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 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 the

three

months ended

September 30, 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, 2019 (

“2019

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

2019

Annual Report unless otherwise noted below.

Recently Adopted Accounting Pronouncements

We adopted ASU

2016

02,

Leases (Topic

842

)

, and subsequent amendments thereto (“ASC

842”

) on

July 1, 2019

using the optional transition approach to apply the standard at the beginning of the

first

quarter of the year of adoption, fiscal year

2020,

with

retrospective adjustments to prior periods. The adoption of the standard resulted in the recognition of right-of-use assets and lease liabilities for operating leases of approximately

$20.7

million and

$20.9

million, respectively, on our Condensed Consolidated Balance Sheets, with

material impact on our Condensed Consolidated Statements of Income and Comprehensive Income, Condensed Consolidated Statements of Stockholders’ Equity, or Condensed Consolidated Statements of Cash Flows. We have elected the practical expedients to (

) carryforward prior conclusions related to lease identification and classification for existing leases, (

) combine lease and non-lease components of an arrangement for all classes of leased assets, and (

) omit short-term leases with a term of

months or less from recognition on the balance sheet. See “Note E. Leases” for additional information on our leases following the adoption of this standard.

July 1, 2019,

we adopted ASU

No.

2017

12,

“

Derivatives and Hedging (Topic

815

): Targeted Improvements to Accounting for Hedging Activities

.” The ASU better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. We applied ASU

No.

2017

using a modified retrospective approach for cash flow and fair value hedges existing at the date of adoption and prospectively for the presentation and disclosure guidance. As a result of the adoption of this ASU, amortization of forward points are now included as a component of net revenues while they were previously included as a component of other income. For the

three

months ended

September 30, 2019,

we included

$237,000

of forward point amortization in Sales. For the

three

months ended

September 30, 2018,

we included

$487,000

of forward point amortization in Other Income.

July 1, 2019,

we adopted 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 (OCI) to retained earnings for stranded tax effects resulting from the

2017

Tax Cuts and Jobs Act. Under this ASU, we reclassified

$128,000

of gains from OCI to retained earnings.

Recently Issued Accounting Pronouncements

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
	September 30,
	2019		2018
Numerator
Net income	$	96	$	2,559

Denominator
Basic weighted average common shares outstanding		6,841		6,765
Dilutive effect of stock options and restricted stock		144		200
Diluted weighted average common shares outstanding		6,985		6,965

Basic net income per common share	$	0.01	$	0.38

Diluted net income per common share	$	0.01	$	0.37

We did

not

exclude any shares for the

three

months ended

September 30, 2019

that would have had an anti-dilutive impact. We excluded shares related to restricted stock totaling

15,000

shares for the

three

months ended

September 30, 2018,

as their impact would have been anti-dilutive.

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

September 30, 2019,

we have

liability recorded for estimated returns of products.

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 “JP Shares”), and Juice Plus+ agreed the JP 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 JP 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 amendments contained in the Amended and Restated Exclusive Manufacturing Agreement, we made a

one

-time adjustment to reverse the expense associated with unvested shares that were returned as a result of such amendments. Amounts associated with the new cash discount began to be recorded in our

fourth

quarter of fiscal

2019

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

$395,000

of “Cash Sales Discount” during the

three

months ended

September 30, 2019

and

$245,000

of “Non-cash Sales Discount” during the

three

months ended

September 30, 2018.

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”, which is 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

$3.2

million during the

three

months ended

September 30, 2019.

We similarly recorded

$5.4

million during the

three

months ended

September 30, 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

$168,000

during the

three

months ended

September 30, 2019.

We similarly recognized

$263,000

of royalty expense during the

three

months ended

September 30, 2018.

Notes Receivable

September 30, 2017,

we accepted a

-month note (the “KM 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 KM Loan Agreement. The First Amendment modified the KM Loan Agreement and related promissory note by extending the loan’s 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

September 30, 2019.

During the

three

months ended

September 30, 2018

we recognized

$58,000

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"). The

2009

Plan expired on

October 15, 2019.

The Board of Directors has approved a new omnibus equity incentive plan effective

October 15, 2019,

which has been presented to our Stockholders for approval at the Annual Meeting of Stockholders to be held on

December 6, 2019.

Under the

2009

and

2019

Plans, which are substantially the same, 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 did

not

grant any options during each of the

three

month periods ending

September 30, 2019

and

September 30, 2018,

respectively. All remaining outstanding stock options are fully vested.

options were exercised during the

three

month period ended

September 30, 2019.

During the

three

months ended

September 30, 2018,

5,000

options were exercised. There were

option forfeitures during the

three

month periods ended

September 30, 2019

September 30, 2018.

We did

not

grant any restricted stock shares during the

three

months ended

September 30, 2019.

During the

three

months ended

September 30, 2018,

we granted

15,000

shares of restricted stock shares to a new member of our management team. During the

three

months ended

September 30, 2019,

15,000

restricted stock shares were forfeited. During the

three

months ended

September 30, 2018

there were

restricted stock forfeitures. Our net income included stock based compensation expense of approximately

$433,000

for the

three

months ended

September 30, 2019.

Our net income included stock based compensation expense of approximately

$409,000

for the

three

months ended

September 30, 2018.

Fair Value of Financial Instruments

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

September 30, 2019,

and

June 30, 2019,

we did

not

have any financial assets or liabilities classified as Level

We classify derivative forward exchange contracts as Level

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

September 30, 2019

was a net asset of

$3.1

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

June 30, 2019

included a net asset of

$2.3

million. The fair values were determined based on obtaining pricing from our bank and corroborating those values with a

third

party bank. As of

September 30, 2019,

and

June 30, 2019,

we did

not

have any financial assets or liabilities classified as Level

We did

not

transfer any assets or liabilities between Levels during fiscal

2019

or the

three

months ended

September 30, 2019.