Note A - Basis of Presentation and Summary of Significant Accounting Policies

9 Months Ended

Mar. 31, 2022

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block]

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, 2022 are not necessarily indicative of the operating results for the full fiscal year or for any future periods.

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

Recently Adopted Accounting Pronouncements

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

Recently Issued Accounting and Regulatory Pronouncements

On March 28, 2022, the Financial Accounting Standards Board (the "FASB”) issued Accounting Standards Update ("ASU") No. 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method. This new standard clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets. The ASU amends the guidance in ASU 2017-123 (released on August 28, 2017) that, among other things, established the “last-of-layer” method for making the fair value hedge accounting for these portfolios more accessible. ASU 2022-01 renames that method the “portfolio layer” method and addresses feedback from stakeholders regarding its application. This standard is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted in any interim period within that year. This ASU will be adopted in our first quarter of fiscal 2023. We do not expect this ASU to have a material impact on our consolidated financial statements.

Net Income per Common Share

We compute net income per common share using the weighted average number of common shares outstanding during the period, and diluted net income per common share using the additional dilutive effect of all dilutive securities. The dilutive impact of stock options and unvested restricted shares account for the additional weighted average shares of common stock outstanding for our diluted net income per common share computation. We calculated basic and diluted net income per common share as follows (in thousands, except per share data):

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2022		2021		2022		2021
Numerator
Net income	$	2,504	$	1,916	$	7,607	$	7,806
Denominator
Basic weighted average common shares outstanding		6,003		6,201		6,168		6,296
Dilutive effect of stock options and restricted stock		38		126		48		105
Diluted weighted average common shares outstanding		6,041		6,327		6,216		6,401
Basic net income per common share	$	0.42	$	0.31	$	1.23	$	1.24
Diluted net income per common share	$	0.41	$	0.30	$	1.22	$	1.22

We excluded 126,850 shares of restricted stock and no shares related to stock options for the three and nine months ended March 31, 2022, as their impact would have been anti-dilutive. We excluded 91,773 shares of restricted stock and no shares related to stock options for the three months ended March 31, 2021. During the nine months ended March 31, 2021, we excluded shares relating to stock options totaling 30,000 and 69,477 shares of unvested restricted stock, as their impact would have been anti-dilutive.

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 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 contracts fulfillment as a contract liability and classified as customer deposits on the consolidated balance sheet.

Except for product defects, no right of return exists on the sale of our products. We estimate returns based on historical experience and recognize a returns liability for any estimated returns. As of March 31, 2022, we have no known returns liability.

We have an Exclusive Manufacturing Agreement with The Juice Plus+ Company LLC (“Juice Plus+”) through August 6, 2025. Pursuant to the Exclusive Manufacturing Agreement, Juice Plus+ has granted us exclusive rights to manufacture and supply them with certain of their products within 24 countries where Juice Plus+ currently sells those products. Pursuant to this Exclusive Manufacturing Agreement, we provide Juice Plus+ with a cash discount. We recorded $0.3 million of “Cash Sales Discount” for the three months ended March 31, 2022, and $1.0 million during the nine months ended March 31, 2022, which was recorded as a reduction to net sales. We recorded $0.4 million of cash sales discount during the three months ended March 31, 2021 and $1.2 million during the nine months ended March 31, 2021.

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 $4.8 million during the three months ended March 31, 2022, and $13.5 million during the nine months ended March 31, 2022. We similarly recorded $4.1 million during the three months ended March 31, 2021, and $9.6 million during the nine months ended March 31, 2021. These royalty income and raw material sale amounts resulted in royalty expense paid to the original patent holders from whom NAI acquired its patents and patent rights. We recognized royalty expense as a component of cost of goods sold in the amount of $0.2 million during the three months ended March 31, 2022, and $0.6 million during the nine months ended March 31, 2022. We recorded $0.2 million during the three months ended March 31, 2021, and $0.4 million during the nine months ended March 31, 2021.

Stock-Based Compensation

The Board of Directors approved a new omnibus equity incentive plan that became effective January 1, 2021 (the “2020 Plan”), which 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 grant any options during each of the three and nine month periods ending March 31, 2022 and March 31, 2021. No options were exercised during the three and nine month periods ending March 31, 2022. During the three months ended March 31, 2021, 10,000 stock options were exercised. During the nine months ended March 31, 2021, 110,000 stock options were exercised. These exercises were cashless net exercises resulting in the issuance of 7,833 shares for the three months ended March 31, 2021 and 38,325 for the nine months ended March 31, 2021. There were no option forfeitures during the three and nine month periods ended March 31, 2022 or March 31, 2021. As of March 31, 2022, we did not have any stock options outstanding.

During the three and nine months ended March 31, 2022, we granted a total of 126,850 restricted stock shares to members of our Board of Directors and certain key members of our management team. During the three and nine months ended March 31, 2021, we granted a total of 91,773 restricted stock shares to members of our Board of Directors and certain key members of our management team. During the three months ended March 31, 2022, 1,400 restricted stock shares were forfeited. During the nine months ended March 31, 2022, 19,832 restricted stock shares were forfeited. No restricted stock shares were forfeited during the three or nine month periods ended March 31, 2021.

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, 2022, we granted a total of $0.3 million in deferred cash awards to members of our Board of Directors and certain key members of our management team. During the three months ended March 31, 2021, we granted a total of $0.5 million in deferred cash awards to members of our Board of Directors and certain key members of our management team. During the nine months ended March 31, 2021, we granted a total of $1.5 million in deferred cash awards to members of our Board of Directors and certain key members of our management team.

No deferred cash awards were forfeited during the three months ended March 31, 2022. Awards totaling $191,000 were forfeited during the nine months ended March 31, 2022. No awards were forfeited during the three and nine months ended March 31, 2021. Each deferred cash award we have granted to date 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.

Fair Value of Financial Instruments

Except for cash and cash equivalents, as of March 31, 2022, and June 30, 2021, 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.

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

	March 31, 2022		June 30, 2021
Euro Forward Contract– Current Assets	$	2,419	$	—
Swiss Franc Forward Contract – Current Assets		26		—
Total Derivative Contracts – Current Assets		2,445		—
Interest Swap – Other noncurrent Assets		358		—
Euro Forward Contract– Other noncurrent Assets		365		—
Total Derivative Contracts – Other noncurrent Assets		723		—
Euro Forward Contract–Current Liabilities		—		(630	)
Swiss Franc Forward Contract – Current Liabilities		—		(184	)
Total Derivative Contracts – Current Liabilities		—		(814	)
Euro Forward Contract – Noncurrent Liabilities		—		(4	)
Fair Value Net Asset (Liability) – all Derivative Contracts	$	3,168	$	(818	)

We also classify any outstanding line of credit and term loan balance as a Level 2 liability, as the fair value is based on inputs that can be derived from information available in publicly quoted markets. As of March 31, 2022, and June 30, 2021, we did not have any financial assets or liabilities classified as Level 3. We did not transfer any assets or liabilities between these levels during fiscal 2021 or the nine months ended March 31, 2022. 

Reclassification of Prior Year Presentation

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.