UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~_______________________~~

FORM 10-Q

☒ QUARTERLY REPORT

pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

FOR THE QUARTERLY PERIOD ENDED ~~December 31, 201~~7MARCH 31, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM _________ TO __________

000-15701

(Commission file number)

NATURAL ALTERNATIVES INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware	84-1007839
(State of incorporation)	(IRS Employer Identification No.)

1535 Faraday ~~Drive~~Ave Carlsbad, ~~California~~CA 92008	(760) ~~744-7340~~736-7700
(Address of principal executive offices)	(~~Registrant's~~Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $0.01 par value per share	NAII	Nasdaq Stock Market

Indicate by check mark whether ~~Natural Alternatives International, Inc. (NAI)~~NAI (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that NAI was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

~~[X]~~ ☒ Yes ~~[_]~~ ☐ No

Indicate by check mark whether NAI has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that NAI was required to submit ~~and post~~ such files).

~~[X]~~ ☒ Yes [ ]☐ No

Indicate by check mark whether NAI is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,, or an emerging growth company.

Large accelerated filer	☐	Accelerated filer	☐	Emerging Growth Company	☐

Non-accelerated filer	☐	Smaller reporting company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether NAI is a shell company (as defined in Rule 12b-2 of the Exchange Act).

~~[_]~~: ☐ Yes ~~[X]~~ ☒ No

As of ~~February 13, 2018, 7,429,020~~May 14, 2020, 6,788,366 shares of NAI's common stock were outstanding, net of ~~1,052,657~~2,068,311 treasury shares.

Table of Contents

Certain statements in this ~~Quarterly Report, including information incorporated by reference,~~Form 10-Q quarterly report (this “Report”) are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect current views about future events and financial performance based on certain assumptions. ~~They~~Examples of forward-looking statements include opinions, forecasts, intentions, plans, goals, projections, guidance, expectations, beliefs, or other statements that are not statements of historical fact. Words such as “may,” “will,” “should,” “could,” “would,” ~~“expects,~~“expect,” ~~“plans,~~“plan,” ~~“believes,~~“believe,” ~~“anticipates,~~“anticipate,” ~~“intends,~~“intend,” ~~“estimates,~~“estimate,” ~~“approximates,~~“approximate,” ~~“predicts,~~“predict,” ~~“forecasts,~~“forecast,” or ~~“projects,~~“project,” or the negative or other variation of such words, and similar expressions may each identify a statement as a forward-looking statement. Any statements contained herein that refer to projections of our future financial performance, our anticipated growth and trends in our business, our goals, strategies, focus and plans, and other characterizations of future events or circumstances, including statements expressing general optimism about our future operating results, are forward-looking statements. Forward-looking statements in this ~~Quarterly~~ Report may include statements about:

~~The forward-looking~~Forward-looking statements in this ~~Quarterly~~ Report speak only as of the date of this ~~Quarterly~~ Report based on information available to us at that time and caution should be taken not to place undue reliance on any such forward-looking statements. Forward-looking statements are subject to certain events, risks, and uncertainties that are or may be outside of our control. When considering forward-looking statements, you should carefully review the risks, uncertainties and other cautionary statements in this ~~Quarterly~~ Report as they identify certain important factors that could cause actual results to differ materially from those expressed in or implied by the forward-looking statements. These factors include, among others, the risks described under Item 1A of Part II and elsewhere in this ~~Quarterly~~ Report, as well as in other reports and documents we have filed and will file with the United States Securities and Exchange Commission (SEC).

Unless the context requires otherwise, all references in this Quarterly Report to the “Company,” “NAI,” “we,” “our,” and “us” refer to Natural Alternatives International, Inc. and, as applicable, Natural Alternatives International Europe S.A. (NAIE).

December 31,
2017

June 30,
2017

(Unaudited)

Assets

Current assets:

Cash and cash equivalents
$ 28,843 $ 27,843
Accounts receivable - less allowance for doubtful accounts of $14 at December 31, 2017 and $18 at June 30, 2017
12,895 8,410
Notes receivable
1,500 —
Inventories, net
17,879 13,729
Income tax receivable
— 261
Prepaids and other current assets
1,585 1,456
Total current assets
62,702 51,699
Property and equipment, net
18,733 18,136
Deferred income taxes
2,443 2,002
Other noncurrent assets, net
709 774
Total assets
$ 84,587 $ 72,611

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable
$ 12,182 $ 5,116
Accrued liabilities
2,215 1,931
Accrued compensation and employee benefits
1,089 1,594
Forward contract
2,088 422
Income taxes payable
1,636 1,207
Total current liabilities
19,210 10,270
Long-term pension liability
409 557
Deferred rent
551 537
Forward contract, noncurrent
609 99
Income taxes payable, noncurrent
2,950 —
Total liabilities
23,729 11,463

Commitments and contingencies

Stockholders’ equity:

Preferred stock; $.01 par value; 500,000 shares authorized; none issued or outstanding
— —
Common stock; $.01 par value; 20,000,000 shares authorized; issued and outstanding (net of treasury shares) 7,429,020 at December 31, 2017 and 6,937,018 at June 30, 2017
84 79
Additional paid-in capital
23,266 22,260
Retained earnings
45,904 45,788
Treasury stock, at cost, 1,052,657 shares at December 31, 2017 and 1,044,659 June 30, 2017
(6,160
)
(6,074
)
Accumulated other comprehensive loss
(2,236
)
(905
)
Total stockholders’ equity
60,858 61,148
Total liabilities and stockholders’ equity
$ 84,587 $ 72,611

Three Months Ended

Six Months Ended

December 31,

December 31,

2017

2016

2017

2016

Net sales
$ 33,335 $ 30,559 $ 61,409 $ 64,626
Cost of goods sold
26,713 24,064 48,417 50,462
Gross profit
6,622 6,495 12,992 14,164
Selling, general and administrative
4,341 3,382 8,828 7,515

Income from operations
2,281 3,113 4,164 6,649

Other income (expense):

Interest income
304 133 554 249
Foreign exchange (loss) gain
(88
)
262 (231
)
203
Other, net
(14
)
(8
)
(13
)
(15
)
Total other income
202 387 310 437
Income before income taxes
2,483 3,500 4,474 7,086
Provision for income taxes
3,801 1,034 4,358 2,130
Net (loss) income
$ (1,318
)
$ 2,466 $ 116 $ 4,956

Unrealized (loss) gain resulting from change in fair value of derivative instruments, net of tax
(197
)
1,242 (1,331
)
852

Comprehensive (loss) income
$ (1,515
)
$ 3,708 $ (1,215
)
$ 5,808

Net (loss) income per common share:

Basic
$ (0.20
)
$ 0.38 $ 0.02 $ 0.76
Diluted
$ (0.20
)
$ 0.37 $ 0.02 $ 0.74

Weighted average common shares outstanding

Basic
6,615,355 6,567,468 6,610,937 6,562,932
Diluted
6,615,355 6,683,356 6,836,567 6,665,159

	March 31, 2020			June 30, 2019
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	33,315		$	25,040
Accounts receivable - less allowance for doubtful accounts of $3,282 at March 31, 2020 and $25 at June 30, 2019		12,379			15,964
Inventories, net		26,111			26,003
Income tax receivable		1,623			901
Forward contracts		1,587			1,978
Prepaids and other current assets		1,973			1,500
Total current assets		76,988			71,386
Property and equipment, net		21,398			21,085
Operating lease right-of-use assets		18,881			—
Other noncurrent assets, net		1,088			1,019
Total assets	$	118,355		$	93,490
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	10,674		$	8,634
Accrued liabilities		2,398			2,782
Accrued compensation and employee benefits		1,308			1,615
Income taxes payable		1,425			1,219
Line of credit – current		10,000			—
Total current liabilities		25,805			14,250
Long-term liability – operating leases		19,230			—
Long-term pension liability		267			246
Deferred rent		—			543
Income taxes payable, noncurrent		1,349			1,349
Deferred income taxes		955			1,018
Total liabilities		47,606			17,406
Commitments and contingencies (Note L)
Stockholders’ equity:
Preferred stock; $.01 par value; 500,000 shares authorized; none issued or outstanding		—			—
Common stock; $.01 par value; 20,000,000 shares authorized; issued and outstanding (net of treasury shares) 6,791,396 at March 31, 2020 and 7,225,072 at June 30, 2019		87			87
Additional paid-in capital		27,631			26,280
Retained earnings		54,485			57,380
Treasury stock, at cost, 2,065,281 shares at March 31, 2020 and 1,626,605 June 30, 2019		(11,437	)		(7,955	)
Accumulated other comprehensive (loss) gain		(17	)		292
Total stockholders’ equity		70,749			76,084
Total liabilities and stockholders’ equity	$	118,355		$	93,490

Condensed Consolidated Statements ~~Of Cash Flows~~of (Loss) Income and Comprehensive (Loss) Income

Six Months Ended

December 31,

2017

2016

Cash flows from operating activities

Net income
$ 116 $ 4,956
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization
1,479 1,059
Deferred income taxes
306 —
Non-cash sales discount
408 —
Non-cash compensation
603 506
Pension expense, net of contributions
(148
)
100
Gain on disposal of assets
(2
)
(23
)
Changes in operating assets and liabilities:

Accounts receivable, net
(4,485
)
3,379
Inventories, net
(4,150
)
3,701
Prepaids and other assets
(64
)
42
Accounts payable and accrued liabilities
6,942 (6,721
)
Accrued compensation and employee benefits
(505
)
(1,726
)
Forward contracts
520 (491 )
Income taxes
3,640 255
Net cash provided by operating activities
4,660 5,037

Cash flows from investing activities

Purchases of property and equipment
(2,095
)
(3,362
)
Proceeds from sale of property and equipment
21 24
Issuance of notes receivable
(1,500
)
—
Net cash used in investing activities
(3,574
)
(3,338
)

Cash flows from financing activities

Repurchase of common stock
(86
)
(84
)
Net cash used in financing activities
(86
)
(84
)

Net increase in cash and cash equivalents
1,000 1,615
Cash and cash equivalents at beginning of period
27,843 19,747
Cash and cash equivalents at end of period
$ 28,843 $ 21,362

Supplemental disclosures of cash flow information

Cash paid during the period for:

Interest
$ — $ —
Taxes
$ 422 $ 1,897
Disclosure of non-cash activities:

Change in unrealized (loss) gain resulting from change in fair value of derivative instruments, net of tax
$ (1,331
)
$ 852

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2020			2019			2020			2019
Net sales	$	25,482		$	35,455		$	83,780		$	108,030
Cost of goods sold		22,588			29,128			71,441			88,104
Gross profit		2,894			6,327			12,339			19,926

Other selling, general and administrative		3,835			4,492			12,637			13,160
Provision for uncollectible accounts receivable		3,282			—			3,282			—
Total selling, general and administrative		7,117			4,492			15,919			13,160

(Loss) income from operations		(4,223	)		1,835			(3,580	)		6,766

Other (expense) income:
Interest income		47			411			176			1,495
Interest expense		(5	)		(11	)		(16	)		(23	)
Foreign exchange (loss) gain		(91	)		232			(144	)		191
Other, net		1			(10	)		(11	)		(1	)
Total other (expense) income		(48	)		622			5			1,662

(Loss) income before income taxes		(4,271	)		2,457			(3,575	)		8,428
(Benefit) provision for income taxes		(256	)		463			(132	)		1,694
Net (loss) income	$	(4,015	)	$	1,994		$	(3,443	)	$	6,734

Unrealized gain (loss) resulting from change in fair value of derivative instruments, net of tax		335			424			(181	)		1,659

Comprehensive (loss) income	$	(3,680	)	$	2,418		$	(3,624	)	$	8,393

Net (loss) income per common share:
Basic	$	(0.61	)	$	0.29		$	(0.51	)	$	0.99
Diluted	$	(0.61	)	$	0.27		$	(0.51	)	$	0.95

Weighted average common shares outstanding
Basic		6,564,765			6,800,375			6,733,781			6,791,105
Diluted		6,564,765			7,394,600			6,733,781			7,119,589

	Common Stock				Additional Paid-in			Retained			Treasury Stock					Accumulated Other Comprehensive
	Shares		Amount		Capital			Earnings			Shares		Amount			Gain (Loss)			Total
Balance, December 31, 2019		8,856,677	$	87	$	27,172		$	58,500			1,801,273	$	(9,287	)	$	(352	)	$	76,120
Compensation expense related to stock compensation plans		—		—		459			—			—		—			—			459
Repurchase of common stock		—		—		—			—			264,008		(2,150	)		—			(2,150	)
Unrealized gain resulting from change in fair value of derivative instruments, net of tax		—		—		—			—			—		—			335			335
Net loss		—		—		—			(4,015	)		—		—			—			(4,015	)
Balance, March 31, 2020		8,856,677	$	87	$	27,631		$	54,485			2,065,281	$	(11,437	)	$	(17	)	$	70,749

Balance, December 31, 2018		8,676,677	$	85	$	25,823		$	55,579			1,147,755	$	(7,014	)	$	657		$	75,130
Issuance of common stock for restricted stock grants		175,000		2		(2	)		—			—		—			—			—
Forfeiture of restricted stock		—		—		4			—			400,000		(4	)		—			—
Compensation expense related to stock compensation plans		—		—		(8	)		—			—		—			—			(8	)
Repurchase of common stock		—		—		—			—			44,866		(511	)		—			(511	)
Unrealized gain resulting from change in fair value of derivative instruments, net of tax		—		—		—			—			—		—			424			424
Net income		—		—		—			1,994			—		—			—			1,994
Balance, March 31, 2019		8,851,677	$	87	$	25,817		$	57,573			1,592,621	$	(7,529	)	$	1,081		$	77,029

	Common Stock				Additional Paid-in			Retained			Treasury Stock					Accumulated Other Comprehensive
	Shares		Amount		Capital			Earnings			Shares		Amount			Gain (Loss)			Total
Balance, June 30, 2019		8,851,677	$	87	$	26,280		$	57,380			1,626,605	$	(7,955	)	$	292		$	76,084
Issuance of common stock for restricted stock grants		5,000		—		—			—			—		—			—			—
Compensation expense related to stock compensation plans		—		—		1,351			—			—		—			—			1,351
Repurchase of common stock		—		—		—			—			423,676		(3,482	)		—			(3,482	)
Forfeiture of restricted stock		—		—		—			—			15,000		—			—			—
Cumulative-effect adjustment pursuant to adoption of ASU 2016-02 (Note E)		—		—		—			420			—		—			—			420
Reclassification pursuant to adoption of ASU 2018-02 (Note D)		—		—		—			128			—		—			(128	)		—
Unrealized loss resulting from change in fair value of derivative instruments, net of tax		—		—		—			—			—		—			(181	)		(181	)
Net loss		—		—		—			(3,443	)		—		—			—			(3,443	)
Balance, March 31, 2020		8,856,677	$	87	$	27,631		$	54,485			2,065,281	$	(11,437	)	$	(17	)	$	70,749

Balance, June 30, 2018		8,656,677	$	85	$	24,486		$	50,839			1,098,268	$	(6,584	)	$	(578	)	$	68,248
Issuance of common stock for stock option exercise		5,000		—		38			—			—		—			—			38
Issuance of common stock for restricted stock grants		190,000		2		(2	)		—			—		—			—			—
Forfeiture of restricted stock		—		—		4			—			405,000		(4	)		—			—
Compensation expense related to stock compensation plans		—		—		1,291			—			—		—			—			1,291
Repurchase of common stock		—		—		—			—			89,353		(941	)		—			(941	)
Unrealized gain resulting from change in fair value of derivative instruments, net of tax		—		—		—			—			—		—			1,659			1,659
Net income		—		—		—			6,734			—		—			—			6,734
Balance, March 31, 2019		8,851,677	$	87	$	25,817		$	57,573			1,592,621	$	(7,529	)	$	1,081		$	77,029

	Nine Months Ended March 31,
	2020			2019
Cash flows from operating activities
Net (loss) income	$	(3,443	)	$	6,734
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for uncollectible accounts receivable		3,282			—
Depreciation and amortization		2,975			2,529
Non-cash lease expense		2,051			—
Non-cash sales discount		—			82
Non-cash compensation		1,351			1,209
Pension expense, net of contributions		21			37
Loss on disposal of assets		118			9
Changes in operating assets and liabilities:
Accounts receivable		303			(2,169	)
Inventories, net		(108	)		(3,449	)
Operating lease liabilities, net		(1,825	)		—
Forward contracts		354			(1,258	)
Prepaids and other assets		(748	)		(174	)
Accounts payable and accrued liabilities		1,656			4,088
Accrued compensation and employee benefits		(307	)		(116	)
Income taxes		(516	)		58
Net cash provided by operating activities		5,164			7,580

Cash flows from investing activities
Purchases of property and equipment		(3,432	)		(4,149	)
Proceeds from sale of property and equipment		25			19
Proceeds from collection of notes receivable		—			1,500
Net cash used in investing activities		(3,407	)		(2,630	)

Cash flows from financing activities
Repurchase of common stock		(3,482	)		(941	)
Borrowings on lines of credit		10,000			—
Issuance of common stock		—			38
Net cash provided by (used in) financing activities		6,518			(903	)

Net increase in cash and cash equivalents		8,275			4,047
Cash and cash equivalents at beginning of period		25,040			23,613
Cash and cash equivalents at end of period	$	33,315		$	27,660

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	16		$	19
Taxes	$	370		$	1,747

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 10-Q10-Q and applicable rules and regulations. ~~Certain~~Pursuant to such rules and regulations certain information and ~~footnote~~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 pursuant to such rules and regulations.~~omitted. In ~~management~~’smanagement’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 ~~six~~nine months ended ~~December~~March 31, ~~2017~~ 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 10-K10-K for the fiscal year ended June 30, ~~201~~7 (~~“2017~~2019 (“2019 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~~2019 Annual Report unless otherwise noted below.

~~Recent~~Recently Issued Accounting Pronouncements

In ~~March 2016,~~ On December 18, 2019, the ~~FASB~~Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No.~~2016~~-~~02,~~ ~~Leases~~ 2019-12, Income Taxes (Topic ~~842~~740): Simplifying the Accounting for Income Taxes. This new standard eliminates certain exceptions in Accounting Standards Codification ("ASC") ~~(ASU~~ ~~2016~~-02~~), which amends~~ ~~existing standards~~740 related to the approach for ~~leases to increase transparency~~intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and ~~comparability among organizations by requiring~~the recognition of ~~lease assets~~deferred tax liabilities for outside basis differences. It also clarifies and ~~liabilities on~~simplifies other aspects of the ~~balance sheet~~accounting for income taxes. This standard is effective for fiscal years, and ~~requiring disclosure of key information about such arrangements.~~interim periods within those years, beginning after December 15, 2020, with early adoption permitted in any interim period within that year. This ASU~~2016~~-02 will be effective for us beginning in our first quarter of fiscal ~~2020.~~ ~~Early adoption is permitted.~~2022. We are currently evaluating the impact ~~of adopting the new standard~~this ASU will have on our consolidated financial ~~statements and the timing and presentation of our adoption.~~statements.

In ~~April 2016,~~ ~~the FASB issued Accounting Standards Update~~ ~~No.~~~~2016~~-~~10,~~ ~~Revenue from Contracts with Customers (Topic~~ ~~606~~~~)(ASU~~ ~~2016~~-10~~), which amends and adds clarity to certain aspects of the guidance set forth in the upcoming revenue standard (ASU~~ ~~2014~~-09~~) 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~~-11~~), which amends and rescinds certain revenue recognition guidance previously released within ASU~~ ~~2014~~-~~09.~~ In ~~May 2016~~ ~~the FASB issued Accounting Standards Update~~ ~~No.~~~~2016~~-~~12,~~ ~~Revenue from Contracts with Customers (Topic~~ ~~606~~~~) (ASU~~ ~~2016~~-12~~), which provides narrow scope improvements and practical expedients related to ASU~~ ~~2014~~-~~09.~~ ~~ASU~~ ~~2014~~-09 ~~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.~~

In ~~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~~-12 ~~will be effective for us beginning in our~~ ~~first~~ ~~quarter of fiscal~~ ~~2020.~~

On ~~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~~.

~~Table of Contents~~

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 ~~account~~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					Six Months Ended				Three Months Ended					Nine Months Ended
	December 31,					December 31,				March 31,					March 31,
	2017			2016		2017		2016		2020			2019		2020			2019
Numerator
Net (loss) income	$	(1,318	)	$	2,466	$	116	$	4,956
Net (loss) income										$	(4,015	)	$	1,994	$	(3,443	)	$	6,734

Denominator
Basic weighted average common shares outstanding		6,615			6,567		6,611		6,563		6,565			6,800		6,734			6,791
Dilutive effect of stock options		—			116		226		102
Dilutive effect of stock options and restricted stock											—			595		—			329
Diluted weighted average common shares outstanding		6,615			6,683		6,837		6,665		6,565			7,395		6,734			7,120

Basic net (loss) income per common share	$	(0.20	)	$	0.38	$	0.02	$	0.76	$	(0.61	)	$	0.29	$	(0.51	)	$	0.99

Diluted net (loss) income per common share	$	(0.20	)	$	0.37	$	0.02	$	0.74	$	(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 ~~(loss)~~ per common share, as their inclusion would have an ~~antdilutive~~antidilutive effect. We excluded shares related to stock options totaling 1~~35,000~~130,000 for the three months and for the nine months ended March 31, 2020. We excluded shares related to restricted stock totaling ~~813,665~~356,998 for the three months ended ~~December~~March 31, ~~2017.~~ 2020. We excluded shares related to restricted stock totaling 388,988 for the nine months ended March 31, 2020. No shares related to stock options or restricted stock were excluded for the ~~six~~three and nine months ended ~~December~~March 31, ~~2017~~ ~~or the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~December 31, 2016.~~2019.

~~To recognize~~We record revenue ~~four~~ ~~basic criteria must be met:~~ 1~~) there is evidence that an arrangement~~ based on a five-step model which includes: (1) identifying a contract with a ~~buyer exists;~~ 2~~) delivery has occurred;~~ 3)customer; (2) identifying the ~~fee~~performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price among the performance obligations; and (5) recognizing revenue as each of the various performance obligations are satisfied.

Revenue is ~~fixed~~measured as the net amount of consideration expected to be received in exchange for fulfilling one or ~~determinable;~~more performance obligations. We identify purchase orders from customers as contracts. The amount of consideration expected to be received and 4~~) collectability~~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 ~~reasonably assured. Revenue~~recognized in the period the adjustments are identified. In assessing whether collection of consideration from ~~sales transactions where~~a customer is probable, we consider both the ~~buyer has~~customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in the ~~right~~underlying customer agreement, which is typically 30 days from the invoice date. Invoices are generally issued on the date of transfer of control of the products ordered to ~~return~~ the ~~product~~customer.

Revenue is recognized at the point in time that each of ~~sale only if (a)~~our performance obligation is fulfilled, and control of the ~~seller’s price~~ordered products is transferred 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~~customer. This transfer occurs when 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~~is shipped, or in some cases, when 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 passesis delivered to the customer, depending on the point at which ~~usually occurs upon shipment. Revenue from shipments where title passes upon completion~~risk of ~~delivery is deferred until~~loss transfers to the ~~shipment has been delivered.~~customer.

We ~~record reductions~~provide early payment discounts to ~~gross revenue~~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, no 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 no liability recorded 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.~~products.

On 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 24 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”~~“JP Shares”), and Juice Plus+ ~~has~~ agreed the JP 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~~the right to vote the JP Shares that remain subject to ~~the associated~~ risk of forfeiture. ~~The Agreements each are~~Each Agreement is for a term of 5 years, and each may be terminated by either party only upon the occurrence of specified events.

On 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+ iswere each recorded as a reduction to ~~revenue.~~ 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 ~~$245,000~~ ~~of expense~~“Cash Sales Discount” during the three months ended ~~December~~March 31, ~~2017~~ 2020 and ~~$408,000~~$1.2 million for the nine months ended March 31, 2020. We recognized $408,000 of “Non-cash Sales Income” during the ~~six~~three months ended ~~December~~March 31, ~~2017.~~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 ~~patent applications, and~~ each patent’s corresponding foreign ~~patents and~~ patent applications. All of these patents and patent rights relate to the ingredient known as ~~beta-alanine~~“beta-alanine”, which is marketed and ~~which we market and sell~~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 ~~$4.0~~$2.8 million during the three months ended ~~December~~March 31, ~~2017~~ 2020 and ~~$9.8~~$10.3 million during the ~~six~~nine months ended ~~December~~March 31, ~~2017.~~ 2020. We similarly recorded ~~$6.7~~$3.7 million during the three months ended ~~December~~March 31, ~~2016~~ 2019 and ~~$13.4~~$13.5 million during the ~~six~~nine months ended ~~December~~March 31, ~~2016.~~ 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 ~~$160,000~~$103,000 during the three months ended ~~December~~March 31, ~~2017~~ 2020 and ~~$444,000~~$462,000 during the ~~six~~nine months ended ~~December~~March 31, ~~2017.~~ 2020. We similarly recognized ~~$250,000~~$156,000 of royalty expense during the three months ended ~~December~~March 31, ~~2016~~ 2019 and ~~$566,000~~$597,000 during the ~~six~~nine months ended ~~December~~March 31, ~~2016.~~

On ~~September 30, 2017,~~ ~~we accepted a~~ 12~~-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.~~

We ~~have~~had an omnibus equity incentive plan that was approved by our Board of Directors effective ~~as of~~ October15,2009 and approved by our stockholders at the Annual Meeting of Stockholders held on November 30,~~2009.~~ 2009 ("2009 Plan"). Under the ~~plan,~~2009 Plan, we ~~may~~ ~~grant~~granted nonqualified and incentive stock options and ~~other stock-based awards~~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 ~~estimate~~currently do not have an equity incentive plan but may still be recording exercises and forfeitures under 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 no 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.2009 Plan.

We did not grant any options during each of the three ~~month or si~~x and nine month periods ended ~~December~~March 31, ~~2017~~ or ~~2016.~~2020 and March 31, 2019. All remaining outstanding stock options are fully vested. No options were exercised during the three or nine month period ended March 31, 2020. No 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 no option forfeitures during the three or ~~six~~nine month periods ended ~~December~~March 31, ~~2017~~ 2020 or ~~2016.~~ ~~There were~~ no ~~forfeitures during~~March 31, 2019.

During the three months ended ~~December~~March 31, ~~2017.~~ ~~During the~~ ~~six~~ ~~months ended~~ ~~December 31, 2017~~ ~~5,000~~ ~~options were forfeited. There were~~ no ~~forfeitures during the~~ ~~three~~ ~~month or~~ ~~six~~ ~~month periods ended~~ ~~December 31, 2016.~~

We2020 we did not grant any shares ~~to employees during~~of restricted stock shares. During the ~~three~~ or ~~six~~nine months ended ~~December~~March 31, ~~2017~~~~, or the~~ ~~three~~ ~~months ended~~ ~~December 31, 2016.~~ We2020, we granted ~~10,000~~5,000 shares of restricted stock shares to a new member of our management ~~during~~team. During the ~~six~~three months ended ~~December~~March 31, ~~2016.~~ 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 no 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 no 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 ~~$302,000~~$400,000 for the three months ended ~~December~~March 31, ~~2017,~~ 2019 and ~~$603,000~~$1.2 million for the ~~six~~nine months ended ~~December~~March 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.~~2019.

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~~ 1 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 1 ~~assets. Fair values determined by Level~~ 2 ~~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~~ 3 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~~ 1 ~~except~~Except for cash and cash equivalents and assets related to our pension ~~plan.~~plan, as of March 31, 2020, and June 30, 2019, we did not have any financial assets or liabilities classified as Level 1. We classify derivative forward exchange contracts as Level 2 ~~assets.~~ assets and liabilities. The fair value of our forward exchange contracts as of ~~December~~March 31, ~~2017~~ 2020 was a net ~~liability~~asset of ~~$2.7~~$1.7 million. The fair value of our forward exchange contracts as of June 30, ~~2017~~ ~~was~~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 2 liability, of ~~$521,000.~~as the fair value is based on inputs that can be derived from information available in publicly quoted markets. As of ~~December~~March 31, ~~2017~~ 2020, and June 30, ~~2017~~ 2019, we did not have any financial assets or liabilities classified as Level 3. We did not transfer any assets or liabilities between Levels during fiscal 2019 or during the three or nine months ended March 31, 2020.

The Company continues to monitor and evaluate the risks to public health and the slowdown in overall business activity related to the COVID-19 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.

D. Other Comprehensive (Loss) Income

Other comprehensive (loss) income (“OCL” and “OCI”) consisted of the following during the three and nine months ended March 31, 2020 and March 31, 2019 (in thousands):

Three Months Ended

Nine Months Ended

March 31, 2020

March 31, 2020

Unrealized

Unrealized

Defined

Gains

Defined

Gains

Benefit

(Losses) on

Benefit

(Losses) on

Pension

Cash Flow

Pension

Cash Flow

Plan

Hedges

Total

Plan

Hedges

Total

Beginning Balance
$ (565
)
$ 213 $ (352
)
$ (491
)
$ 783 $ 292

ASU 2018-02 Adjustment
- - - (74
)
(54
)
(128
)
OCI/OCL before reclassifications
- 990 990 - 1,922 1,922
Amounts reclassified from OCI
- (554
)
(554
)
- (2,166
)
(2,166
)
Tax effect of OCI activity
- (101
)
(101
)
- 63 63
Net current period OCI/OCL
- 335 335 (74 ) (235
)
(309
)

Ending Balance
$ (565
)
$ 548 $ (17 ) $ (565
)
$ 548 $ (17 )

Three Months Ended

Nine Months Ended

March 31, 2019

March 31, 2019

Unrealized

Unrealized

Defined

Gains

Defined

Gains

Benefit

(Losses) on

Benefit

(Losses) on

Pension

Cash Flow

Pension

Cash Flow

Plan

Hedges

Total

Plan

Hedges

Total

Beginning Balance
$ (387
)
$ 1,044 $ 657 $ (387
)
$ (191
)
$ (578
)

OCI/OCL before reclassifications
- 1,492 1,492 - 4,221 4,221
Amounts reclassified from OCI
- (940
)
(940
)
- (2,060
)
(2,060
)
Tax effect of OCI activity
- (128
)
(128
)
- (502
)
(502
)
Net current period OCI/OCL
- 424 424 - 1,659 1,659

Ending Balance
$ (387
)
$ 1,468 $ 1,081 $ (387
)
$ 1,468 $ 1,081

On 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.

Table of Contents

E. Leases

On July 1, 2019, we adopted FASB Accounting Standards Codification, or ASC, Topic 842, Leases, or ASC 842, which requires the recognition of the right-of-use assets and related operating and finance lease liabilities on the balance sheet. As permitted by ASC 842, we elected the adoption date of July 1, 2019, which is the date of initial application. As a result, the consolidated balance sheet prior to July 1, 2019 was not restated and continues to be reported under ASC Topic 840, Leases, or ASC 840, which did not require the recognition of operating lease assets or liabilities on the balance sheet, and is not comparative. Under ASC 842, all leases are required to be recorded on the balance sheet and are classified as either operating leases or finance leases. The lease classification affects the expense recognition in the income statement. Operating lease expenses are recorded entirely in operating expenses. Finance lease charges are split, where amortization of the right-of-use asset is recorded in operating expenses and an implied interest component is recorded in interest expense. The expense recognition for operating leases and finance leases under ASC 842 is substantially consistent with ASC 840. As a result, there is no material difference in our results of operations presented in our Condensed Consolidated Statement of Income and Comprehensive Income for each period presented.

We adopted ASC 842 using a modified retrospective approach for all leases existing at July 1, 2019. The adoption of ASC 842 had a substantial impact on our balance sheet. The most significant impact was the recognition of the operating lease right-of-use assets and the liability for operating leases. As of July 1, 2019, we had no finance leases. Upon adoption, leases that were previously classified as operating leases under ASC 840 were classified as operating leases under ASC 842, and we recorded an adjustment of $20.7 million to operating lease right-of-use assets and an adjustment of $20.9 million to the related lease liability. The lease liability is based on the present value of the remaining minimum lease payments, determined under ASC 840, discounted using our secured incremental borrowing rate at the effective date of July 1, 2019, and using the expected lease term, including any optional renewals, as the tenor. As permitted under ASC 842, we elected several practical expedients that permit us to not reassess (1) whether existing contracts are or contain a lease, (2) the classification of existing leases, and (3) whether previously capitalized costs continue to qualify as initial indirect costs. The application of the practical expedients did not have a significant impact on the measurement of the operating lease liability.

The impact of the adoption of ASC 842 on the balance sheet at June 30, 2019 was (in thousands):

	As Reported June 30, 2019		Adoption of ASC 842 Increase (Decrease)			Balance of July 1, 2019
Operating lease right-of-use assets	$	—	$	20,774		$	20,774
Total assets		93,490		20,774			114,264
Deferred rent		543		(543	)		—
Long-term liability – Operating leases		—		20,897			20,897
Retained earnings		57,380		420			57,800
Total liabilities and equity		93,490		20,774			114,264

We lease substantially all of our product manufacturing and support office space used to conduct our business. For contracts entered into on or after that effective date, at the inception of a contract we assess whether the contract is, or contains, a lease. Our assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period of the contract, and (3) whether we have the right to direct the use of the asset during such time period. At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments.

Leases are classified as either finance leases or operating leases. A lease must be classified as a finance lease if any of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the ~~six~~present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any of these criteria. Substantially all our operating leases are comprised of payments for the use of manufacturing space leases.

For all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under the lease.

The right-of-use asset is initially measured at cost, which primarily comprises the initial amount of the lease liability, plus any initial direct costs incurred, consisting mainly of brokerage commissions, less any lease incentives received. All right-of-use assets are reviewed for impairment. The lease liability is initially measured at the present value of the lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, our secured incremental borrowing rate for the same term as the underlying lease. For our real estate and other operating leases, we use our secured incremental borrowing rate.

Lease payments included in the measurement of the lease liability comprise the following: the fixed noncancelable lease payments, payments for optional renewal periods where it is reasonably certain the renewal period will be exercised, and payments for early termination options unless it is reasonably certain the lease will not be terminated early.

Some of our manufacturing leases contain variable lease payments, including payments based on an index or rate. Variable lease payments based on an index or rate are initially measured using the index or rate in effect at lease commencement and separated into lease and non-lease components based on the initial amount stated in the lease or standalone selling prices. Lease components are included in the measurement of the initial lease liability. Additional payments based on the change in an index or rate, or payments based on a change in our portion of the operating expenses, including real estate taxes and insurance, are recorded as a period expense when incurred. Lease modifications result in remeasurement of the lease liability.

Lease expense for operating leases consists of the lease payments plus any initial direct costs, primarily brokerage commissions, and is recognized on a straight-line basis over the lease term. Included in lease expense are any variable lease payments incurred in the period that were not included in the initial lease liability. Lease expense for finance leases consists of the amortization of the right-of-use asset on a straight-line basis over the lease term and interest expense determined on an amortized cost basis. The lease payments are allocated between a reduction of the lease liability and interest expense.

We have elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a term of 12 months or less. The effect of short-term leases on our right-of-use asset and lease liability was not material.

Table of Contents

F. Debt

On July 1, 2019, we executed an amendment to our credit facility with Wells Fargo Bank, N.A. to extend the maturity for our working line of credit from February 1, 2021, to November 1, 2022. The Credit Agreement provides us with a credit line of up to $10.0 million. The line of credit may be used to finance working capital requirements. There was no commitment fee required as part of this amendment.

Under the terms of the Credit Agreement, borrowings are subject to eligibility requirements including maintaining (i) a ratio of total liabilities to tangible net worth of not greater than 1.25 to 1.0 at any time; and (ii) a ratio of total current assets to total current liabilities of not less than 1.75 to 1.0 at each fiscal quarter end. Any amounts outstanding under the line of credit will bear interest at a fixed or fluctuating interest rate as elected by us from time to time; provided, however, that if the outstanding principal amount is less than $100,000 such amount shall bear interest at the then applicable fluctuating rate of interest. If elected, the fluctuating rate per annum would be equal to 1.25% above the daily one month LIBOR rate as in effect from time to time. If a fixed rate is elected, it would equal a per annum rate of 1.25% above the LIBOR rate in effect on the first day of the applicable fixed rate term. Any amounts outstanding under the line of credit must be paid in full on or before the maturity date. Amounts outstanding that are subject to a fluctuating interest rate may be prepaid at any time without penalty. Amounts outstanding that are subject to a fixed interest rate may be prepaid at any time in minimum amounts of $100,000, subject to a prepayment fee equal to the sum of the discounted monthly differences between payment under a fixed rate versus payment under the variable rate for each month from the month of prepayment through the month in which the then applicable fixed rate term matures. On March 31, 2020, we were in compliance with all of the financial and other covenants required under the Credit Agreement.

Our obligations under the Credit Agreement are secured by our accounts receivable and other rights to payment, general intangibles, inventory, equipment and fixtures. We also have credit approval with Wells Fargo Bank, N.A. which allows us to hedge foreign currency exposures up to 30 months in the future. We also have credit approval with Bank of America which allows us to hedge foreign currency exposures up to 24 months in the future.

In light of the current global economic uncertainty related to COVID-19 and as a measure to provide our business with liquidity, and out of an abundance of caution, we withdrew $10 million from our credit facility with Wells Fargo during the three months ended ~~December~~March 31, ~~2017.~~ 2020. While we have not yet experienced any significant negative effects related to COVID-19 and notwithstanding our belief that our cash position and working capital excluding this $10.0 million borrowing is sufficient to support our ongoing operations, we deemed it prudent to borrow against our line of credit to ensure that such funds would be available to us if and when we need them. As of March 31, 2020, we did not have any remaining availability under our credit facilities.

G. Economic Dependency

~~Concentrations~~We had substantial net sales to certain customers during the periods shown in the following table. The loss of ~~Credit Risk~~any of these customers, or a significant decline in (i) sales to these customers, (ii) the growth rate of sales to these customers, or (iii) these customers’ ability to make payments when due, each individually could have a material adverse impact on our net sales and net income. Net sales to any one customer representing 10% or more of the respective period's consolidated net sales were as follows (in thousands):

	Three Months Ended March 31,				Nine Months Ended March 31,
	2020		2019		2020		2019

Customer 1	$	9,271	$	18,731	$	36,047	$	58,396
Customer 2		7,599		7,294		17,108		17,220
	$	16,870	$	26,025	$	53,155	$	75,616

We buy certain products, including beta-alanine, from a limited number of raw material suppliers who meet our quality standards. The loss of any of these suppliers could have a material adverse impact on our net sales and net income. Raw material purchases from any one supplier representing 10% or more of the respective period’s total raw material purchases were as follows (dollars in thousands):

Three Months Ended

March 31,

Nine Months Ended

March 31,

2020

2019

2020

2019

Supplier 1

1,930

(a)

Supplier 2

(a)

6,312

1,930

—

6,312

(a) Purchases were less than 10% of the respective period’s total raw material purchases.

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~~receivables is concentrated with two of our~~three~~ largest customers, whose receivable balances collectively represented ~~76.1%~~65.5% of gross accounts receivable at ~~December~~ March 31,~~2017~~ 2020 and ~~65.6%~~59.4% at June 30,~~2017.~~ 2019. Additionally, amounts due related to our beta-alanine raw material sales were ~~15.6%~~8.6% of gross accounts receivable at ~~December~~March 31, ~~2017,~~ 2020, and ~~21.3%~~8.0% of gross accounts receivable at June 30, ~~2017.~~ 2019.

As of March 31, 2020, we terminated our ongoing relationship with one customer, Kaged Muscle. We are working with this former customer to deliver the remaining products we completed, and to assist them with their obligations to us, transition to a replacement manufacturer, and the transfer of inventory items we hold specific to this customer. Due to uncertainty regarding the future operations of this former customer as of March 31, 2020, we reserved $3.3M, or 100% of their outstanding accounts receivable balance. Concentrations of credit risk related to the remaining accounts receivable balances are limited due to the number of customers comprising our remaining customer base.

D. H~~Other Comprehensive (Loss) Income~~

O~~ther comprehensive (loss) income (“OCL” and “OCI”) consisted of the following during the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~December 31, 2017~~ ~~and~~ ~~December 31, 2016 (~~~~in thousands):~~

Three Months Ended

Six Months Ended

December 31, 2017

December 31, 2017

Unrealized

Unrealized

Defined

Gains

Defined

Gains

Benefit

(Losses) on

Benefit

(Losses) on

Pension

Cash Flow

Pension

Cash Flow

Plan

Hedges

Total

Plan

Hedges

Total

Beginning Balance
$ (491
)
$ (1,548
)
$ (2,039
)
$ (491
)
$ (414
)
$ (905
)
OCI/OCL before reclassifications
- (490
)
(490
)
- (2,443
)
(2,443
)
Amounts reclassified from OCI
- 187 187 - 365 365
Tax effect of OCI activity
- 106 106 - 747 747
Net current period OCI/OCL
- (197
)
(197
)
- (1,331
)
(1,331
)
Ending Balance
$ (491
)
$ (1,745
)
$ (2,236
)
$ (491
)
$ (1,745
)
$ (2,236
)

Three Months Ended

Six Months Ended

December 31, 2016

December 31, 2016

Unrealized

Unrealized

Defined

Gains

Defined

Gains

Benefit

(Losses) on

Benefit

(Losses) on

Pension

Cash Flow

Pension

Cash Flow

Plan

Hedges

Total

Plan

Hedges

Total

Beginning Balance
$ (775
)
$ (295
)
$ (1,070
)
$ (775
)
$ 95 $ (680
)
OCI/OCL before reclassifications
- 2,287 2,287 - 1,834 1,834
Amounts reclassified from OCI
- (343
)
(343
)
- (501
)
(501
)
Tax effect of OCI activity
- (702
)
(702
)
- (481
)
(481
)
Net current period OCI/OCL
- 1,242 1,242 - 852 852
Ending Balance
$ (775
)
$ 947 $ 172 $ (775
)
$ 947 $ 172

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~~E. Debt~~

~~We have a Credit Agreement with Wells Fargo Bank, N.A. The Credit Agreement provides us with a credit line of up to~~ ~~$10.0~~ ~~million and matures on~~ ~~February 1, 2020.~~ ~~The line of credit~~ ~~may~~ ~~be used to finance working capital requirements. On~~ ~~September 29, 2017,~~ ~~we executed an amendment to the Credit Agreement, which now allows us to make loans or advances to~~ ~~third~~ ~~parties~~ ~~not~~ ~~exceeding~~ ~~$1.5~~ ~~million. We executed this amendment in order to issue a note receivable of~~ ~~$1.5~~ ~~million to a customer. There is~~ no ~~commitment fee under this agreement. There are~~ no ~~amounts currently drawn under the line of credit.~~

~~Under the terms of the Credit Agreement, borrowings are subject to eligibility requirements including maintaining (i) a ratio of total liabilities to tangible net worth of~~ ~~not~~ ~~greater than~~ ~~1.25~~ to ~~1.0~~ ~~at any time; and (ii) a ratio of total current assets to total current liabilities of~~ ~~not~~ ~~less than~~ ~~1.75~~ to ~~1.0~~ at each fiscal quarter end. Any amounts outstanding under the line of credit will bear interest at a fixed or fluctuating interest rate as elected by NAI from time to time; provided, however, that if the outstanding principal amount is less than ~~$100,000~~ ~~such amount shall bear interest at the then applicable fluctuating rate of interest. If elected, the fluctuating rate per annum would be equal to~~ ~~1.25%~~ ~~above the daily~~ ~~one~~ ~~month LIBOR rate as in effect from time to time. If a fixed rate is elected, it would equal a per annum rate of~~ ~~1.25%~~ ~~above the LIBOR rate in effect on the~~ ~~first~~ ~~day of the applicable fixed rate term. Any amounts outstanding under the line of credit must be paid in full on or before~~ ~~the maturity date. Amounts outstanding that are subject to a fluctuating interest rate~~ ~~may~~ ~~be prepaid at any time without penalty. Amounts outstanding that are subject to a fixed interest rate~~ ~~may~~ ~~be prepaid at any time in minimum amounts of~~ ~~$100,000,~~ ~~subject to a prepayment fee equal to the sum of the discounted monthly differences for each month from the month of prepayment through the month in which the then applicable fixed rate term matures.~~

~~Our obligations under the Credit Agreement are secured by our accounts receivable and other rights to payment, general intangibles, inventory, equipment and fixtures.~~

On ~~December 31, 2017~~~~, we were in compliance with all of the financial and other covenants required under the Credit Agreement.~~

~~We also have a foreign exchange facility with Wells Fargo Bank, N.A. in effect until~~ ~~January 31, 2019,~~ ~~and with Bank of America, N.A. in effect until~~ ~~August 15, 2019.~~

~~We did~~ ~~not~~ ~~use our working capital line of credit nor did we have any long-term debt outstanding during the si~~x ~~months ended~~ ~~December 31, 2017.~~ ~~As of~~ ~~December 31, 2017,~~ ~~we had~~ ~~$10.0~~ ~~million available under our credit facilities.~~

~~F. Economic Dependency~~

We had substantial net sales to certain customers during the periods shown in the following table. The loss of any of these customers, or a significant decline in sales to these customers, the growth rate of sales to these customers, or in these customers~~’ ability to make payments when due, could have a material adverse impact on our net sales and net income. Net sales to any~~ ~~one~~ ~~customer representing~~ ~~10%~~ ~~or more of the respective period's consolidated net sales were as follows (in thousands):~~

Three Months Ended
December 31,

Six Months Ended
December 31,

2017

2016

2017

2016

Customer 1
$ 19,134 $ 15,074 $ 32,292 $ 32,152
Customer 2
4,079

(a) 7,239

(a)
$ 23,213 $ 15,074 $ 39,531 $ 32,152

~~(a)~~ ~~Sales were less than~~ ~~10%~~ ~~of the respective period’s total revenues.~~

~~Table of Contents~~

We buy certain products, including beta-alanine, from a limited number of raw material suppliers. The loss of any of these suppliers could have a material adverse impact on our net sales and net income. Raw material purchases from any ~~one~~ ~~supplier representing~~ ~~10%~~ ~~or more of the respective period’s total raw material purchases were as follows (in thousands):~~

Three Months Ended
December 31,

Six Months Ended
December 31,

2017

2016

2017

2016

Supplier 1

$
(a)

(a) $ 2,992

(a)
Supplier 2
1,684

(a) 2,911

(a)
Supplier 3
1,718

(a)

(a)

(a)
$ 3,402 — $ 5,903 —

~~(a) Purchases were less than~~ ~~10%~~ ~~of the respective period’s total raw material purchases.~~

G.. Segment Information

Our business consists of two segments for financial reporting ~~purposes,~~purposes. The two segments are identified as (i) ~~private label~~private-label contract manufacturing, which primarily relates to the provision of ~~private label~~private-label contract manufacturing services to companies that market and distribute nutritional supplements and other health care ~~products;~~products, and (ii) patent and trademark licensing, which primarily includes direct raw material sales and royalty income from our license and supply agreements associated with the sale and use of beta-alanine under our CarnoSyn® and SR CarnoSyn® trade names.

Table of Contents

We evaluate performance based on a number of factors. The primary performance measures for each segment are net sales and income or loss from operations before the allocation of certain corporate ~~allocations.~~level expenses. Operating income or loss for each segment does not include corporate general and administrative expenses, interest expense and other miscellaneous income and expense items. Corporate general and administrative expenses~~, which are~~ ~~not~~ ~~allocated to any segment,~~ include, but are not limited to: human resources, corporate legal, finance, information technology, and other corporate level related ~~expenses.~~expenses, which are not allocated to any segment. Transfers of raw materials between segments are recorded at cost. The accounting policies of our segments are the same as those described in the summary of significant accounting policies in Note A above and in the consolidated financial statements included in our ~~2017~~2019 Annual Report.

Our operating results by business segment were as follows (in thousands):

	Three Months Ended December 31,				Six Months Ended December 31,				Three Months Ended March 31,				Nine Months Ended March 31,
	2017		2016		2017		2016		2020		2019		2020		2019
Net Sales
Private label contract manufacturing	$	29,355	$	23,864	$	51,577	$	51,243
Private-label contract manufacturing									$	22,650	$	31,758	$	73,490	$	94,505
Patent and trademark licensing		3,980		6,695		9,832		13,383		2,832		3,697		10,290		13,525
Total Net Sales	$	33,335	$	30,559	$	61,409	$	64,626	$	25,482	$	35,455	$	83,780	$	108,030

Total Assets

December 31,
2017

June 30,
2017

Private label contract manufacturing
$ 72,115 $ 60,489
Patent and Trademark Licensing
12,472 12,122
Total
$ 84,587 $ 72,611

	Three Months Ended March 31,						Nine Months Ended March 31,
	2020			2019			2020			2019
(Loss) Income from Operations

Private-label contract manufacturing	$	(3,123	)	$	3,534		$	187		$	9,534
Patent and trademark licensing		813			470			1,870			3,745
(Loss) income from operations of reportable segments		(2,310	)		4,004			2,057			13,279
Corporate expenses not allocated to segments		(1,913	)		(2,169	)		(5,637	)		(6,513	)
Total (Loss) Income from Operations	$	(4,223	)	$	1,835		$	(3,580	)	$	6,766

Our ~~private label~~private-label contract manufacturing products are sold both in the U.S. and in markets outside the U.S.U.S., including Europe, Canada, Australia, New Zealand, and ~~Asia, as well as Canada, Mexico and South Africa.~~Asia. Our primary ~~market~~markets outside the U.S. ~~is Europe.~~are Europe and Asia. Our patent and trademark licensing activities are primarily based in the U.S.

Net sales by geographic region, based on the ~~customers~~’customers’ location, were as follows (in thousands):

Products manufactured by ~~NAIE~~our Swiss subsidiary ("NAIE") accounted for ~~81%~~88% of net sales in markets outside the U.S. for the three months ended ~~December~~March 31, ~~2017,~~ 2020 and ~~79%~~90% for the ~~six~~nine months ended ~~December~~March 31, ~~2017.~~ 2020. Products manufactured by NAIE accounted for ~~60%~~74% of net sales in markets outside the U.S. for the three months ended ~~December~~March 31, ~~2016,~~ 2019 and ~~53%~~78% for the ~~six~~nine months ended ~~December~~March 31, ~~2016.~~ 2019. No products manufactured by NAIE were sold in ~~the~~ U.S. markets during the three ~~month~~ or ~~six~~nine month periods ended ~~December~~March 31, ~~2017~~ 2020 and ~~2016.~~2019.

~~Assets and capital~~Long-lived assets by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):

As a result of the implementation of ASC 842, operating lease right-of-use assets are now recorded as part of long-lived assets for segment reporting.

Total assets by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):

Capital expenditures by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):

H.I. Income Taxes

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted on March 27, 2020 in the United States. The CARES Act and related notices include several significant provisions, including delaying certain payroll tax payments, mandatory transition tax payments under the Tax Cuts and Jobs Act ~~(the “Act”~~(“TCJ Act”), and estimated income tax payments. We do not currently expect the CARES Act to have a material impact on our financial results, including on our annual estimated effective tax rate, or on our liquidity. We will continue to monitor and assess the impact the CARES Act, and similar legislation in other countries, with respect to what impact they may have on our business and financial results.

The effective tax rate for the three months ended March 31, 2020 was ~~enacted on~~ ~~December 22, 2017.~~ ~~Among other things,~~a benefit of 6.0% and the ~~Act reduces~~effective tax rate for the nine months ended March 31, 2020 was a benefit of 3.7%. The rates differ from the U.S. federal ~~corporate~~statutory rate of 21% due to our net loss and permanent book to tax differences for the three and nine months ended March 31, 2020. We have recorded our tax benefit commensurate with the tax benefit we expect on an annual basis. The effective tax rate to ~~21%~~ ~~and requires companies to pay a~~ ~~one~~~~-time deemed repatriation transition tax on earnings of U.S.-owned foreign subsidiaries that were previously tax deferred. At~~ ~~December 31, 2017,~~ ~~we had~~ ~~not~~ ~~completed our accounting~~ for the ~~tax effects of the Act; however, in certain cases, as described below and in accordance with SAB~~1~~18,~~ ~~we made a reasonable estimate of the effects on our existing deferred tax balances~~three months ended March 31, 2019 was 18.9% and the ~~one~~~~-time transition tax. In other cases, we were~~ ~~not~~ ~~able to make a reasonable estimate and continue to account~~effective tax for ~~those items based on our existing accounting under ASC~~ ~~740,~~ ~~Income Taxes. For~~ the ~~items for which we did determine a reasonable estimate, we recognized a provisional amount as a discrete component of our provision for income taxes. The impact of the Tax Legislation~~ ~~may~~ ~~differ from these estimates, possibly materially, during the~~ ~~one~~~~-year measurement period~~ ~~ending~~ ~~December 22, 2018~~ ~~due to, among other things, further refinement of our calculations, changes in interpretations and assumptions we made, guidance that~~ ~~may~~ ~~be issued and actions we~~ ~~may~~ ~~take as a result of the Act.~~nine months ended March 31, 2019 was 20.1%.

To determine our quarterly provision for income taxes, we use an estimated annual effective tax rate, ~~that~~which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions to which we are subject. Certain significant or unusual items are separately recognized ~~as discrete items~~ in the quarter in which they occur and can be a source of variability in the effective tax rate from quarter to quarter. We recognize interest and penalties related to uncertain tax positions, if any, as an income tax expense. As of March 31, 2020, and June 30, 2019, we had not recorded any liabilities for any uncertain tax positions. In the three months ended March 31, 2020, we recognized a discrete tax expense of $74,000 related to employee restricted stock vesting. In the nine months ended March 31, 2020, we recognized a discrete tax expense of $64,000 related to employee restricted stock vesting. There were no other significant discrete items for the three and nine months ended March 31, 2020. There were no significant discrete items for the three or nine months ended March 31, 2019.

We record valuation allowances to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ~~effective~~ultimate realization of deferred tax ~~rate for~~assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. During the three or nine months ended ~~December~~March 31, ~~2017~~ 2020, there was ~~153.1%~~ ~~and the effective tax rate~~no change to our valuation allowance for ~~the~~ ~~six~~ ~~months ended~~ ~~December 31, 2017~~ ~~was~~ ~~97.31%.~~ ~~In comparison, the effective tax rate for the~~ ~~three~~ ~~months ended~~ ~~December 31, 2016~~ ~~was~~ ~~29.6~~ ~~% and the effective tax rate for the~~ ~~six~~ ~~months ended~~ ~~December 31, 2016~~ ~~was~~ ~~30.1%.~~ ~~The effective tax rates for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~December 31, 2017~~ ~~differ from the estimated U.S. federal statutory rate of~~ ~~28.06%~~ ~~primarily due to the impact of the Act's required~~ ~~one~~~~-time transition tax and the reevaluation of~~ our deferred ~~taxes, offset by the favorable impact of foreign earnings taxed at less than the U.S. statutory rate. As a fiscal taxpayer, our U.S. federal statutory rate for the year ending~~ ~~June 30, 2018~~ ~~is estimated to be~~ ~~28.06%~~ ~~and is a blended rate of the historic~~ ~~35%~~ ~~statutory rate and the newly enacted~~ ~~21%~~ ~~rate. We expect our U.S. federal statutory rate to be~~ ~~21%~~ ~~for fiscal years beginning after~~ ~~June 30, 2018.~~

~~Table of Contents~~

~~As part of the Act, we are required to recognize a~~~~one~~~~-time deemed repatriation transition~~ tax ~~based on our total post-~~~~1986~~ earnings and profits (E&P) from our Swiss subsidiary NAIE. This accumulated E&P amount has historically been considered permanently reinvested thereby allowing us to defer recognizing any U.S. income tax on the amount. As a result of the Act we recorded a provisional amount for our ~~one~~~~-time transition tax liability resulting in an increase in income tax expense during the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~December 31, 2017~~ of ~~$1,815,966,~~ ~~which was treated as a discrete expense. In accordance with the provisions of the Act, we will elect to pay this tax over an~~ ~~eight~~~~-year period. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified~~ assets. ~~This amount~~ ~~may~~ ~~change when we finalize the calculation at the conclusion of fiscal~~ ~~2018.~~ ~~As of~~ ~~December 31, 2017,~~ we no ~~longer consider undistributed foreign earnings from NAIE as indefinitely reinvested. As a result, we have recorded~~ ~~$775,000~~ ~~in estimated foreign withholding taxes on the amounts deemed repatriated under the Act, which was also treated as a discrete expense during the period.~~

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured using enacted tax rates, for each of the jurisdictions in which we operate, ~~and the tax rates~~ expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized inas income or expense in the period that includes the enactment ~~date. As of~~ ~~December 31, 2017,~~ ~~we remeasured certain deferred tax assets and liabilities based on the tax rates expected to apply in the future. For deferred tax asset and liability balances we expect to reverse during fiscal~~ ~~2018~~ ~~we used the blended U.S. statutory rate of~~ ~~28.06%~~ ~~and~~date for ~~amounts expected to reverse in future periods we used the newly enacted~~ ~~21%~~ tax rate. However, we are still analyzing certain aspects of the Act and refining our calculations accordingly. This analysis and refinement could potentially affect the measurement of these balances or give rise tosuch new ~~deferred tax amounts. The provisional amount we recorded from our remeasurement of our deferred tax balance was~~ ~~$664,000~~ ~~and was treated as a discrete expense for the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~December 31, 2017.~~

~~We record valuation allowances to reduce our deferred tax assets to an amount that we believe is more likely than~~ ~~not~~ ~~to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than~~ ~~not~~ that some portion or all of the deferred tax assets will ultimately be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. During the ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~December 31, 2017,~~ ~~there was~~ no ~~change to our valuation allowance.~~rates.

We are subject to taxation in the U.S., Switzerland and various ~~U.S.~~ state jurisdictions. Our tax ~~returns~~years for the fiscal ~~years~~year ended June 30,~~2014~~ 2017 and forward are subject to examination by the U.S. tax ~~authorities and~~authorities. Our tax years for the fiscal years ended June 30, 2007 and forward are subject to examination by the state tax authorities. Our tax ~~filings~~years for the fiscal year ended June 30,~~2015~~ 2018 and forward are subject to examination by the Swiss tax authorities.

It is our policy to establish reserves based on ~~management~~’smanagement’s assessment of exposure for certain positions taken in previously filed tax returns that may become payable upon audit by tax authorities. Our tax reserves are analyzed quarterly and adjustments are made as events occur that we believe warrant adjustments to ~~the~~those reserves. There were no adjustments to ~~these~~ reserves in the three ~~and~~ ~~six~~ ~~months~~ or nine month periods ended ~~December~~March 31, ~~2017.~~2020.

I.J. Treasury Stock

On ~~June~~2,~~2011,~~ ~~the Board of Directors authorized the repurchase of up to~~ ~~$2.0~~ ~~million of our common stock. On~~ ~~February 6, 2015,~~ January 8, 2020, the Board of Directors authorized a ~~$1.0~~$2.0 million increase to our stock repurchase plan bringing the total authorized repurchase amount to ~~$3.0~~$9.0 million. On ~~May 11, 2015,~~ March 13, 2020, the Board of Directors authorized a ~~$2.0~~an additional $1.0 million increase to our stock repurchase plan bringing the total authorized repurchase amount to ~~$5.0~~ ~~million. On~~ ~~March 28, 2017,~~ ~~the Board of Directors authorized a~~ ~~$2.0~~ ~~million increase to our stock repurchase plan bringing the total authorized repurchase amount to~~ ~~$7.0~~$10.0 million. Under the repurchase plan, we may, from time to time, purchase shares of our common stock, depending upon market ~~conditions. When we do so we~~ ~~may~~ ~~purchase the shares~~conditions, in open market or privately negotiated transactions.

During thethree ~~and~~ ~~six~~ months ended ~~December~~March 31, ~~2017~~ 2020 we repurchased 210,832 shares at a weighted average cost of $8.46 and ~~December 31, 2016,~~ ~~we did~~ ~~not~~ ~~repurchase any shares~~a total cost of $1.8 million under this repurchase plan. During the nine months ended March 31, 2020 we repurchased 362,170 shares at weighted average cost of $8.40 and a total cost of $3.0 million under this repurchase plan. During the three months ended March 31, 2019, we repurchased 5,748 shares at a weighted average cost of $10.17 and a total cost of $58,000 under this repurchase plan. During the nine months ended March 31, 2019, we repurchased 42,697 shares at a weighted average cost of $9.74 and a total cost of $416,000 under this repurchase plan.

During the three months ended ~~December~~March 31, ~~2017,~~ 2020 we acquired ~~7,264~~53,176 shares from employees in connection with restricted stock shares that vested during that period at a weighted average cost of $6.91 per share and a total cost of $367,000. During the nine months ended March 31, 2020, we acquired 61,506 shares from employees in connection with restricted stock shares that vested during that year at a weighted average cost of ~~$10.80~~$7.14 per share and a total cost of ~~$78,000.~~$439,000. During the ~~six~~three months ended ~~December~~March 31, ~~2017,~~ 2019, we acquired ~~7,998~~ ~~shares in connection with restricted stock shares that vested during that period at a weighted average cost of~~ ~~$10.79~~ ~~per share and a total cost of~~ ~~$86,000.~~ ~~During the~~ ~~three~~ ~~months ended~~ ~~December 31, 2016,~~ ~~we acquired~~ ~~367~~39,118 shares from employees in connection with restricted stock shares that vested during the period at a weighted average cost of ~~$12.30~~$11.58 per share and a total cost of ~~$5,000.~~$453,000. During the ~~six~~nine months ended ~~December~~March 31, ~~2016,~~ 2019, we acquired ~~6,404~~46,656 shares ~~from employees~~ in connection with restricted stock shares that vested during ~~the~~that period at a weighted average cost of ~~$13.09~~$11.27 per share and a total cost of ~~$84,000.~~

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$525,000. These shares were returned to ~~NAI~~us by the ~~related~~subject employees and in ~~return NAI~~exchange we paid each employee’s required tax withholding ~~required as a result of~~liability incurred due to the vesting of ~~the~~their restricted ~~shares.~~stock shares during that period. The valuation of the shares acquired and ~~thereby~~ the number of shares returned to ~~NAI~~us was calculated based on the closing share price on the date the ~~restricted~~ shares vested.

J.K. Derivatives and Hedging

We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to forecasted product sales denominated in foreign currencies and to other transactions of NAIE, our ~~foreign subsidiary denominated in foreign currencies.~~Swiss subsidiary. As part of our overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, we ~~sometimes~~ may use foreign exchange contracts in the form of forward contracts. To the extent we enter into such contracts, there can be no guarantee any such contracts will be effective hedges against our foreign currency exchange risk.

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As of ~~December~~March 31, ~~201~~7,2020, we had forward contracts designated as cash flow hedges primarily to protect against the foreign exchange risks inherent in our forecasted sales of products at prices denominated in currencies other than the U.S. Dollar. These contracts are expected to be settled through August ~~2019.~~ 2021. For derivative instruments that are designated and qualify as cash flow hedges, we record the effective portion of the gain or loss on the derivative in accumulated other comprehensive income ~~(loss)~~(“OCI”) as a separate component of stockholders’ equity and subsequently reclassify these amounts into earnings in the period during which the hedged transaction is recognized in earnings.

For foreign currency contracts designated as cash flow hedges, hedge effectiveness is measured using the spot rate. Changes in the spot-forward differential are excluded from the test of hedge effectiveness and are recorded currently in earnings as interest ~~expense~~income or ~~income.~~expense. We measure effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged ~~item.~~ item as well as ensuring the assumptions we made at hedge inception have not materially changed. No hedging relationships were terminated as a result of ineffective hedging for the three or nine months ended March 31, 2020 and March 31, 2019.

We monitor the probability of forecasted transactions as part of the hedge effectiveness testing on a quarterly basis. During the three and nine months ended March 31, 2020 and March 31, 2019, we did not have any losses or gains related to the ineffective portion of our hedging ~~instruments during the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~December 31, 2017.~~ ~~During the~~ ~~three~~ ~~and~~ ~~six~~ ~~months ended~~ ~~December 31, 2016,~~ ~~we recorded a~~ ~~$92,000~~ ~~gain related to the ineffective portion of our hedging instruments to other income.~~ ~~None~~ ~~of our foreign currency forward contracts were terminated as a result of ineffective hedging or forecasted transactions~~ no ~~longer probable of occurring for foreign currency forward contracts. We monitor the probability of forecasted transactions as part of our hedge effectiveness testing on a quarterly basis.~~instruments.

As of ~~December~~March 31, ~~201~~7,2020, the notional amounts of our foreign exchange contracts designated as cash flow hedges were approximately ~~$52.6~~$30.4 million (EUR ~~45.3~~26.0 million). As of ~~December~~March 31, ~~2017,~~ 2020, a net ~~loss~~gain of approximately ~~$2.7~~ ~~million~~$713,000 related to derivative instruments designated as cash flow hedges was recorded in OCI. It is expected that ~~$2.0~~ ~~million~~$633,000 will be reclassified into earnings in the next 12 months along with the earnings effects of the related forecasted transactions.

As of ~~December~~March 31, ~~2017~~,2020, the fair value of our cash flow hedges was ~~a liability~~an asset of ~~$2.7~~$1.7 million, of which ~~$2.1~~$1.6 million was classified as ~~a current liability,~~forward contracts, and ~~$609,000~~$100,000 was classified in other ~~noncurrent liabilities~~non-current assets in our Consolidated Balance Sheets. During the three months ended ~~December~~March 31, ~~2017,~~ 2020, we recognized ~~$731,000~~$990,000 of net ~~losses~~gains in OCI, and reclassified ~~$428,000~~$554,000 of ~~losses~~gains and forward point amortization from OCI to ~~revenue.~~Net Sales. During the ~~six~~nine months ended ~~December~~March 31, ~~2017,~~ 2020, we recognized ~~$2.9~~$1.9 million of net ~~losses~~gains in OCI, reclassified $2.1 million of gains and ~~reclassified~~ ~~$850,000~~ ~~of losses~~forward point amortization from OCI to ~~revenue.~~Net Sales, and reclassified $54,000 of gains from OCI to Other Income. As of June 30,~~2017,~~~~$422,000~~ 2019, $2.0 million of the fair value of our cash flow hedges was classified in ~~accrued liabilities,~~forward contracts, and ~~$99,000~~$312,000 was classified in other ~~noncurrent liabilities~~non-current assets in our Consolidated Balance Sheets. During the three months ended ~~December~~March 31, ~~2016,~~ 2019, we recognized ~~$2.3~~$1.4 million of net gains in OCI, ~~and~~ reclassified ~~$213,000~~$450,000 of gains from OCI to ~~revenue.~~Net Sales, and reclassified $490,000 of gains from OCI to Other Income. During the ~~six~~nine months ended ~~December~~March 31, ~~2016,~~ 2019, we recognized ~~$1.8~~$4.1 million of net gains in OCI, ~~and~~ reclassified ~~$271,000~~$619,000 of gains from OCI to ~~revenue.~~ Net Sales and reclassified $1.4 million of gains from OCI to Other Income.

On July 1, 2019, we adopted ASU No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.” The ASU attempts to better align 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. 2017-12 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 is now included as a component of net sales while it was previously included as a component of other income. We included $209,000 of forward point amortization in Net Sales for the three months ended March 31, 2020, and $707,000 of forward point amortization in Net Sales for the nine months ended March 31, 2020. We included $368,000 of forward point amortization in Other Income for the three months ended March 31, 2019, and $1.3 million of forward point amortization in Other Income for the nine months ended March 31, 2019.

In January 2020, the World Health Organization (the “WHO”) announced a global health emergency because of a new strain of coronavirus COVID-19 originating in Wuhan, China and the risks to the international community as the virus spread globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic based on the rapid increase in global exposure.

As of the date of issuance of these unaudited Condensed Consolidated Financial Statements, our operations have not been significantly impacted. However, the full impact of the COVID-19 pandemic will continue to evolve subsequent to the three and nine months ended March 31, 2020 and as of the date these unaudited Condensed Consolidated Financial Statements are issued. As such, the full magnitude that the COVID-19 pandemic will have on our financial condition and future results of operations is uncertain. Management is actively monitoring the situation on our financial condition, operations, suppliers, industry, customers, and workforce. As the spread of COVID-19 continues, our ability to meet customer demands for products may be impacted or our customers may experience adverse business consequences due to COVID-19. Reduced demand for products or ability to meet customer demand (including as a result of disruptions at our suppliers and vendors) could have a material adverse effect on our business operations and financial performance.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to help you understand our financial condition and results of operations for the three and sixnine months ended ~~December~~March 31, ~~2017.~~2020. You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to the condensed consolidated financial statements included under Item 1 in this ~~Quarterly~~ Report, as well as the risk factors and other information included in our ~~2017~~2019 Annual Report and other reports and documents we have filed and will file with the SEC. Our future financial condition and results of operations will vary from our historical financial condition and results of operations described below based on a variety of factors.

The following overview does not address all of the matters covered in the other sections of this Item 2 or other items in this ~~Quarterly~~ Report ornor does it contain all of the information that may be important to our stockholders or the investing public. You should read this overview in conjunction with the other sections of this Item 2 and with this ~~Quarterly Report.~~Report.

Our primary business activity is providing ~~private label~~private-label contract manufacturing services to companies that market and distribute vitamins, minerals, herbs and other nutritional supplements, as well as other health care products, to consumers both within and outside the U.S. Historically, our revenue has been largely dependent on sales to two or three ~~private label~~private-label contract manufacturing customers and ~~thus sensitive~~subject to variations in the timing of such ~~customers~~’customers’ orders, which ~~variations~~ in turn ~~have been~~is impacted by such customers’ internal marketing programs, supply chain management, entry into new markets, new product introductions, the demand for such customers’ products, and general industry and economic conditions. Our revenue also includes raw material sales and royalty and licensing revenue generated from ~~our patent estate pursuant to~~ license and supply agreements with third parties, ~~for~~granting them the right to use our patents, trademarks and other intellectual property in connection with the distribution and use of the ingredient known as beta-alanine sold under our CarnoSyn® and SR CarnoSyn® trademarks.

A cornerstone of our business strategy is to achieve long-term growth and profitability and to diversify our sales base. We have sought and expect to continue to seek to diversify our sales by developing relationships with additional, quality-oriented, ~~private label~~private-label contract manufacturing customers, and commercializing our patent estate through sales of beta-alanine under our CarnoSyn® and SR CarnoSyn® trade names, royalties from license agreements, and potentially additional contract manufacturing opportunities with ~~these~~ licensees.

On March 11, 2020, the World Health Organization classified the novel coronavirus, or COVID-19, as a pandemic. The COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption and has and will likely affect our business. Significant uncertainty exists concerning the magnitude of the impact and duration of the COVID-19 pandemic. The Company’s facilities, located both in the United States and Europe continue to operate as an essential and critical manufacturer in accordance with federal, state, and local regulations, however, there can be no assurance our facilities will continue to operate without interruption. Factors that derive from the COVID-19 and the accompanying response and that have or may negatively impact sales and gross margin in the future include, but are not limited to the following:

As a measure to provide our business with liquidity, and out of an abundance of caution, we withdrew $10 million from our credit facility with Wells Fargo. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders. While we are unable to determine or predict the nature, duration, or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we are hopeful we will be able to remain operational and our working capital will be sufficient for us to remain operational as the longer term consequences of this pandemic become known.

During the first ~~six~~nine months of fiscal ~~2018,~~2020, our net sales were 5%22% lower than in the first ~~six~~nine months of fiscal ~~2017. Private label~~2019. Private-label contract manufacturing sales ~~increased 1%~~decreased 22% due primarily to the sale of new products to existing customers and higher volumes of current products to existing customers, partially offset by the timing and shipment of orders of current products to existing customers and discontinued customer relationships. Our first quarter fiscal 2018 contract manufacturing sales declined 19% as compared to the same period in the prior year primarily from reduced orders from our largest customer for specific products associated with an inventory reduction program. During our second quarter of fiscal 2018, our contract manufacturing sales increased 23% as compared to the comparable prior year period primarily due to an increase inlower sales to our largest customer partially offset by increased sales to ~~historical levels~~other new and ~~shipment of new products under~~existing customers. Sales to our ~~previously announced expanded relationship.~~ largest private-label contract manufacturing customer declined over 38%. Revenue concentration risk for our largest ~~private label~~private-label contract manufacturing customer as a percentage of our total net sales ~~increased~~decreased from 54% to ~~53%~~43% for the ~~six~~nine months ended ~~December~~March 31, ~~2017~~2020 compared to ~~50% in~~ the ~~first six~~nine months ~~of fiscal 2017.~~ended March 31, 2019. We expect our annualized fiscal ~~2018~~2020 revenue concentration for this customer to be ~~higher~~lower than fiscal ~~2017.~~2019.

Effective March 31, 2020, we terminated our ongoing relationship with one private-label contract manufacturing customer, Kaged Muscle. We are working with this former customer to deliver the remaining products we completed, and to assist them with their obligations to us, transition to a replacement manufacturer, and the transfer of inventory items we hold specific to this customer. Due to uncertainty regarding the future operations of this former customer as of March 31, 2020, we reserved 100% of their outstanding accounts receivable balance and a majority of the inventory we hold for their products, for a total reserve of $4.3 million.

During the first ~~six~~nine months of fiscal ~~2018,~~2020, CarnoSyn® beta-alanine revenue decreased ~~27%~~24% to ~~$9.8~~$10.3 million, as compared to ~~$13.4~~revenue of $13.5 million for the first ~~six~~nine months of fiscal ~~2017.~~2019. The decrease in beta-alanine revenue was primarily due to decreased material shipments ~~as a result of~~resulting from market and seasonal factors and lower average ~~material~~ sales prices. During the quarter ended December 31, 2017, the sports nutrition retail market conditions declined most notably in the standard “brick and mortar” sales channels as products transitioned to higher levelsWe believe this decline was impacted by certain of ~~internet based sales. This transition resulted in excess inventory in certain channels and delayed the re-order rates for many of~~ our customer brands. Additionally, while we still have active patents covering instant release CarnoSyn® beta-alanine, we experienced increased competition from companies selling generic beta-alanine during the current quarter resulting in certain customers discontinuing the use of our CarnoSyn® ~~beta-alanine. In addition~~beta-alanine in favor of generic beta-alanine and lower overall consumer demand for our customers’ CarnoSyn® products.

We continue to ~~legal actions we have prosecuted~~invest in research and others we may institute, to offset this decline, we have increased our sales and marketing activities to consumers, customers, potential customers, and brand owners on multiple platforms to promote and reinforce the features and benefits of utilizing CarnoSyn® beta-alanine. As we enter our third quarter ending March 31, 2018, our re-order rates have improveddevelopment for ~~many of our customer brands suggesting improved sports nutrition retail market conditions. Additionally,~~ our SR CarnoSyn® ~~raw material sales continued to rise during the current quarter as more brands adopted product offerings of this effective~~sustained release delivery system. ~~There can~~We believe SR CarnoSyn® may provide a unique opportunity within the growing Wellness and Healthy Aging markets. We believe our recent efforts to refine our formulations and product offerings will be ~~no assurance that our~~positively received and result in significant opportunity for increased SR CarnoSyn® sales ~~and marketing efforts or~~in the ~~recent apparent improvement in retail market conditions will reverse or decelerate potential future declines of our CarnoSyn® beta-alanine sales.~~future.

To protect our CarnoSyn® business and ~~its underlying patent estate,~~our patents, trademarks and other intellectual property, we incurred litigation and patent ~~complianc~~ecompliance expenses of approximately $1.7 million during the first ~~six~~nine months of fiscal ~~2018 and $2.0~~2020 as compared to $1.6 million during the comparable period in fiscal ~~2017. We describe our efforts to protect our patent estate in more detail under Item 1 of Part II of our 2017 Annual Report.~~2019. Our ability to maintain or further increase our beta-alanine ~~royalty and~~ licensing revenue will depend in large part on our ability to develop a market for our sustained release form of beta-alanine marketed under our SR ~~Carnosyn® tradename, maintenance of~~CarnoSyn® trademark, maintain our patent rights, ~~the availability of~~obtain the raw material beta-alanine when and in the amounts needed, ~~the ability to~~ expand distribution of beta-alanine to new and existing customers, ~~the ability to~~and further commercialize our existing patents, and will also depend on the continued compliance by third parties with our license agreements and our patent, trademark and ~~trademark~~other intellectual property rights.

During the remainder of fiscal ~~2018,~~ 2020, we plan to continue our focus on:

The preparation of our financial statements requires that we make estimates and assumptions that affect the amounts reported in our financial statements and ~~their~~the accompanying notes. We have identified certain policies we believe are important to the accurate and complete portrayal of our financial condition and results of operations. These policies require the application of significant judgment by our management. We base our estimates on our historical experience, industry standards, and various other assumptions we believe are reasonable under the circumstances. Actual results could differ from these estimates under different assumptions or conditions. An adverse effect on our financial condition, changes in financial condition, and results of operations could occur if circumstances change that alter the various assumptions or conditions used in such estimates ~~and~~or assumptions.

Our critical accounting policies are discussed under Item 7 of our ~~201~~72019 Annual Report and ~~recent~~recently adopted and issued accounting pronouncements are discussed ~~under Item A to our~~in the Notes to Condensed Consolidated Financial Statements contained in this Quarterly Report. ~~There have been no significant changes to these policies or pronouncements during the six months ended December 31, 2017.~~

The results of our operations for the three and ~~six~~nine months ended ~~December~~March 31 were as follows ~~(in~~(dollars in thousands):

	Three Months Ended									Six Months Ended									Three Months Ended									Nine Months Ended
	December 31,									December 31,									March 31,									March 31,
	2017			2016			% Change			2017			2016			% Change			2020			2019			% Change			2020			2019			% Change
Private label contract manufacturing	$	29,355		$	23,864			23	%	$	51,577		$	51,243			1	%	$	22,650		$	31,758			(29	)%	$	73,490		$	94,505			(22	)%
Patent and trademark licensing		3,980			6,695			(41	)%		9,832			13,383			(27	)%		2,832			3,697			(23	)%		10,290			13,525			(24	)%
Total net sales		33,335			30,559			9	%		61,409			64,626			(5	)%		25,482			35,455			(28	)%		83,780			108,030			(22	)%
Cost of goods sold		26,713			24,064			11	%		48,417			50,462			(4	)%		22,588			29,128			(22	)%		71,441			88,104			(19	)%
Gross profit		6,622			6,495			(2	)%		12,992			14,164			(8	)%		2,894			6,327			(54	)%		12,339			19,926			(38	)%
Gross profit %		19.9	%		21.3	%					21.2	%		21.9	%					11.4	%		17.8	%					14.7	%		18.4	%

Selling, general and administrative expenses		4,341			3,382			28	%		8,828			7,515			17	%		7,117			4,492			58	%		15,919			13,160			21	%
% of net sales		13.0	%		11.1	%					14.4	%		11.6	%					27.9	%		12.7	%					19.0	%		12.2	%

Income from operations		2,281			3,113			(27	)%		4,164			6,649			(37	)
(Loss) income from operations																				(4,223	)		1,835			(330	)%		(3,580	)		6,766			(153	)%
% of net sales		6.8	%		10.2	%					6.8	%		10.3	%					(16.6	)%		5.2	%					(4.3	)%		6.3	%

Total other income		202			387			(48	)%		310			437			(29	)%
Income before income taxes		2,483			3,500			(29	)%		4,474			7,086			(37	)%
Total other (loss) income																				(48	)		622			(108	)%		5			1,662			(100	)%
(Loss) income before income taxes																				(4,271	)		2,457			(274	)%		(3,575	)		8,428			(142	)%
% of net sales		7.4	%		11.5	%					7.3	%		11.0	%					(16.8	)%		6.9	%					(4.3	)%		7.8	%

Provision for income taxes		3,801			1,034			268	%		4,358			2,130			105	%		(256	)		463			(155	)%		(132	)		1,694			(108	)%
Net (loss) income	$	(1,318	)	$	2,466			(153	)%	$	116		$	4,956			(98	)%	$	(4,015	)	$	1,994			(301	)%	$	(3,443	)	$	6,734			(151	)%
% of net sales		(4.0	)%		8.1	%					0.2	%		7.7	%					(15.8	%)		5.6	%					(4.1	)%		6.2	%

Private-label contract manufacturing net sales ~~increased~~ ~~23%~~decreased 29% during the three months ended ~~December~~March 31, ~~2017~~2020 and 1%22% during the ~~six~~nine months ended ~~December~~March 31, ~~2017,~~2020, when compared to the same periods in the prior year. ~~These increases were~~The decrease was due primarily to the sale of new products to existing customers and higher volumes of current products to existing customers partially offset by the timing and shipment of orders of current products to existing customers and discontinued customer relationships. Netlower sales to our largest customer represented a majority of the increase in our private label contract manufacturing sales during the three months ended December 31, 2017 and were primarily the result of increased orders of current products and orders of new products.customer.

Net sales from our patent and trademark licensing segment decreased ~~41%~~23% during the three months ended ~~December~~March 31, ~~2017~~2020 and decreased ~~27%~~24% during the ~~six~~nine months ended ~~December~~March 31, ~~2017,~~2020, when compared to the same periods in the prior year. The decrease in beta-alanine ~~raw material~~ sales during the three and nine months ended March 31, 2020 was primarily due to decreased material shipments ~~of beta alanine as a result of~~resulting from market and seasonal factors and lower average sales ~~prices~~prices. We believe this decline was due in part by certain of our customers discontinuing the use of our CarnoSyn® beta-alanine in favor of generic beta-alanine and lower overall consumer demand for ~~the material.~~our customer’s CarnoSyn® products.

The change in gross profit margin ~~between~~for the three and ~~six month~~ ~~periods~~nine months ended ~~December~~March 31, ~~2017~~2020, was as follows:

Selling, general and ~~administrative~~administrative expenses increased ~~$1.0 million, or 28%, during~~by 58% for the three months ended ~~December~~March 31, ~~2017 and increased $1.3 million, or 17%, during the six months ended December 31, 2017, as~~2020 when compared to the comparable prior year ~~periods. These increases were~~period. The increase was primarily due to ~~increased marketing, advertising and research and development costs supporting our CarnoSyn® and SR CarnoSyn® brands and increased compensation costs~~$3.3 million of bad debt expense recorded related to the receivable from a former customer, partially offset by ~~lower litigation costs.~~

~~Other income, net~~ ~~decreased $0.2 million during~~a decrease in advertising, consulting, and litigation. Selling, general and administrative expenses increased by 21% for the ~~three~~nine months ended ~~December~~March 31, ~~2017 and decreased $0.1 million during the six months ended December 31, 2017,~~2020 when compared to the comparable prior year periods. ~~These decreases were~~The increase was primarily due to ~~foreign exchange fluctuations.~~$3.3 million of bad debt expense recorded related to the receivable from a former customer. This bad debt expense was partially offset by a decrease in compensation and consulting.

~~Our~~Other income, ~~tax expense increased $2.8 million, or 268%,~~net, decreased $670,000 during the three months ended ~~December~~March 31, ~~2017~~2020, and ~~increased $2.2~~decreased $1.7 million ~~or 105%,~~ during the ~~six~~nine months ended ~~December~~March 31, ~~2017, as~~2020, when compared to the comparable prior year periods. The ~~increases were~~decrease was primarily due to the ~~discrete~~exclusion of the amortization of forward points from cash flow hedge instruments during the three and nine months ended March 31, 2020 as compared to including $368,000 and $1.3 million, respectively, in the comparable periods of fiscal 2019. This change in classification of forward points is the result of the adoption of ASU No. 2017-12 that now requires the amortization of forward points be included as a component of net revenues while they were previously included as a component of other income. The remaining portion of the decrease primarily related to foreign currency exchange losses associated with fluctuations in various foreign exchange rates used to revalue our balance sheet.

Our income tax expense amounts recorded as a result of the Tax Cuts and Jobs Act enacted on December 22, 2017. Among other things, the Act reduces the U.S. federal corporate tax rate to 21% and requires companies to pay a one-time deemed repatriation transition tax on earnings of U.S.-owned foreign subsidiaries that were previously tax deferred. At December 31, 2017, we have not completed our accounting for all of the tax effects of the Act; however, in certain cases, as described below and in accordance with SAB 118, we have made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. In other cases, we have not been able to make a reasonable estimate and continue to account for those items based on our existing accounting under ASC 740, Income Taxes. For the items for which we were able to determine a reasonable estimate, we recognized a provisional amount as a discrete component of our provision for income taxes. The impact of the Act may differ from these estimates, possibly materially,decreased $719,000, or 155%, during ~~the one-year measurement period~~ ~~ending December 22, 2018~~ ~~due to, among other things, further refinement of our calculations, changes in the interpretations and assumptions we made, guidance that may be issued and actions we may take as a result of the Act.~~

~~Included in our tax expense for the three and six months ended December 31, 2017 is~~ ~~$3.3 million of discrete tax items related to the Act. The discrete tax items include:~~

~~Our effective tax rate, excluding the impact of the above noted discrete items, for~~ the three months ended ~~December~~March 31, ~~2017 was 21.9% as compared to an effective tax rate of 29.6% for~~2020, and decreased $1.8 million, or 108%, during the ~~three~~nine months ended ~~December~~March 31, ~~2016. As a fiscal taxpayer, our~~ U.S. federal statutory rate for the year ended June 30, 2018 is estimated to be 28.06% and is a blended rate of the historic 35% statutory rate and the newly enacted 21% rate. The year over year improvement in our second fiscal quarter effective tax rate is2020, primarily ~~due~~related to the ~~reduction of the U.S. federal tax rate used~~decrease in our estimated tax calculation, which reduced to a blended rate of 28.06% as compared to 34.0% used in the same period in the prior year. In addition, as this rate reduction was applied on a year to date basis the second quarter of 2018 tax expense received a benefit from the application of the lower rate to the first quarter of fiscal 2018 pre-tax income ~~thus further reducing the effective tax rate for the quarter. Our effective tax rate,~~ ~~for the six months ended December 31, 2017~~ excluding the impact of the above noted discrete items, was 24.6% as compared to an effective tax rate of 30.1% for the six months ended December 31, 2017. The improvement in our year to date fiscal 2018 effective tax rate asbefore taxes when compared to the ~~same period in the~~comparable prior year is primarily due to the reduction of the U.S. federal tax rate used in our estimated tax calculation, which reduced to a blended rate of 28.06% as compared to 34.0% used in effective tax rate calculation the same period in the prior year.

~~We expect our U.S. federal statutory rate to be 21% for fiscal years beginning after June 30, 2018, which should further reduce our effective tax rate on an annualized basis.~~

Our primary sources of liquidity and capital resources are cash flows provided by operating activities and the availability of borrowings under our credit facility. Net cash provided by operating activities was $~~4.7~~$5.2 million ~~during~~for the ~~six~~nine months ended ~~December~~March 31, ~~2017 as~~2020 compared to net cash provided by operating activities of ~~$5.0~~$7.6 million ~~during~~in the comparable period in the prior fiscal year.

~~During the six months ended December~~At March 31, ~~201~~7,2020, changes in accounts receivable, ~~used $4.5 million~~consisting of amounts due from our private-label contract manufacturing customers and our patent and trademark licensing activities, provided $303,000 in cash compared to ~~having provided $3.4~~using $2.2 million of cash during the comparable ~~six~~nine month period in the prior fiscal year. The decrease in cash provided by accounts receivable during the ~~six month period~~nine months ended ~~December~~March 31, ~~2017~~2020 primarily resulted from timing of sales and ~~the~~ related collections. Days sales outstanding was 3247 days during the ~~six~~nine months ended ~~December~~March 31, ~~2017 and 33~~2020 as compared to 40 days ~~during~~for the ~~six months ended December 31, 2016.~~prior year period.

Changes in inventory used ~~$4.2 million~~$108,000 in cash during the nine months ended March 31, 2020 compared to ~~having provided $3.7~~using $3.5 million in the comparable prior year period. The ~~increase~~change in cash ~~provided by~~related to inventory during the ~~period~~nine months ended ~~December~~March 31, ~~2017~~2020 was primarily related to ~~inventory purchased to support increased sales to our largest private label contract manufacturing customer and~~the timing of ~~orders~~sales and ~~shipments.~~new order activity and includes a $1.0 million reserve associated with a former customer recorded during the nine months ended March 31, 2020. Changes in accounts payable and accrued liabilities provided ~~$6.9~~$1.7 million in cash during the ~~six~~nine months ended ~~December~~March 31, ~~2017~~2020 compared to ~~having used $6.7~~providing $4.1 million during the ~~six~~nine months ended ~~December~~March 31, ~~2016.~~2019. The change in cash flow activity related to accounts payable and accrued liabilities ~~is primarily due to~~ ~~inventory associated with increased sales associated with our largest customer and~~ ~~timing of inventory receipts and payments.~~

~~During the six months ended December 31, 2017, NAIE’s operations provided $2.1 million of our operating cash flow~~was primarily due to the timing of inventory receipts ~~payments~~ and ~~sales.~~payments.

Cash used in investing activities during the ~~six~~nine months ended ~~December~~March 31, ~~2017~~2020 was ~~$3.6~~$3.4 million compared to ~~$3.3~~$2.6 million ~~during~~in the comparable ~~six month period last year.~~prior year period. The primary reason for the change iswas due the ~~conversion~~collection of ~~$1.5 million of accounts receivable into~~ a note receivable during the ~~first quarter of fiscal 2018. This reduction was partially offset by lower~~nine months ended March 31, 2019, as well as a decrease in capital equipment purchases ~~of $2.1 million~~ during the ~~first half of fiscal 2018~~nine months ended March 31, 2020 as compared to ~~$3.3 million during~~ the ~~same six month period of fiscal 2017. Capital expenditures for both years were primarily for manufacturing equipment used in our Vista, California and Manno, Switzerland facilities.~~comparable prior year period.

Cash ~~used~~provided in financing activities ~~during~~for the sixnine months ended ~~December~~March 31, ~~2017~~2020 was $6.5 million compared to $903,000 used in the comparable prior year period. This change is primarily ~~related to treasury shares returned to NAI by employees whose restricted stock vested during the quarter. In return NAI paid each employee's required tax withholding.~~

~~We did not have any consolidated debt as of December 31, 2017 or June 30, 2017.~~

~~We have a Credit Agreement with Wells Fargo Bank, N.A.~~ ~~The Credit Agreement provides us with a credit line of up~~due to $10.0 million ~~and matures on February 1, 2020. The~~in proceeds from our line of credit, ~~may be used~~withdrawn as a measure to ~~finance working capital requirements. On September 29, 2017, we executed~~provide our business with liquidity out of an ~~amendment~~abundance of caution due to the ~~Credit Agreement, that now allows us to make loans or advances to third parties~~COVID-19 pandemic, offset by increased repurchases of our stock. At March 31, 2020 we had $10.0 million due in ~~amounts not exceeding $1.5 million. We executed this amendment~~connection with our loan facility. As of June 30, 2019, we had no outstanding balances due in ~~order to issue a note receivable of $1.5 million to a customer. There is no commitment fee under this agreement. There are no amounts currently drawn under the line of credit.~~connection with our loan facility.

~~Under~~During the terms of the Credit Agreement, borrowings are subject to eligibility requirements including maintaining (i) a ratio of total liabilities to tangible net worth of not greater than 1.25 to 1.0 at any time; and (ii) a ratio of total current assets to total current liabilities of not less than 1.75 to 1.0 at each fiscal quarter end. Any amounts outstanding under the line of credit will bear interest at a fixed or fluctuating interest rate as elected by NAI from time to time; provided, however, that if the outstanding principal amount is less than $100,000 such amount shall bear interest at the then applicable fluctuating rate of interest. If elected, the fluctuating interest rate per annum would be equal to 1.25% above the daily one month LIBOR rate as in effect from time to time during the period loan amounts are outstanding. If a fixed interest rate is elected, the interest rate would equal a per annum rate of 1.25% above the LIBOR rate in effect on the first day of the term for which the fixed rate is elected. Any amounts outstanding under the line of credit must be paid in full on or before the maturity date. Amounts outstanding that are subject to a fluctuating interest rate may be prepaid at any time without penalty. Amounts outstanding that are subject to a fixed interest rate may be prepaid at any time in minimum amounts of $100,000, subject to a prepayment fee equal to the sum of the discounted monthly differences ~~(calculated by comparing the fixed rate to the variable rate that would have been applied, had it been elected)~~ ~~for each month from the month of prepayment through the month in which the then applicable fixed rate term matures.~~

Our obligations under the Credit Agreement are secured by our accounts receivable and other rights to payment, general intangibles, inventory, equipment and fixtures. We also have a foreign exchange facility with Wells Fargo Bank, N.A. that is in effect until Januarynine months ending March 31, ~~2019, and a similar facility with Bank of America, N.A.~~ ~~that is in effect until August 15, 2019.~~

~~On December 31, 201~~7,2020, we were in compliance with all of the financial and other covenants required under the Credit Agreement. Refer to Note F, "Debt," in this Quarterly Report, for terms of our Credit Agreement and additional information.

As of ~~December~~March 31, ~~2017~~,2020, we had ~~$28.8~~$33.3 million in cash and cash ~~equivalents and $10.0 million available under our credit facilities.~~equivalents. We believe our available ~~working capital,~~ cash, ~~and~~ cash equivalents, and potential cash flows from operations will be sufficient to fund our current working capital needs and capital expenditures through at least the next 12 months.

As of ~~December~~March 31, ~~201~~7,2020, we did not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that have or are reasonably likely to have a material current or future ~~adverse~~ effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses ~~that are or could be~~ material to investors.

Recent accounting pronouncements are discussed in the notes to our consolidated financial statements included under Item 1 of this ~~Quarterly~~ Report. Other than those pronouncements, we are not aware of any other pronouncements that materially affect our financial position or results of operations.

As a smaller reporting company, we are not required to provide item 3 disclosure in this Quarterly Report.

We maintain certain disclosure controls and procedures ~~that are prescribed~~as defined under the Securities Exchange Act of 1934. ~~These controls and procedures~~They are designed to help ensure that material information is: (1) gathered and communicated to our management, including our principal executive and financial officers, in a manner that allows for timely decisions regarding required disclosures; and (2) recorded, processed, summarized, reported and filed with the SEC as required under the Securities Exchange Act of 1934 and within the time periods specified by the SEC.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer (principal financial and accounting officer), evaluated the effectiveness of the design and operation of our disclosure controls and pr~~ocedures~~procedures as of ~~December~~March 31, ~~2017.~~2020. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that ~~as of December 31, 2017~~ our disclosure controls and procedures were effective for their intended purpose described ~~above.~~above as of March 31, 2020.

There were no other changes toin our internal ~~controls~~control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarterly period ended ~~December~~March 31, ~~2017~~2020 that ~~have~~has materially affected, or ~~that are~~is reasonably likely to materially affect, our internal control over financial reporting.

From time to time, we become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters may relate to intellectual property, product liability, employment, tax, regulation, contract or other matters. The resolution of these matters as they arise will be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial ~~resources by us.~~resources. While unfavorable outcomes are possible, based on available information, we ~~generally~~currently do not believe the resolution of these matters, even if unfavorable, will result in a material adverse effect on our business, consolidated financial condition, or results of operations. However, a settlement payment or unfavorable outcome could adversely impact our results of operations. Our evaluation of the likely impact of these actions could change in the future and we could have unfavorable outcomes we do not expect. An unexpected settlement expense or an unexpected unfavorable outcome of a matter could adversely impact our results of operations.

As of ~~February 13, 2018, except as described below,~~May 14, 2020, neither NAI nor ~~its subsidiary~~NAIE were a party to any material pending legal proceeding nor was any of our property the subject of aany material pending legal proceeding. We are currently involved in several ~~legal~~ matters in the ordinary course of our ~~business, each of which is related to enforcing our intellectual property rights. Some of these matters are summarized below.~~business.

In 2011, NAI filed a lawsuit against Woodbolt Distribution, LLC, also known as Cellucor (“Woodbolt”), and both NAI and Woodbolt filed additional lawsuits and countersuits against each other. NAI and Woodbolt subsequently settled all of the lawsuits between them, but not before the United States Patent and Trademark Office (“USPTO”) at Woodbolt’s request rejected the claims of two NAI patents. The rulings rejecting the claims of two NAI patents were subsequently confirmed by the Patent Trial and Appeal Board (PTAB) at the USPTO. NAI filed Notices of Appeal with the U.S. Court of Appeals for the Federal Circuit requesting that certain findings of the PTAB's be reversed. No hearing date has been set by the Court. Both NAI patents rejected by the USPTO expired in August 2017.

On September 18, 2015, NAI filed a complaint against Creative Compounds, LLC, alleging various claims including (1) violation of Section 43 of the Lanham Act, (2) violation of California's Unfair Competition Law, (3) violation of California's False Advertising Law, (4) Trade Libel and Business Disparagement and (5) Intentional Interference with Prospective Economic Advantage. Subsequently, NAI and defendant resolved their disputes and entered into settlement ~~and the case was dismissed.~~

On August 24, 2016, NAI filed a separate complaint against Creative Compounds, LLC, alleging infringement of U.S. patent 7,825,084. On October 5, 2016, Creative filed its answer and counterclaims. On January 19, 2017, NAI filed a Motion to Amend the Complaint, to add allegations of infringement of U.S. patents 5,965,596, 7,504,376, 8,993,610 and 8,470,865, and adding the following additional parties: Core Supplement Technology, Inc., Honey Badger LLC, and Myopharma, Inc. The Court granted NAI's motion. On May 2, 2017, the Court issued a revised scheduling order and set a trial date for July 31, 2018. On July 19, 2017, Creative filed a motion for judgment on the pleadings to dismiss the patent infringement claims with prejudice, On September 5, 2017, the Court granted Creative's motion, which was a non-final decision and subject to later appeal to the U.S. Court of Appeals for the Federal Circuit. NAI has stated it will appeal the District Court rulings. The remaining non-patent claims pending against other defendants were not affected. On October 16, 2017, defendant Core Supplement Technology, Inc., filed a Notification of Bankruptcy with the Court. On October 17, 2017, NAI and defendant Honey Badger LLC filed a voluntary stipulation of dismissal, which the Court granted on October 20, 2017. On October 31, 2017, NAI and defendant Myopharma, Inc. filed a voluntary stipulation of dismissal, which the Court granted on November 6, 2017. On November 9, 2017, NAI and Creative Compounds filed a joint motion to dismiss, which the Court granted on November 20, 2017. On November 21, 2017, NAI and Core Supplement Technology, Inc. filed a joint motion to dismiss, which the Court granted on November 27, 2017. On December 8, 2017, NAI filed a Notice of Appeal to the U.S. Court of Appeals for the Federal Circuit regarding the patents asserted against the defendants. NAI's deadline to submit its opening brief to the Federal Circuit is currently April 13, 2018. No hearing date has been set.

On July 6, 2016, NAI filed a complaint against Allmax Nutrition, Inc. in U.S. District Court for the Southern District of California, alleging (1) infringement of U.S. patents 5,965,596, 6,172,098, 7,825,084 and RE 45,947, (2) violation of Section 32 of the Lanham Act, and (3) copyright infringement. On October 19, 2016, ~~NAI~~ ~~filed an amended complaint adding HBS International Corp., Allmax's exclusive distributor, as a co-defendant and to add a civil conspiracy claim.~~ On May 2, 2017, the Court issued a scheduling order setting a trial date for July 31, 2018. On April 25, 2017, defendants filed a motion for judgment on the pleadings and a motion to dismiss as to NAI's trademark and patent infringement and civil conspiracy claims. On June 26, 2017, the Court granted Defendants’ motions, dismissing NAI's patent infringement claim with prejudice and dismissing the trademark and civil conspiracy claims without prejudice. NAI filed a Second Amended Complaint on July 10, 2017. On August 29, 2017, the Court denied NAI's motion to partially reconsider the dismissal of the patent infringement claim, which is a non-final decision and subject to later appeal to the U.S. Court of Appeals for the Federal Circuit. NAI has stated it will appeal the District Court rulings. On August 30, 2017, the Court denied Defendants' motion to dismiss NAI's trademark and conspiracy claims. On September 29, 2017, both defendants filed their amended answers. Defendant HBS International Corp. also asserted a counterclaim for tortious interference with contract. NAI filed its response to the asserted counterclaim ~~on November 10, 2017. The parties subsequently engaged in settlement discussions.~~ ~~On December 22, 2017, NAI and defendants filed a joint stipulation of dismissal of the remaining claims, which the Court granted on January 2, 2018.~~

~~On September 16, 2016,~~ ~~NAI~~ filed a complaint against Hi-Tech Pharmaceuticals, Inc. d/b/a ALR Industries, APS Nutrition, Innovative Laboratories, Formutech Nutrition, LG Sciences and Sports 1 in U.S. District Court for the Southern District of California, alleging (1) infringement of U.S. patents 5,965,596, 7,825,084, 8,993,610 and RE 45,947, (2) violation of Section 32 of the Lanham Act and (3) breach of contract. On May 2, 2017, the Court issued a scheduling order setting a trial date for July 31, 2018. On July 10, 2017, Defendants filed a motion for judgment on the pleadings to dismiss the patent infringement claims with prejudice. On September 5, 2017, the Court granted Defendants' motion, which is a non-final decision and subject to later appeal to the U.S. Court of Appeals for the Federal Circuit. ~~NAI~~ ~~has stated it will appeal the District Court rulings. The remaining non-patent claims pending against the Defendants were not affected.~~ On September 28, 2017, in a separate matter not involving NAI, the United States of America filed a First Superseding Criminal Indictment against defendants Hi-Tech Pharmaceuticals, Inc and its Chief Executive Officer, Jared Wheat. ~~United States v. Hi-Tech Pharmaceuticals, et al.~~, No.1:17-CR-0229 (N.D. Ga. 2017). On or about October 4, 2017, items in the possession of Hi-Tech were seized pursuant to a search warrant, including the documentation relevant to this case. In light of this development, the parties moved the Court on November 3, 2017, seeking an order staying all proceedings in the pending action until disposition of ~~United States v. Hi-Tech Pharmaceuticals, et al~~~~., 1:17-CR-00229 (N.D. Ga 2017), or at a minimum, until the documents relevant to this case can be retrieved by the defendants. The Court~~ ~~granted the parties' motion to stay on November 9, 2017.~~ ~~The case remains stayed as of this date.~~

~~Although we believe our claims in the above litigation matters are valid, there~~There is no assurance we will prevail in these litigation matters or in similar proceedings weit may ~~initiate~~become involved or that ~~our~~ litigation expenses will not be greater than anticipated.

When evaluating our business and future prospects you should carefully consider the risks ~~described~~described under Item 1A of our ~~2017~~2019 Annual Report, as well as the other information in our ~~2017~~2019 Annual Report, this ~~Quarterly~~ Report and other reports and documents we file with the SEC. If any of the identified risks actually occur, our business, financial condition and results of operations could be ~~materially adversely affected.~~seriously harmed. In that event, the market price of our common stock could decline and you could lose all or a portion of the value of your investment in our common stock.

The extent of the impact of COVID-19 on our operational and financial performance will depend on the on-going and future impact on our customers and vendors as well as the potential impact of future expanded local, state, or federal restrictions – all of which are uncertain and cannot be predicted. We are currently unable to reasonably estimate the related financial impact at this time.

~~During the~~ ~~quarter ended December 31, 2017, we~~We did not sell any unregistered equity securities for the three or nine month periods ended March 31, 2020 and March 31, 2019.

During the three months ended March 31, 2020 we ~~did not repurchase any~~repurchased 210,832 shares of ~~our~~ common stock ~~under our stock~~at a total cost of $1.8 million (including commissions and transactions fees) as set forth below:

Refer to Note J, "Treasury Stock," in this Quarterly Report, for terms of repurchase ~~plan.~~plan and additional information.

The following exhibit index shows those exhibits filed with this ~~Quarterly~~ Report and those incorporated by reference:

Pursuant to the requirements of the Securities Exchange Act of 1934, Natural Alternatives International, Inc., the registrant, has duly caused this ~~Quarterly~~ Report to be signed on its behalf by the undersigned, duly authorized officers.

		Page

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS		1

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income	3
	Condensed Consolidated Statements of ~~Cash Flows~~Stockholders’ Equity	4
	Condensed Consolidated Statements of Cash Flows	6
	Notes to Condensed Consolidated Financial Statements	57

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18

Item 4.	Controls and Procedures	1918

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	19

Item 1A.	Risk Factors	19

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19

Item 3.	Defaults Upon Senior Securities	20

Item ~~1A.~~4.	~~Risk Factors~~Mine Safety Disclosures	21 20

~~Item 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	22

~~Item 3.~~	~~Defaults Upon Senior Securities~~	22

Item 5.	Other Information	2220

Item 6.	Exhibits	2320

SIGNATURES		2421

	•	the impact of Covid-19, and other external factors both within and outside of our control on our business and results in operations (especially variations in our quarterly net sales from seasonal and other factors), our employees, our supply chain and on our vendors and customers;
	•	future financial and operating results, including projections of net sales, revenue, income or loss, net income or loss per share, profit margins, expenditures, liquidity, ~~the effect of changes in tax law~~ and other financial items;
	•	our ability to maintain or increase our patent and trademark licensing revenues;
	•	our ability to develop market acceptance for, and increase sales of new products, develop relationships with new customers and maintain or improve existing customer relationships;
	•	future levels of our revenue concentration risk;
	•	our ability to protect our intellectual property;
	•	future economic and political conditions, including implementation of new or increased tariffs;
	•	our ability to improve operating efficiencies, manage costs and business risks and improve or maintain profitability;
	•	currency exchange rates, their effect on our results of operations, including amounts that we may ~~be reclassified~~reclassify as earnings, the availability of foreign exchange facilities, our ability to effectively hedge against foreign exchange risks and the extent to which we may seek to hedge against such risks;
	•	~~future levels of our revenue concentration risk;~~
	•	the outcome of ~~currently pending~~potential litigation, regulatory and tax matters, the costs associated with such matters and the effect of such matters on our business and results of ~~operations~~operations;
	•	sources, availability and ~~availability~~quality of raw materials, including the limited number of suppliers of beta-alanine ~~and certain other raw materials;~~ meeting our quality requirements;
	•	~~inventories,~~inventory levels, including the adequacy of quality raw material and other inventory levels to meet future customer demand, ~~and~~in particular assumptions regarding the impact of the COVID-19 pandemic;
	•	the future adequacy and intended use of our facilities;
	•	potential manufacturing and distribution channels, product returns, and ~~potential~~ product ~~recalls~~;recalls;
	•	~~current or~~ future customer orders;
	•	~~the impact on our business and results of operations from variations in quarterly net sales from seasonal and other factors;~~
	•	our ability to operate within the standards set by the U.S. Food and Drug ~~Administration~~’sAdministration’s (FDA) Good Manufacturing Practices ~~(GMP)~~(GMPs);
	•	our ability to successfully expand our operations, including outside the United States (U.S.);
	•	the adequacy of our financial reserves and allowances;
	•	~~current and future economic and political conditions~~;
	•	the sufficiency of our available cash, cash equivalents, and potential cash flows from our operations to fund our ~~current~~ working capital ~~needs~~ and capital ~~expenditures~~expenditure needs through the next 12 ~~months;~~months and longer;
	•	the impact of accounting pronouncements and our adoption of certain accounting guidance; and
	•	other assumptions described in this ~~report~~Report underlying or relating to any forward-looking statements.

	March 31, 2020			June 30, 2019
Raw materials	$	19,042		$	18,322
Work in progress		4,160			3,785
Finished goods		4,789			5,002
Reserve		(1,880	)		(1,106	)
	$	26,111		$	26,003

	Depreciable Life In Years			March 31, 2020			June 30, 2019
Land	NA			$	1,200		$	1,200
Building and building improvements	7	–	39		3,743			3,729
Machinery and equipment	3	–	12		32,369			30,216
Office equipment and furniture	3	–	5		5,314			5,190
Vehicles		3			255			314
Leasehold improvements	1	–	15		17,989			17,468
Total property and equipment					60,870			58,117
Less: accumulated depreciation and amortization					(39,472	)		(37,032	)
Property and equipment, net				$	21,398		$	21,085

	December 31, 2017			June 30, 2017
Raw materials	$	12,623		$	9,469
Work in progress		3,061			1,312
Finished goods		2,597			3,562
Reserves		(402	)		(614	)
Inventories, net	$	17,879		$	13,729

	December 31, 2017			June 30, 2017
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	28,843		$	27,843
Accounts receivable - less allowance for doubtful accounts of $14 at December 31, 2017 and $18 at June 30, 2017		12,895			8,410
Notes receivable		1,500			—
Inventories, net		17,879			13,729
Income tax receivable		—			261
Prepaids and other current assets		1,585			1,456
Total current assets		62,702			51,699
Property and equipment, net		18,733			18,136
Deferred income taxes		2,443			2,002
Other noncurrent assets, net		709			774
Total assets	$	84,587		$	72,611

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	12,182		$	5,116
Accrued liabilities		2,215			1,931
Accrued compensation and employee benefits		1,089			1,594
Forward contract		2,088			422
Income taxes payable		1,636			1,207
Total current liabilities		19,210			10,270
Long-term pension liability		409			557
Deferred rent		551			537
Forward contract, noncurrent		609			99
Income taxes payable, noncurrent		2,950			—
Total liabilities		23,729			11,463

Commitments and contingencies
Stockholders’ equity:
Preferred stock; $.01 par value; 500,000 shares authorized; none issued or outstanding		—			—
Common stock; $.01 par value; 20,000,000 shares authorized; issued and outstanding (net of treasury shares) 7,429,020 at December 31, 2017 and 6,937,018 at June 30, 2017		84			79
Additional paid-in capital		23,266			22,260
Retained earnings		45,904			45,788
Treasury stock, at cost, 1,052,657 shares at December 31, 2017 and 1,044,659 June 30, 2017		(6,160	)		(6,074	)
Accumulated other comprehensive loss		(2,236	)		(905	)
Total stockholders’ equity		60,858			61,148
Total liabilities and stockholders’ equity	$	84,587		$	72,611

	Three Months Ended									Nine Months Ended
	March 31, 2020									March 31, 2020
				Unrealized									Unrealized
	Defined			Gains						Defined			Gains
	Benefit			(Losses) on						Benefit			(Losses) on
	Pension			Cash Flow						Pension			Cash Flow
	Plan			Hedges			Total			Plan			Hedges			Total
Beginning Balance	$	(565	)	$	213		$	(352	)	$	(491	)	$	783		$	292

ASU 2018-02 Adjustment		-			-			-			(74	)		(54	)		(128	)
OCI/OCL before reclassifications		-			990			990			-			1,922			1,922
Amounts reclassified from OCI		-			(554	)		(554	)		-			(2,166	)		(2,166	)
Tax effect of OCI activity		-			(101	)		(101	)		-			63			63
Net current period OCI/OCL		-			335			335			(74	)		(235	)		(309	)

Ending Balance	$	(565	)	$	548		$	(17	)	$	(565	)	$	548		$	(17	)

	Three Months Ended									Nine Months Ended
	March 31, 2019									March 31, 2019
				Unrealized									Unrealized
	Defined			Gains						Defined			Gains
	Benefit			(Losses) on						Benefit			(Losses) on
	Pension			Cash Flow						Pension			Cash Flow
	Plan			Hedges			Total			Plan			Hedges			Total
Beginning Balance	$	(387	)	$	1,044		$	657		$	(387	)	$	(191	)	$	(578	)

OCI/OCL before reclassifications		-			1,492			1,492			-			4,221			4,221
Amounts reclassified from OCI		-			(940	)		(940	)		-			(2,060	)		(2,060	)
Tax effect of OCI activity		-			(128	)		(128	)		-			(502	)		(502	)
Net current period OCI/OCL		-			424			424			-			1,659			1,659

Ending Balance	$	(387	)	$	1,468		$	1,081		$	(387	)	$	1,468		$	1,081

	March 31, 2020		June 30, 2019
Total Assets
Private-label contract manufacturing	$	97,113	$	74,431
Patent and trademark licensing		21,242		19,059
	$	118,355	$	93,490

	March 31, 2020		June 30, 2019
United States	$	22,095	$	10,977
Europe		18,184		10,108
Total Long-Lived Assets	$	40,279	$	21,085

	March 31, 2020		June 30, 2019
United States	$	68,305	$	54,785
Europe		50,050		38,705
Total Assets	$	118,355	$	93,490

	●	Limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell, or to meet delivery requirements and commitments;
	●	Limitations on the ability of our employees to perform their work due to illness caused by the pandemic or due to other restrictions on our employees to keep them safe and the increased cost of measures taken to ensure employee health and safety;
	●	Local, state, or federal orders requiring employees to remain at home;
	●	Limitations on the ability of carriers to deliver our products to customers;
	●	Limitations on the ability of our customers to conduct their business and purchase our products and services; and
	●	Limitations on the ability of our customers to pay us on a timely basis.

	•	Leveraging our state-of-the-art, certified facilities to increase the value of the goods and services we provide to our highly valued private-label contract manufacturing customers, and to assist us in developing relationships with additional quality oriented customers;

	•	Expanding the commercialization of our beta-alanine patent estate through raw material sales, developing a new sales distribution channel under the Wellness and Healthy Aging category for our sustained release form of beta-alanine marketed under our SR CarnoSyn® trademark, exploiting new contract manufacturing opportunities, license and royalty agreements, and protecting our proprietary rights; and

	•	Improving operational efficiencies and managing costs and business risks to improve profitability.

	Three Months			Six Months			Three Months			Nine Months
	Ended			Ended			Ended			Ended

Contract manufacturing⁽¹⁾		3.2	%		0.8	%		(8.0	%)		(3.5	%)
Patent and trademark licensing⁽²⁾		(4.6	)		(1.6	)		1.6			(0.2	)
Total change in gross profit margin		(1.4	%)		(0.8	%)		(6.4	%)		(3.7	%)

Period	Total Number of Shares Purchased		Average Price Paid per Share ⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs (as of March 31, 2020) (in thousands)
January 1, 2020 to January 31, 2020		180,238		8.80		180,238		—
February 1, 2020 to February 29, 2020		—		—		—		—
March 1, 2020 to March 31, 2020		30,594		6.47		30,594		—
Total		210,832				210,832		$1,963

Exhibit Number	Description	Incorporated By Reference To

3(i)	Amended and Restated Certificate of Incorporation of Natural Alternatives International, Inc. filed with the Delaware Secretary of State on January 14, 2005	Exhibit 3(i) of NAI’s Quarterly Report on Form 10-Q for the quarterly period ended ~~December~~March 31, 2004, filed with the commission on February 14, 2005

3(ii)	Amended and Restated By-laws of Natural Alternatives International, Inc. dated as of February 9, 2009	Exhibit 3(ii) of NAI’s Current Report on Form 8-K dated February 9, 2009, filed with the commission on February 13, 2009

4(i)	Form of ~~NAI~~’sNAI’s Common Stock Certificate	Exhibit 4(i) of NAI’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005, filed with the commission on ~~September~~December 8, 2005

31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer	Filed herewith

31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer	Filed herewith

32	Section 1350 Certification	Filed herewith

101.INS	XBRL Instance Document	Filed herewith

101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith

	NATURAL ALTERNATIVES INTERNATIONAL, INC.

	By:	/s/ Mark A. LeDoux
		Mark A. LeDoux, Chief Executive Officer
		~~(principal~~(principal executive officer)

	By:	/s/ Michael E. Fortin
		Michael E. Fortin, Chief Financial Officer
		~~(principal~~(principal financial and accounting officer)