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. Pursuant to such 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. 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, 2018

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, 2018 (

“2018

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

2018

Annual Report unless otherwise noted below.

Recently Adopted Accounting Pronouncements

April 2017,

the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)

No.

2017

10,

Revenue from Contracts with Customers (Topic

606

)(ASU

2017

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

2014

related to identifying performance obligations and licensing. In

May 2017,

the FASB issued Accounting Standards Update

No.

2017

11,

Revenue Recognition (Topic

605

) and Derivatives and Hedging (Topic

815

) (ASU

2017

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

2014

09.

May 2017,

the FASB issued Accounting Standards Update

No.

2017

12,

Revenue from Contracts with Customers (Topic

606

) (ASU

2017

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

2014

09.

All of these ASUs have been codified under Accounting Standards Codification (ASC)

606.

ASC

606

outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current historical revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods and services in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods and services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with their respective customers.

The new revenue standard is required to be applied either retrospectively to each prior reporting period presented or prospectively with the cumulative effect of initially applying the standard recognized at the date of the initial application, supplemented with certain disclosures related to the effect of adoption on previously reported amounts, if any (the modified retrospective method). We adopted the standard on

July 1, 2018

for contracts that were

not

completed before the adoption date, using the modified retrospective method. We evaluated the effect of the standard and concluded it was

not

material to the timing or amount of revenues or expenses recognized in our historical consolidated financial statements. As a result, we concluded the application of the standard did

not

have a material effect that requires a retrospective adjustment for reporting disclosure purposes to any previously reported amounts in our historical consolidated financial statements.

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 the taxpayer 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,

we calculated our taxes for fiscal

2018

to the best of our ability. Our tax expense for fiscal

2018

was finalized by the end of the

one

-year measurement period ending

December 22, 2018.

The impact of finalizing our fiscal

2018

provision during this period did

not

result in a material impact on our consolidated financial statements.

February 2018,

the FASB issued ASU

2018

03,

Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic

825

): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU

2018

is intended to improve certain aspects of recognition, measurement, presentation, and disclosure of certain financial instruments, i.e. forward contracts, purchased options and option liabilities. ASU

2018

is effective for us beginning in our

first

quarter of fiscal

2019.

This ASU did

not

have a material impact on our consolidated financial statements.

Recently Issued 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. In

July 2018,

the FASB issued ASU

2018

10,

Codification Improvements to Topic

842,

Leases. This ASU affects narrow aspects of the guidance issued in the amendments in ASU

No.

2016

including those regarding residual value guarantees, the interest rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase option, variable lease payments that depend on an index or a rate, investment tax credits, lease term and purchase option, transition guidance for amounts previously recognized in business combinations, certain transition adjustments, transition guidance for leases previously classified as capital leases under Topic

840,

transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic

840,

transition guidance for sale and leaseback transactions, impairment of net investment in the lease, unguaranteed residual asset, effect of initial direct costs on the interest rate implicit in the lease, and failed sale and leaseback transactions. These ASUs will be effective for us beginning in our

first

quarter of fiscal

2020.

We are currently evaluating the impact these ASUs will have on our consolidated financial statements.

August 2017,

the FASB issued ASU

2017

12,

Derivatives and Hedging (Topic

815

): Targeted Improvements to Accounting for Hedging Activities. ASU

2017

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.

February 2018,

the FASB issued ASU

2018

02,

Income Statement-Reporting Comprehensive Income (Topic

220

): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU

2018

allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. We are currently evaluating the impact of adopting the new standard on our consolidated financial statements. ASU

2018

will be effective for us beginning in our

first

quarter of fiscal

2020.

Other recently issued accounting pronouncements

not

discussed in this report did

not

have, or are

not

believed by management to have, a material impact on our present or future financial statements.

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 accounts 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,
	2018		2017			2018		2017
Numerator
Net income (loss)	$	2,181	$	(1,318	)	$	4,740	$	116

Denominator
Basic weighted average common shares outstanding		6,808		6,615			6,786		6,611
Dilutive effect of stock options and restricted stock		191		—			196		226
Diluted weighted average common shares outstanding		6,999		6,615			6,982		6,837

Basic net income (loss) per common share	$	0.32	$	(0.20	)	$	0.70	$	0.02

Diluted net income (loss) per common share	$	0.31	$	(0.20	)	$	0.68	$	0.02

shares related to restricted stock or options were excluded for the

three

six

months ended

December 31, 2018.

We excluded shares related to stock options totaling

135,000

and shares related to restricted stock totaling

813,665

for the

three

months ended

December 31, 2017,

as their impact would have been anti-dilutive.

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

six

months ended

December 31, 2017.

Revenue Recognition

We record revenue based on a

five

-step model which includes: (

) identifying a contract with a customer; (

) identifying the performance obligations in the contract; (

) determining the transaction price; (

) allocating the transaction price among the performance obligations; and (

) recognizing revenue when the various performance obligations are satisfied.

Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling

one

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 are due as specified in the underlying customer agreement, typically

days from the invoice date, which occurs on the date of transfer of control of the products ordered to the customer.

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

Except for product defects,

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, 2018,

we have

known returns liability.

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 granted

500,000

shares of NAI common stock to Juice Plus+, (the “Shares”), and Juice Plus+ agreed the Shares are subject to certain restrictions and risk of forfeiture. Pursuant to the Irrevocable Proxy, Juice Plus+ also granted the NAI Board of Directors the right to vote the Shares that remain subject to the risk of forfeiture. Each Agreement is 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

$245,000

of expense during the

three

months ended

December 31, 2018

and

$490,000

for the

six

months ended

December 31, 2018

as a “Non-cash Sales Discount” which is an offset to net sales. We recorded

$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 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

$4.4

million during the

three

months ended

December 31, 2018

and

$9.8

million during the

six

months ended

December 31, 2018.

We recorded

$4.0

million during the

three

months ended

December 31, 2017

and

$9.8

million during the

six

months ended

December 31, 2017.

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

$178,000

during the

three

months ended

December 31, 2018

and

$441,000

during the

six

months ended

December 31, 2018.

We recognized

$160,000

during the

three

months ended

December 31, 2017

and

$444,000

during the

six

months ended

December 31, 2017.

Notes Receivable

September 30, 2017,

we accepted a

-month note (Loan Agreement) 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. On

September 30, 2018,

we entered into a First Amendment (the “First Amendment”) with Kaged Muscle in connection with the Loan Agreement. The First Amendment modified the Loan Agreement and related promissory note by extending the maturity date from

September 30, 2018

December 28, 2018

in exchange for an extension fee in the amount of

$25,000.

Kaged Muscle is

one

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

fifteen

percent (

15%

) per annum with payments of interest only. The note was paid in full before the amended maturity date. In association with this note, we recognized

$46,000

in interest income during the

three

months ended

December 31, 2018

and

$104,000

during the

six

months ended

December 31, 2018.

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 equity incentive plan that was approved by our Board of Directors effective

October

15,

2009

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

November

30,

2009

(

"2009

Plan"). Under the

2009

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 use of highly subjective assumptions. Black-Scholes uses assumptions related to volatility, the risk-free interest rate, the dividend yield (which we assume to be zero, as we have

not

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

We recognize forfeitures as they occur.

We did

not

grant any options during the

three

month or

six

month periods ended

December 31, 2018

2017.

All remaining outstanding stock options are fully vested.

options were exercised during the

three

month period ended

December 31, 2018.

During the

six

months ended

December 31, 2018,

5,000

options were exercised.

options were exercised during the

three

month or

six

month periods ended

December 31, 2017.

There were

forfeitures during the

three

month or

six

month periods ended

December 31, 2018.

There were

forfeitures during the

three

months ended

December 31, 2017.

During the

six

months ended

December 31, 2017

5,000

options were forfeited.

During

six

months ended

December 31, 2018,

we granted a total of

15,000

restricted stock shares to a new member of our management team. We did

not

grant any shares to employees during the

three

months ended

December 31, 2018,

or the

three

six

months ended

December 31, 2017.

Our net income included stock based compensation expense of approximately

$400,000

for the

three

months ended

December 31, 2018,

and

$809,000

for the

six

months ended

December 31, 2018.

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.

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

December 31, 2018,

and

June 30, 2018,

we did

not

have any financial assets or liabilities classified as Level

except for assets and liabilities 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, 2018

was a net asset of

$2.5

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

June 30, 2018

included a net asset of

$55,000

and a net liability of

$55,000,

with

right of offset. As of

December 31, 2018,

and

June 30, 2018,

we did

not

have any financial assets or liabilities classified as Level

We did

not

transfer any assets or liabilities between Levels during fiscal

2018

or the

six

months ended

December 31, 2018.

Concentrations of Credit Risk

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

three

largest customers, whose receivable balances collectively represented

73.0%

of gross accounts receivable at

December 31, 2018

and

76.6%

June

30,

2018.

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

11.9%

of gross accounts receivable at

December 31, 2018,

and

17.3%

of gross accounts receivable at

June 30, 2018.

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