NATURAL ALTERNATIVES
INTERNATIONAL, INC.
CUSTOM CONTRACT MANUFACTURING
OF SUPPLEMENTS SINCE 1980
2020 ANNUAL REPORT
Chairman’s Letter to the Shareholders
Dear Shareholders,
Our Fiscal Year ended June 30, 2020 presented some challenging circumstances as we navigated the
ongoing global COVID‐19 pandemic (COVID‐19). Our facilities, located in both the United States and
Europe, have been able to, and continue to, operate as essential businesses providing our customers with
products that aid in the health and wellbeing of their customers, which is even more important now than
ever before. We experienced a decline in sales and profitability during fiscal 2020. Despite the challenges
presented to us by COVID‐19, we finished fiscal 2020 strong and saw year over year sales and profitability
growth in the fourth quarter. The positive momentum in the fourth quarter of fiscal 2020 came mostly
from our private‐label contract manufacturing business and from both existing and new customer
relationships. In the beginning of fiscal 2020 one of our largest customers continued to experience
softness in their sales but that trend reversed during the fourth quarter of fiscal 2020 and was a major
contributor to our sales growth in the fourth quarter. We believe our reputation for quality, and our
financial capability will continue to enhance our ability to attract and retain customers to our state‐of‐the‐
art manufacturing facilities in both the USA and Switzerland, especially in light of the current pandemic.
We began fiscal 2021 ‐our 41st year of operation‐ with plenty of momentum generated from the addition
of new multi‐national customers and new customer products added during the prior year. As a result, we
believe we are setting the table for significant sales growth in fiscal 2021 and beyond, which should also
assist in reducing customer concentration factors. Moreover, we continue to have a strong balance sheet
that allows us to meet the dynamic service demands of new and existing customers.
Our CarnoSyn® beta‐alanine sports nutrition business continues to experience challenges associated with
competition from generic beta‐alanine and the unfortunate impact of COVID‐19 on the sports nutrition
industry. We still believe strongly in the potential for our patent‐protected sustained release SR
CarnoSyn® beta‐alanine. We believe there is ample opportunity for this product in the burgeoning healthy
aging and wellness marketplace. We believe this market could be larger in size and scope than the sports
nutrition channel where our instant release CarnoSyn® beta‐alanine has been so successful.
Concluding our 40th year of operation, and embarking on our fifth decade, we are pleased with our internal
identification and deployment of our next generation of leaders in various disciplines, including
management, quality control, product development, research, material management, acquisition and
sales.
We find more and more people globally embracing dietary supplementation with natural products. We
remain committed to leading the responsible members of our industry and enriching the world with the
best of nutrition.
We thank you for your continued support of our worthy endeavors.
Sincerely,
Mark A. LeDoux
Chairman of the Board
Chief Executive Officer
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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, 2020
000-15701
(Commission file number)
NATURAL ALTERNATIVES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State of incorporation)
1535 Faraday Ave
Carlsbad, CA 92008
(Address of principal executive offices)
84-1007839
(IRS Employer Identification No.)
(760) 744-7700
(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
Title of Each Class
Common Stock, $0.01 par value per share
Trading Symbol(s)
NAII
Name of Each Exchange on Which Registered
Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act:
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 every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T during the preceding 12 months (or for such shorter period that NAI was required to submit 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, or an
emerging growth company.
Large accelerated filer
Non-accelerated filer
☐
☐
Accelerated filer
Smaller reporting company
☐
☒
Emerging Growth Company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether NAI is a shell company (as defined in Rule 12b-2 of the Exchange Act): ☐ Yes ☒ No
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, 2019) was approximately $56,302,123 (based on the closing sale price of $7.98 reported by Nasdaq on
December 31, 2019). For this purpose, the shares subject to an irrevocable proxy in favor of the NAI Board of Directors, and all of the shares held
by NAI’s officers, and directors, and their affiliates were assumed to be common stock held by affiliates of NAI.
As of September 18, 2020, 6,521,921 shares of NAI’s common stock were outstanding, net of 2,334,756 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, to be filed on or
before October 28, 2020, for its Annual Meeting of Stockholders to be held December 4, 2020.
DOCUMENTS INCORPORATED BY REFERENCE
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TABLE OF CONTENTS
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS ......................................................................................
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 7A. Quantitative and Qualitative Disclosures About Market Risk .........................................................................................
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 or pessimism about future operating
results, are forward-looking statements. Forward-looking statements in this report may include statements about:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the impact of the COVID-19 Pandemic (“COVID-19”), and other external factors, both within and outside of our control,
on our business and results in operations, our employees, our supply chain and on our vendors and our customers;
future financial and operating results, including projections of net sales, revenue, income or loss, net income or loss per
share, profit margins, expenditures, liquidity, and other financial results;
our ability to maintain or increase our patent and trademark licensing revenues;
our ability to develop market acceptance for and increase sales of new products, develop relationships with new customers
and maintain or improve existing customer relationships;
inventory levels, including the adequacy of quality raw material and other inventory items to meet future customer demand,
in particular assumptions regarding the impact of the COVID-19 pandemic;
our ability to protect our intellectual property;
future economic and political conditions, including implementation of new or increased tariffs;
our ability to improve operating efficiencies, manage costs and business risks and improve or maintain profitability;
currency exchange rates, 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;
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;
sources and availability of raw materials, including the limited number of suppliers of beta-alanine meeting our quality
requirements;
the future adequacy and intended use of our facilities;
potential manufacturing and distribution channels, product returns, and potential product recalls;
future customer orders;
the impact of external factors on our business and results of operations, especially 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 financial reserves and allowances;
the sufficiency of our available cash, cash equivalents, and potential cash flows from operations to fund our working capital
needs and capital expenditures through the next 12 months and longer;
the impact of accounting pronouncements and our adoption of certain accounting guidance; and
other assumptions described in this report underlying or relating to any forward-looking statements.
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 are or may
be outside of our control. When considering forward-looking statements, you should carefully review the risks, uncertainties and other
cautionary statements in this report as they identify certain important factors that could cause actual results to differ materially from those
expressed in or implied by the forward-looking statements. These factors include, among others, the risks described under Item 1A of Part
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).
1
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 allow us to offer a wide range of innovative nutritional products and services to such customers including: 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 raw material ingredient known as beta-alanine, which is primarily commercialized
through the direct sale of this raw material and supply agreements with third parties for the distribution and use of this raw material under
our CarnoSyn® and SR CarnoSyn® trademarks.
History
Originally founded in 1980, Natural Alternatives International, Inc. (NAI) reorganized as a Delaware corporation in 1989. Our principal
executive offices are located at 1535 Faraday Ave, Carlsbad, CA 92008. Our U.S. manufacturing facility is located approximately three
miles away in Vista, California.
In January 1999, we formed Natural Alternatives International Europe S.A. (NAIE), a Swiss corporation, and our wholly-owned subsidiary,
based in Manno, Switzerland. In September 1999, NAIE opened its manufacturing facility in Manno, Switzerland, which has grown over
the ensuing years and currently possesses manufacturing capabilities in encapsulation, powders, tablets, finished goods packaging, quality
control, laboratory testing, warehousing, and distribution and administration.
In 1997, we obtained certain patent rights related to instant-release beta-alanine and have since expanded this patent estate to include
sustained-release beta-alanine. We sell these products under our trademarks CarnoSyn® and SR CarnoSyn®. As part of our business
strategy, we have sought to commercialize our CarnoSyn® patent estate through contract manufacturing and royalty and license agreements.
We directly sell beta-alanine and license our related patent and trademark rights to others for use in or with their products.
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, other than “NAI” and as applicable, to 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 U.S. manufacturing facilities were recertified on
November 8, 2016 by the Therapeutic Goods Administration (TGA) of Australia after its audit of our GMP’s. 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 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
facilities and quality systems for compliance with good manufacturing practices, and a renewed GMP clearance was issued to NAI that
would have expired on August 3, 2020. However, due to the COVID-19 pandemic, TGA overseas GMP inspections have been suspended
and as a result, at this time, NAI has been issued a 6-month extension of its current GMP clearance certificate.
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 setting forth 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 represented.
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, while 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 the GMP requirements 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 strives to provide
information needed to make good choices and informed decisions regarding one’s health. NAI was issued its initial certification by Health
2
Canada in December 2011 and received its most recent renewal in November 2019, which is valid until December 2022. This approval
demonstrates another level of regulatory compliance by NAI, and may also ease the approval process for our customers who import products
into Canada.
During March 2015, our Vista California facility became certified as an Organic Processor and Handler by Natural Food Certifiers
(NFC). This certification demonstrates our facility meets the USDA National Organic Program standards and allows our contract
manufacturing and packaging services to include products labeled as Organic. The certification requires annual renewal and was last
renewed in November 2019. 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 the manufacturing facility and processes for, and the 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 operates a manufacturing, warehousing, packaging and distribution facility in Manno, Switzerland. In January 2004, NAIE obtained
a pharmaceutical license from the Swissmedic Authority of Bern, Switzerland to process pharmaceuticals for packaging, import, export
and sale within Switzerland and other countries. 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 their GMPs. 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. NAIE's last Swissmedic
inspection was conducted in August 2020 and we expect the renewed certification to be issued in the second quarter of fiscal 2021.
In March 2019, the Japanese Minister of Health, Labor, and Welfare approved beta-alanine for use in Japanese food products. We have
partnered with Shimizu Chemical Corporation of Hiroshima Japan to provide exclusive distribution of our CarnoSyn® and SR CarnoSyn®
beta-alanine in Japan.
Business Strategy
Our goals are to achieve long-term growth and profitability and to diversify our sales base. To accomplish these goals, we have sought,
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 to assist in developing relationships with additional quality
oriented customers;
expand the commercialization of our beta-alanine patent estate through raw material sales, developing a new sales
distribution channel under the Wellness and Healthy Aging category for our sustained release form of beta-alanine marketed
under our SR CarnoSyn® trademark, and exploiting new contract manufacturing opportunities, license agreements while
protecting our proprietary rights;
•
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 customer’s nutritional supplements and
their adherence to label claims through 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 collectively provide us with a sustainable competitive advantage and provide 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 because it allows associates or other individuals to 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® and
SR 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 there are several other markets and distribution channels that represent growth opportunities for
the distribution of CarnoSyn® and SR CarnoSyn® beta-alanine. We believe SR CarnoSyn® is a superior delivery system of CarnoSyn®
beta-alanine based on its sustained release profile that allows for increased daily dosing and improved muscle retention of carnosine. We
believe SR CarnoSyn® beta-alanine is a vital component in the further commercialization of our patent estate outside of the sports nutrition
channel. Our patents related to instant release beta-alanine extend through 2026 while our patents for SR CarnoSyn® extend through 2027.
3
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 to consumer ecommerce channels, 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 that include but are not limited to the
following:
•
customized product formulation;
clinical studies;
•
• manufacturing;
• marketing support;
•
•
•
international regulatory and label law compliance;
international product registration; and
packaging in multiple formats and labeling design.
We also seek to commercialize our patent and trademarks through the 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 ............................................
Total Net Sales ....................................................... $
Research and Development
2020
$
106,291
12,585
118,876
%
89 $
11
100 $
2019
$
121,598
16,692
138,290
%
88
12
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 both direct and participate in clinical research studies, often in collaboration with scientists and research
institutions, to validate the benefits of an ingredient or a product and provide scientific support for product claims and marketing initiatives.
We believe our commitment to research and development, as well as to 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 often included as a component of the price we charge to manufacture and deliver
their products. Research and development costs, including costs associated with international regulatory compliance services we provide
to our customers, are expensed as incurred.
Our research and development expenses for the fiscal year ended June 30, 2020 remained consistent at $1.8 million, compared to the same
amount for the fiscal year ended June 30, 2019.
Sources and Availability of Raw Materials
We use many 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 patents and trademarks 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.
4
Our contract manufacturing business did not experience any significant shortages or difficulties obtaining adequate supplies of raw
materials during fiscal 2020. However, due to COVID-19 there continues to be significant pricing pressures and supply chain challenges
associated with various raw materials and packaging components. Additionally, there still remains uncertainty related to existing and
potentially increased tariffs. Throughout fiscal 2021, we expect upward pricing pressures for raw materials, packaging components, and
other costs will continue as a result of limited supplies of various ingredients, the effects of higher labor and transportation costs, and the
potential levy of tariffs on goods we import from overseas, including beta-alanine.
Customers
We have two private-label contract manufacturing customers that each individually represent more than 10% of our consolidated net sales.
The loss of either 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, plant extracts, 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 and internet sales).
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 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 have sufficient information 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.
5
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 in areas 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 regulated by both these and other
authorities include, among others:
•
•
•
•
•
product claims and advertising;
product labels;
product ingredients;
how we manufacture, package, distribute, import, export, sell and store our products; and
our classification as an essential business and our right to continue operations during government shutdowns.
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 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 re-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 about such supplements trigger regulatory status, such as claims that a
product may heal, mitigate, cure or prevent an illness, disease or malady.
In December 2006, the Dietary Supplement and Nonprescription Drug Consumer Protection Act (the "2006 Act") was passed, and further
revised the provisions of the Federal Food, Drug and Cosmetic Act. Under the 2006 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 to notify the FDA of any serious
adverse event report. Events reported to the FDA are not considered an admission from a company that its product caused or contributed
to the reported event. We believe we are in compliance with the 2006 Act and we are committed to meeting or exceeding the requirements
of the 2006 Act.
We are also subject to a variety of other regulations in the U.S., including those relating to health, safety, bioterrorism, taxes, labor,
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 or
that being in compliance will not become prohibitively costly to our business.
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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, or continue to operate in, 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 or that being
in compliance will not become prohibitively costly to our business. 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.
Intellectual Property
Trademarks. We have developed and use trademarks in our business, particularly relating to corporate, brand and product names. We own
48 trademark registrations; including ten registrations in the U.S. Six of these U.S. registrations are incontestable. Federal registration of a
trademark in the United States affords the owner nationwide exclusive trademark rights in the registered mark and the ability to prevent
subsequent users from using the same or similar mark. However, to the extent any other business operator has acquired trademark rights in
a mark by its consistent use of such 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 prior established non-statutory (“Common Law”) rights in that geographic
area. In addition, rights in a registered mark are dependent upon the continued use of the mark in connection with the goods and/or services
set forth in the registration.
We have 37 foreign trademark registrations covering 41 countries including registrations for CarnoSyn and SR CarnoSyn in Australia,
Brazil, Canada, China, Cuba, the European Union Intellectual Property Office, Hong Kong, Israel, Japan, Mexico, New Zealand, Poland,
and South Korea. Registrations have also been obtained for CarnoSyn® and the SR CarnoSyn® logos in Switzerland and for CarnoSyn SR®
in Australia and the European Union. We currently have six U.S. trademark applications pending and three International applications
pending. We also claim common law ownership and protection of certain unregistered trademarks and service marks based upon our
continued use of the marks under common law. In some countries, such as the United States, Common Law offers protection of a mark
within the particular geographic area in which it is continually and deliberately 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 current or future trademark applications will be granted or our current trademarks or registrations 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 (including
established but non-statutory 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 nine U.S. patents and eighteen 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. The royalty payments and licenses are expected to continue until the expiration of the patents. We also sell
beta-alanine, and license our patent and trademark rights related to beta-alanine. These patents extend through 2027.
Licensing, royalties, raw material sales, and revenues we have received associated with the sale and licensing of beta-alanine under the
CarnoSyn® and SR CarnoSyn® trade names were primarily related to the direct sale of the raw material beta-alanine and totaled $12.6
million in fiscal 2020. We incurred intellectual property litigation and patent compliance expenses of approximately $2.0 million during
fiscal 2020 primarily in connection with our efforts to procure and protect our proprietary rights and patent estate. We expect to continue
to incur these types of litigation and compliance expenses during fiscal 2021.
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Employees
As of June 30, 2020, we employed 175 full-time employees in the U.S., three of whom held executive management positions. Of the
remaining full-time employees, 40 were employed in research, laboratory and quality control, 15 in sales and marketing, and 117 in
manufacturing and administration. From time to time we use temporary personnel to help us meet shorter-term operating requirements.
These positions typically are in manufacturing and manufacturing support. As of June 30, 2020, we had nine temporary personnel.
As of June 30, 2020, NAIE employed an additional 87 full-time employees and 54 temporary employees. Most of these positions were in
the areas of manufacturing and manufacturing support.
In response to COVID-19, the state of California has taken measures intended to expand the availability of workers’ compensation or to
change the presumptions applicable to workers compensation measures. These actions may increase our exposure to workers’ compensation
claims and increase our cost of insurance. Additionally, the federal Families First Coronavirus Response Act (the “FFCRA”) expanded
paid sick and family medical leave for employees affected by COVID-19. The FFCRA covers the cost of this paid leave with refundable
tax credits. While we have yet to experience significant labor shortages due to COVID-19, there is no guarantee that we will be able to
maintain or secure sufficient labor to continue manufacturing operations at needed levels.
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, but we cannot assure this will continue in the future.
Seasonality
In addition to general economic factors, we are impacted by seasonal factors and trends, such as major cultural events and vacation patterns.
We manufacture and sell products to customers that operate in many different countries throughout the world and these seasonal factors
vary by region. Although we believe the impact of seasonality on our consolidated results of operations is minimal, our quarterly results
may vary significantly in the future due to the timing of private-label contract manufacturing and CarnoSyn® and SR CarnoSyn® beta-
alanine raw material orders. We cannot provide assurances future revenue trends will follow historical patterns. The market price of our
common stock may be adversely affected by these seasonal factors.
Financial Information about Our Business Segments and Geographic Areas
Our operations are comprised of two reportable segments:
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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® and SR
CarnoSyn® trademarks.
Our private-label contract manufacturing products are sold both in the U.S. and in markets outside the U.S., including Europe, Australia,
Asia and Canada. Our primary markets outside the U.S. are Europe and Asia. 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.
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ITEM 1A.
RISK FACTORS
When evaluating our business and future prospects, you should carefully review and consider the risks described below in conjunction with
other information in this report and in other reports and documents we file with the SEC. The risks and uncertainties described below are
not the only ones we face. Additional material risks and uncertainties, not presently known to us, or that we currently see as immaterial,
may also occur or become material. 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 our stockholders could lose all or a portion of the value of their investment in our common stock.
The COVID-19 pandemic has significantly impacted worldwide economic conditions and could have a material adverse effect on our
operations and business.
While our facilities have been able to continue to operate, the global COVID-19 pandemic has caused disruptions in supply chains, affecting
production and sales across a range of industries. While the disruptions are currently expected to be temporary, there is considerable
uncertainty around the duration and the impact of these disruptions.
The extent of the impact of COVID-19 on our operational and financial performance will depend on the on-going and future impact on our
customers, vendors, and availability of labor as well as the potential impact of future expanded local, state, or federal restrictions – all of
which are uncertain and are difficult to predict.
Out of an abundance of caution with regard to the COVID-19 pandemic and to increase our liquidity in response to the unknown risk from
the pandemic, its potential to have a material negative impact on our business and as a preventative measure to provide our business with
the potentially needed additional liquidity resulting from such negative impact, we withdrew $10 million from our credit facility with Wells
Fargo in the third quarter of fiscal 2020. While we are unable to determine or predict the nature, duration, or scope of the overall impact
the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we believe we will be able to remain
operational and our working capital will be sufficient for us to do so. However, there can be no assurance we will be able to obtain additional
working capital in the amounts or in the timing that may become necessary, which could adversely affect our financial condition and results
of operations.
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 their business, personnel or the timing or amount of their 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, 2020, sales to our largest customer, The Juice Plus+ Company, were approximately 44% of our
consolidated net sales. During fiscal 2020, sales to Juice Plus+ declined 23% primarily as a result of reduced customer demand, and we
cannot predict if sales to Juice Plus+ will increase or decrease in the future. We also have one other private-label contract manufacturing
customer that represented 21% of our consolidated net sales during that same time period. During fiscal 2020 we terminated our ongoing
relationship with one private-label contract manufacturing customer who in some recent times had been greater than 10% of our
consolidated net sales. Due to uncertainty regarding the future operations of this former customer we recorded a $4.3 million accounts
receivable and inventory reserve during fiscal 2020. Sales to this discontinued customer were $7.0 million in fiscal 2020 and there is no
assurance we will replace those sales.
Although no other customers represented more than 10% of our consolidated net sales, the loss of one of our largest customers, or other
major customers, a significant decline in sales to any of our largest customers, a significant change in their business model or personnel, or
in their ability to make payments when due, could materially and adversely affect our financial condition and results of operations. The
timing of our customers’ orders is impacted by, among other factors, their marketing programs, their customer demand, seasonality, their
raw material suppliers we are sometimes required to use, their supply chain management, their entry into new markets and their 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 in the future.
Our future growth and stability depends, in part, on our ability to diversify our sales. Our efforts to establish new sales from both
existing customers and new customers could require significant initial investments, which may or may not result in higher overall sales
and improved financial results.
Our business strategy depends in large part on our ability to develop new product sales from both current and new customer relationships.
These activities often require a significant up-front investment including, among others, customized formulations, compliance with a
different regulatory schemes, 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
(and incur additional related carrying costs) until the time we generate net sales from new products or customers, and it is possible after
incurring such expenditures we may not generate material revenue from new products or customers. 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 would
be adversely affected.
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We currently derive significant revenues and income from sales of beta-alanine and from licensing our patents. Our ability to maintain
or grow our sales of beta-alanine and license revenue from our other patents is contingent on our ability to continue to defend our
patents, and commercialize the sale of beta-alanine under our instant release CarnoSyn® patents and trademark and our sustained
release CarnoSyn® patents and trademark.
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®. Fifteen patents related to CarnoSyn® expired in August 2017 and we have six remaining patents for
this version of CarnoSyn®, of which the latest expires in 2026. Our patent and trademark licensing revenue decreased from $16.7 million
in fiscal 2019 to $12.6 million in fiscal 2020 in part due to certain of our customers discontinuing the use of our CarnoSyn® beta-alanine
in favor of generic beta-alanine. There is no assurance we will be successful maintaining our historical CarnoSyn® instant release beta-
alanine sales levels or growing future sales volumes with our remaining CarnoSyn® instant release patent estate. If we are not successful it
could have a material adverse effect on our business, results of operations, and financial condition.
We believe SR CarnoSyn® is a superior delivery system for CarnoSyn® 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 2027 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 that we will be successful in getting the market to transition to this new form of beta-alanine or that we will be successful
launching new products utilizing SR CarnoSyn® beta-alanine. If we are not successful in either one of these goals, it could have a material
adverse effect on our business, results of operations, and financial condition.
We may continue to incur significant costs in the course of creating and 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 creating and
defending our intellectual property. During fiscal 2020, we incurred approximately $2.0 million in patent litigation and prosecution expense
and expect these expenses to be between $1.0 million and $1.5 million during fiscal 2021. There is no assurance we will be able to create
new intellectual property, protect our existing intellectual property adequately or that our intellectual property rights will be upheld. If, as
we have been in the past, we are again subject to legal proceedings seeking to invalidate our patent rights, such proceedings or the success
of the efforts thereby 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 do 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 ultimately determined in our favor, 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 infringement claims are asserted against us, we may seek to obtain a license to use the claiming third party’s
intellectual property rights. There can be no assurance such a license would be available at all or available on terms acceptable or favorable
to us.
Possible new tariffs on imported goods from China and elsewhere could adversely affect our business operations.
The United States has implemented new and increased tariffs on a wide range of goods and materials imported from China and other
governments, in addition to tariffs previously imposed. These goods may include products and applications, including ingredients we or
our customers require for their products, including beta-alanine. Our ability to maintain or increase CarnoSyn® sales and licensing revenue
depends on the availability of the raw material beta-alanine. In response, China and other governments have, or announced plans, to impose
additional tariffs on certain American products if additional U.S. tariffs are imposed. Continuing or increased tariffs could have a material
adverse effect on our customer’s businesses, the availability of beta-alanine, and the cost of our other products. While it is difficult to
predict whether or how existing and additional potential tariffs will be imposed, or how tariffs will impact our business, we believe the
imposition of additional tariffs by the U.S. or other governments on products we or our customers offer for sale, or ingredients we use in
the products we manufacture could adversely impact our offerings and our customers, and such tariffs could have an adverse impact on the
availability of raw materials we purchase including beta-alanine.
Such results could adversely impact our ability to license our patents and trademarks, our ability to sell beta-alanine, and our customers’
ability to compete in the market place, resulting in reduced demand for our products, and products we manufacture for our customers. Any
of these events could have a material adverse effect on our business and results of operations.
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Our operating results will vary. We experienced declines in net sales and incurred a loss in fiscal 2020 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 decreased during fiscal 2020 as compared to fiscal 2019, and there can be no assurance our net sales will improve in the near
term, or we will earn a profit in any given year. We experienced a net loss in fiscal 2020 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 2021, 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
such 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 the products involved.
Before commencing operations or marketing our products in markets outside the U.S., we are routinely 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 even 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.
As a result of the COVID-19 pandemic, our operations have been subjected to additional laws and regulations imposed by federal, state,
and local governments and have primarily related to the ability for our employees to come to work and the safety measures that need to be
in place in order for our facilities to remain operational. While we already had robust quality standards and procedures, we have had to
constantly monitor these new regulations and implement additional procedures where necessary, including temperature checks, additional
cleaning procedures, allowing administrative personnel to work remotely, etc. New or expanded regulations or our inability to continue
operating as an essential business 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 new or revised requirements or restrictions
related to the safe operation of our facilities due to the pandemic, or 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, could have, and at certain times in the past 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 significant decline in
consumer demand and the level of business activity of our customers, even if only due in part to general economic conditions, could have
a material adverse effect on our revenues and profit margins.
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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 2020, one of our suppliers, Yasunaga Trading Company, LTD
(Yasunaga), represented more than 10% of our total raw material purchases. During fiscal 2019, another of our suppliers, Capsugel
Manufacturing LLC, represented more than 10% of our raw material purchases. Additionally, during fiscal 2019, we began only
sourcing our beta-alanine from Japan through Yasunaga Trading Company. The loss of any of our major suppliers or of any supplier who
provides us materials that are hard to obtain elsewhere at the same quality could adversely affect our business operations. Although we
believe we could establish alternate sources for most of our raw materials, any delay in locating and establishing relationships with other
sources could result in shortages of products we manufacture from such raw materials, 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. 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 cost pricing pressures on raw materials and other products have continued throughout fiscal 2020
as a result of limited supplies of various ingredients, the effects of higher labor and transportation costs, and impact of COVID-19. We
expect these upward pressures to continue through fiscal 2021. 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 the negative effects such
cost increases could have 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 including but not limited to those resulting from conditions outside of our control, such as pandemics, weather,
transportation interruptions, strikes, terrorism, natural disasters, and other catastrophic events.
In addition, our efforts to maintain or increase sales of CarnoSyn® and SR CarnoSyn® and related supply agreements are substantially
dependent on the availability of the raw material beta-alanine and sales of beta-alanine or products incorporating beta-alanine. The
availability of beta-alanine, and thus sales of such raw material and products using such material, could be negatively impacted by any
shortages, interruptions and similar events described above, which could in turn adversely affect the amount of revenue and profit margin
we earn from the sale of beta-alanine. Additional tariffs imposed by any government on beta-alanine could have an adverse impact on the
price we have to pay for beta-alanine and the availability of beta-alanine.
Our industry is highly competitive and we may be unable to continue to compete effectively. Increased competition could adversely
affect our financial condition.
The market for our products, and those of our customers, is highly competitive. Some of our competitors are larger than we are and have
greater financial resources and broader name recognition than we do. Our 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 significant market share. Our competitors may
not stress the level of quality we provide and could manufacture with a lower level of quality at lower costs. Our competitors are largely
private and not subject to the same disclosure requirements as a publicly traded company. If consumers do not perceive higher quality as
worth a higher price, our revenue could suffer. Increased competition could result in price reductions, reduced 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 we will be able to compete effectively 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 risk of injury to consumers from tampering by unauthorized third parties or product
contamination. We could be exposed to future product liability claims that include, among others, assertions that: 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. 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 such insurance coverage will be adequate to cover any liability we may incur, or that our insurance policies will continue to be available
at a cost similar to our cost today, or even an economically reasonable cost.
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, or the failure of a customer to honor indemnification agreements each could have a material adverse effect on our results of operations
and financial condition.
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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 such 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 enter and 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. will likely 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 us, our competitors, our customers, our products, or
our industry or competitors 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, retain and motivate highly qualified management personnel. Competition for qualified individuals
can be intense and 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. Any inability to retain a skilled professional management team could adversely
affect our ability to successfully execute our business strategies and achieve our goals and objectives.
Our manufacturing and third party fulfillment activities are subject to certain risks.
We manufacture the majority of our products at our manufacturing facilities in California and Switzerland. As a result, we are dependent
on the uninterrupted and efficient operation of these facilities. Our manufacturing operations, including those of our suppliers, are subject
to power failures, blackouts, border shutdowns, telecommunications failures, computer viruses, cybersecurity vulnerabilities, human error,
breakdown, failure or substandard performance of our facilities, our equipment, the improper installation or operation of equipment,
terrorism, pandemics (including COVID-19), natural or other disasters, intentional acts of violence, 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 regularly evaluate various
emergency, contingency and disaster recovery plans and we maintain business interruption insurance, there can be no assurance the
occurrence of these or any other operational problems at our facilities in California or 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
13
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 as well as certain manufacturing activities. The operation of the third
party service provider’s facilities is subject to the interruption risk and other risks similar to those 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:
•
•
•
•
•
•
•
•
potential difficulties related to integrating the products, personnel and operations of an acquired company;
failure to operate efficiently as a combined organization utilizing common information and communication systems,
operating procedures, financial controls and human resources practices;
diverting management’s attention from 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 more
experience and stronger market positions;
potential loss of key employees of an acquired company;
potential inability to achieve cost savings and other potential benefits expected from the acquisition;
an uncertain sales and earnings stream from an acquired company; and
potential impairment charges, which may be significant, against goodwill and purchased intangible assets acquired in an
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 an acquired company’s employees, products or
operations successfully, our business, financial position or results of operations could be adversely affected.
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 24% of our outstanding shares of
common stock as of June 30, 2020. Approximately 16% of the outstanding shares of common stock are beneficially owned by Mark
LeDoux, and his family and affiliates. Mr. LeDoux is our Chief Executive Officer and Chairman of the Board. 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:
•
transactions resulting in a change in control;
• mergers and acquisitions;
•
•
•
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.
14
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, if
the line has any credit still available when needed. We currently have taken all of the funds available under our line of credit. If we did
have additional credit available and we fail to maintain certain loan covenants, we may no longer have access to our credit line. 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. Our credit line terminates in November 2022 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 lowering our credit ratings. 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 of 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. There is no assurance
we would be able to market such security 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.
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 such proposals 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 lower 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 including but not limited to factors outside of our control:
•
•
•
•
•
•
•
•
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
•
our and our customers' and suppliers' products 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 on such foreign exchanges. These
15
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.
ITEM 2.
PROPERTIES
This table summarizes our facilities as of June 30, 2020. We believe our facilities are adequate to meet our operating requirements for the
foreseeable future.
Nature of Use
Location
Vista, CA USA(1),(2) .......... Manufacturing, warehousing, packaging and distribution
Manno, Switzerland(3) ....... Manufacturing, warehousing, packaging and distribution
Manno, Switzerland(4) ....... Warehousing
Carlsbad, CA USA(5) ......... Corporate headquarters
(1) This facility is used by NAI for its private-label contract manufacturing segment.
Square
Feet
How Held
Lease
Expiration
Date
162,000
95,990
30,892
20,981
Leased March 2024
June 2024
Leased
Leased December 2023
Owned
N/A
(2) At this facility we use approximately 93,000 square feet for production, 60,000 square feet for warehousing and 9,000 square feet for
administrative functions.
(3) This facility is used by NAIE in connection with our private-label contract manufacturing segment. As of July 1, 2019, we exercised
the option to renew the lease of this facility until June 2024.
(4) This facility is used by NAIE for additional warehouse storage.
(5) We purchased the Carlsbad facility in March 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, even if unfavorable, will result in a material adverse effect on our business,
consolidated financial condition, or results of operations. Our evaluation of the likely impact of these actions could change in the future
and we could have unfavorable outcomes we do not expect. An unexpected settlement expense or an unexpected unfavorable outcome of
a matter could adversely impact our results of operations.
As of September 18, 2020, 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. We are currently involved in several matters in the ordinary course of our business.
There is no assurance NAI will prevail in any litigation matters or that litigation expenses will not be greater than anticipated.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
16
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, 2020 and 2019:
First Quarter ........................................................................... $
Second Quarter ....................................................................... $
Third Quarter ......................................................................... $
Fourth Quarter ........................................................................ $
12.30 $
9.36 $
9.61 $
7.43 $
8.20 $
7.61 $
5.15 $
5.93 $
10.57 $
10.40 $
11.88 $
14.25 $
9.35
8.73
9.46
11.16
Fiscal 2020
Fiscal 2019
High
Low
High
Low
Holders
As of September 18, 2020, there were approximately 203 stockholders of record of our common stock. On that same date, the last sales
price of our common stock as reported on NASDAQ was $6.77 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 without a waiver from our lender.
Recent Sales of Unregistered Securities
During the fiscal year ended June 30, 2020, we did not sell any unregistered securities.
Repurchases
As set forth below, during the quarter ended June 30, 2020, we repurchased 38,617 shares of our common stock at a total cost of $0.3
million (including commissions and transactions fees) under our stock repurchase plan as set forth below:
Period
April 1, 2020 to April 30, 2020 ..
May 1, 2020 to May 31, 2020 ....
June 1, 2020 to June 30, 2020 ....
Total ...........................................
Total Number of
Shares Purchased
4,123
10,652
23,842
38,617
Average Price
Paid per Share (1)
7.13
6.97
6.76
$
$
$
(1) Average price paid per share includes costs associated with the repurchases
Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Plans or
Programs (as of
June 30, 2020)
(in thousands)
—
—
—
1,701
$
Total Number of
Shares
Purchased as Part of
Publicly Announced
Plans or Programs
4,123
10,652
23,842
38,617
17
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, 2020:
Number of Shares
to be Issued Upon
Exercise of
Outstanding
Options, Warrants,
and Rights
Weighted-
Average
Exercise Price
of Outstanding
Options, Warrants,
and Rights
Number of Shares
Remaining
Available
for Future Issuance
Under Equity
Compensation
Plans (Excluding
Shares Reflected in
Column
(a))
Plan Category
Equity compensation plans approved by stockholders ...............
Equity compensation plans not approved by stockholders .........
Total ...........................................................................................
130,000 $
N/A
130,000 $
6.28
N/A
6.28
—
N/A
—
(a)
(b)
(c)
ITEM 6.
SELECTED FINANCIAL DATA
As a smaller reporting company, we are not required to provide Item 6 disclosure in this Annual Report.
18
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,
2020 and 2019 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 two or three private-label contract manufacturing customers and subject
to variations in the timing of such customers’ orders, which in turn is impacted by such customers’ internal marketing programs, supply
chain management, entry into new markets, new product introductions, the demand for such customers’ products, and general industry and
economic conditions. Our revenue also includes raw material sales, 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® and SR CarnoSyn® trademarks.
A cornerstone of our business strategy is to achieve long-term growth and profitability and to diversify our sales base. We have sought and
expect to continue to seek to diversify our sales by developing relationships with additional, quality-oriented, private-label contract
manufacturing customers, and commercializing our patent estate through sales of beta-alanine under our CarnoSyn® and SR CarnoSyn®
trade names, royalties from license agreements, and potentially additional contract manufacturing opportunities with licensees.
Impact of COVID-19 on Our Business
On March 11, 2020, the World Health Organization classified the novel coronavirus, or COVID-19, as a pandemic. The COVID-19
pandemic has resulted, and is likely to continue to result, in significant economic disruption and has and will likely affect our business.
Significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. Our facilities, located both
in the United States and Europe, continue to operate as an essential and critical manufacturer in accordance with applicable federal, state,
and local regulations, however, there can be no assurance our facilities will continue to operate without interruption. Factors that derive
from COVID-19 and the accompanying response, and that have or may negatively impact sales and gross margin in the future include, but
are not limited to the following:
• Limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell, or to meet
delivery requirements and commitments;
• Limitations on the ability of our employees to perform their work due to illness caused by the pandemic or due to other
restrictions on our employees to keep them safe and the increased cost of measures taken to ensure employee health and safety;
• Local, state, or federal orders requiring employees to remain at home;
• Limitations on the ability of carriers to deliver our products to customers;
• Limitations on the ability of our customers to conduct their business and purchase our products and services; and
• Limitations on the ability of our customers to pay us on a timely basis.
As a preventative measure to provide our business with potentially needed liquidity, and out of an abundance of caution, we withdrew $10
million from our credit facility with Wells Fargo in the third quarter of fiscal 2020. We will continue to actively monitor the situation and
may take further actions to alter our business operations as may be required by federal, state or local authorities or that we determine are
in the best interests of our employees, customers, suppliers and shareholders. While we are unable to determine or predict the nature,
duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital
resources, we believe we will be able to remain operational and our working capital will be sufficient for us to remain operational even as
the longer term consequences of this pandemic become known.
During fiscal 2020, our consolidated net sales were 14% lower than in fiscal 2019. Private-label contract manufacturing sales decreased
13% due primarily to lower volumes of current products to existing customers located primarily in the U.S. and European markets partially
offset by new product sales to new and existing customers in the U.S market. During fiscal 2020, sales to our largest private-label contract
manufacturing customer declined 23% primarily as a result of reduced customer demand. However, a majority of this decline occurred
during the first nine months of fiscal 2020 while the fourth quarter of fiscal 2020 included a year over year increase in sales for this
customer, primarily due to increased consumer demand and shipments of a newly awarded product. Fiscal 2021 sales from our largest
private-label contract manufacturing customer are expected to increase as compared to fiscal 2020. Revenue concentration from our largest
19
private-label contract manufacturing customer as a percentage of our total net sales decreased to 44% in fiscal 2020 from 49% in fiscal
2019. We expect this percentage to increase in fiscal 2021.
Effective March 31, 2020, we terminated our ongoing relationship with one private-label contract manufacturing customer, Kaged Muscle.
We are working with this former customer to assist them with completing their obligations to us, transition to a replacement manufacturer,
and the transfer of inventory items we hold specific to this customer. Due to uncertainty regarding the future operations of this former
customer, we reserved 100% of their outstanding accounts receivable balance and a majority of the inventory we hold for their products.
As of June 30, 2020, our balance sheet and results of operations for fiscal 2020 included total reserves (and accompanying expense) of $4.3
million related to this former customer.
During fiscal 2020, CarnoSyn® beta-alanine revenue decreased 25% to $12.6 million as compared to $16.7 million for fiscal 2019. The
decrease in CarnoSyn® revenue was primarily due to decreased beta-alanine shipments as a result of changes to consumer market trends
and lower average beta-alanine sales prices. We believe this sales decline was also impacted by certain customers discontinuing the use of
our CarnoSyn® beta-alanine in favor of generic beta-alanine and lower overall consumer demand for our customers’ CarnoSyn® products,
including the negative impact COVID-19 had on the sports nutrition industry in the latter part of fiscal 2020 due to the shutdown of athletic
activities and gyms across the USA.
We continue to invest in research and development for our SR CarnoSyn® sustained release delivery system. We believe SR CarnoSyn®
may provide a unique opportunity within the growing Wellness and Healthy Aging markets. We believe our recent efforts to refine our
formulations and product offerings will be positively received and result in significant opportunity for increased SR CarnoSyn® sales.
To protect our CarnoSyn® business, we incurred litigation and patent compliance expenses of approximately $2.0 million during fiscal
2020 and $2.4 million during fiscal 2019. The decrease in these legal expenses on a year over year basis was primarily due to the successful
resolution of several cases that were settled and the successful completion of an effort to gain New Dietary Ingredient status from the FDA
on our patented CarnoSyn® beta-alanine. We currently expect our litigation and patent compliance expenses to decrease during fiscal 2021
to an annual rate of approximately $1.0 million to $1.5 million. 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 and the cost of the raw material when and in the amounts needed,
the ability to expand distribution of beta-alanine to new and existing customers, and continued compliance by third parties with our license
agreements and our patent, trademark and other intellectual property rights. During fiscal 2021, we will continue our sales and marketing
activities to consumers, customers, potential customers, and brand owners on multiple platforms to promote and reinforce the features and
benefits of utilizing CarnoSyn® and SR CarnoSyn® beta-alanine.
Based on our current sales order volumes and forecasts we have received from our customers, we expect our fiscal 2021 consolidated net
sales to increase as compared to fiscal 2020. We also expect operating income will increase in fiscal 2021 due to increased sales and a non-
recurrence of the $4.3 million accounts receivable and inventory reserve that was recorded in fiscal 2020. There can be no assurance our
customer’s sales and marketing activities as well as our own sales and marketing and litigation efforts will reverse or decelerate potential
future sales declines. We are also closely monitoring the impact of the COVID-19 pandemic but we cannot reasonably estimate the length
of time or severity of the pandemic and cannot currently estimate the impact this pandemic may have on our consolidated financial results
for fiscal 2021 and beyond.
During fiscal 2021, 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 new sales
distribution channel under the Wellness and Healthy Aging category for our sustained release form of beta-alanine marketed
under our SR CarnoSyn® trademark, exploiting new contract manufacturing opportunities, license and royalty agreements,
and protecting our proprietary rights; and
•
Improving operational efficiencies and managing costs and business risks to improve profitability.
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). A description of our significant accounting policies can be found in the notes to our consolidated financial
statements in Item 8 of this report. The preparation of financial statements in accordance with GAAP requires we make estimates and
assumptions that affect the amounts reported in our financial statements and their accompanying notes. We have identified certain policies
we believe are important to the portrayal of our financial condition and results of operations. Implementation of these policies requires 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 making such estimates or assumptions.
20
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
June 30, 2020
June 30, 2019
Increase
(Decrease)
Private-label contract manufacturing . $
Patent and trademark licensing ..........
Total net sales ....................................
Cost of goods sold ..............................
Gross profit ........................................
Selling, general & administrative
expenses .........................................
(Loss) income from operations ..........
Other (loss) income, net .....................
(Loss) income before income taxes ....
(Benefit) provision for income taxes ..
Net (loss) income ............................... $
106,291
12,585
118,876
100,005
18,871
20,380
(1,509)
(229)
(1,738)
(93)
(1,645)
89% $
11%
100%
84%
16%
121,598
16,692
138,290
114,715
23,575
17%
(1)%
—%
(2)%
—%
(1)% $
17,614
5,961
1,992
7,953
1,412
6,541
88% $
12%
100%
83%
17%
13%
4%
1%
6%
1%
5% $
(15,307)
(4,107)
(19,414)
(14,710)
(4,704)
2,766
(7,470)
(2,221)
(9,961)
(1,505)
(8,186)
(13)%
(25)%
(14)%
(13)%
(20)%
16%
(125)%
(111)%
(122)%
(107)%
(125)%
Private-label contract manufacturing net sales decreased 13% due primarily to lower volumes of current products to existing customers
located primarily in the U.S. and European markets partially offset by new product sales to new and existing customers in the U.S market.
During fiscal 2020, sales to our largest private-label contract manufacturing customer declined 23% primarily as a result of reduced
customer demand. However, a majority of this decline occurred during the first nine months of fiscal 2020 while the fourth quarter of fiscal
2020 included a year over year increase in sales for this customer, primarily due to increased consumer demand and shipments of a newly
awarded product.
Net sales from our patent and trademark licensing segment decreased 25% during fiscal 2020. The decrease in patent and trademark
licensing revenue was primarily due to decreased beta-alanine shipments as a result of changes to consumer market trends and lower
average beta-alanine sales prices. We believe this sales decline was also impacted by certain customers discontinuing the use of our
CarnoSyn® beta-alanine in favor of generic beta-alanine and lower overall consumer demand for our customers’ CarnoSyn® products,
which included the negative impact COVID-19 had on the sports nutrition industry in the latter part of fiscal 2020 due to the shutdown of
athletic activities and gyms across the USA.
The change in gross profit margin for the year ended June 30, 2020, was as follows:
Percentage
Change
Contract manufacturing(1) ..........................................................................................................................................
Patent and trademark licensing(2) ..............................................................................................................................
Total change in gross profit margin ..........................................................................................................................
(1.1)
—
(1.1)
1
Private-label contract manufacturing gross profit margin contribution decreased 1.1 percentage points in fiscal 2020 as compared to
fiscal 2019. The decrease in gross profit as a percentage of sales in fiscal 2020 is primarily due to a $1.0 million inventory reserve
recorded related to one of our former contract manufacturing customers.
2 During fiscal 2020, patent and trademark licensing gross profit margin contribution remained relatively consistent with prior year.
Selling, general and administrative expenses increased $2.8 million, or 16%, during fiscal 2020 as compared to fiscal 2019. This increase
was primarily due $3.3 million of bad debt expense recorded related to a receivable from a former contract manufacturing customer that
was partially offset by decreased litigation and patent compliance expenses associated with our CarnoSyn® beta-alanine patent estate.
Other income (net) decreased $2.2 million during fiscal 2020 as compared to fiscal 2019. The decrease for fiscal 2020 was primarily due
to the exclusion of the amortization of forward points from cash flow hedge instruments during the year ended June 30, 2020 as compared
to including $1.6 million in fiscal 2019. This change in classification of forward points is the result of the adoption of ASU No. 2017-12
that now requires the amortization of forward points be included as a component of net revenues while they were previously included as a
component of other income. The remaining portion of the decrease primarily related to foreign currency exchange losses associated with
fluctuations in various foreign exchange rates used to revalue our balance sheet.
Our income tax expense decreased $1.5 million during fiscal 2020 as compared to fiscal 2019. The decrease was primarily due to the
decrease in income before taxes when compared to fiscal 2019.
21
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 $3.7 million in fiscal 2020 compared to net cash provided by
operating activities of $6.6 million in fiscal 2019.
We had a loss of $1.6 million in fiscal 2020 as compared to net income of $6.5 million in fiscal 2019. This decrease in net income was
primarily due to lower consolidated sales and an accounts receivable and inventory reserve recorded in fiscal 2020 related to one of our
former contract manufacturing customers.
At June 30, 2020, 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 $4.3 million in cash compared to using $1.3 million in fiscal
2019. The increase in cash used by accounts receivable during fiscal 2020 primarily resulted from timing of sales and the related collections
at the end of fiscal 2020 as compared to fiscal 2019. In addition, provision for uncollectible accounts receivable used $3.3 million in fiscal
2020 as compared to zero for fiscal 2019. The change in provision for uncollectible accounts receivable was primarily associated with a
reserve recorded associated with a former contract manufacturing customer. Days sales outstanding (DSO) increased to 51 days during
fiscal 2020 compared to 40 days during fiscal 2019, primarily due to customer sales mix and timing of sales and the related collections.
Inventory used $2.0 million in cash during fiscal 2020 compared to using $2.4 million in fiscal 2019. The change in cash activity from
inventory was primarily related to the timing of sales and anticipated sales at the end of fiscal 2020 as compared to fiscal 2019. Inventory
at the end of fiscal 2020 also included a buildup of inventory associated with anticipated new product launches from multiple private-label
contract manufacturing customers and increased inventory related to our CarnoSyn® beta-alanine business. Changes in accounts payable
and accrued liabilities provided $2.7 million in cash during fiscal 2020 compared to using $0.5 million during fiscal 2019. The change in
cash flow activity related to accounts payable and accrued liabilities is primarily due to the timing of inventory receipts and payments.
Cash used in investing activities in fiscal 2020 was $4.5 million compared to $3.8 million in fiscal 2019. Capital expenditures were $4.5
million during fiscal 2020 compared to $5.3 million in fiscal 2018. Capital expenditures during fiscal 2020 and fiscal 2019 were primarily
for manufacturing equipment used in our Vista, California and Manno, Switzerland facilities. Investing activities in fiscal 2019 also
included the collection of the $1.5 million note receivable.
Cash provided by financing activities in fiscal 2020 was $6.3 million, compared to using $1.3 million in fiscal 2019. This change is primarily
due to $10.0 million in proceeds from our line of credit, withdrawn as a measure to provide our business with liquidity out of an abundance
of caution due to the COVID-19 pandemic, offset by increased repurchases of our stock. At June 30, 2020 we had $10.0 million due in
connection with our loan facility. As of June 30, 2019, we had no outstanding balances due in connection with our loan facility.
During fiscal 2020 we were in compliance with all of the financial and other covenants required under our Credit Agreement. Refer to Note
F, "Debt," in Item 8 of this report, for terms of such Credit Agreement and additional information.
As of June 30, 2020, we had $30.5 million in cash and cash equivalents. Of these amounts, $13.8 million of cash and cash equivalents were
held by NAIE. 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, 2020, 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, in each case 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 2020 and 2019, we did not experience any significant increases in product raw material or operational costs we attributed to
inflationary factors. We currently believe increasing raw material and product cost pricing pressures will exist throughout fiscal 2021 as a
result of limited supplies of various ingredients, the effects of higher labor and transportation costs, and the impact of COVID-19. We do
not believe current inflation rates will have a material impact on our fiscal 2021 operations or profitability.
22
Recent Accounting Pronouncements
A discussion of recent accounting pronouncements is included under Note A in the notes to our consolidated financial statements which
are 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.
23
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.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Natural Alternatives International, Inc. (the Company) as of June 30,
2020 and 2019, and the related consolidated statements of operations and comprehensive (loss) income, stockholders’ equity and cash
flows for each of the years in the two-year period ended June 30, 2020, and the related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
the Company as of June 30, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the two years in the
period ended June 30, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion
on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public
Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our
audits, we are required to obtain an understanding of internal control over financial reporting, 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.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2014.
San Diego, California
September 21, 2020
/s/ HASKELL & WHITE LLP
24
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 $3,240 at June 30, 2020 and
$25 at June 30, 2019 ...........................................................................................................
Inventories, net .......................................................................................................................
Income tax receivable.............................................................................................................
Forward contracts ...................................................................................................................
Prepaids and other current assets ............................................................................................
Total current assets .....................................................................................................
Property and equipment, net...........................................................................................................
Operating lease right-of-use assets .................................................................................................
Deferred tax asset – noncurrent ......................................................................................................
Other noncurrent assets, net ...........................................................................................................
Total assets ................................................................................................................. $
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable ................................................................................................................... $
Accrued liabilities ..................................................................................................................
Accrued compensation and employee benefits .......................................................................
Income taxes payable .............................................................................................................
Line of credit – current ...........................................................................................................
Total current liabilities ...............................................................................................
Long-term liability – operating leases ............................................................................................
Noncurrent forward contracts .........................................................................................................
Long-term pension liability ............................................................................................................
Deferred rent ..................................................................................................................................
Income taxes payable, noncurrent ..................................................................................................
Deferred income taxes....................................................................................................................
Total liabilities............................................................................................................
Commitments and contingencies (Notes H, J and M)
Stockholders’ equity:
2020
2019
30,478 $
25,040
17,001
27,972
848
450
2,275
79,024
21,523
18,354
196
1,106
120,203 $
12,509 $
1,627
2,660
1,010
10,000
27,806
18,782
195
696
—
1,349
—
48,828
15,964
26,003
901
1,978
1,500
71,386
21,085
—
—
1,019
93,490
8,634
2,782
1,615
1,219
—
14,250
—
—
246
543
1,349
1,018
17,406
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, 2020 and June 30,
2019, issued and outstanding (net of treasury shares) 6,752,372 at June 30, 2020 and
7,225,072 at June 30, 2019 .................................................................................................
Additional paid-in capital .......................................................................................................
Retained earnings ...................................................................................................................
Treasury stock, at cost, 2,104,305 shares at June 30, 2020 and 1,626,605 at June 30, 2019 ..
Accumulated other comprehensive (loss) income ..................................................................
Total stockholders’ equity ..........................................................................................
Total liabilities and stockholders’ equity .................................................................... $
—
—
87
27,992
56,181
(11,702 )
(1,183 )
71,375
120,203 $
87
26,280
57,380
(7,955 )
292
76,084
93,490
See accompanying notes to consolidated financial statements.
25
Natural Alternatives International, Inc.
Consolidated Statements of Operations And Comprehensive (Loss) Income
For the Years Ended June 30
(Dollars in thousands, except share and per share data)
Net sales ......................................................................................................................................... $
Cost of goods sold ..........................................................................................................................
Gross profit ....................................................................................................................................
Other selling, general and administrative expenses ........................................................................
Provision for uncollectible accounts receivable .............................................................................
(Loss) income from operations ......................................................................................................
Other (expense) income:
Interest income .......................................................................................................................
Interest expense ......................................................................................................................
Foreign exchange (loss) gain ..................................................................................................
Other, net ................................................................................................................................
Total other (expense) income: ........................................................................................................
(Loss) income before income taxes ................................................................................................
(Benefit) provision for income taxes ..............................................................................................
Net (loss) income ........................................................................................................................... $
Change in minimum pension liability, net of tax ........................................................................... $
Unrealized (loss) gain resulting from change in fair value of derivative instruments, net of tax ...
Comprehensive (loss) income ........................................................................................................ $
Net (loss) income per common share:
Basic ....................................................................................................................................... $
Diluted.................................................................................................................................... $
Weighted average common shares outstanding:
2020
2019
118,876 $
100,005
18,871
17,098
3,282
(1,509 )
177
(67 )
(320 )
(19 )
(229 )
(1,738 )
(93 )
(1,645 ) $
(323 ) $
(1,024 )
(2,992 ) $
(0.25 ) $
(0.25 ) $
138,290
114,715
23,575
17,614
—
5,961
1,868
(29 )
148
5
1,992
7,953
1,412
6,541
(104 )
974
7,411
0.96
0.92
Basic .......................................................................................................................................
Diluted....................................................................................................................................
6,695,302
6,695,302
6,809,306
7,097,678
See accompanying notes to consolidated financial statements.
26
Natural Alternatives International, Inc.
Consolidated Statements of Stockholders’ Equity
For the Years Ended June 30
(Dollars in thousands)
Common Stock
Shares Amount
Balance, June 30, 2018 ..................................... 8,656,677 $
Issuance of common stock for stock option
85 $
exercise ...........................................................
5,000
—
Issuance of common stock for restricted stock
grants ..............................................................
190,000
2
Compensation expense related to stock
compensation plans ........................................
Repurchase of common stock ...........................
Forfeiture of restricted stock ............................
Change in minimum pension liability, net of
—
—
—
—
—
—
Additional
Paid-in
Capital
Retained
Earnings
24,486 $ 50,839
Treasury Stock
Comprehensive
Accumulated
Other
Shares
1,098,268 $
Amount
Income (Loss)
Total
(6,584) $
(578) $
68,248
38
(2)
1,754
—
4
—
—
—
—
—
—
—
123,337
405,000
—
—
—
(1,367)
(4)
—
—
—
—
—
38
—
1,754
(1,367)
—
tax ...................................................................
—
—
—
—
—
—
(104)
(104)
Unrealized gain resulting from change in fair
value of derivative instruments, net of tax .....
—
Net income ........................................................
—
Balance, June 30, 2019 ..................................... 8,851,677
Issuance of common stock for restricted stock
—
—
87
—
—
26,280
—
6,541
57,380
—
—
1,626,605
—
—
(7,955)
grants ..............................................................
5,000
—
—
Compensation expense related to stock
compensation plans ........................................
Repurchase of common stock ...........................
Forfeiture of restricted stock ............................
Cumulative-effect adjustment pursuant to
—
—
—
—
—
—
1,712
—
—
—
—
—
—
adoption of ASU 2016-02 (Note D)...............
—
—
—
318
Reclassification pursuant to adoption of ASU
2018-02 (Note A) ...........................................
—
—
—
128
Change in minimum pension liability, net of
tax ...................................................................
—
—
—
—
Unrealized loss resulting from change in fair
—
—
—
462,700
15,000
—
—
—
—
(3,747)
—
—
—
—
value of derivative instruments, net of tax .....
—
Net loss .............................................................
—
Balance, June 30, 2020 ..................................... 8,856,677 $
—
—
87 $
—
—
—
(1,645)
27,992 $ 56,181
—
—
2,104,305 $
—
—
(11,702) $
974
—
292
—
—
—
—
—
(128)
974
6,541
76,084
—
1,712
(3,747)
—
318
—
(323)
(323)
(1,024)
—
(1,183) $
(1,024)
(1,645)
71,375
See accompanying notes to consolidated financial statements.
27
Natural Alternatives International, Inc.
Consolidated Statements of Cash Flows
For the Years Ended June 30
(in thousands)
2020
2019
Cash flows from operating activities
Net (loss) income ........................................................................................................................... $
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Provision for uncollectible accounts receivable .....................................................................
Depreciation and amortization ...............................................................................................
Deferred income taxes ............................................................................................................
Non-cash sales discount .........................................................................................................
Non-cash lease expenses ........................................................................................................
Non-cash compensation .........................................................................................................
Pension expense .....................................................................................................................
Loss on disposal of assets .......................................................................................................
Changes in operating assets and liabilities:
Accounts receivable ...............................................................................................................
Inventories ..............................................................................................................................
Operating lease liabilities .......................................................................................................
Prepaids and other assets ........................................................................................................
Accounts payable and accrued liabilities ................................................................................
Forward contracts ...................................................................................................................
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 ..............................................................................
Repayment of notes receivable ......................................................................................................
Net cash used in investing activities ...............................................................................................
Cash flows from financing activities
Repurchase of common stock ........................................................................................................
Borrowing on lines of credit ...........................................................................................................
Issuance of common stock .............................................................................................................
Net cash provided by (used in) financing activities ........................................................................
Net increase 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:
(1,645 ) $
3,282
3,959
(893 )
—
2,772
1,712
27
109
(4,319 )
(1,969 )
(2,467 )
(1,174 )
2,720
688
(156 )
1,045
3,691
(4,541 )
35
—
(4,506 )
(3,747 )
10,000
—
6,253
5,438
25,040
30,478 $
6,541
—
3,465
212
82
—
1,672
60
48
(1,343)
(2,436)
—
308
(491)
(1,005)
(666)
117
6,564
(5,327)
19
1,500
(3,808)
(1,367)
—
38
(1,329)
1,427
23,613
25,040
Taxes ...................................................................................................................................... $
Interest.................................................................................................................................... $
993 $
66 $
1,973
23
See accompanying notes to consolidated financial statements.
28
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 sold under our CarnoSyn® and SR CarnoSyn® tradenames
through direct raw material sales and various license and similar arrangements.
Subsidiaries
On January 22, 1999, Natural Alternatives International Europe S.A., a Swiss Corporation (NAIE) was formed as our wholly-owned
subsidiary, based in Manno, Switzerland. In September 1999, NAIE opened a manufacturing facility and currently 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. Certain accounts 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.
Recently Adopted Accounting Pronouncements
We adopted ASU 2016-02, Leases (Topic 842), and subsequent amendments thereto (“ASC 842”) on July 1, 2019 using the optional
transition approach to apply the standard at the beginning of the first quarter of the year of adoption, fiscal year 2020, with no retrospective
adjustments to prior periods. The adoption of the standard resulted in the recognition of right-of-use assets and lease liabilities for operating
leases of approximately $20.7 million and $20.9 million, respectively, on our Condensed Consolidated Balance Sheets, with no material
impact on our Condensed Consolidated Statements of Income and Comprehensive Income, Condensed Consolidated Statements of
Stockholders’ Equity, or Condensed Consolidated Statements of Cash Flows. We have elected the practical expedients to (1) carryforward
prior conclusions related to lease identification and classification for existing leases, (2) combine lease and non-lease components of an
arrangement for all classes of leased assets, and (3) omit short-term leases with a term of 12 months or less from recognition on the balance
sheet. See “Note D. Leases” for additional information on our leases following the adoption of this standard.
On July 1, 2019, we adopted ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging
Activities.” The ASU better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes
to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. We applied
ASU No. 2017-12 using a modified retrospective approach for cash flow and fair value hedges existing at the date of adoption and
prospectively for the presentation and disclosure guidance. As a result of the adoption of this ASU, amortization of forward points are now
included as a component of net revenues while they were previously included as a component of other income. For the year ended June 30,
2020, we included $864,000 of forward point amortization in Sales. For the year ended June 30, 2019, we included $1.6 million of forward
point amortization in Other Income.
On July 1, 2019, we adopted ASU 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain
Tax Effects from Accumulated Other Comprehensive Income”. ASU 2018 allows for a reclassification from accumulated other
comprehensive income (OCI) to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act. Under this ASU,
we reclassified $128,000 of gains from OCI to retained earnings.
Recently Issued Accounting Pronouncements
On December 18, 2019, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2019-
12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This new standard eliminates certain exceptions in Accounting
Standards Codification ("ASC") 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in
an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of
the accounting for income taxes. This standard is effective for fiscal years, and interim periods within those years, beginning after December
15, 2020, with early adoption permitted in any interim period within that year. This ASU will be effective for us beginning in our first
quarter of fiscal 2022. We are currently evaluating the impact this ASU will have on our consolidated financial statements.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
29
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 we have the ability to access. We classify cash, cash
equivalents, and marketable securities balances as Level 1 assets. The approximate fair value of cash and cash equivalents, accounts
receivable, accounts payable and short-term borrowings is equal to book value due to the short-term nature of these items. 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.
Except for cash and cash equivalents and assets and liabilities related to our pension plan, as of June 30, 2020 and June 30, 2019, we did
not have any financial assets or liabilities classified as Level 1. We classify derivative forward exchange contracts as Level 2 assets and
liabilities. The fair value of our forward exchange contracts as of June 30, 2020 included a net asset of $254,000. The fair value as of
June 30, 2019 was a net asset of $2.3 million. The fair values were determined based on obtaining pricing from our bank and corroborating
those values with a third party bank. We classify our outstanding line of credit balance as a Level 2 liability, as the fair value is based on
inputs that can be derived from information available in publicly quoted markets. As of June 30, 2020 and June 30, 2019, 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 2020.
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, including anticipated early payment discounts
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.
Notes Receivable
On September 30, 2017, we accepted a 12-month note (Loan Agreement) from Kaged Muscle, LLC (“Kaged Muscle”), one of our former
contract manufacturing customers, in exchange for $1.5 million of trade receivables due to us from Kaged Muscle. On September 30, 2018,
we entered into a First Amendment (the “First Amendment”) with Kaged Muscle in connection with the Loan Agreement. The First
Amendment modified the Loan Agreement and related promissory note by extending the maturity date from September 30, 2018 to
December 28, 2018 in exchange for an extension fee in the amount of $25,000. The note carried an interest rate of fifteen percent (15%)
per annum with payments of interest only. The note was paid in full before the amended maturity date. In association with this note, we
recognized $104,000 in interest income during the year ended June 30, 2019.
Inventories
We operate primarily as a private-label contract manufacturer. We 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 (first-in, first-out) or 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 net realizable
value, 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.
30
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 useful life of the improvement or the term of the lease. Maintenance and repairs are expensed as incurred. Significant
expenditures that increase economic useful lives of property or equipment are capitalized and expensed over the useful life of such
expenditure.
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 2020 or fiscal 2019.
Derivative Financial Instruments
We may use derivative financial instruments in the management of our foreign currency exchange risk inherent in our forecasted sales
denominated in Euros. We may hedge our foreign currency exposures by entering into offsetting forward exchange contracts. To the extent
we use derivative financial instruments, we account for them as cash flow hedges. Foreign exchange derivative instruments that do not
meet the criteria for cash flow hedge accounting are marked-to-market through the Consolidated Statements of Operations and
Comprehensive Income. Historically, our derivative instruments have met the criteria for hedge accounting.
We recognize any unrealized gains and losses associated with derivative instruments in income in the period in which the underlying hedged
transaction is realized. To the extent the derivative instrument is deemed ineffective we would recognize the resulting gain or loss in income
at that time. As of June 30, 2020, 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, which is primarily
the Euro. As of June 30, 2020, the notional amounts of our foreign exchange contracts were $49.4 million (€43.5 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 obligations and annual pension expense. Key assumptions in
measuring the plan obligations 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
We record revenue based on a five-step model which includes: (1) identifying a contract with a customer; (2) identifying the performance
obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price among the performance obligations;
and (5) recognizing revenue as each of the various performance obligations are satisfied.
Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling one or more performance
obligations. We identify purchase orders from customers as contracts. The amount of consideration expected to be received and revenue
recognized includes estimates of variable consideration, including estimates for early payment discounts and volume rebates. Such
estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. We
review and update these estimates at the end of each reporting period and the impact of any adjustments is recognized in the period the
adjustments are identified. In assessing whether collection of consideration from a customer is probable, we consider both the customer's
ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in the underlying customer
agreement, which is typically 30 days from the invoice date. Invoices are generally issued on the date of transfer of control of the products
ordered to the customer.
Revenue is recognized at the point in time that each of our performance obligation is fulfilled, and control of the ordered products is
transferred to the customer. This transfer occurs when the product is shipped, or in some cases, when the product is delivered to the
customer.
31
We provide early payment discounts to certain customers. Based on historical payment trends, we expect that these customers will take
advantage of these early payment discounts. The cost of these discounts is reported as a reduction to the transaction price. If the actual
discounts differ from those estimated, the difference is also reported as a change in the transaction price.
Except for product defects, no right of return exists on the sale of our products. We estimate returns based on historical experience and
recognize a returns liability for any estimated returns. As of June 30, 2020, we have no known returns liability.
On August 7, 2017, we entered into three agreements (“Agreements”), with The Juice Plus+ Company LLC (“Juice Plus+”). The
Agreements are an Exclusive Manufacturing Agreement, a Restricted Stock Award Agreement, and an Irrevocable Proxy. Pursuant to the
Exclusive Manufacturing Agreement, Juice Plus+ has granted us exclusive rights to manufacture and supply them with certain of their
products within 24 countries where Juice Plus+ currently sells those products. Pursuant to the Restricted Stock Award Agreement, NAI
granted 500,000 shares of NAI common stock to Juice Plus+, (the “Shares”), and Juice Plus+ agreed the Shares are subject to certain
restrictions and risk of forfeiture. Pursuant to the Irrevocable Proxy, Juice Plus+ also granted the NAI Board of Directors the right to vote
the Shares that remain subject to risk of forfeiture. Each of the Agreements is for a term of 5 years, and each may be terminated by either
party only upon the occurrence of specified events.
On March 31, 2019, we amended our original agreements with Juice Plus+ and extended the term of the Exclusive Manufacturing
Agreement through August 6, 2025. In addition, pursuant to that Amended and Restated Exclusive Manufacturing Agreement, Juice Plus+
returned 400,000 shares of restricted common stock in exchange for an annual cash sales discount. The expense associated with the return
of those shares and the related cash discount granted to Juice Plus+ are each recorded as a reduction to sales. As a result of the amendment
to the Exclusive Manufacturing Agreement, we made a one-time adjustment to reverse the expense associated with unvested shares that
were returned as a result of the Amended and Restated Exclusive Manufacturing Agreement. Amounts associated with the new cash
discount began to be recorded in our fourth quarter of fiscal 2019 and will be amortized ratably over the remaining life of the extended
agreement based on the full value of the cash discount expected to be given over the same period. We recorded no “Non-Cash Sales
Discount” and $1.6 million of “Cash Sales Discount” for the year ended June 30, 2020, which was recorded as a reduction to net sales. We
recorded $82,000 of “Non-Cash Sales Discount” and $395,000 of “Cash Sales Discount” during the year ended June 30, 2019, with such
amounts recorded as a reduction to net sales.
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® and SR CarnoSyn® trade names. We recorded beta-
alanine raw material sales and royalty and licensing income as a component of revenue in the amount of $12.6 million during fiscal 2020
and $16.7 million during fiscal 2019. 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 $544,000 during fiscal 2020 and $686,000 during fiscal 2019.
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.
Research and development costs are expensed when incurred. Our research and development expenses for the last two fiscal years ended
June 30 were $1.8 million for fiscal 2020 and $1.8 million for fiscal 2019. 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 $1.4 million during the fiscal year ended June 30, 2020 and $1.6 million during fiscal 2019. These costs were included in selling,
general and administrative expenses.
32
Income Taxes
The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States. The CARES
Act and related notices include several significant provisions, including delaying certain payroll tax payments, mandatory transition tax
payments under the Tax Cuts and Jobs Act (“TCJ Act”), and estimated income tax payments. We do not currently expect the CARES Act
to have a material impact on our financial results, including on our annual estimated effective tax rate, or on our liquidity. We will continue
to monitor and assess the impact of the CARES Act, and similar legislation in other countries, with respect to what impact such legislation
may have on our business and financial results.
To determine our quarterly provision for income taxes, we use an estimated annual effective tax rate that is based on expected annual
income, statutory tax rates and tax planning opportunities available in the various jurisdictions to which we are subject. Certain significant
or unusual items are separately recognized as discrete items in the quarter in which they occur and can be a source of variability in the
effective tax rate from quarter to quarter. We recognize interest and penalties related to uncertain tax positions, if any, as an income tax
expense.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured and recorded using
enacted tax rates for each of the jurisdictions in which we operate, and adjusted using the tax rates 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 income or expense in the period that includes the enactment date.
We account for uncertain tax positions using the more-likely-than-not recognition threshold. It is our policy to establish reserves based on
management’s assessment of exposure for certain positions taken in previously filed tax returns that may become payable upon audit by
tax authorities. Our tax reserves are analyzed quarterly and adjustments are made as events occur that we believe warrant adjustments to
the reserves. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of June 30, 2020
and June 30, 2019, we did not record 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. 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 ultimately be realized based on whether future taxable income will be generated during the periods in which those
temporary differences become deductible. During the year ended June 30, 2020, there was no change to our valuation allowance.
Stock-Based Compensation
We had an omnibus equity incentive plan that was approved by our Board of Directors effective October 15, 2009 and approved by our
stockholders at the Annual Meeting of Stockholders held on November 30, 2009 ("2009 Plan"). Under the 2009 Plan, we granted
nonqualified and incentive stock options and restricted stock grants to employees, non-employee directors and consultants. The 2009 Plan
expired on October 15, 2019. The Board of Directors approved a new omnibus equity incentive plan effective October 15, 2019 (“2019
Plan”), subject to stockholder approval. However, the 2019 Plan was not approved by our stockholders and therefore did not become
effective. We currently do not have an equity incentive plan but will be recording exercises and forfeitures under the 2009 Plan.
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 use 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.
We recognize forfeitures as they occur.
We did not grant any options during fiscal 2020 or 2019.
No options were exercised during the fiscal year ended June 30, 2020, and 5,000 options were exercised during the fiscal year ended June
30, 2019. 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, 2020 and June 30, 2019.
During fiscal 2020, we granted a total of 5,000 restricted stock shares to a new member of our management team pursuant to the 2009 Plan.
During fiscal 2019, we granted a total of 190,000 restricted stock shares to the members of our Board of Directors and certain key members
of our management team pursuant to the 2009 Plan. These restricted stock grants vest over three or five years from the date of grant and
the unvested shares cannot be sold or otherwise transferred and the right to receive dividends, if declared by our Board of Directors, is
forfeitable until the shares become vested. The total remaining unrecognized compensation cost related to unvested restricted stock shares
amounted to $1.7 million at June 30, 2020 and the weighted average remaining requisite service period of unvested restricted stock shares
was 1.3 years. The weighted average fair value of restricted stock shares granted during fiscal 2020 was $8.50 per share. The weighted
average fair value of restricted stock shares granted during fiscal 2019 was $11.57 per share.
33
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 U.S. generally
accepted accounting principles (GAAP). Actual results could differ from those estimates and our assumptions may prove to be inaccurate.
COVID-19 Pandemic
The Company continues to monitor and evaluate the risks to public health and the impact on overall global business activity related to the
COVID-19 pandemic, including potential impacts on our employees, customers, suppliers and financial results. As the situation remains
fluid, it is difficult to predict the duration and scope of the pandemic and its impact on the Company’s business. However, it may result in
a material adverse impact to the Company’s financial position, operations and cash flows if conditions persist or worsen.
Net (Loss) 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 (loss) 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 (loss) income per common share ....................................................................... $
Diluted net (loss) income per common share .................................................................... $
For the Years Ended June 30,
2019
2020
(1,645) $
6,695
—
6,695
(0.25) $
(0.25) $
6,541
6,809
289
7,098
0.96
0.92
In periods where we have a net loss, stock options and restricted stock are excluded from our calculation of diluted net (loss) income per
common share, as their inclusion would have an antidilutive effect. We excluded shares related to stock options totaling 130,000 and
restricted stock totaling 323,904 for the year ended June 30, 2020. We did not exclude shares related to options or restricted stock for the
year ended June 30, 2019.
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 primarily
concentrated with our two largest customers, whose receivable balances collectively represented 65.7% of gross accounts receivable at
June 30, 2020 and 59.4% at June 30, 2019. As of June 30, 2020, we had a receivable balance of $3.3 million from a former contract
manufacturing customer. We have recorded a bad debt reserve equal to 100% of this outstanding balance and thus did not reflect it in the
percentages listed above.
Additionally, amounts due related to our beta-alanine raw material sales were 2.5% of gross accounts receivable at June 30, 2020 and 8.0%
of gross accounts receivable at June 30, 2019. Concentrations of credit risk related to the remaining accounts receivable balances are limited
due to the number of customers comprising our remaining customer base.
34
B. Inventories
Inventories, net, consisted of the following at June 30 (in thousands):
Raw materials .................................................................................................................... $
Work in progress ...............................................................................................................
Finished goods ..................................................................................................................
Reserve ..............................................................................................................................
$
2020
2019
20,863 $
3,447
4,936
(1,274 )
27,972 $
18,322
3,785
5,002
(1,106 )
26,003
The inventory reserve as of June 30, 2020, includes a reserve of $1.0 million related to one of our former customers, Kaged Muscle. We
are working with this former customer to transition to a replacement manufacturer, including the transfer of inventory items we hold specific
to this customer. However, due to the uncertainty regarding the future operations of this former customer, we recorded a reserve against
inventory specific to this customer equal to the estimated net realizable value of those items. The inventory reserve as of June 30, 2019,
includes a reserve of $686,000 related to our first generation SR CarnoSyn® powder.
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 ..............................................................
$
Depreciable Life
In Years
NA
7 – 39
3 – 12
3 – 5
3
1 – 15
$
2020
2019
1,200 $
3,743
33,405
5,318
255
18,031
61,952
(40,429 )
21,523 $
1,200
3,729
30,216
5,190
314
17,468
58,117
(37,032 )
21,085
Depreciation expense was approximately $4.0 million in fiscal 2020 and $3.5 million in fiscal 2019.
35
D. Leases
On July 1, 2019, we adopted FASB Accounting Standards Codification, or ASC, Topic 842, Leases, or ASC 842, which requires the
recognition of the right-of-use assets and related operating and finance lease liabilities on the balance sheet. As permitted by ASC 842, we
elected the adoption date of July 1, 2019, which is the date of initial application. As a result, the consolidated balance sheet prior to July 1,
2019 was not restated and continues to be reported under ASC Topic 840, Leases, or ASC 840, which did not require the recognition of
operating lease assets or liabilities on the balance sheet, and is not comparative. Under ASC 842, all leases are required to be recorded on
the balance sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in
the income statement. Operating lease expenses are recorded entirely in operating expenses. Finance lease charges are split, where
amortization of the right-of-use asset is recorded in operating expenses and an implied interest component is recorded in interest expense.
The expense recognition for operating leases and finance leases under ASC 842 is substantially consistent with ASC 840. As a result, there
is no material difference in our results of operations presented in our Consolidated Statement of Income and Comprehensive (Loss) Income
for each period presented.
We adopted ASC 842 using a modified retrospective approach for all leases existing at July 1, 2019. The adoption of ASC 842 had a
substantial impact on our balance sheet. The most significant impact was the recognition of the operating lease right-of-use assets and the
liability for operating leases. As of July 1, 2019, we had no finance leases. Upon adoption, leases that were previously classified as operating
leases under ASC 840 were classified as operating leases under ASC 842, and we recorded an adjustment of $20.7 million to operating
lease right-of-use assets and an adjustment of $20.9 million to the related lease liability. The lease liability is based on the present value of
the remaining minimum lease payments, determined under ASC 840, discounted using our secured incremental borrowing rate at the
effective date of July 1, 2019, and using the expected lease term, including any optional renewals, as the tenor. As permitted under ASC
842, we elected several practical expedients that permit us to not reassess (1) whether existing contracts are or contain a lease, (2) the
classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. The application of
the practical expedients did not have a significant impact on the measurement of the operating lease liability.
The impact of the adoption of ASC 842 on the balance sheet at June 30, 2019 was (in thousands):
Operating lease right-of-use assets ............................................. $
Total assets .................................................................................
Deferred rent ..............................................................................
Long-term liability – Operating leases .......................................
Deferred income taxes................................................................
Retained earnings .......................................................................
Total liabilities and equity ..........................................................
Other information related to leases was as follows (in thousands):
As Reported
June 30, 2019
Adoption of
ASC 842
Increase (Decrease)
Balance of
July 1, 2019
— $
93,490
543
—
1,018
57,380
93,490
20,774 $
20,774
(543)
20,897
102
318
20,774
20,774
114,264
—
20,897
1,120
57,800
114,264
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of operating lease liabilities ............................................. $
Operating lease liabilities arising from recording Right of Use Assets upon adoption of ASC 842 ...................
Operating lease liabilities arising from obtaining Right of Use Assets for new leases ........................................
Year ended June 30, 2020
3,453
20,897
120
We lease substantially all of our product manufacturing and support office space used to conduct our business. For contracts entered into
on or after that effective date, at the inception of a contract we assess whether the contract is, or contains, a lease. Our assessment is based
on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic
benefit from the use of the asset throughout the period of the contract, and (3) whether we have the right to direct the use of the asset during
such time period. At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative stand-
alone price to determine the lease payments.
Leases are classified as either finance leases or operating leases. A lease must be classified as a finance lease if any of the following criteria
are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is
reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease
payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any
of these criteria. Substantially all our operating leases are comprised of payments for the use of manufacturing space. We have no leases
classified as finance leases. As of June 30, 2020, the weighted average remaining lease term for our operating leases was 7.2 years. The
weighted average discount rate for our operating leases was 3.24%.
For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the
right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease.
The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct
costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All right-of-use assets are reviewed for
impairment. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit
36
in the lease or, if that rate cannot be readily determined, our secured incremental borrowing rate for the same term as the underlying lease.
For our real estate and other operating leases, we use our secured incremental borrowing rate.
Lease payments included in the measurement of the lease liability comprise the following: the fixed noncancelable lease payments,
payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early
termination options unless it is reasonably certain the lease will not be terminated early.
Some of our manufacturing leases contain variable lease payments, including payments based on an index or rate. Variable lease payments
based on an index or rate are initially measured using the index or rate in effect at lease commencement and separated into lease and non-
lease components based on the initial amount stated in the lease or standalone selling prices. Lease components are included in the
measurement of the initial lease liability. Additional payments based on the change in an index or rate, or payments based on a change in
our portion of the operating expenses, including real estate taxes and insurance, are recorded as a period expense when incurred. Lease
modifications result in remeasurement of the lease liability.
Lease expense for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is
recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period
that were not included in the initial lease liability. Lease expense for finance leases consists of the amortization of the right-of-use asset on
a straight-line basis over the lease term and interest expense determined on an amortized cost basis. The lease payments are allocated
between a reduction of the lease liability and interest expense.
We have elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less. The
effect of short-term leases on our right-of-use asset and lease liability was not material.
E. Other comprehensive loss
Other comprehensive (loss) income (“OCL” and “OCI”) consisted of the following at June 30 (dollars in thousands):
Year Ended June 30, 2020
Unrealized
(Losses) Gains
on
Cash Flow
Hedges
Total
Defined Benefit
Pension Plan
Balance as of June 30, 2019 ................................................................ $
(491 ) $
783 $
292
ASU 2018-02 Adjustment ..................................................................
OCI/OCL before reclassifications .......................................................
Amounts reclassified from OCI ..........................................................
Tax effect of OCI activity ...................................................................
Net current period OCI/OCL ..............................................................
Balance as of June 30, 2020 ................................................................ $
(74 )
(404 )
(20 )
101
(397 )
(888 ) $
(54 )
1,400
(2,747 )
323
(1,078 )
(295 ) $
(128 )
988
(2,759 )
424
(1,475 )
(1,183 )
Year Ended June 30, 2019
Unrealized
Gains (Losses)
on
Cash Flow
Hedges
Defined Benefit
Pension Plan
Total
Balance as of June 30, 2018 .................................................................... $
(387) $
(191) $
OCI/OCL before reclassifications ...........................................................
Amounts reclassified from OCI ..............................................................
Tax effect of OCI activity .......................................................................
Net current period OCI/OCL ...................................................................
Balance as of June 30, 2019 .................................................................... $
(144)
3
37
(104)
(491) $
4,251
(2,966)
(311)
974
783 $
(578)
4,107)
(2,963
(274)
870
292
37
F. Debt
On July 1, 2019, we executed an amendment to our credit facility with Wells Fargo Bank, N.A. to extend the maturity for our working line
of credit from February 1, 2021, to November 1, 2022. The Credit Agreement provides us with a credit line of up to $10.0 million. The line
of credit may be used to finance working capital requirements. There was no commitment fee required as part of this amendment.
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 us from time to time; provided, however, that if the outstanding principal amount is less than $100,000 such
amount shall bear interest at the then applicable fluctuating rate of interest. If elected, the fluctuating rate per annum would be equal to
1.25% 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 the maturity date. Amounts outstanding that are subject to a fluctuating interest rate may be prepaid at any
time without penalty. Amounts outstanding that are subject to a fixed interest rate may be prepaid at any time in minimum amounts of
$100,000, subject to a prepayment fee equal to the sum of the discounted monthly differences between payment under a fixed rate versus
payment under the variable rate for each month from the month of prepayment through the month in which the then applicable fixed rate
term matures.
Our obligations under the Credit Agreement are secured by our accounts receivable and other rights to payment, general intangibles,
inventory, equipment and fixtures. We also have credit approval with Wells Fargo Bank, N.A. which allows us to hedge foreign currency
exposures up to 30 months in the future. We also have credit approval with Bank of America which allows us to hedge foreign currency
exposures up to 24 months in the future.
On June 30, 2020, we were in compliance with all of the financial and other covenants required under the Credit Agreement.
In light of the global economic uncertainty related to COVID-19 and as a preventative measure to provide our business with potentially
necessary liquidity, and out of an abundance of caution, we withdrew $10 million from our credit facility with Wells Fargo during the year
ended June 30, 2020. While we have not yet experienced any significant negative effects related to COVID-19 and notwithstanding our
belief that our cash position and working capital excluding this $10.0 million borrowing is sufficient to support our ongoing operations, we
deemed it prudent to borrow against our line of credit to ensure that such funds would be available to us if and when we need them. As of
June 30, 2020, we did not have any remaining availability under our credit facilities.
G. Income Taxes
During fiscal 2020, we recorded U.S.-based domestic tax benefit of $821,000. During fiscal 2019, we recorded U.S.-based domestic tax
expense of $6,000.
The following is a geographical breakdown of (loss) income before income taxes (in thousands):
2020
2019
United States ............................................................................................................. $
Foreign ......................................................................................................................
Total (loss) income before income taxes ........................................................................... $
(5,742 ) $
4,004
(1,738 ) $
The provision for income taxes for the years ended June 30 consisted of the following (in thousands):
2020
2019
Current:
Federal....................................................................................................................... $
State ..........................................................................................................................
Foreign ......................................................................................................................
Deferred:
Federal.......................................................................................................................
State ..........................................................................................................................
Foreign ......................................................................................................................
Total (benefit) provision for income taxes ........................................................................ $
31 $
4
728
763
(641 )
(215 )
—
(856 )
(93 ) $
927
7,026
7,953
12
16
1,172
1,200
6
(28 )
234
212
1,412
38
Net deferred tax assets and deferred tax liabilities as of June 30 were as follows (in thousands):
2020
2019
Deferred tax assets:
Inventory capitalization ............................................................................................. $
Inventory reserves .....................................................................................................
Pension liability .........................................................................................................
Lease liability ............................................................................................................
Net operating loss carry forward ...............................................................................
Deferred rent .............................................................................................................
Stock-based compensation ........................................................................................
Forward Contracts .....................................................................................................
Tax credit carry forward ............................................................................................
Allowance for bad debt .............................................................................................
Other, net ...................................................................................................................
Total gross deferred tax assets ..........................................................................................
Deferred tax liabilities:
Withholding taxes .....................................................................................................
Fixed Assets ..............................................................................................................
Foreign inventory reserves ........................................................................................
Lease asset ................................................................................................................
Forward Contracts .....................................................................................................
Other, net ...................................................................................................................
Deferred tax liabilities .......................................................................................................
Net deferred tax assets (liabilities) .................................................................................... $
412 $
301
260
2,732
245
—
157
93
340
819
246
5,605
(1,133 )
(1,011 )
(469 )
(2,681 )
—
(115 )
(5,409 )
196 $
507
273
159
—
220
130
174
—
260
2
91
1,816
(1,133 )
(905 )
(469 )
—
(229 )
(98 )
(2,834 )
(1,018 )
At June 30, 2020, we had state tax net operating loss carry forwards of approximately $3.4 million. Under California Assembly Bill 85,
effective June 29, 2020, net operating loss deductions were suspended for tax years beginning in 2019, 2020, and 2021 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 2032, 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, 2020 and June 30,
2019.
We are subject to taxation in the U.S., Switzerland and various state jurisdictions. Our tax years for the fiscal year ended June 30, 2017 and
forward are subject to examination by the U.S. tax authorities. Our tax years for the fiscal years ended June 30, 2007 and forward are
subject to examination by the state tax authorities. Our tax years for the fiscal year ended June 30, 2019 and forward are subject to
examination by the Swiss tax authorities.
NAIE’s effective tax rate for Swiss federal, cantonal and communal taxes is approximately 18.2%.
As part of the Tax Cuts and Jobs Act of 2017 (the Tax Act), we were required to recognize a one-time deemed repatriation transition tax
during the fiscal year ended June 30, 2018 based on our total post-1986 earnings and profits (E&P) from our Swiss subsidiary, NAIE. This
accumulated E&P amount has historically been considered permanently reinvested thereby allowing us to defer recognizing any U.S.
income tax on the amount. We no longer consider undistributed foreign earnings from NAIE as of December 31, 2017 as indefinitely
reinvested. We consider earnings accumulated subsequent to December 31, 2017 as indefinitely reinvested.
A reconciliation of our income tax provision computed by applying the statutory federal income tax rate of 21% for fiscal 2020 and for
fiscal 2019 to net income before income taxes for the year ended June 30 is as follows (dollars in thousands):
Income taxes computed at statutory federal income tax rate ............................................ $
State income taxes, net of federal income tax expense .....................................................
Permanent Differences .....................................................................................................
Foreign tax rate differential ..............................................................................................
Global intangible low-taxed income (GILTI) ..................................................................
Income tax provision as reported ..................................................................................... $
Effective tax rate ..............................................................................................................
2020
2019
$
(364)
(174)
155
(112)
402
(93)
$
5.4%
1,670
(6 )
(187 )
(70 )
5
1,412
17.8 %
The effective tax rate for the year ended June 30, 2020 was 5.4%. The effective tax rate for the year ended June 30, 2020 differs from the
estimated U.S. federal statutory rate of 21% due primarily to the global intangible low-taxed income (GILTI) enacted as part of the Tax
Act, and permanent differences, which primarily include discrete tax items related to employee stock vesting. In comparison, the effective
39
tax rate for the year ended June 30, 2019 was 17.8%. The effective tax rate for the year ended June 30, 2019 differs from the estimated
U.S. federal statutory rate of 21% due to permanent differences, which primarily includes research and development tax credits. We expect
our U.S. federal statutory rate to be 21% for fiscal years going forward.
H. Employee Benefit Plans
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 or longer of continuous employment are eligible to
participate in the plan. Under the 401(k) plan, we match 100% of the first 3% and 50% of the next 2% of a participant’s compensation
contributed to the plan. The total contributions under the plan charged to income from operations totaled $314,000 for fiscal 2020 and
$283,000 for fiscal 2019.
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 income from
operations for these benefits totaled $1.4 million for the fiscal year ended June 30, 2020 and $1.3 million for the fiscal year ended June 30,
2019.
Effective July 16, 2020, the Board of Directors approved and adopted a Non-Qualified Incentive Plan. The purpose of the Non-Qualified
Incentive Plan is to enhance the long-term stockholder value of NAI by offering opportunities to directors, officers, employees and eligible
consultants of NAI to receive a cash award that may be subject to conditions precedent or subsequent that must be met before the NAI is
obligated to make the payment, and to provide to the Human Resources Committee and the Board of Directors the ability to make deferred
cash payments or other cash awards in order to encourage Participants to serve NAI or to remain in the service of NAI, or to assist NAI to
achieve results determined by the Human Resources Committee or the Board of Directors to be in NAI's best interest.
The Non-Qualified Incentive Plan provides for the Human Resources Committee or the Board of Directors to award and administer
unsecured and deferred cash awards subject to whatever conditions are determined by the Human Resources Committee or the Board of
Directors with each award. The terms of each award, including the amount and any conditions that must be met to be entitled to payment
of the award, are set forth in an Award Agreement. The Non-Qualified Incentive Plan provides the Board of Directors with the discretion
to set aside assets to fund the Non-Qualified Incentive Plan although that has not been done to date.
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. Annually, 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.
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):
2020
2019
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 ..........................................................................................
Employer contributions .................................................................................................
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 .................................................................................................... $
40
1,615 $
46
380
(6 )
2,035 $
1,369 $
(24 )
—
(6 )
—
1,339 $
(696 ) $
1,087
391 $
2,035 $
2,035 $
1,339 $
1,498
57
173
(113 )
1,615
1,453
69
—
(114 )
(39 )
1,369
(246 )
671
425
1,615
1,615
1,369
The weighted-average discount rate used for determining the projected benefit obligations for the defined benefit pension plan was 2.45%
for the year ended June 30, 2020 and 3.5% during the year ended June 30, 2019.
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 ............................................................................................. $
46 $
(69 )
50
—
27 $
57
(85 )
38
43
53
2020
2019
In the fiscal year ended June 30, 2020, we did not contribute to our defined benefit pension plan. In the fiscal year ended June 30, 2019,
we did not contribute to our defined benefit pension plan. We contributed $7,000 during the first quarter of the fiscal year ended June 30,
2021.
The following is a summary of changes in plan assets and benefit obligations recognized in other comprehensive income (in thousands):
Net gain ..................................................................................................................... $
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 ............... $
2020
2019
481 $
—
(57 )
—
424 $
451 $
189
(50 )
(37 )
39
141
194
The estimated net gain 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 $91,000. 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):
2021 ......................................................................................................................................................................... $
2022 .........................................................................................................................................................................
2023 .........................................................................................................................................................................
2024 .........................................................................................................................................................................
2025 .........................................................................................................................................................................
2026-2030 .....................................................................................................................................................................
Total benefit payments expected to be paid .................................................................................................................. $
888
62
120
—
333
383
1,786
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 ...............................................................................................
2.45%
6.50%
N/A
3.51%
6.50%
N/A
2020
2019
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.
41
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 .........................................................
2020
2019
Target
Allocation
52%
32%
12%
4%
100%
52%
38%
2%
8%
100%
54%
43%
0%
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, 2020 were as follows (in thousands):
Quoted Prices
in Active
Markets
for
Identical
Assets
(Level 1)
Total
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Cash and money market funds ....................................................... $
Commodities and other .................................................................. $
Equity securities(1) .......................................................................... $
Debt securities(2) ............................................................................. $
Total ................................................................................... $
49 $
160 $
705 $
425 $
1,339 $
49 $
160 $
705 $
425 $
1,339 $
— $
— $
— $
— $
— $
—
—
—
—
—
(1) This category is comprised of publicly traded funds, of which 79% are large-cap funds, 13% are developed market funds, and 8% are
emerging markets equity funds.
(2) This category is comprised of publicly traded funds, of which 82% are U.S. fixed income funds and 18% are developed market fixed
income funds.
I. Stockholders’ Equity
Treasury Stock
On January 8, 2020, the Board of Directors authorized a $2.0 million increase to our stock repurchase plan bringing the total authorized
repurchase amount to $9.0 million. On March 13, 2020, the Board of Directors authorized an additional $1.0 million increase to our stock
repurchase plan bringing the total authorized repurchase amount to $10.0 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 year ended June 30, 2020, we repurchased 400,787 shares at a weighted average cost of $8.25 per share and a total cost of $3.3
million including commissions and fees. During the year ended June 30, 2019, we repurchased 76,272 shares at a weighted average cost of
$10.97 per share and a total cost of $837,000 including commissions and fees under this repurchase plan.
During fiscal 2020, we acquired 61,913 shares in connection with restricted stock shares that vested during that year at a weighted average
cost of $7.14 per share and a total cost of $0.4 million. During fiscal 2019, we acquired 47,065 shares in connection with restricted stock
shares that vested during that year at a weighted average cost of $11.26 per share and a total cost of $0.5 million. These shares were returned
to us by the related employees and in return we paid each employee’s required tax withholding resulting from the vesting of restricted
shares. The valuation of the shares acquired and thereby the number of shares returned to us was calculated based on the closing share price
on the date the shares vested.
42
Stock Incentive Plans
Stock option activity for the year ended June 30, 2020 was as follows:
Vested and exercisable at June 30, 2019 ........................................
Exercised ................................................................................
Forfeited .................................................................................
Granted ...................................................................................
Outstanding at June 30, 2020 .........................................................
Vested and exercisable at June 30, 2020 ........................................
Weighted
Average
Exercise
Price
Weighted
Average
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
6.28
—
—
—
6.28
6.28
0.59 $
0.59 $
150,400
150,400
2009
Plan
130,000 $
— $
— $
— $
130,000 $
130,000 $
Restricted stock activity for the year ended June 30, 2020 was as follows:
Number of
Shares –
2009 Plan
Weighted
Average Grant
Date Fair
Value
Nonvested at June 30, 2019...........................................................................................
Granted ..................................................................................................................
Vested ...................................................................................................................
Forfeited ................................................................................................................
Nonvested at June 30, 2020...........................................................................................
383,988 $
5,000 $
(176,338) $
(15,000) $
197,650 $
10.70
8.50
10.33
9.65
11.06
J. 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 through March 2024.
NAIE leases facility space in Manno, Switzerland from two unaffiliated third parties. The leased spaces total approximately 125,000 square
feet. We primarily use the facilities for manufacturing, packaging, warehousing and distributing nutritional supplement products for the
European and Asian marketplaces. On July 1, 2019, NAIE extended the lease on its main manufacturing facility for an additional five years
through June 30, 2024.
On November 5, 2018, NAIE entered into a lease with Sofinol SA for approximately 2,870 square meters of commercial warehouse space
in a building located on the property adjacent to the leasehold for the primary existing NAIE facility in Manno Switzerland. NAIE uses the
space primarily for raw material storage. The lease is for an initial five-year term commencing on January 1, 2019 and NAIE can terminate
the lease with 12 months advance notice given on June 30th or December 31st each year of the initial term. At the end of the initial term
the lease converts to a year to year lease at the same rental rate terminable by NAIE or the landlord upon 12 months' advance notice.
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, 2020
(in thousands):
Gross minimum rental commitments ...... $
3,175 $
3,066 $
3,103 $
2,620 $
— $
2021
2022
2023
2024
2025
There-
after
Total
— $ 11,964
Rental expense totaled $3.2 million for the fiscal year ended June 30, 2020 and $3.1 million for the fiscal year ended June 30, 2019.
43
K. 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 .................................................................................................................
$
52,462 $
24,692
77,154 $
68,197
26,102
94,299
Fiscal 2020
Fiscal 2019
Accounts receivable from these customers totaled $13.4 million at June 30, 2020 and $9.5 million at June 30, 2019.
We buy certain products, including beta-alanine, from a single supplier. The loss of this supplier or other raw material suppliers could have
a material adverse impact on our net sales and net income. Raw material purchases from any one supplier representing 10% or more of the
respective period’s total raw material purchases were as follows (dollars in thousands):
Year ended June 30,
2020
2019
Raw Material
Purchases by
Supplier
% of Total
Raw
Material
Purchases
Raw Material
Purchases by
Supplier
% of Total
Raw
Material
Purchases
Supplier 1 ............................................................. $
Supplier 2 .............................................................
$
6,356
(a)
6,356
10%
(a)
10% $
(a)
8,240
8,240
(a)%
11
11%
(a) Purchases were less than 10% of the respective period’s total raw material purchases.
L. 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.
During the year ended June 30, 2020 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 2021. 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 revenue. We measure
effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item as well as ensuring
the assumptions we made at hedge inception have not materially changed. No hedging relationships were terminated as a result of
ineffective hedging for the years ended June 30, 2020 and June 30, 2019.
We monitor the probability of forecasted transactions as part of the hedge effectiveness testing on a quarterly basis. As of March 31, 2019,
we determined that a portion of forecasted sales for our fourth quarter of fiscal year 2019 were no longer probable of occurring by the end
of the specified time period. Therefore, we partially terminated hedging contracts for 2.3 million Euro and recorded a $132,000 gain to
other income related to this termination.
As of June 30, 2020, the notional amounts of our foreign exchange contracts were $49.4 million (€43.5 million). As of June 30, 2020, a net
loss of approximately $388,000 offset by $93,000 of deferred taxes, related to derivative instruments designated as cash flow hedges was
recorded in OCI. As of June 30, 2019, a net gain of approximately $957,000, offset by $229,000 of deferred taxes, related to derivative
instruments designated as cash flow hedges was recorded in OCI. It is expected that $287,000 of the gross loss as of June 30, 2020, will be
reclassified into earnings in the next 12 months along with the earnings effects of the related forecasted transactions.
As of June 30, 2020, $450,000 of the fair value of our cash flow hedges was classified as a current asset, and $195,000 was classified as a
long-term liability in our Consolidated Balance Sheets. During the year ended June 30, 2020, we recognized $1.4 million of net gains in
OCI, reclassified $2.7 million of gains and forward point amortization from OCI to Net Sales, and reclassified $54,000 of gains from OCI
44
to Other Income. During the year ended June 30, 2019, we recognized $4.3 million of net gains in OCI, reclassified $1.8 million of gains
from OCI to Other Income, and reclassified $1.2 million of gains from OCI to net sales.
M. 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 operations and the price of our common stock. 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.
N. Segment Information
Our business consists of two segments for financial reporting purposes. The two segments are identified as (i) private-label contract
manufacturing, which primarily relates to the provision of private-label contract manufacturing services to companies that market and
distribute nutritional supplements and other health care products, and (ii) patent and trademark licensing, which primarily includes direct
raw material sales and royalty income from our license and supply agreements associated with the sale and use of beta-alanine under our
CarnoSyn® and SR CarnoSyn® trade names.
We evaluate performance 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. Transfers of raw materials between segments are recorded at cost. The accounting
policies of our segments are the same as those described in the summary of significant accounting policies in Note A.
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 ..............................................................................
$
106,291 $
12,585
118,876 $
121,598
16,692
138,290
2020
2019
(Loss) Income from Operations
Private-label contract manufacturing .................................................................... $
Patent and trademark licensing ..............................................................................
Income from operations of reportable segments....................................................
Corporate expenses not allocated to segments ......................................................
$
4,030 $
2,508
6,538
(8,047 )
(1,509 ) $
2020
2019
Assets
Private-label contract manufacturing .................................................................... $
Patent and trademark licensing ..............................................................................
$
100,094 $
20,109
120,203 $
2020
2019
11,232
2,892
14,124
(8,163)
5,961
74,431
19,059
93,490
Our private-label contract manufacturing products are sold both in the U.S. and in markets outside the U.S., including Europe, Canada,
Australia, New Zealand, and Asia. Our primary markets outside the U.S. are Europe and Asia. Our patent and trademark licensing activities
are primarily based in the U.S.
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 ........................................................................................................ $
66,912 $
51,964
118,876 $
67,000
71,290
138,290
2020
2019
Products manufactured by NAIE accounted for 89% of consolidated net sales in markets outside the U.S. in fiscal 2020 and 78% in fiscal
2019. No products manufactured by NAIE were sold in the U.S. during the fiscal years ended June 30, 2020 and 2019.
45
Long-lived assets 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):
United States ................................................................................................................. $
Europe ...........................................................................................................................
Total Long-Lived Assets ....................................................................................... $
21,769 $
18,108
39,877 $
10,977
10,108
21,085
2020
2019
As a result of the implementation of ASC 842, operating lease right-of-use assets are now recorded as part of long-lived assets for segment
reporting.
Total assets 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):
United States ................................................................................................................. $
Europe ...........................................................................................................................
Total Assets ........................................................................................................... $
66,489 $
53,714
120,203 $
54,785
38,705
93,490
2020
2019
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):
United States ................................................................................................................. $
Europe ...........................................................................................................................
Total Capital Expenditures .................................................................................... $
1,530 $
3,011
4,541 $
1,746
3,581
5,327
2020
2019
O. Subsequent Events
On July 8, 2020, we purchased four 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 four contracts expire quarterly beginning
November 2020 and ending August 2021. The forward contracts have a notional amount of €17.3 million and a weighted average forward
rate of 1.1326.
Effective July 16, 2020, the Board of Directors approved and adopted a Non-Qualified Incentive Plan. The purpose of the Non-Qualified
Incentive Plan is to enhance the long-term stockholder value of NAI by offering opportunities to directors, officers, employees and eligible
consultants of NAI to receive a cash award that may be subject to conditions precedent or subsequent that must be met before the NAI is
obligated to make the payment, and to provide to the Human Resources Committee and the Board of Directors the ability to make deferred
cash payments or other cash awards in order to encourage Participants to serve NAI or to remain in the service of NAI, or to assist NAI to
achieve results determined by the Human Resources Committee or the Board of Directors to be in NAI's best interest.
The Non-Qualified Incentive Plan provides for the Human Resources Committee or the Board of Directors to award and administer
unsecured and deferred cash awards subject to whatever conditions are determined by the Human Resources Committee or the Board of
Directors with each award. The terms of each award, including the amount and any conditions that must be met to be entitled to payment
of the award, are set forth in an Award Agreement. The Non-Qualified Incentive Plan provides the Board of Directors with the discretion
to set aside assets to fund the Non-Qualified Incentive Plan although that has not been done to date.
On July 16, 2020, deferred cash awards were granted to various officers, directors and employees of NAI pursuant to the Non-Qualified
Incentive Plan, each providing for a cash payment to the Participant one third of which shall be paid on the one year, and two year, and
three year anniversary of the date of the award, provided on the date of payment the Participant has been employed since the date of the
award, and continues to be a member of the Board of Directors, or an employee of NAI. In the event a Participant ceases to be an employee
of NAI or a member of the Board of Directors of NAI prior to any remaining date of payment no further payments shall be made in
connection with the award.
On July 23, 2020, the United States Department of Treasury issued final regulations which provide an exclusion to GILTI. We are currently
evaluating the impact these regulations will have on our consolidated financial statements. The detriment or benefit, if any, of applying
these regulations will be reflected in our first quarter interim financial statements for fiscal year ending June 30, 2021.
On July 30, 2020, we purchased four 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 four contracts expire quarterly beginning
November 2021 and ending August 2022. The forward contracts have a notional amount of €15.0 million and a weighted average forward
rate of 1.1789.
On September 18, 2020, the Board of Directors authorized a $2.0 million increase to our stock repurchase plan bringing the total authorized
repurchase amount to $12.0 million.
Management has evaluated subsequent events through September 21, 2020, the date the Statements were available to be issued and there
are no additional subsequent events that would require adjustment to or disclosure in the Statements.
46
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, 2020. 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, 2020.
(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, 2020. 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 adverse 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, 2020
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, 2020 based on the criteria issued by COSO.
This assessment 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 the management’s report as part of this
assessment.
(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, 2020 that have materially
affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
47
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 4, 2020, to be filed on or before October 28, 2020.
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, 2020 and 2019;
Consolidated Statements of Operations and Comprehensive (Loss) Income for the years ended June 30, 2020 and 2019;
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2020 and 2019;
Consolidated Statements of Cash Flows for the years ended June 30, 2020 and 2019; and
• Notes to Consolidated Financial Statements.
48
(2) Exhibits. The following exhibit index shows those exhibits filed with this report and those incorporated by reference:
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
Amended and Restated By-laws of Natural Alternatives
International, Inc. dated as of February 9, 2009
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
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
10.5
10.6
Lease of Facilities in Vista, California between NAI and
Calwest Industrial Properties, LLC, a California limited
liability company (lease reference date June 12, 2003)
Form of Indemnification Agreement entered into between
NAI and each of its directors
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
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
10.9
2009 Omnibus Incentive Plan*
Attachment D of NAI’s definitive Proxy Statement filed with
10.10
Nonqualified Incentive Plan*
the commission on October 16, 2009
Exhibit 10.1 to NAI’s Current Report on Form 8-K dated
July 16, 2020, filed with the commission on July 22, 2020
10.21
10.23
10.30
10.33
10.37
10.38
10.39
10.40
10.41
10.42
10.44
10.45
License and Fee Agreement effective November 10, 2010 by
and among Roger Harris, Mark Dunnett, Kenny Johansson
and NAI
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)
Third amendment to the Lease of Facilities in Vista,
California between NAI and CWCA Vista Distribution 77,
LLC, a Delaware limited liability company
Credit Agreement by and between NAI and Wells Fargo
Bank, N.A. effective as of November 1, 2014
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
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
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
Exhibit 10.1 of NAI’s Current Report on Form 8-K dated
December 22, 2014 filed with the commission on December
24, 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)
Amended and Restated Employment Agreement, by and
between NAI and Mark A. LeDoux, effective October 1,
2015*
Amended and Restated Employment Agreement, by and
between NAI and Kenneth E. Wolf, effective October 1,
2015*
Amended and Restated Employment Agreement, by and
between NAI and Michael E. Fortin, effective October 1,
2015*
First amendment to credit agreement by and between NAI
and the Wells Fargo Bank N.A. effective as of February 1,
2016
First amendment to the Amended and Restated Employment
Agreement, by and between NAI and Michael E. Fortin,
effective September 1, 2016*
Second Amendment to the Credit agreement by and between
NAI and the Wells Fargo Bank N.A. effective as of March
28, 2017
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.
Exhibit 10.1 of NAI’s Current Report on Form 8-K dated
October 1, 2015, filed with the commission on October 1,
2015.
Exhibit 10.2 of NAI’s Current Report on Form 8-K dated
October 1, 2015, filed with the commission on October 1,
2015.
Exhibit 10.3 of NAI’s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2015, filed with the
commission on November 12, 2015.
Exhibit 10.01 of NAI’s Quarterly Report on Form 10-Q for
the quarterly period ended December 31, 2015, filed with the
commission on February 9, 2016.
NAI’s Current Report on Form 8-K dated September 1,
2016, filed with the commission on September 6, 2016
Exhibit 10.1 of NAI’s Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2017, filed with the
commission on May 15, 2017
49
10.47
10.48
10.49
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.60
Exclusive Manufacturing Agreement by and between NAI
and the Juice Plus+ Company dated August 7, 2017
Restricted Stock Agreement by and between NAI and the
Juice Plus+ Company dated August 7, 2017
Third amendment to the Credit agreement by and between
NAI and Wells Fargo Bank N.A. effective as of September
30, 2017
Fourth Amendment to the Credit agreement by and between
NAI and the Wells Fargo Bank N.A. effective as of March
20, 2018
Revolving Line of Credit Note made by NAI for the benefit
of Wells Fargo Bank N.A. dated March 20, 2018 in the
amount of $10,000,000
First amendment to the Amended and Restated Employment
Agreement, by and between NAI and Mark A. LeDoux,
effective July 1, 2018*
First amendment to the Amended and Restated Employment
Agreement, by and between NAI and Kenneth E. Wolf,
effective July 1, 2018*
Second amendment
the Amended and Restated
Employment Agreement, by and between NAI and Michael
E. Fortin, effective July 1, 2018*
Lease of Facilities in Manno, Switzerland between NAIE
and Mr. Silvio Tarchini dated October 19, 2018
to
Exhibit 10.45 of NAI’s Current Report on Form 8-K filed
with the commission on August 11, 2017
Exhibit 10.46 of NAI’s Current Report on Form 8-K filed
with the commission on August 11, 2017
Exhibit 10.1 of NAI’s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2017, filed with the
commission on November 13, 2017
Exhibit 10.1 of NAI’s Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2018, filed with the
commission on May 14, 2018
Exhibit 10.2 of NAI’s Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2018, filed with the
commission on May 14, 2018
Exhibit 10.1 of NAI’s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2018, filed with the
commission on November 13, 2018
Exhibit 10.2 of NAI’s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2018, filed with the
commission on November 13, 2018
Exhibit 10.3 of NAI’s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2018, filed with the
commission on November 13, 2018
Exhibit 10.4 of NAI’s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2018, filed with the
commission on November 13, 2018
Lease of Parking Places in Manno, Switzerland between
NAIE and Mr. Silvio Tarchini dated October 19, 2018
Exhibit 10.5 of NAI’s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2018, filed with the
commission on November 13, 2018
Lease of Facilities in Manno, Switzerland between NAIE
and Sofinol SA dated November 5, 2018
Exhibit 10.6 of NAI’s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2018, filed with the
commission on November 13, 2018
Amended
Agreement with Juice Plus+ dated March 31, 2019
and Restated Exclusive Manufacturing
Exhibit 10.48 of NAI’s Current Report on Form 8-K Form
8-K dated March 31, 2019, filed with the commission on
April 5, 2019
to
10.62
10.64
10.61
10.63
Third amendment
the Amended and Restated
Employment Agreement, by and between NAI and Michael
E. Fortin, effective July 1, 2019*
Credit Agreement by and between NAI and Wells Fargo
Bank, N.A. effective as of July 1, 2019
Revolving Line of Credit Note made by NAI for the benefit
of Wells Fargo Bank N.A. dated July 1, 2019 in the amount
of $10,000,000
Security Agreement by and between NAI and Wells Fargo
effective as of July 1, 2019
Subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
32
Section 1350 Certification
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase
21
23.1
31.1
31.2
Filed herewith
Filed herewith
Furnished herewith
Furnished herewith
Furnished herewith
Exhibit 10.61 of NAI's Annual Report on Form 10-K for the
fiscal year ended June 30, 2019, filed with the commission
on September 24, 2019.
Exhibit 10.1 of NAI’s Current Report on Form 8-K dated
July 26, 2019 filed with the commission on July 30, 2019
Exhibit 10.2 of NAI’s Current Report on Form 8-K dated
July 26, 2019 filed with the commission on July 30, 2019
Exhibit 10.3 of NAI’s Current Report on Form 8-K dated
July 26, 2019 filed with the commission on July 30, 2019
Filed herewith
Filed herewith
Filed herewith
Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase
Furnished herewith
Furnished herewith
Furnished herewith
Document
* Indicates management contract or compensatory plan or arrangement.
50
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 21, 2020
SIGNATURES
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)
/s/ L. Kay Matherly
(L. Kay Matherly)
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
Director
September 21, 2020
September 21, 2020
September 21, 2020
September 21, 2020
September 21, 2020
September 21, 2020
September 21, 2020
51
CORPORATE INFORMATION
OFFICERS
Mark LeDoux
Chairman and Chief Executive
Officer
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
Laura Kay Matherly
INVESTOR RELATIONS
Natural Alternatives International,
Inc.
1535 Faraday Avenue
Carlsbad, California 92078 USA
ANNUAL MEETING
The annual meeting of the
stockholders will be held at
11:00 a.m. PST on Friday,
December 4, 2020.
The annual meeting will be
conducted exclusively via a live
webcast.
Meeting ID:
www.meetingcenter.io/254478668
Meeting Password: NAII2020
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.
PO Box 505000
Louisville, Kentucky 40233-5000
T: 800-522-6645
www.Computershare.com/investor
TRADEMARKS
NAI®, CarnoSyn®, SR CarnoSyn® are registered trademarks of Natural Alternatives International, Inc.
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: 760-727-5325 ● 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
1-800-VITAMIN WWW.NAI-ONLINE.COM