part III will be incorporated by reference from our definitive proxy
statement for our Annual Meeting of Stockholders to be held on December 2, 2016, to be filed on or before October 28, 2016.
PART III
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report:
PART IV
(1) Financial Statements. The financial statements listed below are included under Item 8 of this report:
• Consolidated Balance Sheets as of June 30, 2016 and 2015;
• Consolidated Statements of Operations and Comprehensive Income for the years ended June 30, 2016 and
2015;
• Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2016 and 2015;
• Consolidated Statements of Cash Flows for the years ended June 30, 2016 and 2015; and
• Notes to Consolidated Financial Statements.
(2) Exhibits. The following exhibit index shows those exhibits filed with this report and those incorporated by
reference:
52
Exhibit
Number
3(i)
3(ii)
Description
Incorporated By Reference To
EXHIBIT INDEX
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 December 31, 2004, filed with
the commission on February 14, 2005
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 NAI’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 September 8, 2005
10.1
10.2
10.3
10.4
10.5
1999 Omnibus Equity Incentive Plan as adopted
effective May 10, 1999, amended effective January 30,
2004, and further amended effective December 3, 2004*
Exhibit 10.1 of NAI’s Quarterly Report on Form 10-Q for
the quarterly period ended December 31, 2004, filed with
the commission on February 14, 2005
Amended and Restated Exclusive License Agreement
effective as of September 1, 2004 by and among NAI
and Dr. Reginald B. Cherry
Exhibit 10.11 of NAI’s Annual Report on Form 10-K for
the fiscal year ended June 30, 2004, filed with the
commission on September 14, 2004
Exclusive License Agreement effective as of
September 1, 2004 by and among NAI and Reginald B.
Cherry Ministries, Inc.
Exhibit 10.12 of NAI’s Annual Report on Form 10-K for
the fiscal year ended June 30, 2004, filed with the
commission on September 14, 2004
First Amendment to Exclusive License Agreement
effective as of December 10, 2004 by and among NAI
and Reginald B. Cherry Ministries, Inc.
Exhibit 10.13 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2004, filed
with the commission on February 14, 2005
Lease of Facilities in Vista, California between NAI and
Calwest Industrial Properties, LLC, a California limited
liability company (lease reference date June 12, 2003)
Exhibit 10.10 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2003, filed
with the commission on November 5, 2003
10.6
Form of Indemnification Agreement entered
between NAI and each of its directors
into
Exhibit 10.15 of NAI’s Annual Report on Form 10-K for
the fiscal year ended June 30, 2004, filed with the
commission on September 14, 2004
10.7
10.8
Loan Agreement between NAIE and Credit Suisse dated
as of September 22, 2006, including general conditions
(portions of the Loan Agreement have been omitted
pursuant to a request for confidential treatment)
Exhibit 10.36 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2006, filed
with the commission on November 1, 2006
First Amendment to Loan Agreement between NAIE
and Credit Suisse dated as of February 19, 2007
Exhibit 10.41 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2007, filed with
the commission on May 14, 2007
10.9
2009 Omnibus Incentive Plan*
Exhibit D of NAI’s definitive Proxy Statement filed with
the commission on October 16, 2009
10.10 Manufacturing Agreement by and between NSA, Inc.
and NAI dated April 1, 2005
Exhibit 10.43 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2009, filed
with the commission on February 16, 2010
10.11 Manufacturing Agreement by and between Mannatech,
Inc. and NAI dated April 22, 1998
53
Exhibit 10.44 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2009, filed
with the commission on February 16, 2010
10.12
10.13
10.14
10.15
First Amendment to Manufacturing Agreement by and
between Mannatech, Incorporated and NAI dated
May 23, 2003
Exhibit 10.45 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2009, filed
with the commission on February 16, 2010
Second Amendment to Manufacturing Agreement by
and between Mannatech, Incorporated and NAI dated
July 1, 2003
Exhibit 10.46 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2009, filed
with the commission on February 16, 2010
Third Amendment to Manufacturing Agreement by and
between Mannatech, Incorporated and NAI dated July 1,
2004
Exhibit 10.47 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2009, filed
with the commission on February 16, 2010
Fourth Amendment to Manufacturing Agreement by and
among Mannatech, Incorporated, Mannatech Swiss
International GmbH and NAI dated January 1, 2008
Exhibit 10.48 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2009, filed
with the commission on February 16, 2010
10.16 Manufacturing Sales Agreement by and between
Mannatech, Incorporated and NAI dated November 19,
2004
Exhibit 10.49 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2009, filed
with the commission on February 16, 2010
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
Amendment to Manufacturing Sales Agreement by and
among Mannatech, Incorporated, Mannatech Swiss
International GmbH and NAI dated January 1, 2008
Exhibit 10.50 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2009, filed
with the commission on February 16, 2010
Exclusive Manufacturing Agreement by and between
NSA, Inc., NAI and NAIE dated as of April 1, 2005
Exhibit 10.51 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2009, filed
with the commission on February 16, 2010
Amended and Restated Employment Agreement dated
as of August 31, 2010, by and between NAI and Mark
A. LeDoux*
Exhibit 10.41 of NAI’s Annual Report on Form 10-K for
the fiscal year ended June 30, 2010, filed with the
commission on September 17, 2010
Amended and Restated Employment Agreement dated
as of August 31, 2010, by and between NAI and Kenneth
E. Wolf
Exhibit 10.42 of NAI’s Annual Report on Form 10-K for
the fiscal year ended June 30, 2010, filed with the
commission on September 17, 2010
License and Fee Agreement effective November 10,
2010 by and among Roger Harris, Mark Dunnett, Kenny
Johansson and NAI
Exhibit 10.40 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2010, filed
with the commission on November 12, 2010
Credit Agreement by and between NAI and Wells Fargo
Bank, N.A. effective as of December 1, 2010
Exhibit 10.1 of NAI’s Current Report on Form 8-K dated
December 16, 2010, filed with the commission on
December 22, 2010
ISDA 2002 Master Agreement dated as of March 10,
2011 by and between Bank of America N.A. and NAI
(with Schedule dated March 10, 2011)
Exhibit 10.31 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2011, filed with
the commission on May 16, 2011
First Amendment to Credit Agreement by and between
NAI and Wells Fargo Bank, N.A. effective as of
November 28, 2011
Exhibit 10.1 of NAI’s Current Report on Form 8-K dated
December 27, 2011, filed with the commission on
December 30, 2011
Revolving Line of Credit Note made by NAI for the
benefit of Wells Fargo Bank, N.A. dated November 28,
2011 in the amount of $5,000,000
Exhibit 10.2 of NAI’s Current Report on Form 8-K dated
December 27, 2011, filed with the commission on
December 30, 2011
First Amendment to Manufacturing Agreement by and
between NSA, Inc. and NAI effective as of April 1, 2012
Exhibit 10.35 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2012, filed with
the commission on May 14, 2012
54
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
First Amendment
to Exclusive Manufacturing
Agreement by and between NSA, Inc., NAI and NAIE
effective as of April 1, 2005.
Exhibit 10.36 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2012, filed with
the commission on May 14, 2012
Second Amendment to Credit Agreement by and
between NAI and Wells Fargo Bank, N.A. effective as
of December 7, 2012
Exhibit 10.38 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2012, filed
with the commission on February 12, 2013
Revolving Line of Credit Note made by NAI for the
benefit of Wells Fargo Bank, N.A. dated December 7,
2012 in the amount of $5,000,000
Exhibit 10.39 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2012, filed
with the commission on February 12, 2013
Third amendment to the Lease of Facilities in Vista,
California between NAI and CWCA Vista Distribution
77, LLC, a Delaware limited liability company
Exhibit 10.40 of NAI’s Annual Report on Form 10-K for
the fiscal year ended June 30, 2013, filed with the
commission on September 19, 2013
Second amendment to the Amended and Restated
Employment Agreement, by and between NAI and Mark
A. LeDoux, effective July 1, 2013*
Exhibit 10.41 of NAI’s Annual Report on Form 10-K for
the fiscal year ended June 30, 2013, filed with the
commission on September 19, 2013
Second amendment to the Amended and Restated
Employment Agreement, by and between and Kenneth
E. Wolf, effective July 1, 2013*
Exhibit 10.42 of NAI’s Annual Report on Form 10-K for
the fiscal year ended June 30, 2013, filed with the
commission on September 19, 2013
Third Amendment to Credit Agreement by and between
NAI and Wells Fargo Bank, N.A. effective as of
November 1, 2013
Exhibit 10.43 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2013 filed
with the commission on February 12, 2014.
Revolving Line of Credit Note made by NAI for the
benefit of Wells Fargo Bank, N.A. dated November 1,
2013 in the amount of $5,000,000
Exhibit 10.44 of NAI’s Quarterly Report on Form 10-Q
for the quarterly period ended December 31, 2013 filed
with the commission on February 12, 2014.
Third amendment to the Amended and Restated
Employment Agreement, by and between NAI and Mark
A. LeDoux, effective July 7, 2014*
Exhibit 10.35 of NAI’s Annual Report on Form 10-K for
the fiscal year ended June 30, 2014, filed with the
commission on September 25, 2014.
Third amendment to the Amended and Restated
Employment Agreement, by and between and Kenneth
E. Wolf, effective July 7, 2014*
Exhibit 10.36 of NAI’s Annual Report on Form 10-K for
the fiscal year ended June 30, 2014, filed with the
commission on September 25, 2014.
Agreement to License by and between NAI and
Compound Solutions, Inc. effective as of April 1, 2014
Exhibit 10.37 of NAI’s Annual Report on Form 10-K for
the fiscal year ended June 30, 2014, filed with the
commission on September 25, 2014.
Lease of Facilities in Manno, Switzerland between
NAIE and Mr. Silvio Tarchini effective July 1, 2014
(English translation)
Exhibit 10.38 of NAI’s Annual Report on Form 10-K for
the fiscal year ended June 30, 2014, filed with the
commission on September 25, 2014.
Fourth amendment to the Amended and Restated
Employment Agreement, by and between NAI and Mark
A. LeDoux, effective October 1, 2015*
Exhibit 10.41 of NAI’s Annual Report on Form 10-Q for
the quarterly period ended September 30, 2015, filed with
the commission on November 12, 2015.
Fourth amendment to the Amended and Restated
Employment Agreement, by and between NAI and
Kenneth E. Wolf, effective October 1, 2015*
Exhibit 10.42 of NAI’s Annual Report on Form 10-Q for
the quarterly period ended September 30, 2015, filed with
the commission on November 12, 2015.
Amended and Restated Employment Agreement, by and
between NAI and Michael E. Fortin, effective
October 1, 2015*
Exhibit 10.43 of NAI’s Annual Report on Form 10-Q for
the quarterly period ended September 30, 2015, filed with
the commission on November 12, 2015.
55
10.42 Credit agreement by and between NAI and the Wells
Fargo Bank N.A. effective as of February 1, 2016
Exhibit 10.39 of NAI’s Annual Report on Form 10-Q for
the quarterly period ended December 31, 2015, filed with
the commission on February 9, 2016.
10.43
10.44
Revolving Line of Credit Note made by NAI for the
benefit of Wells Fargo Bank N.A. dated February 1,
2016 in the amount of $10,000,000
Exhibit 10.40 of NAI’s Annual Report on Form 10-Q for
the quarterly period ended December 31, 2015, filed with
the commission on February 9, 2016.
First amendment
the Amended and Restated
Employment Agreement, by and between NAI and
Michael E. Fortin, effective September 1, 2016*
to
Exhibit 10.44 of NAI’s Current Report on Form 8-K
dated September 6, 2016, filed with the commission on
September 6, 2016
21
Subsidiaries of the Company
Filed herewith
23.1
31.1
31.2
Consent of Independent Registered Public Accounting
Firm
Filed herewith
Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer
Filed herewith
Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer
Filed herewith
32
Section 1350 Certification
Filed herewith
101.INS XBRL Instance Document
Furnished herewith
101.SCH XBRL Taxonomy Extension Schema Document
Furnished herewith
101.CAL XBRL Taxonomy Extension Calculation Linkbase
Furnished herewith
Document
101.DEF XBRL Taxonomy Extension Definition Linkbase
Furnished herewith
Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document Furnished herewith
101.PRE XBRL Taxonomy Extension Presentation Linkbase
Furnished herewith
Document
* Indicates management contract or compensatory plan or arrangement.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, thereunto duly
authorized.
Date: September 19, 2016
NATURAL ALTERNATIVES INTERNATIONAL, INC.
By: /s/ Mark A. LeDoux
Mark A. LeDoux, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of Natural Alternatives International, Inc. and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Mark A. LeDoux
(Mark A. LeDoux)
/s/ Michael E. Fortin
(Michael E. Fortin)
/s/ Joe E. Davis
(Joe E. Davis)
/s/ Alan G. Dunn
(Alan G. Dunn)
/s/ Alan J. Lane
(Alan J. Lane)
/s/ Lee G. Weldon
(Lee G. Weldon)
September 19, 2016
September 19, 2016
September 19, 2016
September 19, 2016
September 19, 2016
September 19, 2016
Chief Executive Officer and
Chairman of the Board of Directors
(principal executive officer)
Chief Financial Officer
(principal financial officer and
principal accounting officer)
Director
Director
Director
Director
57
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CORPORATE INFORMATION
OFFICERS
Mark LeDoux
Chairman and Chief Executive
Officer
INVESTOR RELATIONS
Natural Alternatives International, Inc.
1535 Faraday Avenue
Carlsbad, California 92078 USA
Kenneth Wolf
President, Chief Operating Officer
and Secretary
Michael Fortin
Chief Financial Officer
BOARD OF DIRECTORS
Mark LeDoux
Joe Davis
Alan Dunn
Alan Lane
Lee Weldon
ANNUAL MEETING
The annual meeting of the
stockholders will be held at
11:00 a.m. PST on Friday,
December 2, 2016 at
Natural Alternatives International, Inc.
1535 Faraday Avenue
Carlsbad, California 92008
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Haskell & White LLP
300 Spectrum Center Drive
Suite 300
Irvine, California 92618
CORPORATE COUNSEL
FisherBroyles LLP
12707 High Bluff Drive, Suite 200
San Diego, California 92130
TRANSFER AGENT & REGISTRAR
Computershare, Inc.
211 Quality Circle, Suite 210
College Station, Texas 77845
T: 800-522-6645
www.Computershare.com/investor
TRADEMARKS
NAI®, CarnoSyn®, SR CarnoSyn® are registered trademarks of Natural Alternatives International, Inc.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are not historical facts and information. These statements represent our intentions,
expectations and beliefs concerning future events, including, among other things, our future operating results and financial condition, our ability
to maintain the viability of our patents and generate revenues from the commercialization of our patents and trademarks, maintain or increase
sales to new and existing customers, as well as the availability of quality raw materials, future economic conditions and the impact of such
conditions on our business. We wish to caution readers these statements involve risks and uncertainties that could cause actual results and
outcomes for future periods to differ materially from any forward-looking statement or views expressed herein. Our financial performance and the
forward-looking statements contained herein are further qualified by other risks including those set forth from time to time in the documents filed
by us with the Securities and Exchange Commission, including our most recent 2016 Annual Report on Form 10-K.
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Custom Formulating ● Blending ● Tablets ● Capsules ● Enteric Coating ● Powders
Pre-Blends ● Packaging Solutions Including High Speed Bottling, Packets and Blister Packs
Domestic and International Regulatory Support
CORPORATE HEADQUARTERS
1535 Faraday Avenue • Carlsbad, California 92008 USA • T: 760‐736‐7700 • F: 760‐744‐9589 • E: info@nai‐online.com
NAI EUROPE
Centro Galleria 1 • Via Cantonale • 6928 Manno • Switzerland • T: 41‐91‐610‐8460 • F: 41‐91‐610‐8470
NAI JAPAN
Yokohama City • Kanagawa‐Ku ● Japan
004CTN1CAA
1-800-VITAMIN • WWW.NAI-ONLINE.COM