Natural Alternatives International, Inc.
Annual Report 2015

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K ANNUAL REPORTpursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2015 000-15701(Commission file number)NATURAL ALTERNATIVES INTERNATIONAL, INC.(Exact name of registrant as specified in its charter) Delaware84-1007839(State of incorporation)(IRS Employer Identification No.) 1185 Linda Vista DriveSan Marcos, California 92078(760) 744-7340(Address of principal executive offices)(Registrant’s telephone number) Securities registered pursuant to Section 12(b) of the Act: Title of each className of exchange on which registered Common Stock, $0.01 par value per shareNasdaq Global Market Securities registered pursuant to Section 12(g) of the Act:NoneIndicate by check mark if Natural Alternatives International, Inc. (NAI) is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of1933. ☐ Yes ☒ No Indicate by check mark if NAI is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of1934. ☐ Yes ☒ No Indicate by check mark whether NAI (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 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 past90 days. ☒ Yes ☐ No Indicate by check mark whether NAI has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to besubmitted 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 submitand post such files). ☒ Yes ☐ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to thebest of NAI’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K. ☐ Indicate by check mark whether NAI is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. Large accelerated filer☐Accelerated filer☐ Non-accelerated filer☐Smaller reporting company☒ Indicate by check mark whether NAI is a shell company (as defined in Rule 12b-2 of the Exchange Act): ☐ Yes ☒ No The aggregate market value of NAI’s common stock held by non-affiliates of NAI as of the last business day of NAI’s most recently completed secondfiscal quarter (December 31, 2014) was approximately $29,300,099 (based on the closing sale price of $5.35 reported by Nasdaq on December 31, 2014).For this purpose, all of NAI’s officers and directors and their affiliates were assumed to be affiliates of NAI. As of September 16, 2015, 6,713,831 shares of NAI’s common stock were outstanding, net of 904,846 treasury shares.DOCUMENTS INCORPORATED BY REFERENCE Part III (Items 10, 11, 12, 13 and 14) of this Form 10-K incorporates by reference portions of NAI’s definitive proxy statement for its Annual Meeting ofStockholders to be held December 4, 2015, to be filed on or before October 28, 2015.  TABLE OF CONTENTS Page SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS1 PART I Item 1.Business2 Item 1A.Risk Factors10 Item 2.Properties16 Item 3.Legal Proceedings16 Item 4.Mine Safety Disclosures17 PART II Item 5.Market for Our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities17 Item 6.Selected Financial Data18 Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations19 Item 8.Financial Statements and Supplementary Data28 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure53 Item 9A.Controls and Procedures53 Item 9B.Other Information53 PART III Item 10.Directors, Executive Officers and Corporate Governance53 Item 11.Executive Compensation53 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters53 Item 13.Certain Relationships and Related Transactions, and Director Independence53 Item 14.Principal Accountant Fees and Services53 PART IV Item 15.Exhibits and Financial Statement Schedules54 SIGNATURES58 (i)  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 ofthe 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. Anystatements that refer to projections of our future financial performance, our anticipated growth and trends in our business, our goals, strategies, focus andplans, and other characterizations of future events or circumstances, including statements expressing general optimism about future operating results, areforward-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 directly sell beta-alanine; •our ability to maintain or increase our patent and trademark licensing revenues; •our ability to 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 matterson our business and results of operations; •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 offoreign exchange facilities, our ability to effectively hedge against foreign exchange risks and the extent to which we may seek to hedgeagainst such risks; •future levels of our revenue concentration risk; •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 andintended use of our facilities; •development of new products and marketing strategies; •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 improve operational efficiencies, manage costs and business risks and improve or maintain profitability; •growth, expansion, diversification, and consolidation strategies, the success of such strategies, and the benefits we believe can be derivedfrom such strategies; •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 andcapital expenditures through the next 12 months; •overall industry and market performance; •competition and competitive advantages; •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 suchforward-looking statements. Forward-looking statements are subject to certain events, risks, and uncertainties that may be outside of our control. Whenconsidering forward-looking statements, you should carefully review the risks, uncertainties and other cautionary statements in this report as they identifycertain important factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. Thesefactors include, among others, the risks described under Item 1A of Part I and elsewhere in this report, as well as in other reports and documents we filewith the United States Securities and Exchange Commission (SEC). 1 PART I ITEM 1.BUSINESS General Our vision is to enrich the world through the best of nutrition. We are a leading formulator, manufacturer and marketer of nutritional supplements. Our comprehensive strategic partnerships with our customers offer awide range of innovative nutritional products and services to our clients including the following: scientific research, clinical studies, proprietaryingredients, customer-specific nutritional product formulation, product testing and evaluation, marketing management and support, packaging anddelivery system design, regulatory review, and international product registration assistance. As our primary business activity, we provide private-label contract manufacturing services to companies that market and distribute vitamins, minerals,herbal and other nutritional supplements, as well as other health care products, to consumers both within and outside the U.S. We also seek tocommercialize our patent and trademark estate related to the ingredient known as beta-alanine through direct raw material sales. History Originally founded in 1980, Natural Alternatives International, Inc. reorganized as a Delaware corporation in 1989. Our principal executive offices arelocated at 1185 Linda Vista Drive, San Marcos, California, 92078. In January 1999, we formed Natural Alternatives International Europe S.A. (NAIE) as our wholly owned subsidiary, based in Manno, Switzerland. InSeptember 1999, NAIE opened its manufacturing facility and now possesses manufacturing capability in encapsulation, powders, and tablets, finishedgoods packaging, quality control, laboratory testing, warehousing, distribution and administration. Historically, as part of our business strategy, we have sought to commercialize our patent estate through contract manufacturing, royalty and licenseagreements. Since March 2009, we have had an agreement with Compound Solutions, Inc. (CSI) to grant a license to manufacture, offer for sale and/or sellproducts incorporating, using or made in accordance with our patent rights to customers of CSI who purchase beta-alanine under the CarnoSyn® tradename from CSI. The most recent agreement additionally granted such a license to CSI. We received a fee from CSI that varied based on the quantity andsource of beta-alanine sold by CSI. Our most recent agreement with CSI expired on March 31, 2015. We elected not to renew our agreement with CSI and,effective April 1, 2015 we began directly selling beta-alanine, and licensing the related patent and trademark rights, in order to take advantage ofstrategic opportunities, including opportunities to provide additional contract manufacturing services, and to increase our top-line revenue and profitprofile. Additionally, we have historically developed, manufactured and marketed our own branded products under the Pathway to Healing product line, whichwas aimed at restoring, maintaining and improving the health of the users. However, due to the steady decline in sales of this product line over the priorseveral years, we decided to discontinue the product line. Pursuant to the license agreements between NAI and each of Dr. Reginald Cherry and theCherry Ministries Inc. dated as of September 1, 2014 as amended (the License Agreements). Dr. Cherry and Cherry Ministries licensed to NAI the name,likeness, style, persona and other attributes of Dr. Cherry in connection with the sale of nutritional products that were marketed by NAI under its Pathwayto Healing brand. Pursuant to the License Agreements, NAI was permitted to terminate the License Agreements by written notice at any time. We notifiedDr. Cherry and Cherry Ministries of our decision to discontinue the product line and the termination of the related license agreement was effective as ofSeptember 15, 2014. All termination activities related to the Pathway to Healing® product line were substantially completed by December 31, 2014. Wedid not change the financial presentation in this report to reflect the branded products segment as “Discontinued Operations” as the wind down of thisproduct line did not meet the criteria for discontinued operations presentation as prescribed by applicable accounting regulations (ASC 205-20). Unless the context requires otherwise, all references in this report to the “Company,” “NAI,” “we,” “our,” and “us” refer to Natural AlternativesInternational, Inc. and, as applicable, and NAIE. 2® Overview of our Facilities and Operations Our U.S.-based operations are located in San Marcos and Vista, California and include manufacturing and distribution, sales and marketing, in-houseformulation, laboratory and other research and development services. Our manufacturing facilities were recertified on December 20, 2012 by theTherapeutic Goods Administration (TGA) of Australia after its audit of our GMP. TGA evaluates new therapeutic products, prepares standards, developstesting methods and conducts testing programs to ensure that products are high in quality, safe and effective. TGA also conducts a range of assessmentand monitoring activities including audits of the manufacturing practices of companies who export and sell products to Australia. TGA certificationenables us to manufacture products for export into countries that have signed the Pharmaceutical Inspection Convention, which include most Europeancountries as well as several Pacific Rim countries. TGA certifications are generally reviewed every eighteen to thirty six months. Our California facilities also have been awarded GMP registration annually since October 2002 by NSF International (NSF) through the NSF DietarySupplements Certification Program and received “GMP for Sport” NSF Certified registration on February 16, 2009. GMP requirements are regulatorystandards and guidelines establishing necessary processes, procedures and documentation for manufacturers in an effort to assure the products producedby that manufacturer have the identity, strength, composition, quality and purity they are represented to possess. The NSF Certified for Sport programfocuses on minimizing the risk that a dietary supplement or sports nutrition product contains banned substances and was developed due to growingdemand from athletes and coaches concerned about banned substances in sports supplements. The program focuses primarily on manufacturing andsourcing processes, embedding preventative measures throughout. NAI’s participation in the program allows us to produce products bearing the NSFSport logo. Our U.S. operations have also been certified by Health Canada as compliant with GMP requirements as outlined in Part 3 of the Canadian Natural HealthProducts Regulations. Health Canada is the federal department of the Canadian government with responsibility for national public health. HealthCanada has initiated work to modernize its regulatory system for food and health products. Health Canada plays an active role in ensuring access to safeand effective drugs and health products while giving highest priority to public safety and striving to provide information needed to make healthy choicesand informed decisions regarding one’s health. NAI was issued its initial certification in December 2011 and received annual re-certifications fromHealth Canada’s Natural Health Products Directorate in October 2013 and November 2014. Not only does this approval demonstrate yet another level ofregulatory compliance for NAI, it may also ease the approval process for our customers who import products into Canada. Additionally, in March 2015, our California facilities became certified as Organic Processor and Handler by Natural Food Certifiers (NFC). Thiscertification demonstrates that we meet the USDA National Organic Program standards and allows us to expand our contract manufacturing andpackaging services to include Organic labeled products. The certification requires annual renewal and we believe we will obtain renewals annually. NAIE also operates a manufacturing, warehousing, packaging and distribution facility in Manno, Switzerland. In January 2004, NAIE obtained apharmaceutical license to process pharmaceuticals for packaging, import, export and sale within Switzerland and other countries from the SwissmedicAuthority of Bern, Switzerland. In March 2007, following the expansion of NAIE’s manufacturing facilities to include powder filling capabilities, NAIEobtained an additional pharmaceutical license from the Swissmedic Authority certifying that NAIE’s expanded facilities conform to GMP. In January2013, following the additional upgrade of NAIE’s manufacturing facilities to include the manufacture of pharmaceuticals, NAIE obtained an additionalpharmaceutical approval from the Swissmedic Authority certifying that NAIE’s upgraded facilities conform to GMP. We believe these licenses andNAIE’s manufacturing capabilities help strengthen our relationships with existing customers and can improve our ability to develop relationships withnew customers. Our Swissmedic licenses are valid until February 2019. In addition to our operations in the U.S. and Switzerland, we have a representative in Japan who provides a range of services to our customers currentlypresent in or seeking to expand into the Japanese market and other markets in the Pacific Rim. These services include regulatory and marketing assistancealong with guidance and support in adapting products to these markets. Business Strategy Our goals are to achieve long-term growth and profitability and to diversify our sales base. To accomplish these goals, we have sought and intend tocontinue to seek to do the following: •leverage our state-of-the-art, certified facilities to increase the value of the goods and services we provide to our highly valued private-labelcontract manufacturing customers and assist in developing relationships with additional quality oriented customers; •expand the commercialization of our beta-alanine patent estate through raw material sales, new contract manufacturing opportunities, licenseagreements and protecting our proprietary rights; •provide strategic partnering services to our private-label contract manufacturing customers, as described below under “Products, PrincipalMarkets and Methods of Distribution”; and •improve operational efficiencies and manage costs and business risks to improve profitability. 3 Overall, we believe there is an opportunity to enhance consumer confidence in the quality of our nutritional supplements and their adherence to labelclaims through the education provided by direct sales and direct-to-consumer marketing programs. We believe our GMP and TGA certified manufacturingoperations, science based product formulations, peer-reviewed clinical studies and regulatory expertise provide us with a sustainable competitiveadvantage by providing our customers with a high degree of confidence in the products we manufacture. While today’s consumer may have access to a variety of information, we believe many consumers remain uneducated about nutrition and nutritionalsupplementation, uncertain about the relevance or reliability of the information available to them, or confused about conflicting claims or information.We believe this state of the market creates a significant opportunity for the direct sales marketing channel. The direct sales marketing channel has proved,and we believe will continue to prove, to be a highly effective method for marketing high-quality nutritional supplements as associates or otherindividuals educate consumers on the benefits of science based nutritional supplements. Our largest customers operate in the direct sales marketingchannel. Thus, the majority of our business has relied primarily on the effectiveness of our customers in this marketing channel. As part of our business strategy, we have sought to commercialize our patent estate through contract manufacturing, royalty and license agreements. SinceMarch 2009, we have had an agreement with Compound Solutions, Inc. (CSI) to grant a license to manufacture, offer for sale and/or sell productsincorporating, using or made in accordance with our patent rights to customers of CSI who purchase beta-alanine under the CarnoSyn® trade name fromCSI. The most recent agreement additionally granted such a license to CSI. Our most recent agreement with CSI expired on March 31, 2015. We electednot to renew our agreement with CSI and, effective April 1, 2015 we began directly selling beta-alanine, and licensing our related patent and trademarkrights, in order to take advantage of strategic opportunities, including opportunities to provide additional contract manufacturing services, and toincrease our top-line revenue and profit profile. Additionally, we have developed, manufactured and marketed our own branded products under the Pathway to Healing product line, which was aimedat restoring, maintaining and improving the health of the users. However, due to the steady decline in sales of this product line over the prior severalyears, we decided to discontinue the product line. Pursuant to the License Agreements, Dr. Cherry and Cherry Ministries licensed to NAI the name,likeness, style, persona and other attributes of Dr. Cherry in connection with the sale of nutritional products that were marketed by NAI under its Pathwayto Healing brand. Pursuant to the License Agreements, NAI was permitted to terminate the License Agreements by written notice at any time. We notifiedDr. Cherry and Cherry Ministries of our decision to discontinue the product line and the termination of the related license agreement was effective as ofSeptember 15, 2014. All termination activities related to the Pathway to Healing product line were substantially completed by December 31, 2014. Wedid not change the financial presentation in this report to reflect the branded products segment as “Discontinued Operations” as the wind down of thisproduct line did not meet the criteria for discontinued operations presentation as prescribed by ASC 205-20. We believe our comprehensive approach to customer service is unique within our industry. We believe this comprehensive approach, together with ourcommitment to high quality, product development and manufacturing capabilities, will provide the means to implement our strategies and achieve ourgoals. There can be no assurance, however, that we will successfully implement any of our business strategies or that we will increase or diversify oursales, successfully commercialize our patent estate, or improve our overall financial results. Products, Principal Markets and Methods of Distribution Our primary business activity is to provide 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. Our private-label contractmanufacturing customers include companies that market nutritional supplements through direct sales marketing channels, direct response television andretail stores. We manufacture products in a variety of forms, including capsules, tablets, chewable wafers and powders to accommodate a variety ofconsumer preferences. We provide strategic partnering services to our private-label contract manufacturing customers, including the following: •customized product formulation; •clinical studies; •manufacturing; •marketing support; •international regulatory and label law compliance; •international product registration; and •packaging in multiple formats and labeling design. 4®® We also seek to commercialize our patent and trademark estate related to the ingredient known as beta-alanine through direct distribution and sale of rawmaterial, new contract manufacturing opportunities, and various license and similar arrangements. Historically, our primary source of income from ourpatent and trademark estate has been from royalties received through a license and distribution agreement with CSI. Our agreement with CSI expiredMarch 31, 2015 and, effective April 1, 2015, we began directly selling beta-alanine, and licensing the related patent and trademark rights, in order to takeadvantage of strategic opportunities, including opportunities to provide additional contract manufacturing services, and to increase our top-line revenueand profit profile. For the last two fiscal years ended June 30, our net sales were derived from the following (in thousands): 2015 2014 $ % $ % Private-label Contract Manufacturing $69,670 88 $67,339 91 Patent and Trademark Licensing 9,140 11 5,444 7 Branded Products 698 1 1,159 2 Total Net Sales $79,508 100 $73,942 100 Research and Development We are committed to quality research and development. We focus on the development of new science based products and the improvement of existingproducts. We periodically test and validate our products to help ensure their stability, potency, efficacy and safety. We maintain quality controlprocedures to verify that our products comply with applicable specifications and standards established by the FDA and other regulatory agencies. We alsodirect and participate in clinical research studies, often in collaboration with scientists and research institutions, to validate the benefits of a product andprovide scientific support for product claims and marketing initiatives. We believe our commitment to research and development, as well as our facilitiesand strategic alliances with our suppliers and customers, allow us to effectively identify, develop and market high-quality and innovative products. As part of the services we provide to our private-label contract manufacturing customers, we may perform, but are not required to perform, certain researchand development activities related to the development or improvement of their products. While our customers often do not pay directly for this service,the cost of this service is included as a component of the price we charge to manufacture and deliver their products. Research and development costs,which include costs associated with international regulatory compliance services we provide to our customers, are expensed as incurred. Our research and development expenses for the last two fiscal years ended June 30 were $1.1 million for 2015 and $1.0 million for 2014. The increase inresearch and development expenses was primarily related to increased personnel costs as a result of changes made to the related departmentalmanagement structure. Sources and Availability of Raw Materials We use raw materials in our operations including powders, excipients, empty capsules, and components for packaging and distributing our finishedproducts. In addition, the commercialization of our beta-alanine patent estate depends on the availability of the raw material beta-alanine. We conductidentity testing for all raw materials we purchase and, on a predetermined testing protocol basis, we evaluate raw materials to ensure their quality, purityand potency before we use them in our products. We typically buy raw materials in bulk from qualified vendors located both within and outside the U.S.During fiscal 2015, we did not have any suppliers that represented more than 10% of our total raw material purchases. Our contract manufacturing business did not experience any significant shortages or difficulties obtaining adequate supplies of raw materials duringfiscal 2015. However, there continues to be significant pricing pressures associated with various vitamins, minerals and herbs in the raw materialmarketplace. In early March 2011, the factory that produces the major supply of beta-alanine sold under our CarnoSyn® trade name was damaged as aresult of the massive earthquake off the coast of Sendai, Japan resulting in a significant beta-alanine supply interruption. While this Japanese factoryresumed operations in June 2011 and was able to produce beta-alanine at historical levels during fiscal 2012, there is no assurance this or any otherfacility will not incur future production interruptions as a result of causes outside our control. Throughout fiscal 2016, we expect to continue toexperience difficulties in sourcing various raw materials as a result of worldwide shortages, and other supply constraints. We also believe raw material andproduct cost pricing pressures will continue throughout fiscal 2016 as a result of limited supplies of various ingredients and the effects of higher laborand transportation costs. Major Customers The Juice Plus+ Company (formerly NSA International, Inc.) has been our largest customer over the past several years. During the fiscal year endedJune 30, 2015, The Juice Plus+ Company accounted for approximately 43% of our private-label contract manufacturing net sales. We historically havehad manufacturing agreements with The Juice Plus+ Company dating back to April 1, 2005. Under the terms of our agreements with The Juice Plus+Company, we develop, manufacture, produce and package certain nutritional products for The Juice Plus+ Company based on monthly purchase orderssubmitted to us by The Juice Plus+ Company and provide certain consulting services, at such prices as are agreed upon from time to time. The agreementsprohibit us from manufacturing or distributing any products that are substantially similar to the products we manufacture for The Juice Plus+ Companyduring the term of the agreements and for a period of three years thereafter. Our most recent agreements with The Juice Plus+ Company expired on April 1,2014. We continue to develop, manufacture, produce and package certain nutritional products for The Juice Plus+ Company based on monthly purchaseorders submitted to us by The Juice Plus+ Company. 5 Our second largest customer is Mannatech, which accounted for approximately 16% of our private-label contract manufacturing net sales during fiscal2015. Under the terms of our manufacturing agreement with Mannatech, we manufacture, produce and bulk package certain nutritional products forMannatech based on purchase orders submitted to us by Mannatech, at such prices as are agreed upon from time to time. The agreement automaticallyextends for successive one year periods unless terminated by either party in the event of a breach of the agreement by the other party or on at least 60 dayswritten notice prior to the expiration of the then current term. We also have a Manufacturing Sales Agreement with Mannatech and its affiliates, underwhich we have the exclusive right to develop and manufacture certain products for Mannatech to be sold in Germany and Denmark. This agreementautomatically extends for successive one year periods unless terminated by either party for cause or in the event of a breach of the agreement by the otherparty or upon written notice prior to the expiration of the then current term. Our third largest customer is CIT Cosmeceutical Pte Ltd (CIT), which accounted for approximately 12% of our private-label contract manufacturing netsales during fiscal 2015. Under the terms of our manufacturing agreement with CIT, we manufacture, produce and bulk package certain nutritionalproducts based on purchase orders submitted to us by CIT, at such prices as are agreed upon from time to time. The Juice Plus+ Company, Mannatech, and CIT are private-label contract manufacturing customers, and the loss of any one of them could result insignificant negative impact to our financial position and results of operations. No other customer accounted for 10% or more of net sales during fiscal2015. We continue to focus on obtaining new private-label contract manufacturing customers to reduce the risks associated with deriving a significantportion of our sales from a limited number of customers. Competition We compete with other manufacturers, distributors and marketers of vitamins, minerals, herbs, and other nutritional supplements both within and outsidethe U.S. The nutritional supplement industry is highly fragmented and competition for the sale of nutritional supplements comes from many sources.These products are sold primarily through retailers (drug store chains, supermarkets, and mass market discount retailers), health and natural food stores,and direct sales channels (network marketing, internet marketing and mail order companies). We believe private-label contract manufacturing competition in our industry is based on, among other things, customized services offered, productquality and safety, innovation, price and customer service. We believe we compete favorably with other companies because of our ability to providecomprehensive solutions for customers, our certified manufacturing operations and our commitment to quality and safety through our research anddevelopment activities. Our future competitive position for private-label contract manufacturing and patent and trademark licensing will likely depend on, but not be limited to,the following: •the continued acceptance of our products by our customers and consumers; •our ability to protect our proprietary rights in our patent estate and the continued validity of such patents; •our ability to successfully expand our product offerings related to our patent and trademark estate; •our ability to maintain adequate inventory levels to meet our customer’s demands; •our ability to expand; •our ability to continue to manufacture high quality products at competitive prices; •our ability to attract and retain qualified personnel; •the effect of any future governmental regulations on our products and business; •the results of, and publicity from, product safety and performance studies performed by governments and other research institutions; •the continued growth of the global nutrition industry; and •our ability to respond to changes within the industry and consumer demand, financially and otherwise. The nutritional supplement industry is highly competitive and we expect the level of competition to remain high over the near term. We do not believe itis possible to accurately estimate the total number or size of our competitors. The nutritional supplement industry has undergone consolidation in therecent past and we expect that trend to continue in the near term. 6 Government Regulation Our business is subject to varying degrees of regulation by a number of government authorities in the U.S., including the FDA, the Federal TradeCommission (FTC), the Consumer Product Safety Commission, the U.S. Department of Agriculture, and the Environmental Protection Agency. Variousagencies of the states and localities in which we operate and in which our products are sold also regulate our business, such as the California Departmentof Health Services, Food and Drug Branch. The areas of our business that these and other authorities regulate include, among others: •product claims and advertising; •product labels; •product ingredients; and •how we manufacture, package, distribute, import, export, sell and store our products. The FDA, in particular, regulates the formulation, manufacturing, packaging, storage, labeling, promotion, distribution and sale of vitamins and othernutritional supplements in the U.S., while the FTC regulates marketing and advertising claims. In August 2007, a new rule issued by the FDA went intoeffect requiring companies that manufacture, package, label, distribute or hold nutritional supplements to meet certain GMP to ensure such products areof the quality specified and are properly packaged and labeled. We are committed to meeting or exceeding the standards set by the FDA and believe weare currently operating within the FDA mandated GMP. The FDA also regulates the labeling and marketing of dietary supplements and nutritional products, including the following: •the identification of dietary supplements or nutritional products and their nutrition and ingredient labeling; •requirements related to the wording used for claims about nutrients, health claims, and statements of nutritional support; •labeling requirements for dietary supplements or nutritional products for which “high potency” and “antioxidant” claims are made; •notification procedures for statements on dietary supplements or nutritional products; and •premarket notification procedures for new dietary ingredients in nutritional supplements. The Dietary Supplement Health and Education Act of 1994 (DSHEA) revised the provisions of the Federal Food, Drug and Cosmetic Act concerning thecomposition and labeling of dietary supplements and defined dietary supplements to include vitamins, minerals, herbs, amino acids and other dietarysubstances. DSHEA generally provides a regulatory framework to help ensure safe, quality dietary supplements and the dissemination of accurateinformation about such products. The FDA is generally prohibited from regulating active ingredients in dietary supplements as drugs unless productclaims, such as claims that a product may heal, mitigate, cure or prevent an illness, disease or malady, trigger drug status. In December 2006, the Dietary Supplement and Nonprescription Drug Consumer Protection Act was passed, which further revised the provisions of theFederal Food, Drug and Cosmetic Act. Under the act, manufacturers, packers or distributors whose name appears on the product label of a dietarysupplement or nonprescription drug are required to include contact information on the product label for consumers to use in reporting adverse eventsassociated with the product’s use and for us to notify the FDA of any serious adverse event report within 15 business days of receiving such report. Eventsreported to the FDA would not be considered an admission from a company that its product caused or contributed to the reported event. We arecommitted to meeting or exceeding the requirements of this Act. We are also subject to a variety of other regulations in the U.S., including those relating to bioterrorism, taxes, labor and employment, import and export,the environment and intellectual property. All of these regulations require significant financial and operational resources to ensure compliance, and wecannot assure you that we will always be in compliance despite our best efforts to do so. Our operations outside the U.S. are similarly regulated by various agencies and entities in the countries in which we operate and in which our products aresold. The regulations of these countries may conflict with those in the U.S. and may vary from country to country. The sale of our products in certainEuropean countries is subject to the rules and regulations of the European Union, which may be interpreted differently among the countries within theEuropean Union. In other markets outside the U.S., we may be required to obtain approvals, licenses or certifications from a country’s ministry of health orcomparable agency before we begin operations or the marketing of products in that country. Approvals or licenses may be conditioned on reformulationof our products for a particular market or may be unavailable for certain products or product ingredients. These regulations may limit our ability to entercertain markets outside the U.S. As with the costs of regulatory compliance in the U.S., foreign regulations require significant financial and operationalresources to ensure compliance, and we cannot assure you that we will always be in compliance despite our best efforts to do so. Our failure to maintainregulatory compliance within and outside the U.S. could impact our ability to sell our products and thus, materially impact our financial position andresults of operations. 7 Intellectual Property Trademarks. We have developed and use registered trademarks in our business, particularly relating to corporate, brand and product names. We own 30trademark registrations, including thirteen incontestable registrations, in the U.S. Federal registration of a trademark affords the owner nationwideexclusive trademark rights in the registered mark and the ability to prevent others from using the same or similar marks. However, to the extent a commonlaw user has made prior use of the mark in connection with similar goods or services in a particular geographic area, the nationwide rights conferred byfederal registration would be subject to that user’s rights in that geographic area. We have sixteen foreign trademark registrations. One trademark is registered with the Australian Patent and Trademark Office, two with the CanadianPatent and Trademark Office, two with the Chinese Patent and Trademark Office, two with the Trademarks and Designs Registration Office of theEuropean Union, two with the Hong Kong Patent and Trademark Office, three with the Japanese Patent and Trademark Office, two with the South KoreanPatent and Trademark Office, and two with the Swiss Patent and Trademark Office. We currently have no additional trademark applications pending inany other jurisdictions outside of the United States. We also claim common law ownership and protection of certain unregistered trademarks and servicemarks. Trademark rights are based on use of a mark. Common law use of a mark offers protection of a mark within the particular geographic area in whichit is used. We believe our registered and unregistered trademarks constitute valuable assets, adding to the recognition of our products and services in themarketplace. These and other proprietary rights have been and will continue to be important in enabling us to compete; however, we cannot assure youthat our future trademark applications will be granted or our current trademarks will be maintained. Trade Secrets. We own certain intellectual property, including trade secrets, which we seek to protect, in part, through confidentiality agreements withemployees and other parties. We regard our proprietary technology, trade secrets, trademarks and similar intellectual property as critical to our success,and we rely on a combination of trade secrets, contract, patent, copyright and trademark law to establish and protect the rights in our products andtechnology. The laws of certain foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S. Patents and Patent Licenses. We currently own fourteen U.S. patents and twenty corresponding patents registered in countries throughout North America,Europe and Asia. We also have pending applications in several countries. All of these patents and patent rights relate to the ingredient known as beta-alanine. Certain of these patents were assigned to NAI and we make certain ongoing royalty payments to the prior owners of the patents. We also licenserights to certain uses that are covered by the patents to the prior owners. The royalty payments and license continue until the expiration of the patents.From March 2009 through March 2015, we had an agreement with CSI that allowed CSI to grant a license of certain of our patent and trademark rights tocustomers of CSI who purchased beta-alanine from CSI. The license agreement allowed CSI’s customers to manufacture, offer for sale and/or sell productsincorporating, using or made in accordance with our patent rights and one or more of our trademarks. We received royalties from CSI that varied based onthe quantity and source of beta-alanine sold by CSI. Our agreement with CSI expired March 31, 2015 and effective April 1, 2015, we began directlyselling beta-alanine, and licensing our related patent and trademark rights, in order to take advantage of strategic opportunities, including opportunitiesto provide additional contract manufacturing services, and to increase our top-line revenue and profit profile. Twenty-five of our patents expire in 2017and nine patents expire in 2026. Beginning in fiscal 2009, the licensing, raw material sales, and revenues we have received associated with the sale and license of beta-alanine under theCarnoSyn® trade name have grown steadily from $515,000 in fiscal 2009 to $9.1 million in fiscal 2015. During fiscal 2015, our revenues included $4.7million of royalties received related to our agreement with CSI and $4.4 million related to the direct sale of beta-alanine raw materials. We anticipate ourlicensing and related revenue to expand further during fiscal 2016 as a result of taking over the direct distribution and sale of beta-alanine. We incurredintellectual property litigation and patent compliance expenses of approximately $1.6 million during fiscal 2015 in connection with our efforts to protectour proprietary rights and patent estate. We expect to continue to incur additional litigation expenses during fiscal 2016, however, we expect theseexpenses to be flat or slightly lower than fiscal 2015. Other Intellectual Property. We had license agreements with Dr. Reginald B. Cherry and his ministries pursuant to which we had the right to use thenames, likenesses, styles, personas and certain other intellectual property and attributes of Dr. Cherry to market and distribute nutritional and dietarysupplements and related products and materials, including the Pathway to Healing product line. The license agreements required the payment of certainroyalties based on net sales. Due to the steady decline in sales of this product line over the prior several years, we decided to discontinue the product line.The termination of the related license agreement was effective as of September 15, 2014. All termination activities related to the Pathway to Healingproduct line were substantially completed by December 31, 2014. Employees As of June 30, 2015, we employed 132 full-time employees in the U.S., two of whom held executive management positions. Of the remaining full-timeemployees, 27 were employed in research, laboratory and quality control, 13 in sales and marketing, and 90 in manufacturing and administration. Fromtime to time we use temporary personnel to help us meet short-term operating requirements. These positions typically are in manufacturing andmanufacturing support. As of June 30, 2015, we had one temporary person. 8®® As of June 30, 2015, NAIE employed an additional 34 full-time employees. Most of these positions were in the areas of manufacturing and manufacturingsupport. Our employees are not represented by a collective bargaining agreement and we have not experienced any work stoppages as a result of labor disputes.We believe our relationship with our employees is good. Seasonality Although we believe there is no material impact on our business or results of operations from seasonal factors, we have experienced and expect tocontinue to experience variations in quarterly net sales due to the timing of private-label contract manufacturing orders. Financial Information about Our Business Segments and Geographic Areas Our operations are comprised of three reportable segments: •Private-label contract manufacturing, in which we primarily provide manufacturing services to companies that market and distributenutritional supplements and other health care products. •Royalty, licensing , and raw material sales associated with the sale and license of beta-alanine under our CarnoSyn® trade name. •Branded products, in which we marketed and distributed branded nutritional supplements through direct-to-consumer marketing programs,and under which we developed, manufactured and marketed our own products and worked with a nationally recognized physician to developbrand name products that reflected his individual approach to restoring, maintaining or improving health. These products were sold throughprint media and the internet. We discontinued the sole product line sold under this segment and terminated the related license agreementeffective as of September 15, 2014. All termination activities related to the product line were substantially completed by December 31, 2014.We did not change the financial presentation in this report to reflect the branded products segment as “Discontinued Operations” as the winddown of this product line did not meet the criteria for discontinued operations presentation as prescribed by applicable accountingregulations (ASC 205-20). Our private-label contract manufacturing products are sold both in the U.S. and in markets outside the U.S., including Europe, Canada, Mexico, Australia,South Africa and Asia. The primary market outside the U.S. is Europe. Our patent and trademark licensing activities are primarily based in the U.S. For additional financial information, including financial information about our business segment and geographic areas, please see the consolidatedfinancial statements and accompanying notes to the consolidated financial statements included under Item 8 of this report. Our activities in markets outside the U.S. are subject to political, economic and other risks in the countries in which our products are sold and in which weoperate. For more information about these and other risks, please see Item 1A in this report. 9 ITEM 1A.RISK FACTORS You should carefully review and consider the risks described below, as well as the other information in this report and in other reports and documentswe file with the SEC when evaluating our business and future prospects. The risks and uncertainties described below are not the only ones we face.Additional risks and uncertainties, not presently known to us, or that we currently see as immaterial, may also occur. If any of the following risks or anyadditional risks and uncertainties actually occur or become material, our business, financial condition and results of operations could be seriouslyharmed. In that event, the market price of our common stock could decline and you could lose all or a portion of the value of your investment in ourcommon stock. You should not draw any inference as to the magnitude of any particular risk from its position in the following discussion. Because we derive a significant portion of our revenues from a limited number of customers, our revenues would be adversely affected by the loss of amajor customer or a significant change in its business, personnel or the timing or amount of its orders. We have in the past and expect to continue to derive a significant portion of our revenues from a relatively limited number of customers. During the fiscalyear ended June 30, 2015, sales to one customer, The Juice Plus+ Company, were approximately 43% of our total private-label contract manufacturingnet sales. Our prior written supply agreement with The Juice Plus+ Company expired on April 1, 2014. We continue to develop, manufacture, produce andpackage certain nutritional products for The Juice Plus+ Company based on monthly purchase orders submitted to us by The Juice Plus+ Company. Oursecond largest customer was Mannatech, Incorporated, which accounted for approximately 16% of our private-label contract manufacturing net salesduring fiscal 2015. Our third largest customer was CIT, which accounted for approximately 12% of our private-label contract manufacturing net salesduring fiscal 2015. The loss of one of these customers or other major customers, a significant decrease in sales to these customers, or a significant changein their business or personnel, would materially affect our financial condition and results of operations. Furthermore, the timing of our customers’ orders isimpacted by, among others, their marketing programs, customer demand, supply chain management, entry into new markets and new productintroductions, all of which are outside of our control. All of these attributes have had and will have a significant impact on our business. Our future growth and stability depends, in part, on our ability to diversify our sales. Our efforts to establish new sales from existing customers and newcustomers could require significant initial investments, which may or may not result in higher sales and improved financial results. Our business strategy depends in large part on our ability to develop new product sales from current and new customer relationships. These activitiesoften require a significant up-front investment including, among others, customized formulations, regulatory compliance, product registrations, packagedesign, product testing, pilot production runs, and the build-up of initial inventory. We may experience significant delays from the time we increase ouroperating expenses and make investments in inventory until the time we generate net sales from new products or customers, and it is possible that we maynever generate any revenue from new products or customers after incurring such expenditures. If we incur significant expenses and investments ininventory that we are not able to recover, and we are not able to compensate for those expenses, our operating results could be adversely affected. We may incur, and have incurred, significant costs defending our intellectual property. We may also be unable to protect our intellectual propertyrights or may inadvertently infringe on the intellectual property rights of others. We possess and may possess in the future certain proprietary technology, trade secrets, trademarks, trade names, licenses, patents and similar intellectualproperty. We may continue to incur significant patent and trademark litigation costs associated with defending this intellectual property. During fiscal2015, we incurred approximately $1.6 million in patent litigation and prosecution expense and expect litigation expenses during fiscal 2016 to be flat orslightly lower than fiscal 2015, in connection with our efforts to protect our proprietary rights and patent estate. These efforts are described in more detailunder Item 3 of this report. There is no assurance we will be able to protect our intellectual property adequately or that our intellectual property rights willbe upheld. If pending legal proceedings to invalidate our patent rights are successful, they could have a material adverse impact upon our financialcondition and results of operations. Furthermore, the laws of certain foreign countries may not protect our intellectual property rights to the same extentas the laws of the U.S. Additional litigation in the U.S. or abroad may be necessary to enforce our intellectual property rights, to determine the validityand scope of the proprietary rights of others or to defend against claims of infringement. This litigation, even if successful, could result in substantialadditional costs and diversion of resources and could have a material adverse effect on our business, results of operations and financial condition. If suchinfringement claims are asserted against us, we may seek to obtain a license under the third party’s intellectual property rights. There can be no assurance,however, that a license would be available on terms acceptable or favorable to us, if at all. Our operating results will vary. We have experienced a decline in net sales and incurred losses in past years and there is no guarantee that our saleswill improve or that we will earn a profit in future years. Fluctuations in our operating results may adversely affect the share price of our commonstock. Our net sales increased during fiscal 2015 as compared to fiscal 2014 but there can be no assurance that our net sales will continue to improve in the nearterm, or that we will earn a profit in any given year. We have experienced net losses in the past and may incur losses in the future. Our operating resultswill fluctuate from year to year and/or from quarter to quarter due to various factors including differences related to the timing of revenues and expensesfor financial reporting purposes and other factors described in this report. At times, these fluctuations may be significant. We anticipate generatingpositive net income in fiscal 2016, although there is no assurance we will be able to do so. Fluctuations in our operating results may adversely affect theshare price of our common stock. 10 Our products and manufacturing activities are subject to extensive government regulation, which could limit or prevent the sale of our products insome markets and could increase our costs. The manufacturing, packaging, labeling, advertising, promotion, distribution, and sale of our products are subject to regulation by numerous national andlocal governmental agencies in the U.S. and in other countries. For example, we are required to comply with certain GMP and incur costs associated withthe audit and certification of our facilities. Failure to comply with governmental regulations may result in, among other things, injunctions, productwithdrawals, recalls, product seizures, fines, and criminal prosecutions. Any action of this type by a governmental agency could materially adverselyaffect our ability to successfully market our products. In addition, if the governmental agency has reason to believe the law is being violated (for example,if it believes we do not possess adequate substantiation for product claims), it can initiate an enforcement action. Governmental agency enforcementcould result in orders requiring, among other things, limits on advertising, consumer redress, divestiture of assets, rescission of contracts, and such otherrelief as may be deemed necessary. Violation of these orders could result in substantial financial or other penalties. Any action by the governmentalagency could materially adversely affect our ability and our customers’ ability to successfully market those products. In markets outside the U.S., before commencing operations or marketing our products, we may be required to obtain approvals, licenses, or certificationsfrom a country’s ministry of health or comparable agency. Approvals or licensing may be conditioned on reformulation of products or may be unavailablewith respect to certain products or product ingredients. We must also comply with product labeling and packaging regulations that vary from country tocountry. Furthermore, the regulations of these countries may conflict with those in the U.S. and with each other. The sale of our products in certainEuropean countries is subject to the rules and regulations of the European Union, which may be interpreted differently among the countries within theEuropean Union. The cost of complying with these various and potentially conflicting regulations can be substantial and can adversely affect our resultsof operations. We cannot predict the nature of any future laws, regulations, interpretations, or applications, nor can we determine what effect additional governmentalregulations, when and if adopted, would have on our business. They could include requirements for the reformulation of certain products to meet newstandards, the recall or discontinuance of certain products, additional compliance costs or record keeping requirements, expanded or different labeling,and additional scientific substantiation. Any or all of these requirements could have a material adverse effect on our operations. A significant or prolonged economic downturn, such as the one the global economy has recently experienced, could have, and recently has had, amaterial adverse effect on our results of operations. Our results of operations are affected by the level of business activity of our customers and licensees, which in turn is affected by the level of consumerdemand for their products. A significant or prolonged economic downturn may adversely affect the disposable income of many consumers and may lowerdemand for the products we produce for our private-label contract manufacturing customers and products sold or manufactured by others using ourlicensed patent rights. During fiscal 2011, the decline in economic conditions in the U.S. and the various foreign markets in which our customers operatenegatively impacted our customers’ businesses and our operations. A renewed or further decline in consumer demand and the level of business activity ofour customers due to economic conditions could have a material adverse effect on our revenues and profit margins. The failure of our suppliers to supply quality materials in sufficient quantities, at a favorable price, and in a timely fashion could adversely affect theresults of our operations. We buy our raw materials from a limited number of suppliers. During fiscal 2015 and fiscal 2014, we did not have any suppliers that represented morethan 10% of our raw material purchases. However, during fiscal 2011, approximately 20% of our total raw material purchases were from two suppliers. Theloss of any of our major suppliers or of a supplier that provides any hard to obtain materials could adversely affect our business operations. Although webelieve that we could establish alternate sources for most of our raw materials, any delay in locating and establishing relationships with other sourcescould result in product shortages, with a resulting loss of sales and customers. In certain situations we may be required to alter our products or tosubstitute different materials from alternative sources. We rely solely on two suppliers to process certain raw materials that we use in the product line of our largest customer. The loss of or unexpectedinterruption in this service would materially adversely affect our results of operations and financial condition. A shortage of raw materials or an unexpected interruption of supply could also result in higher prices for those materials. Since fiscal 2009, we haveexperienced increases in various raw material costs, transportation costs and the cost of petroleum based raw materials and packaging supplies used in ourbusiness. Increasing raw material and product cost pricing pressures have continued throughout fiscal 2015 as a result of limited supplies of variousingredients and the effects of higher labor and transportation costs. We expect these pressures to continue through fiscal 2016. Although we may be ableto raise our prices in response to significant increases in the cost of raw materials, we may not be able to raise prices sufficiently or quickly enough tooffset the negative effects of the cost increases on our results of operations or financial condition. 11 There can be no assurance that suppliers will provide the quality raw materials needed by us in the quantities requested or at a price we are willing to pay.Because we do not control the actual production of these raw materials, we are also subject to delays caused by interruption in production of materialsbased on conditions outside of our control, including weather, transportation interruptions, strikes, natural disasters, or other catastrophic events. In addition, our efforts to commercialize our patent estate and the revenues we receive from related supply agreements, are substantially dependent on theavailability of the raw material beta-alanine and sales of such raw material or products incorporating such raw material. The availability of beta-alanine,and thus sales of such raw material and products using such material, would be negatively impacted by any shortages, interruptions and similar risksdescribed above, which could in turn adversely affect the amount of revenue and product margin we earn from the sale of beta-alanine. In early March2011, the factory that produces the major supply of beta-alanine sold under our CarnoSyn® trade name was damaged as a result of the massive earthquakeoff the coast of Sendai, Japan resulting in a significant beta-alanine supply interruption. As a result, our fiscal 2011 fourth quarter beta-alanine licensingrevenue declined 85% from the preceding quarter ended March 31, 2011. While this Japanese factory resumed operations in June 2011 and is producingbeta-alanine at historical levels, there is no assurance this or any other facility will not incur future production interruptions as a result of additionalenvironmental or other causes outside our control. Our industry is highly competitive and we may be unable to compete effectively. Increased competition could adversely affect our financial condition. The market for our products, and those of our customers, is highly competitive. Many of our competitors are substantially larger and have greaterfinancial resources and broader name recognition than we do. Our larger competitors may be able to devote greater resources to research anddevelopment, marketing and other activities that could provide them with a competitive advantage. Our market has relatively low entry barriers and ishighly sensitive to the introduction of new products that may rapidly capture a significant market share. Increased competition could result in pricereductions, reduced gross profit margins or loss of market share, any of which could have a material adverse effect on our financial condition and resultsof operations. There can be no assurance that we will be able to compete in this intensely competitive environment. We could be exposed to product liability claims or other litigation, which may be costly and could materially adversely affect our operations. We could face financial liability due to product liability claims if the use of our products results in significant loss or injury. Additionally, themanufacture and sale of our products involves the risk of injury to consumers from tampering by unauthorized third parties or product contamination. Wecould be exposed to future product liability claims that, among others: our products contain contaminants; we provide consumers with inadequateinstructions about product use; or we provide inadequate warning about side effects or interactions of our products with other substances. Even if we wereto prevail in any such claims, the cost of litigation and settlement could be significant. We maintain product liability insurance coverage, including primary product liability and excess liability coverage. The cost of this coverage hasincreased dramatically in recent years, while the availability of adequate insurance coverage has decreased. While we expect to be able to continue ourproduct liability insurance, there can be no assurance we will in fact be able to continue such insurance coverage, our insurance will be adequate to coverany liability we may incur, or our insurance will continue to be available at an economically reasonable cost. Additionally, it is possible that one or more of our insurers could exclude from our coverage certain ingredients used in our products. In such event, wemay have to stop using those ingredients or rely on indemnification or similar arrangements with our customers who wish to continue to include thoseingredients in their products. A substantial increase in our product liability risk or the loss of customers or product lines could have a material adverseeffect on our results of operations and financial condition. 12 If we or our private-label contract manufacturing customers expand into additional markets outside the U.S. or our or their sales in markets outside theU.S. increase, our business would become increasingly subject to political, economic, regulatory and other risks in those markets, which couldadversely affect our business. Our future growth may depend, in part, on our ability and the ability of our private-label contract manufacturing customers to expand into additionalmarkets outside the U.S. or to improve sales in markets outside the U.S. There can be no assurance that we or our customers will be able to expand inexisting markets outside the U.S. or enter new markets on a timely basis, or that new markets outside the U.S. will be profitable. There are significantregulatory and legal barriers in markets outside the U.S. that must be overcome to operate in such markets. We will be subject to the burden of complyingwith a wide variety of national and local laws, including multiple and possibly overlapping and conflicting laws. We also may experience difficultiesadapting to new cultures, business customs and legal systems. Our sales and operations outside the U.S. are subject to political, economic and socialuncertainties including, among others: •changes and limits in import and export controls; •increases in custom duties and tariffs; •changes in government regulations and laws; •coordination of geographically separated locations; •absence in some jurisdictions of effective laws to protect our intellectual property rights; •changes in currency exchange rates; •economic and political instability; and •currency transfer and other restrictions and regulations that may limit our ability to sell certain products or repatriate profits to the U.S. Any changes related to these and other factors could adversely affect our business, profitability and growth prospects. If we or our customers expand intoadditional markets outside the U.S. or improve sales in markets outside the U.S., these and other risks associated with operations outside the U.S. arelikely to increase. Our business is subject to the effects of adverse publicity, which could negatively affect our sales and revenues. Our business can be affected by adverse publicity or negative public perception about our industry, our competitors, our customers, or our businessgenerally. This adverse publicity may include publicity about the nutritional supplements industry generally, the efficacy, safety and quality ofnutritional supplements and other health care products or ingredients in general or our products or ingredients specifically, and regulatory investigations,regardless of whether these investigations involve us or the business practices or products of our competitors, or our customers. Any adverse publicity ornegative public perception will likely have a material adverse effect on our business, financial condition and results of operations. Our business, financialcondition and results of operations also could be adversely affected if any of our products or any similar products distributed by other companies arealleged to be or are proved to be harmful to consumers or to have unanticipated health consequences. We may not be able to raise additional capital or obtain additional financing if needed. Our cash from operations may not be sufficient to meet our working capital needs and/or to implement our business strategies. Additionally, there can beno assurance that our existing line of credit will be sufficient to meet our working capital needs. Furthermore, if we fail to maintain certain loan covenantswe may no longer have access to the credit line. Our credit line terminates in November 2016 and there is no guarantee that we will be able to extend orrenew this credit line on favorable terms or at all. We may consider issuing additional debt or equity securities in the future to fund potential acquisitions or investments, to refinance existing debt, or forgeneral corporate purposes. If we issue equity or convertible debt securities to raise additional funds, our existing stockholders may experience dilution,and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we incur additional debt,it may increase our leverage relative to our earnings or to our equity capitalization, requiring us to pay additional interest expenses and potentially lowerour credit ratings. We may not be able to market such issuances on favorable terms, or at all, in which case, we may not be able to develop or enhance ourproducts, execute our business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated customer requirements. At any given time it may be difficult for us to raise capital due to a variety of factors, some of which may be outside a our control, including a tighteningof credit markets, overall poor performance of stock markets, and/or an economic slowdown in the U.S. or other countries. Thus, there is no assurance wewould be able to raise additional capital if needed. To the extent we do raise additional capital the ownership position of existing stockholders would bediluted. Similarly, there can be no assurance that additional financing will be available if needed or that it will be available on favorable terms. Under theterms of our credit facility, there are limits on our ability to create, incur or assume additional indebtedness without the approval of our lender. Our inability to raise additional capital or to obtain additional financing if needed could negatively affect our ability to implement our businessstrategies and meet our goals. This, in turn, could adversely affect our financial condition and results of operations. If we are unable to attract and retain qualified management personnel, our business will suffer. Our executive officers and other management personnel are primarily responsible for our day-to-day operations. We believe our success depends largelyon our ability to attract, maintain and motivate highly qualified management personnel. Competition for qualified individuals can be intense, and wemay not be able to hire additional qualified personnel in a timely manner or on terms that would not substantially increase our costs. Our inability toretain a skilled professional management team could adversely affect our ability to successfully execute our business strategies and achieve our goals. 13 Our manufacturing and third party fulfillment activities are subject to certain risks. We manufacture the vast majority of our products at our manufacturing facility in California. As a result, we are dependent on the uninterrupted andefficient operation of this facility. Our manufacturing operations are subject to power failures, blackouts, the breakdown, failure or substandardperformance of our leased facilities, our equipment, the improper installation or operation of equipment, natural or other disasters, and the need to complywith the requirements or directives of governmental agencies, including the FDA. In addition, we may in the future determine to expand or relocate ourfacilities, which may result in slowdowns or delays in our operations. While we have implemented and are evaluating various emergency, contingencyand disaster recovery plans and maintain business interruption insurance, there can be no assurance that the occurrence of these or any other operationalproblems at our facilities in California or at NAIE’s facility in Switzerland would not have a material adverse effect on our business, financial conditionand results of operations. Furthermore, there can be no assurance our contingency plans will prove to be adequate or successful if needed or our insurancewill continue to be available at a reasonable cost or, if available, will be adequate to cover any losses that we may incur from an interruption in ourmanufacturing and distribution operations. We outsource our beta-alanine fulfillment and distribution activities. The operation of the third party service provider’s facilities is subject to theinterruption and similar risks described above for our facilities and there can be no assurance that these interruptions or any other operational problem atsuch third party’s facilities would not have a material adverse effect on our business, financial condition and results of operations. We may, in the future, pursue acquisitions of other companies that, if not successful, could adversely affect our business, financial condition and resultsof operations. In the future, we may pursue acquisitions of companies that we believe could complement or expand our business, augment our market coverage, provideus with important relationships or otherwise offer us growth opportunities. Acquisitions involve numerous risks, including the following: •potential difficulties related to integrating the products, personnel and operations of the acquired company; •failure to operate as a combined organization utilizing common information and communication systems, operating procedures, financialcontrols and human resources practices; •diverting management’s attention from the normal daily operations of the business; •entering markets in which we have no or limited prior direct experience and where competitors in such markets have stronger marketpositions; •potential loss of key employees of the acquired company; •potential inability to achieve cost savings and other potential benefits expected from the acquisition; •an uncertain sales and earnings stream from the acquired company; and •potential impairment charges, which may be significant, against goodwill and purchased intangible assets acquired in the acquisition due tochanges in conditions and circumstances that occur after the acquisition, many of which may be outside of our control. There can be no assurance that acquisitions that we may pursue will be successful. If we pursue an acquisition but are not successful in completing it, or ifwe complete an acquisition but are not successful in integrating the acquired company’s employees, products or operations successfully, our business,financial position or results of operations could be adversely affected. Collectively, our officers and directors own a significant amount of our common stock, giving them influence over corporate transactions and othermatters and potentially limiting the influence of other stockholders on important policy and management issues. Our officers and directors, together with their families and affiliates, beneficially owned approximately 21% of our outstanding shares of common stock asof June 30, 2015, including approximately 17% of our outstanding shares of common stock beneficially owned by Mark LeDoux, our Chief ExecutiveOfficer and the Chairman of the Board, and his family and affiliates. As a result, our officers and directors, and in particular Mr. LeDoux, could influencesuch business matters as the election of directors and approval of significant corporate transactions. 14 Various transactions could be delayed, deferred or prevented without the approval of stockholders, including the following: •transactions resulting in a change in control; •mergers and acquisitions; •tender offers; •election of directors; and •proxy contests. There can be no assurance that conflicts of interest will not arise with respect to the officers and directors who own shares of our common stock or thatconflicts will be resolved in a manner favorable to us or our other stockholders. Business interruptions could limit our ability to operate our business. Our operations, including those of our suppliers, are vulnerable to damage or interruption from computer viruses, human error, natural disasters,telecommunications failures, intentional acts of vandalism, and similar events. While we have established a formal disaster recovery plan, our back-upoperations and our business interruption insurance may not be adequate to compensate us for losses that occur. A significant business interruption couldresult in losses or damages incurred by us and require us to cease or curtail our operations. If certain provisions of our Certificate of Incorporation, Bylaws and Delaware law are triggered, the future price investors might be willing to pay forour common stock could be limited. Certain provisions in our Certificate of Incorporation, Bylaws and Delaware corporate law may discourage unsolicited proposals to acquire our business,even if the proposal would benefit our stockholders. Those provisions include one that authorizes our Board of Directors, without stockholder approval,to issue up to 500,000 shares of preferred stock having such rights, preferences, and privileges, including voting rights, as the Board of Directorsdesignates. The rights of our common stockholders will be subject to, and may be adversely affected by, the rights of holders of any preferred stock thatmay be issued in the future. Any or all of these provisions could delay, deter or prevent a takeover of our company and could limit the price investors arewilling to pay for our common stock. Our stock price could fluctuate significantly. Stock prices in general have been historically volatile and ours is no different. The trading price of our stock may fluctuate in response to the following,as well as other, factors: •broad market fluctuations and general economic and/or political conditions; •fluctuations in our financial results; •relatively low trading volumes; •future offerings of our common stock or other securities; •the general condition of the nutritional supplement product industry; •increased competition; •regulatory action; •adverse publicity; •manipulative or illegal trading practices by third parties; and •product and other public announcements. The stock market has historically experienced significant price and volume fluctuations. There can be no assurance that an active market in our stock willcontinue to exist or that the price of our common stock will not decline. Our future operating results may be below the expectations of securities analystsand investors. If this were to occur, the price of our common stock would likely decline, perhaps substantially. From time to time our shares may be listed for trading on one or more foreign exchanges, with or without our prior knowledge or consent. Certain foreignexchanges may have less stringent listing requirements, rules and enforcement procedures than the Nasdaq Global Market or other markets in the U.S.,which may increase the potential for manipulative trading practices to occur. These practices, or the perception by investors that such practices couldoccur, may increase the volatility of our stock price or result in a decline in our stock price, which in some cases could be significant. 15 ITEM 2.PROPERTIES This table summarizes our facilities as of June 30, 2015. We believe our facilities are adequate to meet our operating requirements for the foreseeablefuture. Location Nature of Use SquareFeet How Held LeaseExpirationDate San Marcos, CA USA NAI corporate headquarters 29,500 Owned N/A Vista, CA USA Manufacturing, warehousing, packaging and distribution 162,000 Leased March 2024 Manno, Switzerland Manufacturing, warehousing, packaging and distribution 87,763 Leased June 2019 (1)This facility is used by NAI primarily for its private-label contract manufacturing segment. (2)This facility is used by NAIE, our wholly owned Swiss subsidiary, in connection with our private-label contract manufacturing segment. (3)We use approximately 93,000 square feet for production, 60,000 square feet for warehousing and 9,000 square feet for administrative functions. ITEM 3.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. Thesematters may relate to intellectual property, product liability, employment, tax, regulation, contract or other matters. The resolution of these matters as theyarise will be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial andmanagerial resources. While unfavorable outcomes are possible, based on available information, we generally do not believe the resolution of thesematters will result in a material adverse effect on our business, consolidated financial condition, or results of operations. However, a settlement paymentor unfavorable outcome could adversely impact our results of operations. Our evaluation of the likely impact of these actions could change in the futureand we could have unfavorable outcomes we do not expect. As of September 18, 2015, except as described below, neither NAI nor its subsidiary were a party to any material pending legal proceeding nor was any ofour property the subject of any material pending legal proceeding. On December 21, 2011, NAI filed a lawsuit in the U.S. District Court for the Southern District of Texas, Houston Division, alleging infringement byWoodbolt Distribution, LLC, also known as Cellucor (Woodbolt), Vitaquest International, Inc., d/b/a Garden State Nutritionals (Garden State) and F.H.G.Corporation, d/b/a Integrity Nutraceuticals (Integrity), of NAI’s ’381 patent. The complaint alleges that Woodbolt sells nutritional supplements,including supplements containing beta-alanine such as C4 Extreme™, M5 Extreme™, and N-Zero Extreme™, that infringe ‘381 patent. Woodbolt, inturn, filed a complaint seeking a declaratory judgment of non-infringement and invalidity of the ’381 patent in the U.S. District Court for the District ofDelaware. On February 17, 2012, Woodbolt filed a First Amended Complaint, realleging its original claims against the Company and asserting newclaims of violation of the Sherman Antitrust Act (15 U.S.C. § 2) and Unfair Competition. The Company reasserted the arguments in its prior motion todismiss and moved to dismiss the new claims asserted by Woodbolt. On January 23, 2013, the Delaware Court granted the Company’s motion to dismissWoodbolt’s case. On June 5, 2012, the Court in the above-referenced Texas case consolidated the pending suit with a second patent infringement casefiled against Woodbolt by the Company on May 3, 2012, asserting infringement of its ‘422 patent. On November 9, 2012, NAI filed a supplementalcomplaint adding allegations of infringement of Woodbolt’s Cellucor Cor –Performance ®-BCAA™ and Cellucor Cor –Performance™ Creatineproducts. On June 14, 2013, NAI filed a third patent infringement lawsuit in the U.S. District Court for the Southern District of Texas, Houston Division,against Woodbolt, BodyBuilding.com and GNC Corporation alleging infringement of the ‘381 and ‘422 patents by Woodbolt’s Neon Sport Volt™product. Woodbolt asserted the same defenses and counterclaims as set forth in the earlier lawsuits. On June 24, 2013, the Court consolidated the casewith the earlier-filed lawsuits identified above. On June 25, 2013, Woodbolt filed a lawsuit in the U.S. District Court for the Southern District of Texas,Houston Division, against a newly-issued NAI U.S. patent no. 8,470,865, asserting declaratory judgment claims of non-infringement, invalidity andunenforceability. On July 1, 2013, Woodbolt’s lawsuit was consolidated with the three pending lawsuits filed by NAI. On July 24, 2013, NAI filed itsAnswer and Amended Counterclaims against Woodbolt alleging infringement of the ‘865 patent by the products accused in the pending cases previouslyfiled by NAI. On August 14, 2013, Woodbolt filed a counterclaim to NAI’s counterclaim asserting violation of the Sherman Antitrust Act (15 U.S.C. § 2)and Unfair Competition. On September 4, 2013, NAI moved to have Woodbolt’s counterclaims dismissed from the case. All of the consolidated casesremain pending. Separately, Woodbolt also requested inter partes re-examination of the ’381 and ’422 patents by the USPTO. On July 26, 2012, theUSPTO accepted the request to re-exam the ’381 patent. On August 17, 2012, the USPTO accepted the request to re-exam the ’422 patent. On December 6,2013, the USPTO rejected the claims of the ‘381 patent and issued a right of appeal notice. On January 6, 2014, NAI filed its notice of appeal. On January13, 2015, the USPTO issued a notification of appeal hearing in the '381 reexamination, which took place on April 15, 2015, before the Patent Trial andAppeal Board (PTAB) at the USPTO. On July 17, 2015, the PTAB issued its decision affirming the USPTO's prior rejection of the '381 patent claims. OnAugust 13, 2015, the Company filed a Request for Rehearing regarding the PTAB's decision. The request is currently pending. On August 8, 2014, theUSPTO rejected the claims of the ‘422 patent and issued a right of appeal notice. On September 8, 2014, NAI filed its notice of appeal. The parties havefiled briefs with the USPTO and the ‘422 reexamination is pending. 16(1),(3) (2) Although we believe the above litigation matters are supported by valid claims, there is no assurance NAI will prevail in these litigation matters or insimilar proceedings it may initiate or that litigation expenses will be as anticipated ITEM 4.MINE SAFETY DISCLOSURES Not applicable. PART II ITEM 5.MARKET FOR OUR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES Market Information Our common stock trades on the Nasdaq Global Market under the symbol “NAII.” Below are the high and low sales prices of our common stock asreported on the Nasdaq Global Market for each quarter of the fiscal years ended June 30, 2015 and 2014: Fiscal 2015 Fiscal 2014 High Low High Low First Quarter $6.70 $4.95 $5.90 $4.37 Second Quarter $6.63 $5.00 $6.35 $4.42 Third Quarter $5.72 $5.02 $5.93 $4.90 Fourth Quarter $5.88 $5.31 $5.98 $5.01 Holders As of September 16, 2015, there were approximately 236 stockholders of record of our common stock. On that same date, the last sales price of ourcommon stock as reported on Nasdaq was $5.91 per share. Dividends We have never paid a dividend on our common stock and we do not intend to pay a dividend in the foreseeable future. Our current policy is to retain allearnings to provide funds for operations and future growth. Additionally, under the terms of our credit facility, we are precluded from paying a dividendwhile such facility is in place. Recent Sales of Unregistered Securities During the fiscal year ended June 30, 2015, we did not sell or otherwise issue any unregistered securities. 17 Repurchases During the quarter ended June 30, 2015, we repurchased 184,582 shares of our common stock at a total cost of $1.0 million (including commissions andtransaction fees) as set forth below: Period (a)Total Number ofShares Purchased (b)Average PricePaid per Share (c)Total Number ofSharesPurchased as PartofPubliclyAnnouncedPlans orPrograms (d)Maximum Number (orApproximateDollar Value) ofShares that MayYet Be PurchasedUnder the Plansor Programs (as of June30, 2015) April 1, 2015 to April 30, 2015 55,592 $5.55 55,592 May 1, 2015 to May 31, 2015 72,123 $5.72 72,123 June 1, 2015 to June 30, 2015 56,867 $5.72 56,867 $1,518,000 Total 184,582 184,582 $1,518,000 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 authorizedrepurchase 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 repurchaseamount to $5 million. Equity Compensation Plan Information The following table sets forth information regarding outstanding options and shares reserved for future issuance under our existing equity compensationplans as of June 30, 2015: Plan Category Number ofShares to beIssued UponExercise ofOutstandingOptions,Warrants, andRights Weighted-Average ExercisePrice ofOutstandingOptions,Warrants, andRights Number ofShares ofOutstandingRestricted Stock Weighted-AverageExercise Price ofOutstandingRestricted Stock Number ofSharesRemainingAvailable forFuture IssuanceUnder EquityCompensationPlans (ExcludingShares Reflectedin Column (a)and (c)) (a) (b) (c) (d) (e) Equity compensation plans approved bystockholders 185,000 $6.74 204,134 N/A 541,241 Equity compensation plans not approved bystockholders N/A N/A N/A N/A N/A Total 185,000 $6.74 204,134 N/A 541,241 ITEM 6.SELECTED FINANCIAL DATA As a smaller reporting company, we are not required to provide Item 6 disclosure in this Annual Report. 181 2,3 ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion and analysis is intended to help you understand our financial condition and results of operations as of June 30, 2015 and 2014and for each of the last two fiscal years then ended. You should read the following discussion and analysis together with our audited consolidatedfinancial statements and the notes to the consolidated financial statements included under Item 8 in this report. Our future financial condition and resultsof operations will vary from our historical financial condition and results of operations described below based on a variety of factors. You shouldcarefully review the risks described under Item 1A and elsewhere in this report, which identify certain important factors that could cause our futurefinancial condition and results of operations to vary. Executive Overview The following overview does not address all of the matters covered in the other sections of this Item 7 or other items in this report or contain all of theinformation that may be important to our stockholders or the investing public. You should read this overview in conjunction with the other sections ofthis Item 7, the financial statements and accompanying notes, and this report. Our primary business activity is providing private label contract manufacturing services to companies that market and distribute vitamins, minerals, herbsand other nutritional supplements, as well as other health care products, to consumers both within and outside the U.S. Historically, our revenue has beenlargely 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 royalty, licensing revenue, and rawmaterial sales generated from our patent estate pursuant to license and supply agreements with third parties for the distribution and use of the ingredientknown as beta-alanine sold under our CarnoSyn® trade name. 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 tocontinue to seek to diversify our sales by developing relationships with additional, quality-oriented, private label contract manufacturing customers, andcommercializing our patent estate through sales of beta-alanine under our Carnosyn® trade name, contract manufacturing and license agreements. As partof this strategy, and in an effort to enhance shareholder value, we elected not to renew our Carnosyn® license and distribution agreement with CSI whichexpired March 31, 2015. Effective April 1, 2015, we began directly selling beta-alanine, and licensing the related patent and trademark rights, in order totake advantage of strategic opportunities, including possible additional contract manufacturing services, and to increase our top-line revenue and profitprofile. We have historically developed, manufactured and marketed our own branded products under the Pathway to Healing® product line, which was aimed atrestoring, maintaining and improving the health of the users. However, due to the steady decline in sales of this product line over the prior several years,we decided to discontinue the product line. All termination activities related to the Pathway to Healing® product line were substantially complete byDecember 31, 2014. We did not change the financial presentation in this report to reflect the branded products segment as “Discontinued Operations” asthe wind down of this product line did not meet the criteria for discontinued operations presentation as prescribed by applicable accounting regulations(ASC 205-20). During fiscal 2015, our net sales were 7.5% higher than in fiscal 2014. Private-label contract manufacturing sales increased 3.5% due primarily to the saleof higher volumes of existing products to existing customers and new product sales to new customers. Revenue concentration to our two largest private-label contract manufacturing customers as a percentage of our total private-label contract manufacturing sales increased to 59% in fiscal 2015 from 55%for fiscal 2014. We expect our contract manufacturing revenue concentration percentage for our two largest customers to decrease during fiscal 2016 withthe anticipated addition of new customer sales and increased sales to other existing customers. During fiscal 2015, CarnoSyn® beta-alanine royalty and licensing revenue increased 67.9% to $9.1 million as compared to $5.4 million for fiscal 2014.The increase in beta-alanine revenue was primarily due to the increase in raw material sales as a result of taking over the direct sale and distribution ofbeta-alanine raw materials effective April 1, 2015. We had raw material sales of beta-alanine totaling $4.4 million for fiscal 2015 and zero raw materialsales during fiscal 2014. During fiscal 2015, two new U.S. beta-alanine patents were issued to NAI. This new intellectual property related to a broad range of beta-alanine methodand composition claims which covered sustained release formulations for beta-alanine. As of June 30, 2015, NAI possessed twenty-six beta-alaninepatents and eight sustained release beta-alanine patents. To protect our CarnoSyn® business and its underlying patent estate, we incurred litigation and patent compliance expenses of approximately $1.6million during fiscal 2015 and $2.2 million during fiscal 2014. We describe our efforts to protect our patent estate in more detail under Item 1 of Part II ofthis report. Our ability to maintain or further increase our beta-alanine royalty and licensing revenue will depend in large part on our ability to maintainour patent rights, the availability of the raw material beta-alanine when and in the amounts needed, the ability to expand distribution of beta-alanine tonew and existing customers, and the continued compliance by third parties with our patent and trademark rights. 19 Net sales from our branded products declined 39.8% in fiscal 2015 as compared to fiscal 2014 due to our product line discontinuation efforts describedabove. During fiscal 2016, we plan to continue our focus on: •Leveraging our state-of-the-art, certified facilities to increase the value of the goods and services we provide to our highly valued private-label contract manufacturing customers, and assist us in developing relationships with additional quality oriented customers; •Expanding the commercialization of our beta-alanine patent estate through raw material sales, 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 Our consolidated financial statements included under Item 8 in this report have been prepared in accordance with U.S. generally accepted accountingprinciples (GAAP). Our significant accounting policies are described in the notes to our consolidated financial statements. The preparation of financialstatements in accordance with GAAP requires that we make estimates and assumptions that affect the amounts reported in our financial statements andtheir accompanying notes. We have identified certain policies that we believe are important to the portrayal of our financial condition and results ofoperations. 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.An adverse effect on our financial condition, changes in financial condition, and results of operations could occur if circumstances change that alter thevarious assumptions or conditions used in such estimates or assumptions. Our critical accounting policies include those listed below. 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 ordeterminable; and 4) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product isrecognized 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 theseller, 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 sellerwould 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 economicsubstance apart from that provided by the seller; (e) the seller does not have significant obligations for future performance to directly bring about resale ofthe product by the buyer; and (f) the amount of future returns can be reasonably estimated. We recognize revenue upon determination that all criteria forrevenue recognition have been met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenuefrom 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 branded products. The estimated returnsare based on the trailing six months of private label contract manufacturing gross sales and our historical experience for both private label contractmanufacturing and branded product returns. However, the estimate for product returns does not reflect the impact of a potential large product recallresulting from product nonconformance or other factors as such events are not predictable nor is the related economic impact estimable. We followed the provisions of ASU No. 2009-13 for all multiple element agreements. Under this guidance, the delivered item(s) has value to the customeron a standalone basis and, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivereditem(s) is considered probable and substantially in our control. A delivered item is considered a separate unit of accounting when the delivered item has value to the partner on a standalone basis based on theconsideration of the relevant facts and circumstances for each arrangement. Arrangement consideration is allocated at the inception of the agreement toall identified units of accounting based on their relative selling price. The relative selling price for each deliverable is determined using vendor specificobjective evidence, or VSOE, of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence ofselling price exists, we use our best estimate of the selling price for the deliverable. The amount of allocable arrangement consideration is limited toamounts that are fixed or determinable. The consideration received is allocated among the separate units of accounting, and the applicable revenuerecognition criteria are applied to each of the separate units. Changes in the allocation of the sales price between delivered and undelivered elements canimpact revenue recognition but do not change the total revenue recognized under any agreement. If facts and circumstances dictate that a deliverable hasstandalone value from the undelivered items, the deliverable is identified as a separate unit of accounting and the amounts allocated to the deliverable arerecognized upon the delivery of the deliverable, assuming the other revenue recognition criteria have been met. However, if the amounts allocated to thedeliverable through the relative selling price allocation exceed the upfront fee, the amount recognized upon the delivery of the deliverable is limited tothe upfront fee received. If facts and circumstances dictate that the deliverable does not have standalone value, the transaction price, including anyupfront fee payments received, are allocated to the identified separate units of accounting and recognized as those items are delivered and accepted. 20 In addition, we enter into arrangements that provide for milestone payments upon contractually stated events. Under the milestone method, we recognizeconsideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if themilestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following three criteria: 1) The consideration iscommensurate with either the entity’s performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of aspecific outcome resulting from the entity’s performance to achieve the milestone, 2) The consideration relates solely to past performance, and 3) Theconsideration is reasonable relative to all of the deliverables and payment terms within the arrangement. A milestone is defined as an event (i) that canonly be achieved based in whole or in part on either our performance or on the occurrence of a specific outcome resulting from our performance, (ii) forwhich there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additionalpayments being due to us. We currently own certain U.S. patents, and each patent’s corresponding foreign patent applications. All of these patents and patent rights relate to theingredient known as beta-alanine marketed and sold under the CarnoSyn® trade name. Since March 2009, we have had an agreement with CompoundSolutions, Inc. (CSI) to grant a license to manufacture, offer for sale and/or sell products incorporating, using or made in accordance with our patent rightsto customers of CSI who purchase beta-alanine under the CarnoSyn® trade name from CSI. The most recent agreement additionally granted such a licenseto CSI. We received a fee from CSI that varied based on the quantity and source of beta-alanine sold by CSI. Our most recent agreement with CSI expiredon March 31, 2015. We elected not to renew our agreement with CSI and, effective April 1, 2015, we began directly selling beta-alanine, and licensingthe related patent and trademark rights, in order to take advantage of strategic opportunities, including opportunities to provide additional contractmanufacturing services, and to increase our top-line revenue and profit profile. We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of $9.1 million during fiscal2015 and $5.4 million during fiscal 2014. These royalty income and raw material sale amounts resulted in royalty expense paid to the original patentholders 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$806,000 during fiscal 2015 and $722,000 during fiscal 2014. Inventory Reserve We operate primarily as a private-label contract manufacturer and build products based upon anticipated demand or following receipt of customerspecific purchase orders. From time to time, we build inventory for private-label contract manufacturing customers under a specific purchase order withdelivery dates that may subsequently be rescheduled or canceled at the customer’s request. We value inventory at the lower of cost or market on an item-by-item basis and establish reserves equal to all or a portion of the related inventory to reflect situations in which the cost of the inventory is not expectedto be recovered. This requires us to make estimates regarding the market value of our inventory, including an assessment for excess and obsoleteinventory. Once we establish an inventory reserve amount in a fiscal period, the reduced inventory value is maintained until the inventory is sold orotherwise disposed. In evaluating whether inventory is stated at the lower of cost or market, management considers such factors as the amount ofinventory on hand, the estimated time required to sell such inventory, the remaining shelf life and efficacy, the foreseeable demand within a specifiedtime horizon and current and expected market conditions. Based on this evaluation, we record adjustments to cost of goods sold to adjust inventory to itsnet realizable value. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if futureeconomic conditions, customer demand or other factors differ from expectations. Accounting for Income Taxes We account for uncertain tax positions using the more-likely-than-not recognition threshold. Our practice is to recognize interest and/or penalties relatedto income tax matters in income tax expense. As of June 30, 2015 and June 30, 2014, we had not recorded any tax liabilities for uncertain tax positions. We estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax exposure, together withassessing temporary differences resulting from differing treatment of items, such as property and equipment depreciation, for tax and financial reportingpurposes. Actual income taxes could vary from these estimates due to future changes in income tax law or results from final tax examination reviews. We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be realized. We considerestimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If we determinethat it is more likely than not that we will not realize all or part of our deferred tax assets in the future, we will record an adjustment to the carrying valueof the deferred tax asset, which would be reflected as income tax expense. Conversely, if we determine we will realize a deferred tax asset, which currentlyhas a valuation allowance, we will reverse the valuation allowance, which would be reflected as an income tax benefit. 21 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 taxassets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods inwhich those temporary differences become deductible. We will continue to assess the need for a valuation allowance on the deferred tax assets byevaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in theincome statement for the period that the adjustment is determined to be required. During fiscal 2014, as a result of changes in California apportionmentrules and the state nexus study which was completed during the 3 quarter of fiscal 2014, we determined that $193,000 of the deferred tax asset forCalifornia net operating losses was not more likely than not to be realized. As a result, we have established a valuation allowance on our net deferred taxassets for this amount. We did not record any adjustment to the deferred tax asset valuation allowance during fiscal 2015. We have not recorded U.S. income tax expense for NAIE’s retained earnings that we have declared as indefinitely reinvested offshore, thus reducing ouroverall income tax expense. The earnings designated as indefinitely reinvested in NAIE are based on the actual deployment of such earnings in NAIE’sassets and our expectations of the future cash needs of NAIE and NAI. Income tax laws also are a factor in determining the amount of foreign earnings tobe indefinitely reinvested offshore. We carefully review several factors that influence the ultimate disposition of NAIE’s retained earnings declared as reinvested offshore, and apply stringentstandards to overcome the presumption of repatriation. Despite this approach, because the determination involves our future plans and expectations offuture events, the possibility exists that amounts declared as indefinitely reinvested offshore may ultimately be repatriated. For instance, NAI’s actualcash needs may exceed our current expectations or NAIE’s actual cash needs may be less than our current expectations. Additionally, changes may occurin tax laws and/or accounting standards that could change our determination of the status of NAIE’s retained earnings. This would result in additionalincome tax expense in the fiscal year in which we determine that amounts are no longer indefinitely reinvested offshore. On an interim basis, we estimate what our effective tax rate will be for the full fiscal year and record a quarterly income tax provision in accordance withthe anticipated annual rate. As the fiscal year progresses, we refine our estimate based upon actual events and earnings by jurisdiction during the year.This continual estimation process periodically results in a change to our expected effective tax rate for the fiscal year. When this occurs, we adjust theincome tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision equals the expected annual rate. Derivative Financial Instruments We may use derivative financial instruments in the management of our foreign currency exchange risk inherent in our forecasted transactionsdenominated in Euros. We may hedge our foreign currency exposures by entering into offsetting forward exchange contracts and currency options. To theextent we use derivative financial instruments, we account for them using the deferral method, when such instruments are intended to hedge identifiable,firm foreign currency commitments or anticipated transactions and are designated as, and effective as, hedges. Foreign exchange exposures arising fromcertain transactions that do not meet the criteria for the deferral method are marked-to-market. We recognize any unrealized gains and losses associated with derivative instruments in income in the period in which the underlying hedged transactionis realized. In the event the derivative instrument is deemed ineffective we would recognize the resulting gain or loss in income at that time. As ofJune 30, 2015, we held derivative contracts designated as cash flow hedges primarily to protect against the foreign exchange risks inherent in ourforecasted sales of products at prices denominated in currencies other than the U.S. dollar. As of June 30, 2015, the notional amounts of our foreignexchange contracts were $27.1 million (EUR 23.8 million). These contracts will mature over the next 14 months. Allowance for Doubtful Accounts We maintain an allowance for doubtful accounts to reflect our estimate of current and past due receivable balances that may not be collected. Theallowance for doubtful accounts is based upon our assessment of the collectability of specific customer accounts, the aging of accounts receivable andour history of bad debts. We believe that the allowance for doubtful accounts is adequate to cover anticipated losses in the receivable balance undercurrent conditions. However, significant deterioration in the financial condition of our customers, resulting in an impairment of their ability to makepayments, could materially change these expectations and an additional allowance may be required. 22rd Defined Benefit Pension Plan We sponsor a defined benefit pension plan. Effective June 21, 1999, we adopted an amendment to freeze benefit accruals to the participants. The planobligation and related assets of the plan are presented in the notes to the consolidated financial statements. Plan assets, which consist primarily ofmarketable equity and debt instruments, are valued based upon third party market quotations. Independent actuaries, through the use of a number ofassumptions, determine plan obligation and annual pension expense. Key assumptions in measuring the plan obligation include the discount rate andestimated future return on plan assets. In determining the discount rate, we use an average long-term bond yield. Asset returns are based on the historicalreturns of multiple asset classes to develop a risk free rate of return and risk premiums for each asset class. The overall rate for each asset class wasdeveloped by combining a long-term inflation component, the risk free rate of return and the associated risk premium. A weighted average rate isdeveloped based on the overall rates and the plan’s asset allocation. Impairment of Assets Our policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets when certain events have taken place thatindicate the remaining unamortized balance may not be recoverable. When factors indicate that the long-lived assets should be evaluated for possibleimpairment, we use an estimate of related undiscounted cash flows. Factors considered in the valuation include current operating results, trends andanticipated undiscounted future cash flows. During fiscal 2015, we recorded an impairment loss of $417,000 related to manufacturing equipment andrelated tooling that was determined to be obsolete. 23 Results of Operations The following table sets forth selected consolidated operating results for each of the last two fiscal years, presented as a percentage of net sales (dollars inthousands). Fiscal Year Ended June 30, 2015 June 30, 2014 Increase (Decrease) Private-label contract manufacturing $69,670 88% $67,339 91% $2,331 3%Patent and trademark licensing 9,140 11% 5,444 7% 3,696 68%Branded products 698 1% 1,159 2% (461) (40)%Total net sales 79,508 100% 73,942 100% 5,566 8%Cost of goods sold 65,169 82% 61,204 83% 3,965 6%Gross profit 14,339 18% 12,738 17% 1,601 13%Selling, general & administrativeexpenses 10,180 13% 9,961 13% 219 2%Income from operations 4,159 5% 2,777 4% 1,382 50%Other expense, net (148) 0% 109 0% (257) (236)%Income before income taxes 4,307 5% 2,668 4% 1,639 61%Provision for income taxes 961 1% 674 1% 287 42%Net income $3,346 4% $1,994 3% $1,352 68% Fiscal 2015 Compared to Fiscal 2014 The percentage increase in private-label contract manufacturing net sales was primarily attributed to the following: PercentageChange in Net Sales The Juice Plus+ Company 6.6%Mannatech, Incorporated (0.4%)Other customers, net (2.7%)Total 3.5% 1The increase in net sales to The Juice Plus+ Company for fiscal 2015 included an increase in international sales of 34.5% and an increase indomestic sales of 4.3%. The increase in international sales during fiscal 2015 is primarily due to increased consumer demand and higher averageEUR exchange rates including the benefit of our hedging program. Additionally, the first nine months of fiscal 2014 included a customer driveninventory reduction program, which was not repeated in fiscal 2015. The domestic increase is primarily due to increased units shipped in fiscal 2015as compared to fiscal 2014. 2Net sales to Mannatech, Incorporated were flat compared with sales during the same period in fiscal 2014. 3The decrease in net sales to other customers as compared to fiscal 2014 was primarily due to lower sales of existing products for other existingcustomers partially offset by sales to new customers. Net sales from our patent and trademark licensing segment increased 68% during fiscal 2015. During fiscal 2015, patent and trademark licensing salesincluded $4.7 million of royalty income, $4.4 million in direct beta-alanine raw material sales, and zero license fees. During fiscal 2014, patent andtrademark licensing sales included $5.1 million of royalty income, zero direct beta-alanine raw material sales, and $300,000 of license fees. The increasein beta-alanine raw material sales was a result of our decision to take over the direct sale and distribution of beta-alanine effective April 1, 2015. As part ofthis decision, we allowed our agreement with CSI to expire as of March 31, 2015, which also discontinued our royalty income stream. We began directlyselling beta-alanine, and licensing the related patent and trademark rights, in order to take advantage of strategic opportunities, including opportunitiesto provide additional contract manufacturing services, and to increase our top-line revenue and profit profile. Net sales from our branded products declined 40% in fiscal 2015 as compared to fiscal 2014 due to the discontinuation of our Pathway to Healing®product line. All termination activities related to the Pathway to Healing® product line were substantially complete by December 31, 2014. 24(1)(2)(3) Consolidated gross profit margin increased 0.8 percentage points during fiscal 2015 primarily due to the following: PercentageChange Contract manufacturing: Shift in sales mix and material cost (1.3)Overhead expenses 0.1Incremental direct and indirect labor 0.6Patent and trademark licensing 1.1Branded products 0.3Total 0.8 1Private label contract manufacturing gross profit margin contribution decreased 0.6 percentage points in fiscal 2015 as compared to fiscal 2014. Thedecrease in gross profit as a percentage of sales in fiscal 2015 was primarily due to higher material costs as a percentage of sales. 2During fiscal 2015, patent and trademark licensing gross profit margin contribution increased 1.1 percentage points due to patent and trademarkrevenue representing a higher percentage of net sales year over year. In addition, we took over the raw material sale and distribution activities forbeta-alanine in the fourth quarter of fiscal 2015, which resulted in additional profit contribution per sales dollar. 3Branded products gross profit margin contribution as a percentage of consolidated net sales increased 0.3 percentage points during fiscal 2015 dueprimarily to the reversal of $190,000 of inventory reserves due to favorable results of our product line discontinuation program, which resulted in abetter than expected sell through of our remaining inventory. Selling, general and administrative expenses increased $219,000, or 2.2% during fiscal 2015 as compared to fiscal 2014. This increase was primarily dueto increased employee compensation costs partially offset by reduced litigation expense, the resolution of multiple law suits in late fiscal 2014, reducedactivity on the remaining pending litigation, and reduced costs associated with our branded products segment as a result of the discontinuation of allrelated activities as of December 31, 2014. Other income, net increased $257,000 during fiscal 2015 as compared to fiscal 2014. The increase for fiscal 2015 is due primarily to favorable foreigncurrency exchange activity partially offset by other tax expenses. Our income tax expense increased $287,000 during fiscal 2015 as compared to fiscal 2014. The increase is primarily due to increased pre-tax incomepartially offset by a lower effective tax rate. The effective tax rate was lower primarily due to increased foreign earnings, which are taxed at a lower rateand lower domestic taxes as a result of the state tax strategies implemented during the third quarter of fiscal 2014. 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 creditfacilities. Net cash provided by operating activities was $2.7 million in fiscal 2015 compared to net cash provided by operating activities of $5.3 millionin fiscal 2014. Net income increased by $1.4 million to $3.3 million during fiscal 2015 as compared to net income of $2.0 million in the prior fiscal year. At June 30,2015, changes in accounts receivable, consisting primarily of amounts due from our private-label contract manufacturing customers and our patent andtrademark raw material sales activities, used $3.1 million in cash compared to using $268,000 in fiscal 2014. The increase in cash used by accountsreceivable during fiscal 2015 was primarily due to increased amounts due associated with our patent and trade mark business as a result of taking over thedirect distribution and sale of beta-alanine raw material along with timing of sales year over year. The average number of days our accounts receivablewere outstanding was 38 days during fiscal 2015, as compared to 33 days for fiscal 2014. Decreases in inventory provided $276,000 in cash during fiscal 2015 compared to using $2.8 million in fiscal 2014. The change in cash activity frominventory during fiscal 2015 was primarily related to the timing of inventory shipments and receipts, and normalized inventory purchase activity relatedto our private label contract manufacturing business during the fiscal 2015 as compared to a build-up of inventory for new customer product launchesduring fiscal 2014. These decreases were partially offset by inventory purchases during the fourth quarter of fiscal 2015 related to taking over the directsales and distribution activities associated with our patent and trademark business. 25(1)(1)(1)(2)(3) Approximately $818,000 of our operating cash flow was generated by NAIE in fiscal 2015. As of June 30, 2015, NAIE’s undistributed retained earningsof $15.1 million were considered indefinitely reinvested. Cash used in investing activities in fiscal 2015 was $1.6 million compared to $2.5 million in fiscal 2014. Capital expenditures were $1.7 million duringfiscal 2015 compared to $2.7 million in fiscal 2014. Capital expenditures during fiscal 2015 and fiscal 2014 were primarily for manufacturing equipmentin our Vista, California and Manno, Switzerland facilities. At June 30, 2015 and June 30, 2014, on a consolidated basis, we had no outstanding debt balances. On December 22, 2014, we executed a new Credit Agreement with Wells Fargo Bank, N.A. The Credit Agreement replaces the previous credit facilitybetween NAI and the lender. The Credit Agreement is on substantially similar terms as the previous credit facility. The Credit Agreement provides NAIwith a line of credit of up to $5,000,000. The line of credit may be used to finance working capital requirements. In consideration for granting the line ofcredit, NAI paid the lender a commitment fee of $10,000. 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) net income after taxes of not lessthan $750,000 on a trailing four quarter basis as of the end of each calendar quarter beginning with the four quarter period ending December 31, 2014;and (ii) a ratio of total liabilities to tangible net worth of not greater than 1.25 to 1.0 at any time. Any amounts outstanding under the line of credit willbear 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 lessthan $100,000 such amount shall bear interest at the then applicable fluctuating rate of interest. If elected, the fluctuating rate per annum would be equalto 1.75% 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 1.75% abovethe 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 orbefore November 1, 2016; provided, however, that NAI must maintain a zero balance on advances under the line of credit for a period of at least 30consecutive days during each fiscal year. 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 feeequal to the sum of the discounted monthly differences for each month from the month of prepayment through the month in which the then applicablefixed 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 in effect until November 1, 2016, and with Bank of America, N.A. ineffect until August 15, 2016. On June 30, 2015, we were in compliance with all of the financial and other covenants required under the Credit Agreement. On September 22, 2006, NAIE, our wholly owned subsidiary, entered into a credit facility with Credit Suisse to provide NAIE with a credit line of up toCHF 1.3 million, or approximately $1.4 million, which was the initial maximum aggregate amount that could be outstanding at any one time under thecredit facility. This maximum amount is reduced annually by CHF 160,000, or approximately $171,000. On February 19, 2007, NAIE amended its creditfacility to provide that the maximum aggregate amount that may be outstanding under the facility cannot be reduced below CHF 500,000, orapproximately $535,000. As of June 30, 2015, there was no outstanding balance under this credit facility. Under its credit facility, NAIE may draw amounts either as current account loan credits to its current or future bank accounts or as fixed loans with amaximum term of 24 months. Current account loans will bear interest at the rate of 5% per annum. Fixed loans will bear interest at a rate determined bythe parties based on current market conditions and must be repaid pursuant to a repayment schedule established by the parties at the time of the loan. If afixed loan is repaid early at NAIE’s election or in connection with the termination of the credit facility, NAIE will be charged a pre-payment penalty equalto 0.1% of the principal amount of the fixed loan or CHF 1,000 (approximately $1,070), whichever is greater. The bank reserves the right to refuseindividual requests for an advance under the credit facility, although its exercise of such right will not have the effect of terminating the credit facility asa whole. As of June 30, 2015, we had $18.6 million in cash and cash equivalents and $5.5 million available under our credit facilities. Of these amounts, $8.2million of cash and cash equivalents and $535,000 of the amount available under our credit facilities were held by NAIE. Our intent is to permanentlyreinvest all of our earnings from foreign operations, and we do not currently anticipate that we will need funds generated from foreign operations to fundour domestic operations. In the event funds from foreign operations are needed to fund our U.S. operations, we may be required to accrue and payadditional U.S. taxes to repatriate any such funds. Overall, we believe our available cash, cash equivalents and potential cash flows from operations willbe sufficient to fund our current working capital needs and capital expenditures through at least the next 12 months. Off-Balance Sheet Arrangements As of June 30, 2015, we did not have any significant off-balance sheet debt nor did we have any transactions, arrangements, obligations (includingcontingent obligations) or other relationships with any unconsolidated entities or other persons that have or are reasonably likely to have a materialcurrent 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. 26 Inflation During fiscal 2014 and 2015, we did not experience any significant increases in product raw material or operational costs due to inflationary factors. Wecurrently believe increasing raw material and product cost pricing pressures will exist throughout fiscal 2016 as a result of limited supplies of variousingredients, including beta-alanine, and the effects of higher labor and transportation costs. We do not believe current inflation rates will have a materialimpact on our future operations or profitability. Recent Accounting Pronouncements A discussion of recent accounting pronouncements is included under Note A in the notes to our consolidated financial statements included under Item 8of this report. ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, we are not required to provide Item 7A disclosure in this Annual Report. 27 ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Report of Independent Registered Public Accounting Firm To the Board of Directors andStockholders of Natural Alternatives International, Inc. We have audited the accompanying consolidated balance sheet of Natural Alternatives International, Inc. (the “Company”) as of June 30, 2015, and therelated consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for the year then ended. The Company’smanagement is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financialstatements based on our audits. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit includedconsideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not forthe purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no suchopinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements,assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statementpresentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Natural AlternativesInternational, Inc. as of June 30, 2015, and the consolidated results of its operations and its cash flows for the year then ended, in conformity withaccounting principles generally accepted in the United States of America. /s/ HASKELL & WHITE LLP San Diego, CaliforniaSeptember 18, 2015 28  Report of Independent Registered Public Accounting Firm The Board of Directors and StockholdersNatural Alternatives International, Inc. We have audited the accompanying consolidated balance sheet of Natural Alternatives International, Inc. as of June 30, 2014, and the relatedconsolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for the year then ended. These financialstatements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on ouraudit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were notengaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control overfinancial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion onthe effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining,on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significantestimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for ouropinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Natural AlternativesInternational, Inc. at June 30, 2014, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S.generally accepted accounting principles. /s/ Ernst & Young LLP San Diego, CaliforniaSeptember 25, 2014 29 Natural Alternatives International, Inc.Consolidated Balance SheetsAs of June 30(Dollars in thousands, except share and per share data) 2015 2014 Assets Current assets: Cash and cash equivalents $18,551 $19,512 Accounts receivable – less allowance for doubtful accounts of $20 at June 30, 2015 and $94 at June30, 2014 9,895 6,835 Inventories, net 12,564 12,840 Deferred income taxes 367 344 Income tax receivable 316 228 Prepaids and other current assets 1,907 1,144 Total current assets 43,600 40,903 Property and equipment, net 7,633 8,811 Deferred income taxes 1,663 1,593 Other noncurrent assets, net 920 951 Total assets $53,816 $52,258 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $4,647 $6,418 Accrued liabilities 2,495 1,565 Accrued compensation and employee benefits 1,462 1,238 Income taxes payable 489 379 Total current liabilities 9,093 9,600 Long-term pension liability 439 183 Deferred rent 403 37 Other noncurrent liabilities, net 21 — Total liabilities 9,956 9,820 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 at June 30, 2015 and June 30, 2014,issued and outstanding (net of treasury shares) 6,743,093 at June 30, 2015 and 6,997,754 at June30, 2014 75 74 Additional paid-in capital 20,258 19,865 Accumulated other comprehensive loss (766) (469)Retained earnings 29,007 25,661 Treasury stock, at cost, 875,584 shares at June 30, 2015 and 515,923 at June 30, 2014 (4,714) (2,693)Total stockholders’ equity 43,860 42,438 Total liabilities and stockholders’ equity $53,816 $52,258 See accompanying notes to consolidated financial statements. 30 Natural Alternatives International, Inc.Consolidated Statements Of Operations And Comprehensive IncomeFor the Years Ended June 30(Dollars in thousands, except share and per share data) 2015 2014 Net sales $79,508 $73,942 Cost of goods sold 65,169 61,204 Gross profit 14,339 12,738 Selling, general and administrative expenses 10,180 9,961 Income from operations 4,159 2,777 Other income (expense): Interest income 36 34 Interest expense (12) (11)Foreign exchange gain (loss) 127 (29)Other, net (3) (103) 148 (109)Income before income taxes 4,307 2,668 Provision for income taxes 961 674 Net income $3,346 $1,994 Change in minimum pension liability, net of tax (141) (20)Unrealized loss resulting from change in fair value of derivative instruments, net of tax (156) (19)Comprehensive income $3,049 $1,955 Net income per common share: Basic $0.50 $0.29 Diluted $0.49 $0.29 Weighted average common shares outstanding: Basic 6,753,239 6,820,466 Diluted 6,806,385 6,864,216 See accompanying notes to consolidated financial statements. 31 Natural Alternatives International, Inc.Consolidated Statements Of Stockholders’ EquityFor the Years Ended June 30(Dollars in thousands) Common Stock AdditionalPaid-in Retained Treasury Stock AccumulatedOtherComprehensiveIncome Shares Amount Capital Earnings Shares Amount (Loss) Total Balance, June 30, 2013 7,408,677 $73 $19,662 $23,667 494,122 $(2,633) $(430) $40,339 Issuance of common stock for restrictedstock grants 105,000 1 (1) — — — — — Compensation expense related to stockcompensation plans — — 235 — — — — 235 Repurchase of common stock — — — — 21,801 (60) — (60)Tax effect of stock compensation — — (31) — — — — (31)Change in minimum pension liability,net of tax — — — — — — (20) (20)Unrealized loss resulting from changein fair value of derivativeinstruments, net of tax — — — — — — (19) (19)Net income — — — 1,994 — — — 1,994 Balance, June 30, 2014 7,513,677 74 19,865 25,661 515,923 (2,693) (469) 42,438 Issuance of common stock for restrictedstock grants 105,000 1 (1) — — — — — Compensation expense related to stockcompensation plans — — 390 — — — — 390 Repurchase of common stock — — — — 359,661 (2,021) — (2,021)Tax effect of stock compensation — — 4 — — — — 4 Change in minimum pension liability,net of tax — — — — — — (141) (141)Unrealized loss resulting from changein fair value of derivativeinstruments, net of tax — — — — — — (156) (156)Net income — — — 3,346 — — — 3,346 Balance, June 30, 2015 7,618,677 $75 $20,258 $29,007 875,584 $(4,714) $(766) $43,860 See accompanying notes to consolidated financial statements. 32 Natural Alternatives International, Inc.Consolidated Statements Of Cash FlowsFor the Years Ended June 30(in thousands) 2015 2014 Cash flows from operating activities Net income $3,346 $1,994 Adjustments to reconcile net income to net cash provided by operating activities: Provision for uncollectible accounts receivable 7 38 Depreciation and amortization 2,431 2,905 Non-cash equipment impairment charge 417 — Deferred income taxes (93) 199 Non-cash compensation 390 235 Pension expense 31 70 Gain on disposal of assets (62) (23)Changes in operating assets and liabilities: Accounts receivable (3,067) (268)Inventories 276 (2,805)Prepaids and other assets (875) (329)Accounts payable and accrued liabilities (520) 3,112 Income taxes 173 (212)Accrued compensation and employee benefits 224 431 Net cash provided by operating activities 2,678 5,347 Cash flows from investing activities Purchases of property and equipment (1,708) (2,679)Proceeds from sale of property and equipment 90 207 Net cash used in investing activities (1,618) (2,472)Cash flows from financing activities Issuance of common stock — — Repurchase of common stock (2,021) (60)Net cash used in financing activities (2,021) (60)Net (decrease) increase in cash and cash equivalents (961) 2,815 Cash and cash equivalents at beginning of year 19,512 16,697 Cash and cash equivalents at end of year $18,551 $19,512 Supplemental disclosures of cash flow information Cash paid during the year for: Taxes $888 $718 Interest $10 $13 Disclosure of non-cash activities: Change in minimum pension liability, net of tax $141 $20 Change in unrealized gain resulting from change in fair value of derivative instruments, net of tax $156 $19 Fixed assets in accounts payable $14 $41 See accompanying notes to consolidated financial statements. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. Organization and Summary of Significant Accounting Policies Organization We provide private-label contract manufacturing services to companies that market and distribute vitamins, minerals, herbs, and other nutritionalsupplements, as well as other health care products, to consumers both within and outside the U.S. We also seek to commercialize our patent and trademarkestate related to the ingredient known as beta-alanine through direct raw material sales and various license and similar arrangements. Subsidiaries On January 22, 1999, Natural Alternatives International Europe S.A. (NAIE) was formed as our wholly owned subsidiary, based in Manno, Switzerland. InSeptember 1999, NAIE opened its manufacturing facility and possesses manufacturing capability in encapsulation, powders, tablets, finished goodspackaging, quality control laboratory testing, warehousing, distribution and administration. Principles of Consolidation The consolidated financial statements include the accounts of Natural Alternatives International, Inc. (NAI) and our wholly owned subsidiary, NAIE. Allintercompany accounts and transactions have been eliminated. The functional currency of NAIE, our foreign subsidiary, is the U.S. Dollar. The financialstatements of NAIE have been translated at either current or historical exchange rates, as appropriate, with gains and losses included in the consolidatedstatements of operations. Recent Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts withCustomers (Topic 606) (ASU 2014-09), which amends the existing accounting standards for revenue recognition. ASU 2014-09 will require therecognition of revenue at the amount an entity expects to be entitled when products are transferred to customers. In August 2015, the FASB issued ASU2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in this update deferred the effective datefor implementation of ASU 2014-09 by one year and is now effective for annual reporting periods beginning after December 15, 2017. Early applicationis permitted only as of annual reporting periods beginning after December 15, 2016 including interim reporting periods within that period. We arecurrently evaluating the impact this guidance will have on our consolidated financial condition, results of operations, cash flows and disclosures and arecurrently unable to estimate the impact of adopting this guidance. In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory (Topic 330). ASU 2015-11 changes themeasurement principle for inventory from the lower of cost or market to lower of cost or net realizable value. The new standard is effective for our fiscalyears and interim periods beginning after December 15, 2016. We are currently evaluating the impact of adopting ASU 2015-11 on our consolidatedfinancial statements. In July 2015, the FASB issued ASU No. 2015-12, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans(Topic 962), Health and Welfare Benefit Plans (Topic 965) (ASU 2015-12): (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) PlanInvestment Disclosures, (Part III) Measurement Date Practical Expedient. This update reduces complexity in employee benefit plan accounting, which isconsistent with the FASB's Simplification initiative. Part I: Fully Benefit-Responsive Investment Contracts. Topics 962 and 965 on employee benefitplan accounting require fully benefit-responsive investment contracts to be measured at contract value. Those Topics also require an adjustment toreconcile contract value to fair value, when these measures differ, on the face of the plan financial statements. The amendments in Part I of this updatedesignate contract value as the only required measure for fully benefit-responsive investment contracts, which maintains the relevant information whilereducing the cost and complexity of reporting for fully benefit-responsive investment contracts. Part II: Plan Investment Disclosures. As new disclosurerequirements have been issued or amended, employee benefit plan financial statements have been affected. Specifically, the interaction between Topic820, Fair Value Measurement, and Topics 960, 962, and 965 on employee benefit plan accounting sometimes requires aggregation, or organization ofsimilar investment information, in multiple ways. The objective of Part II of this update is to simplify and make more effective the investment disclosurerequirements under Topic 820 and under Topics 960, 962, and 965 for employee benefit plans. Part III: Measurement Date Practical Expedient. Theobjective of Part III of this update is to reduce complexity in employee benefit plan accounting by providing a practical expedient that permits plans tomeasure investments and investment-related accounts as of a month-end date that is closest to the plan's fiscal year-end, when the fiscal period does notcoincide with month-end. This Accounting Standards Update is the final version of Proposed Accounting Standards Update EITF–15C—PlanAccounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965),which has been deleted. The amendments are effective for fiscal years beginning after December 15, 2015. Earlier application is permitted. The adoptionof this pronouncement is not expected to have a material effect on our financial position or results of operations. 34 Cash and Cash Equivalents We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. 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 ormost advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-levelhierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiringthat observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based onmarket data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the inputs that market participantswould 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 quotedprices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. We classify cash, cash equivalents, andmarketable securities balances as Level 1 assets. Fair values determined by Level 2 inputs are based on quoted prices for similar assets or liabilities inactive markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs areobservable 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 flowmethodologies and similar techniques that use significant unobservable inputs. As of June 30, 2015 and June 30, 2014, we did not have any financial assets or liabilities classified as Level 1, except for assets and liabilities related toour pension plan. We classify derivative forward exchange contracts as Level 2 assets. The fair value of our forward exchange contracts as of June 30,2015 was a net asset of $474,000 and the value as of June 30, 2014 was a net liability of $24,000. The fair values were determined based on obtainingpricing from our bank and corroborating those values with a third party bank. As of June 30, 2015 and June 30, 2014, we did not have any financial assetsor liabilities classified as Level 3. We did not transfer any assets or liabilities between any levels during fiscal 2015. Accounts Receivable We perform ongoing credit evaluations of our customers and adjust credit limits based on payment history and customer credit-worthiness. An allowancefor estimated doubtful accounts is maintained based on historical experience and identified customer credit issues. We monitor collections regularly andadjust the allowance for doubtful accounts as necessary to recognize any changes in credit exposure. Upon conclusion that a receivable is uncollectible,we record the respective amount as a charge against allowance for doubtful accounts. To date, such doubtful accounts reserves, in the aggregate, havebeen adequate to cover collection losses. Inventories We operate primarily as a private-label contract manufacturer that builds products based upon anticipated demand or following receipt of customerspecific purchase orders. From time to time, we build inventory for private-label contract manufacturing customers under a specific purchase order withdelivery dates that may subsequently be rescheduled or canceled at the customer’s request. We value inventory at the lower of cost (first-in, first-out) ormarket (net realizable value) on an item-by-item basis, including costs for raw materials, labor and manufacturing overhead. We establish reserves equalto all or a portion of the related inventory to reflect situations in which the cost of the inventory is not expected to be recovered. This requires us to makeestimates regarding the market value of our inventory, including an assessment for excess and obsolete inventory. Once we establish an inventory reservein a fiscal period, the reduced inventory value is maintained until the inventory is sold or otherwise disposed of. In evaluating whether inventory is statedat the lower of cost or market, management considers such factors as the amount of inventory on hand, the estimated time required to sell such inventory,the remaining shelf life and efficacy, the foreseeable demand within a specified time horizon and current and expected market conditions. Based on thisevaluation, we record adjustments to cost of goods sold to adjust inventory to its net realizable value. 35 Property and Equipment We state property and equipment at cost. Depreciation of property and equipment is provided using the straight-line method over their estimated usefullives, generally ranging from 1 to 39 years. We amortize leasehold improvements using the straight-line method over the shorter of the life of theimprovement or the term of the lease. Maintenance and repairs are expensed as incurred. Significant expenditures that increase economic useful lives arecapitalized. Impairment of Long-Lived Assets We periodically evaluate the carrying value of long-lived assets to be held and used when events and circumstances indicate that the carrying amount ofan asset may not be recovered. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future netcash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amountby which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount orfair value less costs to sell. During fiscal 2015, we recorded an impairment loss of $417,000 related to manufacturing equipment and related tooling thatwas determined to be obsolete. We did not recognize any impairment losses during fiscal 2014. Derivative Financial Instruments We currently may use derivative financial instruments in the management of our foreign currency exchange risk inherent in our forecasted transactionsdenominated in Euros. We may hedge our foreign currency exposures by entering into offsetting forward exchange contracts and currency options. To theextent we use derivative financial instruments, we account for them using the deferral method, when such instruments are intended to hedge identifiable,firm foreign currency commitments or anticipated transactions and are designated as, and effective as, hedges. Foreign exchange exposures arising fromcertain transactions that do not meet the criteria for the deferral method are marked-to-market through the Consolidated Statements of Operations andComprehensive Income. We recognize any unrealized gains and losses associated with derivative instruments in income in the period in which the underlying hedged transactionis realized. In the event the derivative instrument is deemed ineffective we would recognize the resulting gain or loss in income at that time. As ofJune 30, 2015, we held derivative contracts designated as cash flow hedges primarily to protect against the foreign exchange risks inherent in ourforecasted sales of products at prices denominated in currencies other than the U.S. Dollar. As of June 30, 2015, the notional amounts of our foreignexchange contracts were $27.1 million (EUR 23.8 million). These contracts will mature over the next 14 months. Defined Benefit Pension Plan We sponsor a defined benefit pension plan. Effective June 21, 1999, we adopted an amendment to freeze benefit accruals to the participants. The planobligation and related assets of the plan are presented in the notes to the consolidated financial statements. Plan assets, which consist primarily ofmarketable equity and debt instruments, are valued based upon third party market quotations. Independent actuaries, through the use of a number ofassumptions, determine plan obligation and annual pension expense. Key assumptions in measuring the plan obligation include the discount rate andestimated future return on plan assets. In determining the discount rate, we use an average long-term bond yield. Asset returns are based on the historicalreturns of multiple asset classes to develop a risk free rate of return and risk premiums for each asset class. The overall rate for each asset class wasdeveloped by combining a long-term inflation component, the risk free rate of return and the associated risk premium. A weighted average rate isdeveloped based on the overall rates and the plan’s asset allocation. 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 ordeterminable; and 4) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product isrecognized 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 theseller, 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 sellerwould 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 economicsubstance apart from that provided by the seller; (e) the seller does not have significant obligations for future performance to directly bring about resale ofthe product by the buyer; and (f) the amount of future returns can be reasonably estimated. We recognize revenue upon determination that all criteria forrevenue recognition have been met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenuefrom shipments where title passes upon delivery is deferred until the shipment has been delivered. 36 We record reductions to gross revenue for estimated returns of private label contract manufacturing products and branded products. The estimated returnsare based on the trailing six months of private label contract manufacturing gross sales and our historical experience for both private label contractmanufacturing and branded product returns. However, the estimate for product returns does not reflect the impact of a potential large product recallresulting from product nonconformance or other factors as such events are not predictable nor is the related economic impact estimable. We followed the provisions of ASU No. 2009-13 for all multiple element agreements. Under this guidance, the delivered item(s) has value to the customeron a standalone basis and, if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivereditem(s) is considered probable and substantially in our control. A delivered item is considered a separate unit of accounting when the delivered item has value to the partner on a standalone basis based on theconsideration of the relevant facts and circumstances for each arrangement. Arrangement consideration is allocated at the inception of the agreement toall identified units of accounting based on their relative selling price. The relative selling price for each deliverable is determined using vendor specificobjective evidence, or VSOE, of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence ofselling price exists, we use our best estimate of the selling price for the deliverable. The amount of allocable arrangement consideration is limited toamounts that are fixed or determinable. The consideration received is allocated among the separate units of accounting, and the applicable revenuerecognition criteria are applied to each of the separate units. Changes in the allocation of the sales price between delivered and undelivered elements canimpact revenue recognition but do not change the total revenue recognized under any agreement. If facts and circumstances dictate that a deliverable hasstandalone value from the undelivered items, the deliverable is identified as a separate unit of accounting and the amounts allocated to the deliverable arerecognized upon the delivery of the deliverable, assuming the other revenue recognition criteria have been met. However, if the amounts allocated to thedeliverable through the relative selling price allocation exceed the upfront fee, the amount recognized upon the delivery of the deliverable is limited tothe upfront fee received. If facts and circumstances dictate that the deliverable does not have standalone value, the transaction price, including anyupfront fee payments received, are allocated to the identified separate units of accounting and recognized as those items are delivered and accepted. In addition, we enter into arrangements that provide for milestone payments upon contractually stated events. Under the milestone method, we recognizeconsideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if themilestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following three criteria: 1) The consideration iscommensurate with either our performance to achieve the milestone or the enhancement of the value of the delivered item(s) as a result of a specificoutcome resulting from our performance to achieve the milestone, 2) The consideration relates solely to past performance, and 3) The consideration isreasonable relative to all of the deliverables and payment terms within the arrangement. A milestone is defined as an event (i) that can only be achievedbased in whole or in part on either the entity’s performance or on the occurrence of a specific outcome resulting from the entity’s performance, (ii) forwhich there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additionalpayments being due to the entity. We currently own certain U.S. patents, and each patent’s corresponding foreign patent applications. All of these patents and patent rights relate to theingredient known as beta-alanine marketed and sold under the CarnoSyn® trade name. Since March 2009, we have had an agreement with CompoundSolutions, Inc. (CSI) to grant a license to manufacture, offer for sale and/or sell products incorporating, using or made in accordance with our patent rightsto customers of CSI who purchase beta-alanine under the CarnoSyn® trade name from CSI. The most recent agreement additionally granted such a licenseto CSI. We received a fee from CSI that varied based on the quantity and source of beta-alanine sold by CSI. Our most recent agreement with CSI expiredon March 31, 2015. We elected not to renew our agreement with CSI and, effective April 1, 2015, we began directly selling beta-alanine, and licensingthe related patent and trademark rights, in order to take advantage of strategic opportunities, including opportunities to provide additional contractmanufacturing services, and to increase our top-line revenue and profit profile. In June 2011, we entered into a license and supply agreement (Agreement) with Abbott Laboratories (Abbott) under which we agreed to grant anexclusive license to Abbott for the use of beta-alanine in certain medical foods and medical nutritionals. Under the terms of the agreement, Abbott paid aninitial license fee of $300,000, an additional fee of $300,000 in January 2012, and upon achievement of certain milestones, an additional license fee of$150,000 was paid on October 3, 2012. The license and supply agreement provided Abbott with the right to terminate the agreement at any time up toMarch 31, 2012, at which time, if not terminated, Abbott was required to pay $4.3 million payable over six annual payments with the initial installmentpayment of $708,334 due March 31, 2012. We have determined that each of the milestone payments meets the definition of a milestone in accordancewith the milestone method of revenue recognition. 37 In February 2012 and June 2012, we amended the Agreement and extended Abbott’s termination rights initially through July 31, 2012 and then furtherthrough October 31, 2012 in exchange for two payments of $354,167 each by Abbott to NAI. Abbott made the first payment on March 13, 2012 and thesecond payment on July 12, 2012. In October 2012, the Agreement was amended for a third time. Unless earlier terminated by Abbott, the amendmentrequires Abbott to pay to NAI (i) upon earlier of achievement of certain milestones or December 1, 2012, additional license fees of $204,167; (ii) uponearlier of achievement of certain milestones or June 1, 2013, additional license fees of $204,167; (iii) upon earlier of achievement of certain milestones orJuly 1, 2013, additional license fees of $150,000; (iv) upon earlier of achievement of certain milestones or December 1, 2013, additional license fees of$150,000; and (v) approximately $2.8 million payable over four annual payments beginning on March 31, 2014. The payment noted in (i) was collectedin December 2012, the payment noted in (ii) was collected in May 2013, the payment noted in (iii) was collected in July 2013 and the payment noted in(iv) was collected in January 2014. Effective November 27, 2013, citing further time and cost required to bring its anticipated product to market, Abbott exercised its right to terminate theAgreement. We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of $9.1 million during fiscal2015 and $5.4 million during fiscal 2014. These royalty income and raw material sale amounts resulted in royalty expense paid to the original patentholders 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$806,000 during fiscal 2015 and $722,000 during fiscal 2014. Cost of Goods Sold Cost of goods sold includes raw material, labor, manufacturing overhead, and royalty expense. Shipping and Handling Costs We include fees earned on the shipment of our products to customers in sales and include costs incurred on the shipment of product to customers in costsof goods sold. Research and Development Costs As part of the services we provide to our private-label contract manufacturing customers, we may perform, but are not obligated to perform, certainresearch and development activities related to the development or improvement of their products. While our customers typically do not pay directly forthis service, the cost of this service is included as a component of the price we charge to manufacture and deliver their products. We also direct andparticipate in clinical research studies, often in collaboration with scientists and research institutions, to validate the benefits of a product and providescientific support for product claims and marketing initiatives. We believe our commitment to research and development, as well as our facilities andstrategic alliances with our suppliers and customers, allow us to effectively identify, develop and market high-quality and innovative products. Research and development costs are expensed when incurred. Our research and development expenses for the last two fiscal years ended June 30 were$1.1 million for 2015 and $1.0 million for 2014. These costs were included in selling, general and administrative expenses and cost of goods sold. Advertising Costs We expense the production costs of advertising the first time the advertising takes place. We incurred and expensed advertising costs in the amount of$69,000 during the fiscal year ended June 30, 2015 and $131,000 during fiscal 2014. These costs were included in selling, general and administrativeexpenses. Income Taxes We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basesand operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates, for each of the jurisdictions inwhich we operate, expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date. We account for uncertain tax positions using the more-likely-than-not recognition threshold. Our practice is to recognize interest and/or penalties relatedto income tax matters in income tax expense. As of June 30, 2015 and June 30, 2014, we had not recorded any tax liabilities for uncertain tax positions. We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than not to be realized. We considerestimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If we determinethat it is more likely than not that we will not realize all or part of our deferred tax assets in the future, we will record an adjustment to the carrying valueof the deferred tax asset, which would be reflected as income tax expense. Conversely, if we determine we will realize a deferred tax asset, which currentlyhas a valuation allowance, we will reverse the valuation allowance, which would be reflected as an income tax benefit. 38 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 taxassets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods inwhich those temporary differences become deductible. We will continue to assess the need for a valuation allowance on the deferred tax assets byevaluating both positive and negative evidence that may exist. Any adjustment to the net deferred tax asset valuation allowance would be recorded in theincome statement for the period that the adjustment is determined to be required. During fiscal 2014, as a result of changes in California apportionmentrules and the state nexus study which was completed during the 3 quarter of fiscal 2014, we determined that $193,000 of the deferred tax asset forCalifornia net operating losses was not more likely than not to be realized. As a result, we have established a valuation allowance on our net deferred taxassets for this amount. We did not record any adjustment to the net deferred tax asset valuation allowance during fiscal 2015. We are subject to taxation in the U.S., Switzerland and various state jurisdictions. Our tax years for the fiscal year ended June 30, 2009 and forward aresubject to examination by the U.S. tax authorities and our years for the fiscal year ended June 30, 2007 and forward are subject to examination by thestate tax authorities. Our tax years for the fiscal year ended June 30, 2013 and forward are subject to examination by the Switzerland 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 overallincome tax expense. The amount of earnings designated as indefinitely reinvested in NAIE is based on the actual deployment of such earnings in NAIE’sassets and our expectations of the future cash needs of our U.S. and foreign entities. Income tax laws are also a factor in determining the amount of foreignearnings to be indefinitely reinvested offshore. 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 theAnnual 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. Our prior equity incentive plan was terminated effective as of November 30, 2009. We estimate the fair value of stock option awards at the date of grant using the Black-Scholes option valuation model. The Black-Scholes optionvaluation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Optionvaluation models require the input of highly subjective assumptions. Black-Scholes uses assumptions related to volatility, the risk-free interest rate, thedividend yield (which we assume to be zero, as we have not paid any cash dividends) and employee exercise behavior. Expected volatilities used in themodel 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 theperiod of grant. The expected life of stock option grants is derived from historical experience. The fair value of restricted stock shares granted is based onthe 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 vestingperiods. The Company did not grant any options during fiscal 2015 or 2014. We did not have any options exercised during fiscal 2015 or fiscal 2014. All remaining outstanding stock options are fully vested and all relatedcompensation cost was fully recognized at June 30, 2014. No options vested during the fiscal year ended June 30, 2015. The total fair value of optionsvested during the fiscal year ended June 30, 2014 was $121,000. During fiscal 2013 we granted a total of 98,000 restricted stock shares to the members of our Board of Directors and certain key members of ourmanagement team pursuant to our 2009 Omnibus Incentive plan. These restricted shares partially vested, and the remainder will continue to vest overthree years and the unvested portion of these shares cannot be sold or otherwise transferred and the rights to receive dividends, if declared by our Board ofDirectors, are forfeitable until the shares become vested. During the three months ended September 30, 2013, 10,000 of these shares were forfeited due tothe termination of employment of one of the grantees. On March 7, 2014 we granted 105,000 restricted stock shares to the members of our Board ofDirectors and certain key members of our management team pursuant to our 2009 Omnibus Incentive plan. On March 19, 2015 we granted an additional105,000 restricted stock shares to the members of our Board of Directors and certain key members of our management team pursuant to our 2009 OmnibusIncentive plan. These restricted stock grants have partially vested and the remainder will vest over three years from the date of grant and the unvestedshares cannot be sold or otherwise transferred and the rights to receive dividends, if declared by our Board of Directors, are forfeitable until the sharesbecome vested. There were 93,866 vested restricted stock shares as of June 30, 2015 and there were 29,720 vested restricted stock shares as of June 30,2014. The total remaining unrecognized compensation cost related to unvested restricted stock shares amounted to $945,000 at June 30, 2015 and theweighted average remaining requisite service period of unvested restricted stock shares was 2.0 years. The weighted average fair value of restricted stockshares granted during fiscal 2015 was $5.51. The weighted average fair value of restricted stock shares granted during fiscal 2014 was $5.56. 39rd Use of Estimates Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenue and expenses, and thedisclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with GAAP. Actual results could differ fromthose estimates. Net Income per Common Share We compute basic net income per common share using the weighted average number of common shares outstanding during the period, and diluted netincome per common share using the additional dilutive effect of all dilutive securities. The dilutive impact of stock options and restricted shares accountfor the additional weighted average shares of common stock outstanding for our diluted net income per common share computation. We calculated basicand diluted net income per common share as follows (in thousands, except per share data): For the Years Ended June 30, 2015 2014 Numerator Net income $3,346 $1,994 Denominator Basic weighted average common shares outstanding 6,753 6,820 Dilutive effect of stock options and restricted stock shares 53 44 Diluted weighted average common shares outstanding 6,806 6,864 Basic net income per common share $0.50 $0.29 Diluted net income per common share $0.49 $0.29 Shares related to 151,000 stock options for the fiscal year ended June 30, 2015 and 268,000 for fiscal 2014, were excluded from the calculation of dilutednet income per common share, as the effect of their inclusion would be anti-dilutive. 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 ourcash and cash equivalents with highly rated financial institutions. Credit risk with respect to receivables is concentrated with our two largest customers,whose receivable balances collectively represented 28.5% of gross accounts receivable at June 30, 2015 and 26.9% at June 30, 2014. Additionally,amounts due related to our beta-alanine raw material sales were 26.0% of gross accounts receivable at June 30, 2015 and royalty amounts due from CSIwere 23.6% of gross accounts receivable at June 30, 2014. Concentrations of credit risk related to the remaining accounts receivable balances are limiteddue to the number of customers comprising our remaining customer base. B. Inventories Inventories, net, consisted of the following at June 30 (in thousands): 2015 2014 Raw materials $9,744 $9,764 Work in progress 1,552 2,176 Finished goods 1,603 1,621 Reserve (335) (721) $12,564 $12,840 40 C. Property and Equipment Property and equipment consisted of the following at June 30 (dollars in thousands): DepreciableLifeIn Years 2015 2014 Land NA $393 $393 Building and building improvements 7–39 2,793 2,793 Machinery and equipment 3–12 26,444 26,772 Office equipment and furniture 3–5 3,168 3,189 Vehicles 3 209 209 Leasehold improvements 1–15 11,244 10,949 Total property and equipment 44,251 44,305 Less: accumulated depreciation and amortization (36,618) (35,494)Property and equipment, net $7,633 $8,811 D. Other comprehensive loss Other comprehensive (loss) income consisted of the following at June 30 (dollars in thousands): Year Ended June 30, 2015 Defined BenefitPension Plan Unrealized Losseson Cash FlowHedges Total Balance as of June 30, 2014 $(502) $33 $(469) Other comprehensive loss before reclassifications (176) 2,228 2,052 Amounts reclassified from OCI (49) (2,461) (2,510) Tax effect of OCI activity 84 77 161 Other comprehensive loss (141) (156) (297)Balance as of June 30, 2015 $(643) $(123) $(766) Year Ended June 30, 2014 Defined BenefitPension Plan Unrealized Losseson Cash FlowHedges Total Balance as of June 30, 2013 $(482) $52 $(430) Other comprehensive loss before reclassifications 31 (488) (457)Amounts reclassified from OCI (10) 454 444 Tax effect of OCI activity (41) 15 (26)Other comprehensive loss (20) (19) (39)Balance as of June 30, 2014 $(502) $33 $(469) E. Debt On December 22, 2014, we executed a new Credit Agreement with Wells Fargo Bank, N.A. The Credit Agreement replaces the previous credit facilitybetween NAI and the lender. The Credit Agreement is on substantially similar terms as the previous credit facility. The Credit Agreement provides NAIwith a line of credit of up to $5,000,000. The line of credit may be used to finance working capital requirements. In consideration for granting the line ofcredit, NAI paid the lender a commitment fee of $10,000. There are no amounts currently drawn under the line of credit. 41 Under the terms of the Credit Agreement, borrowings are subject to eligibility requirements including maintaining (i) net income after taxes of not lessthan $750,000 on a trailing four quarter basis as of the end of each calendar quarter beginning with the four quarter period ending December 31, 2014;and (ii) a ratio of total liabilities to tangible net worth of not greater than 1.25 to 1.0 at any time. Any amounts outstanding under the line of credit willbear 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 lessthan $100,000 such amount shall bear interest at the then applicable fluctuating rate of interest. If elected, the fluctuating rate per annum would be equalto 1.75% 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 1.75% abovethe 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 orbefore November 1, 2016; provided, however, that NAI must maintain a zero balance on advances under the line of credit for a period of at least 30consecutive days during each fiscal year. 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 feeequal to the sum of the discounted monthly differences for each month from the month of prepayment through the month in which the then applicablefixed 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 November 1, 2016, and with Bank ofAmerica, N.A. in effect until August 15, 2016. On June 30, 2015, we were in compliance with all of the financial and other covenants required under the Credit Agreement. On September 22, 2006, NAIE, our wholly owned subsidiary, entered into a credit facility with Credit Suisse to provide NAIE with a credit line of up toCHF 1.3 million, or approximately $1.4 million, which was the initial maximum aggregate amount that could be outstanding at any one time under thecredit facility. This maximum amount is reduced annually by CHF 160,000, or approximately $171,000. On February 19, 2007, NAIE amended its creditfacility to provide that the maximum aggregate amount that may be outstanding under the facility cannot be reduced below CHF 500,000, orapproximately $535,000. As of June 30, 2015, there was no outstanding balance under this credit facility. Under its credit facility, NAIE may draw amounts either as current account loan credits to its current or future bank accounts or as fixed loans with amaximum term of 24 months. Current account loans will bear interest at the rate of 5% per annum. Fixed loans will bear interest at a rate determined bythe parties based on current market conditions and must be repaid pursuant to a repayment schedule established by the parties at the time of the loan. If afixed loan is repaid early at NAIE’s election or in connection with the termination of the credit facility, NAIE will be charged a pre-payment penalty equalto 0.1% of the principal amount of the fixed loan or CHF 1,000 (approximately $1,070), whichever is greater. The bank reserves the right to refuseindividual requests for an advance under the credit facility, although its exercise of such right will not have the effect of terminating the credit facility asa whole. We did not use our working capital line of credit nor did we have any long-term debt outstanding during the year ended June 30, 2015. As of June 30,2015, we had $5.5 million available under our credit facilities. F. Income Taxes During fiscal 2014 we recognized certain discrete items as part of our income tax calculations. These discrete items included (1) an expense to adjust thestate deferred tax assets as a result of a change in the estimated state tax rate, (2) an expense to establish a valuation allowance on a portion of the deferredtax asset for the California net operating loss, (3) a net benefit of state taxes as a result of adjusting California apportionment and filing in other states forprior years, and (4) a true-up of the R&D credit claimed on the federal income tax return filed in fiscal 2014. We did not have any such discrete items infiscal 2015. In addition, during fiscal 2014, as a result of changes in California apportionment rules and the state nexus study which was completed during the year,we determined that $193,000 of the deferred tax asset for California net operating losses was not more likely than not to be realized. As a result, we haveestablished a valuation allowance on our net deferred tax assets for this amount. We did not make any adjustment to our deferred tax asset valuation infiscal 2015. 42 The provision for income taxes for the years ended June 30 consisted of the following (in thousands): 2015 2014 Current: Federal $396 $559 State 41 (370)Foreign 450 343 887 532 Deferred: Federal 125 (264)State (51) 213 Valuation allowance — 193 74 142 Provision for income taxes $961 $674 Net deferred tax assets and deferred tax liabilities as of June 30 were as follows (in thousands): 2015 2014 Deferred tax assets: Allowance for doubtful accounts $3 $28 Accrued vacation expense 106 101 Tax credit carry forward 88 51 Allowance for inventories 74 234 Stock-based compensation 130 157 Pension liability 322 238 Other, net 210 106 Deferred rent 143 13 Accumulated depreciation and amortization 897 911 Net operating loss carry forward 439 458 Total gross deferred tax assets 2,412 2,297 Deferred tax liabilities: Prepaid expenses (189) (157)Other — (10)Deferred tax liabilities (189) (167)Valuation allowance (193) (193)Net deferred tax assets $2,030 $1,937 At June 30, 2015, we had state tax net operating loss carry forwards of approximately $7.5 million. Under California tax law, net operating lossdeductions were suspended for tax years beginning in 2008, 2009, 2010 and 2011 and the carry forward periods of any net operating losses not utilizeddue to such suspension were extended. Our state tax loss carry forwards will begin to expire in fiscal 2022, unless used before their expiration. Pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), the annual use of the net operating loss carry forwards andresearch and development tax credits could be limited by any greater than 50% ownership change during any three-year testing period. We did not haveany ownership changes that met this criterion during the fiscal years ended June 30, 2015 and June 30, 2014. NAIE’s effective tax rate for Swiss federal, cantonal and communal taxes is approximately 17.0%. NAIE had net income of $2.2 million for the fiscal yearended June 30, 2015. Undistributed earnings of NAIE amounted to approximately $15.1 million at June 30, 2015. These earnings are considered to beindefinitely reinvested and, accordingly, no provision for U.S. federal taxes has been provided thereon. 43 A reconciliation of income tax provision computed by applying the statutory federal income tax rate of 34% to net income before income taxes for theyear ended June 30 is as follows (dollars in thousands): 2015 2014 Income taxes computed at statutory federal income tax rate $1,463 $913 State income taxes, net of federal income tax expense 7 (35)Expenses not deductible for tax purposes 13 19 Foreign tax rate differential (451) (297)Return to provision – differences — (41)Adjust state deferred due to change in apportionment (25) 195 State tax planning – net savings — (239)Change in valuation allowance — 193 Other, net (46) (34)Income tax provision as reported $961 $674 Effective tax rate 22.3% 25.1% G. Employee Benefit Plans We have a profit sharing plan pursuant to Section 401(k) of the Code, whereby participants may contribute a percentage of compensation not in excess ofthe maximum allowed under the Code. All employees with six months of continuous employment are eligible to participate in the plan. EffectiveJanuary 1, 2004, the plan was amended to require that we match 100% of the first 3% and 50% of the next 2% of a participant’s compensation contributedto the plan. Effective January 1, 2009, we elected to temporarily discontinue the company match program. The match program was reinstated effectiveJuly 15, 2011. The total contributions under the plan charged to income from operations totaled $225,000 for fiscal 2015 and $184,000 for fiscal 2014. We have a “Cafeteria Plan” pursuant to Section 125 of the Code, whereby health care benefits are provided for active employees through insurancecompanies. Substantially all active full-time employees are eligible for these benefits. We recognize the cost of providing these benefits by expensing theannual premiums, which are based on benefits paid during the year. The premiums expensed to operating income for these benefits totaled $1.1 millionfor the fiscal year ended June 30, 2015 and $956,000 for fiscal 2014. We sponsor a defined benefit pension plan, which provides retirement benefits to employees based generally on years of service and compensation duringthe last five years before retirement. Effective June 21, 1999, we adopted an amendment to freeze benefit accruals to the participants. We contribute anamount not less than the minimum funding requirements of the Employee Retirement Income Security Act of 1974 nor more than the maximum tax-deductible amount. Disclosure of Funded Status The following table sets forth the defined benefit pension plan’s funded status and amount recognized in our consolidated balance sheets at June 30 (inthousands): 2015 2014 Change in Benefit Obligation: Benefit obligation at beginning of year $1,901 $1,796 Interest cost 80 80 Actuarial loss 144 165 Benefits paid (45) (140)Benefit obligation at end of year $2,080 $1,901 Change in Plan Assets: Fair value of plan assets at beginning of year $1,719 $1,662 Actual return on plan assets (5) 226 Benefits paid (45) (140)Plan expenses (27) (29)Fair value of plan assets at end of year $1,642 $1,719 Reconciliation of Funded Status: Difference between benefit obligation and fair value of plan assets $(438) $(182)Unrecognized net actuarial loss in accumulated other comprehensive income 904 679 Net amount recognized $466 $497 Projected benefit obligation $2,080 $1,901 Accumulated benefit obligation $2,080 $1,901 Fair value of plan assets $1,642 $1,719 44 The weighted-average discount rate used for determining the projected benefit obligations for the defined benefit pension plan was 4.4% during the yearended June 30, 2015 and 4.3% for the year ended June 30, 2014. Net Periodic Benefit Cost The components included in the defined benefit pension plan’s net periodic benefit expense for the fiscal years ended June 30 were as follows (inthousands): 2015 2014 Interest cost $80 $80 Expected return on plan assets (115) (105)Recognized actuarial loss 46 46 Settlement loss 20 49 Net periodic benefit expense $31 $70 We did not make any contributions to our defined benefit pension plan in fiscal 2015 and do not expect to make any contributions in fiscal 2016. The following is a summary of changes in plan assets and benefit obligations recognized in other comprehensive income (in thousands): 2015 2014 Net loss $265 $45 Settlement loss (20) (50)Amortization of net loss (47) (46)Plan expenses 27 29 Total recognized in other comprehensive income (loss) $225 $(22) Total recognized in net periodic benefit cost and other comprehensive income $256 $48 The estimated net loss for the defined benefit pension plan that will be amortized from accumulated other comprehensive income into net periodic benefitcost over the next fiscal year is $46,000. We do not have any transition obligations or prior service costs recorded in accumulated other comprehensiveincome. 45 The following benefit payments are expected to be paid (in thousands): 2016 $22 2017 53 2018 74 2019 113 2020 124 2021-2025 673 $1,059 The weighted-average rates used for the years ended June 30 in determining the defined benefit pension plan’s net pension costs, were as follows: 2015 2014 Discount rate 4.33% 4.80%Expected long-term rate of return 7.00% 7.00%Compensation increase rate N/A N/A Our expected rate of return is determined based on a methodology that considers historical returns of multiple classes analyzed to develop a risk free realrate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component,the risk free real rate of return, and the associated risk premium. A weighted average rate was developed based on those overall rates and the target assetallocation of the plan. Our defined benefit pension plan’s weighted average asset allocation at June 30 and weighted average target allocation were as follows: 2015 2014 TargetAllocation Equity securities 53% 49% 49%Debt securities 45% 45% 46%Commodities — — 2%Cash and money market funds 2% 6% 3% 100% 100% 100% The underlying basis of the investment strategy of our defined benefit pension plan is to ensure that pension funds are available to meet the plan’s benefitobligations when due. Our investment strategy is a long-term risk controlled approach using diversified investment options with relatively minimalexposure to volatile investment options like derivatives. The fair values by asset category of our defined benefit pension plan at June 30, 2015 were as follows (in thousands): Total QuotedPrices inActiveMarketsforIdenticalAssets(Level 1) SignificantObservableInputs(Level 2) SignificantUnobservableInputs(Level 3) Cash and money market funds $37 $37 $— $— Equity securities $872 $872 $— $— Debt securities $733 $733 $— $— Total $1,642 $1,642 $— $— (1)This category is comprised of publicly traded funds, of which 76% are large-cap funds, 13% are emerging markets equity funds, and 11% areinternational equity funds.(2)This category is comprised of publicly traded funds, of which 32% are short-term fixed income funds, 14% are high-yield fixed income funds, 38%are intermediate fixed income funds, 12% are REITs and MLPs funds, and 4% are international/emerging markets funds. 46(1)(2) H. Stockholders’ Equity Treasury StockOn 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 Directorsauthorized a $1.0 million increase to our stock repurchase plan bringing the total authorized repurchase amount to $3.0 million. On May 11, 2015, theBoard of Directors authorized a $2.0 million increase to our stock repurchase plan bringing the total authorized repurchase amount to $5.0 million. Underthe repurchase plan, we may, from time to time, purchase shares of our common stock, depending upon market conditions, in open market or privatelynegotiated transactions. For the year ended June 30, 2014, we purchased 5,100 shares at a weighted average cost of $4.55 per share and a total cost of$23,000, including commissions and fees. During the twelve months ended June 30, 2015, we purchased 342,121 shares at a weighted average cost of$5.63 per share and a total cost of $1.9 million including commissions and fees. During fiscal 2015 we acquired 17,540 shares from employees in connection with restricted stock shares that vested during the year and during fiscal2014 we acquired 6,701 shares in connection with restricted stock shares that vested during that year. These shares were returned to the Company by therelated employees and in return the Company paid each employee’s required tax withholding. The valuation of the shares acquired and thereby theamount of shares returned to the Company was calculated based on the closing share price on the date the shares vested. Stock Option Plans On December 6, 1999, our stockholders approved the adoption of the 1999 Omnibus Equity Incentive Plan (the “1999 Plan”). The 1999 Plan wasterminated effective as of November 30, 2009. Effective as of October 15, 2009, our Board of Directors approved an omnibus incentive plan (the “2009 Plan”). The 2009 Plan was approved by ourstockholders at the Annual Meeting of Stockholders held on November 30, 2009. Under the plan, we may grant nonqualified and incentive stock optionsand other stock-based awards to employees, non-employee directors and consultants. As of June 30, 2015, a total of 1.0 million shares of common stockwere reserved under the 2009 Plan for issuance to our employees, non-employee directors and consultants. Stock option activity for the year ended June 30, 2015 was as follows: 1999Plan WeightedAverageExercisePrice WeightedAverageContractualTerm(in years) AggregateIntrinsicValue Outstanding at June 30, 2014 10,000 $10.19 Exercised — — Forfeited (10,000) $10.19 Granted — $— Outstanding at June 30, 2015 — $— — $— Vested and exercisable at June 30, 2015 — $— — $— Available for grant at June 30, 2015 — 2009Plan WeightedAverageExercisePrice WeightedAverageContractualTerm(in years) AggregateIntrinsicValue Outstanding at June 30, 2014 190,019 $6.76 Exercised — $— Forfeited (5,019) $7.50 Granted — $— Outstanding at June 30, 2015 185,000 $6.74 4.41 $86,000 Vested and exercisable at June 30, 2015 185,000 $6.74 4.41 $86,000 47 Restricted stock activity for the year ended June 30, 2015 was as follows (2009 Plan): Number of Shares WeightedAverage GrantDate Fair Value Nonvested at June 30, 2014 163,280 $5.28 Granted 105,000 $5.51 Vested (64,146) $5.20 Forfeited — $— Nonvested at June 30, 2015 204,134 $5.42 As of June 30, 2015, there were 541,241 shares available for grant under the 2009 Plan. I. Commitments We lease a total of 162,000 square feet at our manufacturing facility in Vista, California from an unaffiliated third party under a non-cancelable operatinglease. On July 31, 2013, we executed a third amendment to the lease for our manufacturing facility in Vista, CA. As a result of this amendment, our facilitylease has been extended for an additional 10 year term through March 2024. NAIE leases facility space in Manno, Switzerland. The leased space totals approximately 87,763 square feet. We primarily use the facilities formanufacturing, packaging, warehousing and distributing nutritional supplement products for the European marketplace. Effective July 1, 2014, NAIEentered into a new lease with its current landlord. The new lease replaced, extended, and enlarged an existing lease between the same parties for the samebuilding in Manno Switzerland. NAIE intends to improve portions of the additional space acquired by the new lease, and will continue to use the entireleased premises for offices, laboratory, warehouse and production. The new lease has a term of five years with a right for NAIE to extend the lease for anadditional five years. The initial five year term expires on June 30, 2019. Minimum rental commitments (exclusive of property tax, insurance and maintenance) under all non-cancelable operating leases with initial or remaininglease terms in excess of one year, including the lease agreements referred to above, are set forth below as of June 30, 2015 (in thousands): 2016 2017 2018 2019 2020 There-after Total Gross minimum rental commitments $2,859 $2,783 $2,815 $2,848 $1,394 $5,543 $18,242 Rental expense totaled $3.0 million for the fiscal year ended June 30, 2015 and $2.3 million for fiscal 2014. J. Economic Dependency We had substantial net sales to certain customers during the fiscal years ended June 30 shown in the following table. The loss of any of these customers,or a significant decline in sales or the growth rate of sales to these customers, or in their ability to make payments when due, could have a material adverseimpact on our net sales and net income. Net sales to any one customer representing 10% or more of the respective year’s total private-label contractmanufacturing net sales were as follows (dollars in thousands): 2015 2014 Net SalesbyCustomer % ofTotalNet Sales Net SalesbyCustomer % ofTotalNet Sales Customer 1 $29,724 43% $25,252 38%Customer 2 11,018 16% 11,256 17%Customer 3 8,090 12% (a) (a)Customer 3 (a) (a) 10,960 16% $48,832 71% $47,468 71% (a)Sales were less than 10% of the respective period’s total private label contract manufacturing net sales Accounts receivable from these customers totaled $4.6 million at June 30, 2015 and $3.1 million at June 30, 2014. 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 materialadverse impact on our net sales and net income. During fiscal 2015 and 2014, we did not have any suppliers that individually represented greater than10% of our raw material purchases. 48 K. Derivatives and Hedging We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to forecasted product sales denominated inforeign currencies and transactions of NAIE, our foreign subsidiary. As part of our overall strategy to manage the level of exposure to the risk offluctuations in foreign currency exchange rates, we may use foreign exchange contracts in the form of forward contracts. There can be no guarantee anysuch contracts, to the extent we enter into such contracts, will be effective hedges against our foreign currency exchange risk. During the year ended June 30, 2015 and prior, we entered into forward contracts designated as cash flow hedges primarily to protect against the foreignexchange risks inherent in our forecasted sales of products at prices denominated in currencies other than the U.S. dollar. These contracts are expected tobe settled through August 2016. For derivative instruments that are designated and qualify as cash flow hedges, we record the effective portion of the gainor loss on the derivative in accumulated other comprehensive income (OCI) as a separate component of stockholders’ equity and subsequently reclassifythese 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-forwarddifferential are excluded from the test of hedge effectiveness and are recorded currently in earnings as interest expense. We measure effectiveness bycomparing the cumulative change in the hedge contract with the cumulative change in the hedged item. During the year ended June 30, 2015, we did nothave any losses or gains related to the ineffective portion of our hedging instruments. No hedging relationships were terminated as a result of ineffectivehedging or forecasted transactions no longer probable of occurring for foreign currency forward contracts. We monitor the probability of forecastedtransactions as part of the hedge effectiveness testing on a quarterly basis. As of June 30, 2015, the notional amounts of our foreign exchange contracts were $27.1 million (EUR 23.7 million). As of June 30, 2015, a net loss ofapproximately $191,000, offset by $68,000 of deferred taxes, related to derivative instruments designated as cash flow hedges was recorded in OCI. As ofJune 30, 2014, a net gain of approximately $28,000, offset by $10,000 of deferred taxes, related to derivative instruments designated as cash flow hedgeswas recorded in OCI. It is expected that $168,000 of the gross loss, as of June 30, 2015, will be reclassified into earnings in the next 12 months along withthe earnings effects of the related forecasted transactions. As of June 30, 2015, $528,000 of the fair value of our cash flow hedges was classified in prepaids and other current assets, $45,000 was classified inaccrued liabilities, and $9,000 was classified in other noncurrent liabilities, net in our Consolidated Balance Sheets. During the year ended June 30, 2015,we recognized $2.2 million of gains in OCI and reclassified $2.4 million of gains from OCI to revenue. During the year ended June 30, 2014, werecognized $508,000 of losses in OCI and reclassified $474,000 of losses from OCI to revenue. L. Contingencies From time to time, we become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. Thesematters may relate to product liability, employment, intellectual property, tax, regulation, contract or other matters. The resolution of these matters as theyarise will be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial andmanagerial resources. While unfavorable outcomes are possible, based on available information, we generally do not believe the resolution of thesematters will result in a material adverse effect on our business, consolidated financial condition, or results of operation. However, a settlement payment orunfavorable outcome could adversely impact our results of operation. Our evaluation of the likely impact of these actions could change in the future andwe could have unfavorable outcomes that we do not expect. On December 21, 2011, NAI filed a lawsuit in the U.S. District Court for the Southern District of Texas, Houston Division, alleging infringement byWoodbolt Distribution, LLC, also known as Cellucor (Woodbolt), Vitaquest International, Inc., d/b/a Garden State Nutritionals (Garden State) and F.H.G.Corporation, d/b/a Integrity Nutraceuticals (Integrity), of NAI’s ’381 patent. The complaint alleges that Woodbolt sells nutritional supplements,including supplements containing beta-alanine such as C4 Extreme™, M5 Extreme™, and N-Zero Extreme™, that infringe the ‘381 patent. Woodbolt, inturn, filed a complaint seeking a declaratory judgment of non-infringement and invalidity of the ’381 patent in the U.S. District Court for the District ofDelaware. On February 17, 2012, Woodbolt filed a First Amended Complaint, realleging its original claims against the Company and asserting newclaims of violation of the Sherman Antitrust Act (15 U.S.C. § 2) and Unfair Competition. The Company reasserted the arguments in its prior motion todismiss and moved to dismiss the new claims asserted by Woodbolt. On January 23, 2013, the Delaware Court granted the Company’s motion to dismissWoodbolt’s case. On June 5, 2012, the Court in the above-referenced Texas case consolidated the pending suit with a second patent infringement casefiled against Woodbolt by the Company on May 3, 2012, asserting infringement its ‘422 patent. On November 9, 2012, NAI filed a supplementalcomplaint adding allegations of infringement of Woodbolt’s Cellucor Cor –Performance ®-BCAA™ and Cellucor Cor –Performance™ Creatineproducts. On June 14, 2013, NAI filed a third patent infringement lawsuit in the U.S. District Court for the Southern District of Texas, Houston Division,against Woodbolt, BodyBuilding.com and GNC Corporation alleging infringement of the ‘381 and ‘422 patents by Woodbolt’s Neon Sport Volt™product. Woodbolt asserted the same defenses and counterclaims as set forth in the earlier lawsuits. On June 24, 2013, the Court consolidated the casewith the earlier-filed lawsuits identified above. On June 25, 2013, Woodbolt filed a lawsuit in the U.S. District Court for the Southern District of Texas,Houston Division, against a newly-issued NAI U.S. patent no. 8,470,865, asserting declaratory judgment claims of non-infringement, invalidity andunenforceability. On July 1, 2013, Woodbolt’s lawsuit was consolidated with the three pending lawsuits filed by NAI. On July 24, 2013, NAI filed itsAnswer and Amended Counterclaims against Woodbolt alleging infringement of the ‘865 patent by the products accused in the pending cases previouslyfiled by NAI. On August 14, 2013, Woodbolt filed a counterclaim to NAI’s counterclaim asserting violation of the Sherman Antitrust Act (15 U.S.C. § 2)and Unfair Competition. On September 4, 2013, NAI moved to have Woodbolt’s counterclaims dismissed from the case. All of the consolidated casesremain pending. Woodbolt has also requested inter partes re-examination of the ’381 and ’422 patents by the USPTO. On July 26, 2012, the USPTOaccepted the request to re-examine the ’381 patent. On August 17, 2012, the USPTO accepted the request to re-exam the ’422 patent. On December 6,2013, the USPTO rejected the claims of the ‘381 patent and issued a right of appeal notice. On January 6, 2014, the Company filed its notice of appeal.On January 13, 2015, the USPTO issued a notification of appeal hearing in the '381 reexamination, which took place on April 15, 2015, before the PatentTrial and Appeal Board (PTAB) at the USPTO. On July 17, 2015, the PTAB issued its decision affirming the USPTO's prior rejection of the '381 patentclaims. On August 13, 2015, the Company filed a Request for Rehearing regarding the PTAB's decision. The request is currently pending. On August 8,2014, the USPTO rejected the claims of the ‘422 patent and issued a right of appeal notice. On September 8, 2014, NAI filed its notice of appeal. Theparties have filed briefs with the USPTO and the ‘422 reexamination is pending. 49 A declaration of non-infringement, invalidity or unenforceability of certain of our patents could have a material adverse impact upon our business results,operations, and financial condition. Although we believe the above litigation matters are supported by valid claims, there is no assurance NAI will prevail in these litigation matters or insimilar proceedings it may initiate or that litigation expenses will be as anticipated. M. Segment Information Our business consists of three segments for financial reporting purposes. The three 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 supplementsand other health care products, (ii) patent and trademark licensing, which primarily includes direct raw material sales and royalty income from our licenseand supply agreements associated with the sale and use of beta-alanine under our CarnosSyn® trade name, and (iii) branded products, which relates to themarketing and distribution of our branded nutritional supplements and consists primarily of the products sold under our Pathway to Healing productline. Due to the steady decline in sales of our Pathway to Healing product line over the prior several years, we decided to discontinue the product line.Pursuant to the license agreements between NAI and each of Dr. Reginald Cherry and the Cherry Ministries Inc. dated as of September 1, 2014 asamended (the License Agreements). Dr. Cherry and Cherry Ministries licensed to NAI the name, likeness, style, persona and other attributes of Dr. Cherryin connection with the sale of nutritional products that were marketed by NAI under its Pathway to Healing brand. Pursuant to the License Agreements,NAI was permitted to terminate the License Agreements by written notice at any time. We notified Dr. Cherry and Cherry Ministries of our decision todiscontinue the product line and the termination of the related license agreement was effective as of September 15, 2014. All termination activities relatedto the Pathway to Healing® product line were substantially completed by December 31, 2014. We did not change the financial presentation in this reportto reflect the branded products segment as “Discontinued Operations” as the wind down of this product line did not meet the criteria for discontinuedoperations presentation as prescribed by applicable accounting regulations (ASC 205-20). We evaluate performance based on a number of factors. The primary performance measures for each segment are net sales and income or loss fromoperations 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 the summary of significant accounting policies in Note A. 50®® Our operating results by business segment for the years ended June 30 were as follows (in thousands): 2015 2014 Net Sales Private-label contract manufacturing $69,670 $67,339 Patent and trademark licensing 9,140 5,444 Branded products 698 1,159 $79,508 $73,942 2015 2014 Operating Income Private-label contract manufacturing $5,172 $5,559 Patent and trademark licensing 3,811 2,281 Branded products 248 (235)Income from operations of reportable segments 9,231 7,605 Corporate expenses not allocated to segments (5,072) (4,828) $4,159 $2,777 2015 2014 Total Assets Private-label contract manufacturing $50,313 $50,424 Patent and trademark licensing 3,503 1,632 Branded products — 202 $53,816 $52,258 Our private-label contract manufacturing products are sold both in the U.S. and in markets outside the U.S., including Europe, Canada, Mexico, Australia,South Africa and Asia. Our primary market outside the U.S. is Europe. Our patent and trademark licensing activities are primarily based in the U.S. and ourbranded products are only sold in the U.S. Net sales by geographic region, based on the customers’ location, for the two years ended June 30 were as follows (in thousands): 2015 2014 United States $43,671 $38,729 Markets outside the United States 35,837 35,213 Total net sales $79,508 $73,942 Products manufactured by NAIE accounted for 74% of net sales in markets outside the U.S. in fiscal 2015 and 57% in fiscal 2014. No productsmanufactured by NAIE were sold in the U.S. during the fiscal years ended June 30, 2015 and 2014. 51 Assets and capital expenditures by geographic region, based on the location of the company or subsidiary at which they were located or made, for the twoyears ended June 30 were as follows (in thousands): 2015 Long-LivedAssets TotalAssets CapitalExpenditures United States $5,525 $34,988 $1,071 Europe 2,108 18,828 637 $7,633 $53,816 $1,708 2014 Long-LivedAssets TotalAssets CapitalExpenditures United States $6,648 $36,618 $2,297 Europe 2,163 15,640 382 $8,811 $52,258 $2,679 N. Subsequent Events On July 30, 2015, we entered into a purchase and sale agreement for the sale of our domestic corporate headquarters in San Marcos, CA. This proposedsale is as of the result of an unsolicited offer for the purchase of our building and we are currently in a 150-day escrow that includes significantcontingencies to the completion of the sale. As a result of these contingencies, it is premature to estimate the final sales price or expected gain or loss thatwill result from the completion of this sales transaction. 52 ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A.CONTROLS AND PROCEDURES (a) Evaluation of Disclosure 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 thatmaterial information is: (1) gathered and communicated to our management, including our principal executive and financial officers, in a manner thatallows for timely decisions regarding required disclosures; and (2) recorded, processed, summarized, reported and filed with the SEC as required under theSecurities Exchange Act of 1934 and within the time periods specified by the SEC. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design andoperation of our disclosure controls and procedures as of June 30, 2015. Based on such evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective as of June 30, 2015. (b) Management’s Annual Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, and for performing anassessment of the effectiveness of internal control over financial reporting as of June 30, 2015. For this purpose, internal control over financial reportingrefers to a process designed by, or under the supervision of, the Company’s principal executive and financial officers and effected by the Company’sboard of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of theCompany; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance withGAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of theCompany; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of theCompany’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate. Management performed an assessment of the effectiveness of the Company’s internal control over financial reporting as of June 30, 2015 based uponcriteria in an Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Basedon this assessment, management believes the Company’s internal control over financial reporting was effective as of June 30, 2015 based on the criteriaissued by COSO. This report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control overfinancial reporting. Management’s report was not required to be attested to by the Company’s independent registered public accounting firm pursuant toapplicable law and rules that permit the Company to provide only management’s report in this report. (c) Changes in Internal Control Over Financial Reporting There were no changes to our internal control over financial reporting during the fourth quarter ended June 30, 2015 that have materially affected, or thatare reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B.OTHER INFORMATION None. PART III The information called for under Items 10- 14 of this Part III will be incorporated by reference from our definitive proxy statement for our Annual Meetingof Stockholders to be held on December 4, 2015, to be filed on or before October 28, 2015. 53 PART IV ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES The following documents are filed as part of this report: (1)Financial Statements. The financial statements listed below are included under Item 8 of this report: •Consolidated Balance Sheets as of June 30, 2015 and 2014; •Consolidated Statements of Operations and Comprehensive Income for the years ended June 30, 2015 and 2014; •Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2015 and 2014; •Consolidated Statements of Cash Flows for the years ended June 30, 2015 and 2014; and •Notes to Consolidated Financial Statements. 54 (2)Exhibits. The following exhibit index shows those exhibits filed with this report and those incorporated by reference: EXHIBIT INDEX ExhibitNumber Description Incorporated By Reference To 3(i) Amended and Restated Certificate of Incorporation of NaturalAlternatives International, Inc. filed with the Delaware Secretary ofState on January 14, 2005 Exhibit 3(i) of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2004, filed with thecommission on February 14, 2005 3(ii) Amended and Restated By-laws of Natural AlternativesInternational, 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 yearended June 30, 2005, filed with the commission on September 8,2005 10.1 1999 Omnibus Equity Incentive Plan as adopted effective May 10,1999, amended effective January 30, 2004, and further amendedeffective December 3, 2004* Exhibit 10.1 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2004, filed with thecommission on February 14, 2005 10.2 Amended and Restated Exclusive License Agreement effective as ofSeptember 1, 2004 by and among NAI and Dr. Reginald B. Cherry Exhibit 10.11 of NAI’s Annual Report on Form 10-K for the fiscalyear ended June 30, 2004, filed with the commission on September14, 2004 10.3 Exclusive License Agreement effective as of September 1, 2004 byand among NAI and Reginald B. Cherry Ministries, Inc. Exhibit 10.12 of NAI’s Annual Report on Form 10-K for the fiscalyear ended June 30, 2004, filed with the commission on September14, 2004 10.4 First Amendment to Exclusive License Agreement effective as ofDecember 10, 2004 by and among NAI and Reginald B. CherryMinistries, Inc. Exhibit 10.13 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2004, filed with thecommission on February 14, 2005 10.5 Lease of Facilities in Vista, California between NAI and CalwestIndustrial Properties, LLC, a California limited liability company(lease reference date June 12, 2003) Exhibit 10.10 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended September 30, 2003, filed with thecommission on November 5, 2003 10.6 Form of Indemnification Agreement entered into between NAI andeach of its directors Exhibit 10.15 of NAI’s Annual Report on Form 10-K for the fiscalyear ended June 30, 2004, filed with the commission on September14, 2004 10.7 Loan Agreement between NAIE and Credit Suisse dated as ofSeptember 22, 2006, including general conditions (portions of theLoan Agreement have been omitted pursuant to a request forconfidential treatment) Exhibit 10.36 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended September 30, 2006, filed with thecommission on November 1, 2006 10.8 First Amendment to Loan Agreement between NAIE and CreditSuisse dated as of February 19, 2007 Exhibit 10.41 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended March 31, 2007, filed with the commissionon May 14, 2007 10.9 2009 Omnibus Incentive Plan* Exhibit D of NAI’s definitive Proxy Statement filed with thecommission on October 16, 2009 10.10 Manufacturing Agreement by and between NSA, Inc. and NAI datedApril 1, 2005 Exhibit 10.43 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2009, filed with thecommission on February 16, 2010 10.11 Manufacturing Agreement by and between Mannatech, Inc. and NAIdated April 22, 1998 Exhibit 10.44 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2009, filed with thecommission on February 16, 201010.12 First Amendment to Manufacturing Agreement by and betweenMannatech, Incorporated and NAI dated May 23, 2003 Exhibit 10.45 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2009, filed with thecommission on February 16, 2010 10.13 Second Amendment to Manufacturing Agreement by and betweenMannatech, Incorporated and NAI dated July 1, 2003 Exhibit 10.46 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2009, filed with thecommission on February 16, 2010 10.14 Third Amendment to Manufacturing Agreement by and betweenMannatech, Incorporated and NAI dated July 1, 2004 Exhibit 10.47 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2009, filed with thecommission on February 16, 2010 10.15 Fourth Amendment to Manufacturing Agreement by and amongMannatech, Incorporated, Mannatech Swiss International GmbHand NAI dated January 1, 2008 Exhibit 10.48 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2009, filed with thecommission on February 16, 2010 55 10.16 Manufacturing Sales Agreement by and between Mannatech,Incorporated and NAI dated November 19, 2004 Exhibit 10.49 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2009, filed with thecommission on February 16, 2010 10.17 Amendment to Manufacturing Sales Agreement by and amongMannatech, Incorporated, Mannatech Swiss International GmbH andNAI dated January 1, 2008 Exhibit 10.50 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2009, filed with thecommission on February 16, 2010 10.18 Exclusive Manufacturing Agreement by and between NSA, Inc., NAIand NAIE dated as of April 1, 2005 Exhibit 10.51 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2009, filed with thecommission on February 16, 2010 10.19 Amended and Restated Employment Agreement dated as of August31, 2010, by and between NAI and Mark A. LeDoux* Exhibit 10.41 of NAI’s Annual Report on Form 10-K for the fiscalyear ended June 30, 2010, filed with the commission on September17, 2010 10.20 Amended and Restated Employment Agreement dated as of August31, 2010, by and between NAI and Kenneth E. Wolf Exhibit 10.42 of NAI’s Annual Report on Form 10-K for the fiscalyear ended June 30, 2010, filed with the commission on September17, 2010 10.21 License and Fee Agreement effective November 10, 2010 by andamong Roger Harris, Mark Dunnett, Kenny Johansson and NAI Exhibit 10.40 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended September 30, 2010, filed with thecommission on November 12, 2010 10.22 Credit Agreement by and between NAI and Wells Fargo Bank, N.A.effective as of December 1, 2010 Exhibit 10.1 of NAI’s Current Report on Form 8-K dated December16, 2010, filed with the commission on December 22, 2010 10.23 ISDA 2002 Master Agreement dated as of March 10, 2011 by andbetween Bank of America N.A. and NAI (with Schedule dated March10, 2011) Exhibit 10.31 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended March 31, 2011, filed with the commissionon May 16, 2011 10.24 First Amendment to Credit Agreement by and between NAI andWells Fargo Bank, N.A. effective as of November 28, 2011 Exhibit 10.1 of NAI’s Current Report on Form 8-K dated December27, 2011, filed with the commission on December 30, 2011 10.25 Revolving Line of Credit Note made by NAI for the benefit of WellsFargo Bank, N.A. dated November 28, 2011 in the amount of$5,000,000 Exhibit 10.2 of NAI’s Current Report on Form 8-K dated December27, 2011, filed with the commission on December 30, 2011 10.26 First Amendment to Manufacturing Agreement by and betweenNSA, Inc. and NAI effective as of April 1, 2012 Exhibit 10.35 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended March 31, 2012, filed with the commissionon May 14, 2012 10.27 First Amendment to Exclusive Manufacturing Agreement by andbetween NSA, Inc., NAI and NAIE effective as of April 1, 2005. Exhibit 10.36 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended March 31, 2012, filed with the commissionon May 14, 2012 10.28 Second Amendment to Credit Agreement by and between NAI andWells Fargo Bank, N.A. effective as of December 7, 2012 Exhibit 10.38 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2012, filed with thecommission on February 12, 2013 10.29 Revolving Line of Credit Note made by NAI for the benefit of WellsFargo Bank, N.A. dated December 7, 2012 in the amount of$5,000,000 Exhibit 10.39 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2012, filed with thecommission on February 12, 2013 10.30 Third amendment to the Lease of Facilities in Vista, Californiabetween NAI and CWCA Vista Distribution 77, LLC, a Delawarelimited liability company Exhibit 10.40 of NAI’s Annual Report on Form 10-K for the fiscalyear ended June 30, 2013, filed with the commission on September19, 2013 10.31 Second amendment to the Amended and Restated EmploymentAgreement, by and between NAI and Mark A. LeDoux, effectiveJuly 1, 2013* Exhibit 10.41 of NAI’s Annual Report on Form 10-K for the fiscalyear ended June 30, 2013, filed with the commission on September19, 2013 10.32 Second amendment to the Amended and Restated EmploymentAgreement, by and between and Kenneth E. Wolf, effective July 1,2013* Exhibit 10.42 of NAI’s Annual Report on Form 10-K for the fiscalyear ended June 30, 2013, filed with the commission on September19, 2013 10.33 Third Amendment to Credit Agreement by and between NAI andWells Fargo Bank, N.A. effective as of November 1, 2013 Exhibit 10.43 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2013 filed with thecommission on February 12, 2014.  56 10.34 Revolving Line of Credit Note made by NAI for the benefit ofWells Fargo Bank, N.A. dated November 1, 2013 in the amount of$5,000,000 Exhibit 10.44 of NAI’s Quarterly Report on Form 10-Q for thequarterly period ended December 31, 2013 filed with thecommission on February 12, 2014. 10.35 Third amendment to the Amended and Restated EmploymentAgreement, by and between NAI and Mark A. LeDoux, effectiveJuly 7, 2014* Exhibit 10.35 of NAI’s Annual Report on Form 10-K for the fiscalyear ended June 30, 2014, filed with the commission on September25, 2014. 10.36 Third amendment to the Amended and Restated EmploymentAgreement, by and between and Kenneth E. Wolf, effective July 7,2014* Exhibit 10.36 of NAI’s Annual Report on Form 10-K for the fiscalyear ended June 30, 2014, filed with the commission on September25, 2014. 10.37 Agreement to License by and between NAI and CompoundSolutions, Inc. effective as of April 1, 2014 Exhibit 10.37 of NAI’s Annual Report on Form 10-K for the fiscalyear ended June 30, 2014, filed with the commission on September25, 2014. 10.38 Lease of Facilities in Manno, Switzerland between NAIE and Mr.Silvio Tarchini effective July 1, 2014 (English translation) Exhibit 10.38 of NAI’s Annual Report on Form 10-K for the fiscalyear ended June 30, 2014, filed with the commission on September25, 2014. 21 Subsidiaries of the Company Filed herewith 23.1 Consent of Independent Registered Public Accounting Firm Filed herewith 23.2 Consent of Former Independent Registered Public Accounting Firm 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 Furnished herewith 101.SCH XBRL Taxonomy Extension Schema Document Furnished herewith 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document Furnished herewith 101.DEF XBRL Taxonomy Extension Definition Linkbase Document Furnished herewith 101.LAB XBRL Taxonomy Extension Label Linkbase Document Furnished herewith 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document Furnished herewith *Indicates management contract or compensatory plan or arrangement. 57 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Natural Alternatives International, Inc., the registrant, hasduly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: September 18, 2015 NATURAL ALTERNATIVES INTERNATIONAL, INC. By:/s/ Mark A. LeDoux Mark A. LeDoux, Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of NaturalAlternatives International, Inc. and in the capacities and on the dates indicated. SignatureTitle Date /s/ Mark A. LeDoux Chief Executive Officer andSeptember 18, 2015(Mark A. LeDoux)Chairman of the Board of Directors(principal executive officer) /s/ Ken Wolf Chief Financial OfficerSeptember 18, 2015(Ken Wolf)(principal financial officer andprincipal accounting officer) /s/ Joe E. Davis DirectorSeptember 18, 2015(Joe E. Davis) /s/ Alan G. Dunn DirectorSeptember 18, 2015(Alan G. Dunn) /s/ Alan J. Lane DirectorSeptember 18, 2015(Alan J. Lane) /s/ Lee G. Weldon DirectorSeptember 18, 2015(Lee G. Weldon) 58Exhibit 21 List of Subsidiaries ofNatural Alternatives International, Inc., a Delaware corporation Name of Subsidiary State or other Jurisdictionof Incorporation or Organization Natural Alternatives International Europe S.A.Switzerland  EXHIBIT 23.1 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-164689, 333-180195, 333-195967) of our report datedSeptember 18, 2015, with respect to the consolidated financial statements of Natural Alternatives International, Inc. included in this Annual Report (Form10-K) of Natural Alternatives International, Inc. for the year ended June 30, 2015. /s/ HASKELL & WHITE LLP San Diego, CaliforniaSeptember 18, 2015 Exhibit 23.2 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-164689, 333-180195, 333-195967) of our report datedSeptember 25, 2014, with respect to the consolidated financial statements of Natural Alternatives International, Inc. included in this Annual Report (Form10-K) of Natural Alternatives International, Inc. for the year ended June 30, 2015. /s/ Ernst & Young LLP San Diego, CaliforniaSeptember 18, 2015 /s/ Mark A. LeDoux Mark A. LeDoux, Chief Executive OfficerExhibit 31.1 Certification of Chief Executive OfficerPursuant toRule 13a-14(a)/15d-14(a) I, Mark A. LeDoux, Chief Executive Officer of Natural Alternatives International, Inc., certify that: 1. I have reviewed this Annual Report on Form 10-K 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 thestatements 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 thefinancial 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 inExchange 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)) forthe registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, toensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within thoseentities, 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes 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 theeffectiveness 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 recentfiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materiallyaffect, 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 theregistrant’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 reasonablylikely 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 controlover financial reporting. Date: September 18, 2015 /s/ Ken Wolf Ken Wolf, Chief Financial OfficerExhibit 31.2 Certification of Chief Financial OfficerPursuant toRule 13a-14(a)/15d-14(a) I, Ken Wolf, Chief Financial Officer of Natural Alternatives International, Inc., certify that: 1. I have reviewed this Annual Report on Form 10-K 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 thestatements 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 thefinancial 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 inExchange 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)) forthe 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 withinthose 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 oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal 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 theeffectiveness 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 mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely tomaterially 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 theregistrant’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 arereasonably 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 internalcontrol over financial reporting. Date: September 18, 2015 Exhibit 32 CertificationPursuant 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 ofthe undersigned officers of Natural Alternatives International, Inc., a Delaware corporation, does hereby certify, to such officer’s knowledge, that theAnnual Report on Form 10-K for the fiscal year ended June 30, 2015 of Natural Alternatives International, Inc. fully complies with the requirements ofSection 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, inall material respects, the financial condition and results of operations of Natural Alternatives International, Inc. Date: September 18, 2015 /s/ Mark A. LeDoux Mark A. LeDoux, Chief Executive Officer Date: September 18, 2015 /s/ Ken Wolf Ken Wolf, 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-K or as a separate disclosure document. 

Continue reading text version or see original annual report in PDF format above