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 and

nine

months ended

March 31, 2020

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 Issued Accounting Pronouncements

December 18, 2019,

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

No.

2019

12,

Income Taxes (Topic

740

): Simplifying the Accounting for Income Taxes. This new standard eliminates certain exceptions in Accounting Standards Codification ("ASC")

740

related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes. This standard is effective for fiscal years, and interim periods within those years, beginning after

December 15, 2020,

with early adoption permitted in any interim period within that year. This ASU will be effective for us beginning in our

first

quarter of fiscal

2022.

We are currently evaluating the impact this ASU will have 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 stock options and unvested restricted stock 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 (loss) income per common share as follows (in thousands, except per share data):

	Three Months Ended					Nine Months Ended
	March 31,					March 31,
	20 20			201 9		2020			2019
Numerator
Net (loss) income	$	(4,015	)	$	1,994	$	(3,443	)	$	6,734

Denominator
Basic weighted average common shares outstanding		6,565			6,800		6,734			6,791
Dilutive effect of stock options and restricted stock		—			595		—			329
Diluted weighted average common shares outstanding		6,565			7,395		6,734			7,120

Basic net (loss) income per common share	$	(0.61	)	$	0.29	$	(0.51	)	$	0.99

Diluted net (loss) income per common share	$	(0.61	)	$	0.27	$	(0.51	)	$	0.95

In periods where we have a net loss, stock options and restricted stock are excluded from our calculation of diluted net (loss) income per common share, as their inclusion would have an antidilutive effect. We excluded shares related to stock options totaling

130,000

for the

three

months and for the

nine

months ended

March 31, 2020.

We excluded shares related to restricted stock totaling

356,998

for the

three

months ended

March 31, 2020.

We excluded shares related to restricted stock totaling

388,988

for the

nine

months ended

March 31, 2020.

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

three

and

nine

months ended

March 31, 2019.

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, depending on the point at which risk of loss transfers 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, 2020,

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+ were 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

March 31, 2020

and

$1.2

million for the

nine

months ended

March 31, 2020.

We recognized

$408,000

of “Non-cash Sales Income” during the

three

months ended

March 31, 2019

and

$82,000

of “Non-cash Sales Discount” during the

nine

months ended

March 31, 2019.

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

$2.8

million during the

three

months ended

March 31, 2020

and

$10.3

million during the

nine

months ended

March 31, 2020.

We similarly recorded

$3.7

million during the

three

months ended

March 31, 2019

and

$13.5

million during the

nine

months ended

March 31, 2019.

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

$103,000

during the

three

months ended

March 31, 2020

and

$462,000

during the

nine

months ended

March 31, 2020.

We similarly recognized

$156,000

of royalty expense during the

three

months ended

March 31, 2019

and

$597,000

during the

nine

months ended

March 31, 2019.

Stock-Based Compensation

We had 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 granted nonqualified and incentive stock options and restricted stock grants to employees, non-employee directors and consultants. The

2009

Plan expired on

October 15, 2019.

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

October 15, 2019 (

“2019

Plan”), subject to stockholder approval. However, the

2019

Plan was

not

approved by our stockholders and therefore did

not

become effective. We currently do

not

have an equity incentive plan but

may

still be recording exercises and forfeitures under the

2009

Plan.

We did

not

grant any options during each of the

three

and

nine

month periods ended

March 31, 2020

and

March 31, 2019.

All remaining outstanding stock options are fully vested.

options were exercised during the

three

nine

month period ended

March 31, 2020.

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. There were

option forfeitures during the

three

nine

month periods ended

March 31, 2020

March 31, 2019.

During the

three

months ended

March 31, 2020

we did

not

grant any shares of restricted stock shares. During the

nine

months ended

March 31, 2020,

we granted

5,000

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

months ended

March 31, 2020,

there were

restricted stock forfeitures. During the

nine

months ended

March 31, 2020,

15,000

restricted stock shares were forfeited. During the

three

months ended

March 31, 2019,

there were

restricted stock forfeitures. During the

nine

months ended

March 31, 2019,

5,000

restricted stock shares were forfeited.

Our net loss included stock based compensation expense in connection with prior restricted stock grants of approximately

$459,000

for the

three

months ended

March 31, 2020,

and

$1.4

million for the

nine

months ended

March 31, 2020.

Our net income included stock based compensation expense in connection with prior restricted stock grants of approximately

$400,000

for the

three

months ended

March 31, 2019

and

$1.2

million for the

nine

months ended

March 31, 2019.

Fair Value of Financial Instruments

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

March 31, 2020,

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

March 31, 2020

was a net asset of

$1.7

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. We classify our outstanding line of credit balance as a Level

liability, as the fair value is based on inputs that can be derived from information available in publicly quoted markets. As of

March 31, 2020,

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 during the

three

nine

months ended

March 31, 2020.

COVID-

Pandemic

The Company continues to monitor and evaluate the risks to public health and the slowdown in overall business activity related to the COVID-

pandemic, including potential impacts on our employees, customers, suppliers and financial results. As the situation remains fluid, it is difficult to predict the duration and scope of the pandemic and its impact on the Company’s business. However, it

may

result in a material adverse impact to the Company’s financial position, operations and cash flows if conditions persist or worsen.