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

nine

months ended

March 31, 2019

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 that 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 revenue model 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 model is required to be applied either retrospectively to each prior reporting period presented or prospectively with the cumulative effect of initially applying the model used 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 this revenue model 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 use of the new model 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 new model 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.

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.

August 2018,

the SEC issued Release

No.

10532,

Disclosure Update and Simplification, which amends and clarifies certain financial reporting requirements. We adopted this Release in this

third

quarter of fiscal

2019.

The principal change to our consolidated financial statements is the inclusion of the changes in stockholders’ equity in interim unaudited condensed financial statements (Quarterly Reports), which were previously included only in our Annual Report.

March 2019,

the SEC issued its Final Rule Release

No.

10618,

FAST Act Modernization and Simplification of Regulation S-K

. The guidance in this Release revises certain disclosure requirements in SEC Regulation S-K, with the intent of improving the readability of filed documents and simplifying registrants' compliance efforts. We adopted this Release in this

third

quarter of fiscal

2019.

The adoption of this Release 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 expect these ASUs will have a material impact on our consolidated balance sheets at that time due to the creation of lease assets and liabilities related to our leased manufacturing and storage facilities.

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. Under this ASU, we will record forward points as component of Net Sales, rather than as a component of Other Income. 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. Under this ASU, we currently expect to reclassify

$134,000

of gains from OCI to retained earnings. 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				Nine months Ended
	March 31,				March 31,
	2019		2018		2019		2018
Numerator
Net income	$	1,994	$	2,051	$	6,734	$	2,167

Denominator
Basic weighted average common shares outstanding		6,800		6,639		6,791		6,620
Dilutive effect of stock options and restricted stock		595		270		321		241
Diluted weighted average common shares outstanding		7,395		6,909		7,120		6,861

Basic net income per common share	$	0.29	$	0.31	$	0.99	$	0.33

Diluted net income per common share	$	0.27	$	0.30	$	0.95	$	0.32

We excluded shares related to restricted stock totaling

175,000

for the

three

months ended

March 31, 2019,

as their impact would have been anti-dilutive. We excluded shares related to restricted stock totaling

175,000

for the

three

months ended

March 31, 2018,

as their impact would have been anti-dilutive.

Included in the diluted weighted average common shares outstanding for the

three

and

nine

months ended

March 31, 2019,

is the weighted average effect of

400,000

shares of unvested restricted stock returned to us from Juice Plus+ as a result of the amendment to the Exclusive Manufacturing Agreement, as discussed below.

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 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 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 is due as specified in the underlying customer agreement, which is typically

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 obligation 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 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

March 31, 2019,

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 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.

March 31, 2019,

we amended our original agreements with Juice Plus+ and extended the term of the Exclusive Manufacturing Agreement through

August 6, 2025.

In addition, pursuant to that Amended and Restated Exclusive Manufacturing Agreement, Juice Plus+ returned

400,000

shares of restricted common stock in exchange for an annual cash sales discount. The expense associated with the return of those shares and the related cash discount granted to Juice Plus+ are each recorded as a reduction to sales. As a result of the amendment to the Exclusive Manufacturing Agreement, we made a

one

-time adjustment to reverse the expense associated with unvested shares that were returned as a result of the Amended and Restated Exclusive Manufacturing Agreement. Amounts associated with the new cash discount will begin to be recorded in our

fourth

quarter of fiscal

2019

and will be amortized ratably over the remaining life of the extended agreement based on the full value of the cash discount expected to be given over the same period. We recorded

$408,000

of income during the

three

months ended

March 31, 2019

and

$82,000

of expense for the

nine

months ended

March 31, 2019

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

$245,000

of expense during the

three

months ended

March 31, 2018

and

$653,000

of expense during the

nine

months ended

March 31, 2018

as a "Non-cash Sales Discount."

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

$3.7

million during the

three

months ended

March 31, 2019

and

$13.5

million during the

nine

months ended

March 31, 2019.

We recorded

$6.2

million during the

three

months ended

March 31, 2018

and

$16.0

million during the

nine

months ended

March 31, 2018.

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

$156,000

during the

three

months ended

March 31, 2019

and

$597,000

during the

nine

months ended

March 31, 2019.

We similarly recognized

$215,000

of royalty expense during the

three

months ended

March 31, 2018

and

$659,000

of royalty expense during the

nine

months ended

March 31, 2018.

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 did

not

recognize any interest income during the

three

months ended

March 31, 2019

and recognized

$104,000

in interest income during the

nine

months ended

March 31, 2019.

During the

three

months ended

March 31, 2018

we recognized

$56,000

and

$114,000

during the

nine

months ended

March 31, 2018

in interest income associated with this note.

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

nine

month periods ended

March 31, 2019

2018.

All remaining outstanding stock options are fully vested.

options were exercised during the

three

month period ended

March 31, 2019.

During the

nine

months ended

March 31, 2019,

5,000

options were exercised.

options were exercised during the

three

month or

nine

month periods ended

March 31, 2018.

There were

forfeitures during the

three

month or

nine

month periods ended

March 31, 2019.

There were

forfeitures during the

three

months ended

March 31, 2018.

During the

nine

months ended

March 31, 2018

5,000

options were forfeited.

During the

three

months ended

March 31, 2019,

we granted a total of

175,000

restricted stock shares to members of our Board of Directors and certain key members of our management team. During the

nine

months ended

March 31, 2019,

we granted a total of

190,000

restricted stock shares to members of our Board of Directors and certain key members of our management team. During the

three

and

nine

months ended

March 31, 2018,

we granted

175,000

shares of restricted stock to the members of our Board of Directors and certain key members of our management team. Our net income included stock based compensation expense of approximately

$400,000

for the

three

months ended

March 31, 2019,

and

$1.2

million for the

nine

months ended

March 31, 2019.

Our net income included stock based compensation expense of approximately

$322,000

for the

three

months ended

March 31, 2018,

and

$925,000

for the

nine

months ended

March 31, 2018.

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. The approximate fair value of cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings is equal to book value due to the short-term nature of these items. 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.

Except for assets and liabilities related to our pension plan, as of

March 31, 2019,

and

June 30, 2018,

we did

not

have any financial assets or liabilities classified as Level

We classify derivative forward exchange contracts as Level

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

March 31, 2019

was a net asset of

$3.4

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

March 31, 2019,

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

nine

months ended

March 31, 2019.

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

78.0%

of gross accounts receivable at

March 31, 2019

and

76.6%

June

30,

2018.

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

12.9%

of gross accounts receivable at

March 31, 2019,

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.