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 MARCH 31, 2017

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 Drive
Carlsbad, California 92008	(760) 744-7340
(Address of principal executive offices)	(Registrant’s telephone number)

Indicate by check mark whether Natural Alternatives International, Inc. (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.

[X] 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).

[X] Yes [__] No

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

Large accelerated filer [__] Accelerated filer [__] Non-accelerated filer [__] Smaller reporting company [X]  Emerging Growth 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 [X] No

As of May 15, 2017, 6,938,352 shares of NAI's common stock were outstanding, net of 1,043,325 treasury shares.

TABLE OF CONTENTS

		Page
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS		1
PART I	FINANCIAL INFORMATION	2
Item 1.	Financial Statements	2
	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of 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	14
Item 4.	Controls and Procedures	19
PART II	OTHER INFORMATION	20
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 5.	Other Information	22
Item 6.	Exhibits	23
SIGNATURES		24

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

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

• our ability to protect our intellectual property;

• 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;

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

• the costs associated with defending and resolving potential new claims, even if such claims are without merit;

• currency exchange rates, their effect on our results of operations, including amounts that may be reclassified 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;

• future levels of our revenue concentration risks;

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

• inventories, including the adequacy of raw material and other inventory levels to meet future customer demand and the adequacy and intended use of our facilities;

• manufacturing and distribution channels, product sales and performance, and timing of product shipments;

• current or future customer orders, product returns, and potential product recalls;

• the impact on our business and results of operations and variations in 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 (GMP);

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

• the adequacy of our reserves and allowances;

• the sufficiency of our available cash, cash equivalents, and potential cash flows from operations to fund our current working capital needs and capital expenditures through the next 12 months;

• current and future economic and political conditions;

• 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.

The 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 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).

Unless the context requires otherwise, all references in this report to the “Company,” “NAI,” “we,” “our,” and “us” refer to Natural Alternatives International, Inc. and, as applicable, Natural Alternatives International Europe S.A. (NAIE).

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)

	March 31, 2017			June 30, 2016
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	22,593		$	19,747
Accounts receivable - less allowance for doubtful accounts of $21 at March 31, 2017 and $45 at June 30, 2016		7,919			13,217
Inventories, net		15,966			20,768
Income tax receivable		14			14
Prepaids and other current assets		2,699			2,136
Total current assets		49,191			55,882
Property and equipment, net		17,788			15,167
Deferred income taxes		2,227			2,227
Other noncurrent assets, net		781			899
Total assets	$	69,987		$	74,175
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4,073		$	12,821
Accrued liabilities		2,367			2,242
Accrued compensation and employee benefits		989			2,802
Income taxes payable		1,207			1,340
Total current liabilities		8,636			19,205
Other noncurrent liabilities, net		908			758
Deferred rent		530			486
Total liabilities		10,074			20,449
Commitments and contingencies
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) 6,933,352 at March 31, 2017 and 6,868,628 at June 30, 2016		79			77
Additional paid-in capital		21,933			21,138
Accumulated other comprehensive loss		(279	)		(680	)
Retained earnings		44,254			38,553
Treasury stock, at cost, 1,043,325 shares at March 31, 2017 and 958,049 at June 30, 2016		(6,074	)		(5,362	)
Total stockholders’ equity		59,913			53,726
Total liabilities and stockholders’ equity	$	69,987		$	74,175

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 March 31,						Nine Months Ended March 31,
	2017			2016			2017			2016
Net sales	$	25,135		$	30,006		$	89,761		$	78,502
Cost of goods sold		20,017			23,549			70,479			61,643
Gross profit		5,118			6,457			19,282			16,859
Selling, general and administrative expenses		4,125			3,352			11,640			9,291
Income from operations		993			3,105			7,642			7,568
Other income (expense):
Interest income		109			26			358			82
Interest expense		(1	)		2			(1	)		(1	)
Foreign exchange (loss) gain		(45	)		(137	)		158			(241	)
Other, net		(6	)		1,611			(21	)		1,601
		57			1,502			494			1,441
Income before income taxes		1,050			4,607			8,136			9,009
Provision for income taxes		305			1,584			2,435			2,905
Net income	$	745		$	3,023		$	5,701		$	6,104
Unrealized (loss) gain resulting from change in fair value of derivative instruments, net of tax		(451	)		(473	)		401			(199	)
Comprehensive income	$	294		$	2,550		$	6,102		$	5,905
Net income per common share:
Basic	$	0.11		$	0.46		$	0.87		$	0.94
Diluted	$	0.11		$	0.46		$	0.86		$	0.92
Weighted average common shares outstanding:
Basic		6,581,632			6,510,902			6,569,165			6,513,821
Diluted		6,613,955			6,562,577			6,648,091			6,628,883

See accompanying notes to condensed consolidated financial statements.

3

NATURAL ALTERNATIVES INTERNATIONAL, INC.

Condensed Consolidated Statements Of Cash Flows

(In thousands)

(Unaudited)

	Nine Months Ended March 31,
	2017			2016
Cash flows from operating activities
Net income	$	5,701		$	6,104
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,711			1,364
Non-cash compensation		729			463
Pension expense		149			38
Gain on disposal of assets		(23	)		(1,848	)
Deferred taxes		-			645
Changes in operating assets and liabilities:
Accounts receivable		5,298			(2,473	)
Inventories, net		4,802			(7,164	)
Prepaids and other assets		182			380
Accounts payable and accrued liabilities		(8,579	)		3,514
Income taxes		(291	)		749
Accrued compensation and employee benefits		(1,813	)		588
Net cash provided by operating activities		7,866			2,360
Cash flows from investing activities
Purchases of property and equipment		(4,332	)		(6,959	)
Proceeds from sale of property and equipment		24			3,000
Net cash used in investing activities		(4,308	)		(3,959	)
Cash flows from financing activities
Repurchase of common stock		(712	)		(648	)
Net cash used in financing activities		(712	)		(648	)
Net increase (decrease) in cash and cash equivalents		2,846			(2,247	)
Cash and cash equivalents at beginning of period		19,747			18,551
Cash and cash equivalents at end of period	$	22,593		$	16,304
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	-		$	-
Taxes	$	2,761		$	1,929
Disclosure of non-cash activities:
Change in unrealized gain (loss) resulting from change in fair value of derivative instruments, net of tax	$	401		$	(199	)

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 and nine months ended March 31, 2017 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, 2016 (“2016 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 2016 Annual Report unless otherwise noted below.

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 account for the additional weighted average shares of common stock outstanding for our diluted net income per common share computation. We calculated basic and diluted net income per common share as follows (in thousands, except per share data):

	Three Months Ended March 31,				Nine Months Ended March 31,
	2017		2016		2017		2016
Numerator
Net income	$	745	$	3,023	$	5,701	$	6,104
Denominator
Basic weighted average common shares outstanding		6,582		6,511		6,569		6,514
Dilutive effect of stock options		32		52		79		115
Diluted weighted average common shares outstanding		6,614		6,563		6,648		6,629
Basic net income per common share	$	0.11	$	0.46	$	0.87	$	0.94
Diluted net income per common share	$	0.11	$	0.46	$	0.86	$	0.92

No shares related to stock options were excluded for the three or nine months ended March 31, 2017 and March 31, 2016.

Revenue Recognition

To recognize revenue, four basic criteria must be met: (1) there is evidence that an arrangement exists; (2) delivery has occurred; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (a) the seller’s price to the buyer is substantially fixed or determinable at the date of sale; (b) the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product; (c) the buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product; (d) the buyer acquiring the product for resale has economic substance apart from that provided by the seller; (e) the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer; and (f) the amount of future returns can be reasonably estimated. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon delivery is deferred until the shipment has been delivered.

We record reductions to gross revenue for estimated returns of private label contract manufacturing products and beta-alanine raw material sales. The estimated returns are based on the trailing six months of private-label contract manufacturing gross sales and our historical experience for both private label contract manufacturing and beta-alanine raw material product returns. However, the estimate for product returns does not reflect the impact of a potential large product recall resulting from product nonconformance or other factors as such events are not predictable nor is the related economic impact estimable.

5

We currently own certain U.S. patents, and each patent’s corresponding foreign patent applications. All of these patents and patent rights relate to the ingredient known as beta-alanine marketed and sold under the CarnoSyn® and SR Carnosyn® trademarks. We recorded royalty and licensing income as a component of revenue in the amount of $6.6 million during the three months ended March 31, 2017 and $20.0 million during the nine months ended March 31, 2017. We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of $5.5 million during the three months ended March 31, 2016 and $16.1 million during the nine months ended March 31, 2016. These royalty income and raw material sale amounts resulted in royalty expense paid to the original patent holders from whom NAI acquired its patents and its patent rights. We recognized royalty expense as a component of cost of goods sold in the amount of $233,000 during the three months ended March 31, 2017 and $799,000 during the nine months ended March 31, 2017. We recognized royalty expense as a component of cost of goods sold in the amount of $193,000 during the three months ended March 31, 2016 and $666,000 during the nine months ended March 31, 2016.

Stock-Based Compensation

We have an omnibus incentive plan that was approved by our Board of Directors effective as of October 15, 2009 and approved by our stockholders at the Annual Meeting of Stockholders held on November 30, 2009. Under the 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 input 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.

On March 28, 2017, the Board of Directors approved the grant of 140,000 shares of restricted stock to the members of our Board of Directors and certain key members of our management team pursuant to our 2009 Omnibus Incentive Plan. On March 23, 2016, the Board of Directors approved the grant of 130,000 shares of restricted stock to the members of our Board of Directors and certain key members of our management team pursuant to our 2009 Omnibus Incentive Plan. These restricted stock grants will vest over three years and the unvested shares cannot be sold or otherwise transferred and the rights to receive dividends, if declared by our Board of Directors, are forfeitable until the shares become vested.

Our net income included stock based compensation expense of approximately $223,000 for the three months ended March 31, 2017 and approximately $729,000 for the nine months ended March 31, 2017. Our net income included stock based compensation expense of approximately $183,000 for the three months ended March 31, 2016 and approximately $463,000 for the nine months ended March 31, 2016.

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-level hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available under the circumstances.

The fair value hierarchy is broken down into three levels based on the source of inputs. In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. We classify cash, cash equivalents, and marketable securities balances as Level 1 assets. Fair values determined by Level 2 inputs are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable or can be corroborated, either directly or indirectly by observable market data. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. These include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

6

As of March 31, 2017 and June 30, 2016, we did not have any financial assets or liabilities classified as Level 1. We classify derivative forward exchange contracts as Level 2 assets. The fair value of our forward exchange contracts as of March 31, 2017 was a net asset of $1.1 million. The fair value of our forward exchange contracts as of June 30, 2016 was a net asset of $250,000. As of March 31, 2017 and June 30, 2016, we did not have any financial assets or liabilities classified as Level 3. We did not transfer any assets or liabilities between Levels during fiscal 2016 or the three and nine month periods ended March 31, 2017.

B. Inventories, net

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

	March 31, 2017			June 30, 2016
Raw materials	$	10,043		$	14,751
Work in progress		3,019			3,487
Finished goods		3,014			2,832
Reserves		(110	)		(302	)
Inventories, net	$	15,966		$	20,768

C. Property and Equipment, net

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

	Depreciable Life In Years			March 31, 2017			June 30, 2016
Land		N/A		$	1,200		$	1,200
Building and building improvements	7	–	39		3,675			3,324
Machinery and equipment	3	–	12		24,450			23,846
Office equipment and furniture	3	–	5		3,749			2,994
Vehicles		3			209			209
Leasehold improvements	1	–	15		17,008			15,261
Total property and equipment					50,291			46,834
Less: accumulated depreciation and amortization					(32,503	)		(31,667	)
Property and equipment, net				$	17,788		$	15,167

7

D. Accumulated Other Comprehensive (Loss) Income

Accumulated other comprehensive (loss) income (“OCL” and “OCI”) consisted of the following during the three and nine months ended March 31, 2017 and March 31, 2016 (dollars in thousands):

	Three Months Ended March 31, 2017
	Defined Benefit Pension Plan			Unrealized Gains (losses) on Cash Flow Hedges			Total
Beginning balance	$	(775	)	$	947		$	172
OCI/OCL before reclassifications		—			(322	)		(322	)
Amounts reclassified from OCI		—			(383	)		(383	)
Tax effect of OCI activity		—			254			254
Net current period OCI/OCL		—			(451	)		(451	)
Ending balance	$	(775	)	$	496		$	(279	)

	Nine Months Ended March 31, 2017
	Defined Benefit Pension Plan			Unrealized Gains (Losses) on Cash Flow Hedges			Total
Beginning balance	$	(775	)	$	95		$	(680	)
OCI/OCL before reclassifications		—			1,512			1,512
Amounts reclassified from OCI		—			(884	)		(884	)
Tax effect of OCI activity		—			(227	)		(227	)
Net current period OCI/OCL		—			401			401
Ending balance	$	(775	)	$	496		$	(279	)

	Three Months Ended March 31, 2016
	Defined Benefit Pension Plan			Unrealized Gains (Losses) on Cash Flow Hedges			Total
Beginning balance	$	(643	)	$	151		$	(492	)
OCI/OCL before reclassifications		—			(613	)		(613	)
Amounts reclassified from OCI		—			(120	)		(120	)
Tax effect of OCI activity		—			260			260
Net current period OCI/OCL		—			(473	)		(473	)
Ending balance	$	(643	)	$	(322	)	$	(965	)

8

	Nine Months Ended March 31, 2016
	Defined Benefit Pension Plan			Unrealized Gains (Losses) on Cash Flow Hedges			Total
Beginning balance	$	(643	)	$	(123	)	$	(766	)
OCI/OCL before reclassifications		—			(131	)		(131	)
Amounts reclassified from OCI		—			(178	)		(178	)
Tax effect of OCI activity		—			110			110
Net current period OCI/OCL		—			(199	)		(199	)
Ending balance	$	(643	)	$	(322	)	$	(965	)

During the three months ended March 31, 2017, the amounts reclassified from OCI were comprised of $278,000 of gains reclassified to net revenues and $106,000 related to the amortization of forward points reclassified to other income. During the nine months ended March 31, 2017, the amounts reclassified from OCI were comprised of $549,000 of gains reclassified to net revenues and $336,000 related to the amortization of forward points reclassified to other income.

During the three months ended March 31, 2016, the amounts reclassified from OCI were comprised of $118,000 of gains reclassified to net revenues and $2,000 related to the amortization of forward points reclassified to other income. During the nine months ended March 31, 2016, the amounts reclassified from OCI were comprised of $125,000 of gains reclassified to net revenues and $53,000 related to the amortization of forward points reclassified to other income.

E. Debt

On March 28, 2017, we executed an amendment to our credit facility with Wells Fargo Bank, N.A. to extend the maturity date for our working line of credit from January 31, 2019 to February 1, 2020. The Credit Agreement provides us with a credit line of up to $10.0 million. The line of credit may be used to finance working capital requirements. There was no commitment fee required as part of this amendment. There are no amounts currently drawn under the line of credit.

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 NAI from time to time; provided, however, that if the outstanding principal amount is less than $100,000 such amount shall bear interest at the then applicable fluctuating rate of interest. If elected, the fluctuating rate per annum would be equal to 1.25% above the daily one month LIBOR rate as in effect from time to time. If a fixed rate is elected, it would equal a per annum rate of 1.25% above the LIBOR rate in effect on the first day of the applicable fixed rate term. Any amounts outstanding under the line of credit must be paid in full on or before the maturity date. Amounts outstanding that are subject to a fluctuating interest rate may be prepaid at any time without penalty. Amounts outstanding that are subject to a fixed interest rate may be prepaid at any time in minimum amounts of $100,000, subject to a prepayment fee equal to the sum of the discounted monthly differences for each month from the month of prepayment through the month in which the then applicable fixed rate term matures.

Our obligations under the Credit Agreement are secured by our accounts receivable and other rights to payment, general intangibles, inventory, equipment and fixtures. We also have a foreign exchange facility with Wells Fargo Bank, N.A. in effect until January 31, 2019, and with Bank of America, N.A. in effect until August 15, 2017.

On March 31, 2017, 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 nine months ended March 31, 2017. As of March 31, 2017, we had $10.0 million available under our credit facilities.

9

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 sales to these customers, the growth rate of sales to these customers, or in these customers’ ability to make payments when due, could have a material adverse impact on our net sales and net income. Net sales to any one customer representing 10% or more of the respective period’s consolidated net sales were as follows (dollars in thousands):

	Three Months Ended March 31,					Nine Months Ended March 31,
	2017			2016		2017			2016
	Net Sales by Customer			Net Sales by Customer		Net Sales by Customer			Net Sales by Customer
Customer 1	$	11,046		$	13,023	$	43,198		$	31,714
Customer 2		(a	)		3,367		(a	)		9,705
Customer 3		(a	)		3,196		(a	)		(a	)
	$	11,046		$	19,586	$	43,198		$	41,419

(a) Sales were less than 10% of the respective period’s total private revenues.

We buy certain products, including beta-alanine, from a limited number of raw material suppliers. The loss of any of these suppliers could have a material adverse impact on our net sales and net income. Raw material purchases from any one supplier representing 10% or more of the respective period’s total raw material purchases were as follows (dollars in thousands):

	Three Months Ended March 31,											Nine Months Ended March 31,
	2017					2016						2017						2016
	Raw Material Purchases by Supplier		% of Total Raw Material Purchases			Raw Material Purchases by Supplier			% of Total Raw Material Purchases			Raw Material Purchases by Supplier			% of Total Raw Material Purchases			Raw Material Purchases by Supplier			% of Total Raw Material Purchases
Supplier 1	$	1,683		16	%		(a	)		(a	)		(a	)		(a	)		(a	)		(a	)
Supplier 2		1,646		16			(a	)		(a	)		(a	)		(a	)		(a	)		(a	)
Supplier 3		1,317		13			(a	)		(a	)		(a	)		(a	)		(a	)		(a	)
	$	4,646		45	%		(a	)		(a	)		(a	)		(a	)		(a	)		(a	)

(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® trade name.

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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. The accounting policies of our segments are the same as those described in Note A above and in the consolidated financial statements included in our 2016 Annual Report.

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

	Three Months Ended March 31,				Nine Months Ended March 31,
	2017		2016		2017		2016
Net Sales
Private label contract manufacturing	$	18,544	$	24,493	$	69,787	$	62,377
Patent and trademark licensing		6,591		5,513		19,974		16,125
	$	25,135	$	30,006	$	89,761	$	78,502

	Three Months Ended March 31,						Nine Months Ended March 31,
	2017			2016			2017			2016
Income from Operations
Private label contract manufacturing	$	749		$	2,915		$	6,182		$	7,518
Patent and trademark licensing		1,786			1,750			6,026			4,440
Income from operations of reportable segments		2,535			4,665			12,208			11,958
Corporate expenses not allocated to segments		(1,542	)		(1,560	)		(4,566	)		(4,390	)
	$	993		$	3,105		$	7,642		$	7,568

	March 31,		June 30,
	2017		2016
Total Assets
Private label contract manufacturing	$	58,867	$	66,375
Patent and trademark licensing		11,120		7,800
	$	69,987	$	74,175

Our private label contract manufacturing products are sold both in the U.S. and in markets outside the U.S., including Europe, Australia, Asia, Canada, Mexico, and South Africa. Our primary market outside the U.S. is Europe. Our patent and trademark licensing activities are primarily based in the U.S. and our branded products were only sold in the U.S.

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

	Three Months Ended March 31,				Nine Months Ended March 31,
	2017		2016		2017		2016
Net Sales
United States	$	14,605	$	13,374	$	43,484	$	38,665
Markets outside the United States		10,530		16,632		46,277		39,837
	$	25,135	$	30,006	$	89,761	$	78,502

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Products manufactured by NAIE accounted for approximately 62% of consolidated net sales in markets outside the U.S. for the three months ended March 31, 2017 and 57% for the three months ended March 31, 2016. Products manufactured by NAIE accounted for 55% of consolidated net sales in markets outside the U.S. for the nine months ended March 31, 2017 and 67% for the nine months ended March 31, 2016. No products manufactured by NAIE were sold in the U.S. during the nine months ended March 31, 2017 and 2016.

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

	Long-Lived Assets				Total Assets				Capital Expenditures
									Nine Months Ended
	March 31, 2017		June 30, 2016		March 31, 2017		June 30, 2016		March 31, 2017		March 31, 2016
United States	$	10,827	$	9,678	$	45,599	$	49,755	$	2,090	$	5,004
Europe		6,961		5,489		24,388		24,420		2,242		1,955
	$	17,788	$	15,167	$	69,987	$	74,175	$	4,332	$	6,959

H. Income Taxes

The effective tax rate for the three months ended March 31, 2017 was an expense of 29.0% and the effective tax rate for the nine months ended March 31, 2017 was an expense of 29.9%. The rate differs from the U.S. federal statutory rate of 34% primarily due to the favorable impact of foreign earnings taxed at less than the U.S. statutory rate.

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 and nine months ended March 31, 2017. 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 that 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 and nine months ended March 31, 2017, there was no change to our valuation allowance.

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 in income in the period that includes the enactment date.

We are subject to taxation in the U.S., Switzerland and various state jurisdictions. Our tax years for the fiscal year ended June 30, 2013 and forward are subject to examination by the U.S. tax authorities and our years for the fiscal year ended June 30, 2008 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.

We do not record U.S. income tax expense for NAIE’s retained earnings that are declared as indefinitely reinvested offshore, thus reducing our overall income tax expense. The amount of earnings designated as indefinitely reinvested in NAIE is based on the actual deployment of such earnings in NAIE’s assets and our expectations of the future cash needs of our U.S. and foreign entities. Currently income tax laws are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore.

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. The tax reserves are analyzed quarterly and adjustments are made as events occur that we believe warrant adjustments to the reserves. There were no adjustments to reserves in the nine months ended March 31, 2017.

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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, 2017, the Board of Directors authorized a $2.0 million increase to our stock repurchase plan bringing the total authorized repurchase amount to $7.0 million. When we do so we may purchase the shares in open market or privately negotiated transactions.

During the nine months ended March 31, 2017, we purchased 39,547 shares under this plan at a weighted average cost of $8.74 per share and a total cost of $345,000 including commissions and fees. During the nine months ended March 31, 2016, we purchased 52,603 shares under this plan at a weighted average cost of $6.26 per share and a total cost of $329,000 including commissions and fees.

During the nine months ended March 31, 2017, we acquired 38,729 shares from employees in connection with restricted stock that vested during the year.  During the nine months ended March 31, 2016, we acquired 27,195 shares from employees in connection with restricted stock that vested during the year.  These shares were returned to the Company by the related employees and in return the Company paid each employee's required tax withholding.  The valuation of the shares acquired and thereby the amount of shares returned to the Company was calculated based on the closing price on the date the shares vested.

Unvested restricted stock grants that are forfeited are returned to treasury stock.  During the nine months ended March 31, 2017, employees forfeited 7,000 shares of unvested restricted stock grants.  During the nine months ended March 31, 2016, employees forfeited 2,667 shares of unvested restricted stock grants.

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 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 March 31, 2017, 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 February 2018. For derivative instruments that are designated and qualify as cash flow hedges, we record the effective portion of the gain or loss on the derivative in accumulated other comprehensive income (“OCI”) as a separate component of stockholders’ equity and subsequently reclassify these amounts into earnings in the period during which the hedged transaction is recognized in earnings.

For foreign currency contracts designated as cash flow hedges, hedge effectiveness is measured using the spot rate. Changes in the spot-forward differential are excluded from the test of hedge effectiveness and are recorded currently in earnings as interest 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 March 31, 2017, we recorded a $97,000 gain related to the ineffective portion of our hedging instruments to other income. During the nine months ended March 31, 2017, we recorded a $189,000 gain related to the ineffective portion of our hedging instruments to other income. We did not have any losses or gains related to the ineffective portion of our hedging instruments during the three and nine months ended March 31, 2016. No hedging relationships were terminated as a result of ineffective hedging or forecasted transactions no longer probable of occurring for foreign currency forward contracts. We monitor the probability of forecasted transactions as part of the hedge effectiveness testing on a quarterly basis.

As of March 31, 2017, the notional amounts of our foreign exchange contracts designated as cash flow hedges were approximately $23.1 million (EUR 20.4 million). As of March 31, 2017, a net gain of approximately $776,000 related to derivative instruments designated as cash flow hedges was recorded in OCI. It is expected that a majority of the OCI balance will be reclassified into earnings in the next 12 months along with the earnings effects of the related forecasted transactions.

As of March 31, 2017, the fair value of our cash flow hedges was a net asset of $1.1 million, which was classified as prepaids and other current assets in our Condensed Consolidated Balance Sheets. During the three months ended March 31, 2017 we recognized $322,000 of losses in OCI and reclassified $278,000 of gains from OCI to revenue. During the nine months ended March 31, 2017 we recognized $1.5 million of gains in OCI and reclassified $549,000 of gains from OCI to revenue. As of June 30, 2016, $226,000 of the fair value of our cash flow hedges was classified in prepaids and other current assets in our Consolidated Balance Sheets. During the three months ended March 31, 2016 we recognized $118,000 of gains in OCI and reclassified $2,000 of gains from OCI to revenue. During the nine months ended March 31, 2016 we recognized $125,000 of gains in OCI and reclassified $53,000 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 operation. However, a settlement payment or unfavorable outcome could adversely impact our results of operation. Our evaluation of the likely impact of these actions could change in the future and we could have unfavorable outcomes we do not expect.

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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 and nine months ended March 31, 2017. 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 2016 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 one or two 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, 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® 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 licensing agreements.

On March 29, 2017 we received a Notice of Allowance from the U.S. Patent and Trademark Office related to a new patent application directed to a broad range of improved methods of beta-alanine intake.  These 28 allowed patent claims target such benefits as delaying muscle fatigue, increasing anaerobic capacity, increasing muscle strength and increasing muscle endurance. This patent when issued will not only become part of our global portfolio covering our CarnoSyn® beta-alanine and SR CarnoSyn® products, but more importantly, we believe it significantly lengthens the patent coverage around our instant release CarnoSyn® beta-alanine to 2023.  Following this Notice of Allowance we intend to seek a significant number of additional patent claims to further broaden our intellectual property protection.

During the first nine months of fiscal 2017, our net sales were 14% higher than in the first nine months of fiscal 2016.  Private label contract manufacturing sales increased 12% due primarily to the sale of higher volumes of existing products to existing customers and new products sales to existing customers. Our sales for the first nine months of fiscal 2017 were favorably impacted due to the timing and shipments of orders and new product launches. Revenue concentration risk for our largest private label contract manufacturing customer as a percent of total net sales increased to 48% for the first nine months of fiscal 2017 compared to 40% in the first nine months of fiscal 2016. 

During the first nine months of fiscal 2017, CarnoSyn® beta-alanine revenue increased 24% to $20.0 million as compared to $16.1 million for the first nine months of fiscal 2016. The increase in CarnoSyn® beta-alanine revenue was primarily due to the addition of new customers and increased material shipments to existing customers.

On an annualized basis, we continue to expect our consolidated fiscal 2017 revenue growth percentage to be approximately 5% to 10% due to reductions in contract manufacturing orders and customer forecasts from Australia, Asia, and Europe.  A majority of this expected decline occurred in our third fiscal quarter ending March 31, 2017.  We expect a smaller decline in our fourth fiscal quarter. We believe this international revenue decline will reverse during fiscal 2018.  With respect to our CarnoSyn® beta-alanine business, we expect our current sales levels to continue for the balance of this fiscal year and the foreseeable future as we continue to expand our research, our patent estate and our client base.

To protect our CarnoSyn® business and its underlying patent estate, we incurred litigation, patent compliance, and new patent application expenses of approximately $3.0 million during the first nine months of fiscal 2017 and $1.3 million during the comparable period of fiscal 2016. The increase in these legal expenses on a year over year basis is primarily due to our efforts to enforce compliance with our existing patents, fees and expenses related to new patent applications and to protect our trade name in the marketplace against parties who are using it without our consent.   We describe our efforts to protect our patent estate in more detail under Item 1 of Part II of our 2016 Annual Report. Our ability to maintain or further increase our beta-alanine royalty and licensing revenue will depend in large part on our ability to enforce compliance of our instant release CarnoSyn® patents, maintain our patent rights and develop a market for our sustained release form of beta-alanine marketed under our SR Carnosyn® trademark.

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During the remainder of fiscal 2017, we plan to continue to 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;

• 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 that 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 that 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 2016 Annual Report and recent accounting pronouncements are discussed under Item A to our Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report. There have been no significant changes to these policies or pronouncements during the nine months ended March 31, 2017 other than as listed under Item A to our Notes to Condensed Consolidated Financial Statement contained in this Quarterly Report.

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Results of Operations

The results of our operations for the three- and nine-month periods ended March 31 were as follows (dollars in thousands):

	Three Months Ended March 31,									Nine Months Ended March 31,
	2017			2016			% Change			2016			2016			% Change
Private label contract manufacturing	$	18,544		$	24,493			-24	%	$	69,787		$	62,377			12	%
Patent and trademark licensing		6,591			5,513			20	%		19,974			16,125			24	%
Total net sales		25,135			30,006			-16	%		89,761			78,502			14	%
Cost of goods sold		20,017			23,549			-15	%		70,479			61,643			14	%
Gross profit		5,118			6,457			-21	%		19,282			16,859			14	%
Gross profit %		20.4	%		21.5	%					21.5	%		21.5	%
Selling, general & administrative expenses		4,125			3,352			23	%		11,640			9,291			25	%
% of net sales		16.4	%		11.2	%					13.0	%		11.8	%
Income from operations		993			3,105			-68	%		7,642			7,568			1	%
% of net sales		4.0	%		10.3	%					8.5	%		9.6	%
Other income, net		57			1,502			-96	%		494			1,441			-66	%
Income before income taxes		1,050			4,607			-77	%		8,136			9,009			-10	%
% of net sales		4.2	%		15.4	%					9.1	%		11.5	%
Income tax expense		305			1,584			-81	%		2,435			2,905			-16	%
Net income	$	745		$	3,023			-75	%	$	5,701		$	6,104			-7	%
% of net sales		3.0	%		10.1	%					6.4	%		7.8	%

Private label contract manufacturing net sales decreased 24% during the three months ended March 31, 2017 and increased 12% during the nine months ended March 31, 2017, compared to the same periods in prior year. The decrease in the three months ended March 31, 2017 is primarily due to reductions in orders related to the Asian and European markets. The increase during the first nine months of fiscal 2017 is primarily due to the sale of higher volumes of existing products to existing customers and new products sales to existing customers. 

Net sales from our patent and trademark licensing segment increased 20% during the three months ended March 31, 2017 and 24% during the nine months ended March 31, 2017, compared to the same periods in the prior year. These increases were primarily the result of growth in our customer base and increased material shipments.

The change in gross profit margin between the three and nine month periods ended March 31, 2017 was as follows:

	Three Months Ended			NineMonths Ended
Contract manufacturing(1)		(5.6	)%		(2.4	)%
Patent and trademark licensing(2)		4.5			2.4
Total change in gross profit margin		(1.1	)%		0.0	%

¹ Private label contract manufacturing gross profit margin as a percentage of consolidated net sales decreased 5.6 percentage points during the three months ended March 31, 2017 and decreased 2.4 percentage points during the nine months ended March 31, 2017 as compared to the comparable prior year periods. The decrease during the three months ended March 31, 2017 is primarily due to shift in product sales mix and increased per unit manufacturing costs. The decrease during the nine months ended March 31, 2017 is primarily due to a nominal increase in labor and overhead costs as a percentage of net revenues.

² Patent and trademark licensing gross profit margin as a percentage of consolidated net sales increased 4.5 percentage points during the three months ended March 31, 2017 and increased 2.4 percentage points during the nine months ended March 31, 2017 as compared to the comparable prior year periods. These increases were primarily due to increased revenues and decreased supply chain costs.

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Selling, general and administrative expenses increased $0.8 million, or 23%, during the third quarter of fiscal 2017 as compared to the comparable prior year period. During the first nine months of fiscal 2017, selling, general, and administrative expenses increased $2.4 million, or 25%, as compared to comparable prior year period. These increases were primarily due to increased litigation and patent compliance expenses and increased compensation costs associated with the growth in sales. The increase in expenses associated with our patent and trademark licensing segment are primarily associated with our efforts to enforce compliance with our patents related to instant release CarnoSyn®, new patent applications, and to protect our trade name in the marketplace against parties who are using them without our consent.

The changes in other income, net for both the three and nine month periods ended March 31, 2017, as compared to the same periods in the prior year, primarily relate to the sale of our domestic corporate headquarters in San Marcos, CA during the third quarter of fiscal 2017, which resulted in a one-time pre-tax gain of $1.6 million.

Our income tax expense decreased $1.3 million during the third quarter of fiscal 2017 and $0.5 million during the nine months ended March 31, 2017 as compared to the same periods in fiscal 2016. The decrease during the three months ended March 31, 2017 is primarily related to approximately $0.6 million of tax expense related to the sale of our domestic headquarters recorded in the third quarter of fiscal 2016 and lower pre-tax income in the third quarter of fiscal 2017 as compared to the same period in fiscal 2016. The decrease during the first nine months of fiscal 2017 as compared to the same period in fiscal 2016 primarily relates to approximately $0.6 million of tax expense related to the sale of our domestic headquarters partially offset by increased tax expense on pre-tax income before the impact of the gain recorded on the sale of our corporate headquarters in San Marcos, CA in fiscal 2016.

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 $7.9 million for the nine months ended March 31, 2017, compared to $2.4 million provided by operating activities in the comparable period in the prior year.

At March 31, 2017, changes in accounts receivable, consisting primarily of amounts due from our private label contract manufacturing customers and our patent and trademark licensing activities, provided $5.3 million in cash compared to using $2.5 million in the comparable period in the prior year. The increase in cash provided by accounts receivable during the nine months ended March 31, 2017, was primarily due to increased sales and the timing and collection of sales year over year. Days sales outstanding was 32 days as of March 31, 2017, compared to 39 days as of March 31, 2016.

At March 31, 2017, changes in inventory provided $4.8 million in cash compared to $7.2 million of cash used in the comparable prior year period. The change in cash activity from inventory during the nine months ended March 31, 2017 was primarily related to the conversion of private label contract manufacturing inventory into sales during the first nine months of fiscal 2017 versus inventory growth during the first nine months of fiscal 2017 related to private label contract manufacturing growth. Changes in accounts payable and accrued liabilities used $8.6 million in cash during the nine months ended March 31, 2017 compared to providing $3.5 million during the nine months ended March 31, 2016. The change in cash flow activity related to accounts payable and accrued liabilities is primarily due to the timing of inventory receipts and payments.

NAIE provided approximately $4.3 million of our operating cash flow in the nine months ended March 31, 2017. As of March 31, 2017, NAIE’s undistributed retained earnings were considered indefinitely reinvested.

Cash used in investing activities during the nine months ended March 31, 2017 was $4.3 million as compared to $4.0 million used during the nine months ended March 31, 2016. Capital expenditures decreased to $4.3 million during the nine months ended March 31, 2017 compared to $7.0 million in the comparable period in the prior year. Capital expenditures during both periods included purchases of manufacturing equipment used in our Vista, California and Manno, Switzerland facilities while capital expenditures during the nine months ended March 31, 2016 also included the purchase of our new corporate headquarters located in Carlsbad, CA following the sale of our former headquarters located in San Marcos, CA. The capital expenditures during the first nine months of fiscal 2016 were partially offset by proceeds from the sale of equipment and sale of our former headquarters of $3.0 million as compared to $24,000 in the first nine months of fiscal 2016.

Cash used in financing activities for the nine months periods ending March 31, 2017 and March 31, 2016 related to share purchases of our common stock as part of our share repurchase program.

We did not have any consolidated debt as of either March 31, 2017 or June 30, 2016.

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On March 28, 2017, we executed an amendment to our credit facility with Wells Fargo Bank, N.A. to extend the maturity date for our working line of credit from January 31, 2019 to February 1, 2020. The Credit Agreement provides us with a credit line of up to $10.0 million. The line of credit may be used to finance working capital requirements. There was no commitment fee required as part of this amendment. There are no amounts currently drawn under the line of credit.

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 NAI from time to time; provided, however, that if the outstanding principal amount is less than $100,000 such amount shall bear interest at the then applicable fluctuating rate of interest. If elected, the fluctuating rate per annum would be equal to 1.25% above the daily one month LIBOR rate as in effect from time to time. If a fixed rate is elected, it would equal a per annum rate of 1.25% above the LIBOR rate in effect on the first day of the applicable fixed rate term. Any amounts outstanding under the line of credit must be paid in full on or before January 31, 2020. Amounts outstanding that are subject to a fluctuating interest rate may be prepaid at any time without penalty. Amounts outstanding that are subject to a fixed interest rate may be prepaid at any time in minimum amounts of $100,000, subject to a prepayment fee equal to the sum of the discounted monthly differences for each month from the month of prepayment through the month in which the then applicable fixed rate term matures.

Our obligations under the Credit Agreement are secured by our accounts receivable and other rights to payment, general intangibles, inventory, equipment and fixtures. We also have a foreign exchange facility with Wells Fargo Bank, N.A. in effect until January 31, 2019, and with Bank of America, N.A. in effect until August 15, 2017.

On March 31, 2017, we were in compliance with all of the financial and other covenants required under the Credit agreement.

As of March 31, 2017, we had $22.6 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 March 31, 2017, 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 (principal 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 March 31, 2017. 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 March 31, 2017.

There were no changes to our internal control over financial reporting during the quarterly period ended March 31, 2017 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

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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 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 May 12, 2017, except as described below, 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. Some of these matters are summarized below.

In 2011, NAI filed a lawsuit against Woodbolt Distribution, LLC, also known as Cellucor (“Woodbolt”), and both NAI and Woodbolt filed additional lawsuits and countersuits against each other.  NAI and Woodbolt subsequently settled all of the lawsuits between them, but not before the United States Patent and Trademark Office (“USPTO”) at Woodbolt’s request rejected the claims of two NAI patents.  The rulings rejecting the claims of two NAI patents was subsequently confirmed by the Patent Trial and Appeal Board (PTAB) at the USPTO. NAI has filed a Notice of Appeal with the U.S. Court of Appeals for the Federal Circuit requesting that certain findings of the PTAB’s be reversed. Both NAI patents rejected by the USPTO expire in August 2017.

On September 18, 2015, the Company filed a complaint against Creative Compounds, Inc., alleging various claims including (1) violation of Section 43 of the Lanham Act, (2) violation of California's Unfair Competition Law, (3) violation of California's False Advertising Law, (4) Trade Libel and Business Disparagement and (5) Intentional Interference with Prospective Economic Advantage. A trial date is currently set for October 3, 2017. On August 24, 2016, the Company filed a separate complaint against Creative Compounds, Inc., alleging infringement of U.S. patent 7,825,084. On October 5, 2016, Creative filed its answer and counterclaims. On January 19, 2017, the Company filed a Motion to Amend the Complaint, to add allegations of infringement of U.S. patents 5,965,596, 7,504,376, 8,993,610 and 8,470,865, and additional parties, Core Supplement Technology, Inc., Honey Badger LLC, and Myopharma, Inc. The Court granted the Company’s motion. On May 2, 2017, the Court issued a revised scheduling order and set a trial date for July 31, 2018.  

On July 1, 2016, the Company filed a complaint in U.S. District Court for the Southern District of California against Cenegenics, LLC, alleging infringement of U.S. patents 7,504,376 and 7,825,084.  On August 3, 2016, the Company filed an amended complaint to assert infringement of the same patents against Cenegenics' contract manufacturer, Atlantic-Pro Nutrients d/b/a Xymogen, LLC. Subsequently the Company and defendants resolved their disputes and entered into settlement and license agreements, and the case was dismissed.

On July 6, 2016, the Company filed a complaint against Allmax Nutrition, Inc. in U.S. District Court for the Southern District of California, alleging (1) infringement of U.S. patents 5,965,596, 6,172,098, 7,825,084 and RE 45,947, (2) violation of Section 32 of the Lanham Act, and (3) copyright infringement. On October 19, 2016, the Company filed an amended complaint adding HBS International Corp., Allmax's exclusive distributor, as a co-defendant.  On May 2, 2017, the Court issued a scheduling order setting a trial date for July 31, 2018.

On August 2, 2016, the Company filed a complaint against Muscle Sports Products, LLC in U.S. District Court for the Southern District of California, alleging infringement of its CarnoSyn® and CarnoSyn Beta Alanine® trademarks.  Subsequently the Company and defendant resolved their disputes and entered into settlement and license agreements, and the case was dismissed.

On September 15, 2016, the Company filed a complaint against Arnet Pharmaceutical Corporation in the U.S. District Court for the Southern District of California alleging Breach of Contract.  On May 2, 2017, the Court issued a scheduling order setting a trial date for July 31, 2018.

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On September 16, 2016, the Company filed a complaint against Hi-Tech Pharmaceuticals, Inc. d/b/a ALR Industries, APS Nutrition, Innovative Laboratories, Formutech Nutrition, LG Sciences and Sports 1 in U.S. District Court for the Southern District of California, alleging (1) infringement of U.S. patents 5,965,596, 7,825,084, 8,993,610 and RE 45,947, (2) violation of Section 32 of the Lanham Act and (3) breach of contract. On May 2, 2017, the Court issued a scheduling order setting a trial date for July 31, 2018.

Although we believe our claims in the above litigation matters are valid, there is no assurance we will prevail in these litigation matters or in proceedings we may initiate or that our litigation expenses will not be greater than anticipated.

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ITEM 1A. RISK FACTORS

When evaluating our business and future prospects you should carefully consider the risks described under Item 1A of our 2016 Annual Report, as well as the other information in our 2016 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 our stockholders could lose all or a portion of the value of their investment in our common stock.

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

Repurchases

During the quarter ended March 31, 2017, we repurchased 39,547 shares of our common stock at a total cost of $345,000 (including commissions and transaction fees) as set forth below:

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs1		(d) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (as of March 31, 2017)
January 1, 2017 to January 31, 2017		—		—		—		—
February 1, 2017 to February 29, 2017		—		—		—		—
March 1, 2017 to March 31, 2017		39,547	$	8.74		39,547	$	2,844,000
Total		39,547				39,547	$	2,844,000

1. On June 3, 2011, we announced a plan to repurchase up to $2 million in shares of our common stock.

2. On February 6, 2015, the Board of Directors authorized a $1 million increase to our stock repurchase plan bringing the total authorized repurchase amount to $3 million.

3. On May 11, 2015, the Board of Directors authorized a $2 million increase to our stock repurchase plan bringing the total authorized repurchase amount to $5 million.

4. On March 28, 2017, the Board of Directors authorized a $2 million increase to our stock repurchase plan bringing the total authorized repurchase amount to $7 million.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

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

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
10.1	Second Amendment to the Credit agreement by and between NAI and the Wells Fargo Bank N.A. effective as of March 28, 2017	Filed herewith
10.2	Revolving Line of Credit Note made by NAI for the benefit of Wells Fargo Bank N.A. dated March 28, 2017 in the amount of $10,000,000	Filed herewith

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

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SIGNATURES

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

Date: May 15, 2017

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)

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EX-10.1

Exhibit 10.1

SECOND AMENDMENT TO CREDIT AGREEMENT

THIS AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into as of March 28, 2017, by and between NATURAL ALTERNATIVES INTERNATIONAL, INC., a Delaware corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank").

RECITALS

WHEREAS, Borrower is currently indebted to Bank pursuant to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of November 1, 2014, as amended from time to time ("Credit Agreement").

WHEREAS, Bank and Borrower have agreed to certain changes in the terms and conditions set forth in the Credit Agreement and have agreed to amend the Credit Agreement to reflect said changes.

NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Credit Agreement shall be amended as follows:

1. Section 1.1. (a) is hereby amended by deleting "January 31, 2019" as the last day on which Bank will make advances under the Line of Credit, and by substituting for said date "February 1, 2020," with such change to be effective upon the execution and delivery to

Bank of a promissory note dated as of March 28, 2017 (which promissory note shall replace and be deemed the Line of Credit Note defined in and made pursuant to the Credit Agreement) and

all other contracts, instruments and documents required by Bank to evidence such change.

2.     Except as specifically provided herein, all terms and conditions of the Credit Agreement remain in full force and effect, without waiver or modification. All terms defined in the Credit Agreement shall have the same meaning when used in this Amendment. This Amendment and the Credit Agreement shall be read together, as one document.

3.     Borrower hereby remakes all representations and warranties contained in the Credit Agreement and reaffirms all covenants set forth therein. Borrower further certifies that as of the date of this Amendment there exists no Event of Default as defined in the Credit Agreement, nor any condition, act or event which with the giving of notice or the passage of time or both would constitute any such Event of Default.

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first written above.

		WELLS FARGO BANK,
NATURAL ALTERNATIVES   INTERNATIONAL, INC.		NATIONAL ASSOCIATION
By:	/s/ Kenneth E. Wolf	By:	/s/ Glenn Burton
	KENNETH E. WOLF, PRESIDENT		GLENN BURTON, VICE PRESIDENT
By:	/s/ Michael Fortin
	MICHAEL FORTIN,
	CHIEF FINANCIAL OFFICER

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EX-10.2

Exhibit 10.2

REVOLVING LINE OF CREDIT NOTE

$10,000,000.00                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    Carlsbad, California

March 28, 2017

FOR VALUE RECEIVED, the undersigned NATURAL ALTERNATIVES INTERNATIONAL, INC. ("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at MAC E2413-010, 5901 Priestly Dr., Ste. 130, Carlsbad, California 92008, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Ten Million Dollars ($10,000,000.00), or so much thereof as may be advanced and be outstanding pursuant to the terms of the Credit Agreement, as defined herein, with interest thereon, to be computed on each advance from the date of its disbursement as set forth herein.

DEFINITIONS:

As used herein, the following terms shall have the meanings set forth after each, and any other term defined in this Note shall have the meaning set forth at the place defined:

                  (a)     "Daily One Month LIBOR" means, for any day, the rate of interest equal to LIBOR then in effect for delivery for a one (1) month period.

(b)     "LIBOR" means (i) for the purpose of calculating effective rates of interest for loans making reference to LIBOR Periods, the rate of interest per annum determined by Bank based on the rate for United States dollar deposits for delivery on the first day of each LIBOR Period for a period approximately equal to such LIBOR Period as published by the ICE Benchmark Administration Limited, a United Kingdom company, at approximately 11:00 a.m., London time, two London Business Days prior to the first day of such LIBOR Period (or if not so published, then as determined by Bank from another recognized source or interbank quotation), or (ii) for the purpose of calculating effective rates of interest for loans making reference to Daily One Month LIBOR, the rate of interest per annum determined by Bank based on the rate for United States dollar deposits for delivery of funds for one (1) month as published by the ICE Benchmark Administration Limited, a United Kingdom company, at approximately 11:00 a.m., London time, or, for any day not a London Business Day, the immediately preceding London Business Day (or if not so published, then as determined by Bank from another recognized source or interbank quotation); provided, however, that if LIBOR determined as provided above would be less than zero percent (0.0%), then LIBOR shall be deemed to be zero percent

(0.0%).

(c)     "LIBOR Period" means a period commencing on a New York Business Day and continuing for one (1) or three (3) months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to LIBOR; provided however, that (i) no LIBOR Period may be selected for a principal amount less than One Hundred Thousand Dollars ($100,000.00), (ii) if the day after the end of any LIBOR Period is not a New York Business Day (so that a new LIBOR Period could not be selected by Borrower to start on such day), then such LIBOR Period shall continue up to, but shall not include, the next New York Business Day after the end of such LIBOR Period, unless the result of such extension would be to cause any immediately following LIBOR Period to begin in the next calendar month in which event the LIBOR Period shall continue up to, but shall not include, the New York Business Day immediately preceding the last day of such LIBOR Period, and (iii) no LIBOR Period shall extend beyond the scheduled maturity date hereof.

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(d)     "London Business Day" means any day that is a day for trading by and between banks in dollar deposits in the London interbank market.

(e)     "New York Business Day" means any day except a Saturday, Sunday or any other day on which commercial banks in New York are authorized or required by law to close.

(f)     "State Business Day" means any day except a Saturday, Sunday or any other day on which commercial banks in the jurisdiction described in “Governing Law” herein are authorized or required by law to close.

INTEREST:

(a)     Interest. The outstanding principal balance of this Note shall bear interest (computed on the basis of a 360-day year, actual days elapsed) either (i) at a fluctuating rate per annum determined by Bank to be one and one quarter percent (1.25%) above Daily One Month LIBOR in effect from time to time, or (ii) at a fixed rate per annum determined by Bank to

be one and one quarter percent (1.25%) above LIBOR in effect on the first day of the applicable LIBOR Period. Bank is hereby authorized to note the date, principal amount and interest rate applicable thereto and any payments made thereon on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted.

(b)     Selection of Interest Rate Options. Subject to the provisions herein regarding LIBOR Periods and the prior notice required for the selection of a LIBOR interest rate, (i) at any time any portion of this Note bears interest determined in relation to LIBOR for a LIBOR Period, it may be continued by Borrower at the end of the LIBOR Period applicable thereto so that all or a portion thereof bears interest determined in relation to Daily One Month LIBOR or to LIBOR

for a new LIBOR Period designated by Borrower, (ii) at any time any portion of this Note bears interest determined in relation to Daily One Month LIBOR, Borrower may convert all or a portion

thereof so that it bears interest determined in relation to LIBOR for a LIBOR Period designated

by Borrower, and (iii) at the time an advance is made hereunder, Borrower may choose to have all or a portion thereof bear interest determined in relation to Daily One Month LIBOR or to

LIBOR for a LIBOR Period designated by Borrower.

To select an interest rate option hereunder determined in relation to LIBOR for a LIBOR Period, Borrower shall give Bank notice thereof that is received by Bank prior to 11:00 a.m. in the jurisdiction described in “Governing Law” herein on a State Business Day at least two State Business Days prior to the first day of the LIBOR Period, or at a later time during such State Business Day if Bank, at its sole discretion, accepts Borrower’s notice and quotes a fixed rate to Borrower. Such notice shall specify: (A) the interest rate option selected by Borrower, (B) the principal amount subject thereto, and (C) for each LIBOR selection, the length of the applicable LIBOR Period. If Bank has not received such notice in accordance with the foregoing before an advance is made hereunder or before the end of any LIBOR Period, Borrower shall be deemed to have made a Daily One Month LIBOR interest selection for such advance or the principal amount to which such LIBOR Period applied. Any such notice may be given by telephone (or such other electronic method as Bank may permit) so long as it is given in accordance with the foregoing and, with respect to each LIBOR selection, if requested by Bank, Borrower provides to Bank written confirmation thereof not later than three State Business Days after such notice is given. Borrower shall reimburse Bank immediately upon demand for any loss or expense (including any loss or expense incurred by reason of the liquidation or redeployment of funds obtained to fund or maintain a LIBOR borrowing) incurred by Bank as a result of the failure of Borrower to accept or complete a LIBOR borrowing hereunder after making a request therefor. Any reasonable determination of such amounts by Bank shall be conclusive and binding upon Borrower. Should more than one person or entity sign this Note as a Borrower, any notice required above may be given by any one Borrower acting alone, which notice shall be binding on all other Borrowers.

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(c)     Taxes and Regulatory Costs. Borrower shall pay to Bank immediately upon demand, in addition to any other amounts due or to become due hereunder, any and all (i) withholdings, interest equalization taxes, stamp taxes or other taxes (except income and franchise taxes) imposed by any domestic or foreign governmental authority and related in any manner to LIBOR, and (ii) costs, expenses and liabilities arising from or in connection with reserve percentages prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board, as amended), assessment rates imposed by the Federal Deposit Insurance Corporation, or similar requirements or costs imposed by any domestic or foreign governmental authority or resulting from compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority and related in any manner to LIBOR. In determining which of the foregoing are attributable to any LIBOR option available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower.

(d)     Default Interest. From and after the maturity date of this Note, or such earlier

date as all principal owing hereunder becomes due and payable by acceleration or otherwise, or upon the occurrence and during the continuance of an Event of Default, then at the option of

Bank, in its sole and absolute discretion, the outstanding principal balance of this Note shall

bear interest at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to four percent (4%) above the rate of interest from time to time applicable

to this Note.

BORROWING AND REPAYMENT:

(a)     Borrowing and Repayment of Principal. Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on February 1, 2020.

(b)     Payment of Interest. Interest accrued on this Note shall be payable on the first day of each month, commencing April 1, 2017.

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(c)     Advances. Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at the oral or written request of (i) MARK A. LEDOUX, MICHAEL FORTIN or KENNETH E. WOLF, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (ii) any person, with respect to advances deposited to the credit of any deposit account of Borrower, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by Borrower.

(d)     Application of Payments. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to Daily One Month LIBOR, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to LIBOR, with such payments applied to the oldest LIBOR Period first.

PREPAYMENT:

(a)     Daily One Month LIBOR. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Daily One Month LIBOR rate at any time, in any amount and without penalty.

(b)     LIBOR. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to LIBOR at any time and in the minimum amount of One Hundred Thousand Dollars ($100,000.00); provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the LIBOR Period applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such LIBOR Period matures, calculated as follows for each such month:

(i) Determine the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the LIBOR Period applicable thereto.

(ii)	Subtract from the amount determined in (i) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such LIBOR Period at LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid.
(iii)	If the result obtained in (ii) for any month is greater than zero, discount that difference by LIBOR used in (ii) above.

Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum two percent (2.00%) above the Daily One Month LIBOR rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed).

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(c)     Application of Prepayments. If principal under this Note is payable in more than one installment, then any prepayments of principal shall be applied to the most remote principal installment or installments then unpaid.

EVENTS OF DEFAULT:

This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of November 1, 2014, as amended from time to time (the "Credit Agreement"). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note.

MISCELLANEOUS:

(a)     Remedies. Upon the sale, transfer, hypothecation, assignment or other encumbrance, whether voluntary, involuntary or by operation of law, of all or any interest in any real property securing this Note, if any, or upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, notice of nonperformance, notice of protest, protest or notice of dishonor, all of which are expressly waived by Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses,

including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), expended or incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note whether or not suit is brought, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Borrower or any other person or entity.

(b)     Obligations Joint and Several. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several.

(c)     Governing Law. This Note shall be governed by and construed in accordance with the laws of California, but giving effect to federal laws applicable to national banks, without reference to the conflicts of law or choice of law principles thereof.

-5-

IN WITNESS WHEREOF, the undersigned has executed this Note as of the date first written above.

NATURAL ALTERNATIVES INTERNATIONAL, INC.

By: /s/ Kenneth E. Wolf                     

KENNETH E. WOLF,

PRESIDENT

By: /s/ Michael Fortin                      

MICHAEL FORTIN,

  CHIEF FINANCIAL OFFICER

-6-

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to

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

I, Mark A. LeDoux, 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: May 15, 2017

/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 E. Fortin, 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: May 15, 2017

/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 March 31, 2017 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: May 15, 2017	/s/ Mark A. LeDoux
	Mark A. LeDoux, Chief Executive Officer
Date: May 15, 2017	/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	9 Months Ended
	Mar. 31, 2017	May 15, 2017
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	Smaller Reporting Company
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		6,938,352
Document Type	10-Q
Document Period End Date	Mar. 31, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q3
Amendment Flag	false

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Mar. 31, 2017	Jun. 30, 2016
Current assets:
Cash and cash equivalents	$ 22,593	$ 19,747
Accounts receivable - less allowance for doubtful accounts of $21 at March 31, 2017 and $45 at June 30, 2016	7,919	13,217
Inventories, net	15,966	20,768
Income tax receivable	14	14
Prepaids and other current assets	2,699	2,136
Total current assets	49,191	55,882
Property and equipment, net	17,788	15,167
Deferred income taxes	2,227	2,227
Other noncurrent assets, net	781	899
Total assets	69,987	74,175
Current liabilities:
Accounts payable	4,073	12,821
Accrued liabilities	2,367	2,242
Accrued compensation and employee benefits	989	2,802
Income taxes payable	1,207	1,340
Total current liabilities	8,636	19,205
Other noncurrent liabilities, net	908	758
Deferred rent	530	486
Total liabilities	10,074	20,449
Commitments and contingencies
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) 6,933,352 at March 31, 2017 and 6,868,628 at June 30, 2016	79	77
Additional paid-in capital	21,933	21,138
Accumulated other comprehensive loss	(279)	(680)
Retained earnings	44,254	38,553
Treasury stock, at cost, 1,043,325 shares at March 31, 2017 and 958,049 at June 30, 2016	(6,074)	(5,362)
Total stockholders’ equity	59,913	53,726
Total liabilities and stockholders’ equity	$ 69,987	$ 74,175

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) $ in Thousands	Mar. 31, 2017	Jun. 30, 2016
Accounts receivable, allowance for doubtful accounts	$ 21	$ 45
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, issued (in shares)	6,933,352	6,868,628
Common stock, outstanding (in shares)	6,933,352	6,868,628
Treasury stock, shares (in shares)	1,043,325	958,049

XML

Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Mar. 31, 2017	Mar. 31, 2016
Net sales	$ 25,135	$ 30,006	$ 89,761	$ 78,502
Cost of goods sold	20,017	23,549	70,479	61,643
Gross profit	5,118	6,457	19,282	16,859
Selling, general and administrative expenses	4,125	3,352	11,640	9,291
Income from operations	993	3,105	7,642	7,568
Other income (expense):
Interest income	109	26	358	82
Interest expense	(1)	2	(1)	(1)
Foreign exchange (loss) gain	(45)	(137)	158	(241)
Other, net	(6)	1,611	(21)	1,601
	57	1,502	494	1,441
Income before income taxes	1,050	4,607	8,136	9,009
Provision for income taxes	305	1,584	2,435	2,905
Net income	745	3,023	5,701	6,104
Unrealized (loss) gain resulting from change in fair value of derivative instruments, net of tax	(451)	(473)	401	(199)
Comprehensive income	$ 294	$ 2,550	$ 6,102	$ 5,905
Net income per common share:
Basic (in dollars per share)	$ 0.11	$ 0.46	$ 0.87	$ 0.94
Diluted (in dollars per share)	$ 0.11	$ 0.46	$ 0.86	$ 0.92
Weighted average common shares outstanding:
Basic (in shares)	6,581,632	6,510,902	6,569,165	6,513,821
Diluted (in shares)	6,613,955	6,562,577	6,648,091	6,628,883

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Mar. 31, 2017	Mar. 31, 2016
Cash flows from operating activities
Net income	$ 5,701	$ 6,104
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,711	1,364
Non-cash compensation	729	463
Pension expense	149	38
Gain on disposal of assets	(23)	(1,848)
Deferred taxes		645
Changes in operating assets and liabilities:
Accounts receivable	5,298	(2,473)
Inventories, net	4,802	(7,164)
Prepaids and other assets	182	380
Accounts payable and accrued liabilities	(8,579)	3,514
Income taxes	(291)	749
Accrued compensation and employee benefits	(1,813)	588
Net cash provided by operating activities	7,866	2,360
Cash flows from investing activities
Purchases of property and equipment	(4,332)	(6,959)
Proceeds from sale of property and equipment	24	3,000
Net cash used in investing activities	(4,308)	(3,959)
Cash flows from financing activities
Repurchase of common stock	(712)	(648)
Net cash used in financing activities	(712)	(648)
Net increase (decrease) in cash and cash equivalents	2,846	(2,247)
Cash and cash equivalents at beginning of period	19,747	18,551
Cash and cash equivalents at end of period	22,593	16,304
Supplemental disclosures of cash flow information
Interest
Taxes	2,761	1,929
Disclosure of non-cash activities:
Change in unrealized gain (loss) resulting from change in fair value of derivative instruments, net of tax	$ 401	$ (199)

XML

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

9 Months Ended

Mar. 31, 2017

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 Si

gnificant 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

and

nine

months ended

March

31,

2017

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,

2016

(“2016

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

2016

Annual Report unless otherwise noted below.

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 account for the additional weighted average shares of common stock outstanding for our diluted net income per common share computation. We calculated basic and diluted net income per common share as follows (in thousands, except per share data):

	Three Months Ended March 31,				Nine Months Ended March 31,
	201 7		201 6		201 7		201 6
Numerator
Net income	$	745	$	3,023	$	5,701	$	6,104
Denominator
Basic weighted average common shares outstanding		6,582		6,511		6,569		6,514
Dilutive effect of stock options		32		52		79		115
Diluted weighted average common shares outstanding		6,614		6,563		6,648		6,629
Basic net income per common share	$	0.11	$	0.46	$	0.87	$	0.94
Diluted net income per common share	$	0.11	$	0.46	$	0.86	$	0.92

No

shares related to stock options were excluded for the

three

or

nine

months ended

March

31,

201

7

and

March

31,

2016.

Revenue Recognition

To recognize revenue,

four

basic criteria must be met:

(1)

there is evidence that an arrangement exists;

(2)

delivery has occurred;

(3)

the fee is fixed or determinable; and

(4)

collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (a) the seller’s price to the buyer is substantially fixed or determinable at the date of sale; (b) the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product; (c) the buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product; (d) the buyer acquiring the product for resale has economic substance apart from that provided by the seller; (e) the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer; and (f) the amount of future returns can be reasonably estimated. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon delivery is deferred until the shipment has been delivered.

We record reductions to gross revenue for estimated returns of private label contract manufacturing products and

beta-alanine raw material sales. The estimated returns are based on the trailing

six

months of private-label contract manufacturing gross sales and our historical experience for both private label contract manufacturing and beta-alanine raw material product returns. However, the estimate for product returns does not reflect the impact of a potential large product recall resulting from product nonconformance or other factors as such events are not predictable nor is the related economic impact estimable.

We currently own certain U.S. patents, and each patent

’s corresponding foreign patent applications. All of these patents and patent rights relate to the ingredient known as beta-alanine marketed and sold under the CarnoSyn® and SR Carnosyn® trademarks. We recorded royalty and licensing income as a component of revenue in the amount of

$6.6

million during the

three

months ended

March

31,

2017

and

$20.0

million during the

nine

months ended

March

 

31,

2017.

We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of

$5.5

million during the

three

months ended

March

31,

2016

and

$16.1

million during the

nine

months ended

March

 

31,

2016.

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

$233,000

during the

three

months ended

March

31,

2017

and

$799,000

during the

nine

months ended

March

 

31,

2017.

We recognized royalty expense as a component of cost of goods sold in the amount of

$193,000

during the

three

months ended

March

31,

2016

and

$666,000

during the

nine

months ended

March

 

31,

2016.

Stock-Based Compensation

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

October

 

15,

2009

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

November

 

30,

2009.

Under the 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 input 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.

On

March

28,

2017,

the Board of Directors approved the grant of

140,000

shares of restricted stock to the members of our Board of Directors and certain key members of our management team pursuant to our

2009

Omnibus Incentive Plan. On

March

23,

2016,

the Board of Directors approved the grant of

130,000

shares of restricted stock to the members of our Board of Directors and certain key members of our management team pursuant to our

2009

Omnibus Incentive Plan. These restricted stock grants will vest over

three

years and the unvested shares cannot be sold or otherwise transferred and the rights to receive dividends, if declared by our Board of Directors, are forfeitable until the shares become vested.

Our net income included stock based compensation expense of

approximately

$223,000

for the

three

months ended

March

 

31,

2017

and approximately

$729,000

for the

nine

months ended

March

31,

2017.

Our net income included stock based compensation expense of approximately

$183,000

for the

three

months ended

March

 

31,

2016

and approximately

$463,000

for the

nine

months ended

March

31,

2016.

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a

three

-level hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available under the circumstances.

The fair value hierarchy is broken down into

three

levels based on the source of inputs. In general, fair values determined by Level

1

inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. We classify cash, cash equivalents, and marketable securities balances as Level

1

assets. Fair values determined by Level

2

inputs are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable or can be corroborated, either directly or indirectly by observable market data. Level

3

inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. These include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

As of

March

31,

2017

and

June

30,

2016,

we did

not

have any financial assets or liabilities classified as Level

1.

We classify derivative forward exchange contracts as Level

2

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

March

31,

2017

was a net asset of

$1.1

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

June

 

30,

2016

was a net asset of

$250,000.

As of

March

 

31,

2017

and

June

 

30,

2016,

we did

not

have any financial assets or liabilities classified as Level

3.

We did not transfer any assets or liabilities between Levels during fiscal

2016

or the

three

and

nine

month periods ended

March

31,

2017.

XML

Note B - Inventories, Net

9 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Inventory Disclosure [Text Block]

B

. Inventories

, net

Inventories, net consisted of the following (

dollars in thousands):

	March 31, 201 7			June 30, 201 6
Raw materials	$	10,043		$	14,751
Work in progress		3,019			3,487
Finished goods		3,014			2,832
Reserves		(110	)		(302	)
Inventories, net	$	15,966		$	20,768

XML

Note C - Property and Equipment, Net

9 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Property, Plant and Equipment Disclosure [Text Block]

C

. Property and Equipment

, net

Property and equipment

consisted of the following (dollars in thousands):

	Depreciable Life In Years			March 31, 201 7			June 30, 201 6
Land		N/A		$	1,200		$	1,200
Building and building improvements	7	–	39		3,675			3,324
Machinery and equipment	3	–	12		24,450			23,846
Office equipment and furniture	3	–	5		3,749			2,994
Vehicles		3			209			209
Leasehold improvements	1	–	15		17,008			15,261
Total property and equipment					50,291			46,834
Less: accumulated depreciation and amortization					(32,503	)		(31,667	)
Property and equipment, net				$	17,788		$	15,167

XML

Note D - Accumulated Other Comprehensive (Loss) Income

9 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Comprehensive Income (Loss) Note [Text Block]

D.

Accumulated

Other

C

omprehensive

(Loss)

Income

Accumulated other comprehensive

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

three

and

nine

months ended

March

31,

2017

and

March

31,

2016

(dollars in thousands):

	Three Months Ended March 31, 201 7
	Defined Benefit Pension Plan			Unrealized Gain s (losses) on Cash Flow Hedges			Total
Beginning balance	$	(775	)	$	947		$	172
OCI/OCL before reclassifications		—			(322	)		(322	)
Amounts reclassified from OCI		—			(383	)		(383	)
Tax effect of OCI activity		—			254			254
Net current period OCI/OC L		—			(451	)		(451	)
Ending balance	$	(775	)	$	496		$	(279	)

	Nine Months Ended March 31, 201 7
	Defined Benefit Pension Plan			Unrealized Gains ( Losses ) on Cash Flow Hedges			Total
Beginning balance	$	(775	)	$	95		$	(680	)
OCI/OCL before reclassifications		—			1,512			1,512
Amounts reclassified from OCI		—			(884	)		(884	)
Tax effect of OCI activity		—			(227	)		(227	)
Net current period OCI/OCL		—			401			401
Ending balance	$	(775	)	$	496		$	(279	)

	Three Months Ended March 31, 201 6
	Defined Benefit Pension Plan			Unrealized Gain s ( L osses) on Cash Flow Hedges			Total
Beginning balance	$	(643	)	$	151		$	(492	)
OCI/OCL before reclassifications		—			(613	)		(613	)
Amounts reclassified from OCI		—			(120	)		(120	)
Tax effect of OCI activity		—			260			260
Net current period OCI/OCL		—			(473	)		(473	)
Ending balance	$	(643	)	$	(322	)	$	(965	)

	Nine Months Ended March 31, 201 6
	Defined Benefit Pension Plan			Unrealized Gains ( Losses ) on Cash Flow Hedges			Total
Beginning balance	$	(643	)	$	(123	)	$	(766	)
OCI/OCL before reclassifications		—			(131	)		(131	)
Amounts reclassified from OCI		—			(178	)		(178	)
Tax effect of OCI activity		—			110			110
Net current period OCI/OCL		—			(199	)		(199	)
Ending balance	$	(643	)	$	(322	)	$	(965	)

During the thre

e months ended

March

31,

2017,

the amounts reclassified from OCI were comprised of

$278,000

of gains reclassified to net revenues and

$106,000

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

nine

months ended

March

31,

2017,

the amounts reclassified from OCI were comprised of

$549,000

of gains reclassified to net revenues and

$336,000

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

During the

three

months ended

March

31,

2016,

the amounts reclassified from OCI were comprised of

$118,000

of gains reclassified to net revenues and

$2,000

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

nine

months ended

March

31,

2016,

the amounts reclassified from OCI were comprised of

$125,000

of gains reclassified to net revenues and

$53,000

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

XML

Note E - Debt

9 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Debt Disclosure [Text Block]

E. Debt

On

March

28,

2017,

we executed an amendment to our credit facility with Wells Fargo Bank, N.A. to extend the maturity date for our working line of credit from

January

31,

2019

to

February

1,

2020.

The Credit Agreement provides us with a credit line of up to

$10.0

million. The line of credit

may

be used to finance working capital requirements. There was no commitment fee required as part of this amendment. There are no amounts currently drawn under the line of credit.

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 NAI from time to time; provided, however, that if the outstanding principal amount is less than

$100,000

such amount shall bear interest at the then applicable fluctuating rate of interest. If elected, the fluctuating rate per annum would be equal to

1.25%

above the daily

one

month LIBOR rate as in effect from time to time. If a fixed rate is elected, it would equal a per annum rate of

1.25%

above the LIBOR rate in effect on the

first

day of the applicable fixed rate term. Any amounts outstanding under the line of credit must be paid in full on or before the maturity date. Amounts outstanding that are subject to a fluctuating interest rate

may

be prepaid at any time without penalty. Amounts outstanding that are subject to a fixed interest rate

may

be prepaid at any time in minimum amounts of

$100,000,

subject to a prepayment fee equal to the sum of the discounted monthly differences for each month from the month of prepayment through the month in which the then applicable fixed rate term matures.

Our obligations under the Credit Agreement are secured by our accounts receivable and other rights to payment, general intangibles, inventory, equipment and fixtures. We also have a foreign exchange facility with Wells Fargo

Bank, N.A. in effect until

January

 

31,

2019,

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

August

15,

2017.

On

March

 

31,

2017,

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

nine

months ended

March

31,

201

7.

As of

March

31,

2017,

we had

$10.0

million available under our credit facilities.

XML

Note F - Economic Dependency

9 Months Ended

Mar. 31, 2017

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 sales to these customers, the growth rate of sales to these customers

, or in these customers’ ability to make payments when due, could have a material adverse impact on our net sales and net income. Net sales to any

one

customer representing

10%

or more of the respective period’s consolidated net sales were as follows (dollars in thousands):

	Three Months Ended March 31,					Nine Months Ended March 31,
	2017			2016		2017			2016
	Net Sales by Customer			Net Sales by Customer		Net Sales by Customer			Net Sales by Customer
Customer 1	$	11,046		$	13,023	$	43,198		$	31,714
Customer 2		(a	)		3,367		(a	)		9,705
Customer 3		(a	)		3,196		(a	)		(a	)
	$	11,046		$	19,586	$	43,198		$	41,419

(a) Sales were less than 10% of the respective period ’s total private revenues.

We buy certain products

, including beta-alanine, from a limited number of raw material suppliers. The loss of any of these suppliers could have a material adverse impact on our net sales and net income. Raw material purchases from any

one

supplier representing

10%

or more of the respective period’s total raw material purchases were as follows (dollars in thousands):

	Three Months Ended March 31,											Nine Months Ended March 31,
	201 7					201 6						201 7						201 6
	Raw Material Purchases by Supplier		% of Total Raw Material Purchases			Raw Material Purchases by Supplier			% of Total Raw Material Purchases			Raw Material Purchases by Supplier			% of Total Raw Material Purchases			Raw Material Purchases by Supplier			% of Total Raw Material Purchases
Supplier 1	$	1,683		16	%		(a	)		(a	)		(a	)		(a	)		(a	)		(a	)
Supplier 2		1,646		16			(a	)		(a	)		(a	)		(a	)		(a	)		(a	)
Supplier 3		1,317		13			(a	)		(a	)		(a	)		(a	)		(a	)		(a	)
	$	4,646		45	%		(a	)		(a	)		(a	)		(a	)		(a	)		(a	)

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

XML

Note G - Segment Information

9 Months Ended

Mar. 31, 2017

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® trade name.

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 gen

eral 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. The accounting policies of our segments are the same as those described in Note A above and in the consolidated financial statements included in our

2016

Annual Report.

Our operating results

by business segment were as follows (in thousands):

	Three Months Ended March 31,				Nine Months Ended March 31,
	201 7		2016		201 7		2016
Net Sales
Private label contract manufacturing	$	18,544	$	24,493	$	69,787	$	62,377
Patent and trademark licensing		6,591		5,513		19,974		16,125
	$	25,135	$	30,006	$	89,761	$	78,502

	Three Months Ended March 31,						Nine Months Ended March 31,
	2017			2016			2017			2016
Income from Operations
Private label contract manufacturing	$	749		$	2,915		$	6,182		$	7,518
Patent and trademark licensing		1,786			1,750			6,026			4,440
Income from operations of reportable segments		2,535			4,665			12,208			11,958
Corporate expenses not allocated to segments		(1,542	)		(1,560	)		(4,566	)		(4,390	)
	$	993		$	3,105		$	7,642		$	7,568

	March 31,		June 30,
	201 7		201 6
Total Assets
Private label contract manufacturing	$	58,867	$	66,375
Patent and trademark licensing		11,120		7,800
	$	69,987	$	74,175

Our private label contract manufacturing products are sold both in the U.S. and in markets outside the U.S., including Europe,

Australia, Asia, Canada, Mexico, and South Africa. Our primary market outside the U.S. is Europe. Our patent and trademark licensing activities are primarily based in the U.S. and our branded products were only sold in the U.S.

Net sales by geographic region, based on the customers

’ location, were as follows (in thousands):

	Three Months Ended March 31,				Nine Months Ended March 31,
	2017		2016		2017		2016
Net Sales
United States	$	14,605	$	13,374	$	43,484	$	38,665
Markets outside the United States		10,530		16,632		46,277		39,837
	$	25,135	$	30,006	$	89,761	$	78,502

Products manufactured by NAIE accounted for

approximately

62%

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

three

months ended

March

31,

2017

and

57%

for the

three

months ended

March

31,

2016.

Products manufactured by NAIE accounted for

55%

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

nine

months ended

March

 

31,

2017

and

67%

for the

nine

months ended

March

31,

2016.

No

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

nine

months ended

March

31,

2017

and

2016.

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

	Long-Lived Assets				Total Assets				Capital Expenditures
									Nine Months Ended
	March 31, 201 7		June 30, 201 6		March 31, 201 7		June 30, 201 6		March 31, 2017		March 31, 2016
United States	$	10,827	$	9,678	$	45,599	$	49,755	$	2,090	$	5,004
Europe		6,961		5,489		24,388		24,420		2,242		1,955
	$	17,788	$	15,167	$	69,987	$	74,175	$	4,332	$	6,959

XML

Note H - Income Taxes

9 Months Ended

Mar. 31, 2017

Notes to Financial Statements

Income Tax Disclosure [Text Block]

H

. Income Taxes

The effective tax rate for the

three

months ended

March

 

31,

2017

was an expense of

29.0%

and the effective tax rate for the

nine

months ended

March

31,

2017

was an expense of

29.9%.

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

34%

primarily due to the favorable impact of foreign earnings taxed at less than the U.S. statutory rate.

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

and

nine

months ended

March

31,

2017.

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 that 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

and

nine

months ended

March

31,

2017,

there was no change to our valuation allowance.

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 in income in the period that includes the enactment date.

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

June

 

30,

2013

and forward are subject to examination by the U.S. tax authorities and our years for the fiscal year ended

June

30,

2008

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.

We do not record U.S. income tax expense for NAIE

’s retained earnings that are declared as indefinitely reinvested offshore, thus reducing our overall income tax expense. The amount of earnings designated as indefinitely reinvested in NAIE is based on the actual deployment of such earnings in NAIE’s assets and our expectations of the future cash needs of our U.S. and foreign entities. Currently income tax laws are also a factor in determining the amount of foreign earnings to be indefinitely reinvested offshore.

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. The tax reserves are analyzed quarterly and adjustments are made as events occur that we believe warrant adjustments to the reserves. There were

no

adjustments to reserves in the

nine

months ended

March

31,

2017.

XML

Note I - Treasury Stock

9 Months Ended

Mar. 31, 2017

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,

2017,

the Board of Directors authorized a

$2.0

million increase to our stock repurchase plan bringing the total authorized repurchase amount to

$7.0

million.

When we do so we

may

purchase the shares in open market or privately negotiated transactions.

During the

nine

months ended

March

31,

2017,

we purchased

39,547

shares under this plan at a weighted average cost of

$8.74

per share and a total cost of

$345,000

including commissions and fees.

During the

nine

months ended

March

31,

2016,

we purchased

52,603

shares

under this plan at a weighted average cost of

$6.26

per share and a total cost of

$329,000

including commissions and fees.

During the

nine

months ended

March

31,

2017,

we acquired

38,729

shares from employees in connection with restricted stock that vested during the year.  During the

nine

months ended

March

31,

2016,

we acquired

27,196

shares from employees in connection with restricted stock that vested during the year.  These shares were returned to the Company by the related employees and in return the Company paid each employee's required tax withholding.  The valuation of the shares acquired and thereby the amount of shares returned to the Company was calculated based on the closing price on the date the shares vested.

Unvested restricted stock grants that are forfeited are returned to treasury stock.  

During the

nine

months ended

March

 

31,

2017,

employees forfeited

7,000

shares of unvested restricted stock grants.

  During the

nine

months ended

March

31,

2016,

employees forfeited

2,667

shares of unvested restricted stock grants.

XML

Note J - Derivatives and Hedging

9 Months Ended

Mar. 31, 2017

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 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

March

31,

2017,

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

February

2018.

For derivative instruments that are designated and qualify as cash flow hedges, we record the effective portion of the gain or loss on the derivative in accumulated other comprehensive income (“OCI”) as a separate component of stockholders’ equity and subsequently reclassify these amounts into earnings in the period during which the hedged transaction is recognized in earnings.

For foreign currency contracts designated as cash flow hedges, hedge effectiveness is measured using the spot rate. Changes in the spot-forward differential are excluded from the test of hedge effectiveness and are recorded currently in earnings as interest 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

March

31,

2017,

we recorded a

$97,000

gain related to the ineffective portion of our hedging instruments to other income. During the

nine

months ended

March

31,

2017,

we recorded a

$189,000

gain related to the ineffective portion of our hedging instruments to other income. We did not have any losses or gains related to the ineffective portion of our hedging instruments during the

three

and

nine

months ended

March

31,

2016.

No hedging relationships were terminated as a result of ineffective hedging or forecasted transactions no longer probable of occurring for foreign currency forward contracts. We monitor the probability of forecasted transactions as part of the hedge effectiveness testing on a quarterly basis.

As of

March

 

31,

2017,

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

$23.1

million (EUR

20.4

million). As of

March

 

31,

2017,

a net gain of approximately

$776,000

related to derivative instruments designated as cash flow hedges was recorded in OCI. It is expected that a majority of the OCI balance will be reclassified into earnings in the next

12

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

As of

March

31,

2017,

the fair value of our cash flow hedges was a net asset of

$1.1

million, which was classified as prepaids and other current assets in our Condensed Consolidated Balance Sheets. During the

three

months ended

March

31,

2017

we recognized

$322,000

of losses in OCI and reclassified

$278,000

of gains from OCI to revenue. During the

nine

months ended

March

31,

2017

we recognized

$1.5

million of gains in OCI and reclassified

$549,000

of gains from OCI to revenue. As of

June

 

30,

2016,

$226,000

of the fair value of our cash flow hedges was classified in prepaids and other current assets in our Consolidated Balance Sheets. During the

three

months ended

March

31,

2016

we recognized

$118,000

of gains in OCI and reclassified

$2,000

of gains from OCI to revenue. During the

nine

months ended

March

31,

2016

we recognized

$125,000

of gains in OCI and reclassified

$53,000

of gains from OCI to revenue.

XML

Note K - Contingencies

9 Months Ended

Mar. 31, 2017

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 operation. However, a settlement payment or unfavorable outcome could adversely impact our results of operation. 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

Significant Accounting Policies (Policies)

9 Months Ended

Mar. 31, 2017

Accounting Policies [Abstract]

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 account for the additional weighted average shares of common stock outstanding for our diluted net income per common share computation. We calculated basic and diluted net income per common share as follows (in thousands, except per share data):

	Three Months Ended March 31,				Nine Months Ended March 31,
	201 7		201 6		201 7		201 6
Numerator
Net income	$	745	$	3,023	$	5,701	$	6,104
Denominator
Basic weighted average common shares outstanding		6,582		6,511		6,569		6,514
Dilutive effect of stock options		32		52		79		115
Diluted weighted average common shares outstanding		6,614		6,563		6,648		6,629
Basic net income per common share	$	0.11	$	0.46	$	0.87	$	0.94
Diluted net income per common share	$	0.11	$	0.46	$	0.86	$	0.92

No

shares related to stock options were excluded for the

three

or

nine

months ended

March

31,

201

7

and

March

31,

2016.

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

To recognize revenue,

four

basic criteria must be met:

(1)

there is evidence that an arrangement exists;

(2)

delivery has occurred;

(3)

the fee is fixed or determinable; and

(4)

collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (a) the seller’s price to the buyer is substantially fixed or determinable at the date of sale; (b) the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product; (c) the buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product; (d) the buyer acquiring the product for resale has economic substance apart from that provided by the seller; (e) the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer; and (f) the amount of future returns can be reasonably estimated. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon delivery is deferred until the shipment has been delivered.

We record reductions to gross revenue for estimated returns of private label contract manufacturing products and

beta-alanine raw material sales. The estimated returns are based on the trailing

six

months of private-label contract manufacturing gross sales and our historical experience for both private label contract manufacturing and beta-alanine raw material product returns. However, the estimate for product returns does not reflect the impact of a potential large product recall resulting from product nonconformance or other factors as such events are not predictable nor is the related economic impact estimable.

We currently own certain U.S. patents, and each patent

’s corresponding foreign patent applications. All of these patents and patent rights relate to the ingredient known as beta-alanine marketed and sold under the CarnoSyn® and SR Carnosyn® trademarks. We recorded royalty and licensing income as a component of revenue in the amount of

$6.6

million during the

three

months ended

March

31,

2017

and

$20.0

million during the

nine

months ended

March

 

31,

2017.

We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of

$5.5

million during the

three

months ended

March

31,

2016

and

$16.1

million during the

nine

months ended

March

 

31,

2016.

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

$233,000

during the

three

months ended

March

31,

2017

and

$799,000

during the

nine

months ended

March

 

31,

2017.

We recognized royalty expense as a component of cost of goods sold in the amount of

$193,000

during the

three

months ended

March

31,

2016

and

$666,000

during the

nine

months ended

March

 

31,

2016.

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

Stock-Based Compensation

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

October

 

15,

2009

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

November

 

30,

2009.

Under the 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 input 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.

On

March

28,

2017,

the Board of Directors approved the grant of

140,000

shares of restricted stock to the members of our Board of Directors and certain key members of our management team pursuant to our

2009

Omnibus Incentive Plan. On

March

23,

2016,

the Board of Directors approved the grant of

130,000

shares of restricted stock to the members of our Board of Directors and certain key members of our management team pursuant to our

2009

Omnibus Incentive Plan. These restricted stock grants will vest over

three

years and the unvested shares cannot be sold or otherwise transferred and the rights to receive dividends, if declared by our Board of Directors, are forfeitable until the shares become vested.

Our net income included stock based compensation expense of

approximately

$223,000

for the

three

months ended

March

 

31,

2017

and approximately

$729,000

for the

nine

months ended

March

31,

2017.

Our net income included stock based compensation expense of approximately

$183,000

for the

three

months ended

March

 

31,

2016

and approximately

$463,000

for the

nine

months ended

March

31,

2016.

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 the Company has the ability to access. We classify cash, cash equivalents, and marketable securities balances as Level

1

assets. Fair values determined by Level

2

inputs are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable or can be corroborated, either directly or indirectly by observable market data. Level

3

inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. These include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

As of

March

31,

2017

and

June

30,

2016,

we did

not

have any financial assets or liabilities classified as Level

1.

We classify derivative forward exchange contracts as Level

2

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

March

31,

2017

was a net asset of

$1.1

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

June

 

30,

2016

was a net asset of

$250,000.

As of

March

 

31,

2017

and

June

 

30,

2016,

we did

not

have any financial assets or liabilities classified as Level

3.

We did not transfer any assets or liabilities between Levels during fiscal

2016

or the

three

and

nine

month periods ended

March

31,

2017.

XML

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

9 Months Ended

Mar. 31, 2017

Notes Tables

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

	Three Months Ended March 31,				Nine Months Ended March 31,
	201 7		201 6		201 7		201 6
Numerator
Net income	$	745	$	3,023	$	5,701	$	6,104
Denominator
Basic weighted average common shares outstanding		6,582		6,511		6,569		6,514
Dilutive effect of stock options		32		52		79		115
Diluted weighted average common shares outstanding		6,614		6,563		6,648		6,629
Basic net income per common share	$	0.11	$	0.46	$	0.87	$	0.94
Diluted net income per common share	$	0.11	$	0.46	$	0.86	$	0.92

XML

Note B - Inventories, Net (Tables)

9 Months Ended

Mar. 31, 2017

Notes Tables

Schedule of Inventory, Current [Table Text Block]

	March 31, 201 7			June 30, 201 6
Raw materials	$	10,043		$	14,751
Work in progress		3,019			3,487
Finished goods		3,014			2,832
Reserves		(110	)		(302	)
Inventories, net	$	15,966		$	20,768

XML

Note C - Property and Equipment, Net (Tables)

9 Months Ended

Mar. 31, 2017

Notes Tables

Property, Plant and Equipment [Table Text Block]

	Depreciable Life In Years			March 31, 201 7			June 30, 201 6
Land		N/A		$	1,200		$	1,200
Building and building improvements	7	–	39		3,675			3,324
Machinery and equipment	3	–	12		24,450			23,846
Office equipment and furniture	3	–	5		3,749			2,994
Vehicles		3			209			209
Leasehold improvements	1	–	15		17,008			15,261
Total property and equipment					50,291			46,834
Less: accumulated depreciation and amortization					(32,503	)		(31,667	)
Property and equipment, net				$	17,788		$	15,167

XML

Note D - Accumulated Other Comprehensive (Loss) Income (Tables)

9 Months Ended

Mar. 31, 2017

Notes Tables

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

	Three Months Ended March 31, 201 7
	Defined Benefit Pension Plan			Unrealized Gain s (losses) on Cash Flow Hedges			Total
Beginning balance	$	(775	)	$	947		$	172
OCI/OCL before reclassifications		—			(322	)		(322	)
Amounts reclassified from OCI		—			(383	)		(383	)
Tax effect of OCI activity		—			254			254
Net current period OCI/OC L		—			(451	)		(451	)
Ending balance	$	(775	)	$	496		$	(279	)

	Nine Months Ended March 31, 201 7
	Defined Benefit Pension Plan			Unrealized Gains ( Losses ) on Cash Flow Hedges			Total
Beginning balance	$	(775	)	$	95		$	(680	)
OCI/OCL before reclassifications		—			1,512			1,512
Amounts reclassified from OCI		—			(884	)		(884	)
Tax effect of OCI activity		—			(227	)		(227	)
Net current period OCI/OCL		—			401			401
Ending balance	$	(775	)	$	496		$	(279	)

	Three Months Ended March 31, 201 6
	Defined Benefit Pension Plan			Unrealized Gain s ( L osses) on Cash Flow Hedges			Total
Beginning balance	$	(643	)	$	151		$	(492	)
OCI/OCL before reclassifications		—			(613	)		(613	)
Amounts reclassified from OCI		—			(120	)		(120	)
Tax effect of OCI activity		—			260			260
Net current period OCI/OCL		—			(473	)		(473	)
Ending balance	$	(643	)	$	(322	)	$	(965	)

	Nine Months Ended March 31, 201 6
	Defined Benefit Pension Plan			Unrealized Gains ( Losses ) on Cash Flow Hedges			Total
Beginning balance	$	(643	)	$	(123	)	$	(766	)
OCI/OCL before reclassifications		—			(131	)		(131	)
Amounts reclassified from OCI		—			(178	)		(178	)
Tax effect of OCI activity		—			110			110
Net current period OCI/OCL		—			(199	)		(199	)
Ending balance	$	(643	)	$	(322	)	$	(965	)

XML

Note F - Economic Dependency (Tables)

9 Months Ended

Mar. 31, 2017

Supplier Concentration Risk [Member]

Notes Tables

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

	Three Months Ended March 31,											Nine Months Ended March 31,
	201 7					201 6						201 7						201 6
	Raw Material Purchases by Supplier		% of Total Raw Material Purchases			Raw Material Purchases by Supplier			% of Total Raw Material Purchases			Raw Material Purchases by Supplier			% of Total Raw Material Purchases			Raw Material Purchases by Supplier			% of Total Raw Material Purchases
Supplier 1	$	1,683		16	%		(a	)		(a	)		(a	)		(a	)		(a	)		(a	)
Supplier 2		1,646		16			(a	)		(a	)		(a	)		(a	)		(a	)		(a	)
Supplier 3		1,317		13			(a	)		(a	)		(a	)		(a	)		(a	)		(a	)
	$	4,646		45	%		(a	)		(a	)		(a	)		(a	)		(a	)		(a	)

Customer Concentration Risk [Member]

Notes Tables

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

	Three Months Ended March 31,					Nine Months Ended March 31,
	2017			2016		2017			2016
	Net Sales by Customer			Net Sales by Customer		Net Sales by Customer			Net Sales by Customer
Customer 1	$	11,046		$	13,023	$	43,198		$	31,714
Customer 2		(a	)		3,367		(a	)		9,705
Customer 3		(a	)		3,196		(a	)		(a	)
	$	11,046		$	19,586	$	43,198		$	41,419

XML

Note G - Segment Information (Tables)

9 Months Ended

Mar. 31, 2017

Notes Tables

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

	Three Months Ended March 31,				Nine Months Ended March 31,
	201 7		2016		201 7		2016
Net Sales
Private label contract manufacturing	$	18,544	$	24,493	$	69,787	$	62,377
Patent and trademark licensing		6,591		5,513		19,974		16,125
	$	25,135	$	30,006	$	89,761	$	78,502

	Three Months Ended March 31,						Nine Months Ended March 31,
	2017			2016			2017			2016
Income from Operations
Private label contract manufacturing	$	749		$	2,915		$	6,182		$	7,518
Patent and trademark licensing		1,786			1,750			6,026			4,440
Income from operations of reportable segments		2,535			4,665			12,208			11,958
Corporate expenses not allocated to segments		(1,542	)		(1,560	)		(4,566	)		(4,390	)
	$	993		$	3,105		$	7,642		$	7,568

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

	March 31,		June 30,
	201 7		201 6
Total Assets
Private label contract manufacturing	$	58,867	$	66,375
Patent and trademark licensing		11,120		7,800
	$	69,987	$	74,175

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

	Three Months Ended March 31,				Nine Months Ended March 31,
	2017		2016		2017		2016
Net Sales
United States	$	14,605	$	13,374	$	43,484	$	38,665
Markets outside the United States		10,530		16,632		46,277		39,837
	$	25,135	$	30,006	$	89,761	$	78,502

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

	Long-Lived Assets				Total Assets				Capital Expenditures
									Nine Months Ended
	March 31, 201 7		June 30, 201 6		March 31, 201 7		June 30, 201 6		March 31, 2017		March 31, 2016
United States	$	10,827	$	9,678	$	45,599	$	49,755	$	2,090	$	5,004
Europe		6,961		5,489		24,388		24,420		2,242		1,955
	$	17,788	$	15,167	$	69,987	$	74,175	$	4,332	$	6,959

XML

Note A - Basis of Presentation and Summary of Significant Accounting Policies (Details Textual) - USD ($) xbrli-pure in Thousands			3 Months Ended		9 Months Ended
	Mar. 28, 2017	Mar. 26, 2016	Mar. 31, 2017	Mar. 31, 2016	Mar. 31, 2017	Mar. 31, 2016	Dec. 31, 2016	Jun. 30, 2016
Royalty and Licensing Revenue			$ 6,600,000	$ 5,500,000	$ 20,000,000	$ 16,100,000
Royalty Expense			233,000	193,000	799,000	666,000
Allocated Share-based Compensation Expense			223,000	$ 183,000	729,000	$ 463,000
Fair Value, Inputs, Level 2 [Member] | Foreign Exchange Forward [Member]
Foreign Currency Contract, Asset, Fair Value Disclosure			1,100,000		1,100,000			$ 250,000
Fair Value, Inputs, Level 3 [Member]
Fair Value, Net Asset (Liability)			0		0		$ 0	0
Fair Value, Inputs, Level 1 [Member]
Fair Value, Net Asset (Liability)			$ 0		$ 0			$ 0
Employee Stock Option [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount			0	0	0	0
2009 Omnibus Stock Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Fair Value Assumptions, Expected Dividend Rate					0.00%
2009 Omnibus Stock Incentive Plan [Member] | Restricted Stock [Member] | Board of Directors and Management Members [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period	140,000	130,000
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	3 years

XML

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		9 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Mar. 31, 2017	Mar. 31, 2016
Numerator
Net income	$ 745	$ 3,023	$ 5,701	$ 6,104
Denominator
Basic weighted average common shares outstanding (in shares)	6,581,632	6,510,902	6,569,165	6,513,821
Dilutive effect of stock options (in shares)	32,000	52,000	79,000	115,000
Diluted weighted average common shares outstanding (in shares)	6,613,955	6,562,577	6,648,091	6,628,883
Basic net income per common share (in dollars per share)	$ 0.11	$ 0.46	$ 0.87	$ 0.94
Diluted net income per common share (in dollars per share)	$ 0.11	$ 0.46	$ 0.86	$ 0.92

XML

Note B - Inventories, Net - Summary of Inventories (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Jun. 30, 2016
Raw materials	$ 10,043	$ 14,751
Work in progress	3,019	3,487
Finished goods	3,014	2,832
Reserves	(110)	(302)
Inventories, net	$ 15,966	$ 20,768

XML

Note C - Property and Equipment, Net - Summary of Property and Equipment (Details) - USD ($) $ in Thousands	9 Months Ended
	Mar. 31, 2017	Jun. 30, 2016
Property and equipment, gross	$ 50,291	$ 46,834
Less: accumulated depreciation and amortization	(32,503)	(31,667)
Property and equipment, net	17,788	15,167
Land [Member]
Property and equipment, gross	1,200	1,200
Building and Building Improvements [Member]
Property and equipment, gross	$ 3,675	3,324
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	$ 24,450	23,846
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	$ 3,749	2,994
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	$ 209	209
Depreciable Life In Years (Year)	3 years
Vehicles [Member] | Maximum [Member]
Depreciable Life In Years (Year)
Leasehold Improvements [Member]
Property and equipment, gross	$ 17,008	$ 15,261
Leasehold Improvements [Member] | Minimum [Member]
Depreciable Life In Years (Year)	1 year
Leasehold Improvements [Member] | Maximum [Member]
Depreciable Life In Years (Year)	15 years

XML

Note D - Accumulated Other Comprehensive (Loss) Income (Details Textual) - USD ($)	3 Months Ended		9 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Mar. 31, 2017	Mar. 31, 2016
Revenue, Net	$ 25,135,000	$ 30,006,000	$ 89,761,000	$ 78,502,000
Other Nonoperating Income (Expense)	(6,000)	1,611,000	(21,000)	1,601,000
Reclassification out of Accumulated Other Comprehensive Income [Member] | Accumulated Net Gain (Loss) from Cash Flow Hedges Including Portion Attributable to Noncontrolling Interest [Member]
Revenue, Net	278,000	118,000	549,000	125,000
Other Nonoperating Income (Expense)	$ 106,000	$ 2,000	$ 336,000	$ 53,000

XML

Note D - Accumulated Other Comprehensive (Loss) Income - Other Comprehensive (Loss) Income (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Mar. 31, 2017	Mar. 31, 2016
Beginning balance			$ 53,726
Ending balance	$ 59,913		59,913
Accumulated Defined Benefit Plans Adjustment Attributable to Parent [Member]
Beginning balance	(775)	$ (643)	(775)	$ (643)
OCI/OCL before reclassifications
Amounts reclassified from OCI
Tax effect of OCI activity
Net current period OCI/OCL
Ending balance	(775)	(643)	(775)	(643)
Accumulated Net Gain (Loss) from Cash Flow Hedges Attributable to Parent [Member]
Beginning balance	947	151	95	(123)
OCI/OCL before reclassifications	(322)	(613)	1,512	(131)
Amounts reclassified from OCI	(383)	(120)	(884)	(178)
Tax effect of OCI activity	254	260	(227)	110
Net current period OCI/OCL	(451)	(473)	401	(199)
Ending balance	496	(322)	496	(322)
AOCI Attributable to Parent [Member]
Beginning balance	172	(492)	(680)	(766)
OCI/OCL before reclassifications	(322)	(613)	1,512	(131)
Amounts reclassified from OCI	(383)	(120)	(884)	(178)
Tax effect of OCI activity	254	260	(227)	110
Net current period OCI/OCL	(451)	(473)	401	(199)
Ending balance	$ (279)	$ (965)	$ (279)	$ (965)

XML

Note E - Debt (Details Textual) - USD ($)		9 Months Ended
	Mar. 28, 2017	Mar. 31, 2017
Line of Credit Facility, Remaining Borrowing Capacity		$ 10,000,000
Proceeds from Long-term Lines of Credit		0
Long-term Debt		0
Wells Fargo Bank, N.A. [Member] | Credit Agreement [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 10,000,000
Long-term Debt, Percentage Bearing Fluctuating Interest, Threshold Amount	100,000
Minimum Prepayment Amount Under Line of Credit	$ 100,000
Long-term Line of Credit		$ 0
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

XML

Note F - Economic Dependency - Substantial Net Sales to Certain Customers (Details) - USD ($) $ in Thousands	3 Months Ended			9 Months Ended
	Mar. 31, 2017		Mar. 31, 2016	Mar. 31, 2017		Mar. 31, 2016
Net Sales by Customer	$ 25,135		$ 30,006	$ 89,761		$ 78,502
Sales Revenue, Goods, Net [Member] | Customer Concentration Risk [Member]
Net Sales by Customer	11,046		19,586	43,198		41,419
Sales Revenue, Goods, Net [Member] | Customer Concentration Risk [Member] | Customer 1 [Member]
Net Sales by Customer	11,046		13,023	43,198		31,714
Sales Revenue, Goods, Net [Member] | Customer Concentration Risk [Member] | Customer 2 [Member]
Net Sales by Customer		[1]	3,367		[1]	9,705
Sales Revenue, Goods, Net [Member] | Customer Concentration Risk [Member] | Customer 3 [Member]
Net Sales by Customer		[1]	$ 3,196		[1]		[1]

[1] Sales were less than 10% of the respective period's total private revenues.

XML

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			9 Months Ended
	Mar. 31, 2017	Mar. 31, 2016		Mar. 31, 2017		Mar. 31, 2016
Raw Material Purchases by Supplier	$ 4,646		[1]		[1]		[1]
% of Total Raw Material Purchases	45.00%
Supplier 1 [Member]
Raw Material Purchases by Supplier	$ 1,683		[1]		[1]		[1]
% of Total Raw Material Purchases	16.00%		[1]		[1]		[1]
Supplier 2 [Member]
Raw Material Purchases by Supplier	$ 1,646		[1]		[1]		[1]
% of Total Raw Material Purchases	16.00%		[1]
Supplier 3 [Member]
Raw Material Purchases by Supplier	$ 1,317		[1]		[1]		[1]
% of Total Raw Material Purchases	13.00%

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

XML

Note G - Segment Information (Details Textual) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Mar. 31, 2017	Mar. 31, 2016
Number of Reportable Segments			2
Revenue, Net	$ 25,135	$ 30,006	$ 89,761	$ 78,502
Non-US [Member]
Revenue, Net	10,530	16,632	46,277	39,837
UNITED STATES
Revenue, Net	$ 14,605	$ 13,374	$ 43,484	$ 38,665
Products Manufactured by NAIE [Member] | Non-US [Member] | Sales Revenue, Net [Member] | Product Concentration Risk [Member]
Concentration Risk, Percentage	62.00%	57.00%	55.00%	67.00%
Products Manufactured by NAIE [Member] | UNITED STATES
Revenue, Net			$ 0	$ 0

XML

Note G - Segment Information - Operating Results by Business Segment (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Mar. 31, 2017	Mar. 31, 2016
Net sales	$ 25,135	$ 30,006	$ 89,761	$ 78,502
Income from Operations	993	3,105	7,642	7,568
Operating Segments [Member]
Income from Operations	2,535	4,665	12,208	11,958
Corporate, Non-Segment [Member]
Income from Operations	(1,542)	(1,560)	(4,566)	(4,390)
Private Label Contract Manufacturing [Member]
Net sales	18,544	24,493	69,787	62,377
Private Label Contract Manufacturing [Member] | Operating Segments [Member]
Income from Operations	749	2,915	6,182	7,518
Patent and Trademark Licensing [Member]
Net sales	6,591	5,513	19,974	16,125
Patent and Trademark Licensing [Member] | Operating Segments [Member]
Income from Operations	$ 1,786	$ 1,750	$ 6,026	$ 4,440

XML

Note G - Segment Information - Assets by Business Segment (Details) - USD ($) $ in Thousands	Mar. 31, 2017	Jun. 30, 2016
Assets	$ 69,987	$ 74,175
Private Label Contract Manufacturing [Member]
Assets	58,867	66,375
Patent and Trademark Licensing [Member]
Assets	$ 11,120	$ 7,800

XML

Note G - Segment Information - Net Sales by Geographic Region (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Mar. 31, 2017	Mar. 31, 2016
Net sales	$ 25,135	$ 30,006	$ 89,761	$ 78,502
UNITED STATES
Net sales	14,605	13,374	43,484	38,665
Non-US [Member]
Net sales	$ 10,530	$ 16,632	$ 46,277	$ 39,837

XML

Note G - Segment Information - Assets and Capital Expenditures by Geographical Region (Details) - USD ($) $ in Thousands	9 Months Ended
	Mar. 31, 2017	Mar. 31, 2016	Jun. 30, 2016
Long-Lived Assets	$ 17,788		$ 15,167
Assets	69,987		74,175
Capital Expenditures	4,332	$ 6,959
UNITED STATES
Long-Lived Assets	10,827		9,678
Assets	45,599		49,755
Capital Expenditures	2,090	5,004
Europe [Member]
Long-Lived Assets	6,961		5,489
Assets	24,388		$ 24,420
Capital Expenditures	$ 2,242	$ 1,955

XML

Note H - Income Taxes (Details Textual) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Mar. 31, 2017	Mar. 31, 2017
Effective Income Tax Rate Reconciliation, Percent	29.00%	29.90%
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent		34.00%
Unrecognized Tax Benefits, Period Increase (Decrease)		$ 0
Valuation Allowance, Deferred Tax Asset, Increase (Decrease), Amount	$ 0	$ 0
Earliest Tax Year [Member] | Domestic Tax Authority [Member] | Internal Revenue Service (IRS) [Member]
Open Tax Year		2013
Earliest Tax Year [Member] | State and Local Jurisdiction [Member]
Open Tax Year		2008

XML

Note I - Treasury Stock (Details Textual) - USD ($)				9 Months Ended
	Mar. 28, 2017	May 11, 2015	Feb. 06, 2015	Mar. 31, 2017	Mar. 31, 2016	Jun. 02, 2011
Stock Repurchase Program, Authorized Amount	$ 7,000,000	$ 5,000,000	$ 3,000,000			$ 2,000,000
Stock Repurchase Program, Increase in Authorized Amount	$ 2,000,000	$ 2,000,000	$ 1,000,000
Treasury Stock, Shares, Acquired				39,547	52,603
Treasury Stock Acquired, Average Cost Per Share				$ 8.74	$ 6.26
Treasury Stock, Value, Acquired, Cost Method				$ 345,000	$ 329,000
Restricted Stock [Member]
Shares Paid for Tax Withholding for Share Based Compensation				38,729	27,196
Share-based Compensation Arrangement by Share-based Payment Award, Non-Option Equity Instruments, Forfeitures				7,000	2,667

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Note J - Derivatives and Hedging (Details Textual) € in Millions	3 Months Ended		9 Months Ended
	Mar. 31, 2017 USD ($)	Mar. 31, 2016 USD ($)	Mar. 31, 2017 USD ($)	Mar. 31, 2016 USD ($)	Mar. 31, 2017 EUR (€)	Jun. 30, 2016 USD ($)
Gain (Loss) on Cash Flow Hedge Ineffectiveness, Net	$ 97,000	$ 0	$ 189,000	$ 0
Foreign Currency Cash Flow Hedge Gain (Loss) to be Reclassified During Next 12 Months	776,000		776,000
Cash Flow Hedging [Member]
Derivative Instruments, Gain Recognized in Other Comprehensive Income (Loss), Effective Portion	322,000	118,000	1,500,000	125,000
Derivative Instruments, Gain Reclassified from Accumulated OCI into Income, Effective Portion	278,000	$ 2,000	549,000	$ 53,000
Prepaid Expenses and Other Current Assets [Member]
Cash Flow Hedge Derivative Instrument Assets at Fair Value	1,100,000		1,100,000			$ 226,000
Cash Flow Hedging Foreign Exchange Contract [Member]
Derivative, Notional Amount	$ 23,100,000		$ 23,100,000		€ 20.4