NATURAL ALTERNATIVES INTERNATIONAL INC

(UNAUDITED)

A. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form10-Q and with applicable rules and regulations. Pursuant to such rules and regulations, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted. In management’s opinion, all adjustments necessary for a fair presentation of the financial position, results of operations, stockholders’ equity, and cash flows have been included and are of a normal, recurring nature. The results of operations for thethree andsix months ended* December 31, 2023* arenot necessarily indicative of the operating results for the full fiscal year or for any future periods.

You should read the financial statements and these notes, which notes are an integral part of the financial statements, together with our audited financial statements included in our Annual Report on Form10-K for the fiscal year ended* June 30, 2023* (“2023 Annual Report”). The accounting policies used to prepare the financial statements included in this Report are the same policies described in the notes to the consolidated financial statements in our2023 Annual Report unless otherwise noted below.

Recently Adopted Accounting Pronouncements

We didnot adopt any accounting pronouncements during thethree months ended* December 31, 2023.*

Recently Issued Accounting and Regulatory Pronouncements

In* October 2023,the FASB issued Accounting Standards Update ("ASU")2023-06, "Disclosure Improvements - Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative". ASU2023*-06 clarifies or improves disclosure and presentation requirements on various disclosure areas, including the statement of cash flows, earnings per share, debt, equity, and derivatives. The amendments will align the requirements in the FASB Accounting Standards Codification (ASC) with the SEC’s regulations. The amendments in this ASU will be effective on the date the related disclosures are removed from Regulation S-X or Regulation S-K by the SEC, and willnot be effective if the SEC hasnot removed the applicable disclosure requirement by* June 30, 2027.Early adoption is prohibited. As we are currently subject to these SEC requirements, this ASU isnot* expected to have a material impact on our Consolidated Financial Statements or related disclosures.

In* November 2023,the FASB issued ASU2023*-07, "Segment Reporting (Topic280): Improvements to Reportable Segment Disclosures". This amendment improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments in ASU2023-07 are effective for fiscal years beginning after* December 15, 2023,with early adoption permitted. This ASU will be adopted in ourfirst* quarter of fiscal2025. We are currently evaluating the impact of this standard; however, we donot expect it to have a material impact on our Consolidated Financial Statements.

In* December 2023,the FASB issued ASU2023*-09, "Income Taxes (Topic740): Improvements to Income Tax Disclosures". The amendments in this update address investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. This update also includes certain other amendments to improve the effectiveness of income tax disclosures. The amendments in ASU2023-09 are effective for fiscal years beginning after* December 15, 2024,with early adoption permitted. This ASU will be adopted in ourfirst* quarter of fiscal2026. We are currently evaluating the impact of this standard; however, we donot expect it to have a material impact on our Consolidated Financial Statements.

Net (Loss) Income per Common Share

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

We exclude the impact of restricted stock from the calculation of diluted net loss per common share in periods where we have a net loss or when their inclusion would be antidilutive. During thethree months ended* December 31, 2023,we excluded 238,682 shares of unvested restricted stock. During thesix* months ended* December 31, 2023,we excluded 236,155 shares of unvested stock. During thethree* andsix months ended* December 31, 2022*, we excluded 50,377 shares of unvested restricted stock.

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Revenue Recognition

We record revenue based on afive-step model which includes: (1) identifying a contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price among the performance obligations; and (5) recognizing revenue as each of the various performance obligations are satisfied.

Revenue is measured as the net amount of consideration expected to be received in exchange for fulfillingone or more performance obligations. We identify purchase orders from customers as contracts. The amount of consideration expected to be received and revenue recognized includes estimates of variable consideration, including estimates for early payment discounts and volume rebates. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. We review and update these estimates at the end of each reporting period and the impact of any adjustments is recognized in the period the adjustments are identified. In assessing whether collection of consideration from a customer is probable, we consider both the customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in the underlying customer agreement, which is typically30 days from the invoice date. Invoices are generally issued on the date of transfer of control of the products ordered to the customer.

Revenue is recognized at the point in time that each of our performance obligations is fulfilled, and control of the ordered products is transferred to the customer. This transfer occurs when the product is shipped, or in some cases, when the product is delivered to the customer.

We recognize revenue in certain circumstances before delivery to the customer has occurred (commonly referred to as bill-and-hold transactions). Products sold under bill-and-hold arrangements are recorded as revenue when risk of ownership has been transferred to the customer, but the product hasnot shipped due to a substantive reason, typically at the customer’s request. The product must be separately identified as belonging to the customer, ready for physical transfer to the customer, and we cannot have the ability to redirect the product to another customer.

We provide early payment discounts to certain customers. Based on historical payment trends, we expect that these customers will take advantage of these early payment discounts. The cost of these discounts is reported as a reduction to the transaction price. If the actual discounts differ from those estimated, the difference is also reported as a change in the transaction price. We require prepayment from certain customers. We record any payments received in advance of contract fulfillment as a contract liability and they are classified as customer deposits on the consolidated balance sheet.

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

Except for product defects,no right of return exists on the sale of our products. We estimate returns based on historical experience and recognize a returns liability for any estimated returns. As of* December 31, 2023*, we haveno estimated returns liability.

We currently own certain U.S. patents, and each patent’s corresponding foreign patent applications. All of these patents and patent rights relate to the ingredient known as beta-alanine marketed and sold under our CarnoSyn® and SR CarnoSyn® trade names. We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of $2.2 million during thethree months ended* December 31, 2023*, and $3.9 million during thesix months ended* December 31, 2023.We similarly recorded $1.5 million during thethree* months ended* December 31, 2022*, and $2.8 million during thesix months ended* December 31, 2022.These royalty income and raw material sale amounts resulted in royalty expense paid to the original patent holders from whom NAI acquired its patents and patent rights. We recognized royalty expense as a component of cost of goods sold in the amount of approximately $93,000 during thethree* months ended* December 31, 2023*, and $182,000 during thesix months ended* December 31, 2023.We recorded approximately $78,000 of royalty expense during thethree* months ended* December 31, 2022*, and $105,000 during thesix months ended* December 31, 2022.*

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Stock-Based Compensation

The Board of Directors approved our current omnibus equity incentive plan that became effective* January 1, 2021 (the“2020* Plan”), which was approved by our stockholders at the Annual Meeting of Stockholders on* December 4, 2020.Under the2020* Plan, we* may*grant nonqualified and incentive stock options, restricted stock grants, restricted stock units, stock appreciation rights, and other stock-based awards to employees, non-employee directors and consultants.

We didnot have any option activity or options outstanding during thethree andsix months ended* December 31, 2023*, or* December 31, 2022*.

We didnot grant any restricted stock shares during thethree months ended* December 31, 2023.We granted a total of 15,000 restricted stock shares to certain new members of our management team during thesix* months ended* December 31, 2023.We didnot grant any restricted stock shares during thethree* andsix months ended* December 31, 2022*. During thethree andsix months ended* December 31, 2023*, and* December 31, 2022*,no restricted stock shares were forfeited. Our net loss included stock-based compensation expense with the vesting of prior restricted stock grants of approximately $0.3 million for thethree months ended* December 31, 2023* and $0.6 million for thesix months ended* December 31, 2023.Our net income included stock based compensation expense in connection with the vesting of prior restricted stock grants of approximately $0.2 million for thethree* months ended* December 31, 2022*, and $0.5 million for thesix months ended* December 31, 2023.*

Deferred Compensation Plan

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

The Incentive Plan authorizes the Human Resources Committee or the Board of Directors to grant to, and administer, unsecured and deferred cash Awards to Participants and to subject each Award to whatever conditions are determined appropriate by the Human Resources Committee or the Board of Directors. The terms of each Award, including the amount and any conditions that must be met to be entitled to payment of the Award are set forth in an Award Agreement between each Participant and NAI. The Incentive Plan provides the Board of Directors with the discretion to set aside assets to fund the Incentive Plan although that hasnot been done to date.

No deferred cash awards were granted or forfeited during thethree andsix months ended* December 31, 2023*, and* December 31, 2022*.

Fair Value of Financial Instruments

Except for cash and cash equivalents, as of* December 31, 2023*, and* June 30, 2023*, we didnot have any financial assets or liabilities classified as Level1. We classify derivative forward exchange and interest rate swap contracts as Level2 assets and liabilities. The fair values were determined by obtaining pricing from our bank and corroborating those values with athird party bank or pricing service.

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Fair value of derivative instruments classified as Level2 assets and liabilities consisted of the following (in thousands):

We also classify any outstanding line of credit and term loan balance as a Level2 liability. As of* December 31, 2023*, and* June 30, 2023*, we didnot have any financial assets or liabilities classified as Level3. We didnot transfer any assets or liabilities between these levels during fiscal2023 or thethree andsix months ended* December 31, 2023*.

B. Inventories, net

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

C. Property and Equipment

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

Depreciation and amortization expense was approximately $1.2 million during thethree months ended* December 31, 2023*, and $2.3 million during thesix months ended* December 31, 2023.Depreciation expense was approximately $1.1 million during thethree* months ended* December 31, 2022*, and $2.0 million during thesix months ended* December 31, 2022.*Construction in progress is included in the building and building improvements line.

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D. Other Comprehensive (Loss) Income

Other comprehensive (loss) income (“OCL” and “OCI”) consisted of the following during thethree andsix months ended* December 31, 2023*, and* December 31, 2022* (in thousands):

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E. Leases

We currently lease our Vista, California and Lugano, Switzerland product manufacturing and support facilities.

On* July 18, 2023,we entered into a Fourth Amendment to our Vista, California manufacturing facilities lease. The Fourth Amendment extends the term of the lease by an additionalten years andfive* months commencing* April 1, 2024.The amended lease coveringtwo* buildings and approximately 162,000 square feet will result in an increase in base rent to $1.50 per square foot, afterfive free months of base rent beginning at the commencement of the extended term. NAI intends to construct substantial improvements to the facilities including butnot limited to installation of an approximately $2.3 million solar electrical generating system on both buildings, and other substantial improvements. Pursuant to the Fourth Amendment, the Landlord will reimburse NAI for up to $1.1 million of these tenant improvements to the buildings. Our lease liability and Right of Use asset were both increased by approximately $25.9 million as a result of this lease extension effective on the date that the Fourth Amendment was executed.

Our leases are classified as operating leases. Substantially all our operating leases are comprised of payments for the use of manufacturing and office space. We haveno leases classified as finance leases. As of* December 31, 2023*, the weighted average remaining lease term for our operating leases was 9.9 years and the weighted average discount rate for our operating leases was 5.89%. As of* June 30, 2023*, the weighted average remaining lease term for our operating leases was 5.3 years and the weighted average discount rate was 4.12%.

Other information related to leases as of* December 31, 2023*, and* December 31, 2022*, was as follows (in thousands):

F. Debt

On* May 24, 2021,we entered into a new credit facility with Wells Fargo Bank, N.A (“Wells Fargo”) to extend the maturity for our working line of credit from November 1, 2022,to May 24, 2024.This credit facility provides total lending capacity of up to $20.0 million and allows us to use the credit facility for working capital as well as potential acquisitions. On August 18, 2021,we entered into an amendment of our credit facility with Wells Fargo. The amended credit facility added a $10.0 million term loan to the existing $20.0 million credit facility and permitted us to use the$10.0* million term loan as part of the $17.5 million purchase consideration for the acquisition of our manufacturing and warehouse property in Carlsbad, California. The amended credit agreement also increased the allowed capital expenditures from $10.0 million to $15.0 million for fiscal2022 (exclusive of the amount paid for the acquisition of the new Carlsbad property noted above). In addition, the revised credit notes now reflect a change in the interest rate reference from LIBOR to Secured Overnight Financing Rate (SOFR). The Credit Agreement was amended and a new Revolving Line of Credit Note, and Security Agreement were entered into. A Term Note and real property security documents were added to secure the Term Note by the Carlsbad property.

Subsequently we entered into a Second and Third Amendment that changed certain limits on our use of the line of credit. In thesecond quarter of fiscal2024 we failed to meetthree continuing requirements for our line of credit and werenot in compliance at the end of oursecond quarter. As of* February 13, 2024,*we entered into a Fourth Amendment to our credit facility with Wells Fargo. The Fourth Amendment waived all prior instances of non-compliance, decreased our total borrowing capacity on the line of credit to $12.5 million, increased the interest rate on borrowings under the line of credit to 2.25% from 1.29% above the daily simple SOFR rate, modified our continuing compliance requirements, and reduced the uses we can fund with the line of credit.

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Under the terms of the Credit Agreement, as amended by the Fourth Amendment, borrowings are subject to eligibility requirements including maintaining (i) a ratio of total liabilities to tangible net worth ofnot greater than 1.50 to1.0 at any time; (ii) limits our losses to a decreasing amount over the nextthree quarters, with net income after taxes ofnot less than $1.00 by* September 30, 2024; (iii) a rolling4*-quarter fixed charge coverage rationot less than 1.25 to1.0 as of* December 31, 2024and each quarter thereafter. The Fourth Amendment includes a limitation on the amount of capital expenditures that can be made in a given fiscal year, with such limitation set at $6.5 million, requires us to suspend share repurchase and dividend activity, and includes an availability reserve of 10% that will be in place until we return to profitability. Any amounts outstanding under the line of credit will bear interest at a fixed or fluctuating interest rate as elected by us from time to time. Any amounts outstanding under the line of credit must be paid in full on or before the maturity date which remains at May 23, 2025.Amounts outstanding that are subject to a fluctuating interest rate maybe prepaid at any time without penalty. Amounts outstanding that are subject to a fixed interest rate may*be prepaid at any time in minimum amounts of $100,000, subject to a prepayment fee equal to the sum of the discounted monthly differences between payment under a fixed rate versus payment under the variable rate for each month from the month of prepayment through the month in which the then applicable fixed rate term matures. There is an unused commitment fee of 0.25% required as part of the line of credit, and an origination fee of 1% we paid upon execution of the Fourth Amendment.

The Term Note used as part of the purchase consideration of our powder processing and warehouse property in Carlsbad, California referenced above, was for the original principal amount of $10.0 million, and is aseven-year term note with payments fully amortized based on atwenty-five year assumed term. Installment payments under this loan commenced* October 1, 2021,and continue through August 1, 2028,with a final installment consisting of all remaining amounts due to be paid in full on September 1, 2028.Amounts outstanding on this note during the term of the agreement bear interest equal to 1.8% above the SOFR rolling30*-day average. In connection with this term loan, we entered into an interest rate swap with Wells Fargo that effectively fixes our interest rate on our term loan at 2.4% for thefirst three years of the term of the note.

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 credit approval with Wells Fargo Bank, which allows us to hedge foreign currency exposures up to30 months in the future. We also have credit approval with Bank of America which allows us to hedge foreign currency exposures up to24 months in the future.

As of* December 31, 2023*, we had $9.4 million outstanding under the Term Note used in* August 2021*for the purchase of our Carlsbad, California powder processing and warehouse property.

On* December 31, 2023*, we werenot in compliance with the financial covenants related to net income requirements as noted in item (iii) above and the fixed charge coverage ratio as noted in item (iv) above. On* February 13, 2024,we entered into afourth* amendment to our credit facility with Wells Fargo. Thefourth amendment modifies the financial covenant requirements such that item (iii) noted above has been eliminated through the end of fiscal2024 and replaced with maximum loss requirements of $3.2 million for thethird quarter of fiscal2024 and $2.0 million for thefourth quarter of fiscal2024 and a requirement to maintain net income after taxesnot less than*$1.00* on a quarterly basis beginning with thefirst quarter of fiscal2025. The amendment also eliminates the fixed charge coverage ratio requirements described in item (iv) above through the quarter ending* September 30, 2024and resuming with the quarter ending December 31, 2024.The amended credit agreement also decreased the allowed capital expenditures from $7.5 million to $6.5 million for fiscal2024* and beyond and requires us to suspend share repurchase and dividend activity. All other financial covenants remain unmodified. The amended credit agreement also modifies our borrowing capacity to a monthly asset-based borrowing base calculation with a maximum borrowing capacity of $12.5 million, which includes an availability reserve of 10% that will be in place until we return to profitability. The amendment also modifies our interest rate to be equal to 2.25% above the daily simple SOFR rate and includes a 0.25% unused commitment fee payable quarterly in arrears along with an up-front amendment fee of 1.0% of the maximum borrowing base.

As of* December 31, 2023*, we hadzero outstanding on our credit facility with Wells Fargo Bank.

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G. Economic Dependency

We had substantial net sales to certain customers during the periods shown in the following table. The loss of any of these customers, or a significant decline in (i) sales to these customers, (ii) the growth rate of sales to these customers, or (iii) these customers’ ability to make payments when due, each individually could have a material adverse impact on our net sales and net operating results. Net sales to anyone customer representing10% or more of the respective period's consolidated net sales were as follows (in thousands):

(a) Sales were less than10% of the respective period's consolidated net sales.

Accounts receivable from these customers totaled $6.9 million at* December 31, 2023* and $3.3 million at* June 30, 2023*.

We buy certain products, including beta-alanine, from a limited number of raw material suppliers who meet our quality standards. The loss of any of these suppliers could have a material adverse impact on our net sales and net income. Raw material purchases from anyone supplier representing10% or more of the respective period’s total raw material purchases were as follows (dollars in thousands):

H. Segment Information

Our business consists oftwo segments for financial reporting purposes. Thetwo segments are identified as (i) private-label contract manufacturing, which primarily relates to the provision of private-label contract manufacturing services to companies that market and distribute nutritional supplements and other health care products, and (ii) patent and trademark licensing, which primarily includes direct raw material sales and royalty income from our license and supply agreements associated with the sale and use of beta-alanine under our CarnoSyn® and SR CarnoSyn® trade names.

We evaluate performance of these segments based on a number of factors. The primary performance measures for each segment are net sales and income or loss from operations before the allocation of certain corporate level expenses. Operating income or loss for each segment doesnot include corporate general and administrative expenses, interest expense and other miscellaneous income and expense items. Corporate general and administrative expenses include, but arenot limited to human resources, corporate legal, finance, information technology, and other corporate level related expenses, which arenot allocated to any segment. Transfers of raw materials between segments are recorded at cost. The accounting policies of our segments are the same as those described in the summary of significant accounting policies in Note A above and in the consolidated financial statements included in our2023 Annual Report.

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

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

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

Products manufactured by our Swiss subsidiary ("NAIE") accounted for 70% of net sales in markets outside the U.S. for thethree months ended* December 31, 2023*, and 80% for thesix months ended* December 31, 2023.Products manufactured by our Swiss subsidiary ("NAIE") accounted for 73% of net sales in markets outside the U.S. for thethree* months ended* December 31, 2022*, and 75% for thesix months ended* December 31, 2022.*

Long-lived assets by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):

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

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

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I. Income Taxes

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

Our effective tax rate for thethree months ended* December 31, 2023*, was 19.9% and our effective tax rate for thethree months ended* December 31, 2022,was 20.7%. Our effective tax rate for thesix* months ended* December 31, 2023,was 20.1% and our effective tax rate for thesix* months ended* December 31, 2022*, was 20.5%. Our effective tax rate for thethree andsix months ended* December 31, 2023*, differ from the fiscal2023 U.S. federal statutory rate of 21% primarily due to the foreign tax rate differential and forecasted research and development tax credits.

We record valuation allowances to reduce our deferred tax assets to an amount we believe is more likely thannot to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely thannot that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. During thethree andsix months ended* December 31, 2023*, there wasno change to our valuation allowance for our deferred tax assets.

J. Treasury Stock

We purchase shares under a stock repurchase plan (“Repurchase Plan”) authorized by the Board of Directors. The total authorized repurchase amount is $18.0 million and as of* December 31, 2023*, we had approximately $716,000 remaining available under the Repurchase Plan. Under the Repurchase Plan, we* may,from time to time, purchase shares of our common stock, depending upon market conditions, in open market or privately negotiated transactions. The Fourth Amendment to the Credit Agreement with Wells Fargo effective February 13, 2024,prohibits most stock repurchases (see Footnote F). As a result, until that restriction is modified or removed the Company doesnot* intend to purchase its shares other than its longstanding practice of purchasing shares from its employees in exchange for paying the employees’ withholding requirements upon vesting of restricted stock held by the employee.

There wereno stock repurchases for thethree andsix months ended* December 31, 2023*.

Stock repurchases for thethree months ended* December 31, 2022*, were as follows:

Stock repurchases for thesix months ended* December 31, 2022*, were as follows:

Stock repurchase costs include commissions and fees.

Shares acquired from employees for restricted stock vesting* maybe returned to us by the related employees and in return we pay each employee’s required tax withholding resulting from the vesting of restricted shares. The valuation of the shares acquired and thereby the number of shares returned to us is calculated based on the closing share price on the date the shares vested. We didnot* receive any shares associated with the vesting of employee restricted stock during either of thethree month periods ending* December 31, 2023*, or2022.

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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 in foreign currencies and to other transactions of NAIE, our foreign subsidiary. As part of our overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, we* mayuse foreign exchange contracts in the form of forward contracts. To the extent we enter into such contracts, there can beno* guarantee any such contracts will be effective hedges against our foreign currency exchange risk.

As of* December 31, 2023*, we had forward contracts designated as cash flow hedges primarily to protect against the foreign exchange risks inherent in our forecasted sales of products at prices denominated in currencies other than the U.S. Dollar. These contracts are expected to be settled through* September 2024.*For derivative instruments that are designated and qualify as cash flow hedges, we record the effective portion of the gain or loss on the derivative in accumulated other comprehensive income (“OCI”) as a separate component of stockholders’ equity and subsequently reclassify these amounts into earnings in the period during which the hedged transaction is recognized in earnings.

For foreign currency contracts designated as cash flow hedges, hedge effectiveness is measured using the spot rate. Changes in the spot-forward differential are excluded from the test of hedge effectiveness and are recorded currently in earnings as revenue. We measure effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item.No hedging relationships were terminated as a result of ineffective hedging for thethree andsix months ended* December 31, 2023*, and* December 31, 2022*.

We monitor the probability of forecasted transactions as part of the hedge effectiveness testing on a quarterly basis. During thethree andsix months ended* December 31, 2023*, and* December 31, 2022*, we didnot have any losses or gains related to the ineffective portion of our hedging instruments.

As of* December 31, 2023*, the notional amounts of our foreign exchange contracts designated as cash flow hedges were approximately $18.1 million (EUR 16.3 million). As of* December 31, 2023*, a net loss of approximately $0.1 million, offset by approximately $26,000 of a deferred tax benefit, related to derivative instruments designated as cash flow hedges was recorded in OCI. It is expected that the entire amount will be reclassified into earnings in the next12 months along with the earnings effects of the related forecasted transactions.

For foreign currency contractsnot designated as cash flow hedges, changes in the fair value of the hedge are recorded directly to foreign exchange gain or loss in other income in an effort to offset the change in valuation of the underlying hedged item. During thethree andsix months ended* December 31, 2023*, we entered into forward contracts in order to hedge foreign exchange risk associated with our lease liability at NAIE, which is denominated in Swiss Francs (CHF). As of* December 31, 2023*, the notional amounts of our foreign exchange contractsnot designated as cash flow hedges were approximately $13.1 million (CHF 11.3 million).

We are exposed to interest rate fluctuations related to our $10.0 million Term Note with Wells Fargo, which carries a variable interest rate of 1.80% above the SOFR rolling30-day average. To manage our exposure to this variable rate, on* August 23, 2021,we entered into a floored interest rate swap that fixes our all-in rate on this loan to 2.4% for thefirst* three years of the term loan. Fluctuations in the relation of our contractual swap rate to current market rates are recorded as an asset or liability with an offset to OCI at the end of each reporting period. Interest expense is adjusted for the difference between the actual SOFR spread and the swap contractual rate such that our effective interest expense for each period is equal to our hedged rate of2.4%.

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. These matters* mayrelate to product liability, employment, intellectual property, regulatory, contract or other matters. The resolution of these matters as they arise maybe subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources. While unfavorable outcomes are possible, based on available information, we currently donot* believe the resolution of these matters will result in a material adverse effect on our business, consolidated financial condition, or results of operations. However, a settlement payment or unfavorable outcome could be greater than we currently anticipate and if so, could adversely impact our results of operations. Our evaluation of the likely impact of these actions could change in the future and we could have unfavorable outcomes we donot expect.

Israel-Hamas War

In* October 2023,armed conflict escalated between Israel and Hamas. Management is monitoring the conflict in Israel and Gaza and any broader economic effects from the crisis. Israel accounts for a small portion of our global net sales, but we also source multiple raw materials that come from Israel. While we donot* anticipate this conflict will have a significant impact on our net sales, we are currently communicating with the customers and suppliers that* maybe impacted by this conflict, and we are evaluating options for alternative ingredient sources or holding safety stock of impacted materials to limit the affect that this conflict may*have on our ability to obtain the ingredients sourced from this region. There are further concerns regarding consumer purchasing and consumption behavior, increases in global shipping expenses, greater volatility in foreign exchange and interest rates, and other unforeseen business disruptions due to the current global geopolitical tensions, including and relating to this new conflict between Israel and Hamas and the continued conflict in Ukraine. We will continue to evaluate impacts of the conflict on our customers, suppliers, employees, and operations.

M. Subsequent Event

As of* February 13, 2024,we entered into a Fourth Amendment to our credit facility with Wells Fargo. Among other changes the Fourth Amendment waived all prior instances of non-compliance, decreased our total borrowing capacity on the line of credit to $12.5 million, increased the interest rate on borrowings under the line of credit to 2.25% from 1.29% above the daily simple SOFR rate, modified our continuing compliance requirements, reduced the uses we can fund with the line of credit, decreased the allowed capital expenditures from $7.5 million to $6.5 million for fiscal2024* and beyond, and requires us to suspend share repurchase and dividend activity.

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