NAI(NAII) - 2022 Q4 - Annual Report

Part I Business NAI is a leading nutritional supplement formulator and manufacturer, primarily through private-label contract manufacturing and beta-alanine patent licensing, operating certified facilities in the US and Switzerland - The company's primary business is private-label contract manufacturing for the nutritional supplement industry, complemented by a patent and trademark licensing segment for its beta-alanine ingredient, CarnoSyn®[15] - NAI operates certified manufacturing facilities in Vista and Carlsbad, California, and Manno, Switzerland, holding certifications from TGA, NSF International, Health Canada, and Swissmedic for global distribution[20][21][26] Net Sales by Segment (Fiscal Years 2022 vs. 2021) | Segment | FY 2022 Sales ($ thousands) | % of Total | FY 2021 Sales ($ thousands) | % of Total | | :--- | :--- | :--- | :--- | :--- | | Private-label Contract Manufacturing | $154,798 | 91% | $164,310 | 92% | | Patent and Trademark Licensing | $16,168 | 9% | $14,210 | 8% | | Total Net Sales | $170,966 | 100% | $178,520 | 100% | - The company faces customer concentration risk, with three private-label contract manufacturing customers each accounting for over 10% of consolidated net sales[40] - As of June 30, 2022, NAI employed 294 full-time employees in the U.S. and 95 full-time employees in its Swiss subsidiary, NAIE[58][59] Risk Factors The company faces significant risks including supply chain disruptions from COVID-19, economic downturns, intense competition, dependency on key suppliers and customers, regulatory hurdles, and intellectual property litigation - The COVID-19 pandemic has caused and may continue to cause disruptions in supply chains, production, and labor availability, potentially impacting operational and financial performance[70][71] - The company derives a significant portion of its revenue from a limited number of customers, with sales to the three largest customers constituting approximately 72% of consolidated net sales in fiscal year 2022[91] - A single manufacturer in Japan supplies all beta-alanine for the CarnoSyn® and SR CarnoSyn® business, creating a significant supplier dependency risk[85] - The company's ability to maintain or grow revenue from its patent and trademark licensing segment is highly dependent on its ability to defend its patents for beta-alanine (CarnoSyn® and SR CarnoSyn®)[94] - Officers and directors beneficially owned approximately 20% of outstanding common stock as of June 30, 2022, with the CEO and Chairman, Mark LeDoux, and his affiliates owning about 16%, giving them significant influence over corporate matters[110] Properties As of June 30, 2022, NAI owns its Carlsbad, CA headquarters and a new powder facility, while leasing its primary US manufacturing site in Vista, CA, and Swiss facilities, all deemed adequate for operations Summary of Facilities as of June 30, 2022 | Location | Nature of Use | Square Feet | How Held | | :--- | :--- | :--- | :--- | | Vista, CA USA | Manufacturing, warehousing, packaging | 162,000 | Leased | | Manno, Switzerland | Manufacturing, warehousing, packaging | 95,990 | Leased | | Manno, Switzerland | Warehousing | 30,892 | Leased | | Carlsbad, CA USA | Corporate headquarters | 20,981 | Owned | | Carlsbad, CA USA | Powder filling, packaging, storage | 54,154 | Owned | - A new facility purchased in August 2021 in Carlsbad, CA is being converted into a high-volume powder blending and packaging facility, expected to be operational by mid-fiscal 2023[128] Legal Proceedings As of September 21, 2022, NAI and its subsidiary NAIE were not party to any material pending legal proceedings, with management not expecting current matters to materially adversely affect the business - As of September 21, 2022, the company was not a party to any material pending legal proceedings[126] Mine Safety Disclosures This item is not applicable to the company - Not applicable[128] Part II Market for Our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities NAI common stock trades on Nasdaq under "NAII"; the company has never paid and does not intend to pay cash dividends, instead retaining earnings for growth, and repurchased 37,305 shares for $0.4 million in Q4 FY2022 - The company's common stock is traded on the Nasdaq Global Market under the symbol "NAII"[130] - NAI has never paid a dividend on its common stock and does not intend to in the foreseeable future, with a policy to retain all earnings for growth[132] Common Stock Repurchases (Quarter Ended June 30, 2022) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 1-30, 2022 | 4,359 | $11.64 | | May 1-31, 2022 | 15,114 | $10.20 | | June 1-30, 2022 | 17,832 | $10.56 | | Total | 37,305 | - | Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2022, consolidated net sales decreased 4% to $171.0 million, driven by a 6% decline in private-label manufacturing due to a 40% reduction from the largest customer, partially offset by a 14% increase in licensing revenue, while net income remained flat at $10.7 million Consolidated Operating Results (Fiscal Years Ended June 30) | Metric ($ in thousands) | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Total net sales | $170,966 | $178,520 | $(7,554) | (4)% | | Gross profit | $30,509 | $30,442 | $67 | 0% | | Income from operations | $13,679 | $13,672 | $7 | 0% | | Net income | $10,712 | $10,768 | $(56) | (1)% | - Private-label contract manufacturing sales decreased by 6% in FY2022, mainly due to a 40% drop in sales to the largest customer, whose revenue concentration fell from 51% to 32% of total net sales[142][153] - Patent and trademark licensing revenue grew 14% to $16.2 million in FY2022, attributed to new customers, higher prices, and increased demand as athletic activities resumed post-COVID restrictions[143][154] - For fiscal 2023, the company anticipates consolidated net sales to increase between 10.0% and 15.0% compared to fiscal 2022, with operating income projected to be between 5.0% and 7.0% of net sales[146] - Net cash from operating activities was $11.9 million in FY2022, down from $20.8 million in FY2021, while cash used in investing activities increased significantly to $26.5 million due to the purchase and retrofitting of a new manufacturing facility[158][161] Financial Statements and Supplementary Data Audited consolidated financial statements for FY2022 and FY2021 are presented with an unqualified auditor's opinion, highlighting revenue recognition as a critical audit matter, and showing total assets increased to $146.0 million while liabilities rose to $57.5 million - The independent auditor, HASKELL & WHITE LLP, issued an unqualified opinion on the consolidated financial statements, identifying revenue recognition as a critical audit matter due to contract complexity and judgment[172][177] Key Balance Sheet Data (as of June 30) | ($ in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $21,833 | $32,133 | | Total current assets | $76,746 | $80,348 | | Total assets | $146,003 | $120,281 | | Liabilities & Equity | | | | Total current liabilities | $23,261 | $22,072 | | Total liabilities | $57,483 | $40,198 | | Total stockholders' equity | $88,520 | $80,083 | Key Income Statement Data (for the year ended June 30) | ($ in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net sales | $170,966 | $178,520 | | Gross profit | $30,509 | $30,442 | | Income from operations | $13,679 | $13,672 | | Net income | $10,712 | $10,768 | | Diluted EPS | $1.74 | $1.69 | - The business is divided into two reportable segments: private-label contract manufacturing and patent/trademark licensing, generating $154.8 million in sales and $15.7 million in operating income for the former, and $16.2 million in sales and $6.8 million in operating income for the latter in FY2022[308][310] - The company has significant customer and supplier concentration, with three customers accounting for 72% of net sales and one raw material supplier accounting for 17% of total raw material purchases in FY2022[295][296] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure No disagreements with accountants on accounting and financial disclosure were reported during the period - None reported[318] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of June 30, 2022, with no material changes reported during the fourth quarter - Based on an evaluation as of June 30, 2022, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective[320] - Management's assessment concluded that the company's internal control over financial reporting was effective as of June 30, 2022, based on the COSO 2013 framework[323] Other Information No other information was reported for this period - None[326] Part III Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, and Certain Relationships Information for Items 10 through 14 is incorporated by reference from the definitive proxy statement for the Annual Meeting of Stockholders, scheduled to be filed by October 28, 2022 - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held on December 2, 2022[328] Part IV Exhibits and Financial Statement Schedules This section lists financial statements filed under Item 8 and provides an index of all exhibits filed with the report or incorporated by reference, including corporate governance documents, material contracts, and SEC-required certifications - This section contains the list of financial statements included in Item 8 and an index of all exhibits filed with the report[330][331][332]