Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________

FORM 10-Q

pursuant to Section 13 or 15(d)

ofFor the Securities Exchange Act of 1934quarterly period ended September 30, 2022

 or

FOR THE QUARTERLY PERIOD ENDED December 31, 201For the transition period from7to.

000-15701

(Commission file number)

NATURAL ALTERNATIVES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether Natural Alternatives International, Inc. (NAI)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, a smaller reporting company,, or an 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 February 13, 2018, 7,429,020November 9, 2022, 6,061,533 shares of NAI's common stock were outstanding, net of 1,052,6573,129,873 treasury shares.

TABLE OF CONTENTS

A. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and with applicable rules and regulations. CertainPursuant to such rules and regulations, certain information and footnotenote 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.omitted. In management’smanagement’s opinion, all adjustments necessary for a fair presentation of the financial position, results of operations, stockholders’ equity, and cash flows have been included and are of a normal, recurring nature. The results of operations for the three and sixmonths ended December 31, 2017September 30, 2022 are not necessarily indicative of the operating results for the full fiscal year or for any future periods.

You should read the financial statements and these notes, which notes are an integral part of the financial statements, together with our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (2017 (“20172022 Annual Report”). The accounting policies used to prepare the financial statements included in this Quarterly Report are the same as thosepolicies described in the notes to the consolidated financial statements in our 20172022 Annual Report unless otherwise noted below.

RecentRecently Adopted Accounting Pronouncements

InWe did March 2016, not adopt any accounting pronouncements during the FASBthree months ended September 30, 2022.

Recently Issued Accounting and Regulatory Pronouncements

Other recently issued Accounting Standards Updateaccounting pronouncements are No.not 2016-02, Leases (Topic 842) (ASU 2016-02), which amends existing standards for leasesdiscussed in this Report as such pronouncements did not have, and are not believed by management to increase transparency and comparability among organizations by requiring recognition of lease assets and liabilities on the balance sheet and requiring disclosure of key information about such arrangements. ASU 2016-02 will be effective for us beginning in our first quarter of fiscal 2020. Early adoption is permitted. We are currently evaluating thehave, a material impact of adopting the new standard on our consolidatedpresent or future financial statements and the timing and presentation of our adoption.statements.

In April 2016, the FASB issued Accounting Standards Update No.2016-10, Revenue from Contracts with Customers (Topic 606)(ASU 2016-10), which amends and adds clarity to certain aspects of the guidance set forth in the upcoming revenue standard (ASU 2014-09) related to identifying performance obligations and licensing. In May 2016, the FASB issued Accounting Standards Update No.2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815) (ASU 2016-11), which amends and rescinds certain revenue recognition guidance previously released within ASU 2014-09. In May 2016 the FASB issued Accounting Standards Update No.2016-12, Revenue from Contracts with Customers (Topic 606) (ASU 2016-12), which provides narrow scope improvements and practical expedients related to ASU 2014-09. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible that more judgment and estimates may be required within the revenue recognition process than is required under present U.S. GAAP. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. The new standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. All of these new standards will be effective for us concurrently with ASU 2014-09, beginning in our first quarter of fiscal 2019. Currently, we do not expect our annual revenue to be materially different under Topic 606. The most significant change will be to our quarterly and annual financial statement disclosures.  We are continuing to evaluate the impact of adopting the new standard.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU is intended to improve and simplify accounting rules around hedge accounting and improve the disclosures of hedging arrangements. We are currently evaluating the impact of adopting the new standard on our consolidated financial statements. ASU 2017-12 will be effective for us beginning in our first quarter of fiscal 2020.

On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No.118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the U.S. legislation as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, the our estimated income tax is considered provisional and is expected to be finalized by the end of our fiscal year.

Net Income per Common Share

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

In periods where we have a net loss, stock options andWe excluded 50,377 shares of restricted stock are excluded from our calculation of diluted net income (loss) per common share, as their inclusion would have an antdilutive effect. We excludedand no shares related to stock options totaling 135,000 and shares related to restricted stock totaling 813,665 for the three months ended December 31, 2017.September 30, 2022, as their impact would have been anti-dilutive. We did Nonot shares related toexclude any stock options or restrictedrestrictive stock were excludedshares for the sixthree months ended December 31, 2017September 30, 2021, or theas threenone and six months ended December 31, 2016.would have had an anti-dilutive impact.

Revenue Recognition

To recognizeWe record revenue based on a fourfive basic criteria must be met: -step model which includes: (1) there is evidence that an arrangement identifying a contract with a buyer exists; customer; (2) delivery has occurred; identifying the performance obligations in the contract; (3) determining the fee is fixed or determinable; and transaction price; (4) collectabilityallocating the transaction price among the performance obligations; and (5) recognizing revenue as each of the various performance obligations are satisfied.

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

Revenue is recognized at the point in time that each of sale only if (a)our performance obligations is fulfilled, and control of the seller’s priceordered products is transferred to the buyercustomer. This transfer occurs when the product is substantially fixedshipped, or determinable atin some cases, when the date of sale; (b) the buyer has paid the seller, or the buyerproduct is obligated to pay the seller and the obligation is not contingent on resale of the product; (c) the buyer’s obligationdelivered 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. customer.

We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the time title passesin certain circumstances before delivery to the customer which usually occurs upon shipment. Revenue from shipments where title passes upon completionhas occurred (commonly referred to as bill-and-hold transactions). Products sold under bill-and-hold arrangements are recorded as revenue when risk of delivery is deferred until the shipmentownership has been delivered.transferred to the customer, but the product has not shipped due to a substantive reason, typically at the customer’s request. The product must be separately identified as belonging to the customer, ready for physical transfer to the customer, and we cannot have the ability to redirect the product to another customer.

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

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 sales 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.

On August 7, 2017, we entered into three agreements (“Agreements”), with The Juice Plus+ Company LLC (“Juice Plus+”). The Agreements are an Exclusive Manufacturing Agreement, a Restricted Stock Award Agreement, and an Irrevocable Proxy. Pursuant to the Exclusive Manufacturing Agreement, Juice Plus+ has granted us exclusive rights to manufacture and supply them with certain of their products within 24 countries where Juice Plus+ currently sells those products. Pursuant to the Restricted Stock Award Agreement, NAI has granted 500,000 shares of NAI common stock to Juice Plus+, (the “Shares”), and Juice Plus+ has agreed the Shares are subjectprovide early payment discounts to certain restrictions and riskcustomers. Based on historical payment trends, we expect that these customers will take advantage of forfeiture. Pursuant to the Irrevocable Proxy, Juice Plus+ also has granted to the NAI Boardthese early payment discounts. The cost of Directors Juice Plus+’s right to vote the Shares that remain subject to the associated risk of forfeiture. The Agreements each are for a term of 5 years, and each may be terminated by either party only upon the occurrence of specified events. The expense associated with the shares granted to Juice Plus+these discounts is recordedreported as a reduction to revenue. the transaction price. If the actual discounts differ from those estimated, the difference is also reported as a change in the transaction price. We recordedrequire prepayment from certain customers. We record any payments received in advance of contracts fulfillment as a contract liability and classified as customer deposits on the consolidated balance sheet.

Except for product defects, no right of return exists on the sale of our products. We estimate returns based on historical experience and recognize a returns liability for any estimated returns. As of $245,000September 30, 2022, we have no of expense during the three months ended December 31, 2017 and $408,000 during the six months ended December 31, 2017.estimated returns liability.

We currently own certain U.S. patents, and patent applications, and each patent’s corresponding foreign patents and patent applications. All of these patents and patent rights relate to the ingredient known as beta-alanine marketed and which we market and sellsold under our CarnoSyn® and SR CarnoSyn® trade names. We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of $4.0$1.4 million during the three months ended December 31, 2017 and $9.8 million during the six months ended December 31, 2017.September 30, 2022. We similarly recorded $6.7$4.7 million during the three months ended December 31, 2016 and $13.4 million during the six months ended December 31, 2016.September 30, 2021. These royalty income and raw material sale amounts resulted in royalty expense paid to the original patent holders from whom NAI acquired its patents and patent rights. We recognized royalty expense as a component of cost of goods sold in the amount of $160,000$27,000 during the three months ended December 31, 2017 and $444,000 during the six months ended December 31, 2017.September 30, 2022. We recognized $250,000recorded $200,000 during the three months ended December 31, 2016 September 30, 2021.and $566,000 during the six months ended December 31, 2016.

Notes Receivable

On

Stock-Based Compensation

We have anThe Board of Directors approved our current omnibus equity incentive plan that was approved by our Board of Directorsbecame effective as of OctoberJanuary 1, 2021 (the 15,“2020 2009 andPlan”), which was approved by our stockholders at the Annual Meeting of Stockholders held on NovemberDecember 4, 2020. 30,2009.Under the plan,2020 Plan, we may grant nonqualified and incentive stock options, restricted stock grants, restricted stock units, stock appreciation rights, and other stock-based awards to employees, non-employee directors and consultants.

We 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 to date 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 on the date of grant. The expected life of stock option grants is derived from historical experience. The fair value of restricted stock shares granted is based on the market price of our common stock on the date of grant. We amortize the estimated fair value of our stock awards to expense over the related vesting periods.

We did not grant any options during the three month or six month periods ended December 31, 2017September 30, 2022 orand 2016.September 30, 2021. All remaining outstanding stock options are fully vested. No options were exercised during the three month or six month periods ended December 31, 2017September 30, 2022 orand 2016.September 30, 2021. There were no forfeitures during the three months ended December 31, 2017. During the six months ended December 31, 2017 5,000 options were forfeited. There were nooption forfeitures during the three month or six month periods ended December 31, 2016.September 30, 2022 and September 30, 2021. As of September 30, 2022, we did not have any stock options outstanding.

We did not grant any restricted stock shares to employees during the three or six months ended December 31, 2017, or the three months ended December 31, 2016.September 30, 2022 We grantedor 10,000September 30, 2021. No restricted stock shares to a new member of managementwere forfeited during the sixthree months ended December 31, 2016.September 30, 2022. During the three months ended September 30, 2021, 16,332 restricted stock shares were forfeited. Our net income included stock-based compensation expense in connection with prior restricted stock grants of approximately $0.2 million for the three months ended September 30, 2022. Our net income included stock based compensation expense in connection with the vesting of prior restricted stock grants of approximately $302,000$0.2 million for the three months ended December 31, 2017,September 30, 2021.

Deferred Compensation Plan

Effective July 16, 2020, the Board of Directors approved and adopted a Non-Qualified Incentive Plan (the “Incentive Plan”). Pursuant to the Incentive Plan, the Human Resources Committee and the Board of Directors may make deferred cash payments or other cash awards (“Awards”) to directors, officers, employees and eligible consultants of NAI, (“Participants”). These Awards are made subject to conditions precedent that must be met before NAI is obligated to make the payment. The purpose of the Incentive Plan is to enhance the long-term stockholder value of NAI by providing the Human Resources Committee and the Board of Directors the ability to make deferred cash payments or other cash awards to encourage Participants to serve NAI or to remain in the service of NAI, or to assist NAI to achieve results determined by the Human Resources Committee or the Board of Directors to be in NAI's best interest.

The Incentive Plan authorizes the Human Resources Committee or the Board of Directors to grant to, and administer, unsecured and deferred cash Awards to Participants and to subject each Award to whatever conditions are determined appropriate by the Human Resources Committee or the Board of Directors. The terms of each Award, including the amount and any conditions that must be met to be entitled to payment of the Award are set forth in an Award Agreement between each Participant and NAI. The Incentive Plan provides the Board of Directors with the discretion to set aside assets to fund the Incentive Plan although that has not been done to date.

No deferred cash awards were granted during the three months ended September 30, 2022 and $603,000September 30, 2021. No for the six months ended December 31, 2017. Our net income included stock based compensation expense of approximately $256,000 fordeferred cash awards were forfeited during the three months ended December 31, 2016,September 30, 2022. and $506,000 forDuring the sixthree months ended December 31, 2016.September 30, 2021, awards totaling $191,000 were forfeited.

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

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

As of DecSeptember 30, 2022, ember 31,2017and June 30, 2017,2022, we did not have any financial assets or liabilities classified as Level 11. except for cash and cash equivalents, and assets related to our pension plan. We classify derivative forward exchange and interest rate swap contracts as Level 2 assets.assets and liabilities. The fair values were determined by obtaining pricing from our bank and corroborating those values with a third party bank or pricing service.

We also classify any outstanding line of credit and term loan balance as a net liability ofLevel $2.72 million. The fair value of our forward exchange contracts as of June 30, 2017 was a net liability of $521,000.liability. As of December 31, 2017September 30, 2022, and June 30, 20172022, we did not have any financial assets or liabilities classified as Level 3. We did not transfer any assets or liabilities between Levelsthese levels during fiscal 20172022 or the sixthree months ended December 31, 2017.September 30, 2022. 

Concentrations of Credit Risk

Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We place our cash and cash equivalents with highly rated financial institutions. Credit risk with respect to receivables is concentrated with our three largest customers, whose receivable balances collectively represented 76.1% of gross accounts receivable at December 31,2017 and 65.6% at June 30,2017. Additionally, amounts due related to our beta-alanine raw material sales were 15.6% of gross accounts receivable at December 31, 2017, and 21.3% of gross accounts receivable at June 30, 2017. Concentrations of credit risk related to the remaining accounts receivable balances are limited due to the number of customers comprising our remaining customer base.

B. Inventories, net

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

C. Property and Equipment

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

Depreciation expense was approximately $1.0 million for the three month period ended September 30, 2022 and $1.1 million for the three month period ended September 30, 2021.