UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
FORM 10-Q
QUARTERLY REPORT
pursuant to Section13 or 15(d)
of the Securities Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED DecemberDECEMBER 31, 2017
2021
000-15701
(Commission file number)
NATURAL ALTERNATIVES INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware | 84-1007839 |
(State of incorporation) | (IRS Employer Identification No.) |
1535 Faraday Carlsbad, | (760) |
(Address of principal executive offices) | ( |
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Common Stock, $0.01 par value per share | NAII | Nasdaq Stock Market |
Indicate by check mark whether Natural Alternatives International, Inc. (NAI)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.
[X] Yes [_] No
| ☒ Yes ☐ No |
Indicate by check mark whether NAI has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that NAI was required to submit and post such files).
[X] ☒ Yes [ ]☐ No
Indicate by check mark whether NAI is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,, or an emerging growth company.
Large accelerated filer | ☐ | Accelerated filer | ☐ | Emerging Growth Company | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether NAI is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[_]: ☐ Yes [X] ☒ No
As of February 13, 2018, 7,429,0209, 2022, 6,121,478 shares of NAI's common stock were outstanding, net of 1,052,6572,882,887 treasury shares.
Page | |||
| |||
PART I | |||
Item 1. | |||
| |||
Condensed Consolidated Statements of Income and Comprehensive Income |
| ||
6 | |||
| |||
| |||
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
| |
Item 4. |
| ||
PART II | |||
Item 1. |
| ||
Item 1A. |
| ||
Item 2. |
| ||
Item 3. |
| ||
Item 5. |
| ||
Item 6. |
| ||
| |||
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report,report, including information incorporated by reference, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect current views about future events and financial performance based on certain assumptions. They include opinions, forecasts, intentions, plans, goals, projections, guidance, expectations, beliefs, or other statements that are not statements of historical fact. Words such as “may,” “will,” “should,” “could,” “would,” “expects,“expect,” “plans,“plan,” “believes,“believe,” “anticipates,“anticipate,” “intends,“intend,” “estimates,“estimate,” “approximates,“approximate,” “predicts,“predict,” “forecasts,“forecast,” “project,”, “future”, or “projects,”“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 Quarterly Reportreport may include statements about:
• |
| |
|
| |
| our ability to develop market acceptance for and increase sales of new products, develop relationships with new customers and maintain or improve existing customer relationships; | |
• | the impact, of the Covid-19 Pandemic (“COVID-19”) and other external factors both within and outside of our control, on our business and results in operations including variations in our quarterly net sales, our employees, supply chain, vendors and customers; | |
• | future financial and operating results, including projections of net sales, revenue, income or loss, net income or loss per share, profit margins, expenditures, liquidity, and other financial items; | |
• | our ability to maintain or increase our patent and trademark licensing revenues; | |
• | our ability to attract and retain sufficient labor to successfully execute our business strategies and achieve our goals and objectives; | |
• | inventory levels, including the adequacy of quality raw material and other inventory levels to meet future customer demand, in particular assumptions regarding the impact of the COVID-19 pandemic; | |
• | our ability to price our products to achieve profit margin targets, especially in the current volatile raw material and labor environment; | |
• | our ability to protect our intellectual property; | |
• | future economic and political conditions, including implementation of new or increased tariffs; | |
• | our ability to improve operating efficiencies, manage costs and business risks, and improve or maintain profitability; | |
• | currency exchange rates and their effect on our results of operations | |
• |
| |
| the outcome of | |
• | sources, availability and | |
• |
| |
• | potential manufacturing and distribution channels, product returns, and potential product | |
• |
| |
• | the impact of external factors on our business and results of operations, | |
• | our ability to operate within the standards set by the U.S. Food and Drug | |
• | 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 | |
• | the impact of accounting pronouncements and our adoption of certain accounting guidance; and | |
• | other assumptions described in this |
The forward-lookingForward-looking statements in this Quarterly Report speak only as of the date of this Quarterly Report based on information available to us at that time and caution should be taken not to place undue reliance on any such forward-looking statements. Forward-looking statements are subject to certain future events, risks, and uncertainties that are or may be outside of our control. When considering forward-looking statements, you should carefully review the risks, uncertainties and other cautionary statements in this Quarterly Report as they identify certain important factors that could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements. These factors include, among others, the risks described under Item 1A of Part II and elsewhere in this Quarterly Report, as well as in other reports and documents we have filed and will file with the United States Securities and Exchange Commission (SEC).
Unless the context requires otherwise, all references in this Quarterly Report to the “Company,” “NAI,” “we,” “our,” and “us” refer to Natural Alternatives International, Inc. and, as applicable, Natural Alternatives International Europe S.A. (NAIE).
PART I – FINANCIAL INFORMATION
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Natural Alternatives International, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
December 31, 2017 | June 30, 2017 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 28,843 | $ | 27,843 | ||||
Accounts receivable - less allowance for doubtful accounts of $14 at December 31, 2017 and $18 at June 30, 2017 | 12,895 | 8,410 | ||||||
Notes receivable | 1,500 | — | ||||||
Inventories, net | 17,879 | 13,729 | ||||||
Income tax receivable | — | 261 | ||||||
Prepaids and other current assets | 1,585 | 1,456 | ||||||
Total current assets | 62,702 | 51,699 | ||||||
Property and equipment, net | 18,733 | 18,136 | ||||||
Deferred income taxes | 2,443 | 2,002 | ||||||
Other noncurrent assets, net | 709 | 774 | ||||||
Total assets | $ | 84,587 | $ | 72,611 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 12,182 | $ | 5,116 | ||||
Accrued liabilities | 2,215 | 1,931 | ||||||
Accrued compensation and employee benefits | 1,089 | 1,594 | ||||||
Forward contract | 2,088 | 422 | ||||||
Income taxes payable | 1,636 | 1,207 | ||||||
Total current liabilities | 19,210 | 10,270 | ||||||
Long-term pension liability | 409 | 557 | ||||||
Deferred rent | 551 | 537 | ||||||
Forward contract, noncurrent | 609 | 99 | ||||||
Income taxes payable, noncurrent | 2,950 | — | ||||||
Total liabilities | 23,729 | 11,463 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock; $.01 par value; 500,000 shares authorized; none issued or outstanding | — | — | ||||||
Common stock; $.01 par value; 20,000,000 shares authorized; issued and outstanding (net of treasury shares) 7,429,020 at December 31, 2017 and 6,937,018 at June 30, 2017 | 84 | 79 | ||||||
Additional paid-in capital | 23,266 | 22,260 | ||||||
Retained earnings | 45,904 | 45,788 | ||||||
Treasury stock, at cost, 1,052,657 shares at December 31, 2017 and 1,044,659 June 30, 2017 | (6,160 | ) | (6,074 | ) | ||||
Accumulated other comprehensive loss | (2,236 | ) | (905 | ) | ||||
Total stockholders’ equity | 60,858 | 61,148 | ||||||
Total liabilities and stockholders’ equity | $ | 84,587 | $ | 72,611 | ||||
See accompanying notes to condensed consolidated financial statements.
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Condensed Consolidated Statements Of Income And Comprehensive Income
(In thousands, except share and per share data)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net sales | $ | 33,335 | $ | 30,559 | $ | 61,409 | $ | 64,626 | ||||||||
Cost of goods sold | 26,713 | 24,064 | 48,417 | 50,462 | ||||||||||||
Gross profit | 6,622 | 6,495 | 12,992 | 14,164 | ||||||||||||
Selling, general and administrative | 4,341 | 3,382 | 8,828 | 7,515 | ||||||||||||
Income from operations | 2,281 | 3,113 | 4,164 | 6,649 | ||||||||||||
Other income (expense): | ||||||||||||||||
Interest income | 304 | 133 | 554 | 249 | ||||||||||||
Foreign exchange (loss) gain | (88 | ) | 262 | (231 | ) | 203 | ||||||||||
Other, net | (14 | ) | (8 | ) | (13 | ) | (15 | ) | ||||||||
Total other income | 202 | 387 | 310 | 437 | ||||||||||||
Income before income taxes | 2,483 | 3,500 | 4,474 | 7,086 | ||||||||||||
Provision for income taxes | 3,801 | 1,034 | 4,358 | 2,130 | ||||||||||||
Net (loss) income | $ | (1,318 | ) | $ | 2,466 | $ | 116 | $ | 4,956 | |||||||
Unrealized (loss) gain resulting from change in fair value of derivative instruments, net of tax | (197 | ) | 1,242 | (1,331 | ) | 852 | ||||||||||
Comprehensive (loss) income | $ | (1,515 | ) | $ | 3,708 | $ | (1,215 | ) | $ | 5,808 | ||||||
Net (loss) income per common share: | ||||||||||||||||
Basic | $ | (0.20 | ) | $ | 0.38 | $ | 0.02 | $ | 0.76 | |||||||
Diluted | $ | (0.20 | ) | $ | 0.37 | $ | 0.02 | $ | 0.74 | |||||||
Weighted average common shares outstanding | ||||||||||||||||
Basic | 6,615,355 | 6,567,468 | 6,610,937 | 6,562,932 | ||||||||||||
Diluted | 6,615,355 | 6,683,356 | 6,836,567 | 6,665,159 | ||||||||||||
December 31, 2021 | June 30, 2021 | |||||||
Assets | (Unaudited) | |||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 19,352 | $ | 32,133 | ||||
Accounts receivable – less allowance for doubtful accounts of $3,541 at December 31, 2021 and $3,527 at June 30, 2021 | 15,065 | 17,946 | ||||||
Inventories, net | 31,828 | 27,006 | ||||||
Income tax receivable | 0 | 1,095 | ||||||
Forward contracts | 1,831 | 0 | ||||||
Prepaids and other current assets | 2,485 | 2,168 | ||||||
Total current assets | 70,561 | 80,348 | ||||||
Property and equipment, net | 39,741 | 22,271 | ||||||
Operating lease right-of-use assets | 14,542 | 15,877 | ||||||
Deferred tax asset – noncurrent | 0 | 214 | ||||||
Other noncurrent assets, net | 2,514 | 1,571 | ||||||
Total assets | $ | 127,358 | $ | 120,281 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 10,137 | $ | 11,893 | ||||
Accrued liabilities | 1,521 | 2,441 | ||||||
Accrued compensation and employee benefits | 2,633 | 4,584 | ||||||
Customer deposits | 622 | 1,721 | ||||||
Income taxes payable | 1,278 | 619 | ||||||
Forward contracts | 0 | 814 | ||||||
Mortgage note payable, current portion | 298 | 0 | ||||||
Total current liabilities | 16,489 | 22,072 | ||||||
Long-term liability – operating leases | 15,151 | 16,481 | ||||||
Noncurrent forward contracts | 0 | 4 | ||||||
Long-term pension liability | 408 | 391 | ||||||
Deferred tax liability | 157 | 0 | ||||||
Mortgage note payable, net of current portion | 9,634 | 0 | ||||||
Income taxes payable, noncurrent | 1,118 | 1,250 | ||||||
Total liabilities | 42,957 | 40,198 | ||||||
Commitments and contingencies (Notes E, F, and L) | ||||||||
Stockholders’ equity: | ||||||||
Preferred stock; $.01 par value; 500,000 shares authorized; none issued or outstanding | 0 | 0 | ||||||
Common stock; $.01 par value; 20,000,000 shares authorized at December 31, 2021 and June 30, 2021, issued and outstanding (net of treasury shares) 6,227,742 at December 31, 2021 and 6,436,568 at June 30, 2021 | 88 | 88 | ||||||
Additional paid-in capital | 29,923 | 29,456 | ||||||
Retained earnings | 72,052 | 66,949 | ||||||
Treasury stock, at cost, 2,776,623 shares at December 31, 2021 and 2,567,797 at June 30, 2021 | (18,386 | ) | (15,849 | ) | ||||
Accumulated other comprehensive income (loss) | 724 | (561 | ) | |||||
Total stockholders’ equity | 84,401 | 80,083 | ||||||
Total liabilities and stockholders’ equity | $ | 127,358 | $ | 120,281 | ||||
See accompanying notes to condensed consolidated financial statements.
NATURAL ALTERNATIVES INTERNATIONAL, INC.
Natural Alternatives International, Inc.
Condensed Consolidated Statements Of Cash Flowsof Income and Comprehensive Income
(In thousands)thousands, except share and per share data)
(Unaudited)
Six Months Ended | ||||||||
December 31, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 116 | $ | 4,956 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 1,479 | 1,059 | ||||||
Deferred income taxes | 306 | — | ||||||
Non-cash sales discount | 408 | — | ||||||
Non-cash compensation | 603 | 506 | ||||||
Pension expense, net of contributions | (148 | ) | 100 | |||||
Gain on disposal of assets | (2 | ) | (23 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable, net | (4,485 | ) | 3,379 | |||||
Inventories, net | (4,150 | ) | 3,701 | |||||
Prepaids and other assets | (64 | ) | 42 | |||||
Accounts payable and accrued liabilities | 6,942 | (6,721 | ) | |||||
Accrued compensation and employee benefits | (505 | ) | (1,726 | ) | ||||
Forward contracts | 520 | (491 | ) | |||||
Income taxes | 3,640 | 255 | ||||||
Net cash provided by operating activities | 4,660 | 5,037 | ||||||
Cash flows from investing activities | ||||||||
Purchases of property and equipment | (2,095 | ) | (3,362 | ) | ||||
Proceeds from sale of property and equipment | 21 | 24 | ||||||
Issuance of notes receivable | (1,500 | ) | — | |||||
Net cash used in investing activities | (3,574 | ) | (3,338 | ) | ||||
Cash flows from financing activities | ||||||||
Repurchase of common stock | (86 | ) | (84 | ) | ||||
Net cash used in financing activities | (86 | ) | (84 | ) | ||||
Net increase in cash and cash equivalents | 1,000 | 1,615 | ||||||
Cash and cash equivalents at beginning of period | 27,843 | 19,747 | ||||||
Cash and cash equivalents at end of period | $ | 28,843 | $ | 21,362 | ||||
Supplemental disclosures of cash flow information | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | — | $ | — | ||||
Taxes | $ | 422 | $ | 1,897 | ||||
Disclosure of non-cash activities: | ||||||||
Change in unrealized (loss) gain resulting from change in fair value of derivative instruments, net of tax | $ | (1,331 | ) | $ | 852 | |||
Three Months Ended | Six Months Ended | |||||||||||||||
December 31, | December 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Net sales | $ | 37,727 | $ | 48,083 | $ | 76,067 | $ | 87,809 | ||||||||
Cost of goods sold | 31,181 | 38,409 | 61,240 | 72,130 | ||||||||||||
Gross profit | 6,546 | 9,674 | 14,827 | 15,679 | ||||||||||||
Selling, general and administrative | 4,145 | 4,282 | 8,198 | 8,202 | ||||||||||||
Income from operations | 2,401 | 5,392 | 6,629 | 7,477 | ||||||||||||
Other (expense) income: | ||||||||||||||||
Interest income | 0 | 1 | 0 | 1 | ||||||||||||
Interest expense | (13 | ) | (49 | ) | (26 | ) | (95 | ) | ||||||||
Foreign exchange gain (loss) | 11 | (753 | ) | 5 | (1,018 | ) | ||||||||||
Other, net | (7 | ) | (5 | ) | (14 | ) | (15 | ) | ||||||||
Total other (expense) income | (9 | ) | (806 | ) | (35 | ) | (1,127 | ) | ||||||||
Income before income taxes | 2,392 | 4,586 | 6,594 | 6,350 | ||||||||||||
Provision for income taxes | 545 | 954 | 1,491 | 460 | ||||||||||||
Net income | $ | 1,847 | $ | 3,632 | $ | 5,103 | $ | 5,890 | ||||||||
Unrealized gain (loss) resulting from change in fair value of derivative instruments, net of tax | 331 | (854 | ) | 1,285 | (1,974 | ) | ||||||||||
Comprehensive income | $ | 2,178 | $ | 2,778 | $ | 6,388 | $ | 3,916 | ||||||||
Net income per common share: | ||||||||||||||||
Basic | $ | 0.30 | $ | 0.58 | $ | 0.82 | $ | 0.93 | ||||||||
Diluted | $ | 0.30 | $ | 0.57 | $ | 0.81 | $ | 0.91 | ||||||||
Weighted average common shares outstanding | ||||||||||||||||
Basic | 6,211,954 | 6,270,419 | 6,249,791 | 6,344,256 | ||||||||||||
Diluted | 6,256,498 | 6,405,308 | 6,303,921 | 6,438,143 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
Natural Alternatives International, Inc.
Condensed Consolidated Statements Of Stockholders’ Equity
Three-Month Period Ended December 31, 2021 and 2020
(Dollars in thousands)
(Unaudited)
Common Stock | Additional | Retained | Treasury Stock | Accumulated | ||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Shares | Amount | Income (Loss) | Total | |||||||||||||||||||||||||
Balance, September 30, 2021 | 9,004,365 | $ | 88 | $ | 29,678 | $ | 70,205 | 2,584,821 | $ | (15,859 | ) | $ | 393 | $ | 84,505 | |||||||||||||||||
Compensation expense related to stock compensation plans | — | 0 | 245 | 0 | — | 0 | 0 | 245 | ||||||||||||||||||||||||
Repurchase of common stock | 0 | 0 | 0 | 0 | 189,702 | (2,527 | ) | 0 | (2,527 | ) | ||||||||||||||||||||||
Forfeiture of restricted stock | 0 | 0 | 0 | 0 | 2,100 | 0 | 0 | 0 | ||||||||||||||||||||||||
Unrealized gain resulting from change in fair value of derivative instruments, net of tax | — | 0 | 0 | 0 | — | 0 | 331 | 331 | ||||||||||||||||||||||||
Net income | — | 0 | 0 | 1,847 | — | 0 | 0 | 1,847 | ||||||||||||||||||||||||
Balance, December 31, 2021 | 9,004,365 | $ | 88 | $ | 29,923 | $ | 72,052 | 2,776,623 | $ | (18,386 | ) | $ | 724 | $ | 84,401 | |||||||||||||||||
Balance, September 30, 2020 | 8,856,677 | $ | 87 | $ | 28,353 | $ | 58,439 | 2,340,387 | $ | (13,445 | ) | $ | (2,303 | ) | $ | 71,131 | ||||||||||||||||
Compensation expense related to stock compensation plans | — | 0 | 337 | 0 | — | 0 | 0 | 337 | ||||||||||||||||||||||||
Repurchase of common stock | 0 | 0 | 0 | 0 | 182,867 | (1,758 | ) | 0 | (1,758 | ) | ||||||||||||||||||||||
Issuance of common stock for stock option exercise | 30,442 | 1 | (1 | ) | 0 | 0 | 0 | 0 | 0 |
| ||||||||||||||||||||||
Unrealized loss resulting from change in fair value of derivative instruments, net of tax | — | 0 | 0 | 0 | — | 0 | (854 | ) | (854 | ) | ||||||||||||||||||||||
Net income | — | 0 | 0 | 3,632 | — | 0 | 0 | 3,632 | ||||||||||||||||||||||||
Balance, December 31, 2020 | 8,887,119 | $ | 88 | $ | 28,689 | $ | 62,071 | 2,523,254 | $ | (15,203 | ) | $ | (3,157 | ) | $ | 72,488 | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
Natural Alternatives International, Inc.
Condensed Consolidated Statements Of Stockholders’ Equity
Six-Month Period Ended December 31, 2021 and 2020
(Dollars in thousands)
(Unaudited)
Common Stock | Additional | Retained | Treasury Stock | Accumulated | ||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Shares | Amount | Income (Loss) | Total | |||||||||||||||||||||||||
Balance, June 30, 2021 | 9,004,365 | $ | 88 | $ | 29,456 | $ | 66,949 | 2,567,797 | $ | (15,849 | ) | $ | (561 | ) | $ | 80,083 | ||||||||||||||||
Compensation expense related to stock compensation plans | — | 0 | 467 | 0 | — | 0 | 0 | 467 | ||||||||||||||||||||||||
Repurchase of common stock | 0 | 0 | 0 | 0 | 190,394 | (2,537 | ) | 0 | (2,537 | ) | ||||||||||||||||||||||
Forfeiture of restricted stock | 0 | 0 | 0 | 0 | 18,432 | 0 | 0 | 0 | ||||||||||||||||||||||||
Unrealized gain resulting from change in fair value of derivative instruments, net of tax | — | 0 | 0 | 0 | — | 0 | 1,285 | 1,285 | ||||||||||||||||||||||||
Net income | — | 0 | 0 | 5,103 | — | 0 | 0 | 5,103 | ||||||||||||||||||||||||
Balance, December 31, 2021 | 9,004,365 | $ | 88 | $ | 29,923 | $ | 72,052 | 2,776,623 | $ | (18,386 | ) | $ | 724 | $ | 84,401 | |||||||||||||||||
Balance, June 30, 2020 | 8,856,677 | $ | 87 | $ | 27,992 | $ | 56,181 | 2,104,305 | $ | (11,702 | ) | $ | (1,183 | ) | $ | 71,375 | ||||||||||||||||
Compensation expense related to stock compensation plans | — | 0 | 698 | 0 | — | 0 | 0 | 698 | ||||||||||||||||||||||||
Repurchase of common stock | 0 | 0 | 0 | 0 | 418,949 | (3,501 | ) | 0 | (3,501 | ) | ||||||||||||||||||||||
Issuance of common stock for stock option exercise | 30,442 | 1 | (1 | ) | 0 | 0 | 0 | 0 | 0 |
| ||||||||||||||||||||||
Unrealized loss resulting from change in fair value of derivative instruments, net of tax | — | 0 | 0 | 0 | — | 0 | (1,974 | ) | (1,974 | ) | ||||||||||||||||||||||
Net income | — | 0 | 0 | 5,890 | — | 0 | 0 | 5,890 | ||||||||||||||||||||||||
Balance, December 31, 2020 | 8,887,119 | $ | 88 | $ | 28,689 | $ | 62,071 | 2,523,254 | $ | (15,203 | ) | $ | (3,157 | ) | $ | 72,488 | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
Natural Alternatives International, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands, except share and per share data)
(Unaudited)
Six Months Ended December 31, | ||||||||
2021 | 2020 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 5,103 | $ | 5,890 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Provision for uncollectible accounts receivable | 116 | 0 | ||||||
Depreciation and amortization | 2,155 | 2,148 | ||||||
Non-cash compensation | 467 | 698 | ||||||
Non-cash lease expenses | 1,621 | 2,137 | ||||||
Deferred income taxes | 0 | (469 | ) | |||||
Pension expense, net of contributions | 17 | 38 | ||||||
Gain on disposal of assets | (6 | ) | (3 | ) | ||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 2,765 | (61 | ) | |||||
Inventories, net | (4,822 | ) | (6,494 | ) | ||||
Prepaids and other assets | (691 | ) | (1,075 | ) | ||||
Accounts payable and accrued liabilities | (3,775 | ) | 1,050 | |||||
Forward contracts | (1,562 | ) | 1,270 | |||||
Accrued compensation and employee benefits | (1,951 | ) | (330 | ) | ||||
Operating lease liabilities | (1,616 | ) | (1,643 | ) | ||||
Income taxes | 1,622 | 1,527 | ||||||
Net cash (used in) provided by operating activities | (557 | ) | 4,683 | |||||
Cash flows from investing activities | ||||||||
Proceeds from sale of property and equipment | 25 | 3 | ||||||
Purchases of property and equipment | (19,644 | ) | (3,034 | ) | ||||
Net cash used in investing activities | (19,619 | ) | (3,031 | ) | ||||
Cash flows from financing activities | ||||||||
Borrowings on long-term debt | 10,000 | 0 | ||||||
Payments on long-term debt | (68 | ) | 0 | |||||
Repurchase of common stock | (2,537 | ) | (3,501 | ) | ||||
Net cash provided by (used in) financing activities | 7,395 | (3,501 | ) | |||||
Net decrease in cash and cash equivalents | (12,781 | ) | (1,849 | ) | ||||
Cash and cash equivalents at beginning of period | 32,133 | 30,478 | ||||||
Cash and cash equivalents at end of period | $ | 19,352 | $ | 28,629 | ||||
Supplemental disclosures of cash flow information | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 94 | $ | 91 | ||||
Taxes | $ | 953 | $ | 263 | ||||
See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. Basis of Presentation and Summary of Significant Accounting Policies
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and with applicable rules and regulations. CertainPursuant to such rules and regulations, certain information and footnotenote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations.omitted. In management’smanagement’s opinion, all adjustments necessary for a fair presentation of the financial position, results of operations, stockholders’ equity, and cash flows have been included and are of a normal, recurring nature. The results of operations for the three and six months ended December 31, 20172021 are not necessarily indicative of the operating results for the full fiscal year or for any future periods.
You should read the financial statements and these notes, which notes are an integral part of the financial statements, together with our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021 (2017 (“20172021 Annual Report”). The accounting policies used to prepare the financial statements included in this Quarterly Report are the same as thosepolicies described in the notes to the consolidated financial statements in our 20172021 Annual Report unless otherwise noted below.
RecentRecently Adopted Accounting Pronouncements
InOn March 2016,December 18, 2019, the FASBFinancial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 20162019-02,12, LeasesIncome Taxes (Topic 842740) (ASU: Simplifying the Accounting for Income Taxes. This new standard eliminates certain exceptions in Accounting Standards Codification ("ASC") 2016740-02), which amends existing standards related to the approach for leases to increase transparencyintraperiod tax allocation, the methodology for calculating income taxes in an interim period, and comparability among organizations by requiringthe recognition of lease assetsdeferred tax liabilities for outside basis differences. It also clarifies and liabilities onsimplifies other aspects of the balance sheet and requiring disclosure of key information about such arrangements. ASU 2016-02 will beaccounting for income taxes. This standard is effective for usfiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption permitted in ourany interim period within that year. We have adopted this ASU effective this first quarter of fiscal 2020.2022. Early adoption is permitted. We are currently evaluating theThis ASU did not have a material impact of adopting the new standard on our consolidated financial statements and the timing and presentation of our adoption.statements.
In April 2016, the FASBRecently Issued Accounting and Regulatory Pronouncements
Other recently issued Accounting Standards Update No.2016-10, Revenue from Contracts with Customers (Topic 606)(ASU 2016-10), which amends and adds clarity to certain aspects of the guidance set forth in the upcoming revenue standard (ASU 2014-09) related to identifying performance obligations and licensing. In May 2016, the FASB issued Accounting Standards Update No.2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815) (ASU 2016-11), which amends and rescinds certain revenue recognition guidance previously released within ASU 2014-09. In May 2016 the FASB issued Accounting Standards Update No.2016-12, Revenue from Contracts with Customers (Topic 606) (ASU 2016-12), which provides narrow scope improvements and practical expedients related to ASU 2014-09. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible that more judgment and estimates may be required within the revenue recognition process than is required under present U.S. GAAP. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. The new standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. All of these new standards will be effective for us concurrently with ASU 2014-09, beginning in our first quarter of fiscal 2019. Currently, we doaccounting pronouncements are not expect our annual revenue to be materially different under Topic 606. The most significant change will be to our quarterly and annual financial statement disclosures. We are continuing to evaluate the impact of adopting the new standard.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU is intended to improve and simplify accounting rules around hedge accounting and improve the disclosures of hedging arrangements. We are currently evaluating the impact of adopting the new standard on our consolidated financial statements. ASU 2017-12 will be effective for us beginningdiscussed in our first quarter of fiscal 2020.
On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No.118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. legislationthis Report as “provisional” when it doessuch pronouncements did not have, the necessary information available, preparedand are not believed by management to have, a material impact on our present or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, the our estimated income tax is considered provisional and is expected to be finalized by the end of our fiscal year.future financial statements.
Net Income per Common Share
We compute net income per common share using the weighted average number of common shares outstanding during the period, and diluted net income per common share using the additional dilutive effect of all dilutive securities. The dilutive impact of stock options and unvested restricted shares account for the additional weighted average shares of common stock outstanding for our diluted net income per common share computation. We calculated basic and diluted net income per common share as follows (in thousands, except per share data):
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Numerator | ||||||||||||||||||||||||||||||||
Net (loss) income | $ | (1,318 | ) | $ | 2,466 | $ | 116 | $ | 4,956 | |||||||||||||||||||||||
Net income | $ | 1,847 | $ | 3,632 | $ | 5,103 | $ | 5,890 | ||||||||||||||||||||||||
Denominator | ||||||||||||||||||||||||||||||||
Basic weighted average common shares outstanding | 6,615 | 6,567 | 6,611 | 6,563 | 6,212 | 6,270 | 6,250 | 6,344 | ||||||||||||||||||||||||
Dilutive effect of stock options | — | 116 | 226 | 102 | ||||||||||||||||||||||||||||
Dilutive effect of stock options and restricted stock | 44 | 135 | 54 | 94 | ||||||||||||||||||||||||||||
Diluted weighted average common shares outstanding | 6,615 | 6,683 | 6,837 | 6,665 | 6,256 | 6,405 | 6,304 | 6,438 | ||||||||||||||||||||||||
Basic net (loss) income per common share | $ | (0.20 | ) | $ | 0.38 | $ | 0.02 | $ | 0.76 | |||||||||||||||||||||||
Basic net income per common share | $ | 0.30 | $ | 0.58 | $ | 0.82 | $ | 0.93 | ||||||||||||||||||||||||
Diluted net (loss) income per common share | $ | (0.20 | ) | $ | 0.37 | $ | 0.02 | $ | 0.74 | |||||||||||||||||||||||
Diluted net income per common share | $ | 0.30 | $ | 0.57 | $ | 0.81 | $ | 0.91 | ||||||||||||||||||||||||
In periods where we have a net loss,We did not exclude any stock options andor restricted stock are excluded from our calculation of diluted net income (loss) per common share, shares for the three or six months ended December 31, 2021 as their inclusionnone would have had an antdilutive effect.anti-dilutive impact. We excluded shares related todid not exclude any stock options totaling 135,000 and shares related toor restricted stock totaling 813,665shares for the three months ended December 31, 2017.2020. No shares related to stock options or restricted stock were excluded forDuring the six months ended December 31, 20172020, or the threewe excluded shares relating to stock options totaling 90,000 and six months ended December 31, 2016.116,658 shares of unvested restricted stock, as their impact would have been anti-dilutive.
Revenue Recognition
To recognizeWe record revenue based on a fourfive basic criteria must be met: -step model which includes: (1) there is evidence that an arrangement identifying a contract with a buyer exists; customer; (2) delivery has occurred; identifying the performance obligations in the contract; (3) determining the fee is fixed or determinable; and transaction price; (4) collectabilityallocating the transaction price among the performance obligations; and (5) recognizing revenue as each of the various performance obligations are satisfied.
Revenue is reasonably assured. Revenuemeasured as the net amount of consideration expected to be received in exchange for fulfilling one or more performance obligations. We identify purchase orders from sales transactions wherecustomers 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 buyer hasend of each reporting period and the rightimpact 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 returnpay that amount of consideration when it is due. Payment of invoices is due as specified in the productunderlying 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 sale only if (a)our performance obligations is fulfilled, and control of the seller’s priceordered products is transferred to the buyercustomer. This transfer occurs when the product is substantially fixedshipped, or determinable atin some cases, when the date of sale; (b) the buyer has paid the seller, or the buyerproduct is obligated to pay the seller and the obligation is not contingent on resale of the product; (c) the buyer’s obligationdelivered to the seller would not be changedcustomer.
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 eventtransaction price. We require prepayment from certain customers. We record any payments received in advance of theft or physical destruction or damagecontracts 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 product; (d) the buyer acquiring the productsale of our products. We estimate returns based on historical experience and recognize a returns liability for resale has economic substance apart from that provided by the seller; (e) the seller doesany estimated returns. As of notDecember 31, 2021, we have significant obligations for future performance to directly bring about resale of the product by the buyer; and (f) the amount of future0 known returns can be reasonably estimated. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon completion of delivery is deferred until the shipment has been delivered.liability.
We record reductions to gross revenue for estimated returns of private-label contract manufacturing products and beta-alanine raw material sales. The estimated returns are based on the trailing six months of private-label contract manufacturing gross sales and our historical experience for both private-label contract manufacturing and beta-alanine raw material sales returns. However, the estimate for product returns does not reflect the impact of a potential large product recall resulting from product nonconformance or other factors as such events are not predictable nor is the related economic impact estimable.
On August 7, 2017, we entered into three agreements (“Agreements”),have an Exclusive Manufacturing Agreement with The Juice Plus+ Company LLC (“Juice Plus+”). The Agreements are an Exclusive Manufacturing Agreement, a Restricted Stock Award Agreement, and an Irrevocable Proxy. 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 the Restricted Stock Awardthis Exclusive Manufacturing Agreement, NAI has granted 500,000 shares of NAI common stock towe provide Juice Plus+, (the “Shares”), with a cash discount. We recorded $0.3 million of “Cash Sales Discount” for the three months ended December 31, 2021, and Juice Plus+ has agreed$0.7 during the Shares are subject to certain restrictions and risk of forfeiture. Pursuant to the Irrevocable Proxy, Juice Plus+ also has granted to the NAI Board of Directors Juice Plus+’s right to vote the Shares that remain subject to the associated risk of forfeiture. The Agreements each are for a term of 5six years, and eachmonths ended mayDecember 31, 2021, be terminated by either party only upon the occurrence of specified events. The expense associated with the shares granted to Juice Plus+ iswhich was recorded as a reduction to revenue. net sales. We recorded $0.4 million of $245,000 of expensecash sales discount during the three months ended December 31, 20172020 and $408,000$0.8 million during the six months ended December 31, 2017.2020.
We currently own certain U.S. patents, and patent applications, and each patent’s corresponding foreign patents and patent applications. All of these patents and patent rights relate to the ingredient known as beta-alanine marketed and which we market and sellsold under our CarnoSyn® and SR CarnoSyn® trade names. We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of $4.0$4.1 million during the three months ended December 31, 20172021, and $9.8$8.8 million during the six months ended December 31, 2017.2021. We similarly recorded $6.7$2.8 million during the three months ended December 31, 20162020 and $13.4$5.4 million during the six months ended December 31, 2016.2020. 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 $160,000$0.2 million during the three months ended December 31, 20172021, and $444,000$0.4 million during the six months ended December 31, 2017.2021. We recognized $250,000recorded $0.1 million during the three months ended December 31, 20162020 and $566,000$0.3 million during the six months ended December 31, 2016.2020.
Notes ReceivableStock-Based Compensation
On September 30, 2017, we acceptedThe Board of Directors approved a new omnibus equity incentive plan that became effective 12January 1, 2021 (-month note from Kaged Muscle, LLC (“Kaged Muscle”the “2020 Plan”), which was approved by our stockholders at the Annual Meeting of Stockholders on oneDecember 4, 2020. Under the 2020 Plan, we may grant nonqualified and incentive stock options, restricted stock grants, restricted stock units, stock appreciation rights, and other stock-based awards to employees, non-employee directors and consultants.
We did not grant any options during each of our contract manufacturing customers, in exchange forthe $1.5three million of trade receivables due to us from Kaged Muscle. Kaged Muscle isand onesix of our fastest growing sports nutrition customers month periods ending December 31, 2021 and we executed this note receivable conversion to assist them with their near term financing needs. The note carries an interest rate of fifteenDecember 31, 2020. NaN options were exercised during the three percent (15%) per annum and is an interest only note secured by the assets of Kaged Muscle and a personal guarantee by the co-founder and President of Kaged Muscle. Interest is due quarterly and the note can be paid down at any time without penalty. six month periods ending December 31, 2021. During the three and six months ended December 31, 20172020, we recognized $58,000 in interest income associated with this note from Kaged Muscle.
Stock-Based Compensation
We have an omnibus incentive plan that was approved by our Board of Directors effective as of October15,2009 and approved by our stockholders at the Annual Meeting of Stockholders held on November 30,2009. Under the plan, we may grant nonqualified and incentive100,000 stock options 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 input of highly subjective assumptions. Black-Scholes uses assumptions related to volatility, the risk-free interest rate, the dividend yield (which we assume to be zero, as to date we have not paid any cash dividends) and employee exercise behavior. Expected volatilities usedwere exercised. These exercises were cashless net exercises resulting in the model are based on the historical volatilityissuance of our stock price. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect on the date of grant. The expected life of stock30,442 shares. There were no 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 did not grant any optionsforfeitures during the three month or six month periods ended December 31, 2017 or 2016. All remaining outstanding stock options are fully vested. No options were exercised during the three month orand six month periods ended December 31, 20172021 or 2016.December 31, 2020. As of December 31, 2021, we did not have any stock options outstanding.
We did not grant any restricted stock shares during the three There wereor nosix forfeitures duringmonths ending December 31, 2021 or December 31, 2020. During the three months ended December 31, 2017.2021, 2,100 restricted stock shares were forfeited. During the six months ended December 31, 20172021, 5,000 options18,432 restricted stock shares were forfeited. ThereNaN restricted stock shares were no forfeitures during the three month or six month periods ended December 31, 2016.
We did not grant any shares to employeesforfeited during the three or six months ended December 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 each Participant and NAI. The Incentive Plan provides the Board of Directors with the discretion to set aside assets to fund the Incentive Plan although that has not been done to date.
There were 0 deferred cash awards granted during the three and six months ended December 31, 20172021. , orThere were no deferred cash awards granted during the three months ended December 31, 2016.2020. WeDuring the six months ended December 31, 2020, we granted a total of $1.0 million in deferred cash awards to members of our Board of Directors and certain key members of our management team. NaN deferred cash awards were forfeited during the 10,000three restricted shares to a new member of managementmonths ended December 31, 2021. Awards totaling $191,000 were forfeited during the six months ended December 31, 2016.2021. Our net income included stock based compensation expense of approximately $302,000 forNaN awards were forfeited during the three months ended December 31, 2017, and$603,000 for the six months ended December 31, 2017.2020. Our net income included stock based compensation expense of approximatelyEach deferred cash award provides for $256,000three forequal cash payments to the applicable Participant to be paid on the one year, two year, and three months endedyear 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, December 31, 2016, and $506,000no forfurther payments shall be made in connection with the six months ended December 31, 2016.Award.
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 marketExcept 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 inputscash 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. Fair values determined by Level 2 inputs are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable or can be corroborated, either directly or indirectly by observable market data. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. These include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
As of DecDecember 31, 2021 ember 31,2017and June 30, 2017,2021, we did not have any financial assets or liabilities classified as Level 11. except for cash and cash equivalents, and assets related to our pension plan. We classify derivative forward exchange and interest rate swap contracts as Level 2 assets.assets and liabilities. The fair values were determined by obtaining pricing from our bank and corroborating those values with a third party bank or pricing service.
Fair value of our forward exchange contractsderivative instruments classified as Level 2 assets and liabilities consisted of December 31, 2017 wasthe following (in thousands):
December 31, 2021 | June 30, 2021 | |||||||
Euro Forward Contract– Current Assets | $ | 1,783 | $ | 0 | ||||
Swiss Franc Forward Contract – Current Assets | 48 | 0 | ||||||
Total Derivative Contracts – Current Assets | 1,831 | 0 | ||||||
Interest Swap – Other noncurrent Assets | 62 | 0 | ||||||
Euro Forward Contract– Other noncurrent Assets | 507 | 0 | ||||||
Total Derivative Contracts – Other noncurrent Assets | 569 | 0 | ||||||
Euro Forward Contract–Current Liabilities | 0 | (630 | ) | |||||
Swiss Franc Forward Contract – Current Liabilities | 0 | (184 | ) | |||||
Total Derivative Contracts – Current Liabilities | 0 | (814 | ) | |||||
Euro Forward Contract – Noncurrent Liabilities | 0 | (4 | ) | |||||
Fair Value Net Asset (Liability) – all Derivative Contracts | $ | 2,400 | $ | (818 | ) | |||
We also classify any outstanding line of credit and term loan balance as a netLevel 2 liability, of $2.7 million. Theas the fair value of our forward exchange contracts as of June 30, 2017 was a net liability of $521,000.is based on inputs that can be derived from information available in publicly quoted markets. As of December 31, 20172021, and June 30, 20172021, we did not have any financial assets or liabilities classified as Level 3. We did not transfer any assets or liabilities between Levelsthese levels during fiscal 20172021 or the six months ended December 31, 2017.2021.
Concentrations
Reclassification of Credit Risk
Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We place our cash and cash equivalents with highly rated financial institutions. Credit risk with respect to receivables is concentrated with our three largest customers, whose receivable balances collectively represented 76.1% of gross accounts receivable at December 31,2017 and 65.6% at June 30,2017. Additionally, amounts due related to our beta-alanine raw material sales were 15.6% of gross accounts receivable at December 31, 2017, and 21.3% of gross accounts receivable at June 30, 2017. Concentrations of credit risk related to the remaining accounts receivable balances are limited due to the number of customers comprising our remaining customer base.Prior Year Presentation
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
B. Inventories, net
Inventories, net consisted of the following (in thousands):
December 31, 2017 | June 30, 2017 | December 31, 2021 | June 30, 2021 | |||||||||||||
Raw materials | $ | 12,623 | $ | 9,469 | $ | 24,425 | $ | 20,530 | ||||||||
Work in progress | 3,061 | 1,312 | 2,409 | 3,765 | ||||||||||||
Finished goods | 2,597 | 3,562 | 5,660 | 3,056 | ||||||||||||
Reserves | (402 | ) | (614 | ) | ||||||||||||
Inventories, net | $ | 17,879 | $ | 13,729 | ||||||||||||
Reserve | (666 | ) | (345 | ) | ||||||||||||
| $ | 31,828 | $ | 27,006 | |||||||||||||
C. Property and Equipment
Property and equipment consisted of the following (in thousands):
Depreciable Life In Years | December 31, 2017 | June 30, 2017 | ||||||||||||||||||||||||
Depreciable Life In Years | December 31, 2021 | June 30, 2021 | ||||||||||||||||||||||||
Land | N/A | $ | 1,200 | $ | 1,200 | NA | $ | 7,645 | $ | 1,200 | ||||||||||||||||
Building and building improvements | 7 | – | 39 | 3,715 | 3,706 | 7 | - | 39 | 15,023 | 3,757 | ||||||||||||||||
Machinery and equipment | 3 | – | 12 | 25,499 | 24,194 | 3 | - | 12 | 36,424 | 35,458 | ||||||||||||||||
Office equipment and furniture | 3 | – | 5 | 4,350 | 3,954 | 3 | - | 5 | 5,906 | 5,712 | ||||||||||||||||
Vehicles | 3 | 209 | 209 | 3 | 211 | 255 | ||||||||||||||||||||
Leasehold improvements | 1 | – | 15 | 17,032 | 17,038 | 1 | - | 15 | 20,971 | 20,236 | ||||||||||||||||
Total property and equipment | 52,005 | 50,301 | 86,180 | 66,618 | ||||||||||||||||||||||
Less: accumulated depreciation and amortization | (33,272 | ) | (32,165 | ) | (46,439 | ) | (44,347 | ) | ||||||||||||||||||
Property and equipment, net | $ | 18,733 | $ | 18,136 | $ | 39,741 | $ | 22,271 | ||||||||||||||||||
On August 20, 2021, we acquired a manufacturing and warehouse property in Carlsbad California from an unrelated party for $17.5 million. The approximately 54,154 square foot building includes environmentally controlled warehouse space, office space and additional non-environmentally controlled warehouse space. We intend to retrofit a significant portion of the building into a dedicated high-volume powder blending and packaging facility. This new facility will also provide us with additional raw material storage capacity, and additional office space.
D. Other Comprehensive Income (Loss) Income
OtherOther comprehensive (loss) income (“OCL” and “OCI”) consisted of the following during the three months ended December 31, 2021 and December 31, 2020 (in thousands):
Three Months Ended | ||||||||||||||||
December 31, 2021 | ||||||||||||||||
Defined | Unrealized Gains | Unrealized Gains | ||||||||||||||
Benefit | (Losses) on | (Losses) on | ||||||||||||||
Pension | Cash Flow | Swap | ||||||||||||||
Plan | Hedges | Derivative | Total | |||||||||||||
Beginning Balance | $ | (538 | ) | $ | 931 | 0 | $ | 393 | ||||||||
OCI/OCL before reclassifications | 0 | 855 | 62 | 917 | ||||||||||||
Amounts reclassified from OCI to Sales | 0 | (504 | ) | 0 | (504 | ) | ||||||||||
Tax effect of OCI activity | 0 | (82 | ) | 0 | (82 | ) | ||||||||||
Net current period OCI/OCL | 0 | 269 | 62 | 331 | ||||||||||||
Ending Balance | $ | (538 | ) | $ | 1,200 | $ | 62 | $ | 724 | |||||||
Six Months Ended | ||||||||||||||||
December 31, 2021 | ||||||||||||||||
Defined | Unrealized Gains | Unrealized Gains | ||||||||||||||
Benefit | (Losses) on | (Losses) on | ||||||||||||||
Pension | Cash Flow | Swap | ||||||||||||||
Plan | Hedges | Derivative | Total | |||||||||||||
Beginning Balance | $ | (538 | ) | $ | (23 | ) | 0 | $ | (561 | ) | ||||||
OCI/OCL before reclassifications | 0 | 2,244 | 62 | 2,306 | ||||||||||||
Amounts reclassified from OCI to Sales | 0 | (650 | ) | 0 | (650 | ) | ||||||||||
Tax effect of OCI activity | 0 | (371 | ) | 0 | (371 | ) | ||||||||||
Net current period OCI/OCL | 0 | 1,223 | 62 | 1,285 | ||||||||||||
Ending Balance | $ | (538 | ) | $ | 1,200 | $ | 62 | $ | 724 | |||||||
Three Months Ended | ||||||||||||
December 31, 2020 | ||||||||||||
Unrealized | ||||||||||||
Defined | Gains | |||||||||||
Benefit | (Losses) on | |||||||||||
Pension | Cash Flow | |||||||||||
Plan | Hedges | Total | ||||||||||
Beginning Balance | $ | (888 | ) | $ | (1,415 | ) | $ | (2,303 | ) | |||
OCI/OCL before reclassifications | 0 | (1,850 | ) | (1,850 | ) | |||||||
Amounts reclassified from OCI to Sales | 0 | 737 | 737 | |||||||||
Tax effect of OCI activity | 0 | 259 | 259 | |||||||||
Net current period OCI/OCL | 0 | (854 | ) | (854 | ) | |||||||
Ending Balance | $ | (888 | ) | $ | (2,269 | ) | $ | (3,157 | ) | |||
Six Months Ended | ||||||||||||
December 31, 2020 | ||||||||||||
Unrealized | ||||||||||||
Defined | Gains | |||||||||||
Benefit | (Losses) on | |||||||||||
Pension | Cash Flow | |||||||||||
Plan | Hedges | Total | ||||||||||
Beginning Balance | $ | (888 | ) | $ | (295 | ) | $ | (1,183 | ) | |||
OCI/OCL before reclassifications | 0 | (3,913 | ) | (3,913 | ) | |||||||
Amounts reclassified from OCI to Sales | 0 | 1,341 | 1,341 | |||||||||
Tax effect of OCI activity | 0 | 598 | 598 | |||||||||
Net current period OCI/OCL | 0 | (1,974 | ) | (1,974 | ) | |||||||
Ending Balance | $ | (888 | ) | $ | (2,269 | ) | $ | (3,157 | ) | |||
E. Leases
We currently lease our Vista, CA and Lugano, Switzerland product manufacturing and support facilities. 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 and office space. We have no leases classified as finance leases. As of December 31, 2021, the weighted average remaining lease term for our operating leases was 5.8 years. The weighted average discount rate for our operating leases was 3.24%. As of June 30, 2021, the weighted average remaining lease term for our operating leases was 6.3 years and the weighted average discount rate 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 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.
Other information related to leases as of December 31, 2021 was as follows (in thousands):
Supplemental Cash Flows Information | Six Months Ended December 31, 2021 | Six Months Ended December 31, 2020 | ||||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 1,620 | $ | 1,646 | ||||
For the three months and six months ended December 31, 20172021 and December 31, 2016 (2020 in thousands):we did not have any operating lease liabilities arise from obtaining right of use assets.
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
December 31, 2017 | December 31, 2017 | |||||||||||||||||||||||
Unrealized | Unrealized | |||||||||||||||||||||||
Defined | Gains | Defined | Gains | |||||||||||||||||||||
Benefit | (Losses) on | Benefit | (Losses) on | |||||||||||||||||||||
Pension | Cash Flow | Pension | Cash Flow | |||||||||||||||||||||
Plan | Hedges | Total | Plan | Hedges | Total | |||||||||||||||||||
Beginning Balance | $ | (491 | ) | $ | (1,548 | ) | $ | (2,039 | ) | $ | (491 | ) | $ | (414 | ) | $ | (905 | ) | ||||||
OCI/OCL before reclassifications | - | (490 | ) | (490 | ) | - | (2,443 | ) | (2,443 | ) | ||||||||||||||
Amounts reclassified from OCI | - | 187 | 187 | - | 365 | 365 | ||||||||||||||||||
Tax effect of OCI activity | - | 106 | 106 | - | 747 | 747 | ||||||||||||||||||
Net current period OCI/OCL | - | (197 | ) | (197 | ) | - | (1,331 | ) | (1,331 | ) | ||||||||||||||
Ending Balance | $ | (491 | ) | $ | (1,745 | ) | $ | (2,236 | ) | $ | (491 | ) | $ | (1,745 | ) | $ | (2,236 | ) | ||||||
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
December 31, 2016 | December 31, 2016 | |||||||||||||||||||||||
Unrealized | Unrealized | |||||||||||||||||||||||
Defined | Gains | Defined | Gains | |||||||||||||||||||||
Benefit | (Losses) on | Benefit | (Losses) on | |||||||||||||||||||||
Pension | Cash Flow | Pension | Cash Flow | |||||||||||||||||||||
Plan | Hedges | Total | Plan | Hedges | Total | |||||||||||||||||||
Beginning Balance | $ | (775 | ) | $ | (295 | ) | $ | (1,070 | ) | $ | (775 | ) | $ | 95 | $ | (680 | ) | |||||||
OCI/OCL before reclassifications | - | 2,287 | 2,287 | - | 1,834 | 1,834 | ||||||||||||||||||
Amounts reclassified from OCI | - | (343 | ) | (343 | ) | - | (501 | ) | (501 | ) | ||||||||||||||
Tax effect of OCI activity | - | (702 | ) | (702 | ) | - | (481 | ) | (481 | ) | ||||||||||||||
Net current period OCI/OCL | - | 1,242 | 1,242 | - | 852 | 852 | ||||||||||||||||||
Ending Balance | $ | (775 | ) | $ | 947 | $ | 172 | $ | (775 | ) | $ | 947 | $ | 172 | ||||||||||
E.F. Debt
We haveOn May 24, 2021, we entered into a Credit Agreementnew credit facility with Wells Fargo Bank, N.A.N.A (“Wells Fargo”) 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. On August 18, 2021, we entered into an amendment of our credit facility with Wells Fargo. The amended credit facility added a $10.0 million term loan to the existing $20.0 million credit facility, and permitted us to use the $10.0 million term loan as part of the $17.5 million purchase consideration for the acquisition of our new manufacturing and warehouse property in Carlsbad, California. The amended credit agreement also increased the allowed capital expenditures from $10.0 million to $15.0 million for fiscal 2022, (exclusive of the amount paid for the acquisition of the new Carlsbad property noted above). In addition, the new credit notes now reflect a change in the interest rate reference from LIBOR to SOFR. The Credit Agreement provides us withwas amended and a credit linenew Revolving Line of upCredit Note, and Security Agreement were entered into. A Term Note and real property security documents were added to $10.0 million and matures on February 1, 2020. The line of credit may be used to finance working capital requirements. On September 29, 2017, we executed an amendment tosecure the Credit Agreement, which now allows us to make loans or advances to third parties not exceeding $1.5 million. We executed this amendment in order to issue a note receivable of $1.5 million to a customer. There is no commitment fee under this agreement. There are no amounts currently drawn underTerm Note by the line of credit.new Carlsbad property.
Under the terms of the Credit Agreement, borrowings are subject to eligibility requirements including maintaining (i) a ratio of total liabilities to tangible net worth of not greater than 1.251.50 to 1.0 at any time; and (ii) a ratio of total current assets to total current liabilities of not less than 1.75 to 1.0 at each fiscal quarter end (iii) net income after taxes not less than $1.00, determined on a trailing four quarter basis with notwo consecutive quarterly losses, determined as of each quarter end and (iv) a rolling 4-quarter fixed charge coverage ratio not less than 1.25 to 1.0 as of each fiscal quarter end. The credit agreement also includes a limitation on the amount of capital expenditures that can be made in a given fiscal year, with such limitation set at $15.0 million for our fiscal year ending June 30, 2022 and $7.5 million for all fiscal years thereafter. Any amounts outstanding under the line of credit will bear interest at a fixed or fluctuating interest rate as elected by NAIus from time to time; provided, however, that if the outstanding principal amount is less than $100,000$100,000 such amount shall bear interest at the then applicable fluctuating rate of interest. If elected, the fluctuating rate per annum would be equal to 1.25%1.29% above the daily one month LIBORsimple SOFR rate as in effect from time to time. If a fixed rate is elected, it would equal a per annum rate of 1.25%1.29% above the LIBORSOFR rolling 30-day average rate in effect on the first day of the applicable fixed rate term. Any amounts outstanding under the line of credit must be paid in full on or before the maturity date. Amounts outstanding that are subject to a fluctuating interest rate may be prepaid at any time without penalty. Amounts outstanding that are subject to a fixed interest rate may be prepaid at any time in minimum amounts of $100,000,$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 the line of credit.
The Term Note used as part of the purchase consideration of our new manufacturing and warehouse property in Carlsbad California referenced above, is for the original principal amount of $10.0 million, and is a seven year term note with payments fully amortized based on a twenty five year assumed term. Installment payments under this loan commenced October 1, 2021 and continue through August 1, 2028 with a final installment consisting of all remaining amounts due to be paid in full on September 1, 2028. Amounts outstanding on this note during the term of the agreement will bear interest equal to 1.8% above the SOFR rolling 30-day average. In connection with our term loan, we entered into an interest rate swap with Wells Fargo that effectively fixes our interest rate on our term loan at 2.4% for the firstthree years of the term of the note.
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 December 31, 20172021, , we were in compliance with all of the financial and other covenants required under the Amended Credit Agreement.
We also have a foreign exchangeAs of December 31, 2021, we had $20.0 million available for borrowing under our credit facility with Wells Fargo Bank, N.A. in effect until January 31, 2019, and with Bank of America, N.A. in effect until August 15, 2019.Bank.
We did not use our working capital line of credit nor did we have any long-term debt outstanding during the six months ended December 31, 2017. As of December 31, 2017,2021, we had $10.0$9.9 million availableoutstanding under our credit facilities.the Term Note used in the purchase of the warehouse in August 2021.
F.G. Economic Dependency
We had substantial net sales to certain customers during the periods shown in the following table. The loss of any of these customers, or a significant decline in (i) sales to these customers, (ii) the growth rate of sales to these customers, or in(iii) these customers’customers’ ability to make payments when due, each individually could have a material adverse impact on our net sales and net income. Net sales to any one customer representing 10% or more of the respective period's consolidated net sales were as follows (in thousands):
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Customer 1 | $ | 19,134 | $ | 15,074 | $ | 32,292 | $ | 32,152 | ||||||||
Customer 2 | 4,079 |
| (a) | 7,239 |
| (a) | ||||||||||
| $ | 23,213 | $ | 15,074 | $ | 39,531 | $ | 32,152 | |||||||||
(a) Sales were less than 10% of the respective period’s total revenues.
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Customer 1 | $ | 12,966 | $ | 24,827 | $ | 26,264 | $ | 48,785 | ||||||||
Customer 2 | 8,595 | 8,910 | 15,988 | 11,716 | ||||||||||||
Customer 3 | 4,773 | (a) | 9,121 | (a) | ||||||||||||
| $ | 26,334 | $ | 33,737 | $ | 51,373 | $ | 60,501 | |||||||||
(a) | Sales were less than 10% of the respective period’s total net sales. |
We buy certain products, including beta-alanine, from a limited number of raw material suppliers.suppliers who meet our quality standards. The loss of any of these suppliers could have a material adverse impact on our net sales and net income. Raw material purchases from any one supplier representing 10% or more of the respective period’speriod’s total raw material purchases were as follows (in(dollars in thousands):
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Supplier 1 | $ | 4,485 | 6,412 | $ | 7,854 | 9,787 | ||||||||||
| $ | 4,485 | 6,412 | $ | 7,854 | 9,787 | |||||||||||
(a) | Purchases were less than 10% of the respective period’s total raw material purchases. |
Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We place our cash and cash equivalents with highly rated financial institutions. Credit risk with respect to receivables is concentrated with 2 of our largest customers, whose receivable balances collectively represented 59.6% of gross accounts receivable at December 31, 2021 and 64.8% at June 30,2021. As of December 31, 2021 we had a receivable balance of $3.5 million and at June 30, 2021 we had a receivable balance of $3.4 million related to 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 7.0% of gross accounts receivable at December 31, 2021, and 8.6% of gross accounts receivable at June 30, 2021. Concentrations of credit risk related to the remaining accounts receivable balances are limited due to the number of customers responsible for the remaining accounts receivable.
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Supplier 1 | $ | (a) |
| (a) | $ | 2,992 |
| (a) | ||||||||
Supplier 2 | 1,684 |
| (a) | 2,911 |
| (a) | ||||||||||
Supplier 3 | 1,718 |
| (a) |
| (a) |
| (a) | |||||||||
| $ | 3,402 | — | $ | 5,903 | — | |||||||||||
(a) Purchases were less than 10% of the respective period’s total raw material purchases.
G.H. Segment Information
Our business consists of two2 segments for financial reporting purposes,purposes. The two segments are identified as (i) private labelprivate-label contract manufacturing, which primarily relates to the provision of private labelprivate-label contract manufacturing services to companies that market and distribute nutritional supplements and other health care products;products, and (ii) patent and trademark licensing, which primarily includes direct raw material sales and royalty income from our license and supply agreements associated with the sale and use of beta-alanine under our CarnoSyn® and SR CarnoSyn® trade names.
We evaluate performance of these segments based on a number of factors. The primary performance measures for each segment are net sales and income or loss from operations before the allocation of certain corporate allocations.level expenses. Operating income or loss for each segment does not include corporate general and administrative expenses, interest expense and other miscellaneous income and expense items. Corporate general and administrative expenses, which are not allocated to any segment, include, but are not limited to:to human resources, corporate legal, finance, information technology, and other corporate level related expenses.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 above and in the consolidated financial statements included in our 20172021 Annual Report.
Our operating results by business segment were as follows (in thousands):
Three Months Ended December 31, | Six Months Ended December 31, | Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Net Sales | ||||||||||||||||||||||||||||||||
Private label contract manufacturing | $ | 29,355 | $ | 23,864 | $ | 51,577 | $ | 51,243 | $ | 33,677 | $ | 45,326 | $ | 67,271 | $ | 82,373 | ||||||||||||||||
Patent and trademark licensing | 3,980 | 6,695 | 9,832 | 13,383 | 4,050 | 2,757 | 8,796 | 5,436 | ||||||||||||||||||||||||
Total Net Sales | $ | 33,335 | $ | 30,559 | $ | 61,409 | $ | 64,626 | $ | 37,727 | $ | 48,083 | $ | 76,067 | $ | 87,809 | ||||||||||||||||
Three Months Ended December 31, | Six Months Ended December 31, | Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||||
Income from Operations | ||||||||||||||||||||||||||||||||
Private label contract manufacturing | $ | 3,385 | $ | 2,148 | $ | 5,641 | $ | 5,462 | $ | 2,761 | $ | 6,843 | $ | 6,461 | $ | 10,270 | ||||||||||||||||
Patent and trademark licensing | 504 | 2,340 | 1,692 | 4,240 | 1,757 | 529 | 4,393 | 1,199 | ||||||||||||||||||||||||
Income from operations of reportable segments | 3,889 | 4,488 | 7,333 | 9,702 | 4,518 | 7,372 | 10,854 | 11,469 | ||||||||||||||||||||||||
Corporate expenses not allocated to segments | (1,608 | ) | (1,375 | ) | (3,169 | ) | (3,053 | ) | (2,117 | ) | (1,980 | ) | (4,225 | ) | (3,992 | ) | ||||||||||||||||
Total Income from Operations | $ | 2,281 | $ | 3,113 | $ | 4,164 | $ | 6,649 | $ | 2,401 | $ | 5,392 | $ | 6,629 | $ | 7,477 | ||||||||||||||||
Total Assets | December 31, 2017 | June 30, 2017 | ||||||
Private label contract manufacturing | $ | 72,115 | $ | 60,489 | ||||
Patent and Trademark Licensing | 12,472 | 12,122 | ||||||
Total | $ | 84,587 | $ | 72,611 | ||||
December 31, 2021 | June 30, 2021 | |||||||
Total Assets | ||||||||
Private-label contract manufacturing | $ | 99,746 | $ | 95,324 | ||||
Patent and trademark licensing | 27,612 | 24,957 | ||||||
| $ | 127,358 | $ | 120,281 | |||||
Our private labelprivate-label contract manufacturing products are sold both in the U.S. and in markets outside the U.S.U.S., including Europe, Canada, Australia, and Asia, as well as Canada,New Zealand, Mexico and South Africa.Asia. Our primary marketmarkets outside the U.S. is Europe.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’customers’ location, were as follows (in thousands):
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
United States | $ | 16,426 | $ | 13,654 | $ | 31,620 | $ | 28,879 | ||||||||
Markets outside of the United States | 16,909 | 16,905 | 29,789 | 35,747 | ||||||||||||
Total | $ | 33,335 | $ | 30,559 | $ | 61,409 | $ | 64,626 | ||||||||
Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
United States | $ | 25,402 | $ | 23,074 | $ | 48,897 | $ | 42,860 | ||||||||
Markets outside of the United States | 12,325 | 25,009 | 27,170 | 44,949 | ||||||||||||
Total | $ | 37,727 | $ | 48,083 | $ | 76,067 | $ | 87,809 | ||||||||
Products manufactured by NAIEour Swiss subsidiary ("NAIE") accounted for 81%89% of net sales in markets outside the U.S. for the three months ended December 31, 2017,2021 and 79%84% for the six months ended December 31, 2017.2021. Products manufactured by NAIEour Swiss subsidiary ("NAIE") accounted for 60%83% of net sales in markets outside the U.S. for the three months ended December 31, 2016,2020 and 53%85% for the six months ended December 31, 2016.2020. NoNaN products manufactured by NAIE were sold in the U.S. markets during the three month orand six month periods ended December 31, 20172021 and 2016.2020.
Assets and capitalLong-lived assets by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):
December 31, 2021 | June 30, 2021 | |||||||
United States | $ | 38,976 | $ | 21,109 | ||||
Europe | 15,307 | 17,039 | ||||||
Total Long-Lived Assets | $ | 54,283 | $ | 38,148 | ||||
Total assets by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):
December 31, 2021 | June 30, 2021 | |||||||
United States | $ | 74,290 | $ | 67,307 | ||||
Europe | 53,068 | 52,974 | ||||||
Total Assets | $ | 127,358 | $ | 120,281 | ||||
Capital expenditures by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):
Long-Lived Assets | Total Assets | Capital Expenditures | ||||||||||||||||||||||||||||||
Six Months Ended | Six Months Ended December 31, | |||||||||||||||||||||||||||||||
December 31, 2017 | June 30, 2017 | December 31, 2017 | June 30, 2017 | December 31, 2017 | December 31, 2016 | 2021 | 2020 | |||||||||||||||||||||||||
United States | $ | 10,461 | $ | 10,753 | $ | 53,353 | $ | 47,777 | $ | 426 | $ | 1,812 | $ | 19,250 | $ | 1,033 | ||||||||||||||||
Europe | 8,272 | 7,383 | 31,234 | 24,834 | 1,669 | 1,550 | 394 | 2,001 | ||||||||||||||||||||||||
| $ | 18,733 | $ | 18,136 | $ | 84,587 | $ | 72,611 | $ | 2,095 | $ | 3,362 | |||||||||||||||||||||
Total Capital Expenditures | $ | 19,644 | $ | 3,034 | ||||||||||||||||||||||||||||
H.I. Income Taxes
The Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. Among other things, the Act reduces the U.S. federal corporate tax rate to 21% and requires companies to pay a one-time deemed repatriation transition tax on earnings of U.S.-owned foreign subsidiaries that were previously tax deferred. At December 31, 2017, we had not completed our accounting for the tax effects of the Act; however, in certain cases, as described below and in accordance with SAB118, we made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. In other cases, we were not able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes. For the items for which we did determine a reasonable estimate, we recognized a provisional amount as a discrete component of our provision for income taxes. The impact of the Tax Legislation may differ from these estimates, possibly materially, during the one-year measurement period ending December 22, 2018 due to, among other things, further refinement of our calculations, changes in interpretations and assumptions we made, guidance that may be issued and actions we may take as a result of the Act.
To determine our quarterly provision for income taxes, we use an estimated annual effective tax rate, thatwhich 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.
TheOur effective tax rate for the three months ended December 31, 20172021 was 153.1%22.8% and the effective tax rate for the six months ended December 31, 20172021 was 22.6%. Our effective rates differ from the fiscal 97.31%.2022 In comparison, theU.S. federal statutory rate of 21% primarily due to state income taxes. Our effective tax rate for the three months ended December 31, 20162020 was 29.6 %20.8% and the effective tax rate for the six months ended December 31, 20162020 was 7.2%, primarily due to the discrete tax benefit discussed below.
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 could 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 ratesrate at our foreign subsidiary is greater than 18.9%. We assessed this rate, including the implementation of certain tax strategies, and we determined that our effective rate at our foreign subsidiary was greater than 18.9% as of the year ending June 30, 2020. During the first quarter of fiscal 2021, we reassessed our estimated taxes for fiscal 2020 and in the three months ended September 30, 2020 we recorded a reduction to our fiscal 2020 estimated taxes of $0.4 million as a discrete benefit. As a result of this adjustment, our domestic tax return for fiscal 2020 was expected to reflect a net operating loss which, in accordance with the CARES Act, allowed us to carry the loss back to fiscal 2015and fiscal 2016. Such carryback resulted in a rate differential that resulted in the recognition of a permanent tax benefit of $0.3 million during the six months ended December 31, 2017 2020.differ from the estimated U.S. federal statutory rate of 28.06% primarily due to the impact of the Act's required one-time transition tax and the reevaluation of our deferred taxes, offset by the favorable impact of foreign earnings taxed at less than the U.S. statutory rate. As a fiscal taxpayer, our U.S. federal statutory rate for the year ending June 30, 2018 is estimated to be 28.06% and is a blended rate of the historic 35% statutory rate and the newly enacted 21% rate. We expect our U.S. federal statutory rate to be 21% for fiscal years beginning after June 30, 2018.
As part of the Act, we are required to recognize aone-time deemed repatriation transition tax 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. As a result of the Act we recorded a provisional amount for our one-time transition tax liability resulting in an increase in income tax expense during the three and six months ended December 31, 2017 of $1,815,966, which was treated as a discrete expense. In accordance with the provisions of the Act, we will elect to pay this tax over an eight-year period. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when we finalize the calculation at the conclusion of fiscal 2018. As of December 31, 2017, we no longer consider undistributed foreign earnings from NAIE as indefinitely reinvested. As a result, we have recorded $775,000 in estimated foreign withholding taxes on the amounts deemed repatriated under the Act, which was also treated as a discrete expense during the period.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates for each of the jurisdictions in which we operate, and 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 in the period that includes the enactment date. As of December 31, 2017, we remeasured certain deferred tax assets and liabilities based on the tax rates expected to apply in the future. For deferred tax asset and liability balances we expect to reverse during fiscal 2018 we used the blended U.S. statutory rate of 28.06% and for amounts expected to reverse in future periods we used the newly enacted 21% tax rate. However, we are still analyzing certain aspects of the Act and refining our calculations accordingly. This analysis and refinement could potentially affect the measurement of these balances or give rise to new deferred tax amounts. The provisional amount we recorded from our remeasurement of our deferred tax balance was $664,000 and was treated as a discrete expense for the three and six months ended December 31, 2017.
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. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. During the three and six months ended December 31, 2017,2021, there was no change to our valuation allowance.allowance for our deferred tax assets.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates for each of the jurisdictions in which we operate. Deferred tax assets and liabilities are expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled using the tax rates then in effect. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date for such new rates.
We are subject to taxation in the U.S., Switzerland and various U.S. state jurisdictions. Our U.S. tax returns for the fiscal years ended June 30,2014 and forward are subject to examination by U.S. tax authorities and for fiscal yearsyear ended June 30, 20072015 and forward are subject to examination by the U.S. tax authorities. Our state tax returns for the fiscal years ended June 30, 2017 and forward are subject to examination by the state tax authorities. Our Swiss tax filingsreturns for the fiscal year ended June 30, 2020 30,2015and forward are subject to examination by the Swiss tax authorities.
It is our policy to establish reserves based on management’smanagement’s assessment of exposure for certain positions taken in previously filed tax returns that may become payable upon auditexamination by tax authorities. Our tax reserves are analyzed quarterly, and adjustments are made as events occur that we believe warrant adjustments to thethose reserves. There were no0 adjustments to these reserves in the three and six monthsmonth period ended December 31, 2017.2021.
I.J. Treasury Stock
On June2,2011, the Board of Directors authorized the repurchase of up to $2.0 million of our common stock. On February 6, 2015,September 18, 2020, the Board of Directors authorized a $1.0$2.0 million increase to our stock repurchase plan (“Repurchase Plan”), thus bringing the total authorized repurchase amount to $3.0$12.0 million. On May 11, 2015,March 12, 2021, the Board of Directors authorized a $2.0an additional $3.0 million increase to our stock repurchase planthe Repurchase Plan, thus bringing the total authorized repurchase amount to $5.0$15.0 million. On March 28, 2017,January 14, 2022, the Board of Directors authorized a $2.0an additional $3.0 million increase to our stock repurchase planthe Repurchase Plan, thus bringing the total authorized repurchase amount to $7.0$18.0 million. Under the repurchase plan,Repurchase Plan, we may, from time to time, purchase shares of our common stock, depending upon market conditions. When we do so we may purchase the sharesconditions, in open market or privately negotiated transactions.
During thethree and six months ended December 31, 2017 and December 31, 2016, we did not repurchase any shares under this repurchase plan.
During Stock repurchases for the three months ended December 31, 2017,2021 we acquired 7,264 shares in connection with restricted stock shares that vested during that year at a weighted average cost of $10.80 per share and a total cost of $78,000. Duringwere as follows:
Shares | Average Cost | Total Cost (in thousands) | ||||||||||
Shares purchased under Repurchase Plan | 189,702 | $ | 13.32 | $ | 2,527 | |||||||
Shares acquired in connection with stock option exercises | 0 | 0 | 0 | |||||||||
Shares acquired from employees for restricted stock vesting | 0 | 0 | 0 | |||||||||
Total | 189,702 | 0 | $ | 2,527 | ||||||||
Stock repurchases for the six months ended December 31, 2017,2021 we acquired were as follows:
Shares | Average Cost | Total Cost (in thousands) | ||||||||||
Shares purchased under Repurchase Plan | 189,702 | $ | 13.32 | $ | 2,527 | |||||||
Shares acquired in connection with stock option exercises | 0 | 0 | 0 | |||||||||
Shares acquired from employees for restricted stock vesting | 692 | 14.20 | 10 | |||||||||
Total | 190,394 | $ | 2,537 | |||||||||
Stock repurchases for the three months ended December 31, 2016,2020 we acquired 367 shares from employees in connection with restricted stock shares that vested during the period at a weighted average cost of $12.30 per share and a total cost of $5,000. Duringwere as follows:
Shares | Average Cost | Total Cost (in thousands) | ||||||||||
Shares purchased under Repurchase Plan | 144,681 | $ | 9.67 | $ | 1,398 | |||||||
Shares acquired in connection with stock option exercises | 30,442 | 9.95 | 303 | |||||||||
Shares acquired from employees for restricted stock vesting | 7,744 | 7.40 | 57 | |||||||||
Total | 182,867 | 0 | $ | 1,758 | ||||||||
Stock repurchases for the sixthree months ended December 31, 2016,2020 wewere as follows:
Shares | Average Cost | Total Cost (in thousands) | ||||||||||
Shares purchased under Repurchase Plan | 380,071 | $ | 8.25 | $ | 3,136 | |||||||
Shares acquired in connection with stock option exercises | 30,442 | 9.95 | 303 | |||||||||
Shares acquired from employees for restricted stock vesting | 8,436 | 7.34 | 62 | |||||||||
Total | 418,949 | 0 | $ | 3,501 | ||||||||
Stock repurchase costs include commissions and fees.
Shares acquired6,404 shares from employees in connection withfor restricted stock shares that vested during the period at a weighted average cost of $13.09 per sharevesting and a total cost of $84,000.
These sharesstock options exercises were returned to NAIus by the related employees and in return NAIwe paid each employee’s required tax withholding required as a result ofresulting from the vesting of the restricted shares. The valuation of the shares acquired and thereby the number of shares returned to NAIus was calculated based on the closing share price on the date the restricted shares vested.
J.K. Derivatives and Hedging
We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to forecasted product sales denominated in foreign currencies and to other transactions of NAIE, our foreign subsidiary denominated in foreign currencies.subsidiary. As part of our overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, we sometimesmay use foreign exchange contracts in the form of forward contracts. To the extent we enter into such contracts, there can be no guarantee any such contracts will be effective hedges against our foreign currency exchange risk.
As of December 31, 2021, 2017,we had forward contracts designated as cash flow hedges primarily to protect against the foreign exchange risks inherent in our forecasted sales of products at prices denominated in currencies other than the U.S. Dollar. These contracts are expected to be settled through August 2019.2023. For derivative instruments that are designated and qualify as cash flow hedges, we record the effective portion of the gain or loss on the derivative in accumulated other comprehensive income (loss)(“OCI”) as a separate component of stockholders’ equity and subsequently reclassify these amounts into earnings in the period during which the hedged transaction is recognized in earnings.
For foreign currency contracts designated as cash flow hedges, hedge effectiveness is measured using the spot rate. Changes in the spot-forward differential are excluded from the test of hedge effectiveness and are recorded currently in earnings as interest expense or income.revenue. We measure effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item. No hedging relationships were terminated as a result of ineffective hedging for the three and six months ended December 31, 2021 and December 31, 2020.
We monitor the probability of forecasted transactions as part of the hedge effectiveness testing on a quarterly basis. During the three and six months ended December 31, 2021 and December 31, 2020, we did not have any losses or gains related to the ineffective portion of our hedging instruments during the three and six months ended December 31, 2017. During the three and six months ended December 31, 2016, we recorded a $92,000 gain related to the ineffective portion of our hedging instruments to other income. None of our foreign currency forward contracts were terminated as a result of ineffective hedging or forecasted transactions no longer probable of occurring for foreign currency forward contracts. We monitor the probability of forecasted transactions as part of our hedge effectiveness testing on a quarterly basis.instruments.
As of December 31, 2021, 2017,the notional amounts of our foreign exchange contracts designated as cash flow hedges were approximately $52.6$55.7 million (EUR 45.346.5 million). As of December 31, 2017,2021, a net lossgain of approximately $2.7$1.6 million, offset by $0.4 million of deferred taxes, related to derivative instruments designated as cash flow hedges was recorded in OCI. It is expected that $2.0$1.1 million will be reclassified into earnings in the next 12 months along with the earnings effects of the related forecasted transactions.
As ofFor foreign currency contracts December 31, 2017not, designated as cash flow hedges, changes in the fair value of our cash flow hedges was a liability of $2.7 million, of which $2.1 million was classified as a current liability, and $609,000 was classifiedthe hedge are recorded directly to foreign exchange gain or loss in other noncurrent liabilitiesincome in our Consolidated Balance Sheets.an effort to offset the change in valuation of the underlying hedged item. During the three months ended December 31, 2017, we recognized $731,000 of net losses in OCI and reclassified $428,000 of losses from OCI to revenue. During the six months ended December 31, 2017,2021 we recognized $2.9 million of net lossesentered into forward contracts in OCI and reclassified $850,000 of losses from OCIorder to revenue.hedge foreign exchange risk associated with our lease liability at NAIE, which is denominated in Swiss Francs (CHF). As of JuneDecember 31, 2021, 30,2017,$422,000 of the fair valuenotional amounts of our foreign exchange contracts not designated as cash flow hedges was classified in accrued liabilities, and were approximately $5.4 million (CHF 5.0 million).
We are exposed to interest rate fluctuations related to our Consolidated Balance Sheets. During$10 million Term Note with Wells Fargo, which carries a variable interest rate of 1.80% above the SOFR rolling 30-day average. To manage our exposure to this variable rate, on August 23, 2021, we entered into a floored interest rate swap that fixes our all-in rate on this loan to 2.4% for the first three months endedyears of the term loan. Fluctuations in the relation of our contractual swap rate to current market rates are recorded as an asset or liability with an offset to OCI at the end of each reporting period. Interest expense is adjusted for the difference between the actual SOFR spread and the swap contractual rate such that our effective interest expense for each period is equal to our hedged rate of December 31, 2016, 2.4%.we recognized $2.3 million of net gains in OCI and reclassified $213,000 of gains from OCI to revenue. During the six months ended December 31, 2016, we recognized $1.8 million of net gains in OCI and reclassified $271,000 of gains from OCI to revenue.
K.L. Contingencies
From time to time, we become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters may relate to product liability, employment, intellectual property, tax, regulation,regulatory, contract or other matters. The resolution of these matters as they arise will may be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. While unfavorable outcomes are possible, based on available information, we generallycurrently do not believe the resolution of these matters will result in a material adverse effect on our business, consolidated financial condition, or results of operations. However, a settlement payment or unfavorable outcome could be greater than we currently anticipate and if so, could adversely impact our results of operations. Our evaluation of the likely impact of these actions could change in the future and we could have unfavorable outcomes we do not expect.
COVID-19 Pandemic
We continue to monitor and evaluate the risks to public health and the impact on overall global business activity related to the COVID-19 pandemic, including its potential impacts on our employees, customers, suppliers and financial results. As the situation remains fluid, it is difficult to predict the duration and scope of the pandemic and its impact on our business. However, it may result in a material adverse impact to our financial position, operations and cash flows if conditions persist or worsen.
M. Subsequent Event
On January 14, 2022, the Board of Directors authorized an additional $3.0 million increase to the Repurchase Plan, thus bringing the total authorized repurchase amount to $18.0 million. Under the Repurchase Plan, we may, from time to time, purchase shares of our common stock, depending upon market conditions, in open market or privately negotiated transactions.
On February 8, 2022, we entered into a second amendment to our credit facility with Wells Fargo that is effective January 31, 2022 and modifies the annual limit imposed upon the company’s ability to repurchase stock are issue dividends. This amendment increased this limit from $5.0 million annually to $7.0 million annually.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to help you understand our financial condition and results of operations for the three and sixsix months ended December 31, 2017.2021. You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to the condensed consolidated financial statements included under Item 1 in this Quarterly Report, as well as the risk factors and other information included in our 20172021 Annual Report and other reports and documents we file with the SEC. Our future financial condition and results of operations will vary from our historical financial condition and results of operations described below based on a variety of factors.
Executive Overview
The following overview does not address all of the matters covered in the other sections of this Item 2 or other items in this Quarterly Report ornor does it contain all of the information that may be important to our stockholders or the investing public. You should read this overview in conjunction with the other sections of this Item 2 and this Quarterly Report.
Our primary business activity is providing private labelprivate-label contract manufacturing services to companies that market and distribute vitamins, minerals, herbsherbal 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 labelprivate-label contract manufacturing customers and thus sensitivesubject to variations in the timing of such customers’customers’ orders, which variations in turn have beenis impacted by such customers’ internal marketing programs, supply chain management, entry into new markets, new product introductions, the demand for such customers’ products, and general industry and economic conditions. Our revenue also includes raw material sales and royalty and licensing revenue generated from our patent estate pursuant to license and supply agreements with third parties, forgranting them the right to use our patents, trademarks and other intellectual property in connection with the distribution and use of the ingredient known as beta-alanine sold under our CarnoSyn® and SR CarnoSyn® trademarks.
A cornerstone of our business strategy is to achieve long-term growth and profitability and to diversify our sales base. We have sought and expect to continue to seek to diversify our sales by developing relationships with additional, quality-oriented, private labelprivate-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 these licensees.
During the first six months of fiscal 2018,2022, our net sales were 5%13% lower than in the first six months of fiscal 2017. Private label2021. Private-label contract manufacturing sales increased 1%decreased 18% primarily due primarily to the sale of new productslower sales to existing customers and higher volumes of current productsour largest customer. Sales to existing customers, partially offset by the timing and shipment of orders of current products to existing customers and discontinuedthis customer relationships. Our first quarter fiscal 2018 contract manufacturing sales declined 19%decreased 46% as compared to the same period in the prior year primarily from reduced orders from our largest customer for specific productswith a majority of the decrease associated with an inventory reduction program. During our second quarter of fiscal 2018, our contract manufacturing sales increased 23% as comparedprogram mostly related to the comparable prior year period primarily due to an increasetheir European business. The decrease in sales to our largest customer was partially offset by increased sales from other existing customers and sales to historical levels and shipment ofa new products under our previously announced expanded relationship. customer. Revenue concentration risk for our largest private labelprivate-label contract manufacturing customer as a percentage of our total net sales increased to 53%decreased from 56% for the six months ended December 31, 2017 compared to 50% in the first six months of fiscal 2017.2021 to 35% for the first six months fiscal 2022. We expect our annualized fiscal 2018year 2022 revenue concentration for this customer to be higherlower than fiscal 2017.year 2021.
During the first six months of fiscal 2018, CarnoSyn® beta-alanine2022, patent and trademark licensing revenue decreased 27%increased 62% to $9.8$8.8 million, as compared to $13.4revenue of $5.4 million for the first six months of fiscal 2017.2021. The decreaseincrease in beta-alaninepatent and trademark licensing revenue during the first six months of fiscal 2022 was primarily due to decreased materialincreased shipments to existing customers related to athletic activities and gyms reopening in accordance with easing COVID-19 restrictions across the USA as a result of market and seasonal factors and lower average material sales prices. During the quarter ended December 31, 2017, the sports nutrition retail market conditions declined most notablycompared to significant restrictions in athletic activities in the standard “brickfirst and mortar”second quarter of fiscal 2021 combined with sales channels as products transitioned to higher levels of internet based sales. This transition resulted in excess inventory in certain channels and delayed the re-order rates for many of our customer brands. Additionally, while we still have active patents covering instant release CarnoSyn® beta-alanine, we experienced increased competition from companies selling generic beta-alanine during the current quarter resulting in certain customers discontinuing the use of our CarnoSyn® beta-alanine. In addition to legal actions we have prosecuted and others we may institute, to offset this decline, we have increased our sales and marketing activities to consumers, customers, potentialnew customers and brand owners on multiple platformshigher average sales prices.
We continue to promoteinvest in research and reinforce the features and benefits of utilizing CarnoSyn® beta-alanine. As we enter our third quarter ending March 31, 2018, our re-order rates have improveddevelopment for many of our customer brands suggesting improved sports nutrition retail market conditions. Additionally, our SR CarnoSyn® raw material sales continued to rise during the current quarter as more brands adopted product offerings of this effectivesustained release delivery system. There canWe believe SR CarnoSyn® may provide a unique opportunity within the growing Wellness and Healthy Aging markets. We believe our recent efforts to refine our formulations and product offerings will be no assurance that our salespositively received and marketing efforts or the recent apparent improvementresult in retail market conditions will reverse or decelerate potential future declines of oursignificant opportunity for increased SR CarnoSyn® beta-alanine sales.
To protect our CarnoSyn® business and its underlying patent estate,our patents, trademarks and other intellectual property, we incurred litigation and patent compliancecompliance expenses of approximately $1.7$0.2 million during the first six months of fiscal 2018 and $2.02022 as compared to $0.7 million during the comparable period in fiscal 2017. We describe our efforts2021. The decrease in these legal expenses on a year over year basis was primarily due to protect our patent estate in more detail under Item 1the successful resolution of Part II of our 2017 Annual Report.several cases that were settled. Our ability to maintain or further increase our beta-alanine royalty and licensing revenue will depend in large part on our ability to develop a market for our sustained release form of beta-alanine marketed under our SR Carnosyn® tradename, maintenance ofCarnoSyn® trademark, maintain our patent rights, the availability ofobtain the raw material beta-alanine when and in the amounts needed, the ability to expand distribution of beta-alanine to new and existing customers, the ability to further commercialize our existing patents, and the continued compliance by third parties with our license agreements and our patent, trademark and trademarkother intellectual property rights. During the remainder of 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, along with the continued challenges with supply chain and staffing shortages, including challenges from COVID-19 absences, we now anticipate our fiscal 2022 consolidated net sales will be flat to slightly up as compared to fiscal 2021. We also anticipate we will generate operating income between 8.0% and 11.0% of net sales for our fiscal year ending June 30, 2022. As we previously estimted it would, sales and profitability during the first half of fiscal 2022 declined when compared to the same period of fiscal 2021 primarily related to lower sales to our largest contract manufacturing customer. During the second half of fiscal 2022, we expect net sales to increase 10.0% to 13.0% as compared to the same period in fiscal 2021, and operating income to increase to between 8.0% to 11.0% of net sales. The improvement in net sales and operating profitability is expected to be generated from continued growth from sales and improved sales mix and staffing levels. There can be no assurance our expectations will result in the currently anticipated increase in 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 materials included in the products we sell, or to meet delivery requirements and commitments; | |
● | Limitations on the ability of our employees to perform their work due to illness caused by the pandemic or due to other restrictions on our employees to keep them safe and the increased cost of measures taken to ensure employee health and safety; | |
● | Limitation on the availability of qualified individuals to adequately staff our manufacturing facilities; | |
● | Limitations on the ability of carriers to deliver materials to us or deliver our products to customers;Limitations on the ability of our suppliers to manufacture and meet timelines associated with capital improvement projects; | |
● | Limitations on the ability of our customers to conduct their business and purchase our products and services; and | |
● | Limitations on the ability of our customers to pay us on a timely basis. |
We will continue to actively monitor the situation and may take further actions to alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders. While we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we believe we will be able to remain operational and our working capital will be sufficient for us to remain operational even as the longer term consequences of this pandemic become known.
During the remainder of fiscal 2018, year 2022, we also plan to continue our focus on:
Leveraging our state-of-the-art, certified facilities to increase the value of the goods and services we provide to our highly valued private-label contract manufacturing customers, and develop relationships with additional quality oriented customers;
Expanding the commercialization of our beta-alanine patent estate through raw material sales, developing a market for our sustained release form of beta-alanine marketed under our SR Carnosyn® tradename, new contract manufacturing opportunities, license agreements and protecting our proprietary rights;
• | Leveraging our state-of-the-art, certified facilities to increase the value of the goods and services we provide to our highly valued private-label contract manufacturing customers, and to assist us in developing relationships with additional quality oriented customers; | |
• | Expanding the commercialization of our beta-alanine patent estate through raw material sales, developing a new sales distribution channel under the Wellness and Healthy Aging category for our sustained release form of beta-alanine marketed under our SR CarnoSyn® trademark, exploiting new contract manufacturing opportunities license and royalty agreements, and protecting our proprietary rights; and | |
• | Improving operational efficiencies and managing costs and business risks to improve profitability. |
Discussion of Critical Accounting Policies and Estimates
The preparation of our financial statements requires that we make estimates and assumptions that affect the amounts reported in our financial statements and their accompanying notes. We have identified certain policies we believethe following as our most critical accounting estimates, which are those that are most important to the portrayal of ourthe Company’s financial condition and results, and that require management’s most subjective and complex judgments. Information regarding our other significant accounting estimates and policies are disclosed in Note 1 of operations. These policies requireItem 1 of this report and as disclosed in the application2021 Annual Report.
Revenue Recognition — Revenue is measured as the net amount of significant judgment by our management. We baseconsideration expected to be received in exchange for fulfilling one or more performance obligations. For certain contracts with volume rebates and discounts, our estimates on our historical experience, industry standards,of future sales used to assess the volume rebate and various other assumptions we believediscount estimates are reasonable under the circumstances. Actual results couldsubject to a high degree of judgement and may differ from these estimates under different assumptions or conditions. An adverse effect on our financial condition,actual sales due to, among other things, changes in financial condition,customer orders and results of operations could occur if circumstances change that alter the various assumptions or conditions used in such estimates and assumptions.
Our critical accounting policies are discussed under Item 7 of our 2017 Annual Report and recent accounting pronouncements are discussed under Item A to our Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report. There have been no significant changes to these policies or pronouncements during the six months ended December 31, 2017.raw material availability.
Results of Operations
The results of our operations for the three and six months ended December 31 were as follows (in(dollars in thousands):
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | % Change | 2017 | 2016 | % Change | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||||||
Private label contract manufacturing | $ | 29,355 | $ | 23,864 | 23 | % | $ | 51,577 | $ | 51,243 | 1 | % | $ | 33,677 | $ | 45,326 | (26 | )% | $ | 67,271 | $ | 82,373 | (18 | )% | ||||||||||||||||||||||||
Patent and trademark licensing | 3,980 | 6,695 | (41 | )% | 9,832 | 13,383 | (27 | )% | 4,050 | 2,757 | 47 | % | 8,796 | 5,436 | 62 | % | ||||||||||||||||||||||||||||||||
Total net sales | 33,335 | 30,559 | 9 | % | 61,409 | 64,626 | (5 | )% | 37,727 | 48,083 | (22 | )% | 76,067 | 87,809 | (13 | )% | ||||||||||||||||||||||||||||||||
Cost of goods sold | 26,713 | 24,064 | 11 | % | 48,417 | 50,462 | (4 | )% | 31,181 | 38,409 | (19 | )% | 61,240 | 72,130 | (15 | )% | ||||||||||||||||||||||||||||||||
Gross profit | 6,622 | 6,495 | (2 | )% | 12,992 | 14,164 | (8 | )% | 6,546 | 9,674 | (32 | )% | 14,827 | 15,679 | (5 | )% | ||||||||||||||||||||||||||||||||
Gross profit % | 19.9 | % | 21.3 | % | 21.2 | % | 21.9 | % | 17.4 | % | 20.1 | % | 19.5 | % | 17.9 | % | ||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | 4,341 | 3,382 | 28 | % | 8,828 | 7,515 | 17 | % | 4,145 | 4,282 | (3 | )% | 8,198 | 8,202 | (0 | )% | ||||||||||||||||||||||||||||||||
% of net sales | 13.0 | % | 11.1 | % | 14.4 | % | 11.6 | % | 11.0 | % | 8.9 | % | 10.8 | % | 9.3 | % | ||||||||||||||||||||||||||||||||
Income from operations | 2,281 | 3,113 | (27 | )% | 4,164 | 6,649 | (37 | ) | 2,401 | 5,392 | (55 | )% | 6,629 | 7,477 | (11 | )% | ||||||||||||||||||||||||||||||||
% of net sales | 6.8 | % | 10.2 | % | 6.8 | % | 10.3 | % | 6.4 | % | 11.2 | % | 8.7 | % | 8.5 | % | ||||||||||||||||||||||||||||||||
Total other income | 202 | 387 | (48 | )% | 310 | 437 | (29 | )% | ||||||||||||||||||||||||||||||||||||||||
Other expense | (9 | ) | (806 | ) | (99 | )% | (35 | ) | (1,127 | ) | (97 | )% | ||||||||||||||||||||||||||||||||||||
Income before income taxes | 2,483 | 3,500 | (29 | )% | 4,474 | 7,086 | (37 | )% | 2,392 | 4,586 | (48 | )% | 6,594 | 6,350 | 4 | % | ||||||||||||||||||||||||||||||||
% of net sales | 7.4 | % | 11.5 | % | 7.3 | % | 11.0 | % | 6.3 | % | 9.5 | % | 8.7 | % | 7.2 | % | ||||||||||||||||||||||||||||||||
Provision for income taxes | 3,801 | 1,034 | 268 | % | 4,358 | 2,130 | 105 | % | 545 | 954 | (43 | )% | 1,491 | 460 | 224 | % | ||||||||||||||||||||||||||||||||
Net (loss) income | $ | (1,318 | ) | $ | 2,466 | (153 | )% | $ | 116 | $ | 4,956 | (98 | )% | |||||||||||||||||||||||||||||||||||
Net income | $ | 1,847 | $ | 3,632 | (49 | )% | $ | 5,103 | $ | 5,890 | (13 | )% | ||||||||||||||||||||||||||||||||||||
% of net sales | (4.0 | )% | 8.1 | % | 0.2 | % | 7.7 | % | 4.9 | % | 7.6 | % | 6.7 | % | 6.7 | % | ||||||||||||||||||||||||||||||||
Private-label contract manufacturing net sales increased 23%decreased 26% during the three months ended December 31, 20172021 and 1%18% during the six months ended December 31, 2017, when compared to the same periods in the prior year. These increases were due primarily to the sale of new products to existing customers and higher volumes of current products to existing customers partially offset by the timing and shipment of orders of current products to existing customers and discontinued customer relationships. Net sales to our largest customer represented a majority of the increase in our private label contract manufacturing sales during the three months ended December 31, 2017 and were primarily the result of increased orders of current products and orders of new products.
Net sales from our patent and trademark licensing segment decreased 41% during the three months ended December 31, 2017 and decreased 27% during the six months ended December 31, 2017,2021, when compared to the same periods in the prior year. The decrease in beta-alanine raw material sales during the three months ended December 31, 2022 was primarily due to lower sales to our largest customer. Sales to our largest customer decreased 48% for the three months ended December 31, 2021 as compared to the same period in fiscal 2021 and was driven by an inventory reduction program mostly related to their European business. The decrease in sales during the first six months of fiscal 2022 was primarily due to decreased sales from our largest customer partially offset by increased sales from other existing customers and sales to a new customer. Sales to our largest customer decreased 46% for the six months ended December 31, 2021 as compared to the same period in the prior year with a majority of the decrease associated with their European business.
Net sales from our patent and trademark licensing segment increased 47% during the three months ended December 31, 2021 and 62% during the six months ended December 31, 2021, when compared to the same periods in the prior year. The increase in patent and trademark licensing revenue during the second quarter and the first six months of fiscal 2022 was primarily due to increased shipments to existing customers related to athletic activities and gyms reopening in accordance with easing COVID-19 restrictions across the USA as compared to significant restrictions in athletic activities in the second quarter and first six months of beta alanine as a result of marketfiscal 2021. The increase in the three and seasonal factorssix months ended December 31, 2021 also included sales to new customers and lowerhigher average sales prices for the material.
prices. The change in gross profit margin betweenfor the three and six month periodsmonths ended December 31, 20172021, was as follows:
Three Months | Six Months | Three Months | Six Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
Contract manufacturing(1) | 3.2 | % | 0.8 | % | (5.9 | )% | (2.3 | )% | ||||||||
Patent and trademark licensing(2) | (4.6 | ) | (1.6 | ) | 3.2 | 3.9 | ||||||||||
Total change in gross profit margin | (1.4 | %) | (0.8 | %) | (2.7 | )% | 1.6 | % | ||||||||
1 |
|
2 | Patent and trademark licensing gross profit margin as a percentage of consolidated net sales increased 3.2 percentage points during the three months ended December 31, |
|
|
Selling, general and administrativeadministrative expenses increased $1.0decreased $0.2 million, or 28%3%, during the three months ended December 31, 20172021, and increased $1.3 million, or 17%,remained flat during the six months ended December 31, 2017,2021, as compared to the comparable prior year periods. These increases were primarily due to increased marketing, advertising and research and development costs supporting our CarnoSyn® and SR CarnoSyn® brands and increased compensation costs partially offset by lower litigation costs.
Other income,expense, net, decreased $0.2$0.8 million during the three months ended December 31, 20172021, and decreased $0.1$1.1 million during the six months ended December 31, 2017,2021, when compared to the comparable periods during the prior year periods. Theseyear. The decreases were primarily due to the favorable fiscal 2022 foreign exchange fluctuations.revaluation activity associated with our balance sheet and the fluctuations in unhedged foreign currency rates when compared to the same activity in fiscal 2021.
Our income tax expense increased $2.8decreased $0.4 million or 268%, during the three months ended December 31, 20172021 and increased $2.2$1.0 million or 105%, during the six months ended December 31, 2017, as2021, when compared to the comparable prior year periods.same periods in fiscal 2021. The increases were primarily due to the discretedecrease in income tax expense amounts recorded as a result of the Tax Cuts and Jobs Act enacted on December 22, 2017. Among other things, the Act reduces the U.S. federal corporate tax rate to 21% and requires companies to pay a one-time deemed repatriation transition tax on earnings of U.S.-owned foreign subsidiaries that were previously tax deferred. At December 31, 2017, we have not completed our accounting for all of the tax effects of the Act; however, in certain cases, as described below and in accordance with SAB 118, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes. For the items for which we were able to determine a reasonable estimate, we recognized a provisional amount as a discrete component of our provision for income taxes. The impact of the Act may differ from these estimates, possibly materially, during the one-year measurement period ending December 22, 2018 due to, among other things, further refinement of our calculations, changes in the interpretations and assumptions we made, guidance that may be issued and actions we may take as a result of the Act.
Included in our tax expense for the three and six months ended December 31, 2017 is $3.3 million of discrete tax items related to the Act. The discrete tax items include:
|
|
|
|
|
|
Our effective tax rate, excluding the impact of the above noted discrete items, for the three months ended December 31, 2017 was 21.9% as compared to an effective tax rate of 29.6% for the three months ended December 31, 2016. As a fiscal taxpayer, our U.S. federal statutory rate for the year ended June 30, 2018 is estimated to be 28.06% and is a blended rate of the historic 35% statutory rate and the newly enacted 21% rate. The year over year improvement in our second fiscal quarter effective tax rate is primarily due to the reduction of the U.S. federal tax rate used in our estimated tax calculation, which reduced to a blended rate of 28.06% as compared to 34.0% used in the same period in the prior year. In addition, as this rate reduction was applied on a year to date basis the second quarter of 2018 tax expense received a benefit from the application of the lower ratefiscal 2022 was primarily related to the first quarter of fiscal 2018decrease pre-tax income thus further reducing the effective tax rate for the quarter. Our effective tax rate, for the six months ended December 31, 2017 excluding the impact of the above noted discrete items, was 24.6% as compared to an effective tax rate of 30.1% for the six months ended December 31, 2017. The improvement in our year to date fiscal 2018 effective tax rate as compared to the same period in the prior year isyear. The increase during the first six months of fiscal 2022 was primarily due to the reduction of the U.S. federal tax rate used in our estimated tax calculation, which reducedrelated to a blended ratediscrete tax benefit of 28.06% as compared to 34.0% used$0.9 million recorded during the six months ended December 31, 2020 without a corresponding discrete item in the six months ended December 31, 2021 and an increase in taxes associated with slightly higher pre-tax income and a marginally higher effective tax rate calculationexcluding the same period in the prior year.discrete item.
We expect our U.S. federal statutory rate to be 21% for fiscal years beginning after June 30, 2018, which should further reduce our effective tax rate on an annualized basis.
Liquidity and Capital Resources
Our primary sources of liquidity and capital resources are cash flows provided by operating activities and the availability of borrowings under our credit facility. Net cash providedused by operating activities was $4.7$0.6 million duringfor the six months ended December 31, 2017 as2021 compared to net cash provided by operating activities of $5.0$4.7 million duringin the comparable period in the prior fiscal year.
During the six months endedAt December 31, 2017,2021, changes in accounts receivable, used $4.5consisting of amounts due from our private-label contract manufacturing customers and our patent and trademark licensing activities, provided $2.8 million in cash compared to having provided $3.4 millionusing $61,000 of cash during the comparable six month period in the prior year. The decreaseincrease in cash providedused by accounts receivable during the six month periodmonths ended December 31, 20172021 primarily resulted from the timing of sales and the related collections. Days sales outstanding was 3240 days during the six months ended December 31, 2017 and 332021 as compared to 36 days duringfor the six months ended December 31, 2016.prior year period.
During the six months ended December 31, 2017, changesChanges in inventory used $4.2 million in cash compared to having provided $3.7 million in the comparable prior year period. The increase in cash provided by inventory during the period ended December 31, 2017 was primarily related to inventory purchased to support increased sales to our largest private label contract manufacturing customer and timing of orders and shipments. Changes in accounts payable and accrued liabilities provided $6.9$4.8 million in cash during the six months ended December 31, 20172021 compared to havingusing $6.5 million in the comparable prior year period. The change in cash related to inventory during the six months ended December 31, 2021 was primarily related to the difference in the amount and timing of orders and anticipated sales as compared to same period in the prior year. Changes in accounts payable and accrued liabilities used $6.7$3.8 million in cash during the six months ended December 31, 2021 compared to providing $1.1 million during the six months ended December 31, 2016.2020. The change in cash flow activity related to accounts payable and accrued liabilities is primarily due to inventory associated with increased sales associated with our largest customer and timing of inventory receipts and payments.
During the six months ended December 31, 2017, NAIE’s operations provided $2.1 million of our operating cash flowwas primarily due to the timing of inventory receipts payments and sales.payments.
Cash used in investing activities duringin the six months ended December 31, 20172021 was $3.6$19.6 million compared to $3.3$3.0 million duringin the comparable six month period last year.prior year period. The primary reason for the change iswas due to the conversionpurchase of $1.5 million of accounts receivable into a note receivablenew manufacturing and warehouse facility in Carlsbad, CA during the first quarter of fiscal 2018. This reduction was partially offset by lower capital equipment purchases of $2.1 million during the first half of fiscal 2018 as compared to $3.3 million during the same six month period of fiscal 2017. Capital expenditures for both years were primarily for manufacturing equipment used in our Vista, California and Manno, Switzerland facilities.2022.
Cash used inprovided by financing activities duringfor the sixsix months ended December 31, 20172021, was $7.4 million, compared to $3.5 million used in the comparable prior year period. The difference is primarily due to borrowings related to the purchase of our new manufacturing and warehouse facility in Carlsbad, CA, offset by the difference in treasury shares returned to NAI by employees whose restricted stock vested during the quarter. In return NAI paid each employee's required tax withholding.repurchase activity.
We did not have any consolidated debt as of DecemberAt December 31, 2017 or June 30, 2017.
We have a Credit Agreement with Wells Fargo Bank, N.A. The Credit Agreement provides us2021 we had $9.9 million due in connection with a credit line of upterm loan related to $10.0our recently acquired manufacturing and warehouse facility and we also had a $20.0 million and matures on February 1, 2020. Theworking capital line of credit may be usedavailable to finance working capital requirements. On September 29, 2017,us under which we executed an amendment tohad no borrowings outstanding. During the Credit Agreement, that now allows us to make loans or advances to third parties in amounts not exceeding $1.5 million. We executed this amendment in order to issue a note receivable of $1.5 million to a customer. There is no commitment fee under this agreement. There are no amounts currently drawn under the line of credit.
Under the terms of the Credit Agreement, borrowings are subject to eligibility requirements including maintaining (i) a ratio of total liabilities to tangible net worth of not greater than 1.25 to 1.0 at any time; and (ii) a ratio of total current assets to total current liabilities of not less than 1.75 to 1.0 at each fiscal quarter end. Any amounts outstanding under the line of credit will bear interest at a fixed or fluctuating interest rate as elected by NAI from time to time; provided, however, that if the outstanding principal amount is less than $100,000 such amount shall bear interest at the then applicable fluctuating rate of interest. If elected, the fluctuating interest rate per annum would be equal to 1.25% above the daily one month LIBOR rate as in effect from time to time during the period loan amounts are outstanding. If a fixed interest rate is elected, the interest rate would equal a per annum rate of 1.25% above the LIBOR rate in effect on the first day of the term for which the fixed rate is elected. 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 (calculated by comparing the fixed rate to the variable rate that would have been applied, had it been elected) for each month from the month of prepayment through the month in which the then applicable fixed rate term matures.
Our obligations under the Credit Agreement are secured by our accounts receivable and other rights to payment, general intangibles, inventory, equipment and fixtures. We also have a foreign exchange facility with Wells Fargo Bank, N.A. that is in effect until January 31, 2019, and a similar facility with Bank of America, N.A. that is in effect until August 15, 2019.
Onsix months ending December 31, 2017,2021, we were in compliance with all of the financial and other covenants required under the Credit Agreement.
Refer to Item 1, Note F., "Debt," in this Quarterly Report, for terms of our Credit Agreement.
As of December 31, 2017,2021, we had $28.8$19.4 million in cash and cash equivalents and $10.0 million available under our credit facilities.equivalents. We believe our available working capital, cash, and cash equivalents, credit facility and potential cash flows from operations will be sufficient to fund our current working capital needs, and capital expenditures, and minimum debt and interest payments through at least the next 12 months. Our capital requirements for fiscal 2022 include amounts that will be required to complete our planned retrofit of the facility we purchased in August 2021 that is planned to become a powder blending, packaging, and storage facility.
Off-Balance Sheet Arrangements
As of December 31, 2017,2021, we did not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that have or are reasonably likely to have a material current or future adverse effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses that are or could be material to investors.
Recent Accounting Pronouncements
Recent accounting pronouncements are discussed in the notes to our consolidated financial statements included under Item 1, Note A. of this Quarterly Report. Other than those pronouncements, we are not aware of any other pronouncements that materially affect our financial position or results of operations.
ITEM 4.CONTROLS AND PROCEDURES
We maintain certain disclosure controls and procedures that are prescribedas defined under the Securities Exchange Act of 1934. These controls and proceduresThey are designed to help ensure that material information is: (1) gathered and communicated to our management, including our principal executive and financial officers, in a manner that allows for timely decisions regarding required disclosures; and (2) recorded, processed, summarized, reported and filed with the SEC as required under the Securities Exchange Act of 1934 and within the time periods specified by the SEC.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (principal financial and accounting officer), evaluated the effectiveness of the design and operation of our disclosure controls and proceduresprocedures as of December 31, 2017.2021. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2017 our disclosure controls and procedures were effective for their intended purpose described above.above as of December 31, 2021.
There were no changes toin our internal controlscontrol over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarterly period ended December 31, 20172021 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
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 by us.resources. While unfavorable outcomes are possible, based on available information, we generallycurrently do not believe the resolution of these matters, even if unfavorable, will result in a material adverse effect on our business, consolidated financial condition, or results of operations. However, a settlement payment or unfavorable outcome could adversely impact our results of operations. Our evaluation of the likely impact of these actions could change in the future and we could have unfavorable outcomes we do not expect. An unexpected settlement expense or an unexpected unfavorable outcome of a matter could adversely impact our results of operations.
As of February 13, 2018, except as described below,9, 2022, neither NAI nor its subsidiaryNAIE were a party to any material pending legal proceeding nor was any of our property the subject of aany material pending legal proceeding. We are currently involved in several legal matters in the ordinary course of our business, each of which is related to enforcing our intellectual property rights. Some of these matters are summarized below.business.
In 2011, NAI filed a lawsuit against Woodbolt Distribution, LLC, also known as Cellucor (“Woodbolt”), and both NAI and Woodbolt filed additional lawsuits and countersuits against each other. NAI and Woodbolt subsequently settled all of the lawsuits between them, but not before the United States Patent and Trademark Office (“USPTO”) at Woodbolt’s request rejected the claims of two NAI patents. The rulings rejecting the claims of two NAI patents were subsequently confirmed by the Patent Trial and Appeal Board (PTAB) at the USPTO. NAI filed Notices of Appeal with the U.S. Court of Appeals for the Federal Circuit requesting that certain findings of the PTAB's be reversed. No hearing date has been set by the Court. Both NAI patents rejected by the USPTO expired in August 2017.
On September 18, 2015, NAI filed a complaint against Creative Compounds, LLC, alleging various claims including (1) violation of Section 43 of the Lanham Act, (2) violation of California's Unfair Competition Law, (3) violation of California's False Advertising Law, (4) Trade Libel and Business Disparagement and (5) Intentional Interference with Prospective Economic Advantage. Subsequently, NAI and defendant resolved their disputes and entered into settlement and the case was dismissed.
On August 24, 2016, NAI filed a separate complaint against Creative Compounds, LLC, alleging infringement of U.S. patent 7,825,084. On October 5, 2016, Creative filed its answer and counterclaims. On January 19, 2017, NAI filed a Motion to Amend the Complaint, to add allegations of infringement of U.S. patents 5,965,596, 7,504,376, 8,993,610 and 8,470,865, and adding the following additional parties: Core Supplement Technology, Inc., Honey Badger LLC, and Myopharma, Inc. The Court granted NAI's motion. On May 2, 2017, the Court issued a revised scheduling order and set a trial date for July 31, 2018. On July 19, 2017, Creative filed a motion for judgment on the pleadings to dismiss the patent infringement claims with prejudice, On September 5, 2017, the Court granted Creative's motion, which was a non-final decision and subject to later appeal to the U.S. Court of Appeals for the Federal Circuit. NAI has stated it will appeal the District Court rulings. The remaining non-patent claims pending against other defendants were not affected. On October 16, 2017, defendant Core Supplement Technology, Inc., filed a Notification of Bankruptcy with the Court. On October 17, 2017, NAI and defendant Honey Badger LLC filed a voluntary stipulation of dismissal, which the Court granted on October 20, 2017. On October 31, 2017, NAI and defendant Myopharma, Inc. filed a voluntary stipulation of dismissal, which the Court granted on November 6, 2017. On November 9, 2017, NAI and Creative Compounds filed a joint motion to dismiss, which the Court granted on November 20, 2017. On November 21, 2017, NAI and Core Supplement Technology, Inc. filed a joint motion to dismiss, which the Court granted on November 27, 2017. On December 8, 2017, NAI filed a Notice of Appeal to the U.S. Court of Appeals for the Federal Circuit regarding the patents asserted against the defendants. NAI's deadline to submit its opening brief to the Federal Circuit is currently April 13, 2018. No hearing date has been set.
On July 6, 2016, NAI filed a complaint against Allmax Nutrition, Inc. in U.S. District Court for the Southern District of California, alleging (1) infringement of U.S. patents 5,965,596, 6,172,098, 7,825,084 and RE 45,947, (2) violation of Section 32 of the Lanham Act, and (3) copyright infringement. On October 19, 2016, NAI filed an amended complaint adding HBS International Corp., Allmax's exclusive distributor, as a co-defendant and to add a civil conspiracy claim. On May 2, 2017, the Court issued a scheduling order setting a trial date for July 31, 2018. On April 25, 2017, defendants filed a motion for judgment on the pleadings and a motion to dismiss as to NAI's trademark and patent infringement and civil conspiracy claims. On June 26, 2017, the Court granted Defendants’ motions, dismissing NAI's patent infringement claim with prejudice and dismissing the trademark and civil conspiracy claims without prejudice. NAI filed a Second Amended Complaint on July 10, 2017. On August 29, 2017, the Court denied NAI's motion to partially reconsider the dismissal of the patent infringement claim, which is a non-final decision and subject to later appeal to the U.S. Court of Appeals for the Federal Circuit. NAI has stated it will appeal the District Court rulings. On August 30, 2017, the Court denied Defendants' motion to dismiss NAI's trademark and conspiracy claims. On September 29, 2017, both defendants filed their amended answers. Defendant HBS International Corp. also asserted a counterclaim for tortious interference with contract. NAI filed its response to the asserted counterclaim on November 10, 2017. The parties subsequently engaged in settlement discussions. On December 22, 2017, NAI and defendants filed a joint stipulation of dismissal of the remaining claims, which the Court granted on January 2, 2018.
On September 16, 2016, NAI filed a complaint against Hi-Tech Pharmaceuticals, Inc. d/b/a ALR Industries, APS Nutrition, Innovative Laboratories, Formutech Nutrition, LG Sciences and Sports 1 in U.S. District Court for the Southern District of California, alleging (1) infringement of U.S. patents 5,965,596, 7,825,084, 8,993,610 and RE 45,947, (2) violation of Section 32 of the Lanham Act and (3) breach of contract. On May 2, 2017, the Court issued a scheduling order setting a trial date for July 31, 2018. On July 10, 2017, Defendants filed a motion for judgment on the pleadings to dismiss the patent infringement claims with prejudice. On September 5, 2017, the Court granted Defendants' motion, which is a non-final decision and subject to later appeal to the U.S. Court of Appeals for the Federal Circuit. NAI has stated it will appeal the District Court rulings. The remaining non-patent claims pending against the Defendants were not affected. On September 28, 2017, in a separate matter not involving NAI, the United States of America filed a First Superseding Criminal Indictment against defendants Hi-Tech Pharmaceuticals, Inc and its Chief Executive Officer, Jared Wheat. United States v. Hi-Tech Pharmaceuticals, et al., No.1:17-CR-0229 (N.D. Ga. 2017). On or about October 4, 2017, items in the possession of Hi-Tech were seized pursuant to a search warrant, including the documentation relevant to this case. In light of this development, the parties moved the Court on November 3, 2017, seeking an order staying all proceedings in the pending action until disposition of United States v. Hi-Tech Pharmaceuticals, et al., 1:17-CR-00229 (N.D. Ga 2017), or at a minimum, until the documents relevant to this case can be retrieved by the defendants. The Court granted the parties' motion to stay on November 9, 2017. The case remains stayed as of this date.
Although we believe our claims in the above litigation matters are valid, thereThere is no assurance weNAI will prevail in these litigation matters or in similar proceedings weNAI or others may initiate or that our litigation expenses will not be greater than anticipated.
When evaluating our business and future prospects you should carefully consider the risks describeddescribed under Item 1A of our 20172021 Annual Report, as well as the other information in our 20172021 Annual Report, this Quarterly Report and other reports and documents we file with the SEC. If any of the identified risks actually occur, our business, financial condition and results of operations could be materially adversely affected.seriously harmed. In that event, the market price of our common stock could decline, and you could lose all or a portion of the value of your investment in our common stock.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We did not sell any unregistered equity securities during the three and six month periods ended December 31, 2021 and December 31, 2020.
Repurchases
During the quarter three months ended December 31, 2017,2021 we did not sell any unregistered equity securities and we did not repurchase anyrepurchased 189,702 shares of our common stock under our stockat a total cost of $2.5 million (including commissions and transaction fees) as set forth below:
Period | Total Number of Shares Purchased | Average Price Paid per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (as of December 31, 2021) (in thousands) | ||||||||||||
October 1, 2021 to October 31, 2021 | 52,359 | $ | 13.81 | 52,359 | — | |||||||||||
November 1, 2021 to November 30, 2021 | 43,715 | $ | 13.77 | 43,715 | — | |||||||||||
December 1, 2021 to December 31, 2021 | 93,628 | $ | 12.84 | 93,628 | — | |||||||||||
Total | 189,702 | 189,702 | $ | 671 | ||||||||||||
(1) Average price paid per share includes costs associated with the repurchases
Refer to Note J, "Treasury Stock," in this Quarterly Report, for terms of repurchase plan.plan and additional information.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
None.
None.
The following exhibit index shows those exhibits filed with this Quarterly Report and those incorporated by reference:
EXHIBIT INDEX
Exhibit | Description | Incorporated By Reference To | ||
3(i) | Exhibit 3(i) of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended | |||
3(ii) | Exhibit 3(ii) of NAI’s Current Report on Form 8-K dated February 9, 2009, filed with the commission on February 13, 2009 | |||
4(i) | 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 | |||
| 10.33 | Second Amendment to the Credit Agreement by and between NAI and Wells Fargo Bank, N.A. effective as of January 31, 2022 | Filed herewith | ||
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer | Filed herewith | ||
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer | Filed herewith | ||
32 | ||||
| Filed herewith | |||
101.INS | Inline XBRL Instance Document | Filed herewith | ||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | Filed herewith | ||
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed herewith | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed herewith | ||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Filed herewith | ||
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | Filed herewith | ||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
Pursuant to the requirements of the Securities Exchange Act of 1934, Natural Alternatives International, Inc., the registrant, has duly caused this Quarterly Report to be signed on its behalf by the undersigned, duly authorized officers.
Date: February 13, 20189, 2022
NATURAL ALTERNATIVES INTERNATIONAL, INC. | ||||
By: | /s/ Mark A. LeDoux | |||
Mark A. LeDoux, Chief Executive Officer | ||||
| ||||
By: | /s/ Michael E. Fortin | |||
Michael E. Fortin, Chief Financial Officer | ||||
| ||||
24