NATURAL ALTERNATIVES
INTERNATIONAL, INC.
CUSTOM CONTRACT MANUFACTURING
OF SUPPLEMENTS SINCE 1980
2021 ANNUAL REPORT
Dear Stockholders,
Chairman’s Letter to Stockholders
To suggest that the fiscal year concluded June 30, of 2021, was abnormal would be an understatement. At the beginning of
the year the world found itself in the throes of a global pandemic, struggling for answers against a threat that embodies a
‘black-swan’ event. Mercifully, our company retained its status as an essential business, which allowed our global operations
to continue, even in the face of significant concerns for the welfare of our team members, their families and our customers.
The efforts of our heroic employees, vendors and logistic suppliers were nothing short of amazing. During fiscal 2021 NAI
experienced a 50% year over year growth in sales and resulting record profits.
Notwithstanding the challenges presented in the past year, some of which remain in the areas of supply chain disruption, and
our need for continued increases in human resources, we continue to make bold efforts preparing for what we believe is a
very bright future. Our new 54,000 square foot facility in Carlsbad, California is being retrofitted to create a dedicated high-
volume, high-quality powder blending and packaging facility, and is anticipated to be fully operational by the summer of
2022. Our investment in state-of-the -art production equipment continues with the installation of a new high capacity blender
for our Vista California manufacturing facility, which should be fully operational by early January of 2022, further bolstering
our throughput capacity. Packaged powder delivery systems of high-quality whole food based nutrient rich protein and meal
replacements are enjoying sustained growth in the industry, and as this segment grows, NAII intends to be well positioned to
capture relevant market share.
As Fiscal Year 2022 represents our 42nd year of continuous operations, we are excited with the positive momentum garnered
throughout the past 18 months. Clearly consumers have endorsed the expanded use of properly made dietary supplements as
part of their daily food choices and the science has supported this direction every step of the way. We believe the entire
COVID-19 experience resulted in consumers globally becoming more educated and taking greater personal control over their
health and well-being. We see no signs of this trend decelerating.
With the growth of our business, both in capacity and dosage forms, we are focusing on client and channel diversification.
With our facilities around the world receiving the highest regulatory licensure, major players in the food and beverage industry
are being added to our esteemed roster of clients, and our products are finding their way into the global supply chain at an
expanding rate. Maintaining the financial discipline to make long-term decisions that generate appropriate returns on
investment while fortifying our balance sheet has placed this firm in an enviable position. Having these financial resources
available to us allows us to meet the dynamic service demands of new and existing customers while permitting us to also
make strategic investments.
Our CarnoSyn® beta-alanine portfolio recovered during fiscal 2021 from the negative impacts of COVID-19 gym closures.
We believe this channel will stabilize for us and return to pre-pandemic levels in fiscal 2022. We are also working diligently
on commercialization of patent-protected sustained release forms of SR CarnoSyn® where we believe there is significant
opportunity in the rapidly growing healthy aging and wellness marketplace. Market research has indicated to us that this
channel is larger in scope and size than the sports nutrition channel where our instant release CarnoSyn® has enjoyed such
great success.
In the face of various economic and logistical headwinds we continue to work diligently to resolve supply concerns and build
appropriate safety-stocks whenever available, so as to remain well positioned to support our customers. We remain
committed to leading the responsible members of our industry while 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 of Directors
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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, 2021
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)
Title of each class
Common Stock, $0.01 par value per share
Name of exchange on which registered
Nasdaq Global Market
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.01 par value per share
Securities registered pursuant to Section 12(g) of the Act:
Trading Symbol(s)
NAII
Name of Each Exchange on Which Registered
Nasdaq Stock Market
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, 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, 2020) was approximately $50,488,386 (based on the closing sale price of $10.59 reported
by Nasdaq on December 31, 2020).
As of September 17, 2021, 6,434,902 shares of NAI’s common stock were outstanding, net of 2,569,463 treasury shares.
DOCUMENTS INCORPORATED BY REFERENCE
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, 2021, for its Annual Meeting of Stockholders to be held December 3, 2021.
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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS ......................................................................
Page
1
TABLE OF CONTENTS
PART I
Item 1.
Business ..........................................................................................................................................................
2
Item 1A. Risk Factors ....................................................................................................................................................
10
Item 2.
Properties ........................................................................................................................................................
18
Item 3.
Legal Proceedings...........................................................................................................................................
18
Item 4. Mine Safety Disclosures .................................................................................................................................
18
PART II
Item 5. Market for Our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ..
19
Item 6.
Selected Financial Data ..................................................................................................................................
19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .........................
20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........................................................................
24
Item 8.
Financial Statements and Supplementary Data ...............................................................................................
25
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .........................
52
Item 9A. Controls and Procedures .................................................................................................................................
52
Item 9B. Other Information ...........................................................................................................................................
52
PART III
Item 10. Directors, Executive Officers and Corporate Governance ..............................................................................
53
Item 11. Executive Compensation ................................................................................................................................
53
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .......
53
Item 13. Certain Relationships and Related Transactions, and Director Independence ................................................
53
Item 14. Principal Accountant Fees and Services .........................................................................................................
53
PART IV
Item 15. Exhibits and Financial Statement Schedules ..................................................................................................
53
SIGNATURES ................................................................................................................................................................
56
(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,” “expect,” “plan,” “believe,” “anticipate,” “intend,” “estimate,” “approximate,” “predict,”
“forecast,” “project,”, “future”, or “likely”, 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 including variations in our quarterly net sales , our employees,
supply chain, vendors and customers;
future financial and operating results, including projections of net sales, revenue, income or loss, net income or
loss per share, profit margins, expenditures, liquidity, and other financial items;
our ability to maintain or increase our patent and trademark licensing revenues;
our ability to develop market acceptance 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 levels 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 and their effect on our results of operations (including amounts that we may reclassify as
earnings), the availability of foreign exchange facilities, our ability to effectively hedge against foreign exchange
risks and the extent to which we may seek to hedge against such risks;
the outcome of litigation, regulatory and tax matters we may become involved in, the costs associated with such
matters and the effect of such matters on our business and results of operations;
sources, availability and quality of raw materials, including the limited number of suppliers of beta-alanine meeting
our quality requirements;
the future adequacy and intended use of our facilities;
potential manufacturing and distribution channels, product returns, and potential product recalls;
future customer orders;
the impact of external factors on our business and results of operations, especially, for example, variations in
quarterly net sales from seasonal and other external factors;
our ability to operate within the standards set by the U.S. Food and Drug Administration’s (FDA) Good
Manufacturing Practices (GMPs);
our ability to successfully expand our operations, including outside the United States (U.S.);
the adequacy of our financial reserves and allowances;
the sufficiency of our available cash, cash equivalents, and potential cash flows from our operations to fund our
working capital and capital expenditure needs through the next 12 months and longer;
the impact of accounting pronouncements and our adoption of certain accounting guidance; and
other assumptions described in this Report underlying or relating to any forward-looking statements.
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
ITEM 1. BUSINESS
General
Our vision is to enrich the world through the best of nutrition.
PART I
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 primary U.S. manufacturing
facility is located approximately three miles away in Vista, California. We also purchased a new manufacturing and
warehousing facility on August 20, 2021 located approximately one mile away from our executive offices in Carlsbad, CA.
In January 1999, we formed our wholly owned subsidiary 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,
distribution and administration.
In 1997, we licensed certain patent rights related to instant-release beta-alanine and have since expanded this patent estate by
applying for and obtaining patents 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, royalty and license agreements. We directly sell CarnoSyn® and SR CarnoSyn® 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, as applicable 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 Vista 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. NAI’s GMP Certification and authorization to manufacture product for Australia remains in place and our TGA
clients are advised to file for clearance extensions every 6 months to ensure supply is not interrupted.
Our Vista 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
2
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 Vista 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 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 October 2020. 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.
In April 2021, NAI became the first company to meet new safety and benchmarking standards created by the Supplement
Safety & Compliance Initiative (SSCI). The SSCI is an industry-driven initiative led by retailers to provide a harmonized
benchmark to recognize various safety standards throughout the entire dietary supplement supply chain. Patterned after the
Global Food Safety Initiative (GFSI), which has been very successful in implementation across the grocery marketplace and
food retail sectors, the program is focused on improved traceability and identification protocols to provide maximum safety
for end users. SSCI key objectives include creating effective global systems to ensure traceability, transparency, and quality
in the supply chain; reducing risks by ensuring equivalence between safety management systems’ and driving global change
through benchmarking of domestic and international quality standards.
On August 20, 2021, NAI acquired a new manufacturing and warehouse facility in Carlsbad, California that is scheduled to
be retrofitted to become a dedicated high volume powder blending and packaging facility while also providing additional raw
material storage capacity. The building improvements to allow for these capabilities are expected to be completed in late
fiscal year 2022 and all such construction is expected to be in compliance with GMP requirements. We are currently
evaluating which of the above referenced additional certifications will be necessary for this new facility and will be dependent
on types of products and customers we will service out of this facility.
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 the renewed certification was issued in October 2020.
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.
3
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, exploiting new contract manufacturing opportunities, and license and
royalty 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. As part of this
commercialization effort we launched a SR CarnoSyn® tablet product called Perfect Synergy® under a brand we created
called SustainedRx®. This product is currently exclusively offered through Amazon and is marketed as a Health & Wellness
product. In addition, we are actively working on the development of an SR CaronSyn® powder that we believe will provide
more opportunities in the marketplace. Our patents related to instant release beta-alanine extend through 2026 and our patents
for SR CarnoSyn® extend through 2036.
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.
4
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:
•
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•
•
•
•
•
customized product formulation;
clinical study design and support;
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, royalty, 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
2021
$
164,310
14,210
178,520
%
92 $
8
100 $
2020
$
106,291
12,585
118,876
%
89
11
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 always
engaged to perform, certain research and development activities related to the development or improvement of their products.
Our customers are usually charged for these services but are often reimbursed for these costs if their products are ultimately
commercialized and manufactured by NAI. 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, 2021 were $1.9 million, compared to $1.8 million
for the fiscal year ended June 30, 2020.
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
5
in our or our customer’s products. We typically buy raw materials in bulk from qualified vendors located both within and
outside the U.S.
Like many companies and industries, we experienced challenges within our supply chain as a result of the affects of the
COVID-19 pandemic. In particular, we encountered difficulties related to the supply of raw materials and packaging
components. These challenges were driven by, but were not limited to, increased demand for certain ingredients with a limited
supply, our supplier’s inability to meet demand due to capacity constraints, and increased lead times associated with
constrained transportation availability. While we were able to manage these circumstances in fiscal 2021 by working closely
with our customers and suppliers, 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 2022, 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:
•
•
•
•
•
•
•
•
•
•
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.
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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.
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:
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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.
Under FDA rules, companies that manufacture, package, label, distribute or hold nutritional supplements are required 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.
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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.
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 provide assurances 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 49 trademark registrations; including 14 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 35 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. We currently have two 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 provide assurances 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 eleven U.S. patents and 20 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. Some of our patents extend as far as through 2036.
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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 $14.2 million in fiscal 2021. We incurred intellectual property litigation and patent compliance expenses of
approximately $1.2 million during fiscal 2021 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 2022.
Employees
As of June 30, 2021, we employed 220 full-time employees in the U.S., three of whom held executive management positions.
Of the remaining full-time employees, 35 were employed in research, laboratory and quality control, 14 in sales and
marketing, and 168 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, 2021, we had eight temporary personnel.
As of June 30, 2021, NAIE employed an additional 97 full-time employees and 25 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 (“FFCRA”) expanded paid sick and family medical leave for employees affected by COVID-19.
FFCRA covers the cost of this paid leave with refundable tax credits. We are experiencing a shortage of associates and
applicants to fill staffing requirements at our U.S. manufacturing facilities due to the current labor shortage affecting
manufacturing businesses. This has adversely affected the operating efficiency of our manufacturing facilities. The steps we
have taken to address the labor shortage at our manufacturing facilities include hosting hiring events, paying retention
bonuses, offering enhanced wages and paying referral bonuses.
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. 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, Mexico, 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.
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Our activities in markets outside the U.S. are subject to political, economic and other risks in the countries in which our
products are sold and in which we operate. For more information about these and other risks, please see Item 1A in this report.
ITEM 1A. RISK FACTORS
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.
Risks Related to the Company’s Industry and Business
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 of the pandemic 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 $10.0 million from our credit facility with Wells Fargo in the third quarter of fiscal 2020. On February 2, 2021 we
repaid the entire withdrawal balance bringing our borrowings under our credit facility to zero. 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
and available credit facility 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.
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.
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
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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.
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 and 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.
Risks Related to Operations, Manufacturing, and Technology
If we are unable to attract and retain qualified management personnel and key manufacturing personnel, our business
may suffer.
Our executive officers and other management personnel along with key manufacturing positions 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 and key manufacturing personnel. Competition for qualified individuals can be intense and has been
increasing in recent years. 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 and manufacturing
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
but not limited to 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 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 recently acquired a warehouse and distribution facility in Carlsbad, California,
and plan to convert it into a dedicated high volume powder blending and packaging facility while also providing additional
raw material storage capacity. There can be no assurance our conversion plans will be completed in a time period or at the
cost we estimate, or that we will obtain sufficient business from our clients to effectively utilize the facility and our investment
therein.
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.
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
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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.
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 2021, one of our suppliers, Lonza Group AG,
represented more than 10% of our total raw material purchases. During fiscal 2020, another of our suppliers, Yasunaga
Trading Company, LTD (Yasunaga), represented more than 10% of our raw material purchases. We currently purchase all
of our beta-alanine for our CarnoSyn® and SR CarnoSyn® business from Yasunaga. Any disruption in their ability to source
materials for or produce the amounts of beta-alanine needed to meet our requirements could have an adverse effect on our
business.
The loss of any of our other 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 pricing pressures on raw materials and other products have continued
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 expect these upward pressures to continue through fiscal 2022. 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, labor shortages, strikes, terrorism, natural disasters,
and other catastrophic events.
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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.
Risks Related to Customer Concentration
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 sales to their customers and their orders from us.
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, 2021, sales to our largest customer, The Juice Plus+ Company, were
approximately 51% of our consolidated net sales. We cannot predict with any certainty if sales to Juice Plus+ will increase
or decrease in the future. We also have one other private-label contract manufacturing customer that represented 14% of our
consolidated net sales during this same time period.
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.
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 SR 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 and other
intellectual property associated with instant release beta-alanine, sold under our trade name CarnoSyn®. We have five patents
for this version of CarnoSyn®, of which the latest expires in 2026. Our patent and trademark licensing revenue increased from
$12.6 million in fiscal 2020 to $14.2 million in fiscal 2021 in part due to recovery of the sports nutrition industry after the
reopening of gyms and athletic facilities and activities in accordance with easing COVID-19 guidelines for such activities.
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 2036 and we believe the introduction of SR CarnoSyn® beta-alanine is an important step in the further
commercialization of our patent estate. There can be no assurance we will be successful in getting the market to accept this
new form of beta-alanine or that we will be successful launching new products utilizing SR CarnoSyn® beta-alanine.
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Risks Related to Regulations
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 subject to additional laws and regulations imposed by
federal, state, and local governments primarily related to the ability of 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.
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, applications, and
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 have 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 other raw materials we use in our customer’s 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 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. Additional tariffs imposed by any government on beta-alanine could have an adverse impact on the price
14
we have to pay for beta-alanine and the availability of beta-alanine. Any of these events could have a material adverse effect
on our business and results of operations.
Risks Related to Litigation
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 could
each have a material adverse effect on our 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 2021, we incurred approximately $1.2 million in patent
litigation and prosecution expense and expect these expenses to be between $0.5 million and $1.0 million during fiscal 2022.
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.
Risks Related to Insider Ownership and Corporate Structure
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.
15
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 22% of our
outstanding shares of common stock as of June 30, 2021. 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.
Risks Related to Future Acquisitions
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.
16
General Risk Factors
Our operating results will vary. Fluctuations in our operating results may adversely affect the share price of our common
stock.
Our net sales increased during fiscal 2021 as compared to fiscal 2020, 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 2022, 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 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 market for our stock 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 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.
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. Furthermore, if 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
May 2024 and there is no guarantee we will be able to extend or renew this credit line on favorable terms or at all.
17
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.
ITEM 2. PROPERTIES
This table summarizes our facilities as of June 30, 2021. 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
Carlsbad, CA USA(6) ........... Powder filling, packaging, distribution and storage
Lease
Expiration
Date
Square
Feet
162,000
95,990
30,892
20,981 Owned
54,154 Owned
How
Held
Leased March 2024
Leased
June 2024
Leased December 2023
N/A
N/A
(1)
(2)
This facility is used by NAI for its private-label contract manufacturing segment.
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.
This facility is used by NAIE in connection with our private-label contract manufacturing segment.
This facility is used by NAIE for additional warehouse storage.
(3)
(4)
(5) We purchased the Carlsbad facility in March 2016.
(6) We purchased this facility in August 2021, and are presently converting it into a dedicated high volume powder blending and
packaging facility with additional raw material storage capacity.
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 20, 2021, neither NAI nor NAIE were a party to any material pending legal proceeding nor was any of our
property the subject of any material pending legal proceeding. We are currently involved in several matters in the ordinary
course of our business.
There is no assurance NAI will prevail in any litigation matters or that litigation expenses will not be greater than anticipated.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
18
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, 2021 and
2020:
First Quarter ................................................................. $
Second Quarter ............................................................. $
Third Quarter ................................................................ $
Fourth Quarter .............................................................. $
8.23 $
10.99 $
17.66 $
18.20 $
6.52 $
7.40 $
10.60 $
12.90 $
12.30 $
9.36 $
9.61 $
7.43 $
8.20
7.61
5.15
5.93
Fiscal 2021
Fiscal 2020
High
Low
High
Low
Holders
As of September 17, 2021, there were approximately 195 stockholders of record of our common stock. On that same date,
the last sales price of our common stock as reported on NASDAQ was $14.91 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, 2021, we did not sell any unregistered securities.
Repurchases
During the quarter ended June 30, 2021, we did not repurchase any shares of our common stock under our stock repurchase
plan. Currently we have $3.2 million approved under the Plan for future purchases.
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, 2021:
Number of Shares
to be Issued Upon
Exercise of
Outstanding
Options, Warrants,
and Rights
(a)
Weighted-
Average
Exercise Price
of Outstanding
Options,
Warrants, and
Rights
(b)
Number of Shares
Remaining
Available
for Future Issuance
Under Equity
Compensation
Plans (Excluding
Shares Reflected in
Column
(a))
(c)
Plan Category
Equity compensation plans approved by stockholders ...............
Equity compensation plans not approved by stockholders .........
Total ...........................................................................................
— $
N/A
— $
—
N/A
—
608,227
N/A
608,227
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, we are not required to provide Item 6 disclosure in this Annual Report.
19
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, 2021 and 2020 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.
During fiscal 2021, our consolidated net sales were 50% higher than in fiscal 2020. Private-label contract manufacturing sales
increased 55% due to higher sales from a majority of our distribution channels worldwide. A significant portion of our
increased contract manufacturing sales related to higher sales of immune and wellness products which is in line with the trend
being experienced by the dietary supplement industry and is being driven by consumers taking a more active role in their
health and wellness as a result of the COVID-19 pandemic. Our contract manufacturing sales also increased due to sales of
newly awarded products from new and existing customers. This sales increase was partially offset by a reduction in sales as
a result of a discontinued customer relationship. Revenue concentration from our largest private-label contract manufacturing
customer as a percentage of our total net sales increased to 51% in fiscal 2021 from 44% in fiscal 2020. We expect this
percentage to decrease in fiscal 2022.
Effective March 31, 2020, we terminated our ongoing relationship with one private-label contract manufacturing customer,
Kaged Muscle. During fiscal 2020 we reserved 100% of their accounts receivable and a majority of the inventory held for
their products resulting in a total reserve of $4.3 million. During fiscal 2021, we recovered $0.8 million primarily associated
with sales of inventory previously reserved. As of June 30, 2021, all remaining inventory amounts have been converted to
accounts receivables and our balance sheet now includes a reserve of $3.5 million. We continue working with this former
customer to assist them with completing their obligations to us.
During fiscal 2021, CarnoSyn® beta-alanine revenue increased 13% to $14.2 million as compared to $12.6 million for fiscal
2020. The increase in CarnoSyn® revenue was primarily due to an increase in material shipments primarily resulting from
higher sales to existing customers, which we believe was primarily influenced by the increase in athletic activities as gyms
and athletic facilities began to reopen during the second half of fiscal 2021 in accordance with easing COVID-19 guidelines
for various cities and states across the USA. We believe the increase experienced in the second half of our fiscal year 2021
included larger than usual orders associated with our customer’s refilling their distribution channels and we anticipate these
sales levels will normalize to historical trend in fiscal 2022.
20
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
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 $1.2 million
during fiscal 2021 and $2.0 million during fiscal 2020. The decrease in these legal expenses on a year over year basis was
primarily due to the successful resolution of several cases that were settled. We currently expect our litigation and patent
compliance expenses to decrease during fiscal 2022 to an annual rate of approximately $0.5 million to $1.0 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 2022, we will continue our sales
and marketing activities to consumers, customers, potential customers, and brand owners on multiple platforms to promote
and reinforce the features and benefits of utilizing CarnoSyn® and SR CarnoSyn® beta-alanine.
Based on our current sales order volumes and forecasts we have received from our customers, we anticipate our fiscal 2022
consolidated net sales will increase between 5.0% and 10.0% as compared to fiscal 2021. We also anticipate we will generate
operating income between 7.0% and 9.0% of net sales for our fiscal year ending June 30, 2022. Sales and profitability during
the first half of fiscal 2022 are anticipated to decline when compared to the same period of fiscal 2021. Our expectations for
the first half of fiscal 2022 are being driven by continuing supply chain, labor and logistical constraints, all of which are
expected to result in a backlog of existing orders that may not get fully cleared until the second half of fiscal 2022. We
currently anticipate these manufacturing challenges will mostly resolve themselves during the second half of fiscal 2022. As
a result, we expect sales and profitability in the second half of fiscal 2022 to exceed the comparable period in fiscal 2021,
with the overall fiscal 2022 results reflecting an increase in both sales and profitability on a full year basis. There can be no
assurance our expectations will result in the currently anticipated increase in net sales or operating income. Notwithstanding,
we are also closely monitoring the impact of the COVID-19 pandemic. Currently, we cannot reasonably estimate the length
of time or severity of the pandemic and cannot currently reliably estimate the impact this pandemic may have on our
consolidated financial results for fiscal 2022 and beyond.
Impact of COVID-19 on Our Business
The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption and has and will
likely continue to affect our business. Significant uncertainty exists concerning the magnitude of the impact and duration of
the COVID-19 pandemic. Our facilities, located both in the United States and Europe, continue to operate as an essential and
critical manufacturer in accordance with applicable federal, state, and local regulations, however, there can be no assurance
our facilities will continue to operate without interruption. Factors that derive from COVID-19 and the accompanying
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;
Limitation on the availability of qualified individuals to adequately staff our manufacturing facilities;
Local, state, or federal orders requiring employees to remain at home;
Limitations on the ability of carriers to deliver materials to us or 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.
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.
21
During fiscal 2022, 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.
Discussion of Critical Accounting Estimates
We have identified the following as our most critical accounting estimates, which are those that are most important to the
portrayal of the Company’s financial condition and results, and that require management’s most subjective and complex
judgments. Information regarding our other significant accounting estimates and policies are disclosed in Note 1, Nature of
Operations and Summary of Significant Accounting Policies, of the notes to the consolidated financial statements.
Revenue Recognition — Revenue is measured as the net amount of consideration expected to be received in exchange for
fulfilling one or more performance obligations. For certain contracts with volume rebates, our estimates of future sales used
to assess the volume rebate estimates are subject to a high degree of judgement and may differ from actual sales due to,
among other things, changes in customer orders and raw material availability.
Results of Operations
The 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, 2021
June 30, 2020
Increase (Decrease)
Private-label contract
manufacturing ........................... $ 164,310
14,210
178,520
148,078
30,442
Patent and trademark licensing .....
Total net sales ...............................
Cost of goods sold ........................
Gross profit ...................................
Selling, general & administrative
expenses ....................................
Income (loss) from operations ......
Other (loss), net ............................
Income (loss) before income taxes
Provision (benefit) for income
16,770
13,672
(1,547)
12,125
92% $
8%
100%
83%
17%
106,291
12,585
118,876
100,005
18,871
9%
8%
(1)%
7%
20,380
(1,509)
(229)
(1,738)
89% $
11%
100%
84%
16%
17%
(1)%
—%
(2)%
58,019
1,625
59,644
48,073
11,571
(3,610)
15,181
(1,318)
13,863
55%
13%
50%
48%
61%
(18)%
1,006%
(576)%
798%
taxes ..........................................
Net income (loss) ......................... $
1,357
10,768
1%
6% $
(93)
(1,645)
—%
(1)% $
1,450
12,413
—%
755%
Private-label contract manufacturing sales increased 55% due to higher sales from a majority of our distribution channels
worldwide. A significant portion of our increased contract manufacturing sales related to higher sales of immune and wellness
products which is in line with the trend being experienced by the dietary supplement industry and is being driven by
consumers taking a more active role in their health and wellness as a result of the COVID-19 pandemic. Our contract
manufacturing sales also increased due to sales of newly awarded products from new and existing customers. This sales
increase was partially offset by a reduction in sales as a result of a discontinued customer relationship. Revenue concentration
from our largest private-label contract manufacturing customer as a percentage of our total net sales increased to 51% in fiscal
2021 from 44% in fiscal 2020. We expect this percentage to decrease in fiscal 2022.
Net sales from our patent and trademark licensing segment increased 13% during fiscal 2021. The increase in patent and
trademark licensing revenue was primarily due to an increase in material shipments primarily resulting from higher sales to
existing customers, which we believe was primarily influenced by the increase in athletic activities as gyms and athletic
22
facilities began to reopen during the second half of fiscal 2021 in accordance with easing COVID-19 guidelines for various
cities and states across the USA. We believe the increase experienced in the second half of our fiscal year 2021 included
larger than usual orders associated with our customer’s refilling their distribution channels and we anticipate these sales levels
will normalize to historical trend in fiscal 2022.
The change in gross profit margin for the year ended June 30, 2021, was as follows:
Percentage
Change
Contract manufacturing(1) ..........................................................................................................................
Patent and trademark licensing(2) ...............................................................................................................
Total change in gross profit margin ...........................................................................................................
3.0
(1.8)
1.2
1 Private-label contract manufacturing gross profit margin contribution increased 3.0 percentage points in fiscal 2021 as
compared to fiscal 2020. The increase in gross profit as a percentage of sales for private-label contract manufacturing is
primarily due to a decrease in per unit manufacturing costs as a result of increased sales as well as a $1.0 million
inventory reserve recorded in the prior fiscal year, with no such comparable reserve in the current fiscal year. These
decreases were partially offset by unfavorable product and customer sales mix.
2 During fiscal 2021, patent and trademark licensing gross profit margin contribution decreased 1.8 percentage points in
fiscal 2021 as compared to fiscal 2020. The decrease in margin contribution during the year ended June 30, 2021 was
primarily due to decreased patent and trademark licensing net sales as a percentage of total consolidated net sales and
lower average sales prices.
Selling, general and administrative expenses decreased $3.6 million, or 18%, during fiscal 2021 as compared to fiscal 2020.
This decrease was primarily due to $3.3 million of bad debt expense recorded during fiscal 2020 related to a receivable from
a former contract manufacturing customer with no such comparable reserve during fiscal 2021, decreased litigation and patent
compliance expenses associated with our CarnoSyn® beta-alanine patent estate, and decreased CarnoSyn® advertising and
research expenses. These decreases were partially offset by increased employee compensation costs.
Other income, net, decreased $1.3 million during fiscal 2021 as compared to fiscal 2020. The decreases were primarily due
to the unfavorable foreign exchange revaluation activity due to volatility in the Euro and Swiss Franc impacting our balance
sheet.
Our income tax expense increased $1.5 million during fiscal 2021 as compared to fiscal 2020. The increase was primarily
due to the increase in income before taxes when compared to a loss in fiscal 2020.
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 $20.8 million in fiscal 2021 compared
to net cash provided by operating activities of $3.7 million in fiscal 2020.
At June 30, 2021, 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 $0.8 million in cash compared to
using $4.3 million in fiscal 2020. The decrease in cash used by accounts receivable during fiscal 2021 primarily resulted from
timing of sales and the related collections at the end of fiscal 2021 as compared to fiscal 2020. In addition, provision for
uncollectible accounts receivable provided $0.1 million in fiscal 2021 as compared to using $3.3 million for fiscal 2020. The
change in provision for uncollectible accounts receivable was primarily associated with a reserve recorded for a former
contract manufacturing customer in fiscal 2020 while the activity in fiscal 2021 reflected an amount recovered against the
same receivable. Days sales outstanding decreased to 36 days during fiscal 2021 compared to 51 days during fiscal 2020,
primarily due to customer sales mix and timing of sales and the related collections.
Inventory provided $1.0 million in cash during fiscal 2021 compared to using $2.0 million in fiscal 2020. The change in cash
activity from inventory was primarily related to the difference in amount and timing of sales at the end of fiscal 2021 and
anticipated sales for the beginning of fiscal 2022 as compared to the same drivers at the end of fiscal 2020. Changes in
accounts payable and accrued liabilities provided $1.9 million in cash during fiscal 2021 compared to providing $2.7 million
during fiscal 2020. The change in cash flow activity related to accounts payable and accrued liabilities is primarily due to the
timing of inventory receipts and payments.
23
Cash used in investing activities in fiscal 2021 was $5.0 million compared to $4.5 million in fiscal 2020. Capital expenditures
were $5.1 million during fiscal 2021 compared to $4.5 million in fiscal 2020. Capital expenditures during fiscal 2021 and
fiscal 2020 were primarily for manufacturing equipment used in our Vista, California and Manno, Switzerland facilities.
Cash used by financing activities in fiscal 2021 was $14.1 million, compared to providing $6.3 million in fiscal 2020. This
change is primarily due to $10.0 million in proceeds from our line of credit, withdrawn as a measure to provide our business
with liquidity out of an abundance of caution due to the COVID-19 pandemic during fiscal 2020 that was paid off in February
2021. Financing activities also included an increase in repurchases of our stock, which increased to $4.1 million in fiscal
2021 as compared to $3.7 million in fiscal 2020. At June 30, 2021 we had no outstanding balances due and $20.0 million
available in connection with our loan facility. At June 30, 2020 we had $10.0 million due and no amount available in
connection with our loan facility.
During fiscal 2021 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, 2021, we had $32.1 million in cash and cash equivalents. Of these amounts, $15.6 million of cash and cash
equivalents were held by NAIE. In August 2021 we used $7.5 million of cash related to the building purchase further disclosed
in our subsequent events footnote. 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, 2021, 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 2021 we experienced price increases in product raw material and operational costs related to inflationary
pressures. During fiscal 2020, 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
continue throughout fiscal 2022 as a result of limited supplies of various ingredients, the effects of higher labor and
transportation costs, and the impact of COVID-19. We believe current inflation rates will have an impact on our fiscal 2022
operations and we are monitoring the drivers and working with suppliers and customers to mitigate the impact on our results.
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.
24
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 Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Natural Alternatives International, Inc. (the “Company”)
as of June 30, 2021 and 2020, and the related consolidated statements of operations and comprehensive income (loss),
stockholders’ equity and cash flows for each of the two years in the period ended June 30, 2021, 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 consolidated financial position of the Company as of June 30, 2021 and 2020, and
the consolidated results of its operations and its cash flows for each of the two years in the period ended June 30, 2021, in
conformity with U.S. generally accepted accounting principles.
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 audits to obtain reasonable assurance about whether the consolidated 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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the consolidated financial
statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or
disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective,
or complex judgments. The communication of this critical audit matter does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition—Refer to Note A to the Consolidated Financial Statements
Critical Audit Matter Description
The Company recognizes revenue upon transfer of control of promised products to customers in an amount that reflects the
consideration the Company expects to receive in exchange for those products. The Company may enter into certain customer
contracts that contain unique, customer-specific terms and conditions, variable consideration, as well as multiple performance
obligations. For such contracts, significant interpretation may be required to determine the appropriate accounting, including
the identification of performance obligations, the allocation of the transaction price to performance obligations in the
arrangement, the timing of the transfer of control of promised goods for each of those performance obligations, estimates of
variable consideration and agent versus principal consideration.
25
Our assessment of managements’ evaluation of the above referenced matters related to proper revenue recognition is
significant to our audit because the amounts are material to the financial statements, the assessment process involves
significant judgment, and the application of U.S. generally accepted accounting principles in this area is complex.
How the Critical Audit Matter Was Addressed in the Audit
Our principal audit procedures related to the Company’s revenue recognition for customer contracts included the following:
• We evaluated the appropriateness of management’s revenue recognition policies.
• We tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue
recognized in the consolidated financial statements.
• We selected a sample of revenue transactions and performed the following procedures:
o Obtained and read source documents for each selection, including master agreements, purchase orders and
other documents that evidenced the customer arrangement.
o Tested management’s identification and treatment of the key contract terms, including performance
obligations and variable consideration.
o Assessed the terms in the customer agreement and evaluated the appropriateness of management's
application of the Company’s accounting policies, along with their use of estimates, in the determination
of revenue recognition conclusions.
/s/ HASKELL & WHITE LLP
We have served as the Company’s auditor since 2014.
San Diego, California
September 20, 2021
26
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 $3,527 at June 30,
2021 and $3,240 at June 30, 2020 ........................................................................
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 ........................................................
Customer deposits ....................................................................................................
Income taxes payable ...............................................................................................
Forward contracts .....................................................................................................
Line of credit ............................................................................................................
Total current liabilities ..................................................................................
Long-term liability – operating leases .............................................................................
Noncurrent forward contracts ..........................................................................................
Long-term pension liability .............................................................................................
Income taxes payable, noncurrent ...................................................................................
Total liabilities ...............................................................................................
Commitments and contingencies (Notes H, J and M)
Stockholders’ equity:
2021
2020
32,133 $
30,478
17,946
27,006
1,095
—
2,168
80,348
22,271
15,877
214
1,571
120,281 $
11,893 $
2,441
4,584
1,721
619
814
—
22,072
16,481
4
391
1,250
40,198
17,001
27,972
848
450
2,275
79,024
21,523
18,354
196
1,106
120,203
12,509
1,565
2,660
62
1,010
—
10,000
27,806
18,782
195
696
1,349
48,828
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, 2021
and June 30, 2020, issued and outstanding (net of treasury shares) 6,436,568 at
June 30, 2021 and 6,752,372 at June 30, 2020 .....................................................
Additional paid-in capital .........................................................................................
Retained earnings .....................................................................................................
Treasury stock, at cost, 2,567,797 shares at June 30, 2021 and 2,104,305 at June
30, 2020 ................................................................................................................
Accumulated other comprehensive loss ...................................................................
Total stockholders’ equity .............................................................................
Total liabilities and stockholders’ equity ....................................................... $
88
29,456
66,949
(15,849)
(561)
80,083
120,281 $
87
27,992
56,181
(11,702 )
(1,183 )
71,375
120,203
See accompanying notes to consolidated financial statements.
27
Natural Alternatives International, Inc.
Consolidated Statements of Operations And Comprehensive Income (Loss)
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 .........................................................
(Recoveries) provision for uncollectible accounts receivable .........................................
Income (loss) from operations .........................................................................................
Other (expense) income:
Interest income .........................................................................................................
Interest expense ........................................................................................................
Foreign exchange loss ..............................................................................................
Other, net ..................................................................................................................
Total other (expense) .......................................................................................................
Income (loss) before income taxes ..................................................................................
Provision (benefit) for income taxes ...............................................................................
Net income (loss) ............................................................................................................ $
Change in minimum pension liability, net of tax ............................................................ $
Unrealized gain (loss) resulting from change in fair value of derivative instruments,
net of tax ......................................................................................................................
Comprehensive income (loss) ......................................................................................... $
Net income (loss) per common share:
Basic ......................................................................................................................... $
Diluted ...................................................................................................................... $
Weighted average common shares outstanding:
2021
2020
178,520 $
148,078
30,442
16,902
(132)
13,672
1
(118)
(1,409)
(21)
(1,547)
12,125
1,357
10,768 $
350 $
272
11,390 $
1.71 $
1.69 $
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 )
Basic .........................................................................................................................
Diluted ......................................................................................................................
6,290,689
6,379,486
6,695,302
6,695,302
See accompanying notes to consolidated financial statements.
28
Natural Alternatives International, Inc.
Consolidated Statements of Stockholders’ Equity
For the Years Ended June 30
(Dollars in thousands)
Additional
Paid-in
Common Stock
Shares Amount Capital
Retained
Earnings Shares
Treasury Stock
Amount Income (Loss) Total
Accumulated
Other
Comprehensive
Balance, June 30, 2019 .... 8,851,677
Issuance of common
stock for restricted
stock grants .................
5,000
87
26,280
57,380 1,626,605
(7,955)
292
76,084
—
—
—
—
—
—
—
Compensation expense
related to stock
compensation plans .....
Repurchase of common
stock ............................
Forfeiture of restricted
stock ............................
Cumulative-effect
adjustment pursuant to
adoption of ASU
2016-02 (Note D) ........
Reclassification pursuant
to adoption of ASU
2018-02 (Note A) ........
Change in minimum
pension liability, net of
tax ...............................
Unrealized loss resulting
from change in fair
value of derivative
instruments, net of tax .
Net loss ...........................
—
—
—
—
—
—
1,712
—
—
—
—
1,712
—
—
— 462,700
(3,747)
—
(3,747)
—
15,000
—
—
—
—
—
—
318
—
—
—
318
—
—
—
128
—
—
(128)
—
—
—
—
—
—
—
(323)
(323)
—
—
—
—
—
—
—
(1,645)
—
—
—
—
(1,024)
—
(1,024)
(1,645)
Balance, June 30, 2020 .... 8,856,677 $
Issuance of common
stock for restricted
stock grants .................
91,773
87 $
27,992 $
56,181 2,104,305 $
(11,702) $
(1,183) $
71,375
1
(1)
—
—
—
—
—
Compensation expense
related to stock
compensation plans .....
Repurchase of common
stock ............................
Issuance of common
stock for stock option
exercise .......................
Change in minimum
pension liability, net of
tax ...............................
—
—
—
—
1,430
—
—
—
—
1,430
—
— 433,050
(3,844)
—
(3,844)
55,915
—
35
—
30,442
(303)
—
(268)
—
—
—
—
—
—
350
350
Unrealized gain resulting
from change in fair
value of derivative
—
instruments, net of tax .
—
Net income ......................
Balance, June 30, 2021 .... 9,004,365 $
—
—
88 $
—
—
29,456 $
—
—
—
10,768
66,949 2,567,797 $
—
—
(15,849) $
272
—
(561) $
272
10,768
80,083
See accompanying notes to consolidated financial statements.
29
Natural Alternatives International, Inc.
Consolidated Statements of Cash Flows
For the Years Ended June 30
(in thousands)
Cash flows from operating activities
Net income (loss) ............................................................................................................ $
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
(Recovery of) provision for uncollectible accounts receivable ................................
Depreciation and amortization .................................................................................
Deferred income taxes ..............................................................................................
Non-cash lease expenses ..........................................................................................
Non-cash compensation ...........................................................................................
Pension expense .......................................................................................................
(Gain) loss on disposal of assets, net of impairment ................................................
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 ...............................................................
Net cash used in investing activities ................................................................................
Cash flows from financing activities
Repurchase of common stock ..........................................................................................
(Payments) borrowings on lines of credit ........................................................................
Issuance of common stock for stock option exercise ......................................................
Net cash (used in) provided by 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:
2021
2020
10,768 $
(1,645)
(132 )
4,338
(214 )
3,421
1,430
163
(47 )
(813 )
966
(3,245 )
(358 )
1,912
1,430
(737 )
1,924
20,806
(5,107 )
68
(5,039 )
(4,147 )
(10,000 )
35
(14,112 )
1,655
30,478
32,133 $
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
Taxes ........................................................................................................................ $
Interest ...................................................................................................................... $
2,960 $
131 $
993
66
See accompanying notes to consolidated financial statements.
30
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 did not adopt any accounting pronouncements during the fiscal year ended June 30, 2021.
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 do not
expect this ASU will have a material impact on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference
Rate Reform on Financial Reporting. This ASU provides optional expedient and exceptions for applying generally accepted
accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain
criteria are met. In response to the concerns about structural risks of interbank offered rates ("IBORs") and, particularly, the
risk of cessation of the London Interbank Offered Rate ("LIBOR"), regulators in several jurisdictions around the world have
undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction
based and less susceptible to manipulation. The ASU provides companies with optional guidance to ease the potential
accounting burden associated with transitioning away from reference rates that are expected to be discontinued. The ASU
can be adopted no later than December 1, 2022 (fiscal year 2023) with early adoption permitted. We do not expect this ASU
will have a material impact 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.
31
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, as of June 30, 2021 and June 30, 2020, 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, 2021 included a net liability of $0.8 million. The fair value as of June 30, 2020
was a net asset of $0.3 million. The fair values were determined based on obtaining pricing from our bank and corroborating
those values with a third party bank or pricing service. We classify any 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,
2021 and June 30, 2020, 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 2021.
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
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.
Customer Deposits
For certain customers we have contract terms where the customer pays a certain portion of their orders as prepayment. We
treat this as a customer deposit liability and do not record revenue until we ship the product to the customer. As of June 30,
2021 we had $1.7 million in customer deposits. As of June 30, 2020 our customer deposit balance was $0.1 million.
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
32
conditions. Based on this evaluation, we record adjustments to cost of goods sold to adjust inventory to its net realizable
value.
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. During fiscal 2021 we recognized $21,000 in impairment losses. We did not recognize any impairment
losses during fiscal 2020.
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 (Loss). Historically, our cash flow derivative
instruments have met the criteria for hedge accounting.
We recognize any unrealized gains and losses associated with derivative instruments accounted for as cash flow hedges 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, 2021, 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,
2021, the notional amounts of our foreign exchange contracts were $60.4 million (€51.3 million). These contracts will mature
over the next 14 months.
As of June 30, 2021, we held foreign currency contracts not designated as cash flow hedges primarily to protect against
change in valuation of an underlying balance sheet item. As of June 30, 2021, the notional amounts of our foreign currency
contracts not designated as cash flow hedges were $6.2 million (CHF 5.5 million). These contracts will mature in the first
quarter of fiscal year 2022.
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.
33
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 obligations is fulfilled, and control of the ordered
products is transferred to the customer. This transfer occurs when the product is shipped, or in some cases, when the product
is delivered to the customer.
We provide early payment discounts to certain customers. Based on historical payment trends, we expect that these customers
will 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.
We require prepayment from certain customers. We record any payments received in advance of contracts fulfillment as a
contract liability and classified as customer deposits on the consolidated balance sheet.
Except for product defects, no right of return exists on the sale of our products. We estimate returns based on historical
experience and recognize a returns liability for any estimated returns. As of June 30, 2021, we have no known returns liability.
We have an Exclusive Manufacturing Agreement with The Juice Plus+ Company LLC (“Juice Plus+”) through August 6,
2025. 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
this Exclusive Manufacturing Agreement, we provide Juice Plus+ with a cash discount. We recorded $1.6 million of “Cash
Sales Discount” for the year ended June 30, 2021, which was recorded as a reduction to net sales. We recorded $1.6 million
of “Cash Sales Discount” during the year ended June 30, 2020, 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 our CarnoSyn® and SR CarnoSyn® trade
names. We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the
amount of $14.2 million during fiscal 2021 and $12.6 million during fiscal 2020. These royalty income and raw material sale
amounts resulted in royalty expense paid to the original patent holders from whom NAI acquired its patents and patent rights.
We recognized royalty expense as a component of cost of goods sold in the amount of $0.6 million during fiscal 2021 and
$0.5 million during fiscal 2020.
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
34
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 $1.9 million for fiscal 2021 and $1.8 million for fiscal 2020. 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 $0.8 million during the fiscal year ended June 30, 2021 and $1.4 million during fiscal 2020.
These costs were included in selling, general and administrative expenses.
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 filed an amended return for our fiscal 2015 and fiscal 2016 tax years under provisions of the CARES act, as
discussed below. 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.
On July 23, 2020, the Department of Treasury issued final regulations which provide an exclusion to the global intangible
low-taxed income (GILTI) calculation on an elective basis. These regulations were effective September 21, 2020 and may be
retroactively applied. Under these new regulations, we are able to exclude the GILTI calculation from our domestic taxable
income if the deemed effective tax rate at our foreign subsidiary is greater than 18.9%. We assessed this rate, including the
implementation of certain tax strategies, and we have determined that our effective rate at NAIE is greater than 18.9% as of
the year ended June 30, 2020. We reassessed our estimated taxes for fiscal 2020 and in the year ended June 30, 2021 we
recorded a reduction to our fiscal 2020 estimated taxes of $0.4 million as a discrete benefit. As a result of this adjustment,
our domestic tax return for fiscal 2020 reflected a net operating loss which, in accordance with the CARES ACT, we
carried back to fiscal 2015 and fiscal 2016, which reflected a higher federal tax rate. Due to this rate differential we have
recorded a permanent discrete tax benefit of $0.3 million during the year ended June 30, 2021. For NAIE the result of this
tax planning during the year ended June 30, 2021 was an additional foreign estimated tax benefit of $0.1 million.
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, 2021 and June 30, 2020, 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, 2021,
there was no change to our valuation allowance.
35
Stock-Based Compensation
We had an omnibus equity incentive plan that was approved by our Board of Directors effective October 15, 2009 and
approved by our stockholders at the Annual Meeting of Stockholders held on November 30, 2009 (the "2009 Plan"). The
2009 Plan expired on October 15, 2019. The Board of Directors approved a new omnibus equity incentive plan that became
effective January 1, 2021 (the “2020 Plan”), which was approved by our stockholders at the Annual Meeting of Stockholders
on December 4, 2020. Under the 2020 Plan, we may grant nonqualified and incentive stock options, restricted stock grants,
restricted stock units, stock appreciation rights, and other stock-based awards to employees, non-employee directors and
consultants.
We 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.
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.
Net Income (Loss) per Common Share
We compute basic net income per common share using the weighted average number of common shares outstanding during
the period, and diluted net income per common share using the additional dilutive effect of all dilutive securities. The dilutive
impact of stock options and restricted shares account for the additional weighted average shares of common stock outstanding
for our diluted net income per common share computation. We calculated basic and diluted net income per common share as
follows (in thousands, except per share data):
Numerator
Net income (loss) .................................................................................................... $
Denominator
Basic weighted average common shares outstanding ..............................................
Dilutive effect of stock options and restricted stock shares.....................................
Diluted weighted average common shares outstanding ...........................................
Basic net income (loss) per common share ............................................................. $
Diluted net income (loss) per common share .......................................................... $
For the Years Ended June 30,
2021
2020
10,768 $
(1,645)
6,291
88
6,379
1.71 $
1.69 $
6,695
—
6,695
(0.25)
(0.25)
During the year ended June 30, 2021, we excluded shares relating to stock options totaling 22,500 and 52,108 shares of
unvested restricted stock, as their impact would have been anti-dilutive.
In periods where we have a net loss, stock options and restricted stock are excluded from our calculation of diluted net income
(loss) per common share, as their inclusion would have an antidilutive effect. For the year ended June 30, 2020 we recorded
a net loss for the year and therefore we excluded shares related to stock options totaling 130,000 and restricted stock totaling
323,904.
36
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
64.8% of gross accounts receivable at June 30, 2021 and 65.7% at June 30, 2020. As of June 30, 2021, we had a receivable
balance of $3.5 million and 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 8.6% of gross accounts receivable at June 30,
2021 and 2.5% of gross accounts receivable at June 30, 2020. Concentrations of credit risk related to the remaining accounts
receivable balances are limited due to the number of customers comprising our remaining customer base.
B. Inventories
Inventories, net, consisted of the following at June 30 (in thousands):
Raw materials .............................................................................................................. $
Work in progress .........................................................................................................
Finished goods.............................................................................................................
Reserve ........................................................................................................................
$
2021
2020
20,668 $
3,760
3,050
(472)
27,006 $
20,863
3,447
4,936
(1,274)
27,972
The inventory reserve as of June 30, 2020, included a reserve of $1.0 million related to Kaged Muscle while the inventory
reserve as of June 30, 2021 did not include any amounts related to this former customer. During fiscal 2021, through our
efforts working with this former customer, we recovered $0.8 million of the amount that was reserved during the year ended
June 30, 2020 and the remaining inventory balance and related reserve was converted to accounts receivable and allowance
for doubtful accounts.
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
$
2021
2020
1,200 $
3,757
35,458
5,712
255
20,236
66,618
(44,347)
22,271 $
1,200
3,743
33,405
5,318
255
18,031
61,952
(40,429)
21,523
Depreciation expense was approximately $4.3 million in fiscal 2021 and $4.0 million in fiscal 2020.
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. Under ASC 842,
all leases greater than one year are required to be recorded on the balance sheet and are classified as either operating leases
37
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.
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 842, 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.
Other information related to leases was as follows (in thousands) for the year ended June 30,
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 ...
2021
2020
3,298 $
3,453
—
187
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, 2021, the
weighted average remaining lease term for our operating leases was 6.3 years. The weighted average discount rate for our
operating leases was 3.24%. 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 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
38
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, 2021
Unrealized
(Losses) Gains
on
Cash Flow
Hedges
Defined Benefit
Pension Plan
Total
Balance as of June 30, 2020 ......................................................... $
(888) $
(295) $
(1,183)
OCI/OCL before reclassifications ................................................
Amounts reclassified from OCI ...................................................
Tax effect of OCI activity ............................................................
Net current period OCI/OCL ........................................................
Balance as of June 30, 2021 ......................................................... $
337
123
(110)
350
(538) $
(2,817)
3,173
(84)
272
(23) $
(2,480)
3,296
(194)
622
(561)
Year Ended June 30, 2020
Unrealized
(Losses) Gains
on
Cash Flow
Hedges
Defined Benefit
Pension Plan
Total
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)
F. Debt
On May 24, 2021, we entered into a new credit facility with Wells Fargo Bank, N.A. to extend the maturity for our working
line of credit from November 1, 2022, to May 24, 2024. This new credit facility provides total lending capacity of up to $20.0
million and allows us to use the credit facility for working capital as well as potential acquisitions.
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
39
current liabilities of not less than 1.75 to 1.0 at each fiscal quarter end (iii) net income after taxes not less than $1.00,
determined on a trailing four quarter basis with no two consecutive quarterly losses, determined as of each quarter end. The
credit agreement also includes a limitation on the amount of capital expenditures that can be made in a given fiscal year, with
such limitation set at $10.0 million for our fiscal year ending June 30, 2022 and $7.5 million for all fiscal years thereafter
Any amounts outstanding under the line of credit will bear interest at a fixed or fluctuating interest rate as elected by us from
time to time; provided, however, that if the outstanding principal amount is less than $100,000 such amount shall bear interest
at the then applicable fluctuating rate of interest. If elected, the fluctuating rate per annum would be equal to 1.25% 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. There is an unused commitment fee of
0.125% required as part of this new credit facility.
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, 2021, 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 $10.0 million from our credit facility with
Wells Fargo during the year ended June 30, 2020. During February 2021 we fully repaid the entire balance of our $10.0
million credit line with Wells Fargo, bringing our debt under the line to zero. As of June 30, 2021, we had the full $20.0
million available for borrowing under our credit facility with Wells Fargo Bank.
G. Income Taxes
During fiscal 2021, we recorded U.S.-based domestic tax expense of $0.6 million. During fiscal 2020, we recorded U.S.-
based domestic tax benefit of $0.8 million.
The following is a geographical breakdown of income (loss) before income taxes (in thousands):
2021
2020
United States .................................................................................................... $
Foreign .............................................................................................................
Total income (loss) before income taxes ................................................................. $
7,462 $
4,663
12,125 $
(5,742)
4,004
(1,738)
The provision for income taxes for the years ended June 30 consisted of the following (in thousands):
Current:
Federal .............................................................................................................. $
State ..................................................................................................................
Foreign .............................................................................................................
Deferred:
Federal ..............................................................................................................
State ..................................................................................................................
Foreign .............................................................................................................
Total provision (benefit) for income taxes .............................................................. $
2021
2020
274 $
59
1,238
1,571
44
211
(469)
(214)
1,357 $
31
4
728
763
(641)
(215)
—
(856)
(93)
40
Net deferred tax assets and deferred tax liabilities as of June 30 were as follows (in thousands):
2021
2020
Deferred tax assets:
Inventory capitalization .................................................................................... $
Inventory reserves ............................................................................................
Pension liability ................................................................................................
Lease liability ...................................................................................................
Net operating loss carry forward ......................................................................
Accrued compensation .....................................................................................
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 ........................................................................................................
Other, net ..........................................................................................................
Deferred tax liabilities .............................................................................................
Net deferred tax assets ............................................................................................. $
259 $
143
150
2,477
94
568
96
8
300
863
3
4,961
(1,133)
(997)
—
(2,413)
(204)
(4,747)
214 $
412
301
260
2,732
245
—
157
93
340
819
246
5,605
(1,133)
(1,011)
(469)
(2,681)
(115)
(5,409)
196
At June 30, 2021, we had state tax net operating loss carry forwards of approximately $1.3 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 2029, 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, 2021 and June 30, 2020.
We are subject to taxation in the U.S., Switzerland and various state jurisdictions. Our tax years for the fiscal year ended June
30, 2015 and forward are subject to examination by the U.S. tax authorities. Our tax years for the fiscal years ended June 30,
2017 and forward are subject to examination by the state tax authorities. Our tax years for the fiscal year ended June 30, 2020
and forward are subject to examination by the Swiss tax authorities.
NAIE’s effective tax rate for the fiscal year ending June 30, 2021 for Swiss federal, cantonal and communal taxes is
approximately 16.5%. Excluding the discrete tax item recorded as part of the GILTI final regulations, NAIE’s effective tax
rate for the year ending June 30, 2021 is 18.9%.
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.
41
A reconciliation of our income tax provision computed by applying the statutory federal income tax rate of 21% for fiscal
2021 and for fiscal 2020 to net income before income taxes for the year ended June 30 is as follows (dollars in thousands):
2021
2020
Income taxes computed at statutory federal income tax rate ................................... $
State income taxes, net of federal income tax expense ...........................................
Permanent Differences ............................................................................................
Foreign tax rate differential .....................................................................................
Tax credits ...............................................................................................................
FDII export sales incentive ......................................................................................
Stock based compensation .......................................................................................
Global intangible low-taxed income (GILTI) .........................................................
GILTI final regulations planning .............................................................................
CARES Act rate differential ....................................................................................
Income tax provision as reported ............................................................................ $
Effective tax rate .....................................................................................................
2,546 $
189
(6)
(210)
(60)
(137)
(231)
28
(436)
(326)
1,357 $
11.3%
(364)
(174)
155
(112)
—
—
—
402
—
—
(93)
5.4%
The effective tax rate for the year ended June 30, 2021 was 11.3%. The effective tax rate for the year ended June 30, 2021
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 stock option
exercises and employee stock vesting. In comparison, 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. We expect our U.S. federal statutory rate to be 21% for fiscal
years going forward.
H. Employee Benefit Plans
401(k) Plan
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 $0.4 million for fiscal 2021 and $0.3 million for fiscal 2020.
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 $1.2 million for the fiscal year ended
June 30, 2021 and $1.4 million for the fiscal year ended June 30, 2020.
Deferred Compensation Plan
Effective July 16, 2020, the Board of Directors approved and adopted a Non-Qualified Incentive Plan (the “Incentive Plan”).
Pursuant to the Incentive Plan, the Human Resources Committee and the Board of Directors may make deferred cash
payments or other cash awards (“Awards”) to directors, officers, employees and eligible consultants of NAI, (“Participants”).
These Awards are made subject to conditions precedent that must be met before NAI is obligated to make the payment. The
purpose of the Incentive Plan is to enhance the long-term stockholder value of NAI by providing the Human Resources
Committee and the Board of Directors the ability to make deferred cash payments or other cash awards to encourage
Participants to serve NAI or to remain in the service of NAI, or to assist NAI to achieve results determined by the Human
Resources Committee or the Board of Directors to be in NAI's best interest.
The Incentive Plan authorizes the Human Resources Committee or the Board of Directors to grant to, and administer,
unsecured and deferred cash Awards to Participants and to subject each Award to whatever conditions are determined
appropriate by the Human Resources Committee or the Board of Directors. The terms of each Award, including the amount
and any conditions that must be met to be entitled to payment of the Award are set forth in an Award Agreement between
42
each Participant and NAI. The Incentive Plan provides the Board of Directors with the discretion to set aside assets to fund
the Incentive Plan although that has not been done to date.
During the year ended June 30, 2021, we granted a total of $1.5 million in deferred cash awards to members of our Board of
Directors and certain key members of our management team. Each deferred cash award provides for three equal cash
payments to the applicable Participant to be paid on the one year, two year, and three year anniversaries of the date of the
grant of such Awards, (the “Award Date”); provided on the date of each payment (the “Payment Date”), the Participant has
been since Award Date, and continues to be through the Payment Date, a member of our Board of Directors or an employee
of NAI. In the event a Participant ceases to be an employee of NAI or a member of our Board of Directors prior to any
Payment Date, no further payments shall be made in connection with the Award.
Defined Benefit Pension Plan
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):
2021
2020
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 .......................................................................................... $
2,035 $
39
(43)
(211)
1,820 $
1,339 $
294
7
(211)
—
1,429 $
(391) $
626
235 $
1,820 $
1,820 $
1,429 $
1,615
46
380
(6)
2,035
1,369
(24)
—
(6)
—
1,339
(696)
1,087
391
2,035
2,035
1,339
The weighted-average discount rate used for determining the projected benefit obligations for the defined benefit pension
plan was 2.74% for the year ended June 30, 2021 and 2.45% during the year ended June 30, 2020.
43
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 ................................................................................... $
39 $
(59)
110
73
163 $
46
(69 )
50
—
27
2021
2020
In the fiscal year ended June 30, 2021, we contributed $7,000 to our defined benefit pension plan. In the fiscal year ended
June 30, 2020, we did not contribute to our defined benefit pension plan.
The following is a summary of changes in plan assets and benefit obligations recognized in other comprehensive income
(loss) (in thousands):
Net (gain) loss .................................................................................................. $
Settlement loss .................................................................................................
Amortization of net loss ...................................................................................
Plan expenses ...................................................................................................
Total recognized in other comprehensive (loss) income ......................................... $
Total recognized in net periodic benefit cost and other comprehensive income ..... $
(277) $
(73)
(110)
—
(460) $
(297) $
481
—
(57)
—
424
451
2021
2020
The estimated net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive
income into net periodic benefit cost over the next fiscal year is $34,000. 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):
2022 ...................................................................................................................................................... $
2023 ......................................................................................................................................................
2024 ......................................................................................................................................................
2025 ......................................................................................................................................................
2026 ......................................................................................................................................................
2027-2031 .................................................................................................................................................
Total benefit payments expected to be paid .............................................................................................. $
787
109
—
323
16
345
1,580
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 .....................................................................................
2021
2020
2.74%
6.60%
N/A
2.45%
6.50%
N/A
Our expected rate of return is determined based on a methodology that considers historical returns of multiple classes analyzed
to develop a risk free real rate of return and risk premiums for each asset class. The overall rate for each asset class was
developed by combining a long-term inflation component, the risk free real rate of return, and the associated risk premium.
A weighted average rate was developed based on those overall rates and the target asset allocation of the plan.
44
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 ..............................................
2021
2020
Target
Allocation
62%
25%
12%
1%
100%
52%
32%
12%
4%
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, 2021 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 ........................................................................... $
9 $
172 $
882 $
366 $
1,429 $
9 $
172 $
882 $
366 $
1,429 $
— $
— $
— $
— $
— $
—
—
—
—
—
(1)
(2)
This category is comprised of publicly traded funds, of which 83% are large-cap funds, 10% are developed market
funds, and 7% are emerging markets equity funds.
This category is comprised of publicly traded funds, of which 52% are U.S. fixed income funds and 48% are corporate
and foreign market fixed income funds.
I. Stockholders’ Equity
Treasury Stock
On September 18, 2020, the Board of Directors authorized a $2.0 million increase to our stock repurchase plan (“Repurchase
Plan”), thus bringing the total authorized repurchase amount to $12.0 million. On March 12, 2021, the Board of Directors
authorized an additional $3.0 million increase to the Repurchase Plan, thus bringing the total authorized repurchase amount
to $15.0 million. 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.
Treasury Stock repurchases for the year ended June 30, 2021 were as follows:
Shares purchased under Repurchase Plan ....................................
Shares acquired in connection with stock option exercises ..........
Shares acquired from employees for restricted stock vesting .......
Total .............................................................................................
385,822 $
30,442
47,228
463,492
45
Shares
Average Cost
Total Cost
(in thousands)
3,197
303
647
4,147
8.28 $
9.95
13.69
$
Treasury Stock repurchases for the year ended June 30, 2020 were as follows:
Shares
Average Cost
Shares purchased under Repurchase Plan ....................................
Shares acquired in connection with stock option exercises ..........
Shares acquired from employees for restricted stock vesting .......
Total .............................................................................................
400,787 $
—
61,913
462,700
Treasury stock repurchase costs include commissions and fees.
Total Cost
(in thousands)
3,305
—
442
3,747
8.25 $
—
7.14
$
Shares acquired from employees for restricted stock vesting and stock options exercises 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.
Stock Incentive Plans
Stock option activity for the year ended June 30, 2021 was as follows:
Vested and exercisable at June 30, 2020 ..............................
Exercised .......................................................................
Forfeited ........................................................................
Granted ..........................................................................
Outstanding at June 30, 2021 ...............................................
Vested and exercisable at June 30, 2021 ..............................
Weighted
Average
Exercise
Price
Weighted
Average
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
6.28
6.28
—
—
—
—
— $
— $
—
—
2009
Plan
130,000 $
(130,000 ) $
— $
— $
— $
— $
Of the 130,000 options exercised, 120,000 of these option exercises were cashless net exercises resulting in the issuance of
55,915 shares for the year ended June 30, 2021.
Stock option activity for the year ended June 30, 2020 was as follows:
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 $
Vested and exercisable at June 30, 2019 ..............................
Exercised .......................................................................
Forfeited ........................................................................
Granted ..........................................................................
Outstanding at June 30, 2020 ...............................................
Vested and exercisable at June 30, 2020 ..............................
46
Restricted stock activity for the year ended June 30, 2021 was as follows:
Number of
Shares –
2009 Plan
Weighted
Average Grant
Date Fair
Value
Nonvested at June 30, 2020 ..................................................................................
Granted ..........................................................................................................
Vested ............................................................................................................
Forfeited .........................................................................................................
Nonvested at June 30, 2021 ..................................................................................
Available for grant at June 30, 2021 .....................................................................
197,650 $
— $
(136,326 ) $
— $
61,324 $
—
11.06
—
10.88
—
11.47
Number of
Shares –
2020 Plan
Weighted
Average Grant
Date Fair
Value
Nonvested at June 30, 2020 ...................................................................................
Granted ...........................................................................................................
Vested ............................................................................................................
Forfeited .........................................................................................................
Nonvested at June 30, 2021 ...................................................................................
Available for grant at June 30, 2021 .....................................................................
— $
91,773 $
(4,000) $
— $
87,773 $
608,227
—
16.81
16.81
—
16.81
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
Restricted stock grants, granted to members of our Board of Directors and certain key members of our management team,
vest over a period of 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 $1.8 million at June 30, 2021 and
the weighted average remaining requisite service period of unvested restricted stock shares was 1.9 years.
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
47
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, 2021 (in thousands):
Gross minimum rental commitments $ 3,193 $ 3,186 $ 2,659 $
— $
— $
2022
2023
2024
2025
2026
There-
after
Total
— $ 9,038
Rental expense totaled $3.4 million for the fiscal year ended June 30, 2021 and $3.2 million for the fiscal year ended June
30, 2020.
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 ..................................................................................................................
$
90,820 $
25,410
116,230 $
52,462
24,692
77,154
Fiscal 2021
Fiscal 2020
Accounts receivable from these customers totaled $14.0 million at June 30, 2021 and $13.4 million at June 30, 2020.
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,
2021
2020
Supplier 1 ..................................................................... $
Supplier 2 .....................................................................
$
23,033
(a)
23,033
Raw Material
Purchases by
Supplier
% of Total
Raw
Material
Purchases
24%
(a)
24% $
Raw Material
Purchases by
Supplier
% of Total
Raw
Material
Purchases
(a)
6,356
6,356
(a)%
10
10%
(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, 2021 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 2022. 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
48
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, 2021 and June 30, 2020.
We monitor the probability of forecasted transactions as part of the hedge effectiveness testing on a quarterly basis.
As of June 30, 2021, the notional amounts of our foreign exchange contracts were $60.4 million (€51.3 million). As of
June 30, 2021, a net loss of approximately $33,000 offset by $8,000 of deferred taxes, related to derivative instruments
designated as cash flow hedges was recorded in OCI. As of June 30, 2020, a net loss of approximately $0.4 million, offset by
$0.1 million of deferred taxes, related to derivative instruments designated as cash flow hedges was recorded in OCI. It is
expected that $6,000 of the gross loss as of June 30, 2021, will be reclassified into earnings in the next 12 months along with
the earnings effects of the related forecasted transactions.
As of June 30, 2021, $0.6 million of the fair value of our cash flow hedges was classified as a current liability, and $4,000
was classified as a long-term liability in our Consolidated Balance Sheets. During the year ended June 30, 2021, we
recognized $2.8 million of net losses in OCI, reclassified $3.2 million of losses and forward point amortization from OCI to
Net Sales. 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 $0.1 million of gains from OCI to Other Income.
For foreign currency contracts not designated as cash flow hedges, changes in the fair value of the hedge are recorded directly
to foreign exchange gain or loss in other income in an effort to offset the change in valuation of the underlying hedged item.
During the year ended June 30, 2021 we entered into forward contracts in order to hedge foreign exchange risk associated
with our lease liability at NAIE, which is denominated in Swiss Francs (CHF). As of June 30, 2021, the notional amounts of
our foreign exchange contracts not designated as cash flow hedges were approximately $6.2 million (CHF 5.5 million). As
of June 30, 2021, $0.2 million of the fair value of our foreign exchange contracts not designated as cash flow hedges was
classified as a current liability in our Consolidated Balance Sheets.
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.
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.
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
49
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 ........................................................................
$
164,310 $
14,210
178,520 $
106,291
12,585
118,876
2021
2020
Income (Loss) from Operations
Private-label contract manufacturing ............................................................... $
Patent and trademark licensing ........................................................................
Income from operations of reportable segments ..............................................
Corporate expenses not allocated to segments .................................................
$
17,744 $
4,442
22,186
(8,514)
13,672 $
4,030
2,508
6,538
(8,047)
(1,509)
2021
2020
Assets
Private-label contract manufacturing ............................................................... $
Patent and trademark licensing ........................................................................
$
95,324 $
24,957
120,281 $
100,094
20,109
120,203
2021
2020
Our private-label contract manufacturing products are sold both in the U.S. and in markets outside the U.S., including Europe,
Canada, Australia, New Zealand, Mexico and Asia. Our primary markets outside the U.S. are Europe and Asia. Our patent
and trademark licensing activities are primarily based in the U.S.
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 ................................................................................................... $
94,702 $
83,818
178,520 $
66,912
51,964
118,876
2021
2020
Products manufactured by NAIE accounted for 77% of consolidated net sales in markets outside the U.S. in fiscal 2021 and
89% in fiscal 2020. No products manufactured by NAIE were sold in the U.S. during the fiscal years ended June 30, 2021
and 2020.
Long-lived assets by geographic region, based on the location of the company or subsidiary at which they were located or
made, for the two years ended June 30 were as follows (in thousands):
United States ........................................................................................................... $
Europe .....................................................................................................................
Total Long-Lived Assets .................................................................................. $
2021
2020
21,109 $
17,039
38,148 $
21,769
18,108
39,877
50
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 ...................................................................................................... $
2021
2020
67,307 $
52,974
120,281 $
66,489
53,714
120,203
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 ............................................................................... $
2021
2020
2,336 $
2,771
5,107 $
1,530
3,011
4,541
O. Subsequent Events
On August 18, 2021, we entered into an amendment of our credit facility with Wells Fargo Bank, N.A.. The amended credit
facility added a $10.0 million term loan to the existing $20.0 million credit facility, and permitted us to use the $10.0 million
term loan as part of the $17.5 million purchase consideration for the acquisition of a manufacturing and warehouse property
in Carlsbad California. In addition to the added borrowing capacity, the financial covenants included in the credit agreement
were modified such that the ratio of total liabilities to tangible net worth is now required to be not greater than 1.50 to 1.0 at
any time and now requires a rolling 4-quarter fixed charge coverage ratio not less than 1.25 to 1.0 as of each fiscal quarter
end. The amended credit agreement also increased the allowed capital expenditures for fiscal 2022 to increase from $10.0
million to $15.0 million (exclusive of amount paid for the acquisition of the property noted below). The Credit Agreement
was amended and a new Revolving Line of Credit Note, Security Agreement, Term Note and real property security documents
were added to the credit facility.
On August 20, 2021, we acquired a manufacturing and warehouse property in Carlsbad California from an unrelated party
for $17.5 million. We financed $10.0 million of the purchase price through a term loan pursuant to our recently amended
credit facility with Wells Fargo Bank, N.A. and paid the remainder of the purchase price and closing costs with our available
cash. The approximately 54,154 square foot building includes environmentally controlled warehouse space, office and
additional non-environmentally controlled warehouse space. We intend to retrofit a significant portion of the building into a
dedicated high-volume powder blending and packaging facility. This new facility will also provide us with additional raw
material storage capacity, and offices.
On September 3, 2021, 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 2022 and ending August 2023. The forward contracts have a notional amount
of €17.2 million and a weighted average forward rate of 1.1993.
On September 18, 2021, two of our directors resigned without disagreement as to any matter regarding the Company, and
only since they had served for many years, and for their personal and professional reasons determined it best for them and
NAI for them to resign.
On September 17, 2021, the Board of Directors appointed Dr. Guru Ramanathan to a vacant seat on the Board of Directors,
and determined to reduce the size of the Board of Directors from six to four members. Also on September 17, 2021 the Board
appointed Dr. Ramanathan to the Audit Committee, the Human Resources Committee, and the Nominating Committee, and
appointed Laura Kay Matherly to the Nominating Committee.
Management has evaluated subsequent events through September 20, 2021, 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.
51
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, 2021. 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, 2021.
(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,
2021. 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, 2021 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, 2021 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, 2021 that have
materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
52
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 3, 2021, to be filed on or before October 28, 2021.
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, 2021 and 2020;
Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended June 30,
2021 and 2020;
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2021 and 2020;
Consolidated Statements of Cash Flows for the years ended June 30, 2021 and 2020; and
Notes to Consolidated Financial Statements.
(2)
Exhibits. The following exhibit index shows those exhibits filed with this report and those incorporated by
reference:
Description
Incorporated By Reference To
EXHIBIT INDEX
Exhibit
Number
3(i)
3(ii)
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
4(i)
Form of NAI’s Common Stock Certificate
10.1
10.2
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
10.3
2009 Omnibus Incentive Plan*
10.4
Nonqualified Incentive Plan*
10.5
10.6
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)
53
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
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
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
Attachment D of NAI’s definitive Proxy Statement
filed with 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
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
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
Third amendment to the Lease of Facilities in Vista,
California between NAI and CWCA Vista Distribution
77, LLC, a Delaware limited liability company
Agreement to License by and between NAI and
Compound Solutions, Inc. effective as of April 1, 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*
Exclusive Manufacturing Agreement by and between
NAI and the Juice Plus+ Company dated August 7,
2017
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 to 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
Lease of Parking Places in Manno, Switzerland
between NAIE and Mr. Silvio Tarchini dated October
19, 2018
Lease of Facilities in Manno, Switzerland between
NAIE and Sofinol SA dated November 5, 2018
Amended and Restated Exclusive Manufacturing
Agreement with Juice Plus+ dated March 31, 2019
Third amendment to the Amended and Restated
Employment Agreement, by and between NAI and
Michael E. Fortin, effective July 1, 2019*
Second amendment to the Amended and Restated
Employment Agreement, by and between NAI and
Mark LeDoux, effective July 1, 2021*
Second amendment to the Amended and Restated
Employment Agreement, by and between NAI and
Kenneth E. Wolf, effective July 1, 2021*
Fourth amendment to the Amended and Restated
Employment Agreement, by and between NAI and
Michael E. Fortin, effective July 1, 2021*
54
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 10.37 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.
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 10.45 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, 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
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
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
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
Exhibit 10.61 of NAI's Annual Report on Form 10-K
for the annual period ended June 30, 2019, filed with
the commission on September 24, 2019
Exhibit 10.65 of NAI’s Current Report on Form 8-K
dated July 1, 2021, filed with the commission on July
9, 2021
Exhibit 10.66 of NAI’s Current Report on Form 8-K
dated July 1, 2021, filed with the commission on July
9, 2021
Exhibit 10.67 of NAI’s Current Report on Form 8-K
dated July 1, 2021, filed with the commission on July
9, 2021
10.27
Credit Agreement by and between NAI and Wells
Fargo Bank, N.A. effective as of May 24, 2021
10.28
2020 Omnibus Incentive Plan*
10.29
10.30
10.31
10.32
First Amendment to Credit Agreement by and between
NAI and Wells Fargo Bank, N.A. effective as of
August 16, 2021
Revolving Line of Credit Note made by NAI for the
benefit of Wells Fargo Bank. N.A. dated August 16,
2021 in the amount of $20,000,000
Term Note by and between NAI and Wells Fargo
Bank, N.A. effective as of August 16, 2021
Security Agreement by and between NAI and Wells
Fargo Bank, N.A. effective as of August 16. 2021
31.1
31.2
21
23.1
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
Section 1350 Certification
32
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase
Exhibit 10.1 of NAI’s Current Report on Form 8-K
dated May 24, 2021 filed with the commission on May
27, 2021.
Annex I of NAI’s definitive Proxy Statement filed with
the commission on October 26, 2020
Exhibit 10.3 of NAI’s Current Report on Form 8-K
dated August 16, 2021 filed with the commission on
August 24, 2021
Exhibit 10.4 of NAI’s Current Report on Form 8-K
dated August 16, 2021 filed with the commission on
August 24, 2021
Exhibit 10.5 of NAI’s Current Report on Form 8-K
dated August 16, 2021 filed with the commission on
August 24, 2021
Exhibit 10.6 of NAI’s Current Report on Form 8-K
dated August 16, 2021 filed with the commission on
August 24, 2021
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Furnished herewith
Furnished herewith
Furnished herewith
Document
101.DEF XBRL Taxonomy Extension Definition Linkbase
Furnished herewith
Document
101.LAB XBRL Taxonomy Extension Label Linkbase
Furnished herewith
Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase
Furnished herewith
Document
*
Indicates management contract or compensatory plan or arrangement.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Natural Alternatives
International, Inc., the registrant, has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: September 20, 2021
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/ 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
September 17, 2021
September 17, 2021
September 17, 2021
September 17, 2021
September 17, 2021
September 17, 2021
56
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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
Alan Dunn
Laura Kay Matherly
Guru Ramanathan
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 3, 2021.
The annual meeting will be
conducted exclusively via a live
webcast.
Meeting ID:
www.meetnow.global/MVSTMPT
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