A. Basis of Presentation and Summary of Significant Accounting Policies

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form

-Q and applicable rules and regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or omitted pursuant to such rules and regulations. In management

’s opinion, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows have been included and are of a normal, recurring nature. The results of operations for the

three

and

six

months ended

December 31, 2017

are

not

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

You should read the financial statements and these notes, which are an integral part of the financial statements, together with our audited financial statements included in our Annual Report on Form

-K for the fiscal year ended

June 30,

201

(

“2017

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

2017

Annual Report unless otherwise noted below.

Recent Accounting Pronouncements

March 2016,

the FASB issued Accounting Standards Update

No.

2016

02,

Leases (Topic

842

) (ASU

2016

), which amends

existing standards for leases to increase transparency and comparability among organizations by requiring recognition of lease assets and liabilities on the balance sheet and requiring disclosure of key information about such arrangements. ASU

2016

will be effective for us beginning in our

first

quarter of fiscal

2020.

Early adoption is permitted. We are currently evaluating the impact of adopting the new standard on our consolidated financial statements and the timing and presentation of our adoption.

April 2016,

the FASB issued Accounting Standards Update

No.

2016

10,

Revenue from Contracts with Customers (Topic

606

)(ASU

2016

), which amends and adds clarity to certain aspects of the guidance set forth in the upcoming revenue standard (ASU

2014

) related to identifying performance obligations and licensing. In

May 2016,

the FASB issued Accounting Standards Update

No.

2016

11,

Revenue Recognition (Topic

605

) and Derivatives and Hedging (Topic

815

) (ASU

2016

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

2014

09.

May 2016

the FASB issued Accounting Standards Update

No.

2016

12,

Revenue from Contracts with Customers (Topic

606

) (ASU

2016

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

2014

09.

ASU

2014

defines a

five

step process to achieve this core principle and, in doing so, it is possible that more judgment and estimates

may

be required within the revenue recognition process than is required under present U.S. GAAP. These

may

include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. The new standard also requires additional disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments.

All of these new standards will be effective for us concurrently with ASU

2014

09,

beginning in our

first

quarter of fiscal

2019.

Currently, we do

not

expect our annual revenue to be materially different under Topic

606.

The most significant change will be to our quarterly and annual financial statement disclosures. We are continuing to evaluate the impact of adopting the new standard.

August 2017,

the FASB issued ASU

2017

12,

Derivatives and Hedging (Topic

815

): Targeted Improvements to Accounting for Hedging

Activities. The ASU is intended to improve and simplify accounting rules around hedge accounting and improve the disclosures of hedging arrangements.

We are currently evaluating the impact of adopting the new standard on our consolidated financial statements. ASU

2017

will be effective for us beginning in our

first

quarter of fiscal

2020.

December 22, 2017,

the SEC issued guidance under Staff Accounting Bulletin

No.

118,

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

118”

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

not

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

In accordance with SAB

118,

the our estimated income tax is considered provisional and is expected to be finalized by the end of our fiscal year

Net Income per Common Share

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

	Three Months Ended					Six Months Ended
	December 31,					December 31,
	201 7			2016		201 7		2016
Numerator
Net (loss) i ncome	$	(1,318	)	$	2,466	$	116	$	4,956

Denominator
Basic weighted average common shares outstanding		6,615			6,567		6,611		6,563
Dilutive effect of stock options		—			116		226		102
Diluted weighted average common shares outstanding		6,615			6,683		6,837		6,665

Basic net (loss) income per common share	$	(0.20	)	$	0.38	$	0.02	$	0.76

Diluted net (loss) income per common share	$	(0.20	)	$	0.37	$	0.02	$	0.74

In periods where we have a net loss, stock options and restricted stock are excluded from our calculation of

diluted net income (loss) per common share, as their inclusion would have an antdilutive effect. We excluded shares related to stock options totaling

35,000

and shares related to restricted stock totaling

813,665

for the

three

months ended

December 31, 2017.

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

six

months ended

December 31, 2017

or the

three

and

six

months ended

December 31, 2016.

Revenue Recognition

To recognize revenue,

four

basic criteria must be met:

) there is evidence that an arrangement

with a buyer exists;

) delivery has occurred;

) the fee is fixed or determinable; and

) collectability is reasonably assured. Revenue from sales transactions where the buyer has the right to return the product is recognized at the time of sale only if (a) the seller’s price to the buyer is substantially fixed or determinable at the date of sale; (b) the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is

not

contingent on resale of the product; (c) the buyer’s obligation to the seller would

not

be changed in the event of theft or physical destruction or damage of the product; (d) the buyer acquiring the product for resale has economic substance apart from that provided by the seller; (e) the seller does

not

have significant obligations for future performance to directly bring about resale of the product by the buyer; and (f) the amount of future returns can be reasonably estimated. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon completion of delivery is deferred until the shipment has been delivered.

We record reductions to gross revenue for estimated returns of private-label contract manufacturing products and beta-alanine raw material sales. The estimated returns are based on the trailing

six

months of private-label contract manufacturing gross sales and our historical experience for both private-label contract manufacturing and beta-alanine raw material

sales returns. However, the estimate for product returns does

not

reflect the impact of a potential large product recall resulting from product nonconformance or other factors as such events are

not

predictable nor is the related economic impact estimable.

August 7, 2017,

we entered into

three

agreements (“

Agreements”), with The Juice Plus+ Company LLC (“Juice Plus+”). The Agreements are an Exclusive Manufacturing Agreement, a Restricted Stock Award Agreement, and an Irrevocable Proxy. Pursuant to the Exclusive Manufacturing Agreement, Juice Plus+ has granted us exclusive rights to manufacture and supply them with certain of their products within

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

500,000

shares of NAI common stock to Juice Plus+, (the “Shares”), and Juice Plus+ has agreed the Shares are subject to certain restrictions and risk of forfeiture. Pursuant to the Irrevocable Proxy, Juice Plus+ also has granted to the NAI Board of Directors Juice Plus+’s right to vote the Shares that remain subject to the associated risk of forfeiture. The Agreements each are for a term of

years, and each

may

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

We recorded of

$245,000

of expense during the

three

months ended

December 31, 2017

and

$408,000

during the

six

months ended

December 31, 2017.

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

corresponding foreign patents and patent applications. All of these patents and patent rights relate to the ingredient known as beta-alanine and which we market and sell under our CarnoSyn® and SR CarnoSyn® trade names. We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of

$4.0

million during the

three

months ended

December 31, 2017

and

$9.8

million during the

six

months ended

December 31, 2017.

We recorded

$6.7

million during the

three

months ended

December 31, 2016

and

$13.4

million during the

six

months ended

December 31, 2016.

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

$160,000

during the

three

months ended

December 31, 2017

and

$444,000

during the

six

months ended

December 31, 2017.

We recognized

$250,000

during the

three

months ended

December 31, 2016

and

$566,000

during the

six

months ended

December 31, 2016.

Notes Receivab

September 30, 2017,

we accepted a

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

one

of our contract manufacturing customers, in exchange for

$1.5

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

one

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

fifteen

percent (

15%

) per annum and is an interest only note secured by the assets of Kaged Muscle and a personal guarantee by the co-founder and President of Kaged Muscle. Interest is due quarterly and the note can be paid down at any time without penalty. During the

three

and

six

months ended

December 31, 2017

we recognized

$58,000

in interest income associated with this note from Kaged Muscle.

Stock-Based Compensation

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

October

15,

2009

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

November

30,

2009.

Under the plan, we

may

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

We estimate the fair value of stock option awards at the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have

vesting restrictions and are fully transferable. Option valuation models require the input of highly subjective assumptions. Black-Scholes uses assumptions related to volatility, the risk-free interest rate, the dividend yield (which we assume to be zero, as

to date we have

not

paid any cash dividends) and employee exercise behavior. Expected volatilities used in the model are based on the historical volatility of our stock price. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect on the date of grant. The expected life of stock option grants is derived from historical experience. The fair value of restricted stock shares granted is based on the market price of our common stock on the date of grant. We amortize the estimated fair value of our stock awards to expense over the related vesting periods.

We did

not

grant any options during the

three

month or si

month periods ended

December 31, 2017

2016.

All remaining outstanding stock options are fully vested.

options were exercised during the

three

month or

six

month periods ended

December 31, 2017

2016.

There were

forfeitures during the

three

months ended

December 31, 2017.

During the

six

months ended

December 31, 2017

5,000

options were forfeited. There were

forfeitures during the

three

month or

six

month periods ended

December 31, 2016.

We did

not

grant any shares to employees during the

three

six

months ended

December 31, 2017

, or the

three

months ended

December 31, 2016.

We granted

10,000

restricted shares to a new member of management during the

six

months ended

December 31, 2016.

Our net income included stock based compensation expense of approximately

$302,000

for the

three

months ended

December 31, 2017,

and

$603,000

for the

six

months ended

December 31, 2017.

Our net income included stock based compensation expense of approximately

$256,000

for the

three

months ended

December 31, 2016,

and

$506,000

for the

six

months ended

December 31, 2016.

Fair Value of Financial Instruments

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

three

-level hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent

sources. Unobservable inputs are inputs that reflect our assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available under the circumstances.

The fair value hierarchy is broken down into

three

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

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

assets. Fair values determined by Level

inputs are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are

not

active and models for which all significant inputs are observable or can be corroborated, either directly or indirectly by observable market data. Level

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

As of

Dec

ember

31,

2017

and

June 30, 2017,

we did

not

have any financial assets or liabilities classified as Level

except for cash and cash equivalents, and assets related to our pension plan. We classify derivative forward exchange contracts as Level

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

December 31, 2017

was a net liability of

$2.7

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

June 30, 2017

was a net liability of

$521,000.

As of

December 31, 2017

and

June 30, 2017

we did

not

have any financial assets or liabilities classified as Level

We did

not

transfer any assets or liabilities between Levels during fiscal

2017

or the

six

months ended

December 31, 2017.

Concentrations of Credit Risk

Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We place our cash and cash equivalents with highly rated financial institutions. Credit risk with respect to rec

eivables is concentrated with our

three

largest customers, whose receivable balances collectively represented

76.1%

of gross accounts receivable at

December

31,

2017

and

65.6%

June

30,

2017.

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

15.6%

of gross accounts receivable at

December 31, 2017,

and

21.3%

of gross accounts receivable at

June 30, 2017.

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