NATURAL ALTERNATIVES INTERNATIONAL INC [NAII] Filings

10-Q 1 naii20240331_10q.htm FORM 10-Q naii20240331_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

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 Ave Carlsbad, CA 92008	(760) 736-7700
(Address of principal executive offices)	(Registrant’s telephone number)

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

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

Indicate by check mark 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 ☒ No

As of May 14, 2024, 6,200,869 shares of NAI's common stock were outstanding, net of 3,280,037 treasury shares.

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TABLE OF CONTENTS

		Page

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS		1

PART I	FINANCIAL INFORMATION	2

Item 1.	Financial Statements	2

	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income	3
	Condensed Consolidated Statements of Stockholders’ Equity	4
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	18

Item 4.	Controls and Procedures	23

PART II	OTHER INFORMATION	24

Item 1.	Legal Proceedings	24

Item 1A.	Risk Factors	24

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24

Item 3.	Defaults Upon Senior Securities	24

Item 5.	Other Information	24

Item 6.	Exhibits	25

SIGNATURES		26

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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

Certain statements in this report, including information incorporated by reference, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect current views about future events and financial performance based on certain assumptions. They include opinions, forecasts, intentions, plans, goals, projections, guidance, expectations, beliefs, or other statements that are not statements of historical fact. Words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “believe,” “anticipate,” “intend,” “estimate,” “approximate,” “predict,” “forecast,” “project,” “future,” or “likely,” or the negative or other variation of such words, and similar expressions may identify a statement as a forward-looking statement. Any statements that refer to projections of our future financial performance, our anticipated growth and trends in our business, our goals, strategies, focus and plans, and other characterizations of future events or circumstances, including statements expressing general optimism or pessimism about future operating results, are forward-looking statements. Forward-looking statements in this report may include statements about:

	•	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;
	•	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;
	•	the sufficiency of our available cash, cash equivalents, and potential cash flows from our operations to fund our working capital and capital expenditure needs through the next 12 months and longer;
	•	the future adequacy and intended use of our facilities, including recommencing operations at our manufacturing facility in Carlsbad, California after a temporary closing in October 2023;
	•	future customer orders and the timing thereof;
	•	our ability to price our products to achieve profit margin targets, especially in the current volatile raw material and labor environment;
	•	our ability to maintain or increase our patent and trademark licensing revenues;
	•	our ability to improve operating efficiencies, manage costs and business risks, and improve or maintain profitability;
	•	sources, availability and quality of raw materials, including the limited number of suppliers of beta-alanine meeting our quality requirements;
	•	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;
	•	our ability to protect our intellectual property;
	•	future economic and political conditions;
	•	sources, availability and quality of raw materials, including the limited number of suppliers of beta-alanine meeting our quality requirements;
	•	currency exchange rates and their effect on our results of operations (including amounts that we may reclassify as earnings), the availability of foreign exchange facilities, our ability to effectively hedge against foreign exchange risks and the extent to which we may seek to hedge against such risks;
	•	the outcome of litigation, regulatory and tax matters we may become involved in, the costs associated with such matters and the effect of such matters on our business and results of operations;
	•	potential manufacturing and distribution channels, product returns, and potential product recalls;
	•	the impact of external factors on our business and results of operations, especially, for example, variations in quarterly net sales from seasonal and other external factors;
	•	our ability to operate within the standards set by the U.S. Food and Drug Administration’s (FDA) Good Manufacturing Practices (GMPs);
	•	the adequacy of our financial reserves and allowances;
	•	the impact of accounting pronouncements and our adoption of certain accounting guidance; and
	•	other assumptions described in this Report underlying or relating to any forward-looking statements.

Forward-looking statements in this Report speak only as of the date of this 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 Report as they identify certain important factors that could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements. These factors include, among others, the risks described under Item 1A of Part I of our fiscal 2023 Annual Report, as well as in other reports and documents we have filed and will file with the United States Securities and Exchange Commission (SEC).

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Natural Alternatives International, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

	*March 31, 2024*			*June 30, 2023*
Assets
Current assets:
Cash and cash equivalents	$	12,407		$	13,604
Accounts receivable – less allowance for doubtful accounts of $0 at March 31, 2024 and $23 at June 30, 2023		11,221			7,022
Inventories, net		21,071			29,694
Income tax receivable		1,662			305
Forward contracts		335			390
Prepaids and other current assets		7,665			5,995
Total current assets		54,361			57,010
Property and equipment, net		52,384			53,841
Operating lease right-of-use assets		44,032			20,369
Deferred tax asset – noncurrent		291			355
Other noncurrent assets, net		2,143			2,577
Total assets	$	153,211		$	134,152
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	6,970		$	7,778
Accrued liabilities		2,425			2,409
Accrued compensation and employee benefits		2,092			2,246
Customer deposits		387			317
Short-term liability – operating leases		1,134			2,448
Forward contracts		345			—
Income taxes payable		—			374
Mortgage note payable, current portion		294			312
Total current liabilities		13,647			15,884
Long-term liability – operating leases		45,423			18,965
Long-term pension liability		295			339
Mortgage note payable, net of current portion		9,007			9,205
Income taxes payable, noncurrent		740			987
Total liabilities		69,112			45,380
Commitments and contingencies (Notes E, F, and L)
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 at March 31, 2024 and June 30, 2023, issued and outstanding (net of treasury shares) 6,200,869 at March 31, 2024 and 6,073,813 at June 30, 2023		93			91
Additional paid-in capital		32,356			31,436
Retained earnings		74,840			80,183
Treasury stock, at cost, 3,280,037 shares at March 31, 2024 and 3,240,593 at June 30, 2023		(23,072	)		(22,855	)
Accumulated other comprehensive income		(118	)		(83	)
Total stockholders’ equity		84,099			88,772
Total liabilities and stockholders’ equity	$	153,211		$	134,152

See accompanying notes to condensed consolidated financial statements.

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Natural Alternatives International, Inc.

Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income

(In thousands, except share and per share data)

(Unaudited)

	*Three Months Ended*				*Nine Months Ended*
	*March 31,*				*March 31,*
	*2024*		*2023*		*2024*		*2023*
Net sales		$ 25,136		$ 32,699		$ 84,307		$ 118,121
Cost of goods sold		23,214		31,323		78,861		105,160
Gross profit		1,922		1,376		5,446		12,961
Selling, general and administrative		3,874		3,864		11,455		11,422

(Loss) income from operations		(1,952)		(2,488)		(6,009)		1,539

Other (expense) income:
Interest income		79		12		100		25
Interest expense		(74)		(116)		(237)		(246)
Foreign exchange loss		(23)		(194)		(540)		(484)
Other, net		2		(2)		3		(18)
Total other expense		(16)		(300)		(674)		(723)

(Loss) income before income taxes		(1,968)		(2,788)		(6,683)		816
(Benefit) provision for income taxes		(390)		(407)		(1,340)		331
Net (loss) income		$ (1,578)		$ (2,381)		$ (5,343)		$ 485

Unrealized gain (loss) resulting from change in fair value of derivative instruments, net of tax		119		(357)		(30)		(1,621)

Comprehensive (loss)		$ (1,459)		$ (2,738)		$ (5,373)		$ (1,136)

Net (loss) income per common share:
Basic		$ (0.27)		$ (0.41)		$ (0.91)		$ 0.08
Diluted		$ (0.27)		$ (0.41)		$ (0.91)		$ 0.08

Weighted average common shares outstanding
Basic		5,867,528		5,816,058		5,855,930		5,867,400
Diluted		5,867,528		5,816,058		5,855,930		5,885,116

See accompanying notes to condensed consolidated financial statements.

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Natural Alternatives International, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

Three-Month Period Ended March 31, 2024 and 2023

(Dollars in thousands)

(Unaudited)

																*Accumulated*
					*Additional*											*Other*
	*Common Stock*				*Paid-in*			*Retained*			*Treasury Stock*					*Comprehensive*
	*Shares*		*Amount*		*Capital*			*Earnings*			*Shares*		*Amount*			*(Loss) Income*			*Total*
Balance, December 31, 2023		9,329,406	$	91	$	32,043		$	76,418			3,240,593	$	(22,855	)	$	(242	)	$	85,455
Compensation expense related to stock compensation plans		—		—		315			—			—		—			—			315
Issuance of common stock for restricted stock grants		151,500		2		(2	)		—			—		—			—			—
Change in minimum pension liability, net of tax		—		—		—			—			—		—			5			5
Repurchase of common stock		—		—		—			—			36,444		(217	)		—			(217	)
Forfeiture of restricted stock		—		—		—			—			3,000		—			—			—
Unrealized loss resulting from change in fair value of derivative instruments, net of tax		—		—		—			—			—		—			119			119
Net loss		—		—		—			(1,578	)		—		—			—			(1,578	)
Balance, March 31, 2024		9,480,906	$	93	$	32,356		$	74,840			3,280,037	$	(23,072	)	$	(118	)	$	84,099

Balance, December 31, 2022		9,191,406	$	89	$	30,890		$	80,527			3,177,160	$	(22,411	)	$	435		$	89,530
Compensation expense related to stock compensation plans		—		—		258			—			—		—			—			258
Issuance of common stock for restricted stock grants		118,000		2		(2	)		—			—		—			—			—
Repurchase of common stock		—		—		—			—			49,034		(444	)		—			(444	)
Unrealized loss resulting from change in fair value of derivative instruments, net of tax		—		—		—			—			5,999		—			(357	)		(357	)
Net loss		—		—		—			(2,381	)		—		—			—			(2,381	)
Balance, March 31, 2023		9,309,406	$	91	$	31,146		$	78,146			3,232,193	$	(22,855	)	$	78		$	86,606

See accompanying notes to condensed consolidated financial statements.

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Natural Alternatives International, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

Nine-Month Period Ended March 31, 2024 and 2023

(Dollars in thousands)

(Unaudited)

																*Accumulated*
					*Additional*											*Other*
	*Common Stock*				*Paid-in*			*Retained*			*Treasury Stock*					*Comprehensive*
	*Shares*		*Amount*		*Capital*			*Earnings*			*Shares*		*Amount*			*(Loss) Income*			*Total*
Balance, June 30, 2023		9,314,406	$	91	$	31,436		$	80,183			3,240,593	$	(22,855	)	$	(83	)	$	88,772
Compensation expense related to stock compensation plans		—		—		922			—			—		—			—			922
Issuance of common stock for restricted stock grants		166,500		2		(2	)		—			—		—			—			—
Change in minimum pension liability, net of tax		—		—		—			—			—		—			(5	)		(5	)
Repurchase of common stock		—		—		—			—			36,444		(217	)		—			(217	)
Forfeiture of restricted stock		—		—		—			—			3,000		—			—			—
Unrealized loss resulting from change in fair value of derivative instruments, net of tax		—		—		—			—			—		—			(30	)		(30	)
Net loss		—		—		—			(5,343	)		—		—			—			(5,343	)
Balance, March 31, 2024		9,480,906	$	93	$	32,356		$	74,840			3,280,037	$	(23,072	)	$	(118	)	$	84,099

Balance, June 30, 2022		9,191,406		89		30,423			77,661			3,061,795		(21,352	)		1,699		$	88,520
Compensation expense related to stock compensation plans		—		—		725			—			—		—			—			725
Issuance of common stock for restricted stock grants		118,000		2		(2	)		—			—		—			—			—
Repurchase of common stock		—		—		—			—			164,399		(1,503	)		—			(1,503	)
Forfeiture of restricted stock		—		—		—			—			5,999		—			—			—
Unrealized loss resulting from change in fair value of derivative instruments, net of tax		—		—		—			—			—		—			(1,621	)		(1,621	)
Net income		—		—		—			485			—		—			—			485
Balance, March 31, 2023		9,309,406	$	91	$	31,146		$	78,146			3,232,193	$	(22,855	)	$	78		$	86,606

See accompanying notes to condensed consolidated financial statements.

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Natural Alternatives International, Inc.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	*Nine Months Ended*
	*March 31,*
	*2024*			*2023*
Cash flows from operating activities
Net (loss) income	$	(5,343	)	$	485
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Recovery of uncollectible accounts receivable		—			(18	)
Depreciation and amortization		3,439			3,050
Non-cash compensation		922			725
Non-cash lease expense		4,007			2,937
Pension expense, net of contributions		(44	)		75
Gain on disposal of assets		—			(43	)
Changes in operating assets and liabilities:
Accounts receivable		(4,199	)		9,829
Inventories, net		8,623			(6,834	)
Prepaids and other assets		(1,561	)		(868	)
Accounts payable and accrued liabilities		(722	)		(6,178	)
Forward contracts		755			517
Accrued compensation and employee benefits		(154	)		(614	)
Operating lease liabilities		(2,525	)		(2,455	)
Income taxes		(1,978	)		(1,078	)
Net cash provided by (used in) operating activities		1,220			(470	)

Cash flows from investing activities
Proceeds from sale of property and equipment		—			48
Purchases of property and equipment		(1,983	)		(13,239	)
Net cash used in investing activities		(1,983	)		(13,191	)

Cash flows from financing activities
Borrowings on line of credit		—			9,100
Payments on long-term debt		(217	)		(209	)
Repurchase of common stock		(217	)		(1,503	)
Net cash (used in) provided by financing activities		(434	)		7,388

Net decrease in cash and cash equivalents		(1,197	)		(6,273	)
Cash and cash equivalents at beginning of period		13,604			21,833
Cash and cash equivalents at end of period	$	12,407		$	15,560

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	184		$	507
Income taxes	$	283		$	1,321

See accompanying notes to condensed consolidated financial statements.

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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. 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 and nine months ended March 31, 2024 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, 2023 (“2023 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 2023 Annual Report unless otherwise noted below.

Recently Adopted Accounting Pronouncements

We did not adopt any accounting pronouncements during the three months ended March 31, 2024.

Recently Issued Accounting and Regulatory Pronouncements

In October 2023, the FASB issued Accounting Standards Update ("ASU") 2023-06, "Disclosure Improvements - Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative". ASU 2023-06 clarifies or improves disclosure and presentation requirements on various disclosure areas, including the statement of cash flows, earnings per share, debt, equity, and derivatives. The amendments will align the requirements in the FASB Accounting Standards Codification (ASC) with the SEC’s regulations. The amendments in this ASU will be effective on the date the related disclosures are removed from Regulation S-X or Regulation S-K by the SEC, and will not be effective if the SEC has not removed the applicable disclosure requirement by June 30, 2027. Early adoption is prohibited. As we are currently subject to these SEC requirements, this ASU is not expected to have a material impact on our Consolidated Financial Statements or related disclosures.

In November 2023, the FASB issued ASU 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures". This amendment improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, with early adoption permitted. This ASU will be adopted in our fiscal 2025. We are currently evaluating the impact of this standard; however, we do not expect it to have a material impact on our Consolidated Financial Statements.

In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures". The amendments in this update address investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. This update also includes certain other amendments to improve the effectiveness of income tax disclosures. The amendments in ASU 2023-09 are effective for fiscal years beginning after December 15, 2024, with early adoption permitted. This ASU will be adopted in our first quarter of fiscal 2026. We are currently evaluating the impact of this standard; however, we do not expect it to have a material impact on our Consolidated Financial Statements.

In March 2024, the SEC adopted rules under SEC Release No. 33-11275, "The Enhancement and Standardization of Climate-Related Disclosures for Investors", which require a registrant to disclose information in annual reports and registration statements about climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition. The information would include disclosure of a registrant's greenhouse gas emissions. In addition, certain disclosures related to severe weather events and other natural conditions will be required in a registrant’s audited financial statements. Annual disclosure requirements would be effective for the Company as early as the fiscal year beginning July 1, 2027. However, in April 2024, the SEC voluntarily stayed the final rules pending certain legal challenges. It is presently unclear what the nature and scope of these requirements may be when and if the stay is lifted. We are evaluating the impact these anticipated types of rules may have on our record keeping and disclosures.

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Net (Loss) Income per Common Share

We compute net (loss) 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 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 (loss) income per common share as follows (in thousands, except per share data):

	*Three Months Ended*						*Nine Months Ended*
	*March 31,*						*March 31,*
	*2024*			*2023*			*2024*			*2023*
Numerator
Net (loss) income	$	(1,578	)	$	(2,381	)	$	(5,343	)	$	485

Denominator
Basic weighted average common shares outstanding		5,868			5,816			5,856			5,867
Dilutive effect of restricted stock		—			—			—			18
Diluted weighted average common shares outstanding		5,868			5,816			5,856			5,885

Basic net (loss) income per common share	$	(0.27	)	$	(0.41	)	$	(0.91	)	$	0.08

Diluted net (loss) income per common share	$	(0.27	)	$	(0.41	)	$	(0.91	)	$	0.08

We exclude the impact of restricted stock from the calculation of diluted net loss per common share in periods where we have a net loss or when their inclusion would be antidilutive. During the three months ended March 31, 2024, we excluded 173,230 shares of unvested restricted stock. During the nine months ended March 31, 2024, we excluded 215,180 shares of unvested stock. During the three months ended March 31, 2023, we excluded 227,082 shares of restricted stock, and during the nine months ended March 31, 2023, we excluded 151,585 shares of unvested restricted stock.

Revenue Recognition

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

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

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

We recognize revenue in certain circumstances before delivery to the customer has occurred (commonly referred to as bill-and-hold transactions). Products sold under bill-and-hold arrangements are recorded as revenue when risk of ownership has been transferred to the customer, but the product has not shipped due to a substantive reason, typically at the customer’s request. The product must be separately identified as belonging to the customer, ready for physical transfer to the customer, and we cannot have the ability to redirect the product to another customer.

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

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Contract liabilities and revenue recognized were as follows (in thousands):

		*June 30, 2023*				*Additions*				*Revenue Recognized*				*Customer Refunds*				*March 31, 2024*
Contract Liabilities (Customer Deposits)		$	317			$	1,406			$	(1,336	)		$	—			$	387

		*June 30, 2022*				*Additions*				*Revenue Recognized*				*Customer Refunds*				*March 31, 2023*
Contract Liabilities (Customer Deposits)		$	140			$	326			$	(137	)		$	(3	)		$	326

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 March 31, 2024, we had no estimated returns liability.

We currently own certain U.S. patents, and each patent’s corresponding foreign patent applications. All of these patents and patent rights relate to the ingredient known as beta-alanine marketed and sold under our CarnoSyn® and SR CarnoSyn® trade names. We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of $2.7 million during the three months ended March 31, 2024, and $6.6 million during the nine months ended March 31, 2024. We similarly recorded $2.3 million during the three months ended March 31, 2023, and $5.2 million during the nine months ended March 31, 2023. 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 approximately $96,000 during the three months ended March 31, 2024, and $278,000 during the nine months ended March 31, 2024. We recorded approximately $107,000 of royalty expense during the three months ended March 31, 2023, and $213,000 during the nine months ended March 31, 2023.

Stock-Based Compensation

The Board of Directors approved our current omnibus equity incentive plan that became effective January 1, 2021 (the “2020 Plan”). The 2020 Plan was approved by our stockholders at the Annual Meeting of Stockholders on December 4, 2020. Under the 2020 Plan, we may grant nonqualified and incentive stock options, restricted stock grants, restricted stock units, stock appreciation rights, and other stock-based awards to employees, non-employee directors and consultants.

We did not have any stock option activity or stock options outstanding during the three and nine months ended March 31, 2024, or March 31, 2023.

During the three months ended March 31, 2024 we granted a total of 151,500 restricted stock shares to members of our Board of Directors and key members of our management team. During the nine months ended March 31, 2024, we granted a total of 166,500 restricted stock shares to members of our Board of Directors and key members of our management team. During the three and nine months ended March 31, 2023, we granted a total of 118,000 restricted stock shares to members of our Board of Directors and key members of our management team. During the three and nine months ended March 31, 2024, 3,000 restricted stock shares were forfeited. During the three and nine months ended March 31, 2023, 5,999 restricted stock shares were forfeited. Our net loss included stock-based compensation expense with the vesting of prior restricted stock grants of approximately $0.3 million for the three months ended March 31, 2024 and $0.9 million for the nine months ended March 31, 2024. Our net income included stock-based compensation expense in connection with the vesting of prior restricted stock grants of approximately $0.3 million for the three months ended March 31, 2023, and $0.7 million for the nine months ended March 31, 2023.

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.

During the three and nine months ended March 31, 2024, we granted a total of $0.9 million in deferred cash awards to members or our Board of Directors and certain key members or our management team. During the three and nine months ended March 31, 2023, we granted a total of $0.6 million in deferred cash awards to members or our Board of Directors and certain key members or our management team. Each deferred cash award provides for three equal cash payments to the applicable Participant to be paid on the one year, two year, and three year anniversaries of the date of the grant of such Awards, (the “Award Date”); provided on the date of each payment (the “Payment Date”), the Participant has been since Award Date, and continues to be through the Payment Date, a member of our Board of Directors or an employee of NAI. In the event a Participant ceases to be an employee of NAI or a member of our Board of Directors prior to any Payment Date, no further payments are to be made in connection with the Award.

No deferred cash awards were forfeited during the three and nine months ended March 31, 2024, and March 31, 2023.

Fair Value of Financial Instruments

Except for cash and cash equivalents, as of March 31, 2024, and June 30, 2023, we did not have any financial assets or liabilities classified as Level 1. We classify derivative forward exchange and interest rate swap contracts as Level 2 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.

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Fair value of derivative instruments classified as Level 2 assets and liabilities consisted of the following (in thousands):

	*March 31, 2024*			*June 30, 2023*
Euro Forward Contract– Current Assets	$	335		$	250
Swiss Franc Forward Contract – Current Assets		—			140
Total Derivative Contracts – Current Assets		335			390

Interest Swap – Other noncurrent Assets		221			532
Euro Forward Contract– Other noncurrent Assets		—			15
Total Derivative Contracts – Other noncurrent Assets		221			547

Euro Forward Contract– Current Liabilities		—			—
Swiss Franc Forward Contract – Current Liabilities		(345	)		—
Total Derivative Contracts – Current Liabilities		(345	)		—

Fair Value Net Asset – all Derivative Contracts	$	211		$	937

We also classify any outstanding line of credit and term loan balance as a Level 2 liability. As of March 31, 2024, and June 30, 2023, 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 2023 or the three and nine months ended March 31, 2024.

B. Inventories, net

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

	*March 31,*			*June 30,*
	*2024*			*2023*
Raw materials	$	15,219		$	20,946
Work in progress		3,261			4,504
Finished goods		3,273			4,928
Reserve		(682	)		(684	)
	$	21,071		$	29,694

C. Property and Equipment

Property and equipment consisted of the following (in thousands):

	*Depreciable Life*	*March 31,*			*June 30,*
	*In Years*	*2024*			*2023*
Land	NA	$	8,941		$	8,940
Building and building improvements	7 – 39		25,251			24,712
Machinery and equipment	3 – 12		42,318			41,460
Office equipment and furniture	3 – 5		6,616			6,522
Vehicles	3		227			227
Leasehold improvements	1 – 15		23,133			22,641
Total property and equipment			106,486			104,502
Less: accumulated depreciation and amortization			(54,102	)		(50,661	)
Property and equipment, net		$	52,384		$	53,841

Depreciation and amortization expense was approximately $1.1 million during the three months ended March 31, 2024, and $3.4 million during the nine months ended March 31, 2024. Depreciation expense was approximately $1.0 million during the three months ended March 31, 2023, and $3.1 million during the nine months ended March 31, 2023. Construction in progress is included in the building and building improvements line.

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D. Other Comprehensive (Loss) Income

Other comprehensive (loss) income (“OCL” and “OCI”) consisted of the following during the three and nine months ended March 31, 2024, and March 31, 2023 (in thousands):

	*Three Months Ended*
	*March 31, 2024*
	*Defined*			*Unrealized (Losses)*			*Unrealized Gains*
	*Benefit*			*Gains on*			*(Losses) on*
	*Pension*			*Cash Flow*			*Swap*
	*Plan*			*Hedges*			*Derivative*			*Total*
Beginning Balance	$	(390	)	$	(104	)	$	252		$	(242	)
OCI/OCL before reclassifications		—			285			(96	)		189
Amounts reclassified from OCI to Sales		—			(35	)		—			(35	)
Tax effect of OCI activity		5			(52	)		17			(30	)
Net current period OCI/OCL		5			198			(79	)		124
Ending Balance	$	(385	)	$	94		$	173		$	(118	)

	*Nine Months Ended*
	*March 31, 2024*
	*Defined*			*Unrealized Gains*			*Unrealized Gains*
	*Benefit*			*(Losses) on*			*(Losses) on*
	*Pension*			*Cash Flow*			*Swap*
	*Plan*			*Hedges*			*Derivative*			*Total*
Beginning Balance	$	(380	)	$	(110	)	$	407		$	(83	)
OCI/OCL before reclassifications		—			286			(311	)		(25	)
Amounts reclassified from OCI to Sales		—			54			—			54
Tax effect of OCI activity		(5	)		(136	)		77			(64	)
Net current period OCI/OCL		(5	)		204			(234	)		(35	)
Ending Balance	$	(385	)	$	94		$	173		$	(118	)

	*Three Months Ended*
	*March 31, 2023*
	*Defined*			*Unrealized Gains*			*Unrealized Gains*
	*Benefit*			*(Losses) on*			*(Losses) on*
	*Pension*			*Cash Flow*			*Swap*
	*Plan*			*Hedges*			*Derivative*			*Total*
Beginning Balance	$	(444	)	$	391		$	488		$	435
OCI/OCL before reclassifications		—			713			(90	)		623
Amounts reclassified from OCI to Sales		—			(1,181	)		—			(1,181	)
Tax effect of OCI activity		—			122			79			201
Net current period OCI/OCL		—			(346	)		(11	)		(357	)
Ending Balance	$	(444	)	$	45		$	477		$	78

	*Nine Months Ended*
	*March 31, 2023*
	*Defined*			*Unrealized Gains*			*Unrealized Gains*
	*Benefit*			*(Losses) on*			*(Losses) on*
	*Pension*			*Cash Flow*			*Swap*
	*Plan*			*Hedges*			*Derivative*		*Total*
Beginning Balance	$	(444	)	$	1,795		$	348	$	1,699
OCI/OCL before reclassifications		—			1,328			88		1,416
Amounts reclassified from OCI to Sales		—			(3,604	)		41		(3,563	)
Tax effect of OCI activity		—			526			—		526
Net current period OCI/OCL		—			(1,750	)		129		(1,621	)
Ending Balance	$	(444	)	$	45		$	477	$	78

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E. Leases

We currently lease our Vista, California and Lugano, Switzerland product manufacturing and support facilities.

On July 18, 2023, we entered into a Fourth Amendment to the Lease of our Vista, California manufacturing facility. The Fourth Amendment extends the term of the Lease by an additional ten years and five months commencing April 1, 2024. The amended lease covering two buildings and approximately 162,000 square feet will result in an increase in base rent to $1.50 per square foot, after five free months of base rent beginning at the commencement of the extended term. NAI intends to construct substantial improvements to the facilities including but not limited to installation of an approximately $2.3 million solar electrical generating system on both buildings, and other substantial improvements. Pursuant to the Fourth Amendment, the Landlord will reimburse NAI for up to $1.1 million of these tenant improvements to the buildings. Our lease liability and Right of Use asset were both increased by approximately $25.9 million as a result of this lease extension effective on the date that the Fourth Amendment was executed.

On January 26, 2024, we exercised the early termination of an apartment lease in Lugano, Switzerland. The early termination reduced the lease term by 9 years and 8 months thus ending on April 30, 2024. Our lease liability and Right of Use asset were both decreased by approximately $0.3 million as a result of the early termination of the lease agreement.

Our leases are classified as operating leases. 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 March 31, 2024, the weighted average remaining lease term for our operating leases was 9.7 years and the weighted average discount rate for our operating leases was 5.92%. As of June 30, 2023, the weighted average remaining lease term for our operating leases was 5.3 years and the weighted average discount rate was 4.12%.

Other information related to leases as of March 31, 2024, and March 31, 2023, was as follows (in thousands):

Supplemental Cash Flow Information	Nine Months Ended		Nine Months Ended
	March 31, 2024		March 31, 2023
Cash paid for amounts included in the measurement of operating lease liabilities	$	2,523	$	2,433
Increase in operating lease liabilities and right-of-use assets due to lease remeasurement	$	25,589	$	—

F. Debt

On May 24, 2021, we entered into a renewed credit facility with Wells Fargo Bank, N.A (“Wells Fargo”) to extend the maturity for our working line of credit from November 1, 2022, to May 24, 2024. That credit facility provided total lending capacity of up to $20.0 million and allowed us to use the credit facility for working capital as well as potential acquisitions. On August 18, 2021, we entered into an amendment of that 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 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 revised credit notes reflected a change in the interest rate reference from LIBOR to Secured Overnight Financing Rate (SOFR). The Credit Agreement was amended and a new Revolving Line of Credit Note, and Security Agreement were entered into. A Term Note and real property security documents were added to secure the Term Note by the Carlsbad property.

Subsequently we entered into a Second and Third Amendment that changed certain limits on our use of the line of credit. In the second quarter of fiscal 2024 we failed to meet three continuing requirements for our line of credit and were not in compliance at the end of our second quarter. As of February 13, 2024, we entered into a Fourth Amendment to our credit facility with Wells Fargo. The Fourth Amendment waived all prior instances of non-compliance, decreased our total borrowing capacity on the line of credit to $12.5 million, increased the interest rate on borrowings under the line of credit to 2.25% from 1.29% above the daily simple SOFR rate, modified our continuing compliance requirements, and reduced the uses we can fund with the line of credit.

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On December 31, 2023, we were not in compliance with certain financial covenants, including those related to net income requirements and the fixed charge coverage ratio. On February 13, 2024, we entered into a fourth amendment to our credit facility with Wells Fargo. Under the terms of the Credit Agreement, as amended by the Fourth Amendment, borrowings are subject to eligibility requirements including maintaining (i) a ratio of total liabilities to tangible net worth of not greater than 1.50 to 1.0 at any time; (ii) limits our losses to a decreasing amount over the next three quarters, with net income after taxes of not less than $1.00 by September 30, 2024; (iii) a rolling four-quarter fixed charge coverage ratio not less than 1.25 to 1.0 as of December 31, 2024 and each quarter thereafter. The Fourth Amendment includes a limitation on the amount of capital expenditures that can be made in a given fiscal year, with such limitation set at $6.5 million, requires us to suspend share repurchase and dividend activity, and includes an availability reserve of 10% that will be in place until we return to profitability. Any amounts outstanding under the line of credit bear interest at a fixed or fluctuating interest rate as elected by us from time to time. Any amounts outstanding under the line of credit must be paid in full on or before the maturity date which remains at May 23, 2025. Amounts outstanding that are subject to a fluctuating interest rate may be prepaid at any time without penalty. Amounts outstanding that are subject to a fixed interest rate may be prepaid at any time in minimum amounts of $100,000, subject to a prepayment fee equal to the sum of the discounted monthly differences between payment under a fixed rate versus payment under the variable rate for each month from the month of prepayment through the month in which the then applicable fixed rate term matures. There is an unused commitment fee of 0.25% required as part of the line of credit, and an origination fee of 1% which we paid upon execution of the Fourth Amendment.

The Term Note used as part of the purchase consideration of our powder processing and warehouse property in Carlsbad, California referenced above, was 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 bear interest equal to 1.8% above the SOFR rolling 30-day average. In connection with this 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 first three 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, 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.

As of March 31, 2024, we had $9.3 million outstanding under the Term Note used in August 2021 for the purchase of our Carlsbad, California powder processing and warehouse property.

On March 31, 2024, we were in compliance with all of the financial and other covenants required under the Amended Credit Agreement.

As of March 31, 2024, we had zero outstanding on our credit facility with Wells Fargo Bank. Our available borrowing capacity under the amended terms of our amended credit facility was $6.4 million as of March 31, 2024.

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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 (iii) these customers’ ability to make payments when due, each individually could have a material adverse impact on our net sales and net operating results. 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*				*Nine Months Ended*
	*March 31,*				*March 31,*
	*2024*		*2023*		*2024*		*2023*

Customer 1	$	11,251	$	15,962	$	35,215	$	46,948
Customer 2		(a)		9,558		13,604		38,823
Customer 3		2,640		(a)		(a)		(a)
	$	13,891	$	25,520	$	48,819	$	85,771

(a) Sales were less than 10% of the respective period's consolidated net sales.

Accounts receivable from these customers totaled $7.6 million at March 31, 2024 and $5.2 million at June 30, 2023.

We buy certain products, including beta-alanine, from a limited number of raw material 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’s total raw material purchases were as follows (dollars in thousands):

	*Three Months Ended*				*Nine Months Ended*
	*March 31,*				*March 31,*
	*2024*		*2023*		*2024*		*2023*

Supplier 1	$	4,149		3,916	$	10,018		11,394
	$	4,149	$	3,916	$	10,018	$	11,394

H. Segment Information

Our business consists of two segments for financial reporting purposes. The two segments are identified as (i) private-label contract manufacturing, which primarily relates to the provision of private-label contract manufacturing services to companies that market and distribute nutritional supplements and other health care products, and (ii) patent and trademark licensing, which primarily includes direct raw material sales and royalty income from our license and supply agreements associated with the sale and use of beta-alanine under our CarnoSyn® and SR CarnoSyn® trade names.

We evaluate performance 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 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 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 above and in the consolidated financial statements included in our 2023 Annual Report.

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Our operating results by business segment were as follows (in thousands):

	*Three Months Ended*				*Nine Months Ended*
	*March 31,*				*March 31,*
	*2024*		*2023*		*2024*		*2023*
Net Sales
Private label contract manufacturing	$	22,479	$	30,354	$	77,718	$	112,969
Patent and trademark licensing		2,657		2,345		6,589		5,152
Total Net Sales	$	25,136	$	32,699	$	84,307	$	118,121

	*Three Months Ended*						*Nine Months Ended*
	*March 31,*						*March 31,*
	*2024*			*2023*			*2024*			*2023*
(Loss) Income from Operations
Private label contract manufacturing	$	(1,007	)	$	(1,243	)	$	(2,367	)	$	6,264
Patent and trademark licensing		1,201			790		$	2,592			1,485
Income (Loss) from operations of reportable segments		194			(453	)	$	225			7,749
Corporate expenses not allocated to segments		(2,146	)