10-Q

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 SEPTEMBER 30, 2018

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)

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that NAI was required to submit and post such files).    ☒  Yes     ☐  No

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

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 November 13, 2018, 7,570,871 shares of NAI's common stock were outstanding, net of 1,105,806 treasury shares.

TABLE OF CONTENTS

		Page
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS		1
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Income and Comprehensive Income	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 4.	Controls and Procedures	20
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.	Defaults Upon Senior Securities	21
Item 5.	Other Information	21
Item 6.	Exhibits	22
SIGNATURES		23

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. These 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,” “expects,” “plans,” “believes,” “anticipates,” “intends,” “estimates,” “approximates,” “predicts,” “forecasts,” or “projects,” or the negative or other variation of such words, and similar expressions may each identify a statement as a forward-looking statement. Any statements contained herein 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 about our future operating results, are forward-looking statements. Forward-looking statements in this report may include statements about:

• 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;

• our ability to maintain or increase our patent and trademark licensing revenues;

• 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 levels of our revenue concentration risk;

• our ability to protect our intellectual property;

• future economic and political conditions, including implementation of new or increased tariffs;

• our ability to improve operating efficiencies, manage costs and business risks and improve or maintain profitability;

• currency exchange rates, 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 currently pending litigation, regulatory and tax matters, the costs associated with such matters and the effect of such matters on our business and results of operations;

• sources and availability of raw materials, including the limited number of suppliers of beta-alanine meeting our quality requirements;

• inventory levels, including the adequacy of raw material and other inventory levels to meet future customer demand;

• the future adequacy and intended use of our facilities;

• potential manufacturing and distribution channels, product returns, and product recalls;

• future customer orders;

• the impact of external factors on our business and results of operations, especially variations in our quarterly net sales from seasonal and other factors;

• our ability to operate within the standards set by the U.S. Food and Drug Administration’s (FDA) Good Manufacturing Practices;

• our ability to successfully expand our operations, including outside the United States (U.S.);

• the adequacy of our financial reserves and allowances;

• 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 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 and caution should be taken not to place undue reliance on any such forward-looking statements. Forward-looking statements are subject to certain 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 II and elsewhere in this report, as well as in other reports and documents we file with the United States Securities and Exchange Commission (SEC).

1

PART I – FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

NATURAL ALTERNATIVES INTERNATIONAL, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

	September 30, 2018			June 30, 2018
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	27,613		$	23,613
Accounts receivable - less allowance for doubtful accounts of $63 at September 30, 2018 and $49 at June 30, 2018		12,733			14,621
Note receivable		1,500			1,500
Inventories, net		24,972			23,567
Prepaids and other current assets		3,087			1,882
Total current assets		69,905			65,183
Property and equipment, net		19,277			19,290
Other noncurrent assets, net		920			734
Total assets	$	90,102		$	85,207
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	10,064		$	9,649
Accrued liabilities		2,302			2,346
Accrued compensation and employee benefits		1,612			1,498
Income taxes payable		1,442			787
Total current liabilities		15,420			14,280
Long-term pension liability		57			45
Deferred rent		555			556
Income taxes payable, noncurrent		1,546			1,546
Deferred income taxes		648			532
Total liabilities		18,226			16,959
Commitments and contingencies (Note K)
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; issued and outstanding (net of treasury shares) 7,577,735 at September 30, 2018 and 7,558,408 at June 30, 2018		85			85
Additional paid-in capital		25,177			24,486
Retained earnings		53,399			50,839
Treasury stock, at cost, 1,098,942 shares at September 30, 2018 and 1,098,268 June 30, 2018		(6,590	)		(6,584	)
Accumulated other comprehensive loss		(195	)		(578	)
Total stockholders’ equity		71,876			68,248
Total liabilities and stockholders’ equity	$	90,102		$	85,207

See accompanying notes to condensed consolidated financial statements.

2

NATURAL ALTERNATIVES INTERNATIONAL, INC.

Condensed Consolidated Statements of Income and Comprehensive Income

(In thousands, except share and per share data)

(Unaudited)

	Three Months Ended September 30,
	2018			2017
Net sales	$	36,532		$	28,074
Cost of goods sold		29,369			21,704
Gross profit		7,163			6,370
Selling, general and administrative expenses		4,439			4,487
Income from operations		2,724			1,883
Other income (expense):
Interest income		555			250
Interest expense		(3	)		-
Foreign exchange loss		(78	)		(143	)
Other, net		23			1
Total other income		497			108
Income before income taxes		3,221			1,991
Provision for income taxes		662			557
Net income	$	2,559		$	1,434
Unrealized gain (loss) resulting from change in fair value of derivative instruments, net of tax		383			(1,134	)
Comprehensive income	$	2,942		$	300
Net income per common share:
Basic	$	0.38		$	0.22
Diluted	$	0.37		$	0.21
Weighted average common shares outstanding:
Basic		6,764,962			6,606,518
Diluted		6,964,942			6,831,230

See accompanying notes to condensed consolidated financial statements.

3

NATURAL ALTERNATIVES INTERNATIONAL, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands, except share and per share data)

(Unaudited)

	Three Months Ended September 30,
	2018			2017
Cash flows from operating activities
Net income	$	2,559		$	1,434
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		792			717
Non-cash sales discount		245			163
Non-cash compensation		409			301
Pension expense		12			51
(Gain) loss on disposal of assets		(1	)		1
Changes in operating assets and liabilities:
Accounts receivable, net		1,888			(799	)
Notes Receivable		-			-
Inventories, net		(1,405	)		(5,267	)
Prepaids and other assets		(993	)		52
Accounts payable and accrued liabilities		471			5,773
Accrued compensation and employee benefits		114			(604	)
Income taxes		655			492
Net cash provided by operating activities		4,746			2,314
Cash flows from investing activities
Purchases of property and equipment		(796	)		(956	)
Proceeds from sale of property and equipment		19			5
Issuance of notes receivable		—			(1,500	)
Net cash used in investing activities		(777	)		(2,451	)
Cash flows from financing activities
Repurchase of common stock		(6	)		—
Issuance of common stock		37			—
Net cash provided by financing activities		31			—
Net increase (decrease) in cash and cash equivalents		4,000			(137	)
Cash and cash equivalents at beginning of period		23,613			27,843
Cash and cash equivalents at end of period	$	27,613		$	27,706
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	3		$	—
Taxes	$	7		$	76
Disclosure of non-cash activities:
Change in unrealized gain (loss) resulting from change in fair value of derivative instruments, net of tax	$	383		$	(1,134	)

See accompanying notes to condensed consolidated financial statements.

4

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 applicable rules and regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows have been included and are of a normal, recurring nature. The results of operations for the three months ended September 30, 2018 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

You should read the financial statements and these notes, which 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, 2018 (“2018 Annual Report”). The accounting policies used to prepare the financial statements included in this report are the same as those described in the notes to the consolidated financial statements in our 2018 Annual Report unless otherwise noted below.

Recently Adopted Accounting Pronouncements

In April 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-10, Revenue from Contracts with Customers (Topic 606)(ASU 2017-10), 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 2017, the FASB issued Accounting Standards Update No. 2017-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815) (ASU 2017-11), which amends and rescinds certain revenue recognition guidance previously released within ASU 2014-09. In May 2017, the FASB issued Accounting Standards Update No. 2017-12, Revenue from Contracts with Customers (Topic 606) (ASU 2017-12), which provides narrow scope improvements and practical expedients related to ASU 2014-09.  All of these ASUs have been codified under Accounting Standards Codification (ASC) 606. 

This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current historical revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods and services in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods and services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with their respective customers. 

The new revenue standard is required to be applied either retrospectively to each prior reporting period presented or prospectively with the cumulative effect of initially applying the standard recognized at the date of the initial application, supplemented with certain disclosures related to the effect of adoption on previously reported amounts, if any (the modified retrospective method). We adopted the standard on July 1, 2018 for contracts that were not completed before the adoption date, using the modified retrospective method.  We evaluated the effect of the standard and concluded it is not material to the timing or amount of revenues or expenses recognized in our historical consolidated financial statements. As a result, we concluded the application of the standard does not have a material effect that requires a retrospective adjustment for reporting disclosure purposes to any previously reported amounts in our historical consolidated financial statements.

On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. legislation as “provisional” when the taxpayer does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, we calculated our taxes for fiscal 2018 to the best of our ability and we do not expect any significant changes, however our estimated income tax could change once we complete our tax return and thus our tax expense for fiscal 2018 is considered provisional and is expected to be finalized by the end of the one-year measurement period ending December 22, 2018.

5

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2018-03 is intended to improve certain aspects of recognition, measurement, presentation, and disclosure of certain financial instruments, i.e. forward contracts, purchased options and option liabilities. We do not expect this ASU to have a material impact on our consolidated financial statements. ASU 2018-03 is effective for us beginning in this quarter, our first quarter of fiscal 2019.

Recently Issued 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.  In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. This ASU affects narrow aspects of the guidance issued in the amendments in ASU No. 2016-02 including those regarding residual value guarantees, the interest rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase option, variable lease payments that depend on an index or a rate, investment tax credits, lease term and purchase option, transition guidance for amounts previously recognized in business combinations, certain transition adjustments, transition guidance for leases previously classified as capital leases under Topic 840, transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic 840, transition guidance for sale and leaseback transactions, impairment of net investment in the lease, unguaranteed residual asset, effect of initial direct costs on the interest rate implicit in the lease, and failed sale and leaseback transactions.  These ASUs will be effective for us beginning in our first quarter of fiscal 2020.  We are currently evaluating the impact these ASUs will have on our consolidated financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 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.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effect from Accumulated Other Comprehensive Income. ASU 2018-02 allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. We are currently evaluating the impact of adopting the new standard on our consolidated financial statements. ASU 2018-02 will be effective for us beginning in our first quarter of fiscal 2020.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The ASU clarifies that Topic 718 does not apply to share-based payments used to effectively provide financing to the issuer or awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. We are currently evaluating the impact of the new standard. ASU 2018-07 will be effective for us beginning in our first quarter of fiscal 2020.

Other recently issued accounting pronouncements did not or are not believed by management to have a material impact on our present or future financial statements.

6

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 accounts 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 September 30,
	2018		2017
Numerator
Net income	$	2,559	$	1,434
Denominator
Basic weighted average common shares outstanding		6,765		6,607
Dilutive effect of stock options		200		224
Diluted weighted average common shares outstanding		6,965		6,831
Basic net income per common share	$	0.38	$	0.22
Diluted net income per common share	$	0.37	$	0.21

We excluded shares related to restricted stock totaling 15,000 shares for the three months ended September 30, 2018, as their impact would have been anti-dilutive. No shares related to stock options were excluded for the three months ended September 30, 2018. No shares related to stock options or restricted stock were excluded for the three months ended September 30, 2017.

Revenue Recognition

We record revenue based on the 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 when the various performance obligations are satisfied.

Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling one of 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 are due as specified in the underlying customer agreement, typically 30 days from the invoice date, which occurs on the date of transfer of control of the products ordered to the customer.

Revenue is recognized at the point in time that our performance obligation is fulfilled, and control of the ordered products is transferred to the customer. This 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 reported as a change in the transaction price.

Except for product defects, no right of return exists on the sale of our products. We estimate returns based on historical experience and recognize a returns liability for any estimated returns. As of September 30, 2018, we have no known returns liability.

7

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 them with certain of their products within 24 countries where Juice Plus+ currently sells those products. Pursuant to the Restricted Stock Award Agreement, NAI granted 500,000 shares of NAI common stock to Juice Plus+, (the “Shares”), and Juice Plus+ agreed the Shares are subject to certain restrictions and risk of forfeiture. Pursuant to the Irrevocable Proxy, Juice Plus+ also granted the NAI Board of Directors the right to vote the Shares that remain subject to the risk of forfeiture. Each Agreement is for a term of 5 years, and each may be terminated by either party only upon the occurrence of specified events. The expense associated with the Shares granted to Juice Plus+ is recorded as a reduction to revenue. We recorded $245,000 of expense during the three months ended September 30, 2018 and $163,000 for the three months ended September 30, 2017 as a "Non-cash Sales Discount" which is an offset to net sales.

We currently own certain U.S. patents, and each patent’s corresponding foreign patent applications. All of these patents and patent rights relate to the ingredient known as beta-alanine 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 $5.4 million during the three months ended September 30, 2018 and $5.9 million during the three months ended September 30, 2017. These royalty income and raw material sale amounts resulted in royalty expense paid to the original patent holders from whom we acquired the patents and patent rights. We recognized royalty expense as a component of cost of goods sold in the amount of $263,000 during the three months ended September 30, 2018, and $284,000 during the three months ended September 30, 2017.

Notes Receivable

On September 30, 2017, we accepted a 12-month note (Loan Agreement) from Kaged Muscle, LLC (“Kaged Muscle”), one of our contract manufacturing customers, in exchange for $1.5 million of trade receivables due to us from Kaged Muscle. On September 30, 2018, we entered into a First Amendment (the “First Amendment”) with Kaged Muscle in connection with the Loan Agreement. The First Amendment modifies the Loan Agreement and related promissory note by extending the maturity date from September 30, 2018 to December 28, 2018 in exchange for an extension fee in the amount of $25,000. Kaged Muscle is one of our fastest growing sports nutrition customers and we executed this note receivable conversion, and subsequent amendment, to assist them with their near term financing needs. The note carries an interest rate of fifteen percent (15%) per annum with payments of interest only.  Repayment of the note is secured by all of the assets of Kaged Muscle and the note is personally guaranteed by the co-founder and President of Kaged Muscle. Interest is due quarterly and the note can be prepaid in any amount at any time without penalty.  In association with this note, we recognized $58,000 in interest income during the three months ended September 30, 2018 and zero interest income during the three months ended September 30, 2017.

Stock-Based Compensation

We have an omnibus equity incentive plan that was approved by our Board of Directors effective October 15, 2009 and approved by our stockholders at the Annual Meeting of Stockholders held on November 30, 2009. Under the 2009 Plan, we may grant nonqualified and incentive stock options and other stock-based awards to employees, non-employee directors and consultants.

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.

We recognize forfeitures as they occur.   

We did not grant any options during the three months ended September 30, 2018 or the three months ended September 30, 2017. All remaining outstanding stock options are fully vested. During the three months ended September 30, 2018, 5,000 options were exercised. There were no options exercised during the three months ended September 30, 2017. There were no forfeitures during the three months ended September 30, 2018 or the three months ended September 30, 2017.

During the three months ended September 30, 2018, we granted a total of 15,000 restricted stock shares to a new member of our management team. We did not grant any shares to employees during the three months ended September 30, 2017. Our net income included stock based compensation expense of approximately $409,000 for the three months ended September 30, 2018, and $301,000 for the three months ended September 30, 2017.

8

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 we have 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 techniques that use significant unobservable inputs.

As of September 30, 2018, and June 30, 2018, 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. The fair value of our forward exchange contracts as of September 30, 2018 was a net asset of $1.0 million. The fair value of our forward exchange contracts as of June 30, 2018 included a net asset of $55,000 and a net liability of $55,000, with no right of offset. As of September 30, 2018, and June 30, 2018, we did not have any financial assets or liabilities classified as Level 3. We did not transfer any assets or liabilities between Levels during fiscal 2018 or the three months ended September 30, 2018. 

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 67.6% of gross accounts receivable at September 30, 2018 and 76.6% at June 30, 2018. Additionally, amounts due related to our beta-alanine raw material sales were 20.4% of gross accounts receivable at September 30, 2018, and 17.3% of gross accounts receivable at June 30, 2018. 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, net

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

	September 30, 2018			June 30, 2018
Raw materials	$	17,092		$	16,209
Work in progress		3,256			4,268
Finished goods		5,005			3,462
Reserve		(381	)		(372	)
	$	24,972		$	23,567

C. Property and Equipment

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

	Depreciable Life In Years			September 30, 2018			June 30, 2018
Land		NA		$	1,200		$	1,200
Building and building improvements	7	–	39		3,721			3,721
Machinery and equipment	3	–	12		28,393			28,185
Office equipment and furniture	3	–	5		4,861			4,883
Vehicles		3			313			209
Leasehold improvements	1	–	15		15,821			15,688
Total property and equipment					54,309			53,886
Less: accumulated depreciation and amortization					(35,032	)		(34,596	)
Property and equipment, net				$	19,277		$	19,290

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D. Other Comprehensive Loss

Other comprehensive (loss) income (“OCL” and “OCI”) consisted of the following during the three months ended September 30, 2018 and September 30, 2017 (in thousands):

	Three months ended September 30, 2018
	Defined Benefit Pension Plan			Unrealized (Losses) Gains on Cash Flow Hedges			Total
Balance as of June 30, 2018	$	(387	)	$	(191	)	$	(578	)
OCI/OCL before reclassifications		—			945			945
Amounts reclassified from OCI		—			(446	)		(446	)
Tax effect of OCI activity		—			(116	)		(116	)
Net current period OCI/OCL		—			383			383
Balance as of September 30, 2018	$	(387	)	$	192		$	(195	)

During the three months ended September 30, 2018, the amounts reclassified from OCI were comprised of $41,000 of losses reclassified to net revenues and $487,000 related to the amortization of forward points reclassified to other income.

	Three months ended September 30, 2017
	Defined Benefit Pension Plan			Unrealized Gains (Losses) on Cash Flow Hedges			Total
Balance as of June 30, 2017	$	(491	)	$	(414	)	$	(905	)
OCI/OCL before reclassifications		—			(1,953	)		(1,953	)
Amounts reclassified from OCI		—			178			178
Tax effect of OCI activity		—			641			641
Net current period OCI/OCL		—			(1,134	)		(1,134	)
Balance as of September 30, 2017	$	(491	)	$	(1,548	)	$	(2,039	)

During the three months ended September 30, 2017, the amounts reclassified from OCI were comprised of $422,000 of losses reclassified to net revenues and $244,000 related to the amortization of forward points reclassified to other income.

E. Debt

On March 20, 2018, 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 February 1, 2020, to February 1, 2021. 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 amendment. 

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Under the terms of the Credit Agreement, borrowings are subject to eligibility requirements including 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 us 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, 2021, and with Bank of America, N.A. in effect until August 15, 2019. 

On September 30, 2018, we were in compliance with all of the financial and other covenants required under the Credit Agreement.

We did not use our working capital line of credit nor did we have any long-term debt outstanding during the three months ended September 30, 2018. As of September 30, 2018, we had $10.0 million available under our credit facilities.

F. 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 any of (i) the in sales to these customers, (ii) the growth rate of sales to these customers, or (iii) in these customers’ ability to make payments when due, each 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 period's consolidated net sales were as follows (in thousands):

	Three months Ended September 30,
	2018		2017
Customer 1	$	21,078	$	13,157
Customer 2		3,729		3,161
	$	24,807	$	16,318

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 September 30,
	2018						2017
	Raw Material Purchases by Supplier			% of Total Raw Material Purchases			Raw Material Purchases by Supplier			% of Total Raw Material Purchases
Supplier 1	$	3,107			15	%		(a	)		(a	)
Supplier 2		(a	)		(a	)		1,967			14	%
	$	3,107			15	%	$	1,967			14	%

(a)         Purchases were less than 10% of the respective period’s total raw material purchases.

G. 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.

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We evaluate performance based on a number of factors. The primary performance 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 above and in the consolidated financial statements included in our 2018 Annual Report.

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

	Three months Ended September 30,
	2018		2017
Net Sales
Private-label contract manufacturing	$	31,087	$	22,222
Patent and trademark licensing		5,445		5,852
	$	36,532	$	28,074

	Three months Ended September 30,
	2018			2017
Income from Operations
Private-label contract manufacturing	$	3,145		$	2,257
Patent and trademark licensing		1,802			1,188
Income from operations of reportable segments		4,947			3,445
Corporate expenses not allocated to segments		(2,223	)		(1,562	)
	$	2,724		$	1,883

	September 30, 2018		June 30, 2018
Total Assets
Private-label contract manufacturing	$	72,677	$	69,037
Patent and trademark licensing		17,425		16,170
	$	90,102	$	85,207

Our private-label contract manufacturing products are sold both in the U.S. and in markets outside the U.S., including Europe, Canada, Australia, New Zealand, and Asia. Our primary markets outside the U.S. are Europe and Asia. Our patent and trademark licensing activities are primarily based in the U.S.

Net sales by geographic region, based on the customers’ location, were as follows (in thousands):

	Three months Ended September 30,
	2018		2017
United States	$	17,646	$	15,194
Markets outside the United States		18,886		12,880
Total net sales	$	36,532	$	28,074

Products manufactured by NAIE accounted for 72% of net sales in markets outside the U.S. for the three months ended September 30, 2018, and 75% for the three months ended September 30, 2017. No products manufactured by NAIE were sold in the U.S. during the three months ended September 30, 2018 and 2017.

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Assets and capital expenditures by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):

	Long-Lived Assets				Total Assets				Capital Expenditures
									Three Months Ended
	September 30, 2018		June 30, 2018		September 30, 2018		June 30, 2018		September 30, 2018		September 30, 2017
United States	$	10,841	$	10,887	$	54,279	$	51,562	$	337	$	89
Europe		8,436		8,403		35,823		33,645		459		867
	$	19,277	$	19,290	$	90,102	$	85,207	$	796	$	956

H. Income Taxes

The effective tax rate for the three months ended September 30, 2018 was 20.6%. The rate differs slightly from the U.S. federal statutory rate of 21% primarily due to the favorable impact of foreign earnings of NAIE, which are taxed at less than the U.S. statutory rate.  The effective tax rate for the three months ended September 30, 2017 was 28.0%.

To determine our quarterly provision for income taxes, we use an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions to which we are subject. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rate from quarter to quarter. There were no significant discrete items for the three months ended September 30, 2018. We recognize interest and penalties related to uncertain tax positions, if any, as an income tax expense.

We record valuation allowances to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. 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. During the three months ended September 30, 2018, there was no change to our valuation allowance for our deferred tax assets.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates, for each of the jurisdictions in which we operate, 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 as income or expense in the period that includes the enactment date for such new rates.

We are subject to taxation in the U.S., Switzerland and various state jurisdictions. Our tax years for the fiscal year ended June 30, 2015 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 Swiss tax authorities.

It is our policy to establish reserves based on management’s assessment of exposure for certain positions taken in previously filed tax returns that may become payable upon audit by tax authorities. Our tax reserves are analyzed quarterly and adjustments are made as events occur that we believe warrant adjustments to those reserves. There were no adjustments to reserves in the three months ended September 30, 2018.

I. 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, 2018, 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 three months ended September 30, 2018 and September 30, 2017, we did not repurchase any shares under this repurchase plan.

During the three months ended September 30, 2018, we acquired 674 shares from employees in connection with restricted stock shares owned by such employees that vested during that period at a weighted average cost of $9.65 per share and a total cost of $6,000. During the three months ended September 30, 2017, we acquired 734 shares from employees in connection with restricted stock shares owned by such employees that vested during that period at a weighted average cost of $10.70 per share and a total cost of $8,000. These shares were returned to us by the subject employees and in exchange therefor we paid each employee’s required tax withholding liability incurred due to the vesting of their restricted stock shares during that period. The valuation of the shares acquired and therefor the number of shares returned to us was calculated based on the closing share price on the date the shares vested.

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J. 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 to other 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. To the extent we enter into such contracts, there can be no guarantee any such contracts will be effective hedges against our foreign currency exchange risk.

As of September 30, 2018, we had 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 2020. 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 expense. We measure effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item. During the three months ended September 30, 2018, we did not have any losses or gains related to the ineffective portion of our hedging instruments. 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 September 30, 2018, the notional amounts of our foreign exchange contracts designated as cash flow hedges were approximately $83.3 million (EUR 68.9 million). As of September 30, 2018, a net gain of approximately $171,000 related to derivative instruments designated as cash flow hedges was recorded in OCI. It is expected that $119,000 will be reclassified into earnings in the next 12 months along with the earnings effects of the related forecasted transactions.

As of September 30, 2018, the fair value of our cash flow hedges was an asset of $955,000, of which $680,000 was classified in prepaids and other current assets, and $275,000 was classified in other non-current assets in our Consolidated Balance Sheets. During the three months ended September 30, 2018, we recognized $458,000 of net gains in OCI and reclassified $41,000 of gains from OCI to revenue. As of June 30, 2018, $55,000 of the fair value of our cash flow hedges was classified in prepaids and other current assets, $46,000 was classified in other non-current assets, and $101,000 was classified in accrued liabilities in our Consolidated Balance Sheets. During the three months ended September 30, 2017, we recognized $2.2 million of net losses in OCI and reclassified $422,000 of gains from OCI to revenue.

K. 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 we do not expect.

L. Subsequent Events

On October 19, 2018, Natural Alternatives International Europe Ltd. SA, a Swiss corporation ("NAIE") and wholly-owned subsidiary of Natural Alternatives International, Inc. entered into a new lease with its current landlord providing five additional years to the term of NAIE's leasehold for its primary manufacturing facility in Manno Switzerland. The new lease term runs from July 1, 2019 through June 30, 2024 and is automatically extended for successive one-year periods thereafter unless NAIE provides a one-year advance notice not to extend.  

On November 5, 2018, Natural Alternatives International Europe Ltd. SA, a Swiss corporation ("NAIE") and wholly-owned subsidiary of Natural Alternatives International, Inc. entered into a lease with Sofinol SA for approximately 2,870 square meters of commercial warehouse space in a building located on the property adjacent to the leasehold for the primary existing NAIE facility in Manno Switzerland. NAIE intends to use the space primarily for raw material storage. The lease is for an initial five-year term commencing on January 1, 2019 and NAIE can terminate the lease with 12 months advance notice given on June 30th or December 31st each year of the initial term. At the end of the initial term the lease converts to a year to year lease at the same rental rate terminable by NAIE or the landlord upon 12 months' advance notice.

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ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to help you understand our financial condition and results of operations for the three months ended September 30, 2018. You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to the condensed consolidated financial statements included under Item 1 in this report, as well as the risk factors and other information included in our 2018 Annual Report and other reports and documents we file with the SEC. Our future financial condition and results of operations will vary from our historical financial condition and results of operations described below based on a variety of factors.

Executive Overview

The following overview does not address all of the matters covered in the other sections of this Item 2 or other items in this report or contain all of the information that may be important to our stockholders or the investing public. You should read this overview in conjunction with the other sections of this Item 2 and this report.

Our primary business activity is providing 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. Historically, our revenue has been largely dependent on sales to two or three private label contract manufacturing customers and subject to variations in the timing of such customers’ orders, which in turn is impacted by such customers’ internal marketing programs, supply chain management, entry into new markets, new product introductions, the demand for such customers’ products, and general industry and economic conditions. Our revenue also includes raw material sales and royalty and licensing revenue generated from our patent estate pursuant to license and supply agreements with third parties for the distribution and use of the ingredient known as beta-alanine sold under our CarnoSyn® and SR CarnoSyn® trademarks.

A cornerstone of our business strategy is to achieve long-term growth and profitability and to diversify our sales base. We have sought and expect to continue to seek to diversify our sales by developing relationships with additional, quality-oriented, private label contract manufacturing customers, and commercializing our patent estate through sales of beta-alanine under our Carnosyn® and SR Carnosyn® trade names, contract manufacturing, and license agreements.

During the first three months of fiscal 2019, our net sales were 30% higher than in the first three months of fiscal 2018. Private label contract manufacturing sales increased 40% due primarily to the sale of new products to existing customers and higher volumes of current products to existing customers located primarily in U.S., Asian, Australia, and European markets. The increase in sales included shipment of new products and increased sales of existing products to our largest customer under our previously announced expanded relationship. Revenue concentration risk for our largest private label contract manufacturing customer as a percentage of our total net sales increased to 58% for the three months ended September 30, 2018 compared to 47% for the three months ended September 30, 2018. We expect our annualized fiscal 2019 revenue concentration for this customer to be consistent with fiscal 2018.

During the first three months of fiscal 2019, CarnoSyn® beta-alanine revenue decreased 7% to $5.4 million as compared to $5.9 million for the first three months of fiscal 2018. The decrease in beta-alanine revenue was primarily due to lower average material sales prices.

To protect our CarnoSyn® business and its underlying patent estate, we incurred litigation and patent compliance expenses of approximately $618,000 during the first quarter of fiscal 2019 and $972,000 during the comparable period in fiscal 2018. Our ability to maintain or further increase our beta-alanine royalty and licensing revenue will depend in large part on our ability to develop a market for our sustained release form of beta-alanine marketed under our SR Carnosyn® trademark, maintenance of our patent rights, the availability of the raw material beta-alanine when and in the amounts needed, the ability to expand distribution of beta-alanine to new and existing customers, the ability to further commercialize our existing patents, and the continued compliance by third parties with our license agreements and patent and trademark rights.

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During the remainder of fiscal 2019, we plan to continue our focus on:

• Leveraging our state-of-the-art, certified facilities to increase the value of the goods and services we provide to our highly valued private-label contract manufacturing customers, and assist us in developing relationships with additional quality oriented customers;

• Expanding the commercialization of our beta-alanine patent estate through raw material sales, developing a market for our sustained release form of beta-alanine marketed under our SR Carnosyn® trademark, new contract manufacturing opportunities, license agreements and protecting our proprietary rights; and

• Improving operational efficiencies and managing costs and business risks to improve profitability.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires that we make estimates and assumptions that affect the amounts reported in our financial statements and their accompanying notes. We have identified certain policies we believe are important to the portrayal of our financial condition and results of operations. These policies require the application of significant judgment by our management. We base our estimates on our historical experience, industry standards, and various other assumptions we believe are reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. An adverse effect on our financial condition, changes in financial condition, and results of operations could occur if circumstances change that alter the various assumptions or conditions used in such estimates or assumptions.

Our critical accounting policies are discussed under Item 7 of our 2018 Annual Report and recent accounting pronouncements are discussed under Item A to our Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report

In the three months ended September 30, 2018, there were changes to the application of critical accounting policies previously disclosed in our most recent Annual Report on Form 10-K related to the adoption of ASU 2014-09 on July 1, 2018, as described below.

Revenue Recognition

Revenue is recognized at the point in time that our performance obligation is fulfilled, and control of the ordered products is transferred to the customer. Generally, this occurs when the product is shipped, or in some cases, when the product is delivered to the customer. Refer to Revenue Recognition in Note A, "Basis of Presentation and Summary of Significant Accounting Policies," in this Quarterly Report, for additional information.

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Results of Operations

The results of our operations for the three months ended September 30 were as follows (dollars in thousands):

	Three Months Ended
	September 30, 2018				September 30, 2017				Increase (Decrease)
Private-label contract manufacturing	$	31,087	85	%	$	22,222	79	%	$	8,865		40	%
Patent and trademark licensing		5,445	15	%		5,852	21	%		(407	)	(7	)%
Total net sales		36,532	100	%		28,074	100	%		8,458		30	%
Cost of goods sold		29,369	80	%		21,704	77	%		7,665		35	%
Gross profit		7,163	20	%		6,370	23	%		793		12	%
Selling, general & administrative expenses		4,439	12	%		4,487	16	%		(48	)	(1	)%
Income from operations		2,724	7	%		1,883	7	%		841		45	%
Other income, net		497	1	%		108	0	%		389		360	%
Income before income taxes		3,221	9	%		1,991	7	%		1,230		62	%
Provision for income taxes		662	2	%		557	2	%		105		19	%
Net income	$	2,559	7	%	$	1,434	5	%	$	1,125		78	%

Private label contract manufacturing sales increased 40% due primarily to the sale of new products to existing customers and higher volumes of current products to existing customers located primarily in U.S., Asian, Australian, and European markets. The increase in sales included shipment of new products and increased sales of existing products to our largest customer under our previously announced expanded relationship.

Net sales from our patent and trademark licensing segment decreased 7% during the first quarter of fiscal 2019. The decrease in beta-alanine raw material sales was primarily due to lower average material sales prices.

The change in gross profit margin for the three months ended September 30, 2018, was as follows:

	Percentage Change
Contract manufacturing (1)		0.1
Patent and trademark licensing (2)		(3.2	)
Total change in gross profit margin		(3.1	)

1 Private-label contract manufacturing gross profit margin contribution increased 0.1 percentage points during the first quarter of fiscal 2019 as compared to the comparable period in fiscal 2018. The increase in gross profit as a percentage of sales is primarily due to a marginal decrease in per unit manufacturing costs.

2 During the first quarter of fiscal 2019, patent and trademark licensing gross profit margin contribution decreased 3.2 percentage points primarily due to decreased raw material sales and decreased royalty income as a percentage of total consolidated net sales which decreases were partially offset by favorable raw material costs.

Selling, general and administrative expenses decreased $48,000, or 1%, during the first quarter of fiscal 2019 primarily due to lower legal, marketing, and advertising costs associated with our patent and trademark licensing segment partially offset by increased employee compensation and consulting costs.

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Other income, net increased $389,000 during the first quarter of fiscal 2019 as compared to the same period in the prior fiscal year primarily due to favorable interest income associated with our foreign currency hedge contracts.

Our income tax expense increased $105,000 during the first quarter of fiscal 2019 as compared to the same period in the prior fiscal year. The increase was primarily due to the higher pre-tax income in the first quarter of fiscal 2019 as compared to the comparable prior year period partially offset by a lower effective tax rate.

Liquidity and Capital Resources

Our primary sources of liquidity and capital resources are cash flows provided by operating activities and the availability of borrowings under our credit facility. Net cash provided by operating activities was $4.7 million for the three months ended September 30, 2018 compared to net cash provided by operating activities of $2.3 million in the comparable quarter last year.

At September 30, 2018, changes in accounts receivable, consisting of amounts due from our private label contract manufacturing customers and our patent and trademark licensing activities, provided $1.9 million in cash compared to using $799,000 of cash in the comparable prior year quarter. The increase in cash provided by accounts receivable during the quarter ended September 30, 2018 primarily resulted from timing and amount of sales and the related collections. Days sales outstanding was 34 days during the three months ended September 30, 2018 as compared to 29 days for the prior year period.

Changes in inventory used $1.4 million in cash during the three months ended September 30, 2018 compared to using $5.3 million in the comparable prior year quarter. The change in cash used by inventory during the quarter ended September 30, 2018 was primarily related to the timing of sales and new order activity. Changes in accounts payable and accrued liabilities provided $471,000 in cash during the three months ended September 30, 2018 compared to providing $5.8 million during the three months ended September 30, 2017. The change in cash flow activity related to accounts payable and accrued liabilities is primarily due to the timing of inventory receipts and payments.

Cash used in investing activities in the three months ended September 30, 2018 was $777,000 compared to $2.5 million in the comparable quarter last year. The primary reason for the change was due to the conversion of $1.5 million of accounts receivable into a note receivable during the first quarter of fiscal 2018 with no similar activity in the first quarter of fiscal 2019. In addition, we made capital equipment purchases of $796,000 in the three months ended September 30, 2018 as compared to capital equipment purchases of $956,000 in the three months ended September 30, 2017. Capital expenditures during fiscal 2019 and fiscal 2018 were primarily for manufacturing equipment used in our Vista, California and Manno, Switzerland facilities. At September 30, 2018 and June 30, 2018, on a consolidated basis, we had no outstanding balances due in connection with our loan facility.

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During the three months ending September 30, 2018, we were in compliance with all of the financial and other covenants required under the Credit Agreement.  Refer to Note E, "Debt," in this Quarterly Report, for terms of Credit Agreement and additional information.

As of September 30, 2018, we had $27.6 million in cash and cash equivalents and $10.0 million available under our credit facilities. We believe our available cash, cash equivalents and potential cash flows from operations will be sufficient to fund our current working capital needs and capital expenditures through at least the next 12 months.

Off-Balance Sheet Arrangements

As of September 30, 2018, we did not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses material to investors.

Recent Accounting Pronouncements

Recent accounting pronouncements are discussed in the notes to our consolidated financial statements included under Item 1 of this report. Other than those pronouncements, we are not aware of any other pronouncements that materially affect our financial position or results of operations.

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ITEM 4.     CONTROLS AND PROCEDURES

We maintain certain disclosure controls and procedures as defined under the Securities Exchange Act of 1934. They are designed to help ensure that material information is: (1) gathered and communicated to our management, including our principal executive and financial officers, in a manner that allows for timely decisions regarding required disclosures; and (2) recorded, processed, summarized, reported and filed with the SEC as required under the Securities Exchange Act of 1934 and within the time periods specified by the SEC.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (principal financial and accounting officer), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2018. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective for their intended purpose described above as of September 30, 2018.

On July 1, 2018, we adopted Topic 606 (see Note 1). We implemented internal controls to ensure we adequately evaluate our contracts and properly assess the impact of the new accounting standards on our condensed consolidated financial statements. Although adoption of the new revenue standard had no material impact on July 1, 2018 retained earnings or financial statement activity for the quarter ended September 30, 2018, and is not expected to have a material impact on our ongoing financial statements, we implemented changes to our business processes related to revenue recognition and the control activities within them. The changes included training within management, as well as new processes for ongoing contract review and monitoring to ensure completeness and accuracy of the information for new disclosures.

There were no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarterly period ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

There were no other changes to our internal control over financial reporting during the quarterly period ended September 30, 2018 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

20

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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 intellectual property, product liability, employment, 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, even if unfavorable, 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 we do not expect.

As of November 13, 2018, neither NAI nor its subsidiary were a party to any material pending legal proceeding nor was any of our property the subject of any material pending legal proceeding. We are currently involved in several matters in the ordinary course of our business, each of which is related to enforcing our intellectual property rights.

There is no assurance NAI will prevail in these litigation matters or in similar proceedings it may initiate or that litigation expenses will not be greater than anticipated.

ITEM 1A. RISK FACTORS

When evaluating our business and future prospects you should carefully consider the risks described under Item 1A of our 2018 Annual Report, as well as the other information in our 2018 Annual Report, this report and other reports and documents we file with the SEC. If any of the identified risks actually occur, our business, financial condition and results of operations could be seriously harmed. In that event, the market price of our common stock could decline, and you could lose all or a portion of the value of your investment in our common stock.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Repurchases

During the quarter ended September 30, 2018, we did not repurchase any shares of our common stock under any stock repurchase plans.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 5. OTHER INFORMATION

None.

21

ITEM 6.      EXHIBITS

The following exhibit index shows those exhibits filed with this report and those incorporated by reference:

EXHIBIT INDEX

Exhibit Number	Description	Incorporated By Reference To
3(i)	Amended and Restated Certificate of Incorporation of Natural Alternatives International, Inc. filed with the Delaware Secretary of State on January 14, 2005	Exhibit 3(i) of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2004, filed with the commission on February 14, 2005
3(ii)	Amended and Restated By-laws of Natural Alternatives International, Inc. dated as of February 9, 2009	Exhibit 3(ii) of NAI’s Current Report on Form 8-K dated February 9, 2009, filed with the commission on February 13, 2009
4(i)	Form of NAI’s Common Stock Certificate	Exhibit 4(i) of NAI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005, filed with the commission on September 8, 2005
10.01	First Amendment to Amended and Restated Employment Agreement, by and between NAI and Mark A. LeDoux, effective July 1, 2018	Filed herewith
10.02	First Amendment to Amended and Restated Employment Agreement, by and between NAI and Kenneth E. Wolf, effective July 1, 2018	Filed herewith
10.03	Second Amendment to Employment Agreement, by and between NAI and Michael E. Fortin, effective July 1, 2018	Filed herewith
10.04	Lease of Facilities in Manno, Switzerland between NAIE and Mr. Silvio Tarchini dated October 19, 2018	Filed herewith
10.05	Lease of Parking Places in Manno, Switzerland between NAIE and Mr. Silvio Tarchini dated October 19, 2018	Filed herewith
10.06	Lease of Facilities in Manno, Switzerland between NAIE and Sofinol SA dated November 5, 2018	Filed herewith
10.07	First Amendment to Loan Agreement with Kaged Muscle LLC, dated September 30, 2018	Exhibit 10.53 of NAI’s Current Report on Form 8-K dated October 2, 2018, filed with the commission on October 2, 2018.
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer	Filed herewith
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer	Filed herewith
32	Section 1350 Certification	Filed herewith
101.INS	XBRL Instance Document	Filed herewith
101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith
101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith

22

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Natural Alternatives International, Inc., the registrant, has duly caused this report to be signed on its behalf by the undersigned, duly authorized officers.

Date: November 13, 2018

NATURAL ALTERNATIVES INTERNATIONAL, INC.
By:	/s/ Mark A. LeDoux
	Mark A. LeDoux, Chief Executive Officer
	(principal executive officer)
By:	/s/ Michael E. Fortin
	Michael E. Fortin, Chief Financial Officer
	(principal financial and accounting officer)

23

EX-10.01

Exhibit 10.01

First Amendment to

Amended and restated EMPLOYMENT AGREEMENT

This First Amendment (“Amendment”) to the Amended and Restated Employment Agreement by and between Natural Alternatives International, Inc., a Delaware corporation (“Company”), and Mark LeDoux (“Employee”), dated effective as of October 1, 2015 (“Agreement”), is made and entered into effective as of July 1, 2018. Unless otherwise defined herein, capitalized terms shall have the meanings given them in the Agreement.

1.      Pursuant to Section 4(a) of the Agreement, Employee’s base salary is hereby increased to Four Hundred Twenty-Five Thousand dollars ($425,000) per year effective as of July 1, 2018.

2.     Except as set forth herein, all other terms and conditions of the Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the undersigned have executed this Amendment as of September 20, 2018.

EMPLOYEE

/s/ Mark A. LeDoux                              

Mark A. LeDoux

COMPANY

Natural Alternatives International, Inc.,

a Delaware corporation

/s/ Kenneth E. Wolf                              

Kenneth E. Wolf, President

EX-10.02

Exhibit 10.02

First Amendment to

Amended and restated EMPLOYMENT AGREEMENT

This First Amendment (“Amendment”) to the Amended and Restated Employment Agreement by and between Natural Alternatives International, Inc., a Delaware corporation (“Company”), and Kenneth E. Wolf (“Employee”), dated effective as of October 1, 2015 (“Agreement”), is made and entered into effective as of July 1, 2018. Unless otherwise defined herein, capitalized terms shall have the meanings given them in the Agreement.

1.      Pursuant to Section 4(a) of the Agreement, Employee’s base salary is hereby increased to Four Hundred Thousand dollars ($400,000) per year.

2.     Except as set forth herein, all other terms and conditions of the Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the undersigned have executed this Amendment as of September 20, 2018.

EMPLOYEE

/s/ Kenneth E. Wolf                     

Kenneth E. Wolf

COMPANY

Natural Alternatives International, Inc.,

a Delaware corporation

/s/ Mark LeDoux                    

Mark LeDoux, Chief Executive Officer

EX-10.03

Exhibit 10.03

Second Amendment to

EMPLOYMENT AGREEMENT

This Second Amendment (“Amendment”) to the Employment Agreement by and between Natural Alternatives International, Inc., a Delaware corporation (“Company”), and Michael E. Fortin (“Employee”), dated effective as of October 1, 2015, and previously amended effective September 1, 2016 (“Agreement”), is made and entered into effective as of July 1, 2018. Unless otherwise defined herein, capitalized terms shall have the meanings given them in the Agreement.

1.      Pursuant to Section 4(a) of the Agreement, Employee’s base salary is hereby increased to Two Hundred Twenty-Five Thousand dollars ($225,000) per year.

2.     Except as set forth herein, all other terms and conditions of the Agreement shall remain in full force and effect.

IN WITNESS WHEREOF, the undersigned have executed this Amendment as of September 20, 2018.

EMPLOYEE

/s/ Michael E. Fortin                    

Michael E. Fortin

COMPANY

Natural Alternatives International, Inc.,

a Delaware corporation

/s/ Kenneth E. Wolf                    

Kenneth E. Wolf, President

EX-10.04

TARCHINI REAL ESTATE SA - Manno, Centro Galleria 3, further mentioned as landlord and represented by Mrs. Alessandra Tarchini Marra and Mrs Giorgia Tarchini Gygax (VAT # CHE-100.072.922)

and

NAIE NATURAL ALTERNATIVES INTERNATIONAL EUROPE SA –

Manno,

Centro Galleria 1, further mentioned as tenant, represented by Mr. Mark

LeDoux and Mr. Fausto Petrini (VAT # CHE-105.013.401)

enter the following

LEASE CONTRACT

1.

TARCHINI      REAL      ESTATE     SA     –     Manno,      lease     to      NAIE      NATURAL ALTERNATIVES INTERNATIONAL EUROPE SA – Manno a surface of

8'153.39 sqm, located in the building Centro Galleria 1, Map 433 in Manno, ground and first floors

2.

The leased surface is highlighted in yellow in the attached layouts, the areas are identified as # 1, 2, 4, 5, 6, 7, 8, 10, 11, 12, 13, 15, 16, 17, 18, 22, 25, and 31.

3.

The tenant will use the areas as offices, laboratory, warehouse and production, in agreement with the current regulations.

4.

The lease is effective as of July 01, 2019 for a 5-year duration having a binding expiry on June 30, 2024. Nonetheless, if none of the parties will terminate the lease on maturity by means of a written registered letter to

address to the landlord one year ahead, the lease shall be considered renewed for a further period of one year.

LEASE

5.

The yearly lease is fixed at CHF 1’250’000.- (one million two hundred fifty thousand/00 Swiss francs) VAT excluded, property expenses included, payable in advance with quarterly settlements on January 01, April 01, July

01 and October 01 of every year.

Overdue settlements of the quarterly lease portions will be increased by an interest rate of 7% (seven percent).

Upon 1 month delay of the lease portion payments, the landlord has the faculty to initiate a legal recovery, being the present contract an acknowledgement of indebtedness as per article 82 – LEF (National Law on Failure & Insolvency).

6.

The existing deposit # 550557-10 of CHF 45’103.70 executed on May 07, 2003 in favor of the landlord at the Credit Suisse bank guarantees any subsequent duty deriving from the present contract.

LEASE INDEXING

7.

The lease is index-linked. It will be yearly adjusted to the national cost of living index with one-month notice.

Contract initial index: 336.20.

The first adjustment may occur on July 01, 2020.

8.

In the event the tenant, for whatever reason, would not leave the leased areas at the contract termination date or at any extended date settled by the judge, the tenant already agrees to pay to the landlord a lease equivalent to

150% of the last lease for the months the tenant will occupy the areas,

against the landlord’s will.

9.

All costs for lightening, power or whatever energy used in the leased areas

are at the tenant’s expenses.

10.

The lease includes the property expenses, as well as administration costs, routine maintenance and operating expenses of the shared utilities.

The following expenses, costs or taxes are included in the lease:

-     Heating and air conditioning of the offices

-     Shared spaces lightening and powering

-     Shared spaces drinkable water

-     Sewage and cleansing

-     Gardening and maintenance of the shared areas

-     Snow removal

-     Cleaning of the shared spaces.

In the event the tenant’s activity would cause a high usage of heating or any other utility, causing an increase in cost above the average, such costs will be at the tenant’s expenses.

Beside the above mentioned expenses, the property expenses include all expenses as stated in the “Catef” lease contract (Camera Ticinese dell’Economia Fondaria = Tessin Association of the real estate owners).

11.

The landlord will insure the building against fire, whilst the tenant will insure his properties stored in the leased areas against fire, water damages, natural events etc.

MODIFICATIONS INTO THE LEASED AREAS

12.

The tenant is allowed to modify the leased areas at his own expenses and whereas those modifications are necessary to his specific activity, previous written agreement by the landlord.

13.

Upon lease contract termination, the leasehold improvements to walls and building will remain the property of the landlord, with no obligation of refunding from his side, in the event such modifications cannot be removed without causing damages to the structure.

14.

The tenant will pay all costs such as electrical connections to the existing central heating, power system, phone lines already installed in the leased areas. The RASI certifications and all future controls to the electrical system, as legally stated, are at his costs as well (Low tension regulations – OIBT).

All electric connections or installations in building Galleria 1 must be carried out by contractors hired by Tarchini Real Estate SA.

The phone connections will be ruled by a separate contract between the landlord and tenant. The tenant is not allowed to use external phone, fax, telex lines if not connected to the Alcatel main switchboard.

Parking signals, logos, signs will be placed by the company SPM S.A. and costs invoiced to the tenant. It is forbidden to place any type of panel, commercial, logo without prior approval by the landlord.

DISPUTE AND LITIGATION

15.

Governing Law for any dispute, where not regulated by the present contract, is the Pretura di Lugano (Court of Lugano).

16.

This contract is undersigned in two originals, one for each party.

IN WITNESS WHEREOF, Manno, September 03, 2018

The Landlord :     The Tenant :

TARCHINI REAL ESTATE SA     NAIE NATURAL ALTERNATIVES INT. EUROPE SA

/s/ Alessanda Tarchini Marra                           /s/ Mark LeDoux

---------------------------------------     ---------------------------------------------

/s/ Giorgia Tarchini Gygax                            /s/ Kenneth Wolf

---------------------------------------     ---------------------------------------------

TECHNICAL DESCRIPTION OF THE LEASED AREAS

NAIE NATURAL ALTERNATIVES INTERNATIONAL EUROPE SA BUILDING : Centro Galleria 1 – Manno

FLOOR : Ground and first

REFERENCES : # 1, 2, 4, 5 ,6, 7, 8, 10, 11, 12, 13, 15, 16, 17, 18, 22, 25, 31

FINISHES :

The areas are let in their present state, except for the warehouse inner walls that the landlord will dismantle at his expenses.

Manno, September 03, 2018

EX-10.05

1. PARTIES

Landlord: TARCHINI REAL ESTATE SA – Manno

Via Cantonale - Centro Galleria 3 (VAT # CHE-100.072.922)

further mentioned as landlord and represented by Mrs. Alessandra Tarchini Marra and

Mrs Giorgia Tarchini Gygax

Tenant : NAIE NATURAL ALTERNATIVES INTERNATIONAL EUROPE SA – Manno, Via Cantonale - Centro Galleria 1

(VAT # CHE-105.013.401)

further mentioned as tenant, represented by Mr. Mark LeDoux and Mr. Fausto Petrini

2. LEASE OBJECT

Location: Manno Municipality, Map 433, building Centro Galleria 1

n. 16 indoor parking places identified as # 71, 72, 76, 77, 78, 79, 80, 81, 82, 83, 84, 85, 86,

87, 88, 89 and n. 39 outdoor parking places identified as # 101, 102, 103, 104, 125, 126, 127,

128, 129, 130, 141, 142, 143, 144, 145, 146, 147, 148, 149, 150, 151, 152, 154, 155, 156, 157,

158, 159, 164, 165, 166, 230, 231, 232, 233, 234, 235, 236, 237, as highlighted in yellow in the attached layouts.

3. LEASE TERM

The lease is effective as of July 01, 2019 having a binding expiry on June 30, 2020. Nonetheless, the tenant has the faculty to renew the present contract for additional 1 (one) year, by means of a written registered letter to address to the landlord six months ahead.

4. LEASE AMOUNT

The yearly lease is fixed at CHF 58’680.- (fifty eight thousand six hundred eighty/00

Swiss francs), + the yearly connection tax of CHF 48’180.- (forty eight thousand one hundred eighty/00 Swiss francs), for a total amount of 106’860.- (one hundred six thousand eight hundred sixty/00 Swiss francs) VAT excluded, payable in advance with quarterly settlements.

4.a

This contract cancels and replaces all the current lease contracts between Tarchini real estate Sa and NAIE SA and specifically the lease concerning 10 external parking spaces dated 27 February 2017, the lease concerning 2 internal parking lots dated 29 January

2016 and the lease re. 2 internal parking lots dated 30 December 2014, within the building

Galleria 1, in Manno.

5. CONNECTION TAX

The tenant acknowledges that the State Council has submitted to the High Council the note 7139 dated November 4, 2015 as a review of the Law on Public Transport dated December 6, 1994. The note provides for the introduction of the connection tax against the landlords.

On June 5, 2016 the cantonal vote has decreed the approval of the connection tax, effective August 2016.

In the light of the above, the Tenant acknowledges that the rent for each parking place increases of CHF 73.-/month from August 1, 2016 as the above mentioned tax repayment.

6. FLP – Lugano Rail Project

The tenant claims to be informed of the content of the above mentioned project concerning the construction of a tram railway, published on the Official Journal 99/2017 dated December 12, 2017.

In particular, the Tenant knows that the project provides for the partial expropriation of Maps # 818, 819, 822, 841 and 885 in Manno and that viability and accessibility might change and the parking places might be reduced.

In this respect, the Tenant should not claim any allowance and/or compensation against the Landlord for any modification of the leased property and for any possible inconvenience or impediment arising under the subject project.

7. MISCELLANEOUS

Failing Landlord’s written consensus, it is prohibited for the Tenant to:

–     Partially or totally sublet or transfer the lease to any third party;

– Use the parking garage electricity for different purposes than regular lighting;

–     Wash/carry out any maintenance works inside the building boundary.

The Landlord declines any responsibility for any damage or accident the vehicles might face.

The Tenant is bound to respect the Fire Department provisions. The vehicles shall be parked facing the wall.

It is forbidden to leave the car running in the parking lot

The Tenants shall leave/arrive the most quietly and silently, especially by night. Governing Law for any dispute, where not regulated by the present contract, is the Pretura di Lugano (Court of Lugano).

The parties agree on the content of this Lease contract. IN WITNESS WHEREOF,

Manno, September 10, 2018

The Landlord :     The Tenant :

TARCHINI REAL ESTATE SA     NAIE NATURAL ALTERNATIVES INT. EUROPE SA

/s/ Alessanda Tarchini Marra                           /s/ Mark LeDoux

---------------------------------------     ---------------------------------------------

/s/ Giorgia Tarchini Gygax                            /s/ Kenneth Wolf

---------------------------------------     ---------------------------------------------

EDIFICAZIONE AL MAPP. 433 - MANNO

GALLERIA 1 - PIANO TERRENO

TARCHINI REAL ESTATE SA - Centro Galleria 3 - 6928 Manno

EX-10.06

Rental Agreement for Commercial Premises

Property:

Via Cantonale 8, 6928 Manno TI

Owner / Landlord

Sofinol SA

Via Cantonale 8

6928 Manno TI

(hereinafter referred to as Landlord)

Type of property: Industry/trade

Start of rental period: 01/01/2019

Tenant

NAIE Natural Alternatives

International Europe SA

Centro Galleria 1

Via Cantonale 4

6928 Manno TI

(hereinafter referred to as Tenant)

Multiple tenants shall be jointly and severally liable for the obligations arising from this Rental Agreement.

Table of Contents

1     Rental objects/ rent/ ancillary costs     3

1.2     Basis of the rental fee     3

1.3     Value added tax (VAT)     3

2     Intended purpose     4

3     Start of the Rental Period, duration of the Rental Period, extension and termination     4

5     Ancillary costs     4

6     Default interest     5

7     Handover, defects     5

8     Use of the Rental Property     5

10     Security deposit     6

11     Original condition and tenant improvements     6

11.2     Maintenance of tenant improvements     6

11.3     At the Start of the Rental Period     7

11.4     During the Rental Period     7

11.5     Fulfilment of officially ordered or statutory requirements     7

11.6     Consideration of third-party interests     7

12     Securing of Tenant Improvements     8

13     Minor maintenance     8

14     Common areas     8

15     Cleaning     8

16     Restoring the original condition at the end of the Tenancy     8

17     Company signs, illuminated advertising, advertising, antenna systems     9

18     Subletting/ Transfer of Tenancy     9

22     Right of retention     10

23     Key handover     10

24     Landlord's right of access     10

25     Amendments to the Agreement     10

26     Duty to provide information     11

27     Severability clause     11

28     Jurisdiction/applicable law     11

29     Issue of the Rental Agreement     11

30     Integral part of the Rental Agreement     11

1 Rental objects/ rent/ ancillary costs

1.1 Description of the property, areas, rent

The Landlord shall rent out the rooms and areas to the Tenant in the aforementioned property, the location and size of which are marked on the enclosed layout plans, forming an integral part of this agreement (hereinafter referred to as Rental Agreement or Agreement). The original state and condition of the rental property, hereinafter referred to as "basic construction" are specified in the upgrading description, which also forms an integral part of this Agreement.

Property	Floor	Reference number	m2/ number	Price per m2/lot	Francs per year	Francs per month
Ex-SABO	ground floor 2nd upper floor 3rd upper floor		785 785 1,300	80.00 80.00 80.00	62,800.00 62,800.00 104,000.00	5,233.35 5,233.35 8,666.65

Parking spaces outside	14	70.00	11,760.00	980.00
Total fixed net rent			241,360.00	20,113.35

The rent is fixed during the rental period (i.e. no stepped or index-linked rent). The rent is payable in advance on the 1st day of the month. For IT-reasons, the amounts p.a. are partially rounded up or down.

The aforementioned areas are indicative approximate values and may differ from the actual areas. Any deviations have no influence on the fixed net annual rent.

1.2 Basis of the rental fee

Mortgage  interest rate:	1.5%		As of 02/06/2018
National index of consumer  prices:	Base year 2015	As of 31/08/2018	101.8 points
Cost increases considered:			As of 31/08/2018

1.3 Value added tax (VAT)

The Landlord, who is obligated to pay tax, has made use of the option of disclosing VAT on the rent and any ancillary costs. The VAT is shown in accordance with the law. This option shall be exercised during the agreed contractual period. By signing the Rental Agreement, the Tenant confirms that the rented objects will not be used exclusively for residential purposes.

VAT will be levied at the statutory rate on the agreed rent and any ancillary costs

(see calculation of rent at the VAT rate valid at the time the Agreement was drawn up). If the VAT rate changes, the Landlord is entitled to notify the Tenant of the resulting rent adjustment in the legally prescribed form -currently by means of an official form- at the time the new VAT rate comes into force.

If the option is cancelled during the contractual period for reasons for which the Tenant is responsible (e.g. due to exclusive use for residential purposes), the Landlord is entitled to pass on to the Tenant any self-consumption tax owed by the changes of use.

2 Intended purpose

The rental property shall be made available to the Tenant for the following use:

● Commercial / warehouse

● Truck access ramps

The rental property may only be used for the contractually agreed purpose. Significant extensions, restrictions and/or changes to the purpose are only permitted upon the prior written consent of the Landlord.

If the rental property is used for other purposes without the consent of the Landlord, the Landlord is entitled to terminate the Rental Agreement at any time subject to a notice period of 60 (sixty) days, provided that the Tenant does not use the rented object again within one month in conformity with the Agreement after a one-time written reminder.

3 Start of the Rental Period, duration of the Rental Period, extension and termination

3.1 Start of the Rental Period

The rental period starts on 01/01/2019 and the rent is due from this date, provided the agreed floor bearing capacity (in kg/m2) of the individual areas/floors have been confirmed in accordance with section 8. 

Should the handover take place before the start of the rental period, in particular for the completion of the tenant's improvements, risk and peril shall pass to the Tenant upon handover.

The rental property shall be handed over to the Tenant in accordance with the floor plans of 24/01/2007 in good working order (according to Annex 1).

The Landlord shall hand over the rental property to the Tenant in the contractually agreed state, in accordance with section 7. In particular, the water leakage from the ceiling and the damaged doors on the top floor must be repaired before the start to the rental period at the Landlord's expense.

3.2 Rental Period

The rental is limited in time and automatically ends on 31/12/2023 (Art. 255 para. 2 OR [Swiss Code of Obligations]) without the need of notice. During this 5-year period, the Tenant has a right to terminate the rental in advance twice a year with a 12 months' notice, as of 30/06 and 31/12. Starting from 01/01/2024, the Agreement is transferred to an indefinite tenancy, which can be terminated twice a year by both the Tenant and the Landlord with a 12 months' notice, as of 30/06 and 31/12.

4     Fixed Rent     

The fixed rent for the rental property shall amount to CHF 241,360.00 net per year (cf. section 1), irrespective of any deviations in area.

5     Ancillary costs

The basic rent does not include the following ancillary costs, which must be paid in addition to the rent and shall be billed separately twice annually:

• Electricity

• Service subscriptions, maintenance agreements and individual maintenance of lifts, escalators, paging system, hoisting platforms, façade lifts, gates, flat roof, pumps, emergency power systems, delivery facilities, roller shutters

• Water

• Waste water

The right to adjust changing costs and expenses associated with the operation of the property as outlined above (ancillary costs), which are introduced as the result of changed circumstances or legal regulations during the rental period, remains reserved; in such a case down payments may also be adjusted.

The Landlord shall determine the distribution key. If costs are not incurred or only partially incurred in one or other rental object, this shall be duly accounted for in the distribution key.

The settlement of ancillary costs shall be deemed approved unless the Tenant raises an objection in writing to the Landlord or his representative within 30 days of receipt. The Tenant is entitled to inspect the detailed invoice and the associated documents in their original form at the Landlord or his representative or have them inspected by an authorised representative.

Subsequent claims must be settled within 30 days of receipt of the invoice. Refunds must be made within the same period.

Expenses and costs, which exclusively concern the operation of the rented property, must also be borne by the Tenant, even if they are charged to the Landlord. Clearance of snow and ice on the main access roads and ramps for the trucks during working days shall be guaranteed at the expense of the Landlord.

The Landlord is always entitled to order the installation of a separate water sub-meter at the expense of the Tenant.

The costs for water, telephone, fax, modem, TV charges etc., which are charged directly to the Tenant must be paid directly by the Tenant. Electricity will be charged to the Tenant by the Landlord.

6 Default interest

In the event of delayed payment, the Landlord shall charge the Tenant 5 % (p.a.) interest on arrears on the amount owed from the invoice expiry date. The right to charge any expenses (dunning fees) shall remain reserved.

7 Handover, defects

The Landlord shall hand over the rental property to the Tenant in good working order. The parties sign a jointly recorded handover protocol. -If the handover date falls on a Saturday, Sunday or a officially recognised public holiday at the location of the property, the handover shall take place on the next working day until 12:00 noon without entitlement to a rent reduction.

The Landlord shall record any defects in the handover in the protocol in writing. If there are other defects in addition to those listed in the protocol. the Tenant must assert complaints in writing within 14 days of discovery. Otherwise the rental property as a whole shall be deemed to have been taken over in a good condition in accordance with the Agreement

8 Use of the Rental Property

If the Tenant intends to bring very heavy objects (machines, safes etc.) or equipment that can cause noise or vibrations (e.g. air-conditioning systems etc.) into the rental property, the written consent of the Landlord must be obtained in advance in order to clarify the necessary bearing capacity of the floors or possible effects for other rental properties. In each case, the Tenant is obliged to take all necessary and appropriate measures to prevent sound transmissions and vibrations. In this context, Colliers International Zurich AG will have a study carried out by an external engineer by November 2018 to confirm the floor bearing capacity (in kg/m²) of the individual areas/floors The Tenant shall be liable for all consequences in connection with a breach of this obligation, in particular for all justified claims of other tenants (reduction of rent and compensation for damages in accordance with Art. 259d and 259e OR) or neighbours and is obligated to participate in proceedings in the event of a dispute upon notification of a dispute and to conduct this, at the request of the Landlord, in his own name and at his own risk - also with regard to the consequences in terms of costs and compensation.

Access to the building etc. as well as passage or other free spaces may not be used for storing objects and goods of any kind. Vehicles may only be parked in the designated, rented parking spots. Refuse of any kind may only be stored at the locations specified by the Landlord and in compliance with the law.

The Landlord is entitled to co-use the shafts that run through the rental property and any subsequently constructed shafts, as well as all other shafts, which can be (co-)used by the Tenant for all kinds of supply and return lines. The Tenant is then also entitled to use the shafts present in the rental property for supply and return lines to the extent the available capacities permit this. If he wishes to make use of them, he must obtain prior written consent of the Landlord.

10 Security deposit

The Tenant undertakes to pay an amount of CHF 57,400.00 in cash (Art. 257e para. 1 OR) as security deposit for all claims of the Landlord under the present Rental Agreement (rent payments, damages in the event of early termination of the Agreement, claims due to damage to the rented property or external wear and tear or for other reasons) and to pay these to a first-class Swiss bank. This security deposit is pledged in favour of any claims by the Landlord.

The cash deposit must be paid before the rental object is handed over. In case of omission, the Landlord shall be entitled to refuse handover.

Upon transfer of the Rental Agreement, the Landlord may demand that the security deposit for covering the risk of the rent is increased if he could otherwise refuse the required consent.

11 Original condition and tenant improvements

11.1 Differentiation of the original condition and tenant improvements

The agreed net rent constitutes the adequate quid pro quo for the extended rental property as indicated (=basic construction). Extensions to the rental property beyond the basic extensions are regarded as tenant improvements. Any existing extensions by a previous tenant are deemed to have been carried out by the Tenant and are therefore part of the tenant improvements. In any case, all costs of the construction of the Tenant’s improvements shall be borne exclusively by the Tenant.

11.2 Maintenance of tenant improvements

Maintenance and replacement of all types of improvements are not part of the basic construction, i.e. the tenant’s improvements, are the exclusive responsibility of the Tenant, even if they are firmly connected to the building and the Landlord has financed the tenant’s improvements in whole or in part; the corresponding costs shall be borne by the tenant. At the Landlord's first request, the Tenant is obligated to perform maintenance and repair work on the Tenant improvements if the condition thereof threatens to damage the rental property or other parts of the

rental property or the outer appearance of the rental property.

The parties agree that the above agreed obligations have been adequately considered when determining the rental fee and therefore do not have a detrimental effect on the Tenant.

11.3 At the Start of the Rental Period

The Landlord shall permit the Tenant to perform tenant improvements in accordance with the construction specification present at the time the Agreement is signed and the Tenant’s corresponding plans at the Tenant's expense.

The Tenant undertakes to provide the Landlord with a complete, updated set of the relevant execution plans unsolicited and free of charge after completion of the tenant's improvements.

With respect to these approved tenant improvements, the Landlord reserves the right to demand that the original condition be restored in full or in part at the end of the Agreement. The Tenant shall waive any claim for compensation in the event that the restoration of the original condition of the rental property at the time of termination of the Agreement is not or only partially demanded, even if the tenant improvements remaining in the rental property embody an added value.

11.4 During the Rental Period

If the Tenant intends to perform tenant improvements in or on the rental property during the rental period, he shall obtain the written consent of the Landlord before beginning such work.

The Landlord is entitled to refuse his consent without specifying reasons or to grant it subject to the condition that the costs of the tenant improvements are secured before the construction work is performed. If the consent is granted, it shall be deemed agreed that

• the right to demand that the original condition or the condition prior to the performance of the tenant improvements be properly restored at the end of the Tenancy is reserved,

• that the Tenant shall waive any compensation upon termination of the Agreement in the event that the Landlord does not demand the restoration of the original condition or the condition existing prior to the completion of the tenant improvements, even if the tenant improvements could embody added value.

11.5 Fulfilment of officially ordered or statutory requirements

If the approval of tenant improvements depends on compliance with official orders or legal requirements, which require additional structural or other measures, e.g. for fire-protection, safety, ecological or other reasons (additional escape doors, sprinkler systems, fire alarm systems, use of ecologically prescribed facilities and materials, disposal of hazardous equipment or materials, such as asbestos, etc.), all associated costs shall be borne exclusively by the Tenant. Upon termination of the Agreement, the Landlord shall not owe any compensation even if the corresponding measures are not reversed.

In the event of interventions in the general parts of the building, in particular in the structural design, installations and the building envelope, the Landlord shall have the right to specify planners and/or contractors/products/systems as a prerequisite for the approval of such measures.

Connection fees for water, electricity, sewerage, etc. as well as premium adjustments of the progressive building insurance, which are attributable to tenant improvements, shall be charged proportionally

to the Tenant.

11.6 Consideration of third-party interests

The Tenant undertakes to have any tenant improvements performed in accordance with the applicable construction regulations and to monitor the performance in a professional manner. The statics of the building may not be affected. The Tenant must ensure that the defined maximum floor load is not exceeded. Upon request, an engineering report must be submitted to the Landlord together with the application for approval.

While work is performed on the tenant improvements, the interests of other tenants or users of the rental property must be taken into consideration to the greatest extent possible. Even in the case of careful and considerate execution of corresponding work, the Tenant shall be liable for any claims raised by other tenants or third parties (proportionate reduction of the rent or compensation) to the extent that such claims are rightfully asserted, with reference to the relevant legal provisions, and undertakes to participate in any legal dispute initiated in this respect vis-à-vis the Landlord upon notification of a dispute and to assume the legal dispute at his own risk and at his own expense at the corresponding request of the Landlord.

12 Securing of Tenant Improvements

The Landlord can make the approval of Tenant improvements dependent on the Tenant's corresponding security deposits.

The Tenant shall ensure that no tradesmen's liens are registered for the Tenant

improvements. If this still happens, the Tenant must ensure that these liens are cancelled immediately at his own expense; the corresponding obligation already exists at the stage of the provisional (precautionary) registration of each tradesmen’s lien. If the Tenant violates these obligations, this constitutes a breach of the Agreement, which entitles the Landlord to the extraordinary termination of the Agreement after expiry of a subsequent deadline which is set in writing. In any case, the Tenant shall be liable vis-à-vis the Landlord for the damage incurred.

For every construction project, the Tenant must take out builder's liability insurance.

13 Minor maintenance

Maintenance and minor repairs to the rental property fall under the Tenant’s responsibility up to an amount of 1 % of the annual net rent, but not exceeding CHF 2,413.60 per repair and individual case.

14 Common areas

The term "common areas" describes all areas and spaces, which are not exclusively used by a single tenant, but are collectively available for use by all tenants and/or customers of the property. The common areas in particular include stairs, delivery zones, ramps, and surrounding areas.

In general, the Tenant may not use such common areas for his own purposes. Any storage of goods, packaging materials, etc. as well as any handling of goods within the common areas is also expressly prohibited. Exceptions, which can only be permitted in individual cases and therefore for a limited time, require the express written consent of the Landlord.

15 Cleaning

The Tenant is obliged to clean the rental properties, including the corresponding toilet facilities, at his own expense.

16 Restoring the original condition at the end of the Tenancy

The Landlord has the right to request that at the time of return of the rental unit, the Tenant restores all improvements at the Tenant's own expense in whole or in part in a professional manner and that the Tenant restores the rental unit to its original condition at the Tenant's own expense.

If the Landlord refrains in full or in part from demanding the removal of tenant improvements, they or the corresponding portion thereof, which does not have to be removed, shall be transferred to the property of the Landlord without compensation. In this case, the Tenant has no right to take away or dismantle the tenant extensions or part thereof.

17 Company signs, illuminated advertising, advertising, antenna systems

The façade parts shall not be rented out. Company and advertising signs, billboards, display cases, antenna systems, etc. may only be installed with the written consent by the Landlord and only at certain points on the building as specified by the Landlord. For this purpose, an additional rent is levied, which will be determined on a case-by-case basis at the time the advertising is approved. The approval of the Landlord includes the size, rent, colour, shape, material and allocation of the respective advertising. The Tenant shall assume operation and cleaning costs. In the event maintenance is performed on parts of the building, the Tenant has to disassemble/reinstall the advertising at his own expense. If advertising is removed, any damages must be repaired and the façade surface must be adapted to the other building components by means of suitable measures (cleaning/paintwork).

The Tenant shall obtain any required official approvals at his own expense. The Tenant shall also pay for any connection costs and electricity consumption.

Where in a property the advertising is done according to a uniform concept, the Tenant undertakes to adapt his advertising to this concept. He shall bear the resulting costs.

18 Subletting/ Transfer of Tenancy

Subletting is only permitted with the written consent of the Landlord, whereby the Tenant must notify the Landlord of the intended contractual conditions as well as personal details of the sub-tenant. The Landlord must be provided with a copy of the sublease agreement. In all other respects, Art. 262 OR. shall apply.

The transfer of the Rental Agreement to a third party requires the written consent of the Landlord. The terms of the transfer must be submitted to the Landlord requesting his consent together with an excerpt from the commercial register, an excerpt from the debt collection register and the annual reports of the new tenant for the past three full fiscal years. If any of these documents are missing, the Landlord shall be entitled to refuse his consent to the transfer without further ado. The agreement of "key money" (or similar compensation for the transfer of the Rental Agreement without adequate quid pro quo) is not permitted. If such compensation is agreed, this shall entitle the Landlord to refuse his consent to the transfer. If the Landlord learns at a later stage that such compensation has been agreed and/or paid, this shall constitute an important reason for the extraordinary dissolution of the Agreement with the current Tenant pursuant to Art. 266g OR, whereby the Landlord is entitled to assert the damage caused by the Tenant or his legal successor. In all other respects, Art. 263 OR. applies.

19     Premature dissolution of the Agreement     

The Landlord may prematurely terminate the Rental Agreement in compliance with the legal periods in addition to the reasons expressly provided for by law if one of the following events occurs:

• if the rental property is used for a purpose other than the intended one.

• if the Tenant, his employees or agents breach e.g. cardinal contractual obligations. when transferring the rental property to a third party and/or subletting etc. without the Landlord’s prior written consent.

• if tradesmen's liens are registered in connection with the Tenant improvements.

If the contractual relationship is terminated by extraordinary termination on the part of the Landlord, the Tenant shall be liable for the resulting damage to the Landlord, which includes in particular the total loss of rent up to the first possible termination date of the rental relationship, as well as costs and expenses incurred in connection with the search for a successor tenant (advertisement costs, etc.).

20 Return

Upon termination of the Rental Agreement, the rental property must be properly vacated

and returned in a clean condition in accordance with the Agreement, including all keys, badges, etc. by 12h00 on the last day of the notice period. If this day falls on a Saturday, Sunday or an officially recognised public holiday at the location of the rental property, the return must take place on the next working day by 12h00 noon latest.

21 Risk of damage

The Landlord shall insure the rental property against damage and natural hazards, not including furnishings and installations.

The Tenant undertakes to take out liability insurance with coverage of at least CHF 5.0 million.

Further insurances such as water damage to furnishings, operations interruption insurances (fire/water), all damages in connection with glass breakage of display windows, mirrors, glass doors and windows including advertising and illuminated advertising are, if necessary, solely the responsibility of the Tenant.

22 Right of retention

The Tenant’s right of retention on the furnishings and furniture of the Tenant, pursuant to 268 OR. takes precedence over all third-party claims. The Tenant confirms that the furnishings he has brought into the rental property are his own and that no reservation of title of a third party is entered in the register for any inventory item.

23 Key handover

When the rental property is handed over, a list of the keys / badges and the like, which are handed over to the tenant, is created. The Tenant will receive a number of keys / badges. Additional keys/badges may only be made by the Tenant at his own expense and with the written consent of the Landlord.

On the day the rental property is returned, the Tenant must hand over all keys/badges to the Landlord, including those, which he had made at his own expense. In the event of loss, the Tenant must inform the Landlord. In this case, the Landlord is entitled to replace the locks, keys and badges at Tenant's expense.

24 Landlord's right of access

The Landlord or her representatives are entitled to exercise their right of ownership in order to perform the inspections of the property required for the repairs, maintenance, controls and renovations, subject to a 48 hours advance notice. In justified cases (fire, burglary, emergencies, reduction of damages), the notice requirement shall be omitted.

If the Tenant intends to leave the rental property unused for a prolonged period, he shall be obligated to designate a person, who will provide the keys and inform the Landlord or the administration accordingly. The duty of use as per this Agreement shall remain reserved. The keys can also be handed over to the Landlord in a sealed envelope.

25 Amendments to the Agreement

Amendments and supplements to this Rental Agreement require written form for their validity. This also applies to the repeal of this written form requirement.

26 Duty to provide information

The Tenant is obligated to immediately report to the Landlord all changes of a legal and financial nature which significantly affect the structure of the company (substantial changes in the shareholder structure, company takeover, merger, incorporation into a holding structure or similar). All documents requested by the Landlord must be provided free of charge.

The Tenant is furthermore obligated to notify the Landlord of any change to the corporate form, the company name or a limitation of liability.

27 Severability clause

The invalidity or unenforceability of individual provisions of this Agreement shall not affect the legal validity of the Agreement as a whole. In place of the ineffective provision, a provision must be agreed which corresponds to or comes as close as possible to the original legal and economic objective of the parties bona fide.

28 Jurisdiction/applicable law

The parties agree that the competent courts at the location of the property shall have jurisdiction. This Rental Agreement is subject to Swiss Law.

29 Issue of the Rental Agreement

The above Rental Agreement shall be drafted and signed in two identical copies

and only becomes legally valid upon signature by both parties.

30 Integral part of the Rental Agreement

The following documents constitute integral parts of this Rental Agreement and are attached to it:

• Annex 1: Floor plans, dated 24/01/2007

Lugano, 28/09/2018

The Landlord:	The Tenant:
Sofinol SA	NAIE Natural Alternatives International Europe SA
/s/ Pierre Giannoni   ---------------------------------------	/s/ Mark LeDoux                            -----------------------------------------
	/s/ Fausto Petrini                           -----------------------------------------

,

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to

Rule 13a-14(a)/15d-14(a)

I, Mark A. LeDoux, Chief Executive Officer of Natural Alternatives International, Inc., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Natural Alternatives International, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2018

/s/ Mark A. LeDoux

Mark A. LeDoux, Chief Executive Officer

EX-31.2

Exhibit 31.2

Certification of Chief Financial Officer

Pursuant to

Rule 13a-14(a)/15d-14(a)

I, Michael Fortin, Chief Financial Officer of Natural Alternatives International, Inc., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Natural Alternatives International, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 13, 2018

/s/ Michael E. Fortin

Michael E. Fortin, Chief Financial Officer

EX-32

Exhibit 32

Certification

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), each of the undersigned officers of Natural Alternatives International, Inc., a Delaware corporation, does hereby certify, to such officer’s knowledge, that the Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018 of Natural Alternatives International, Inc. fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)) and that information contained in such report fairly presents, in all material respects, the financial condition and results of operations of Natural Alternatives International, Inc.

Date: November 13, 2018	/s/ Mark A. LeDoux
	Mark A. LeDoux, Chief Executive Officer
Date: November 13, 2018	/s/ Michael E. Fortin
	Michael E. Fortin, Chief Financial Officer

The foregoing certification is furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.

XML

Document And Entity Information - shares	3 Months Ended
	Sep. 30, 2018	Nov. 13, 2018
Document Information [Line Items]
Entity Registrant Name	NATURAL ALTERNATIVES INTERNATIONAL INC
Entity Central Index Key	0000787253
Trading Symbol	naii
Current Fiscal Year End Date	--06-30
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Common Stock, Shares Outstanding (in shares)		7,570,871
Document Type	10-Q
Document Period End Date	Sep. 30, 2018
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q1
Amendment Flag	false

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Sep. 30, 2018	Jun. 30, 2018
Current assets:
Cash and cash equivalents	$ 27,613	$ 23,613
Accounts receivable - less allowance for doubtful accounts of $63 at September 30, 2018 and $49 at June 30, 2018	12,733	14,621
Note receivable	1,500	1,500
Inventories, net	24,972	23,567
Prepaids and other current assets	3,087	1,882
Total current assets	69,905	65,183
Property and equipment, net	19,277	19,290
Other noncurrent assets, net	920	734
Total assets	90,102	85,207
Current liabilities:
Accounts payable	10,064	9,649
Accrued liabilities	2,302	2,346
Accrued compensation and employee benefits	1,612	1,498
Income taxes payable	1,442	787
Total current liabilities	15,420	14,280
Long-term pension liability	57	45
Deferred rent	555	556
Income taxes payable, noncurrent	1,546	1,546
Deferred income taxes	(648)	(532)
Total liabilities	18,226	16,959
Commitments and contingencies (Note K)
Stockholders’ equity:
Preferred stock; $.01 par value; 500,000 shares authorized; none issued or outstanding	0	0
Common stock; $.01 par value; 20,000,000 shares authorized; issued and outstanding (net of treasury shares) 7,577,735 at September 30, 2018 and 7,558,408 at June 30, 2018	85	85
Additional paid-in capital	25,177	24,486
Retained earnings	53,399	50,839
Treasury stock, at cost, 1,098,942 shares at September 30, 2018 and 1,098,268 June 30, 2018	(6,590)	(6,584)
Accumulated other comprehensive loss	(195)	(578)
Total stockholders’ equity	71,876	68,248
Total liabilities and stockholders’ equity	$ 90,102	$ 85,207

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ in Thousands	Sep. 30, 2018	Jun. 30, 2018
Accounts receivable, allowance for doubtful accounts	$ 63	$ 49
Preferred stock par value (in dollars per share)	$ 0.01	$ 0.01
Preferred stock, shares authorized (in shares)	500,000	500,000
Preferred stock, shares issued (in shares)	0	0
Preferred stock, shares outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.01	$ 0.01
Common stock, shares authorized (in shares)	20,000,000	20,000,000
Common stock, shares issued (in shares)	7,577,735	7,558,408
Common stock, shares outstanding (in shares)	7,577,735	7,558,408
Treasury stock, shares (in shares)	1,098,942	1,098,268

XML

Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Net sales	$ 36,532	$ 28,074
Cost of goods sold	29,369	21,704
Gross profit	7,163	6,370
Selling, general and administrative expenses	4,439	4,487
Income from operations	2,724	1,883
Other income (expense):
Interest income	555	250
Interest expense	(3)
Foreign exchange loss	(78)	(143)
Other, net	23	1
Total other income	497	108
Income before income taxes	3,221	1,991
Provision for income taxes	662	557
Net income	2,559	1,434
Unrealized gain (loss) resulting from change in fair value of derivative instruments, net of tax	383	(1,134)
Comprehensive income	$ 2,942	$ 300
Net income per common share:
Basic (in dollars per share)	$ 0.38	$ 0.22
Diluted (in dollars per share)	$ 0.37	$ 0.21
Weighted average common shares outstanding:
Basic (in shares)	6,764,962	6,606,518
Diluted (in shares)	6,964,942	6,831,230

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Cash flows from operating activities
Net income	$ 2,559	$ 1,434
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	792	717
Non-cash sales discount	245	163
Non-cash compensation	409	301
Pension expense	12	51
(Gain) loss on disposal of assets	(1)	1
Changes in operating assets and liabilities:
Accounts receivable, net	1,888	(799)
Notes Receivable
Inventories, net	(1,405)	(5,267)
Prepaids and other assets	(993)	52
Accounts payable and accrued liabilities	471	5,773
Accrued compensation and employee benefits	114	(604)
Income taxes	655	492
Net cash provided by operating activities	4,746	2,314
Cash flows from investing activities
Purchases of property and equipment	(796)	(956)
Proceeds from sale of property and equipment	19	5
Issuance of notes receivable		(1,500)
Net cash used in investing activities	(777)	(2,451)
Cash flows from financing activities
Repurchase of common stock	(6)
Issuance of common stock	37
Net cash provided by financing activities	31
Net increase (decrease) in cash and cash equivalents	4,000	(137)
Cash and cash equivalents at beginning of period	23,613	27,843
Cash and cash equivalents at end of period	27,613	27,706
Supplemental disclosures of cash flow information
Interest	3
Taxes	7	76
Disclosure of non-cash activities:
Change in unrealized gain (loss) resulting from change in fair value of derivative instruments, net of tax	$ 383	$ (1,134)

XML

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

3 Months Ended

Sep. 30, 2018

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 applicable rules and regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows have been included and are of a normal, recurring nature. The results of operations for the

three

months ended

September 30, 2018

are

not

necessarily indicative of the operating results for the full fiscal year or any future periods.

You should read the financial statements and these notes, which 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, 2018 (

“2018

Annual Report”). The accounting policies used to prepare the financial statements included in this report are the same as those described in the notes to the consolidated financial statements in our

2018

Annual Report unless otherwise noted below.

Recently Adopted Accounting Pronouncements

In

April 2017,

the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)

No.

2017

-

10,

Revenue from Contracts with Customers (Topic

606

)(ASU

2017

-

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 2017,

the FASB issued Accounting Standards Update

No.

2017

-

11,

Revenue Recognition (Topic

605

) and Derivatives and Hedging (Topic

815

) (ASU

2017

-

11

), which amends and rescinds certain revenue recognition guidance previously released within ASU

2014

-

09.

In

May 2017,

the FASB issued Accounting Standards Update

No.

2017

-

12,

Revenue from Contracts with Customers (Topic

606

) (ASU

2017

-

12

), which provides narrow scope improvements and practical expedients related to ASU

2014

-

09.

  All of these ASUs have been codified under Accounting Standards Codification (ASC)

606.

 

This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current historical revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods and services in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods and services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with their respective customers. 

The new revenue standard is required to be applied either retrospectively to each prior reporting period presented or prospectively with the cumulative effect of initially applying the standard recognized at the date of the initial application, supplemented with certain disclosures related to the effect of adoption on previously reported amounts, if any (the modified retrospective method). We adopted the standard on

July 1, 2018

for contracts that were

not

completed before the adoption date, using the modified retrospective method.  We evaluated the effect of the standard and concluded it is

not

material to the timing or amount of revenues or expenses recognized in our historical consolidated financial statements. As a result, we concluded the application of the standard does

not

have a material effect that requires a retrospective adjustment for reporting disclosure purposes to any previously reported amounts in our historical consolidated financial statements.

On

December 22, 2017,

the SEC issued guidance under Staff Accounting Bulletin

No.

118,

Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB

118”

) directing taxpayers to consider the impact of the U.S. legislation as “provisional” when the taxpayer does

not

have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB

118,

we calculated our taxes for fiscal

2018

to the best of our ability and we do

not

expect any significant changes, however our estimated income tax could change once we complete our tax return and thus our tax expense for fiscal

2018

is considered provisional and is expected to be finalized by the end of the

one

-year measurement period ending

December 22, 2018.

In

February 2018,

the FASB issued ASU

2018

-

03,

Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic

825

-

10

): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU

2018

-

03

is intended to improve certain aspects of recognition, measurement, presentation, and disclosure of certain financial instruments, i.e. forward contracts, purchased options and option liabilities. We do

not

expect this ASU to have a material impact on our consolidated financial statements. ASU

2018

-

03

is effective for us beginning in this quarter, our

first

quarter of fiscal

2019.

Recently Issued 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.  In

July 2018,

the FASB issued ASU

2018

-

10,

Codification Improvements to Topic

842,

Leases. This ASU affects narrow aspects of the guidance issued in the amendments in ASU

No.

2016

-

02

including those regarding residual value guarantees, the interest rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase option, variable lease payments that depend on an index or a rate, investment tax credits, lease term and purchase option, transition guidance for amounts previously recognized in business combinations, certain transition adjustments, transition guidance for leases previously classified as capital leases under Topic

840,

transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic

840,

transition guidance for sale and leaseback transactions, impairment of net investment in the lease, unguaranteed residual asset, effect of initial direct costs on the interest rate implicit in the lease, and failed sale and leaseback transactions.  These ASUs will be effective for us beginning in our

first

quarter of fiscal

2020.

  We are currently evaluating the impact these ASUs will have on our consolidated financial statements.

In

August 2017,

the FASB issued ASU

2017

-

12,

Derivatives and Hedging (Topic

815

): Targeted Improvements to Accounting for Hedging Activities. ASU

2017

-

12

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.

In

February 2018,

the FASB issued ASU

2018

-

02,

Income Statement-Reporting Comprehensive Income (Topic

220

): Reclassification of Certain Tax Effect from Accumulated Other Comprehensive Income. ASU

2018

-

02

allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. We are currently evaluating the impact of adopting the new standard on our consolidated financial statements. ASU

2018

-

02

will be effective for us beginning in our

first

quarter of fiscal

2020.

In

June 2018,

the FASB issued ASU

2018

-

07,

Compensation-Stock Compensation (Topic

718

): Improvements to Nonemployee Share-Based Payment Accounting. The ASU clarifies that Topic

718

does

not

apply to share-based payments used to effectively provide financing to the issuer or awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic

606,

Revenue from Contracts with Customers. We are currently evaluating the impact of the new standard. ASU

2018

-

07

will be effective for us beginning in our

first

quarter of fiscal

2020.

Other recently issued accounting pronouncements did

not

or are

not

believed by management to have a material impact on our present or future financial statements.

Net Income per Common Share

We compute net income per common share using the weighted average number of common shares outstanding during the period, and diluted net income per common share using the additional dilutive effect of all dilutive securities. The dilutive impact of stock options accounts 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 September 30,
	2018		2017
Numerator
Net income	$	2,559	$	1,434
Denominator
Basic weighted average common shares outstanding		6,765		6,607
Dilutive effect of stock options		200		224
Diluted weighted average common shares outstanding		6,965		6,831
Basic net income per common share	$	0.38	$	0.22
Diluted net income per common share	$	0.37	$	0.21

We excluded shares related to restricted stock totaling

15,000

shares for the

three

months ended

September 30, 2018,

as their impact would have been anti-dilutive.

No

shares related to stock options were excluded for the

three

months ended

September 30, 2018.

No

shares related to stock options or restricted stock were excluded for the

three

months ended

September 30, 2017.

Revenue Recognition

We record revenue based on the

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 when the various performance obligations are satisfied.

Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling

one

of 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 are due as specified in the underlying customer agreement, typically

30

days from the invoice date, which occurs on the date of transfer of control of the products ordered to the customer.

Revenue is recognized at the point in time that our performance obligation is fulfilled, and control of the ordered products is transferred to the customer. This 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 reported as a change in the transaction price.

Except for product defects,

no

right of return exists on the sale of our products. We estimate returns based on historical experience and recognize a returns liability for any estimated returns. As of

September 30, 2018,

we have

no

known returns liability.

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 them with certain of their products within

24

countries where Juice Plus+ currently sells those products. Pursuant to the Restricted Stock Award Agreement, NAI granted

500,000

shares of NAI common stock to Juice Plus+, (the “Shares”), and Juice Plus+ agreed the Shares are subject to certain restrictions and risk of forfeiture. Pursuant to the Irrevocable Proxy, Juice Plus+ also granted the NAI Board of Directors the right to vote the Shares that remain subject to the risk of forfeiture. Each Agreement is for a term of

5

years, and each

may

be terminated by either party only upon the occurrence of specified events. The expense associated with the Shares granted to Juice Plus+ is recorded as a reduction to revenue. We recorded

$245,000

of expense during the

three

months ended

September 30, 2018

and

$163,000

for the

three

months ended

September 30, 2017

as a "Non-cash Sales Discount" which is an offset to net sales.

We currently own certain U.S. patents, and each patent’s corresponding foreign patent applications. All of these patents and patent rights relate to the ingredient known as beta-alanine 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

$5.4

million during the

three

months ended

September 30, 2018

and

$5.9

million during the

three

months ended

September 30, 2017.

These royalty income and raw material sale amounts resulted in royalty expense paid to the original patent holders from whom we acquired the patents and patent rights. We recognized royalty expense as a component of cost of goods sold in the amount of

$263,000

during the

three

months ended

September 30, 2018,

and

$284,000

during the

three

months ended

September 30, 2017.

Notes Receivable

On

September 30, 2017,

we accepted a

12

-month note (Loan Agreement) from Kaged Muscle, LLC (“Kaged Muscle”),

one

of our contract manufacturing customers, in exchange for

$1.5

million of trade receivables due to us from Kaged Muscle. On

September 30, 2018,

we entered into a First Amendment (the “First Amendment”) with Kaged Muscle in connection with the Loan Agreement. The First Amendment modifies the Loan Agreement and related promissory note by extending the maturity date from

September 30, 2018

to

December 28, 2018

in exchange for an extension fee in the amount of

$25,000.

Kaged Muscle is

one

of our fastest growing sports nutrition customers and we executed this note receivable conversion, and subsequent amendment, to assist them with their near term financing needs. The note carries an interest rate of

fifteen

percent (

15%

) per annum with payments of interest only.  Repayment of the note is secured by all of the assets of Kaged Muscle and the note is personally guaranteed by the co-founder and President of Kaged Muscle. Interest is due quarterly and the note can be prepaid in any amount at any time without penalty.  In association with this note, we recognized

$58,000

in interest income during the

three

months ended

September 30, 2018

and

zero

interest income during the

three

months ended

September 30, 2017.

Stock-Based Compensation

We have an omnibus equity incentive plan that was approved by our Board of Directors effective

October 

15,

2009

and approved by our stockholders at the Annual Meeting of Stockholders held on

November 

30,

2009.

Under the

2009

Plan, we

may

grant nonqualified and incentive stock options and other stock-based awards to employees, non-employee directors and consultants.

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.

We recognize forfeitures as they occur.   

We did

not

grant any options during the

three

months ended

September 30, 2018

or the

three

months ended

September 30, 2017.

All remaining outstanding stock options are fully vested. During the

three

months ended

September 30, 2018,

5,000

options were exercised. There were

no

options exercised during the

three

months ended

September 30, 2017.

There were

no

forfeitures during the

three

months ended

September 30, 2018

or the

three

months ended

September 30, 2017.

During the

three

months ended

September 30, 2018,

we granted a total of

15,000

restricted stock shares to a new member of our management team. We did

not

grant any shares to employees during the

three

months ended

September 30, 2017.

Our net income included stock based compensation expense of approximately

$409,000

for the

three

months ended

September 30, 2018,

and

$301,000

for the

three

months ended

September 30, 2017.

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 we have 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 techniques that use significant unobservable inputs.

As of

September 30, 2018,

and

June 30, 2018,

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. The fair value of our forward exchange contracts as of

September 30, 2018

was a net asset of

$1.0

million. The fair value of our forward exchange contracts as of

June 30, 2018

included a net asset of

$55,000

and a net liability of

$55,000,

with

no

right of offset. As of

September 30, 2018,

and

June 30, 2018,

we did

not

have any financial assets or liabilities classified as Level

3.

We did

not

transfer any assets or liabilities between Levels during fiscal

2018

or the

three

months ended

September 30, 2018. 

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

67.6%

of gross accounts receivable at

September 

30,

2018

and

76.6%

at

June 

30,

2018.

Additionally, amounts due related to our beta-alanine raw material sales were

20.4%

of gross accounts receivable at

September 30, 2018,

and

17.3%

of gross accounts receivable at

June 30, 2018.

Concentrations of credit risk related to the remaining accounts receivable balances are limited due to the number of customers comprising our remaining customer base.

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Note B - Inventories, Net

3 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Inventory Disclosure [Text Block]

B. Inventories, net

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

	September 30, 2018			June 30, 2018
Raw materials	$	17,092		$	16,209
Work in progress		3,256			4,268
Finished goods		5,005			3,462
Reserve		(381	)		(372	)
	$	24,972		$	23,567

XML

Note C - Property and Equipment

3 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Property, Plant and Equipment Disclosure [Text Block]

C. Property and Equipment

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

	Depreciable Life In Years			September 30, 2018			June 30, 2018
Land		NA		$	1,200		$	1,200
Building and building improvements	7	–	39		3,721			3,721
Machinery and equipment	3	–	12		28,393			28,185
Office equipment and furniture	3	–	5		4,861			4,883
Vehicles		3			313			209
Leasehold improvements	1	–	15		15,821			15,688
Total property and equipment					54,309			53,886
Less: accumulated depreciation and amortization					(35,032	)		(34,596	)
Property and equipment, net				$	19,277		$	19,290

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Note D - Other Comprehensive Loss

3 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Comprehensive Income (Loss) Note [Text Block]

D. Other Comprehensive Loss

Other comprehensive (loss) income (“OCL” and “OCI”) consisted of the following during the

three

months ended

September 30, 2018

and

September 30, 2017 (

in thousands):

	Three months ended September 30, 2018
	Defined Benefit Pension Plan			Unrealized (Losses) Gains on Cash Flow Hedges			Total
Balance as of June 30, 2018	$	(387	)	$	(191	)	$	(578	)
OCI/OCL before reclassifications		—			945			945
Amounts reclassified from OCI		—			(446	)		(446	)
Tax effect of OCI activity		—			(116	)		(116	)
Net current period OCI/OCL		—			383			383
Balance as of September 30, 2018	$	(387	)	$	192		$	(195	)

During the

three

months ended

September 30, 2018,

the amounts reclassified from OCI were comprised of

$41,000

of losses reclassified to net revenues and

$487,000

related to the amortization of forward points reclassified to other income.

	Three months ended September 30, 2017
	Defined Benefit Pension Plan			Unrealized Gains (Losses) on Cash Flow Hedges			Total
Balance as of June 30, 2017	$	(491	)	$	(414	)	$	(905	)
OCI/OCL before reclassifications		—			(1,953	)		(1,953	)
Amounts reclassified from OCI		—			178			178
Tax effect of OCI activity		—			641			641
Net current period OCI/OCL		—			(1,134	)		(1,134	)
Balance as of September 30, 2017	$	(491	)	$	(1,548	)	$	(2,039	)

During the

three

months ended

September 30, 2017,

the amounts reclassified from OCI were comprised of

$422,000

of losses reclassified to net revenues and

$244,000

related to the amortization of forward points reclassified to other income.

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Note E - Debt

3 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Debt Disclosure [Text Block]

E. Debt

On

March 20, 2018,

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

February 1, 2020,

to

February 1, 2021.

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 amendment. 

Under the terms of the Credit Agreement, borrowings are subject to eligibility requirements including 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 us 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, 2021,

and with Bank of America, N.A. in effect until

August 15, 2019. 

On

September 30, 2018,

we were in compliance with all of the financial and other covenants required under the Credit Agreement.

We did

not

use our working capital line of credit nor did we have any long-term debt outstanding during the

three

months ended

September 30, 2018.

As of

September 30, 2018,

we had

$10.0

million available under our credit facilities.

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Note F - Economic Dependency

3 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Concentration Risk Disclosure [Text Block]

F. 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 any of (i) the in sales to these customers, (ii) the growth rate of sales to these customers, or (iii) in these customers’ ability to make payments when due, each 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 period's consolidated net sales were as follows (in thousands):

	Three months Ended September 30,
	2018		2017
Customer 1	$	21,078	$	13,157
Customer 2		3,729		3,161
	$	24,807	$	16,318

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 September 30,
	2018						201 7
	Raw Material Purchases by Supplier			% of Total Raw Material Purchases			Raw Material Purchases by Supplier			% of Total Raw Material Purchases
Supplier 1	$	3,107			15	%		(a	)		(a	)
Supplier 2		(a	)		(a	)		1,967			14	%
	$	3,107			15	%	$	1,967			14	%

(a)         Purchases were less than

10%

of the respective period’s total raw material purchases.

XML

Note G - Segment Information

3 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

G. 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 based on a number of factors. The primary performance 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 above and in the consolidated financial statements included in our

2018

Annual Report.

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

	Three months Ended September 30,
	2018		201 7
Net Sales
Private-label contract manufacturing	$	31,087	$	22,222
Patent and trademark licensing		5,445		5,852
	$	36,532	$	28,074

	Three months Ended September 30,
	2018			201 7
Income from Operations
Private-label contract manufacturing	$	3,145		$	2,257
Patent and trademark licensing		1,802			1,188
Income from operations of reportable segments		4,947			3,445
Corporate expenses not allocated to segments		(2,223	)		(1,562	)
	$	2,724		$	1,883

	September 30, 2018		June 30, 2018
Total Assets
Private-label contract manufacturing	$	72,677	$	69,037
Patent and trademark licensing		17,425		16,170
	$	90,102	$	85,207

Our private-label contract manufacturing products are sold both in the U.S. and in markets outside the U.S., including Europe, Canada, Australia, New Zealand, and Asia. Our primary markets outside the U.S. are Europe and Asia. Our patent and trademark licensing activities are primarily based in the U.S.

Net sales by geographic region, based on the customers’ location, were as follows (in thousands):

	Three months Ended September 30,
	2018		2017
United States	$	17,646	$	15,194
Markets outside the United States		18,886		12,880
Total net sales	$	36,532	$	28,074

Products manufactured by NAIE accounted for

72%

of net sales in markets outside the U.S. for the

three

months ended

September 30, 2018,

and

75%

for the

three

months ended

September 30, 2017.

No

products manufactured by NAIE were sold in the U.S. during the

three

months ended

September 30, 2018

and

2017.

Assets and capital expenditures by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):

	Long-Lived Assets				Total Assets				Capital Expenditures
									Three Months Ended
	September 30, 2018		June 30, 201 8		September 30, 2018		June 30, 2018		September 30, 2018		September 30, 201 7
United States	$	10,841	$	10,887	$	54,279	$	51,562	$	337	$	89
Europe		8,436		8,403		35,823		33,645		459		867
	$	19,277	$	19,290	$	90,102	$	85,207	$	796	$	956

XML

Note H - Income Taxes

3 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Income Tax Disclosure [Text Block]

H. Income Taxes

The effective tax rate for the

three

months ended

September 

30,

2018

was

20.6%.

The rate differs slightly from the U.S. federal statutory rate of

21%

primarily due to the favorable impact of foreign earnings of NAIE, which are taxed at less than the U.S. statutory rate.  The effective tax rate for the

three

months ended

September 

30,

2017

was

28.0%.

To determine our quarterly provision for income taxes, we use an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions to which we are subject. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rate from quarter to quarter. There were

no

significant discrete items for the

three

months ended

September 30, 2018.

We recognize interest and penalties related to uncertain tax positions, if any, as an income tax expense.

We record valuation allowances to reduce our deferred tax assets to an amount we believe is more likely than

not

to be realized. 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. During the

three

months ended

September 30, 2018,

there was

no

change to our valuation allowance for our deferred tax assets.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates, for each of the jurisdictions in which we operate, 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 as income or expense in the period that includes the enactment date for such new rates.

We are subject to taxation in the U.S., Switzerland and various state jurisdictions. Our tax years for the fiscal year ended

June 30,

2015

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 Swiss tax authorities.

It is our policy to establish reserves based on management’s assessment of exposure for certain positions taken in previously filed tax returns that

may

become payable upon audit by tax authorities. Our tax reserves are analyzed quarterly and adjustments are made as events occur that we believe warrant adjustments to those reserves. There were

no

adjustments to reserves in the

three

months ended

September 30, 2018.

XML

Note I - Treasury Stock

3 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Treasury Stock [Text Block]

I. 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, 2018,

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

three

months ended

September 30, 2018

and

September 30, 2017,

we did

not

repurchase any shares under this repurchase plan.

During the

three

months ended

September 30, 2018,

we acquired

674

shares from employees in connection with restricted stock shares owned by such employees that vested during that period at a weighted average cost of

$9.65

per share and a total cost of

$6,000.

During the

three

months ended

September 30, 2017,

we acquired

734

shares from employees in connection with restricted stock shares owned by such employees that vested during that period at a weighted average cost of

$10.70

per share and a total cost of

$8,000.

These shares were returned to us by the subject employees and in exchange therefor we paid each employee’s required tax withholding liability incurred due to the vesting of their restricted stock shares during that period. The valuation of the shares acquired and therefor the number of shares returned to us was calculated based on the closing share price on the date the shares vested.

XML

Note J - Derivatives and Hedging

3 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

J. 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 to other 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. To the extent we enter into such contracts, there can be

no

guarantee any such contracts will be effective hedges against our foreign currency exchange risk.

As of

September 30, 2018,

we had 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 2020.

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 expense. We measure effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item. During the

three

months ended

September 30, 2018,

we did

not

have any losses or gains related to the ineffective portion of our hedging instruments.

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

September 30, 2018,

the notional amounts of our foreign exchange contracts designated as cash flow hedges were approximately

$83.3

million (EUR

68.9

million). As of

September 30, 2018,

a net gain of approximately

$171,000

related to derivative instruments designated as cash flow hedges was recorded in OCI. It is expected that

$119,000

will be reclassified into earnings in the next

12

months along with the earnings effects of the related forecasted transactions.

As of

September 30, 2018,

the fair value of our cash flow hedges was an asset of

$955,000,

of which

$680,000

was classified in prepaids and other current assets, and

$275,000

was classified in other non-current assets in our Consolidated Balance Sheets. During the

three

months ended

September 30, 2018,

we recognized

$458,000

of net gains in OCI and reclassified

$41,000

of gains from OCI to revenue. As of

June 30, 2018,

$55,000

of the fair value of our cash flow hedges was classified in prepaids and other current assets,

$46,000

was classified in other non-current assets, and

$101,000

was classified in accrued liabilities in our Consolidated Balance Sheets. During the

three

months ended

September 30, 2017,

we recognized

$2.2

million of net losses in OCI and reclassified

$422,000

of gains from OCI to revenue.

XML

Note K - Contingencies

3 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Legal Matters and Contingencies [Text Block]

K. 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 we do

not

expect.

XML

Note L - Subsequent Events

3 Months Ended

Sep. 30, 2018

Notes to Financial Statements

Subsequent Events [Text Block]

L. Subsequent Events

On

October 19, 2018,

Natural Alternatives International Europe Ltd. SA, a Swiss corporation ("NAIE") and wholly-owned subsidiary of Natural Alternatives International, Inc. entered into a new lease with its current landlord providing

five

additional years to the term of NAIE's leasehold for its primary manufacturing facility in Manno Switzerland. The new lease term runs from

July 1, 2019

through

June 30, 2024

and is automatically extended for successive

one

-year periods thereafter unless NAIE provides a

one

-year advance notice

not

to extend.  

On

November 5, 2018,

Natural Alternatives International Europe Ltd. SA, a Swiss corporation ("NAIE") and wholly-owned subsidiary of Natural Alternatives International, Inc. entered into a lease with Sofinol SA for approximately

2,870

square meters of commercial warehouse space in a building located on the property adjacent to the leasehold for the primary existing NAIE facility in Manno Switzerland. NAIE intends to use the space primarily for raw material storage. The lease is for an initial

five

-year term commencing on

January 1, 2019

and NAIE can terminate the lease with

12

months advance notice given on

June

30th

or

December

31st

each year of the initial term. At the end of the initial term the lease converts to a year to year lease at the same rental rate terminable by NAIE or the landlord upon

12

months' advance notice.

XML

Significant Accounting Policies (Policies)

3 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Adopted Accounting Pronouncements

In

April 2017,

the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)

No.

2017

-

10,

Revenue from Contracts with Customers (Topic

606

)(ASU

2017

-

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 2017,

the FASB issued Accounting Standards Update

No.

2017

-

11,

Revenue Recognition (Topic

605

) and Derivatives and Hedging (Topic

815

) (ASU

2017

-

11

), which amends and rescinds certain revenue recognition guidance previously released within ASU

2014

-

09.

In

May 2017,

the FASB issued Accounting Standards Update

No.

2017

-

12,

Revenue from Contracts with Customers (Topic

606

) (ASU

2017

-

12

), which provides narrow scope improvements and practical expedients related to ASU

2014

-

09.

  All of these ASUs have been codified under Accounting Standards Codification (ASC)

606.

 

This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current historical revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods and services in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods and services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with their respective customers. 

The new revenue standard is required to be applied either retrospectively to each prior reporting period presented or prospectively with the cumulative effect of initially applying the standard recognized at the date of the initial application, supplemented with certain disclosures related to the effect of adoption on previously reported amounts, if any (the modified retrospective method). We adopted the standard on

July 1, 2018

for contracts that were

not

completed before the adoption date, using the modified retrospective method.  We evaluated the effect of the standard and concluded it is

not

material to the timing or amount of revenues or expenses recognized in our historical consolidated financial statements. As a result, we concluded the application of the standard does

not

have a material effect that requires a retrospective adjustment for reporting disclosure purposes to any previously reported amounts in our historical consolidated financial statements.

On

December 22, 2017,

the SEC issued guidance under Staff Accounting Bulletin

No.

118,

Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB

118”

) directing taxpayers to consider the impact of the U.S. legislation as “provisional” when the taxpayer does

not

have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB

118,

we calculated our taxes for fiscal

2018

to the best of our ability and we do

not

expect any significant changes, however our estimated income tax could change once we complete our tax return and thus our tax expense for fiscal

2018

is considered provisional and is expected to be finalized by the end of the

one

-year measurement period ending

December 22, 2018.

In

February 2018,

the FASB issued ASU

2018

-

03,

Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic

825

-

10

): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU

2018

-

03

is intended to improve certain aspects of recognition, measurement, presentation, and disclosure of certain financial instruments, i.e. forward contracts, purchased options and option liabilities. We do

not

expect this ASU to have a material impact on our consolidated financial statements. ASU

2018

-

03

is effective for us beginning in this quarter, our

first

quarter of fiscal

2019.

Recently Issued 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.  In

July 2018,

the FASB issued ASU

2018

-

10,

Codification Improvements to Topic

842,

Leases. This ASU affects narrow aspects of the guidance issued in the amendments in ASU

No.

2016

-

02

including those regarding residual value guarantees, the interest rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase option, variable lease payments that depend on an index or a rate, investment tax credits, lease term and purchase option, transition guidance for amounts previously recognized in business combinations, certain transition adjustments, transition guidance for leases previously classified as capital leases under Topic

840,

transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic

840,

transition guidance for sale and leaseback transactions, impairment of net investment in the lease, unguaranteed residual asset, effect of initial direct costs on the interest rate implicit in the lease, and failed sale and leaseback transactions.  These ASUs will be effective for us beginning in our

first

quarter of fiscal

2020.

  We are currently evaluating the impact these ASUs will have on our consolidated financial statements.

In

August 2017,

the FASB issued ASU

2017

-

12,

Derivatives and Hedging (Topic

815

): Targeted Improvements to Accounting for Hedging Activities. ASU

2017

-

12

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.

In

February 2018,

the FASB issued ASU

2018

-

02,

Income Statement-Reporting Comprehensive Income (Topic

220

): Reclassification of Certain Tax Effect from Accumulated Other Comprehensive Income. ASU

2018

-

02

allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. We are currently evaluating the impact of adopting the new standard on our consolidated financial statements. ASU

2018

-

02

will be effective for us beginning in our

first

quarter of fiscal

2020.

In

June 2018,

the FASB issued ASU

2018

-

07,

Compensation-Stock Compensation (Topic

718

): Improvements to Nonemployee Share-Based Payment Accounting. The ASU clarifies that Topic

718

does

not

apply to share-based payments used to effectively provide financing to the issuer or awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic

606,

Revenue from Contracts with Customers. We are currently evaluating the impact of the new standard. ASU

2018

-

07

will be effective for us beginning in our

first

quarter of fiscal

2020.

Other recently issued accounting pronouncements did

not

or are

not

believed by management to have a material impact on our present or future financial statements.

Earnings Per Share, Policy [Policy Text Block]

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 accounts 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 September 30,
	2018		2017
Numerator
Net income	$	2,559	$	1,434
Denominator
Basic weighted average common shares outstanding		6,765		6,607
Dilutive effect of stock options		200		224
Diluted weighted average common shares outstanding		6,965		6,831
Basic net income per common share	$	0.38	$	0.22
Diluted net income per common share	$	0.37	$	0.21

We excluded shares related to restricted stock totaling

15,000

shares for the

three

months ended

September 30, 2018,

as their impact would have been anti-dilutive.

No

shares related to stock options were excluded for the

three

months ended

September 30, 2018.

No

shares related to stock options or restricted stock were excluded for the

three

months ended

September 30, 2017.

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

We record revenue based on the

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 when the various performance obligations are satisfied.

Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling

one

of 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 are due as specified in the underlying customer agreement, typically

30

days from the invoice date, which occurs on the date of transfer of control of the products ordered to the customer.

Revenue is recognized at the point in time that our performance obligation is fulfilled, and control of the ordered products is transferred to the customer. This 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 reported as a change in the transaction price.

Except for product defects,

no

right of return exists on the sale of our products. We estimate returns based on historical experience and recognize a returns liability for any estimated returns. As of

September 30, 2018,

we have

no

known returns liability.

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 them with certain of their products within

24

countries where Juice Plus+ currently sells those products. Pursuant to the Restricted Stock Award Agreement, NAI granted

500,000

shares of NAI common stock to Juice Plus+, (the “Shares”), and Juice Plus+ agreed the Shares are subject to certain restrictions and risk of forfeiture. Pursuant to the Irrevocable Proxy, Juice Plus+ also granted the NAI Board of Directors the right to vote the Shares that remain subject to the risk of forfeiture. Each Agreement is for a term of

5

years, and each

may

be terminated by either party only upon the occurrence of specified events. The expense associated with the Shares granted to Juice Plus+ is recorded as a reduction to revenue. We recorded

$245,000

of expense during the

three

months ended

September 30, 2018

and

$163,000

for the

three

months ended

September 30, 2017

as a "Non-cash Sales Discount" which is an offset to net sales.

We currently own certain U.S. patents, and each patent’s corresponding foreign patent applications. All of these patents and patent rights relate to the ingredient known as beta-alanine 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

$5.4

million during the

three

months ended

September 30, 2018

and

$5.9

million during the

three

months ended

September 30, 2017.

These royalty income and raw material sale amounts resulted in royalty expense paid to the original patent holders from whom we acquired the patents and patent rights. We recognized royalty expense as a component of cost of goods sold in the amount of

$263,000

during the

three

months ended

September 30, 2018,

and

$284,000

during the

three

months ended

September 30, 2017.

Finance, Loans and Leases Receivable, Policy [Policy Text Block]

Notes Receivable

On

September 30, 2017,

we accepted a

12

-month note (Loan Agreement) from Kaged Muscle, LLC (“Kaged Muscle”),

one

of our contract manufacturing customers, in exchange for

$1.5

million of trade receivables due to us from Kaged Muscle. On

September 30, 2018,

we entered into a First Amendment (the “First Amendment”) with Kaged Muscle in connection with the Loan Agreement. The First Amendment modifies the Loan Agreement and related promissory note by extending the maturity date from

September 30, 2018

to

December 28, 2018

in exchange for an extension fee in the amount of

$25,000.

Kaged Muscle is

one

of our fastest growing sports nutrition customers and we executed this note receivable conversion, and subsequent amendment, to assist them with their near term financing needs. The note carries an interest rate of

fifteen

percent (

15%

) per annum with payments of interest only.  Repayment of the note is secured by all of the assets of Kaged Muscle and the note is personally guaranteed by the co-founder and President of Kaged Muscle. Interest is due quarterly and the note can be prepaid in any amount at any time without penalty.  In association with this note, we recognized

$58,000

in interest income during the

three

months ended

September 30, 2018

and

zero

interest income during the

three

months ended

September 30, 2017.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

Stock-Based Compensation

We have an omnibus equity incentive plan that was approved by our Board of Directors effective

October 

15,

2009

and approved by our stockholders at the Annual Meeting of Stockholders held on

November 

30,

2009.

Under the

2009

Plan, we

may

grant nonqualified and incentive stock options and other stock-based awards to employees, non-employee directors and consultants.

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.

We recognize forfeitures as they occur.   

We did

not

grant any options during the

three

months ended

September 30, 2018

or the

three

months ended

September 30, 2017.

All remaining outstanding stock options are fully vested. During the

three

months ended

September 30, 2018,

5,000

options were exercised. There were

no

options exercised during the

three

months ended

September 30, 2017.

There were

no

forfeitures during the

three

months ended

September 30, 2018

or the

three

months ended

September 30, 2017.

During the

three

months ended

September 30, 2018,

we granted a total of

15,000

restricted stock shares to a new member of our management team. We did

not

grant any shares to employees during the

three

months ended

September 30, 2017.

Our net income included stock based compensation expense of approximately

$409,000

for the

three

months ended

September 30, 2018,

and

$301,000

for the

three

months ended

September 30, 2017.

Fair Value Measurement, Policy [Policy Text Block]

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 we have 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 techniques that use significant unobservable inputs.

As of

September 30, 2018,

and

June 30, 2018,

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. The fair value of our forward exchange contracts as of

September 30, 2018

was a net asset of

$1.0

million. The fair value of our forward exchange contracts as of

June 30, 2018

included a net asset of

$55,000

and a net liability of

$55,000,

with

no

right of offset. As of

September 30, 2018,

and

June 30, 2018,

we did

not

have any financial assets or liabilities classified as Level

3.

We did

not

transfer any assets or liabilities between Levels during fiscal

2018

or the

three

months ended

September 30, 2018. 

Concentration Risk, Credit Risk, Policy [Policy Text Block]

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

67.6%

of gross accounts receivable at

September 

30,

2018

and

76.6%

at

June 

30,

2018.

Additionally, amounts due related to our beta-alanine raw material sales were

20.4%

of gross accounts receivable at

September 30, 2018,

and

17.3%

of gross accounts receivable at

June 30, 2018.

Concentrations of credit risk related to the remaining accounts receivable balances are limited due to the number of customers comprising our remaining customer base.

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Note A - Basis of Presentation and Summary of Significant Accounting Policies (Tables)

3 Months Ended

Sep. 30, 2018

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three Months Ended September 30,
	2018		2017
Numerator
Net income	$	2,559	$	1,434
Denominator
Basic weighted average common shares outstanding		6,765		6,607
Dilutive effect of stock options		200		224
Diluted weighted average common shares outstanding		6,965		6,831
Basic net income per common share	$	0.38	$	0.22
Diluted net income per common share	$	0.37	$	0.21

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Note B - Inventories, Net (Tables)

3 Months Ended

Sep. 30, 2018

Notes Tables

Schedule of Inventory, Current [Table Text Block]

	September 30, 2018			June 30, 2018
Raw materials	$	17,092		$	16,209
Work in progress		3,256			4,268
Finished goods		5,005			3,462
Reserve		(381	)		(372	)
	$	24,972		$	23,567

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Note C - Property and Equipment (Tables)

3 Months Ended

Sep. 30, 2018

Notes Tables

Property, Plant and Equipment [Table Text Block]

	Depreciable Life In Years			September 30, 2018			June 30, 2018
Land		NA		$	1,200		$	1,200
Building and building improvements	7	–	39		3,721			3,721
Machinery and equipment	3	–	12		28,393			28,185
Office equipment and furniture	3	–	5		4,861			4,883
Vehicles		3			313			209
Leasehold improvements	1	–	15		15,821			15,688
Total property and equipment					54,309			53,886
Less: accumulated depreciation and amortization					(35,032	)		(34,596	)
Property and equipment, net				$	19,277		$	19,290

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Note D - Other Comprehensive Loss (Tables)

3 Months Ended

Sep. 30, 2018

Notes Tables

Schedule of Accumulated Other Comprehensive Income (Loss) [Table Text Block]

	Three months ended September 30, 2018
	Defined Benefit Pension Plan			Unrealized (Losses) Gains on Cash Flow Hedges			Total
Balance as of June 30, 2018	$	(387	)	$	(191	)	$	(578	)
OCI/OCL before reclassifications		—			945			945
Amounts reclassified from OCI		—			(446	)		(446	)
Tax effect of OCI activity		—			(116	)		(116	)
Net current period OCI/OCL		—			383			383
Balance as of September 30, 2018	$	(387	)	$	192		$	(195	)

	Three months ended September 30, 2017
	Defined Benefit Pension Plan			Unrealized Gains (Losses) on Cash Flow Hedges			Total
Balance as of June 30, 2017	$	(491	)	$	(414	)	$	(905	)
OCI/OCL before reclassifications		—			(1,953	)		(1,953	)
Amounts reclassified from OCI		—			178			178
Tax effect of OCI activity		—			641			641
Net current period OCI/OCL		—			(1,134	)		(1,134	)
Balance as of September 30, 2017	$	(491	)	$	(1,548	)	$	(2,039	)

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Note F - Economic Dependency (Tables)

3 Months Ended

Sep. 30, 2018

Supplier Concentration Risk [Member]

Notes Tables

Schedules of Concentration of Risk, by Risk Factor [Table Text Block]

	Three months Ended September 30,
	2018						201 7
	Raw Material Purchases by Supplier			% of Total Raw Material Purchases			Raw Material Purchases by Supplier			% of Total Raw Material Purchases
Supplier 1	$	3,107			15	%		(a	)		(a	)
Supplier 2		(a	)		(a	)		1,967			14	%
	$	3,107			15	%	$	1,967			14	%

Customer Concentration Risk [Member]

Notes Tables

Schedules of Concentration of Risk, by Risk Factor [Table Text Block]

	Three months Ended September 30,
	2018		2017
Customer 1	$	21,078	$	13,157
Customer 2		3,729		3,161
	$	24,807	$	16,318

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Note G - Segment Information (Tables)

3 Months Ended

Sep. 30, 2018

Notes Tables

Schedule of Segment Reporting Information, by Segment [Table Text Block]

	Three months Ended September 30,
	2018		201 7
Net Sales
Private-label contract manufacturing	$	31,087	$	22,222
Patent and trademark licensing		5,445		5,852
	$	36,532	$	28,074

	Three months Ended September 30,
	2018			201 7
Income from Operations
Private-label contract manufacturing	$	3,145		$	2,257
Patent and trademark licensing		1,802			1,188
Income from operations of reportable segments		4,947			3,445
Corporate expenses not allocated to segments		(2,223	)		(1,562	)
	$	2,724		$	1,883

Reconciliation of Assets from Segment to Consolidated [Table Text Block]

	September 30, 2018		June 30, 2018
Total Assets
Private-label contract manufacturing	$	72,677	$	69,037
Patent and trademark licensing		17,425		16,170
	$	90,102	$	85,207

Revenue from External Customers by Geographic Areas [Table Text Block]

	Three months Ended September 30,
	2018		2017
United States	$	17,646	$	15,194
Markets outside the United States		18,886		12,880
Total net sales	$	36,532	$	28,074

Long-lived Assets by Geographic Areas [Table Text Block]

	Long-Lived Assets				Total Assets				Capital Expenditures
									Three Months Ended
	September 30, 2018		June 30, 201 8		September 30, 2018		June 30, 2018		September 30, 2018		September 30, 201 7
United States	$	10,841	$	10,887	$	54,279	$	51,562	$	337	$	89
Europe		8,436		8,403		35,823		33,645		459		867
	$	19,277	$	19,290	$	90,102	$	85,207	$	796	$	956

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Note A - Basis of Presentation and Summary of Significant Accounting Policies (Details Textual)			3 Months Ended		12 Months Ended
	Sep. 30, 2017 USD ($)	Aug. 07, 2017 shares	Sep. 30, 2018 USD ($) shares	Sep. 30, 2017 USD ($) shares	Jun. 30, 2018 USD ($)
Sales Discounts, Noncash			$ 245,000	$ 163,000
Royalty and Licensing Revenue			5,400,000	5,900,000
Royalty Expense			263,000	284,000
Notes, Loans and Financing Receivable, Net, Current, Total			1,500,000		$ 1,500,000
Investment Income, Interest			$ 555,000	$ 250,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross | shares			0	0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Exercises in Period | shares			5,000	0
Share-based Compensation Arrangement by Share-based Payment Award, Options, Forfeitures in Period | shares			0	0
Allocated Share-based Compensation Expense, Total			$ 409,000	$ 301,000
Foreign Currency Contract, Asset, Fair Value Disclosure			$ 1,000,000		55,000
Foreign Currency Contracts, Liability, Fair Value Disclosure					$ 55,000
Customer Concentration Risk [Member] | Accounts Receivable [Member]
Concentration of Risk Number of Major Customers			3
Concentration Risk, Percentage			67.60%		76.60%
Customer Concentration Risk [Member] | Accounts Receivable [Member] | Beta Alanine Raw Material Sale Customers [Member]
Concentration Risk, Percentage			20.40%		17.30%
Fair Value, Inputs, Level 1 [Member]
Fair Value, Net Asset (Liability), Total			$ 0		$ 0
Fair Value, Inputs, Level 3 [Member]
Fair Value, Net Asset (Liability), Total			0		$ 0
Juice Plus + [Member]
Agreement, Term		5 years
Kaged Muscle LLC [Member] | Notes Receivable [Member]
Notes, Loans and Financing Receivable, Term	1 year
Notes, Loans and Financing Receivable, Net, Current, Total	$ 1,500,000			$ 1,500,000
Notes, Loans and Financing Receivable, Extension Fee			25,000
Notes, Loans and Financing Receivable, Interest Rate, Stated Percentage	15.00%			15.00%
Investment Income, Interest			$ 58,000	$ 0
Restricted Stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount | shares			15,000	0
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period | shares			15,000	0
Restricted Stock [Member] | Juice Plus + [Member]
Stock Issuance Agreement, Shares Agreed to Grant | shares		500,000
Sales Discounts, Noncash			$ 245,000	$ 163,000
Employee Stock Option [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount | shares			0	0
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Dividend Rate			0.00%

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Note A - Basis of Presentation and Summary of Significant Accounting Policies - Calculation of Basic and Diluted Net Income Per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Numerator
Net income	$ 2,559	$ 1,434
Denominator
Basic weighted average common shares outstanding (in shares)	6,764,962	6,606,518
Dilutive effect of stock options (in shares)	200,000	224,000
Diluted weighted average common shares outstanding (in shares)	6,964,942	6,831,230
Basic net income per common share (in dollars per share)	$ 0.38	$ 0.22
Diluted net income per common share (in dollars per share)	$ 0.37	$ 0.21

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Note B - Inventories, Net - Summary of Inventories (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Jun. 30, 2018
Raw materials	$ 17,092	$ 16,209
Work in progress	3,256	4,268
Finished goods	5,005	3,462
Reserve	(381)	(372)
Inventories, net	$ 24,972	$ 23,567

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Note C - Property and Equipment - Summary of Property and Equipment (Details) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2018	Jun. 30, 2018
Property and equipment, gross	$ 54,309	$ 53,886
Less: accumulated depreciation and amortization	(35,032)	(34,596)
Property and equipment, net	19,277	19,290
Land [Member]
Property and equipment, gross	1,200	1,200
Building and Building Improvements [Member]
Property and equipment, gross	$ 3,721	3,721
Depreciable Life In Years (Year)
Building and Building Improvements [Member] | Minimum [Member]
Depreciable Life In Years (Year)	7 years
Building and Building Improvements [Member] | Maximum [Member]
Depreciable Life In Years (Year)	39 years
Machinery and Equipment [Member]
Property and equipment, gross	$ 28,393	28,185
Depreciable Life In Years (Year)
Machinery and Equipment [Member] | Minimum [Member]
Depreciable Life In Years (Year)	3 years
Machinery and Equipment [Member] | Maximum [Member]
Depreciable Life In Years (Year)	12 years
Office Equipment [Member]
Property and equipment, gross	$ 4,861	4,883
Depreciable Life In Years (Year)
Office Equipment [Member] | Minimum [Member]
Depreciable Life In Years (Year)	3 years
Office Equipment [Member] | Maximum [Member]
Depreciable Life In Years (Year)	5 years
Vehicles [Member]
Property and equipment, gross	$ 313	209
Depreciable Life In Years (Year)	3 years
Vehicles [Member] | Minimum [Member]
Depreciable Life In Years (Year)	3 years
Vehicles [Member] | Maximum [Member]
Depreciable Life In Years (Year)
Leasehold Improvements [Member]
Property and equipment, gross	$ 15,821	$ 15,688
Depreciable Life In Years (Year)
Leasehold Improvements [Member] | Minimum [Member]
Depreciable Life In Years (Year)	1 year
Leasehold Improvements [Member] | Maximum [Member]
Depreciable Life In Years (Year)	15 years

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Note D - Other Comprehensive Loss (Details Textual) - USD ($)	3 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Revenues, Total	$ 36,532,000	$ 28,074,000
Nonoperating Income (Expense), Total	497,000	108,000
Reclassification out of Accumulated Other Comprehensive Income [Member]
Revenues, Total	(41,000)	(422,000)
Nonoperating Income (Expense), Total	$ 487,000	$ 244,000

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Note D - Other Comprehensive Loss - Other Comprehensive (Loss) Income (Details) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Balance	$ 68,248
Balance	71,876
Accumulated Defined Benefit Plans Adjustment Attributable to Parent [Member]
Balance	(387)	$ (491)
OCI/OCL before reclassifications
Amounts reclassified from OCI
Tax effect of OCI activity
Net current period OCI/OCL
Balance	(387)	(491)
Accumulated Net Gain (Loss) from Cash Flow Hedges Attributable to Parent [Member]
Balance	(191)	(414)
OCI/OCL before reclassifications	945	(1,953)
Amounts reclassified from OCI	(446)	178
Tax effect of OCI activity	(116)	641
Net current period OCI/OCL	383	(1,134)
Balance	192	(1,548)
AOCI Attributable to Parent [Member]
Balance	(578)	(905)
OCI/OCL before reclassifications	945	(1,953)
Amounts reclassified from OCI	(446)	178
Tax effect of OCI activity	(116)	641
Net current period OCI/OCL	383	(1,134)
Balance	$ (195)	$ (2,039)

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Note E - Debt (Details Textual)	3 Months Ended
	Sep. 30, 2018 USD ($)
Proceeds from Long-term Lines of Credit	$ 0
Line of Credit Facility, Remaining Borrowing Capacity	10,000,000
Long-term Debt, Total	0
Wells Fargo Bank, N.A. [Member] | Credit Agreement [Member]
Line of Credit Facility, Maximum Borrowing Capacity	10,000,000
Line of Credit Facility, Commitment Fee Amount	0
Long-term Debt, Percentage Bearing Fluctuating Interest, Threshold Amount	100,000
Minimum Prepayment Amount Under Line of Credit	$ 100,000
Wells Fargo Bank, N.A. [Member] | Credit Agreement [Member] | London Interbank Offered Rate (LIBOR) [Member]
Debt Instrument, Basis Spread on Variable Rate	1.25%
Debt Instrument Basis Spread on Elected Fixed Rate Borrowing	1.25%
Wells Fargo Bank, N.A. [Member] | Credit Agreement [Member] | Maximum [Member]
Ratio of Indebtedness to Net Capital	1.25
Ratio of Total Current Assets to Total Current Liabilities	1.75

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Note F - Economic Dependency - Substantial Net Sales to Certain Customers (Details) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Net sales	$ 36,532	$ 28,074
Customer Concentration Risk [Member] | Sales Revenue, Goods, Net [Member]
Net sales	24,807	16,318
Customer Concentration Risk [Member] | Sales Revenue, Goods, Net [Member] | Customer 1 [Member]
Net sales	21,078	13,157
Customer Concentration Risk [Member] | Sales Revenue, Goods, Net [Member] | Customer 2 [Member]
Net sales	$ 3,729	$ 3,161	[1]

[1] Sales were less than 10% of the respective period's consolidated net sales.

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Note F - Economic Dependency - Substantial Net Purchase From Certain Supplier (Details) - Supplier Concentration Risk [Member] - Raw Material Purchases [Member] - USD ($) $ in Thousands		3 Months Ended
		Sep. 30, 2018	Sep. 30, 2017
Raw Material Purchases by Supplier		$ 3,107	$ 1,967
% of Total Raw Material Purchases		15.00%	14.00%
Supplier 1 [Member]
Raw Material Purchases by Supplier		$ 3,107		[1]
% of Total Raw Material Purchases		15.00%		[1]
Supplier 2 [Member]
Raw Material Purchases by Supplier	[1]		$ 1,967
% of Total Raw Material Purchases	[1]		14.00%

[1] Purchases were less than 10% of the respective period's total raw material purchases.

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Note G - Segment Information (Details Textual) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Number of Reportable Segments	2
Revenues, Total	$ 36,532	$ 28,074
Non-US [Member]
Revenues, Total	18,886	12,880
UNITED STATES
Revenues, Total	$ 17,646	$ 15,194
Products Manufactured by NAIE [Member] | Non-US [Member] | Sales Revenue, Net [Member] | Product Concentration Risk [Member]
Concentration Risk, Percentage	72.00%	75.00%
Products Manufactured by NAIE [Member] | UNITED STATES
Revenues, Total	$ 0	$ 0

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Note G - Segment Information - Operating Results by Business Segment (Details) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Net sales	$ 36,532	$ 28,074
Income from operations	2,724	1,883
Operating Segments [Member]
Income from operations	4,947	3,445
Corporate, Non-Segment [Member]
Income from operations	(2,223)	(1,562)
Private Label Contract Manufacturing [Member]
Net sales	31,087	22,222
Private Label Contract Manufacturing [Member] | Operating Segments [Member]
Income from operations	3,145	2,257
Patent and Trademark Licensing [Member]
Net sales	5,445	5,852
Patent and Trademark Licensing [Member] | Operating Segments [Member]
Income from operations	$ 1,802	$ 1,188

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Note G - Segment Information - Assets by Business Segment (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Jun. 30, 2018
Assets	$ 90,102	$ 85,207
Private Label Contract Manufacturing [Member]
Assets	72,677	69,037
Patent and Trademark Licensing [Member]
Assets	$ 17,425	$ 16,170

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Note G - Segment Information - Net Sales by Geographic Region (Details) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Net sales	$ 36,532	$ 28,074
UNITED STATES
Net sales	17,646	15,194
Non-US [Member]
Net sales	$ 18,886	$ 12,880

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Note G - Segment Information - Assets and Capital Expenditures by Geographical Region (Details) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Jun. 30, 2018
Long-Lived Assets	$ 19,277		$ 19,290
Total Assets	90,102		85,207
Capital Expenditures	796	$ 956
UNITED STATES
Long-Lived Assets	10,841		10,887
Total Assets	54,279		51,562
Capital Expenditures	337	89
Europe [Member]
Long-Lived Assets	8,436		8,403
Total Assets	35,823		$ 33,645
Capital Expenditures	$ 459	$ 867

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Note H - Income Taxes (Details Textual) - USD ($) $ in Thousands	3 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Effective Income Tax Rate Reconciliation, Percent, Total	20.60%	28.00%
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent	21.00%
Valuation Allowance, Deferred Tax Asset, Increase (Decrease), Amount	$ 0
Earliest Tax Year [Member] | Domestic Tax Authority [Member]
Open Tax Year	2015
Earliest Tax Year [Member] | State and Local Jurisdiction [Member]
Open Tax Year	2007
Earliest Tax Year [Member] | Foreign Tax Authority [Member] | Swiss Federal Tax Administration (FTA) [Member]
Open Tax Year	2015

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Note I - Treasury Stock (Details Textual) - USD ($)	3 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Mar. 28, 2017	May 11, 2015	Feb. 06, 2015	Jun. 02, 2011
Stock Repurchase Program, Authorized Amount			$ 7,000,000	$ 5,000,000	$ 3,000,000	$ 2,000,000
Treasury Stock, Shares, Acquired	674	734
Treasury Stock Acquired, Average Cost Per Share	$ 9.65	$ 10.70
Payments Related to Tax Withholding for Share-based Compensation	$ 6,000
Treasury Stock, Value, Acquired, Cost Method		$ 8,000
Excluding Restricted Stock Purchased [Member]
Treasury Stock, Shares, Acquired	0	0
2015 Increase [Member]
Stock Repurchase Program, Authorized Amount				$ 2,000,000	$ 1,000,000
2017 Increase [Member]
Stock Repurchase Program, Authorized Amount			$ 2,000,000

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Note J - Derivatives and Hedging (Details Textual) € in Millions	3 Months Ended
	Sep. 30, 2018 USD ($)	Sep. 30, 2017 USD ($)	Sep. 30, 2018 EUR (€)	Jun. 30, 2018 USD ($)
Gain (Loss) on Cash Flow Hedge Ineffectiveness, Net, Total	$ 0
Unrealized Loss on Foreign Currency Derivatives, before Tax	171,000
Cash Flow Hedge Derivative Instrument Assets at Fair Value	955,000,000,000
Prepaid Expenses and Other Current Assets [Member]
Cash Flow Hedge Derivative Instrument Assets at Fair Value	680,000			$ 55,000
Other Noncurrent Assets [Member]
Cash Flow Hedge Derivative Instrument Assets at Fair Value	275,000			46,000
Accrued Liabilities [Member]
Cash Flow Hedge Derivative Instrument Liabilities at Fair Value				$ 101,000
Reclassification out of Accumulated Other Comprehensive Income [Member]
Foreign Currency Cash Flow Hedge Gain (Loss) to be Reclassified During Next 12 Months	119,000
Cash Flow Hedging [Member]
Other Comprehensive Income (Loss), Unrealized Gain (Loss) on Derivatives Arising During Period, before Tax	458,000	$ (2,200,000)
Derivative Instruments, Gain Reclassified from Accumulated OCI into Income, Effective Portion	41,000	$ 422,000
Foreign Exchange Contract [Member] | Cash Flow Hedging [Member]
Derivative, Notional Amount	$ 83,300,000		€ 68.9

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Note L - Subsequent Events (Details Textual) - Natural Alternatives International Europe SA [Member] - SWITZERLAND - Subsequent Event [Member] - m²	Oct. 19, 2018	Nov. 05, 2018
Primary Manufacturing Facility [Member]
Lessee, Operating Lease, Term of Contract	5 years
Lessee, Operating Lease, Renewal Term	1 year
Lessee, Operating Lease, Notice to Not Extend Lease Term	1 year
Commercial Warehouse [Member]
Lessee, Operating Lease, Term of Contract		5 years
Area of Real Estate Property		2,870