Table of Contents

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 SEPTEMBER 30, 2021

☐    TRANSITION REPORT

pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020For the transition period from to .

000-15701

(Commission file number)

NATURAL ALTERNATIVES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

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

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

As of November 9, 2020, 6,475,6702021, 6,365,085 shares of NAI's common stock were outstanding, net of 2,386,6882,639,280 treasury shares.

TABLE OF CONTENTS

A. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q10-Q and with applicable rules and regulations. Pursuant to such rules and regulations, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted. In management’s opinion, all adjustments necessary for a fair presentation of the financial position, results of operations, stockholders’ equity, and cash flows have been included and are of a normal, recurring nature. The results of operations for the three months ended September 30, 2020 2021 are not necessarily indicative of the operating results for the full fiscal year or for any future periods.

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

Recently Adopted Accounting Pronouncements

On December 18, 2019, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No.2019-12,Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This new standard eliminates certain exceptions in Accounting Standards Codification ("ASC") 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption permitted in any interim period within that year. We have adopted this ASU effective this first quarter of fiscal 2022. This ASU did not adopt any accounting pronouncements during the three months ended September 30, 2020. have a material impact on our consolidated financial statements.

Recently Issued Accounting and Regulatory Pronouncements

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

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

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):

We did not exclude any stock options or restricted stock shares for the three months ended September 30, 2021 as none would have had an anti-dilutive impact. During the three months ended September 30, 2020 we excluded shares related to stock options totaling 90,000 underlying shares and 116,658 shares of issued but unvested restricted stock, as their impact would have been anti-dilutive. We did not exclude any stock options or restricted stock shares for the three months ended September 30, 2019 as none would have had an anti-dilutive impact.

Revenue Recognition

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

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

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

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

Except for product defects, no right of return exists on the sale of our products. We estimate returns based on historical experience and recognize a returns liability for any estimated returns. As of September 30, 2020, 2021, we have no liability recorded for estimated0 known returns of products.liability.

We have an Exclusive Manufacturing Agreement with The Juice Plus+, as amended and restated on March 31, 2019, (the "JP Agreement" Company LLC (“Juice Plus+”). through August 6, 2025. Pursuant to the JPExclusive Manufacturing Agreement, Juice Plus+ has granted us exclusive rights to manufacture and supply them with certain of their products within 24 countries where Juice Plus+ currently sells those products. The JP Agreement is effective through August 6, 2025. As part of the JPPursuant to this Exclusive Manufacturing Agreement, we provide Juice Plus+ with a cash discount that is amortized ratably overdiscount. We recorded $0.3 million of “Cash Sales Discount” for the remaining life of the JP Agreement based on the full value of the cash discount expectedthree months ended September 30, 2021, which was recorded as a reduction to be given over the same period.net sales. We recorded $0.4 million of cash sales discount“Cash Sales Discount” during the three months ended September 30, 2020, and $0.4 million during the three months ended September 30, 2019.with such amounts recorded as a reduction to net sales.

We currently own certain U.S. patents, and each patent’s corresponding foreign patent applications. All of these patents and patent rights relate to the ingredient known as “beta-alanine”, which we marketbeta-alanine marketed and sellsold under our CarnoSyn® and SR CarnoSyn® trade names. We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of $4.7 million during the three months ended September 30, 2021, and $2.7 million during the three months ended September 30, 2020. We similarly recorded $3.2 million during the three months ended September 30, 2019.  These royalty income and raw material sale amounts resulted in royalty expense paid to the original patent holders from whom NAI acquired its patents and patent rights. We recognized royalty expense as a component of cost of goods sold in the amount of $0.2 million during the three months ended September 30, 2021, and $0.1 million during the three months ended September 30, 2020. We recognized $0.2 million of royalty expense during the three months ended September 30, 2019.

Stock-Based Compensation

We had an omnibus equity incentive plan that was approved by our Board of Directors effective October 15, 2009 and approved by our stockholders at the Annual Meeting of Stockholders held on November 30, 2009 ("2009 Plan"). Under the 2009 Plan, we granted nonqualified and incentive stock options and restricted stock grants to employees, non-employee directors and consultants. The 2009 Plan expired on October 15, 2019. The Board of Directors approved a new omnibus equity incentive plan to bethat became effective October 15, 2019 (“2019January 1, 2021 (the “2020 Plan”), subject to stockholder approval. However, the 2019 Planwhich was not approved by our stockholders at the Annual Meeting of Stockholders on December 4, 2020. Under the 2020 Plan, we may grant nonqualified and therefore did not become effective. We currently do not have an equity incentive plan but may still be recording exercisesstock options, restricted stock grants, restricted stock units, stock appreciation rights, and forfeitures under the 2009 Plan.other stock-based awards to employees, non-employee directors and consultants.

We did not grant any options during each of the three month periods ending September 30, 2020 2021 and September 30, 2019, respectively. All remaining outstanding stock options are fully vested. No2020. NaN options were exercised during the three month periodperiods ending September 30, 2020 2021 and September 30, 2019. 2020. There were no0 option forfeitures during the three month periods ended September 30, 2020 2021 or September 30, 2019.2020. As of September 30, 2021, we did not have any stock options outstanding.

We did not grant any restricted stock shares during the three months ending September 30, 2020 2021 or September 30, 2019. No2020. During the three months ended September 30, 2021, 16,332 restricted stock shares were forfeited. NaN restricted stock shares were forfeited during the three months ended September 30, 2020. During the three months ended September 30, 2019, 15,000 restricted stock shares were forfeited. Our net income included stock based compensation expense in connection with prior restricted stock grants of approximately $0.4$0.2 million for the three months ended September 30, 2020. 2021. Our net income included stock based compensation expense in connection with the vesting of prior restricted stock grants of approximately $0.4 million for the three months ended September 30, 2019.2020.

Deferred Compensation Plan

Effective July 16, 2020, the Board of Directors approved and adopted a Non-Qualified Incentive Plan (the “NQ“Incentive Plan”). Pursuant to the NQIncentive 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 NQIncentive 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 NQIncentive 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 NQIncentive Plan provides the Board of Directors with the discretion to set aside assets to fund the NQIncentive Plan although that has not been done to date.

On July 16, 2020,There were 0 deferred cash awards granted during the three months ended September 30, 2021. During the three months ended September 30, 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. Of the total $1.0 million in deferred cash awards granted, awards totaling $119,000 were granted to various officers, directors and employees of NAI pursuant toforfeited during the NQ Plan, each providingthree months ended September 30, 2021. Additionally, awards totaling $72,000 that were issued in March 2021 were also forfeited during the three months ended September 30, 2021. Each deferred cash award provides for three equal cash payments to the applicable Participant each of which shallto be paid on the one year, two year, and twothree year and three year anniversaryanniversaries of the date of the grant of such AwardAwards, (the “Award Date”); provided that, on the date of each payment (the “Payment Date”), the Participant has been since Award Date, and continues to be through the Payment Date, a member of our Board of Directors or an employee of NAI. In the event a Participant ceases to be an employee of NAI or a member of our Board of Directors prior to any Payment Date, no further payments shall be made in connection with the Award.

Fair Value of Financial Instruments

Except for cash and cash equivalents, and assets and liabilities related to our pension plan, as of September 30, 2020 2021 and June 30, 2020, 2021, we did not have any financial assets or liabilities classified as Level 1. We classify derivative forward exchange contracts as Level 2 assets and liabilities. The fair value of our Euro and Swiss Franc forward exchange contracts as of September 30, 2020 2021 was a net liabilityasset of $2.4$1.6 million. The fair value of our forward exchange contracts as of June 30, 2020 2021 included a net assetliability of $0.3$0.8 million. The fair values were determined by obtaining pricing from our bank and corroborating those values with a third party bank.bank or pricing service. We also classify our outstanding line of credit and term loan balance as a Level 2 liability, as the fair value is based on inputs that can be derived from information available in publicly quoted markets. As of September 30, 2020, 2021, and June 30, 2020, 2021, we did not have any financial assets or liabilities classified as Level 3. We did not transfer any assets or liabilities between these levels during fiscal 20202021 or the three months ended September 30, 2020. 2021. 

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.

B. Inventories, net

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

The inventory reserve includes $0.8 million as

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.