NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Organization and Summary of Significant Accounting Policies
Organization
We provide private-label contract manufacturing services to companies that market and distribute vitamins, minerals, herbs, and other nutritional supplements, as well as other health care products, to consumers both within and outside the U.S. We also seek to commercialize our patent and trademark estate related to the ingredient known as beta-alanine through
direct raw material sales and various license and similar arrangements.
Subsidiaries
On January
22, 1999, Natural Alternatives International Europe S.A. (NAIE) was formed as our wholly owned subsidiary, based in Manno, Switzerland. In September 1999, NAIE opened its manufacturing facility and possesses manufacturing capability in encapsulation, powders, tablets, finished goods packaging, quality control laboratory testing, warehousing, distribution and administration.
Principles of Consolidation
The consolidated financial statements include the accounts of Natural Alternatives International, Inc. (NAI) and our wholly owned subsidiary, NAIE. All intercompany accounts and transactions have been eliminated. The functional currency of NAIE, our foreign subsidiary, is the U.S. Dollar. The financial statements of NAIE have been translated at either current or historical exchange rates, as appropriate,
with gains and losses included in the consolidated statements of operations.
Recent Accounting Pronouncements
In March 2016, the
FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), which amends existing standards for leases to increase transparency and comparability among organizations by requiring recognition of lease assets and liabilities on the balance sheet and requiring disclosure of key information about such arrangements. ASU 2016-02 will be effective for us beginning in our first quarter of fiscal 2020. Early adoption is permitted. We are currently evaluating the impact of adopting the new standard on our consolidated financial statements and the timing and presentation of our adoption.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation-Stock Compensation (Topic 718) (ASU 2016-09), which provides guidance improvements to employee share-based payment accounting. The standard amends several aspects of current employee share-based payment accounting including income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 will be effective for us beginning in our first quarter of fiscal 2018.
We do not expect the new standard to have a material impact on our consolidated financial statements.
In April 2016
, the FASB issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606)(ASU 2016-10), which amends and adds clarity to certain aspects of the guidance set forth in the upcoming revenue standard (ASU 2014-09) related to identifying performance obligations and licensing. In May 2016, the FASB issued Accounting Standards Update No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815) (ASU 2016-11), which amends and rescinds certain revenue recognition guidance previously released within ASU 2014-09. In May 2016 the FASB issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606) (ASU 2016-12), which provides narrow scope improvements and practical expedients related to ASU 2014-09.
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 disclosure 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. Early adoption is not permitted.
Currently, w
e do 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 beginning in our first quarter of fiscal 2020.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-level hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by
requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available under the circumstances.
The fair value hierarchy is broken down into three levels based on the source of inputs. In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. We classify cash, cash equivalents, and marketable securities balances as Level 1 assets. Fair values determined by Level 2 inputs are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable or can be corroborated, either directly or indirectly by observable market data. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. These include certain pricing models, discounted cash flow methodologies and similar techniqu
es that use significant unobservable inputs.
As of June 30,
2017 and June 30, 2016, we did not have any financial assets or liabilities classified as Level 1, except for assets and liabilities related to our pension plan. We classify derivative forward exchange contracts as Level 2 assets and liabilities. The fair value of our forward exchange contracts as of June 30, 2017 was a net liability of $521,000 and the value as of June 30, 2016 was a net asset of $250,000. The fair values were determined based on obtaining pricing from our bank and corroborating those values with a third party bank. As of June 30, 2017 and June 30, 2016, we did not have any financial assets or liabilities classified as Level 3. We did not transfer any assets or liabilities between any levels during fiscal 2017.
Accounts
Receivable
We perform ongoing credit evaluations of our customers and adjust credit limits based on payment history and customer credit-worthiness. An allowance for estimated doubtful accounts is maintained based on historical experience and identified customer credit issues. We monitor collections regularly and adjust the allowance for doubtful accounts as necessary to recognize any changes in credit exposure. Upon conclusion that a receivable is uncollectible, we record the respective amount as a charge against allowance for doubtful accounts. To date, such doubtful accounts reserves, in the aggregate, have been adequate to cover collection losses.
Inventories
We operate primarily as a private-label contract manufacturer that builds products based upon anticipated demand or following receipt of customer specific purchase orders. From time to time, we build inventory for private-label contract manufacturing customers under a specific purchase order with delivery dates that may subsequently be rescheduled or canceled at the customer
’s request. We value inventory at the lower of cost (first-in, first-out) or market (net realizable value) on an item-by-item basis, including costs for raw materials, labor and manufacturing overhead. We establish reserves equal to all or a portion of the related inventory to reflect situations in which the cost of the inventory is not expected to be recovered. This requires us to make estimates regarding the market value of our inventory, including an assessment for excess and obsolete inventory. Once we establish an inventory reserve in a fiscal period, the reduced inventory value is maintained until the inventory is sold or otherwise disposed of. In evaluating whether inventory is stated at the lower of cost or market, management considers such factors as the amount of inventory on hand, the estimated time required to sell such inventory, the remaining shelf life and efficacy, the foreseeable demand within a specified time horizon and current and expected market conditions. Based on this evaluation, we record adjustments to cost of goods sold to adjust inventory to its net realizable value.
Property and Equipment
We state property and equipment at cost. Depreciation of property and equipment is provided using the straight-line method over their estimated useful lives, generally ranging from 1 to 39 years. We amortize leasehold improvements using the straight-line method over the shorter of the life of the improvement or the term of the lease. Maintenance and repairs are expensed as incurred. Significant expenditures that increase economic useful lives are capitalized.
Impairment of Long-Lived Assets
We periodically evaluate the carrying value of long-lived assets to be held and used when events and circumstances indicate that the carrying amount of an asset may not be recovered. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
We did not recognize any impairment losses during fiscal 2017 or fiscal 2016.
Derivative Financial Instruments
We currently may use derivative financial instruments in the management of our foreign currency exchange risk inherent in our forecasted transactions denominated in Euros. We may hedge our foreign currency exposures by entering into offsetting forward exchange contracts and currency options. To the extent we use derivative financial instruments, we account for them using the deferral method, when such instruments are intended to hedge identifiable, firm foreign currency commitments or anticipated transactions and are designated as, and effective as, hedges. Foreign exchange exposures arising from certain transactions that do not meet the criteria for the deferral method are marked-to-market through the Consolidated Statements of Operations and Comprehensive Income.
We recognize any unrealized gains and losses associated with derivative instruments in income in the period in which the underlying hedged transaction is realized. In the event the derivative instrument is deemed ineffective we would recognize the resulting gain or loss in income at that time. As of June
30, 2017, we held derivative contracts designated as cash flow hedges primarily to protect against the foreign exchange risks inherent in our forecasted sales of products at prices denominated in currencies other than the U.S. Dollar. As of June 30, 2017, the notional amounts of our foreign exchange contracts were $26.1 million (EUR 23.1 million). These contracts will mature over the next 14 months.
Defined Benefit Pension Plan
We
formerly sponsored a defined benefit pension plan. Effective June 21, 1999, we adopted an amendment to freeze benefit accruals to the participants. The plan obligation and related assets of the plan are presented in the notes to the consolidated financial statements. Plan assets, which consist primarily of marketable equity and debt instruments, are valued based upon third party market quotations. Independent actuaries, through the use of a number of assumptions, determine plan obligation and annual pension expense. Key assumptions in measuring the plan obligation include the discount rate and estimated future return on plan assets. In determining the discount rate, we use an average long-term bond yield. Asset returns are based on the historical returns of multiple asset classes to develop a risk free rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk free rate of return and the associated risk premium. A weighted average rate is developed based on the overall rates and the plan’s asset allocation.
Revenue Recognition
To recognize revenue
, four basic criteria must be met: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and 4) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (a) the seller’s price to the buyer is substantially fixed or determinable at the date of sale; (b) the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product; (c) the buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product; (d) the buyer acquiring the product for resale has economic substance apart from that provided by the seller; (e) the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer; and (f) the amount of future returns can be reasonably estimated. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon delivery is deferred until the shipment has been delivered.
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 gross sales and our historical experience for both private-label contract manufacturing and beta-alanine raw material product returns. However, the estimate for product returns does not reflect the impact of a potential large product recall resulting from product nonconformance or other factors as such events are not predictable nor is the related economic impact estimable.
We currently own certain U.S. patents, and each patent
’s corresponding foreign patent applications. All of these patents and patent rights relate to the ingredient known as beta-alanine marketed and sold under the CarnoSyn® 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 $26.9 million during fiscal 2017 and $21.8 million during fiscal 2016. 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 $1.0 million during fiscal 2017 and $865,000 during fiscal 2016.
Cost of Goods Sold
Cost of goods sold includes raw material, labor, manufacturing overhead, and royalty expense.
Shipping and Handling Costs
We include fees earned on the shipment of our products to customers in sales and include costs incurred on the shipment of product to customers in costs of goods sold.
Research and Development Costs
As part of the services we provide to our private-label contract manufacturing customers, we may perform, but are not obligated to perform, certain research and development activities related to the development or improvement of their products. While our customers typically do not pay directly for this service, the cost of this service is included as a component of the price we charge to manufacture and deliver their products.
We also direct and participate in clinical research studies, often in collaboration with scientists and research institutions, to validate the benefits of a product and provide scientific support for product claims and marketing initiatives. We believe our commitment to research and development, as well as our facilities and strategic alliances with our suppliers and customers, allow us to effectively identify, develop and market high-quality and innovative products.
Research and development costs are expensed when incurred. Our research and development expenses for the last two fiscal years ended June
30 were $1.6 million for fiscal 2017 and $1.1 million for fiscal 2016. These costs were included in selling, general and administrative expenses and cost of goods sold.
Advertising Costs
We expense the production costs of advertising the first time the advertising takes place. We incurred and expensed advertising costs in the amount of $
598,000 during the fiscal year ended June 30, 2017 and $334,000 during fiscal 2016. These costs were included in selling, general and administrative expenses.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards.
For each of the jurisdictions in which we operate, deferred tax assets and liabilities are measured using enacted 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 operations in the period that includes the enactment date.
We account for uncertain tax positions using the more-likely-than-not recognition threshold. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of June
30, 2017 and June 30, 2016, we had not recorded any tax liabilities for uncertain tax positions.
We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be realized. We consider estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If we determine that it is more likely than not that we will not realize all or part of our deferred tax assets in the future, we will record an adjustment to the carrying value of the deferred tax asset, which would be reflected as income tax expense. Conversely, if we determine we will realize a deferred tax asset, which currently has a valuation allowance, we will reverse the valuation allowance, which would be reflected as an income tax benefit.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible
. There was no change in the valuation allowance during fiscal 2017. During the fourth quarter of fiscal 2016, we concluded that it was more likely than not that we would be able to realize the benefit of our federal and state deferred tax assets in the future. We based this conclusion on historical and projected operating performance, as well as our expectation that our operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets. As a result, we reduced the valuation allowance on our net deferred tax assets by $193,000 at June 30, 2016. We will continue to assess the need for a valuation allowance on the deferred tax assets by evaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in the income statement for the period that the adjustment is determined to be required.
We do not record U.S. income tax expense for
NAIE’s retained earnings that are declared as indefinitely reinvested offshore, thus reducing our overall income tax expense. The amount of earnings designated as indefinitely reinvested in NAIE is based on the actual deployment of such earnings in NAIE’s assets and our expectations of the future cash needs of our U.S. and foreign entities. Income tax laws are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore.
Stock-Based Compensation
We have an omnibus incentive plan that was approved by our Board of Directors effective as of October
15, 2009 and approved by our stockholders at the Annual Meeting of Stockholders held on November 30, 2009. Under the 2009 Plan, we may grant nonqualified and incentive stock options and other stock-based awards to employees, non-employee directors and consultants. Our prior equity incentive plan was terminated effective as of November 30, 2009.
We estimate the fair value of stock option awards at the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the use of highly subjective assumptions. Black-Scholes uses assumptions related to volatility, the risk-free interest rate, the dividend yield (which we assume to be zero, as we have not paid any cash dividends) and employee exercise behavior. Expected volatilities used in the model are based on the historical volatility of our stock price. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect in the period of grant. The expected life of stock option grants is derived from historical experience. The fair value of restricted stock shares granted is based on the market price of our common stock on the date of grant. We amortize the estimated fair value of our stock awards to expense over the related vesting periods.
The Company did
not grant any options during fiscal 2017 or 2016.
We did not have any options exercised during fiscal
2017 or fiscal 2016. All remaining outstanding stock options are fully vested and all related compensation cost was fully recognized at June 30, 2014. No options vested during the fiscal years ended June 30, 2017 and June 30, 2016.
During fiscal 2017, we granted a total of
155,000 restricted stock shares to the members of our Board of Directors and certain key members of our management team pursuant to the 2009 Plan. During fiscal 2016, we granted a total of 208,000 restricted stock shares to the members of our Board of Directors and certain key members of our management team pursuant to the 2009 Plan. These restricted stock grants will vest over three or five years from the date of grant and the unvested shares cannot be sold or otherwise transferred and the rights to receive dividends, if declared by our Board of Directors, are forfeitable until the shares become vested. There were 319,335 vested restricted stock shares as of June 30, 2017 and there were 193,012 vested restricted stock shares as of June 30, 2016. The total remaining unrecognized compensation cost related to unvested restricted stock shares amounted to $2.5 million at June 30, 2017 and the weighted average remaining requisite service period of unvested restricted stock shares was 2.4 years. The weighted average fair value of restricted stock shares granted during fiscal 2017 was $8.82 per share. The weighted average fair value of restricted stock shares granted during fiscal 2016 was $9.86 per share.
Use of
Estimates
Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates.
Net Income per Common Share
We compute basic net income per common share using the weighted average number of common shares outstanding during the period, and diluted net income per common share using the additional dilutive effect of all dilutive securities. The dilutive impact of stock options and restricted shares account for the additional weighted average shares of common stock outstanding for our diluted net income per common share computation. We
calculated basic and diluted net income per common share as follows (in thousands, except per share data):
|
|
For
the Years Ended June 30,
|
|
|
|
201
7
|
|
|
201
6
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,235
|
|
|
$
|
9,546
|
|
Denominator
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
6,577
|
|
|
|
6,524
|
|
Dilutive effect of stock opt
ions and restricted stock shares
|
|
|
79
|
|
|
|
117
|
|
Diluted weighted average common shares outstanding
|
|
|
6,656
|
|
|
|
6,641
|
|
Basic net income per common share
|
|
$
|
1.10
|
|
|
$
|
1.46
|
|
Diluted net income per common share
|
|
$
|
1.09
|
|
|
$
|
1.44
|
|
No shares related to stock options were excluded for the
year ended June 30, 2017.
Concentrations of Credit Risk
Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We place our cash and cash equivalents with highly rated financial institutions. Credit risk with respect to receivables is concentrated with
our three largest customers, whose receivable balances collectively represented 65.6% of gross accounts receivable at June 30, 2017 and 58.7% at June 30, 2016. Additionally, amounts due related to our beta-alanine raw material sales were 21.3% of gross accounts receivable at June 30, 2017, and 14.6% of gross accounts receivable at June 30, 2016. Concentrations of credit risk related to the remaining accounts receivable balances are limited due to the number of customers comprising our remaining customer base.
B
. Inventories
Inventories, net, consisted of the following at June
30 (in thousands):
|
|
201
7
|
|
|
2016
|
|
Raw materials
|
|
$
|
9,469
|
|
|
$
|
14,751
|
|
Work in progress
|
|
|
1,312
|
|
|
|
3,487
|
|
Finished goods
|
|
|
3,562
|
|
|
|
2,832
|
|
Reserve
|
|
|
(614
|
)
|
|
|
(302
|
)
|
Total inventories
|
|
$
|
13,729
|
|
|
$
|
20,768
|
|
C
. Property and Equipment
Property and equipment consisted of the following at June
30 (dollars in thousands):
|
|
Depreciable
Life
In Years
|
|
|
201
7
|
|
|
201
6
|
|
Land
|
|
|
|
NA
|
|
|
|
$
|
1,200
|
|
|
$
|
1,200
|
|
Building and building improvements
|
|
|
7
|
–
|
39
|
|
|
|
3,706
|
|
|
|
3,324
|
|
Machinery and equipment
|
|
|
3
|
–
|
12
|
|
|
|
24,194
|
|
|
|
23,846
|
|
Office equipment and furniture
|
|
|
3
|
–
|
5
|
|
|
|
3,954
|
|
|
|
2,994
|
|
Vehicles
|
|
|
|
3
|
|
|
|
|
209
|
|
|
|
209
|
|
Leasehold improvements
|
|
|
1
|
–
|
15
|
|
|
|
17,038
|
|
|
|
15,261
|
|
Total property and equipment
|
|
|
|
|
|
|
|
|
50,301
|
|
|
|
46,834
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
|
|
|
|
(32,165
|
)
|
|
|
(31,667
|
)
|
Property and equipment, net
|
|
|
|
|
|
|
|
$
|
18,136
|
|
|
$
|
15,167
|
|
Depreciation expense was approximately $2.3 million in fiscal 2017 and $1.8 million in fiscal 2016.
D
. Other comprehensive loss
Other comprehensive (loss) income (“OCL” and “OCI”) consisted of the following at June 30 (dollars in thousands):
|
|
Year
Ended June 30, 201
7
|
|
|
|
Defined Benefit
Pension Plan
|
|
|
Unrealized
Gains
(
Losses
)
on Cash
Flow Hedges
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 201
6
|
|
$
|
(775
|
)
|
|
$
|
95
|
|
|
$
|
(680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCI/OCL
before reclassifications
|
|
|
271
|
|
|
|
(110)
|
|
|
|
161
|
|
Amounts reclassified from OCI
|
|
|
175
|
|
|
|
(685
|
)
|
|
|
(510
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of OCI activity
|
|
|
(162
|
)
|
|
|
286
|
|
|
|
124
|
|
Net current period OCI/OCL
|
|
|
284
|
|
|
|
(509
|
)
|
|
|
(225
|
)
|
Balance as of June 30, 201
7
|
|
$
|
(491
|
)
|
|
$
|
(414
|
)
|
|
$
|
(905
|
)
|
|
|
Year
Ended June 30, 201
6
|
|
|
|
Defined Benefit
Pension Plan
|
|
|
Unrealized
(
Losses
) Gains
on
Cash Flow
Hedges
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30,
2015
|
|
$
|
(643
|
)
|
|
$
|
(123
|
)
|
|
$
|
(766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCI/OCL
before reclassifications
|
|
|
(232
|
)
|
|
|
414
|
|
|
|
182
|
|
Amounts reclassified from OCI
|
|
|
19
|
|
|
|
(74
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect of OCI activity
|
|
|
81
|
|
|
|
(122
|
)
|
|
|
(41
|
)
|
Net current period OCI/OCL
|
|
|
(132
|
)
|
|
|
218
|
|
|
|
86
|
|
Balance as of June 30,
2016
|
|
$
|
(775
|
)
|
|
$
|
95
|
|
|
$
|
(680
|
)
|
E
. Debt
On
March 28, 2017, we executed an amendment to our credit facility with Wells Fargo Bank, N.A
. to extend the maturity for our working line of credit from January 31, 2019, to February 1, 2020. The Credit Agreement provides us with a credit line of up to $10.0 million. The line of credit may be used to finance working capital requirements. There was no commitment fee required as part of this 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 includ
ing maintaining (i) a ratio of total liabilities to tangible net worth of not greater than 1.25 to 1.0 at any time; and (ii) a ratio of total current assets to total current liabilities of not less than 1.75 to 1.0 at each fiscal quarter end. Any amounts outstanding under the line of credit will bear interest at a fixed or fluctuating interest rate as elected by NAI from time to time; provided, however, that if the outstanding principal amount is less than $100,000 such amount shall bear interest at the then applicable fluctuating rate of interest. If elected, the fluctuating rate per annum would be equal to 1.25% above the daily one month LIBOR rate as in effect from time to time. If a fixed rate is elected, it would equal a per annum rate of 1.25% above the LIBOR rate in effect on the first day of the applicable fixed rate term. Any amounts outstanding under the line of credit must be paid in full on or before 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 for each month from the month of prepayment through the month in which the then applicable fixed rate term matures.
Our obligations under the Credit Agreement are secured by our accounts receivable and other rights to payment, general intangibles, inventory, equipment and fixtures. We also have a foreign exchange facility with Wells Fargo
Bank, N.A. in effect until January 31, 2019, and with Bank of America, N.A. in effect until August 15, 2019.
On June 30,
2017, we were in compliance with all of the financial and other covenants required under the Credit Agreement.
Our wholly owned subsidiary, NAIE, formerly had a credit facility with Credit Suisse that would provide NAIE with a credit line of up to CHF 500,000, or approximately $
522,000. We terminated this line of credit in December 2016 as we determined that it was unnecessary as we believe our current cash position and ongoing cash from operations are sufficient to support our cash requirements
.
We did not use our working capital line of credit nor did we
have any long-term debt outstanding during the year ended June 30, 2017. As of June 30, 2017, we had $10.0 million available under our credit facilities.
F
.
Income Taxes
During fiscal 201
7, we recorded U.S.-based domestic tax expense of $2.2 million. During fiscal 2016, we recorded U.S.-based domestic tax expense of $3.6 million on U.S.-based income, which was offset by the release of our deferred tax asset valuation of $193,000 resulting in a net domestic tax expense of $3.4 million. The release of our deferred tax asset valuation was based on historical and projected operating performance, as well as our expectation that our operations will generate sufficient taxable income in future periods to realize the tax benefits associated with the deferred tax assets. The valuation allowance activity did not have any impact on the tax expense and related liability recorded for operating income recognized by NAIE during the years ended June 30, 2017 or June 30, 2016.
The provision for income taxes for the years
ended June 30 consisted of the following (in thousands):
|
|
201
7
|
|
|
2016
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
1,791
|
|
|
$
|
3,339
|
|
State
|
|
|
90
|
|
|
|
138
|
|
Foreign
|
|
|
646
|
|
|
|
629
|
|
Total current
|
|
|
2,527
|
|
|
|
4,106
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
305
|
|
|
|
46
|
|
State
|
|
|
44
|
|
|
|
67
|
|
Valuation allowance
|
|
|
—
|
|
|
|
(193
|
)
|
Total deferred
|
|
|
349
|
|
|
|
(80
|
)
|
Total provision for income taxes
|
|
$
|
2,876
|
|
|
$
|
4,026
|
|
Net deferred tax assets and deferred tax liabilities as of June 30 were as follows (in thousands):
|
|
201
7
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventory capitalization
|
|
$
|
438
|
|
|
$
|
576
|
|
Inventory reserves
|
|
|
178
|
|
|
|
103
|
|
Pension liability
|
|
|
241
|
|
|
|
403
|
|
Accrued bonus
|
|
|
114
|
|
|
|
391
|
|
Net operating loss carry forward
|
|
|
240
|
|
|
|
298
|
|
Deferred rent
|
|
|
193
|
|
|
|
175
|
|
Accumulated depreciation and amortization
|
|
|
8
|
|
|
|
158
|
|
Stock-based compensation
|
|
|
195
|
|
|
|
154
|
|
Tax credit carry forward
|
|
|
176
|
|
|
|
138
|
|
Accrued vacation expense
|
|
|
111
|
|
|
|
130
|
|
Other, net
|
|
|
256
|
|
|
|
15
|
|
Total gross deferred tax assets
|
|
|
2,150
|
|
|
|
2,541
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(148
|
)
|
|
|
(260
|
)
|
Other, net
|
|
|
—
|
|
|
|
(54
|
)
|
Deferred tax liabilities
|
|
|
(148
|
)
|
|
|
(314
|
)
|
Valuation allowance
|
|
|
—
|
|
|
|
—
|
|
Net deferred tax assets
|
|
$
|
2,002
|
|
|
$
|
2,227
|
|
At June
30, 2017, we had state tax net operating loss carry forwards of approximately $4.1 million. Under California tax law, net operating loss deductions were suspended for tax years beginning in 2008, 2009, 2010 and 2011 and the carry forward periods of any net operating losses not utilized due to such suspension were extended.
Our state tax loss carry forwards will begin to expire in fiscal 2032, unless used before their expiration.
Pursuant to Section
382 of the Internal Revenue Code of 1986, as amended (the “Code”), the annual use of the net operating loss carry forwards and research and development tax credits could be limited by any greater than 50% ownership change during any three-year testing period. We did not have any ownership changes that met this criterion during the fiscal years ended June 30, 2017 and June 30, 2016.
We are subject to taxation in the U.S., Switzerland and various state jurisdictions. Our tax years for the fiscal year ended June
30, 2014 and forward are subject to examination by the U.S. tax authorities and our years for the fiscal year ended June 30, 2007 and forward are subject to examination by the state tax authorities. Our tax years for the fiscal year ended June 30, 2015 and forward are subject to examination by the Switzerland tax authorities.
NAIE
’s effective tax rate for Swiss federal, cantonal and communal taxes is approximately 17.5%. NAIE had net income of $3.1 million for the fiscal year ended June 30, 2017. Undistributed earnings of NAIE amounted to approximately $20.9 million at June 30, 2017. These earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal taxes has been provided thereon.
A reconciliation of income tax provision computed by applying the statutory federal income tax rate of 34% to net income before income taxes for the year ended June
30 is as follows (dollars in thousands):
|
|
2017
|
|
|
2016
|
|
Income taxes computed at statutory federal income tax rate
|
|
$
|
3,438
|
|
|
$
|
4,614
|
|
State income taxes, net of federal income tax expense
|
|
|
95
|
|
|
|
179
|
|
Expenses not deductible for tax purposes
|
|
|
29
|
|
|
|
19
|
|
Foreign tax rate differential
|
|
|
(613
|
)
|
|
|
(514
|
)
|
Adjust state deferred due to change in apportionment
|
|
|
6
|
|
|
|
(18
|
)
|
Change in valuation allowance
|
|
|
—
|
|
|
|
(193
|
)
|
Other, net
|
|
|
(79
|
)
|
|
|
(61
|
)
|
Income tax provision as reported
|
|
$
|
2,876
|
|
|
$
|
4,026
|
|
Effective tax rate
|
|
|
28.4
|
%
|
|
|
29.7
|
%
|
G
. Employee Benefit Plans
We have a profit sharing plan pursuant to Section
401(k) of the Code, whereby participants may contribute a percentage of compensation not in excess of the maximum allowed under the Code. All employees with six months of continuous employment are eligible to participate in the plan. Effective January 1, 2004, the plan was amended to require that we match 100% of the first 3% and 50% of the next 2% of a participant’s compensation contributed to the plan. Effective January 1, 2009, we elected to temporarily discontinue the company match program. The match program was reinstated effective July 15, 2011. The total contributions under the plan charged to income from operations totaled $248,000 for fiscal 2017 and $229,000 for fiscal 2016.
We have a “Cafeteria Plan” pursuant to Section
125 of the Code, whereby health care benefits are provided for active employees through insurance companies. Substantially all active full-time employees are eligible for these benefits. We recognize the cost of providing these benefits by expensing the annual premiums, which are based on benefits paid during the year. The premiums expensed to operating income for these benefits totaled $1.0 million for the fiscal year ended June 30, 2017 and $847,000 for the fiscal year ended June 30, 2016.
We
formerly sponsored a defined benefit pension plan, which provides retirement benefits to employees based generally on years of service and compensation during the last five years before retirement. Effective June 21, 1999, we adopted an amendment to freeze benefit accruals to the participants. We contribute an amount not less than the minimum funding requirements of the Employee Retirement Income Security Act of 1974 nor more than the maximum tax-deductible amount.
Disclosure of Funded Status
The following table sets forth the defined benefit pension plan
’s funded status and amount recognized in our consolidated balance sheets at June 30 (in thousands):
|
|
2017
|
|
|
2016
|
|
Change in Benefit Obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
2,329
|
|
|
$
|
2,080
|
|
Interest cost
|
|
|
70
|
|
|
|
87
|
|
Actuarial
(gain) loss
|
|
|
(189
|
)
|
|
|
272
|
|
Benefits paid
|
|
|
(406
|
)
|
|
|
(110
|
)
|
Benefit obligation at end of year
|
|
$
|
1,804
|
|
|
$
|
2,329
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
1,571
|
|
|
$
|
1,642
|
|
Actual return on plan assets
|
|
|
117
|
|
|
|
74
|
|
Benefits paid
|
|
|
(406
|
)
|
|
|
(112
|
)
|
Plan expenses
|
|
|
(35
|
)
|
|
|
(33
|
)
|
Fair value of plan assets at end of year
|
|
$
|
1,247
|
|
|
$
|
1,571
|
|
Reconciliation of Funded Status:
|
|
|
|
|
|
|
|
|
Difference between benefit obligation and fair value of plan assets
|
|
$
|
(557
|
)
|
|
$
|
(758
|
)
|
Unrecognized net actuarial loss in accumulated other comprehensive income
|
|
|
671
|
|
|
|
1,117
|
|
Net amount recognized
|
|
$
|
114
|
|
|
$
|
359
|
|
Projected benefit obligation
|
|
$
|
1,804
|
|
|
$
|
2,329
|
|
Accumulated benefit obligation
|
|
$
|
1,804
|
|
|
$
|
2,329
|
|
Fair value of plan assets
|
|
$
|
1,247
|
|
|
$
|
1,571
|
|
The weighted-average discount rate used for determining the projected benefit obligations for the defined benefit pension plan
was 3.9% for the year ended June 30, 2017 and 3.6% during the year ended June 30, 2016.
Net Periodic Benefit Cost
The components included in the defined benefit pension plan
’s net periodic benefit expense for the fiscal years ended June 30 were as follows (in thousands):
|
|
201
7
|
|
|
201
6
|
|
Interest cost
|
|
$
|
70
|
|
|
$
|
87
|
|
Expected return on plan assets
|
|
|
(74
|
)
|
|
|
(105
|
)
|
Recognized actuarial loss
|
|
|
93
|
|
|
|
68
|
|
Settlement loss
|
|
|
155
|
|
|
|
55
|
|
Net periodic benefit expense
|
|
$
|
244
|
|
|
$
|
105
|
|
We
did not make any contributions to our defined benefit pension plan in fiscal 2017 and do not expect to make any contributions in fiscal 2018.
The following is a summary of changes in plan assets and benefit obligations recognized in other comprehensive income (in thousands):
|
|
201
7
|
|
|
2016
|
|
Net
(gain) loss
|
|
$
|
(233
|
)
|
|
$
|
304
|
|
Settlement loss
|
|
|
(155
|
)
|
|
|
(55
|
)
|
Amortization of net loss
|
|
|
(93
|
)
|
|
|
(68
|
)
|
Plan expenses
|
|
|
35
|
|
|
|
32
|
|
Total recognized in other comprehensive income (loss)
|
|
$
|
(446
|
)
|
|
$
|
213
|
|
Total recognized in net periodic benefit cost and other comprehensive income
|
|
$
|
(202)
|
|
|
$
|
318
|
|
The estimated net loss for the defined benefit pension
plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $38,000. We do not have any transition obligations or prior service costs recorded in accumulated other comprehensive income.
The following benefit
payments are expected to be paid (in thousands):
2018
|
|
$
|
45
|
|
2019
|
|
|
65
|
|
2020
|
|
|
103
|
|
2021
|
|
|
114
|
|
2022
|
|
|
113
|
|
2023
-2027
|
|
|
650
|
|
Total benefit payments expected to be paid
|
|
$
|
1,090
|
|
The weighted-average rates used for the years ended June
30 in determining the defined benefit pension plan’s net pension costs, were as follows:
|
|
201
7
|
|
|
201
6
|
|
Discount rate
|
|
|
3.87
|
%
|
|
|
3.61
|
%
|
Expected long-term rate of return
|
|
|
6.5
|
%
|
|
|
7.00
|
%
|
Compensation increase rate
|
|
|
N/A
|
|
|
|
N/A
|
|
Our expected rate of return is determined based on a methodology that considers historical returns of multiple classes analyzed to develop a risk free real rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk free real rate of return, and the associated risk premium. A weighted average rate was developed based on those overall rates and the target asset allocation of the plan.
Our defined benefit pension plan
’s weighted average asset allocation at June 30 and weighted average target allocation were as follows:
|
|
201
7
|
|
|
201
6
|
|
|
Target
Allocation
|
|
Equity securities
|
|
|
41
|
%
|
|
|
50
|
%
|
|
|
49
|
%
|
Debt securities
|
|
|
44
|
%
|
|
|
47
|
%
|
|
|
46
|
%
|
Commodities
|
|
|
2
|
%
|
|
|
—
|
|
|
|
2
|
%
|
Cash and money market funds
|
|
|
13
|
%
|
|
|
3
|
%
|
|
|
3
|
%
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
The underlying basis of the investment strategy of our defined benefit pension plan is to ensure that pension funds are available to meet the plan
’s benefit obligations when due. Our investment strategy is a long-term risk controlled approach using diversified investment options with relatively minimal exposure to volatile investment options like derivatives.
The fair values by asset category of our defined benefit pension plan at June
30, 2017 were as follows (in thousands):
|
|
Total
|
|
|
Quoted
Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Cash and money market funds
|
|
$
|
157
|
|
|
$
|
157
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commodities and other
|
|
$
|
27
|
|
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Equity securities
(1)
|
|
$
|
517
|
|
|
$
|
517
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Debt securities
(2)
|
|
$
|
546
|
|
|
$
|
546
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
|
$
|
1,247
|
|
|
$
|
1,247
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)
|
This category is comprised of publicly traded funds, of which
26% are large-cap funds, 46% are mid-cap and small-cap, 17% are developed market funds, 10% are emerging markets equity funds, and 1% are specialty funds.
|
(2)
|
This category is comprised of publicly traded funds, of
which 28% are REITs, 25% are high-yield fixed income funds, 24% are U.S. fixed income funds, 12% are developed market fixed income funds, and 11% are international/emerging markets funds.
|
H
. Stockholders’ Equity
Treasury Stock
On June
2, 2011, the Board of Directors authorized the repurchase of up to $2.0 million of our common stock. On February 6, 2015, the Board of Directors authorized a $1.0 million increase to our stock repurchase plan bringing the total authorized repurchase amount to $3.0 million. On May 11, 2015, the Board of Directors authorized a $2.0 million increase to our stock repurchase plan bringing the total authorized repurchase amount to $5.0 million. On March 28, 2017, the Board of Directors authorized a $2.0 million increase to our stock repurchase plan bringing the total authorized repurchase amount to $7.0 million. Under the repurchase plan, we may, from time to time, purchase shares of our common stock, depending upon market conditions, in open market or privately negotiated transactions.
During the twelve months ended June 30, 2017, we purchased 39,547 shares at a weighted average cost of $
8.74 per share and a total cost of $345,000 including commissions and fees. During the twelve months ended June 30, 2016, we purchased 52,603 shares at a weighted average cost of $6.26 per share and a total cost of $329,000 including commissions and fees.
During fiscal 2017, we acquired
38,729 shares in connection with restricted stock shares that vested during that year at a weighted
average cost of $9.47 per share and a total cost of $367,000
. During fiscal 2016 we acquired 27,195 shares from employees in connection with restricted stock shares that vested during the year
at a weighted average cost of $11.70 per share and a total cost of $319,000
. These shares were returned to the Company by the related employees and in return the Company paid each employee’s required tax withholding. The valuation of the shares acquired and thereby the number of shares returned to the Company was calculated based on the closing share price on the date the shares vested.
Stock
Option Plans
Effective as of October
15, 2009, our Board of Directors approved the 2009 Plan. The 2009 Plan was approved by our stockholders at the Annual Meeting of Stockholders held on November 30, 2009. Under the 2009 Plan, we may grant nonqualified and incentive stock options and other stock-based awards to employees, non-employee directors and consultants. Between October 15, 2009, and June 30, 2017, a total of 1.2 million shares of common stock have been authorized under the 2009 Plan for issuance to our employees, non-employee directors and consultants. As of June 30, 2017, there were 389,000 remaining shares available for grant under the 2009 Plan.
Stock option activity for the year
ended June 30, 2017 was as follows:
|
|
2009
Plan
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Contractual
Term
(in years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Vested and exercisable at June
30, 2016
|
|
|
140,000
|
|
|
$
|
6.36
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding at June
30, 2017
|
|
|
140,000
|
|
|
$
|
6.36
|
|
|
|
3.58
|
|
|
$
|
502,000
|
|
Vested and exercisable at June
30, 2017
|
|
|
140,000
|
|
|
$
|
6.36
|
|
|
|
3.58
|
|
|
$
|
502,000
|
|
Restricted stock activity for the year ended June 30,
2017 was as follows (2009 Plan):
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Nonvested at June
30, 2016
|
|
|
310,321
|
|
|
$
|
8.43
|
|
Granted
|
|
|
155,000
|
|
|
$
|
8.82
|
|
Vested
|
|
|
(126,323
|
)
|
|
$
|
7.77
|
|
Forfeited
|
|
|
(8,333
|
)
|
|
$
|
9.96
|
|
Nonvested at June
30, 2017
|
|
|
330,665
|
|
|
$
|
8.83
|
|
I
. Commitments
We lease a total of 162,000 square feet at
our manufacturing facility in Vista, California from an unaffiliated third party under a non-cancelable operating lease. On July 31, 2013, we executed a third amendment to the lease for our manufacturing facility in Vista, CA. As a result of this amendment, our facility lease has been extended through March 2024.
During February 2016, we sold our former corporate headquarters in San Marcos, CA and the property was leased though a sale
-leaseback agreement through August 2016. The property was vacated during August 2016. We purchased the Carlsbad facility in March 2016 and began to occupy as our new corporate headquarters during August 2016.
NAIE leases facility space in Manno, Switzerland.
The leased space totals approximately 94,217 square feet
.
We primarily use the facilities for manufacturing, packaging, warehousing and distributing nutritional supplement products for the European marketplace. Effective July 1, 2014, NAIE entered into a new lease with its current landlord. The new lease replaced, extended, and enlarged an existing lease between the same parties for the same building in Manno Switzerland. NAIE intends to improve portions of the additional space acquired by the new lease, and will continue to use the entire leased premises for offices, laboratory, warehouse and production. The new lease has a term of five years with a right for NAIE to extend the lease for an additional five years. The initial five year term expires on June 30, 2019.
Minimum rental commitments (exclusive of property tax, insurance and maintenance) under all non-cancelable operating leases with initial or remaining lease terms in excess of one year, including the lease agreements referred to above, are set forth below as of
June 30, 2017 (in thousands):
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
There-
after
|
|
|
Total
|
|
Gross minimum rental commitments
|
|
$
|
2,816
|
|
|
$
|
2,812
|
|
|
$
|
1,394
|
|
|
$
|
1,429
|
|
|
$
|
1,092
|
|
|
$
|
3,022
|
|
|
$
|
12,565
|
|
Rental expense totaled $
3.0 million for the fiscal year ended June 30, 2017 and $3.1 million for the fiscal year ended June 30, 2016.
J
. Economic Dependency
We had substantial net sales to certain customers during the fiscal years ended June
30 shown in the following table. The loss of any of these customers, or a significant decline in sales or the growth rate of sales to these customers, or in their ability to make payments when due, could have a material adverse impact on our net sales and net income. Net sales to any one customer representing 10% or more of the respective year’s consolidated net sales were as follows (dollars in thousands):
|
|
Fiscal 2017
|
|
|
Fiscal 2016
|
|
Customer 1
|
|
$
|
60,532
|
|
|
$
|
49,442
|
|
Customer 2
|
|
(a)
|
|
|
|
13,952
|
|
|
|
$
|
60,532
|
|
|
$
|
63,394
|
|
|
(a)
|
Sales were less than 10% of the respective period
’s consolidated net sales.
|
Accounts receivable from these
customers totaled $1.5 million at June 30, 2017 and $8.1 million at June 30, 2016.
We buy certain products, including beta-alanine, from a limited number of raw material suppliers. The loss of any of these suppliers could have a material adverse impact on our net sales and net income.
Raw material purchases from any one supplier representing 10% or more of the respective period’s total raw material purchases were as follows (dollars in thousands):
|
|
Year ended June 30
,
|
|
|
|
201
7
|
|
|
201
6
|
|
|
|
Raw
Material
Purchases by
Supplier
|
|
|
%
of Total
Raw
Material
Purchases
|
|
|
Raw
Material
Purchases by
Supplier
|
|
|
%
of Total
Raw
Material
Purchases
|
|
Supplier
1
|
|
$
|
6,694
|
|
|
|
12
|
%
|
|
(a)
|
|
|
(a)
|
|
|
|
$
|
6,694
|
|
|
|
12
|
%
|
|
(a)
|
|
|
(a)
|
|
|
(a)
|
Purchases were less than 10% of the respective period’s total raw material purchases.
|
K
. Derivatives and Hedging
We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to forecasted product sales denominated in foreign currencies and transactions of NAIE, our foreign subsidiary. As part of our overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, we may use foreign exchange contracts in the form of forward contracts. There can be no guarantee any such contracts, to the extent we enter into such contracts, will be effective hedges against our foreign currency exchange risk.
During the year ended June
30, 2017 and prior, we entered into forward contracts designated as cash flow hedges primarily to protect against the foreign exchange risks inherent in our forecasted sales of products at prices denominated in currencies other than the U.S. dollar. These contracts are expected to be settled through August 2018. For derivative instruments that are designated and qualify as cash flow hedges, we record the effective portion of the gain or loss on the derivative in accumulated other comprehensive income (OCI) as a separate component of stockholders’ equity and subsequently reclassify these amounts into earnings in the period during which the hedged transaction is recognized in earnings.
For foreign currency contracts designated as cash flow hedges, hedge effectiveness is measured using the spot rate. Changes in the spot-forward differential are excluded from the test of hedge effectiveness and are recorded currently in earnings as interest
income or expense. We measure effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item. During the year ended June 30, 2017, we recorded a $189,000 gain related to the ineffective portion of our hedging instruments to other income. We did not have any losses or gains related to the ineffective portion of our hedging instruments during the year ended June 30, 2016.
No hedging relationships were terminated as a result of ineffective hedging or forecasted transactions no longer probable of occurring for foreign currency forward contracts. We monitor the probability of forecasted transactions as part of the hedge effectiveness testing on a quarterly basis.
As of June
30, 2017, the notional amounts of our foreign exchange contracts were $26.1 million (EUR 23.1 million). As of June 30, 2017, a net liability of approximately $646,000, offset by $232,000 of deferred taxes, related to derivative instruments designated as cash flow hedges was recorded in OCI. As of June 30, 2016, a net asset of approximately $149,000, offset by $54,000 of deferred taxes, related to derivative instruments designated as cash flow hedges was recorded in OCI. It is expected that $541,000 of the gross loss, as of June 30, 2017, will be reclassified into earnings in the next 12 months along with the earnings effects of the related forecasted transactions.
As of June
30, 2017, $422,000 of the fair value of our cash flow hedges was classified in accrued liabilities, and $99,000 was classified other noncurrent liabilities, net in our Consolidated Balance Sheets. During the year ended June 30, 2017, we recognized $110,000 of losses in OCI and reclassified $685,000 of gains from OCI to revenue. During the year ended June 30, 2016, we recognized $414,000 of losses in OCI and reclassified $74,000 of gains from OCI to revenue.
L
. Contingencies
From time to time, we become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters
may relate to product liability, employment, intellectual property, tax, regulation, contract or other matters. The resolution of these matters as they arise will be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. While unfavorable outcomes are possible, based on available information, we generally do not believe the resolution of these matters will result in a material adverse effect on our business, consolidated financial condition, or results of 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 that we do not expect.
M
. Segment Information
Our business consists of
two segments for financial reporting purposes. The two segments are identified as (i) private-label contract manufacturing, which primarily relates to the provision of private-label contract manufacturing services to companies that market and distribute nutritional supplements and other health care products, and (ii) patent and trademark licensing, which primarily includes direct raw material sales and royalty income from our license and supply agreements associated with the sale and use of beta-alanine under our CarnoSyn® trade name.
We evaluate performance based on a number of factors. The primary perf
ormance measures for each segment are net sales and income or loss from operations before corporate allocations. Operating income or loss for each segment does not include corporate general and administrative expenses, interest expense and other miscellaneous income and expense items. Corporate general and administrative expenses include, but are not limited to: human resources, corporate legal, finance, information technology, and other corporate level related expenses, which are not allocated to any segment. Transfers of raw materials between segments are recorded at cost.
The accounting policies of our segments are the same as those described in the summary of significant accounting policies in Note A.
Our operating results by business segment for the years
ended June 30 were as follows (in thousands):
|
|
201
7
|
|
|
201
6
|
|
Net Sales
|
|
|
|
|
|
|
|
|
Private-label contract manufacturing
|
|
$
|
95,024
|
|
|
$
|
92,420
|
|
Patent and trademark licensing
|
|
|
26,922
|
|
|
|
21,781
|
|
Total net sales
|
|
$
|
121,946
|
|
|
$
|
114,201
|
|
|
|
201
7
|
|
|
201
6
|
|
Income from Operations
|
|
|
|
|
|
|
|
|
Private-label contract manufacturing
|
|
$
|
8,569
|
|
|
$
|
12,184
|
|
Patent and trademark licensing
|
|
|
7,534
|
|
|
|
6,153
|
|
Income from operations of reportable segments
|
|
|
16,103
|
|
|
|
18,337
|
|
Corporate expenses not allocated to segments
|
|
|
(6,401
|
)
|
|
|
(6,079
|
)
|
Total income from operations
|
|
$
|
9,702
|
|
|
$
|
12,258
|
|
|
|
201
7
|
|
|
201
6
|
|
Assets
|
|
|
|
|
|
|
|
|
Private-label contract manufacturing
|
|
$
|
60,489
|
|
|
$
|
66,375
|
|
Patent and trademark licensing
|
|
|
12,122
|
|
|
|
7,800
|
|
Total assets
|
|
$
|
72,611
|
|
|
$
|
74,175
|
|
Our private-label contract manufacturing products are sold both in the U.S. and in markets outside the U.S., including Europe, Canada, Mexico, Australia, South Africa and Asia. Our primary market outside the U.S. is
Europe. Our patent and trademark licensing activities are primarily based in the U.S.
Net sales by geographic region, based on the customers
’ location, for the two years ended June 30 were as follows (in thousands):
|
|
201
7
|
|
|
201
6
|
|
United States
|
|
$
|
63,104
|
|
|
$
|
50,575
|
|
Markets outside the
United States
|
|
|
58,842
|
|
|
|
63,626
|
|
Total net sale
|
|
$
|
121,946
|
|
|
$
|
114,201
|
|
Products manufactured by NAIE accounted for
59% of consolidated net sales in markets outside the U.S. in fiscal 2017 and 61% in fiscal 2016. No products manufactured by NAIE were sold in the U.S. during the fiscal years ended June 30, 2017 and 2016.
Assets and capital expenditures by geographic region, based on the location of the company or subsidiary at which they were located or made, for the two years ended June
30 were as follows (in thousands):
201
7
|
|
Long-Lived
Assets
|
|
|
Total
Assets
|
|
|
Capital
Expenditures
|
|
United States
|
|
$
|
10,753
|
|
|
$
|
47,777
|
|
|
$
|
2,365
|
|
Europe
|
|
|
7,383
|
|
|
|
24,834
|
|
|
|
2,989
|
|
|
|
$
|
18,136
|
|
|
$
|
72,611
|
|
|
$
|
5,354
|
|
201
6
|
|
Long-Lived
Assets
|
|
|
Total
Assets
|
|
|
Capital
Expenditures
|
|
United States
|
|
$
|
9,678
|
|
|
$
|
49,755
|
|
|
$
|
6,423
|
|
Europe
|
|
|
5,489
|
|
|
|
24,420
|
|
|
|
4,018
|
|
|
|
$
|
15,167
|
|
|
$
|
74,175
|
|
|
$
|
10,441
|
|
N
. Subsequent Events
On August 7, 2017, we entered into three agreements (“Agreements”), with The Juice Plus+ Company LLC (“Juice Plus+”). The Agreements are an Exclusive Manufacturing Agreement, a Restricted Stock Award Agreement, and an Irrevocable Proxy. Pursuant to the Exclusive Manufacturing Agreement Juice Plus+ has granted us exclusive rights to manufacture and supply Juice Plus+ with certain Juice Plus+ products within 24 countries that Juice Plus+ currently sells those products. Pursuant to the Restricted Stock Award Agreement, NAI has agreed to grant 500,000 shares of NAI common stock to Juice Plus+, (the “Shares”), and Juice Plus+ has agreed the Shares are subject to certain restrictions and risk of forfeiture. Pursuant to the Irrevocable Proxy, Juice Plus+ has granted to the NAI Board of Directors Juice Plus+
’s right to vote the Shares as long as they are subject to the associated risk of forfeiture. The Agreements are for a term of 5 years, and may be terminated by either party only on the occurrence of specified events.
On
July 3, 2017, we purchased 24 forward contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk inherent in a portion of our forecasted sales transactions denominated in Euros. The 24 contracts expire monthly beginning September 2017 and ending August 2019. The forward contracts had a notional amount of 26.2 million Euros and a weighted average forward rate of $1.16.
On August 4, 2017
, we purchased 11 forward contracts designated and effective as cash flow hedges to protect against the foreign currency exchange risk inherent in a portion of our forecasted sales transactions denominated in Euros. The 11 contracts expire monthly beginning October 2017 and ending August 2018. The forward contracts had a notional amount of 12.5 million Euros and a weighted average forward rate of $1.18.