Indicate by check mark whether 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. ☒ 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). ☒ 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.

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 ☒ No

As of ~~November 13, 2018, 7,570,871~~May 9, 2019, 7,258,647 shares of NAI's common stock were outstanding, net of ~~1,105,806~~1,593,030 treasury shares.

Certain statements in this report, including information incorporated by reference, 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. These 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,” “plans,” “believes,” “anticipates,” “intends,” “estimates,” “approximates,” “predicts,” “forecasts,” or “projects,” 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 report may include statements about:

future financial and operating results, including projections of net sales, revenue, income or loss, net income or loss per share, profit margins, expenditures, liquidity, 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 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;

the outcome of currently pending litigation, regulatory and tax matters, the costs associated with such matters and the effect of such matters on our business and results of operations;

sources and availability of raw materials, including the limited number of suppliers of beta-alanine meeting our quality requirements;

inventory levels, including the adequacy of raw material and other inventory levels to meet future customer demand;

the future adequacy and intended use of our facilities;

potential manufacturing and distribution channels, product returns, and product recalls;

future customer orders;

the impact of external factors on our business and results of operations, especially variations in our quarterly net sales from seasonal and other factors;

our ability to operate within the standards set by the U.S. Food and Drug Administration’s (FDA) Good Manufacturing Practices;

our ability to successfully expand our operations, including outside the United States (U.S.);

the adequacy of our financial reserves and allowances;

the sufficiency of our available cash, cash equivalents, and potential cash flows from our operations to fund our working capital and capital expenditure needs through the next 12 months and longer;

the impact of accounting pronouncements and our adoption of certain accounting guidance; and

other assumptions described in this report underlying or relating to any forward-looking statements.

Forward-looking statements in this report speak only as of the date of this report 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 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 report, as well as in other reports and documents we file with the United States Securities and Exchange Commission (SEC).

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-Q and applicable rules and regulations. ~~Certain~~Pursuant to such rules and regulations certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) have been condensed or ~~omitted pursuant to such rules and regulations.~~omitted. In management’s opinion, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows have been included and are of a normal, recurring nature. The results of operations for the three and nine months ended ~~September 30, 2018~~March 31, 2019 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

You should read the financial statements and these notes, which are an integral part of the financial statements, together with our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018 (“2018 Annual Report”). The accounting policies used to prepare the financial statements included in this report are the same as those described in the notes to the consolidated financial statements in our 2018 Annual Report unless otherwise noted below.

Recently Adopted Accounting Pronouncements

In April 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-10, Revenue from Contracts with Customers (Topic 606)(ASU 2017-10), which amends and adds clarity to certain aspects of the guidance set forth in the ~~upcoming~~ revenue standard ~~(ASU 2014-09)~~ASU 2014-09 related to identifying performance obligations and licensing. In May 2017, the FASB issued Accounting Standards Update No. 2017-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815) (ASU 2017-11), which amends and rescinds certain revenue recognition guidance previously released within ASU 2014-09. In May 2017, the FASB issued Accounting Standards Update No. 2017-12, Revenue from Contracts with Customers (Topic 606) (ASU 2017-12), which provides narrow scope improvements and practical expedients related to ASU 2014-09. All of these ASUs have been codified under Accounting Standards Codification (ASC) 606.

~~This standard~~ASC 606 outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current historical revenue recognition guidance, including industry-specific guidance. The core principle of ~~the~~that revenue model is that an entity recognizes revenue to depict the transfer of promised goods and services in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods and services. In addition, the new ~~standard~~revenue model requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with their respective customers.

The new revenue ~~standard~~model is required to be applied either retrospectively to each prior reporting period presented or prospectively with the cumulative effect of initially applying the ~~standard recognized~~model used at the date of the initial application, supplemented with certain disclosures related to the effect of adoption on previously reported amounts, if any (the modified retrospective method). We adopted ~~the standard~~this revenue model on July 1, 2018 for contracts that were not completed before the adoption date, using the modified retrospective method. We evaluated the effect of the ~~standard~~use of the new model and concluded it iswas not material to the timing or amount of revenues or expenses recognized in our historical consolidated financial statements. As a result, we concluded the application of the ~~standard does~~new model did not have a material effect that requires a retrospective adjustment for reporting disclosure purposes to any previously reported amounts in our historical consolidated financial statements.

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 the taxpayer does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. In accordance with SAB 118, we calculated our taxes for fiscal 2018 to the best of our ability and we do not expect any significant changes, however our estimated income tax could change once we complete our tax return and thus our tax expense for fiscal 2018 is considered provisional and is expected to be finalized by the end of the one-year measurement period ending December 22, 2018.

~~Table of Contents~~

In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2018-03 is intended to improve certain aspects of recognition, measurement, presentation, and disclosure of certain financial instruments, i.e. forward contracts, purchased options and option liabilities. ~~We do~~ASU 2018-03 is effective for us beginning in our first quarter of fiscal 2019. This ASU did not ~~expect this ASU to~~ have a material impact on our consolidated financial statements. ~~ASU 2018-03 is effective for us beginning~~

In August 2018, the SEC issued Release No. 33-10532, Disclosure Update and Simplification, which amends and clarifies certain financial reporting requirements. We adopted this Release in this ~~quarter, our first~~third quarter of fiscal 2019. The principal change to our consolidated financial statements is the inclusion of the changes in stockholders’ equity in interim unaudited condensed financial statements (Quarterly Reports), which were previously included only in our Annual Report.

In March 2019, the SEC issued its Final Rule Release No. 33-10618, FAST Act Modernization and Simplification of Regulation S-K. The guidance in this Release revises certain disclosure requirements in SEC Regulation S-K, with the intent of improving the readability of filed documents and simplifying registrants' compliance efforts. We adopted this Release in this third quarter of fiscal 2019. The adoption of this Release did not have a material impact on our consolidated financial statements.

Table of Contents

Recently Issued Accounting Pronouncements

In March 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (ASU 2016-02), which amends existing standards for leases to increase transparency and comparability among organizations by requiring recognition of lease assets and liabilities on the balance sheet and requiring disclosure of key information about such arrangements. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases. This ASU affects narrow aspects of the guidance issued in the amendments in ASU No. 2016-02 including those regarding residual value guarantees, the interest rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase option, variable lease payments that depend on an index or a rate, investment tax credits, lease term and purchase option, transition guidance for amounts previously recognized in business combinations, certain transition adjustments, transition guidance for leases previously classified as capital leases under Topic 840, transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic 840, transition guidance for sale and leaseback transactions, impairment of net investment in the lease, unguaranteed residual asset, effect of initial direct costs on the interest rate implicit in the lease, and failed sale and leaseback transactions. These ASUs will be effective for us beginning in our first quarter of fiscal 2020. We ~~are currently evaluating the impact~~expect these ASUs will have a material impact on our consolidated ~~financial statements.~~balance sheets at that time due to the creation of lease assets and liabilities related to our leased manufacturing and storage facilities.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. ASU 2017-12 is intended to improve and simplify accounting rules around hedge accounting and improve the disclosures of hedging arrangements. ~~We are currently evaluating the impact~~Under this ASU, we will record forward points as component of ~~adopting the new standard on our consolidated financial statements.~~Net Sales, rather than as a component of Other Income. ASU 2017-12 will be effective for us beginning in our first quarter of fiscal 2020.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax ~~Effect~~Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ~~We are~~Under this ASU, we currently ~~evaluating the impact~~expect to reclassify $134,000 of ~~adopting the new standard on our consolidated financial statements.~~gains from OCI to retained earnings. ASU 2018-02 ~~will be effective for us beginning in our first quarter of fiscal 2020.~~

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The ASU clarifies that Topic 718 does not apply to share-based payments used to effectively provide financing to the issuer or awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. We are currently evaluating the impact of the new standard. ASU 2018-07 will be effective for us beginning in our first quarter of fiscal 2020.

Other recently issued accounting pronouncements not discussed in this report did not have, or are not believed by management to have, a material impact on our present or future financial statements.

Table of Contents

Net Income per Common Share

We compute net income per common share using the weighted average number of common shares outstanding during the period, and diluted net income per common share using the additional dilutive effect of all dilutive securities. The dilutive impact of stock options accounts for the additional weighted average shares of common stock outstanding for our diluted net income per common share computation. We calculated basic and diluted net income per common share as follows (in thousands, except per share data):

					Three Months Ended				Nine months Ended
	Three Months Ended September 30,				March 31,				March 31,
	2018		2017		2019		2018		2019		2018
Numerator
Net income	$	2,559	$	1,434	$	1,994	$	2,051	$	6,734	$	2,167

Denominator
Basic weighted average common shares outstanding		6,765		6,607		6,800		6,639		6,791		6,620
Dilutive effect of stock options		200		224
Dilutive effect of stock options and restricted stock						595		270		321		241
Diluted weighted average common shares outstanding		6,965		6,831		7,395		6,909		7,120		6,861

Basic net income per common share	$	0.38	$	0.22	$	0.29	$	0.31	$	0.99	$	0.33

Diluted net income per common share	$	0.37	$	0.21	$	0.27	$	0.30	$	0.95	$	0.32

We excluded shares related to restricted stock totaling ~~15,000 shares~~175,000 for the three months ended ~~September 30,~~March 31, 2019, as their impact would have been anti-dilutive. We excluded shares related to restricted stock totaling 175,000 for the three months ended March 31, 2018, as their impact would have been anti-dilutive. No

Included in the diluted weighted average common shares ~~related to stock options were excluded~~outstanding for the three and nine months ended ~~September 30, 2018. No~~March 31, 2019, is the weighted average effect of 400,000 shares ~~related to stock options or~~of unvested restricted stock ~~were excluded for~~returned to us from Juice Plus+ as a result of the ~~three months ended September 30, 2017.~~

We record revenue based on ~~the~~a five-step model which includes: (1) identifying a contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price among the performance obligations; and (5) recognizing revenue ~~when~~as each of the various performance obligations are satisfied.

Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling one ofor more performance obligations. We identify purchase orders from customers as contracts. The amount of consideration expected to be received and revenue recognized includes estimates of variable consideration, including estimates for early payment discounts and volume rebates. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. We review and update these estimates at the end of each reporting period and the impact of any adjustments is recognized in the period the adjustments are identified. In assessing whether collection of consideration from a customer is probable, we consider both the customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices ~~are~~is due as specified in the underlying customer agreement, which is typically 30 days from the invoice ~~date, which occurs~~date. Invoices are generally issued on the date of transfer of control of the products ordered to the customer.

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

We provide early payment discounts to certain customers. Based on historical payment trends, we expect that these customers will take advantage of these early payment discounts. The cost of these discounts is reported as a reduction to the transaction price. If the actual discounts differ from those estimated, the difference is also reported as a change in the transaction price.

Except for product defects, 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 ~~September 30, 2018,~~March 31, 2019, we have no known returns liability.

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 granted 500,000 shares of NAI common stock to Juice Plus+, (the “Shares”), and Juice Plus+ agreed the Shares are subject to certain restrictions and risk of forfeiture. Pursuant to the Irrevocable Proxy, Juice Plus+ also granted the NAI Board of Directors the right to vote the Shares that remain subject to ~~the~~ risk of forfeiture. Each Agreement is for a term of 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 ~~Shares~~return of those shares and the related cash discount granted to Juice Plus+ isare each recorded as a reduction to ~~revenue.~~sales. As a result of the amendment to the Exclusive Manufacturing Agreement, we made a one-time adjustment to reverse the expense associated with unvested shares that were returned as a result of the Amended and Restated Exclusive Manufacturing Agreement. Amounts associated with the new cash discount will begin to be recorded in our fourth quarter of fiscal 2019 and will be amortized ratably over the remaining life of the extended agreement based on the full value of the cash discount expected to be given over the same period. We recorded $408,000 of income during the three months ended March 31, 2019 and $82,000 of expense for the nine months ended March 31, 2019 as a “Non-cash Sales Discount” which is an adjustment to net sales. We recorded $245,000 of expense during the three months ended ~~September 30,~~March 31, 2018 and ~~$163,000 for~~$653,000 of expense during the ~~three~~nine months ended ~~September 30, 2017~~March 31, 2018 as a "Non-cash Sales ~~Discount" which is an offset to net sales.~~Discount."

We currently own certain U.S. patents, and each patent’s corresponding foreign patent applications. All of these patents and patent rights relate to the ingredient known as beta-alanine marketed and sold under our CarnoSyn® and SR CarnoSyn® trade names. We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of ~~$5.4~~$3.7 million during the three months ended ~~September 30, 2018~~March 31, 2019 and ~~$5.9~~$13.5 million during the nine months ended March 31, 2019. We recorded $6.2 million during the three months ended ~~September 30, 2017.~~March 31, 2018 and $16.0 million during the nine months ended March 31, 2018. These royalty income and raw material sale amounts resulted in royalty expense paid to the original patent holders from whom weNAI acquired ~~the~~its patents and patent rights. We recognized royalty expense as a component of cost of goods sold in the amount of ~~$263,000~~$156,000 during the three months ended ~~September 30, 2018,~~March 31, 2019 and ~~$284,000~~$597,000 during the nine months ended March 31, 2019. We similarly recognized $215,000 of royalty expense during the three months ended ~~September 30, 2017.~~March 31, 2018 and $659,000 of royalty expense during the nine months ended March 31, 2018.

On September 30, 2017, we accepted a 12-month note (Loan Agreement) from Kaged Muscle, LLC (“Kaged Muscle”), one of our contract manufacturing customers, in exchange for $1.5 million of trade receivables due to us from Kaged Muscle. On September 30, 2018, we entered into a First Amendment (the “First Amendment”) with Kaged Muscle in connection with the Loan Agreement. The First Amendment ~~modifies~~modified the Loan Agreement and related promissory note by extending the maturity date from September 30, 2018 to December 28, 2018 in exchange for an extension fee in the amount of $25,000. Kaged Muscle is one of our fastest growing sports nutrition customers and we executed this note receivable conversion, and subsequent amendment, to assist them with their near term financing needs. The note ~~carries~~carried an interest rate of fifteen percent (15%) per annum with payments of interest only. ~~Repayment of~~The note was paid in full before the note is secured by all of the assets of Kaged Muscle and the note is personally guaranteed by the co-founder and President of Kaged Muscle. Interest is due quarterly and the note can be prepaid in any amount at any time without penalty.amended maturity date. In association with this note, we ~~recognized $58,000 in~~did not recognize any interest income during the three months ended ~~September 30, 2018~~March 31, 2019 and ~~zero~~recognized $104,000 in interest income during the nine months ended March 31, 2019. During the three months ended ~~September 30, 2017.~~March 31, 2018 we recognized $56,000 and $114,000 during the nine months ended March 31, 2018 in interest income associated with this note.

We have an omnibus equity incentive plan that was approved by our Board of Directors effective October 15, 2009 and approved by our stockholders at the Annual Meeting of Stockholders held on November 30, ~~2009.~~2009 ("2009 Plan"). Under the 2009 Plan, we may grant nonqualified and incentive stock options and other stock-based awards to employees, non-employee directors and consultants.

We estimate the fair value of stock option awards at the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation models require the use of highly subjective assumptions. Black-Scholes uses assumptions related to volatility, the risk-free interest rate, the dividend yield (which we assume to be zero, as we have not to date ever paid any cash dividends) and employee exercise behavior. Expected volatilities used in the model are based on the historical volatility of our stock price. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect in the period of grant. The expected life of stock option grants is derived from historical experience. The fair value of restricted stock shares granted is based on the market price of our common stock on the date of grant. We amortize the estimated fair value of our stock awards to expense over the related vesting periods.

We did not grant any options during the three ~~months~~month or nine month periods ended ~~September 30, 2018~~March 31, 2019 or ~~the three months ended September 30, 2017.~~2018. All remaining outstanding stock options are fully vested. No options were exercised during the three month period ended March 31, 2019. During the ~~three~~nine months ended ~~September 30, 2018,~~March 31, 2019, 5,000 options were exercised. ~~There~~No options were ~~no options~~ exercised during the three ~~months~~month or nine month periods ended ~~September 30, 2017.~~March 31, 2018. There were no forfeitures during the three month or nine month periods ended March 31, 2019. There were no forfeitures during the three months ended ~~September 30, 2018 or~~March 31, 2018. During the ~~three~~nine months ended ~~September 30, 2017.~~March 31, 2018 5,000 options were forfeited.

During the three months ended ~~September 30, 2018,~~March 31, 2019, we granted a total of ~~15,000~~175,000 restricted stock shares to ~~a new member~~members of our Board of Directors and certain key members of our management team. ~~We did not grant any~~During the nine months ended March 31, 2019, we granted a total of 190,000 restricted stock shares to ~~employees during~~members of our Board of Directors and certain key members of our management team. During the three and nine months ended ~~September 30, 2017.~~March 31, 2018, we granted 175,000 shares of restricted stock to the members of our Board of Directors and certain key members of our management team. Our net income included stock based compensation expense of approximately ~~$409,000~~$400,000 for the three months ended ~~September 30, 2018,~~March 31, 2019, and ~~$301,000~~$1.2 million for the nine months ended March 31, 2019. Our net income included stock based compensation expense of approximately $322,000 for the three months ended ~~September 30, 2017.~~March 31, 2018, and $925,000 for the nine months ended March 31, 2018.

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

AsExcept for assets and liabilities related to our pension plan, as of ~~September 30, 2018,~~March 31, 2019, and June 30, 2018, we did not have any financial assets or liabilities classified as Level ~~1, except for assets and liabilities related to our pension plan.~~1. We classify derivative forward exchange contracts as Level 2 assets. The fair value of our forward exchange contracts as of ~~September 30, 2018~~March 31, 2019 was a net asset of ~~$1.0~~$3.4 million. The fair value of our forward exchange contracts as of June 30, 2018 included a net asset of $55,000 and a net liability of $55,000, with no right of offset. As of ~~September 30, 2018,~~March 31, 2019, and June 30, 2018, 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 2018 or the ~~three~~nine months ended ~~September 30, 2018.~~March 31, 2019.

Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We place our cash and cash equivalents with highly rated financial institutions. Credit risk with respect to receivables is concentrated with our three largest customers, whose receivable balances collectively represented ~~67.6%~~78.0% of gross accounts receivable at ~~September 30, 2018~~March 31, 2019 and 76.6% at June 30, 2018. Additionally, amounts due related to our beta-alanine raw material sales were ~~20.4%~~12.9% of gross accounts receivable at ~~September 30, 2018,~~March 31, 2019, and 17.3% of gross accounts receivable at June 30, 2018. Concentrations of credit risk related to the remaining accounts receivable balances are limited due to the number of customers comprising our remaining customer base.

C. Property and Equipment

Property and equipment consisted of the following (in thousands):

Depreciable Life
In Years

September 30,
2018

June 30,
2018

Land

NA

$
1,200

$
1,200

Building and building improvements

7
–
39

3,721

3,721

Machinery and equipment

3
–
12

28,393

28,185

Office equipment and furniture

3
–
5

4,861

4,883

Vehicles

3

313

209

Leasehold improvements

1
–
15

15,821

15,688

Total property and equipment

54,309

53,886

Less: accumulated depreciation and amortization

(35,032
)

(34,596
)
Property and equipment, net

$
19,277

$
19,290

~~Table of Contents~~

	Depreciable Life In Years				March 31, 2019			June 30, 2018
Land			NA		$	1,200		$	1,200
Building and building improvements		7	–	39		3,730			3,721
Machinery and equipment		3	–	12		30,263			28,185
Office equipment and furniture		3	–	5		5,039			4,883
Vehicles			3			314			209
Leasehold improvements		1	–	15		17,025			15,688
Total property and equipment						57,571			53,886
Less: accumulated depreciation and amortization						(36,689	)		(34,596	)
Property and equipment, net					$	20,882		$	19,290

During the three months ended ~~September 30,~~March 31, 2019, the amounts reclassified from OCI were comprised of $450,000 of gains reclassified to net revenues, $368,000 related to the amortization of forward points reclassified to interest income and $122,000 related to partially terminated hedging contracts to other income. During the nine months ended March 31, 2019, the amounts reclassified from OCI were comprised of $619,000 of gains reclassified to net revenues, $1.3 million related to the amortization of forward points reclassified to interest income and $122,000 related to partially terminated hedging contracts to other income.

During the three months ended March 31, 2018, the amounts reclassified from OCI were comprised of ~~$41,000~~$974,000 of losses reclassified to net revenues and ~~$487,000~~$206,000 related to the amortization of forward points reclassified to ~~other~~interest income.

During the ~~three~~nine months ended ~~September 30, 2017,~~March 31, 2018, the amounts reclassified from OCI were comprised of ~~$422,000~~$1.8 million of losses reclassified to net revenues and ~~$244,000~~$691,000 related to the amortization of forward points reclassified to ~~other~~interest income.

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):

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

Our private-label contract manufacturing products are sold both in the U.S. and in markets outside the U.S., including Europe, Canada, Australia, New Zealand, and Asia. Our primary markets outside the U.S. 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’ location, were as follows (in thousands):

Products manufactured by ~~NAIE~~our Swiss subsidiary ("NAIE") accounted for ~~72%~~74% of net sales in markets outside the U.S. for the three months ended ~~September 30, 2018,~~March 31, 2019, and ~~75%~~78% for the nine months ended March 31, 2019. Products manufactured by NAIE accounted for 89% of net sales in markets outside the U.S. for the three months ended ~~September 30, 2017.~~March 31, 2018, and 82% for the nine months ended March 31, 2018. No products manufactured by NAIE were sold in ~~the~~ U.S. markets during the three ~~months~~month or nine month periods ended ~~September 30, 2018~~March 31, 2019 and ~~2017.~~2018.

Assets and 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):

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 nine months ended ~~September 30, 2018.~~March 31, 2019. 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 report, as well as the risk factors and other information included in our 2018 Annual Report and other reports and documents we 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 report ornor does it contain all of the information that may be important to our stockholders or the investing ~~public~~.public. You should read this overview in conjunction with the other sections of this Item 2 and this report.

Our primary business activity is providing 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 contract manufacturing customers and subject to variations in the timing of such customers’ orders, which in turn 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~~grant 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 contract manufacturing customers, and commercializing our patent estate through sales of beta-alanine under our Carnosyn® and SR Carnosyn® trade names ~~contract manufacturing,~~ and license agreements.

During the first ~~three~~nine months of fiscal 2019, our net sales were ~~30%~~16% higher than in the first ~~three~~nine months of fiscal 2018. Private label contract manufacturing sales increased ~~40%~~22% due primarily to the sale of new products to new and existing customers and higher volumes of current products to existing customers located primarily in U.S., Asian, ~~Australia,~~ and European markets. The increase in sales included shipment of new products and increased sales of existing products to our largest customer under our previously announced expanded relationship. Revenue concentration risk for our largest private label contract manufacturing customer as a percentage of our total net sales increased slightly from 53% to ~~58%~~54% for the ~~three~~nine months ended ~~September 30, 2018~~March 31, 2019 compared to ~~47% for~~ the ~~three~~nine months ended ~~September 30,~~March 31, 2018. We expect our annualized fiscal 2019 revenue concentration for this customer to be ~~consistent with~~slightly lower than fiscal ~~2018.~~2018 primarily as a result of anticipated sales growth from new and other existing customers.

During the first ~~three~~nine months of fiscal 2019, CarnoSyn® beta-alanine revenue decreased 7%15% to ~~$5.4~~$13.5 million, as compared to ~~$5.9~~revenue of $16.0 million for the first ~~three~~nine months of fiscal 2018. The decrease in beta-alanine revenue was primarily due to ~~lower average~~decreased material shipments resulting from market and seasonal factors. We believe that a portion of this decline was impacted by certain of our customers discontinuing the use of our CarnoSyn® beta-alanine in favor of generic beta-alanine. However, several events have transpired over the past few months that we believe have strengthened our position in the market place and will aid in our efforts to increase our sales, ~~prices.~~including the following:

There can be no assurance our sales, marketing, or legal efforts will reverse or decelerate potential future declines of our CarnoSyn® beta-alanine sales.

To protect our CarnoSyn® business and ~~its underlying patent estate,~~our patents, trademarks and other intellectual property, we incurred litigation and patent compliance expenses of approximately ~~$618,000~~$1.6 million during the first ~~quarter~~nine months of fiscal 2019 and ~~$972,000~~$2.4 million during the comparable period in fiscal 2018. 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® trademark, ~~maintenance of~~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.

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 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 market for our sustained release form of beta-alanine marketed under our SR Carnosyn® trademark, new contract manufacturing opportunities, license agreements and protecting our proprietary rights; and

	•	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, and exploiting new contract manufacturing opportunities, license agreements and protecting our proprietary rights; and

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

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Critical Accounting Policies and Estimates

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 or assumptions.

Our critical accounting policies are discussed under Item 7 of our 2018 Annual Report and recent accounting pronouncements are discussed under Item A to our Notes to Condensed Consolidated Financial Statements contained in this Quarterly ~~Report~~Report.

In the ~~three~~nine months ended ~~September 30, 2018,~~March 31, 2019, there were changes to the application of critical accounting policies previously disclosed in our most recent Annual Report on Form 10-K related to the adoption of ASU 2014-09 on July 1, 2018, as described below.

Revenue Recognition

Revenue is recognized at the point in time that our performance ~~obligation is~~obligations are fulfilled and control of the ordered products is transferred to the customer. Generally, this transfer occurs when the product is shipped, or in some cases, when the product is delivered to the customer. Refer to Revenue Recognition in Note A, "Basis of Presentation and Summary of Significant Accounting Policies," in this Quarterly Report, for ~~additional~~more information.

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Results of Operations

The results of our operations for the three and nine months ended ~~September 30~~March 31 were as follows (dollars in thousands):

	Three Months Ended													Three Months Ended									Nine months Ended
	September 30, 2018				September 30, 2017				Increase (Decrease)					March 31,									March 31,
Private-label contract manufacturing	$	31,087	85	%	$	22,222	79	%	$	8,865		40	%
														2019			2018			% Change			2019			2018			% Change
Private label contract manufacturing														$	31,758		$	25,648			24	%	$	94,505		$	77,225			22	%
Patent and trademark licensing		5,445	15	%		5,852	21	%		(407	)	(7	)%		3,697			6,167			(40	)%		13,525			15,999			(15	)%
Total net sales		36,532	100	%		28,074	100	%		8,458		30	%		35,455			31,815			11	%		108,030			93,224			16	%
Cost of goods sold		29,369	80	%		21,704	77	%		7,665		35	%		29,128			25,105			16	%		88,104			73,522			20	%
Gross profit		7,163	20	%		6,370	23	%		793		12	%		6,327			6,710			(6	)%		19,926			19,702			1	%
Selling, general & administrative expenses		4,439	12	%		4,487	16	%		(48	)	(1	)%
Gross profit %															17.8	%		21.1	%					18.4	%		21.1	%

Selling, general and administrative expenses															4,492			4,187			7	%		13,160			13,015			1	%
% of net sales															12.7	%		13.2	%					12.2	%		14.0	%

Income from operations		2,724	7	%		1,883	7	%		841		45	%		1,835			2,523			(27	)%		6,766			6,687			1	%
Other income, net		497	1	%		108	0	%		389		360	%
% of net sales															5.2	%		7.9	%					6.3	%		7.2	%

Total other income															622			76			718	%		1,662			386			331	%
Income before income taxes		3,221	9	%		1,991	7	%		1,230		62	%		2,457			2,599			(5	)%		8,428			7,073			19	%
% of net sales															6.9	%		8.2	%					7.8	%		7.6	%

Provision for income taxes		662	2	%		557	2	%		105		19	%		463			548			(16	)%		1,694			4,906			(65	)%
Net income	$	2,559	7	%	$	1,434	5	%	$	1,125		78	%	$	1,994		$	2,051			(3	)%	$	6,734		$	2,167			211	%
% of net sales															5.6	%		6.4	%					6.2	%		2.3	%

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Private label contract manufacturing net sales increased ~~40%~~24% during the three months ended March 31, 2019 and 22% during the nine months ended March 31, 2019, when compared to the same periods in the prior year. These increases were due primarily to the sale of new products to new and existing customers and higher volumes of current products to existing customers located primarily in U.S., Asian, ~~Australian,~~ and European markets. The increase in sales included shipment of new products and increased sales of existing products to our largest customer under our previously announced expanded relationship.

Net sales from our patent and trademark licensing segment decreased 7%40% during the ~~first quarter of fiscal 2019.~~three months ended March 31, 2019 and decreased 15% during the nine months ended March 31, 2019, when compared to the same periods in the prior year. The decrease in beta-alanine raw material sales ~~was~~during the three and nine months ended March 31, 2019 were primarily due to ~~lower average~~decreased material ~~sales prices.~~shipments resulting from market and seasonal factors. We believe that a portion of this decline was impacted by certain of our customers discontinuing the use of our CarnoSyn® beta-alanine in favor of generic beta-alanine.

The change in gross profit margin for the three and nine months ended ~~September 30, 2018,~~March 31, 2019, was as follows:

	~~Percentage~~ ~~Change~~
~~Contract manufacturing~~ ⁽¹⁾		~~0.1~~
~~Patent and trademark licensing~~ ⁽²⁾		~~(3.2~~	)
~~Total change in gross profit margin~~		~~(3.1~~	)

	Three Months			Nine months
	Ended			Ended

Contract manufacturing⁽¹⁾		2.9	%		0.3	%
Patent and trademark licensing⁽²⁾		(6.2	)		(3.0	)
Total change in gross profit margin		(3.3	)%		(2.7	)%

~~Private-label~~Private label contract manufacturing gross profit margin ~~contribution~~as a percentage of consolidated net sales increased ~~0.1~~2.9 percentage points during the ~~first quarter of fiscal~~three months ended March 31, 2019 asand increased 0.3 percentage points during the nine months ended March 31, 2019 when compared to the comparable ~~period in fiscal 2018.~~prior year periods. The increase in gross profit as a percentage of sales is primarily due to favorable product sales mix and a marginal decrease in per unit manufacturing costs.

~~During the first quarter of fiscal 2019, patent~~Patent and trademark licensing gross profit margin ~~contribution~~as a percentage of consolidated net sales decreased ~~3.2~~6.2 percentage points during the three months ended March 31, 2019 and decreased 3.0 percentage points during the nine months ended March 31, 2019 when compared to the comparable prior year periods. These decreases were primarily due to decreased ~~raw~~ material shipments resulting from market and seasonal factors and lower average sales ~~and decreased royalty income as a percentage of total consolidated net sales which decreases were partially offset by favorable raw material costs.~~price.

Selling, general and administrative expenses ~~decreased $48,000,~~increased $305,000, or 7%, during the three months ended March 31, 2019 and increased $145,000, or 1%, during the ~~first quarter of fiscal~~nine months ended March 31, 2019, as compared to the comparable prior year periods. These increases were primarily due to increased employee compensation and consulting costs partially offset by lower legal, marketing, and advertising costs associated with our patent and trademark licensing ~~segment partially offset by increased employee compensation and consulting costs.~~segment.

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Other income, net, increased ~~$389,000~~$546,000 during the ~~first quarter of fiscal~~three months ended March 31, 2019 asand increased $1.3 million during the nine months ended March 31, 2019, when compared to the ~~same period in the~~comparable prior ~~fiscal~~ year periods. These increases were primarily due to favorable interest income associated with our foreign currency hedge contracts, including a gain of $132,000 recorded in the three months ended March 31, 2019 related to the termination of certain hedging contracts.

Our income tax expense ~~increased $105,000~~decreased $85,000, or 16%, during the ~~first quarter of fiscal~~three months ended March 31, 2019, ~~as compared~~primarily related to ~~the same period in the prior fiscal year. The increase was primarily due to the higher~~lower pre-tax income inand a lower tax rates as a result of the ~~first quarter of fiscal~~Tax Act. Income tax expense decreased $3.2 million, or 65%, during the nine months ended March 31, 2019, as compared to the comparable prior year ~~period partially offset by~~periods. These decreases were primarily due to the discrete tax items incurred as a result of the Tax Act fiscal 2018 and a lower effective tax ~~rate.~~rate in fiscal 2019 as a result of the Tax Act, partially offset by increased pre-tax income during the nine months ended March 31, 2019 as compared to the comparable prior year periods.

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Liquidity and Capital Resources

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~~$7.6 million for the ~~three~~nine months ended ~~September 30, 2018~~March 31, 2019 compared to net cash provided by operating activities of ~~$2.3~~$4.7 million in the comparable ~~quarter last~~period in the prior fiscal year.

At ~~September 30, 2018,~~March 31, 2019, changes in accounts receivable, consisting of amounts due from our private label contract manufacturing customers and our patent and trademark licensing activities, ~~provided $1.9~~used $2.2 million in cash compared to using ~~$799,000~~$3.0 million of cash during the comparable nine month period in the ~~comparable prior year quarter.~~year. The ~~increase~~decrease in cash ~~provided~~used by accounts receivable during the ~~quarter~~nine months ended ~~September 30, 2018~~March 31, 2019 primarily resulted from timing and the amount of sales and ~~the~~ related collections. Days sales outstanding was 3440 days during the ~~three~~nine months ended ~~September 30, 2018~~March 31, 2019 as compared to 29 days for the prior year period.

Changes in inventory used ~~$1.4~~$3.5 million in cash during the ~~three~~nine months ended ~~September 30, 2018~~March 31, 2019 compared to using ~~$5.3~~$10.1 million in the comparable prior year ~~quarter.~~period. The change in cash ~~used by~~related to inventory during the ~~quarter~~nine months ended ~~September 30, 2018~~March 31, 2019 was primarily related to the timing of sales and new order activity. Changes in accounts payable and accrued liabilities provided ~~$471,000~~$4.1 million in cash during the ~~three~~nine months ended ~~September 30, 2018~~March 31, 2019 compared to providing ~~$5.8~~$8.7 million during the ~~three~~nine months ended ~~September 30, 2017.~~March 31, 2018. The change in cash flow activity related to accounts payable and accrued liabilities iswas primarily due to the timing of inventory receipts and payments.

Cash used in investing activities in the ~~three~~nine months ended ~~September 30, 2018~~March 31, 2019 was ~~$777,000~~$2.6 million compared to ~~$2.5~~$4.4 million in the comparable ~~quarter last year.~~prior year period. The primary reason for the change was due to the ~~conversion~~repayment of a $1.5 million ~~of accounts receivable into a~~ note receivable during the ~~first~~second quarter of fiscal ~~2018 with no similar activity in~~2019, which was originally issued during the ~~first~~second quarter of fiscal ~~2019.~~2018. In addition we made capital equipment purchases of ~~$796,000~~$4.2 million in the ~~three~~nine months ended ~~September 30, 2018~~March 31, 2019 as compared to capital equipment purchases of ~~$956,000~~$2.9 million in the ~~three~~nine months ended ~~September 30, 2017.~~March 31, 2018. Capital expenditures during fiscal 2019 and fiscal 2018 were primarily for manufacturing equipment used in our Vista, California and Manno, Switzerland facilities. At ~~September 30, 2018~~March 31, 2019 and June 30, 2018, on a consolidated basis, we had no outstanding balances due in connection with our loan facility.

~~Table~~Cash used in financing activities for the nine months ended March 31, 2019, was $903,000, compared to $505,000 used in the comparable prior year period. This is primarily due increased repurchases of ~~Contents~~

our stock.

During the ~~three~~nine months ending ~~September 30, 2018,~~March 31, 2019, we were in compliance with all of the financial and other covenants required under the Credit Agreement. Refer to Note E, "Debt," in this Quarterly Report, for terms of Credit Agreement and additional information.

As of ~~September 30, 2018,~~March 31, 2019, we had ~~$27.6~~$27.7 million in cash and cash equivalents and $10.0 million available under our credit facilities. We believe our available cash, 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.

Off-Balance Sheet Arrangements

As of ~~September 30, 2018,~~March 31, 2019, 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 effect on our financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses material to investors.

Recent Accounting Pronouncements

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

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ITEM 4. CONTROLS AND PROCEDURES

We maintain certain disclosure controls and procedures as defined under the Securities Exchange Act of 1934. 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 procedures as of ~~September 30, 2018.~~March 31, 2019. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective for their intended purpose described above as of ~~September 30, 2018.~~March 31, 2019.

On July 1, 2018, we adopted Topic 606 (see Note 1). We implemented internal controls to ensure we adequately evaluate our contracts and properly assess the impact of the new accounting standards on our condensed consolidated financial statements. Although adoption of the new revenue standard had no material impact on July 1, 2018 retained earnings or financial statement activity for the quarter ended ~~September 30, 2018,~~March 31, 2019, and is not expected to have a material impact on our ongoing financial statements, we implemented changes to our business processes related to revenue recognition and the control activities within them. The changes included training within management, as well as new processes for ongoing contract review and monitoring to ensure completeness and accuracy of the ~~information for new disclosures.~~information.

There were no other changes in our internal 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 ~~September 30, 2018~~March 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

There were no other changes to our internal control over financial reporting during the quarterly period ended September 30, 2018 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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. 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.

As of ~~November 13, 2018,~~May 9, 2019, neither NAI nor ~~its subsidiary~~NAIE were a party to any material pending legal proceeding nor was any of our property the subject of any material pending legal proceeding. We are currently involved in several matters in the ordinary course of our business, each of which is related to enforcing our intellectual property rights.

There is no assurance NAI will prevail in these litigation matters or in similar proceedings it may initiate or that litigation expenses will not be greater than anticipated.

ITEM 1A. RISK FACTORS

When evaluating our business and future prospects you should carefully consider the risks described under Item 1A of our 2018 Annual Report, as well as the other information in our 2018 Annual Report, this 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 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.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We did not sell any unregistered equity securities for the three or nine month periods ended March 31, 2019 and March 31, 2018.

Repurchases

During the ~~quarter~~three months ended ~~September 30, 2018,~~March 31, 2019 we ~~did not repurchase any~~repurchased 5,748 shares of ~~our~~ common stock ~~under any stock~~at a total cost of $58,000 (including commissions and transactions fees) as set forth below:

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, 2019) (in thousands)
January 1, 2019 to January 31, 2019		5,748	$	10.17		5,748		—
February 1, 2019 to February 28, 2019		—		—		—		—
March 1, 2019 to March 31, 2019		—		—		—		—
Total		5,748				5,748	$	2,428

⁽¹⁾ Average price paid per share includes costs associated with the repurchases

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

The following exhibit index shows those exhibits filed with this report and those incorporated by reference:

EXHIBIT INDEX

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’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
10.01	~~First Amendment to~~ Amended and Restated ~~Employment~~Exclusive Manufacturing Agreement ~~by and between NAI and Mark A. LeDoux, effective July 1, 2018~~with Juice Plus+	~~Filed herewith~~
~~10.02~~	~~First Amendment to Amended and Restated Employment Agreement, by and between NAI and Kenneth E. Wolf, effective July 1, 2018~~	~~Filed herewith~~
~~10.03~~	~~Second Amendment to Employment Agreement, by and between NAI and Michael E. Fortin, effective July 1, 2018~~	~~Filed herewith~~
~~10.04~~	~~Lease of Facilities in Manno, Switzerland between NAIE and Mr. Silvio Tarchini dated October 19, 2018~~	~~Filed herewith~~
~~10.05~~	~~Lease of Parking Places in Manno, Switzerland between NAIE and Mr. Silvio Tarchini dated October 19, 2018~~	~~Filed herewith~~
~~10.06~~	~~Lease of Facilities in Manno, Switzerland between NAIE and Sofinol SA dated November 5, 2018~~	~~Filed herewith~~
~~10.07~~	~~First Amendment to Loan Agreement with Kaged Muscle LLC, dated September 30, 2018~~	Exhibit ~~10.53~~10.48 of NAI’s Current Report on Form 8-K Form 8-K dated ~~October 2, 2018,~~March 31, 2019, filed with the commission on ~~October 2, 2018.~~April 5, 2019.
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

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SIGNATURES

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

Date: ~~November 13, 2018~~May 9, 2019

	NATURAL ALTERNATIVES INTERNATIONAL, INC.

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

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

2326

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

1535 Faraday Ave Carlsbad, CA 92008	(760) 736-7700
(Address of principal executive offices)	(Registrant’s telephone number)

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

		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 Income and Comprehensive Income	3
	Condensed Consolidated Statements of Stockholders’ Equity	4
	Condensed Consolidated Statements of Cash Flows	45
	Notes to Condensed Consolidated Financial Statements	56

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1518

Item 4.	Controls and Procedures	2023

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	2124

Item 1A.	Risk Factors	2124

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2124

Item 3.	Defaults Upon Senior Securities	2124

Item 5.	Other Information	2124

Item 6.	Exhibits	2225

SIGNATURES		2326

	September 30, 2018			June 30, 2018			March 31, 2019			June 30, 2018
	(Unaudited)						(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	27,613		$	23,613		$	27,660		$	23,613
Accounts receivable - less allowance for doubtful accounts of $63 at September 30, 2018 and $49 at June 30, 2018		12,733			14,621
Accounts receivable - less allowance for doubtful accounts of $78 at March 31, 2019 and $49 at June 30, 2018								16,790			14,621
Note receivable		1,500			1,500			—			1,500
Inventories, net		24,972			23,567			27,016			23,567
Forward contracts								2,770			55
Prepaids and other current assets		3,087			1,882			2,052			1,827
Total current assets		69,905			65,183			76,288			65,183
Property and equipment, net		19,277			19,290			20,882			19,290
Other noncurrent assets, net		920			734			1,286			734
Total assets	$	90,102		$	85,207		$	98,456		$	85,207
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	10,064		$	9,649		$	12,374		$	9,649
Accrued liabilities		2,302			2,346			3,612			2,346
Accrued compensation and employee benefits		1,612			1,498			1,382			1,498
Income taxes payable		1,442			787			845			787
Total current liabilities		15,420			14,280			18,213			14,280

Long-term pension liability		57			45
Deferred rent		555			556
Income taxes payable, noncurrent		1,546			1,546			1,546			1,546
Deferred income taxes		648			532			1,034			532
Other long-term liabilities								634			601
Total liabilities		18,226			16,959			21,427			16,959
Commitments and contingencies (Note K)
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) 7,577,735 at September 30, 2018 and 7,558,408 at June 30, 2018		85			85
Common stock; $.01 par value; 20,000,000 shares authorized; issued and outstanding (net of treasury shares) 7,259,056 at March 31, 2019 and 7,558,408 at June 30, 2018								87			85
Additional paid-in capital		25,177			24,486			25,817			24,486
Retained earnings		53,399			50,839			57,573			50,839
Treasury stock, at cost, 1,098,942 shares at September 30, 2018 and 1,098,268 June 30, 2018		(6,590	)		(6,584	)
Accumulated other comprehensive loss		(195	)		(578	)
Treasury stock, at cost, 1,592,621 shares at March 31, 2019 and 1,098,268 June 30, 2018								(7,529	)		(6,584	)
Accumulated other comprehensive gain/(loss)								1,081			(578	)
Total stockholders’ equity		71,876			68,248			77,029			68,248
Total liabilities and stockholders’ equity	$	90,102		$	85,207		$	98,456		$	85,207

	Three Months Ended September 30,						Nine Months Ended March 31,
	2018			2017			2019			2018
Cash flows from operating activities
Net income	$	2,559		$	1,434		$	6,734		$	2,167
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		792			717			2,529			2,222
Deferred income taxes								—			306
Non-cash sales discount		245			163			82			653
Non-cash compensation		409			301			1,209			925
Pension expense		12			51
(Gain) loss on disposal of assets		(1	)		1
Pension expense, net of contributions								37			(97	)
Loss (gain) on disposal of assets								9			(9	)
Changes in operating assets and liabilities:
Accounts receivable, net		1,888			(799	)		(2,169	)		(2,971	)
Notes Receivable		-			-
Inventories, net		(1,405	)		(5,267	)		(3,449	)		(10,056	)
Prepaids and other assets		(993	)		52			(174	)		(308	)
Accounts payable and accrued liabilities		471			5,773			4,088			8,674
Accrued compensation and employee benefits		114			(604	)		(116	)		(577	)
Forward contracts								(1,258	)		715
Income taxes		655			492			58			3,045
Net cash provided by operating activities		4,746			2,314			7,580			4,689

Cash flows from investing activities
Purchases of property and equipment		(796	)		(956	)		(4,149	)		(2,937	)
Proceeds from sale of property and equipment		19			5			19			28
Issuance of notes receivable		—			(1,500	)		—			(1,500	)
Proceeds from collection of notes receivable								1,500			—
Net cash used in investing activities		(777	)		(2,451	)		(2,630	)		(4,409	)

Cash flows from financing activities
Repurchase of common stock		(6	)		—			(941	)		(505	)
Issuance of common stock		37			—			38			—
Net cash provided by financing activities		31			—
Net cash used in financing activities								(903	)		(505	)

Net increase (decrease) in cash and cash equivalents		4,000			(137	)		4,047			(225	)
Cash and cash equivalents at beginning of period		23,613			27,843			23,613			27,843
Cash and cash equivalents at end of period	$	27,613		$	27,706		$	27,660		$	27,618

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	3		$	—		$	19		$	6
Taxes	$	7		$	76		$	1,747		$	1,578
Disclosure of non-cash activities:
Change in unrealized gain (loss) resulting from change in fair value of derivative instruments, net of tax	$	383		$	(1,134	)
Unrealized gain (loss) resulting from change in fair value of derivative instruments, net of tax							$	1,659		$	(1,550	)

Large accelerated filer	☐	Accelerated filer	☐	Emerging Growth Company	☐

Non-accelerated filer	☐	Smaller reporting company	☒

	Common Stock				Additional Paid-in			Retained		Treasury Stock					Accumulated Other Comprehensive
	Shares		Amount		Capital			Earnings		Shares		Amount			Income (Loss)			Total
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	)		—		—		—			—			—
Compensation expense related to stock compensation plans		—		—		1,291			—		—		—			—			1,291
Repurchase of common stock		—		—		—			—		89,353		(941	)		—			(941	)
Forfeiture of restricted stock		—		—		4			—		405,000		(4	)		—			—
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

Balance as of June 30, 2017		7,981,677		79		22,260			45,788		1,044,659		(6,074	)		(905	)		61,148
Issuance of common stock for restricted stock grants		675,000		6		(6	)		—		—		—			—			—
Compensation expense related to stock compensation plans		—		—		1,578			—		—		—			—			1,578
Repurchase of common stock		—		—		—			—		43,201		(505	)		—			(505	)
Unrealized gain (loss) resulting from change in fair value of derivative instruments, net of tax		—		—		—			—		—		—			(1,550	)		(1,550	)
Net income		—		—		—			2,167		—		—			—			2,167
Balance, March 31, 2018		8,656,667	$	85	$	23,832		$	47,955		1,087,860	$	(6,579	)	$	(2,455	)	$	62,838

	September 30, 2018			June 30, 2018			March 31, 2019			June 30, 2018
Raw materials	$	17,092		$	16,209		$	19,990		$	16,209
Work in progress		3,256			4,268			4,400			4,268
Finished goods		5,005			3,462			3,360			3,462
Reserve		(381	)		(372	)		(734	)		(372	)
	$	24,972		$	23,567		$	27,016		$	23,567

	Depreciable Life In Years			September 30, 2018			June 30, 2018
Land		NA		$	1,200		$	1,200
Building and building improvements	7	–	39		3,721			3,721
Machinery and equipment	3	–	12		28,393			28,185
Office equipment and furniture	3	–	5		4,861			4,883
Vehicles		3			313			209
Leasehold improvements	1	–	15		15,821			15,688
Total property and equipment					54,309			53,886
Less: accumulated depreciation and amortization					(35,032	)		(34,596	)
Property and equipment, net				$	19,277		$	19,290

	Three months ended September 30, 2018									Three Months Ended									Nine months Ended
	Defined Benefit Pension Plan			Unrealized (Losses) Gains on Cash Flow Hedges			Total			March 31, 2019									March 31, 2019
													Unrealized									Unrealized
Balance as of June 30, 2018	$	(387	)	$	(191	)	$	(578	)
										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		—			945			945			-			1,492			1,492			-			4,221			4,221
Amounts reclassified from OCI		—			(446	)		(446	)		-			(940	)		(940	)		-			(2,060	)		(2,060	)

Tax effect of OCI activity		—			(116	)		(116	)		-			(128	)		(128	)		-			(502	)		(502	)
Net current period OCI/OCL		—			383			383			-			424			424			-			1,659			1,659
Balance as of September 30, 2018	$	(387	)	$	192		$	(195	)

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

	Three Months Ended									Nine months Ended
	March 31, 2018									March 31, 2018
				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	)	$	(1,745	)	$	(2,236	)	$	(491	)	$	(414	)	$	(905	)
OCI/OCL before reclassifications		-			(987	)		(987	)		-			(3,430	)		(3,430	)
Amounts reclassified from OCI		-			768			768			-			1,133			1,133
Tax effect of OCI activity		-			-			-			-			747			747
Net current period OCI/OCL		-			(219	)		(219	)		-			(1,550	)		(1,550	)

Ending Balance	$	(491	)	$	(1,964	)	$	(2,455	)	$	(491	)	$	(1,964	)	$	(2,455	)

	Three months ended September 30, 2017
	Defined Benefit Pension Plan			Unrealized Gains (Losses) on Cash Flow Hedges			Total

Balance as of June 30, 2017	$	(491	)	$	(414	)	$	(905	)

OCI/OCL before reclassifications		—			(1,953	)		(1,953	)
Amounts reclassified from OCI		—			178			178

Tax effect of OCI activity		—			641			641
Net current period OCI/OCL		—			(1,134	)		(1,134	)
Balance as of September 30, 2017	$	(491	)	$	(1,548	)	$	(2,039	)

					Three Months Ended March 31,				Nine months Ended March 31,
	Three months Ended September 30,				2019		2018		2019		2018
	2018		2017
Customer 1	$	21,078	$	13,157	$	18,731	$	17,229	$	58,396	$	49,521
Customer 2		3,729		3,161		7,294		3,668		17,220		10,908
	$	24,807	$	16,318	$	26,025	$	20,897	$	75,616	$	60,429

	September 30, 2018		June 30, 2018		March 31, 2019		June 30, 2018
Total Assets
Private-label contract manufacturing	$	72,677	$	69,037	$	77,968	$	69,037
Patent and trademark licensing		17,425		16,170		20,488		16,170
	$	90,102	$	85,207	$	98,456	$	85,207

	Three Months Ended March 31,				Nine months Ended March 31,
	2019		2018		2019		2018

United States	$	16,222	$	17,235	$	52,417	$	48,855
Markets outside of the United States		19,233		14,580		55,613		44,369
Total	$	35,455	$	31,815	$	108,030	$	93,224

	Three months Ended September 30,												Three Months Ended March 31,				Nine months Ended March 31,
	2018						2017						2019		2018		2019		2018
	Raw Material Purchases by Supplier			% of Total Raw Material Purchases			Raw Material Purchases by Supplier			% of Total Raw Material Purchases
Supplier 1	$	3,107			15	%		(a	)		(a	)	$	(a)	(a)		$	6,312	(a)
Supplier 2		(a	)		(a	)		1,967			14	%		(a)		2,076	(a)			5,068
	$	3,107			15	%	$	1,967			14	%	$	-		2,076	$	6,312		5,068

	Long-Lived Assets				Total Assets				Capital Expenditures				Long-Lived Assets				Total Assets				Capital Expenditures
									Three Months Ended												Nine months Ended
	September 30, 2018		June 30, 2018		September 30, 2018		June 30, 2018		September 30, 2018		September 30, 2017		March 31, 2019		June 30, 2018		March 31, 2019		June 30, 2018		March 31, 2019		March 31, 2018
United States	$	10,841	$	10,887	$	54,279	$	51,562	$	337	$	89	$	10,978	$	10,887	$	57,040	$	51,562	$	1,295	$	966
Europe		8,436		8,403		35,823		33,645		459		867		9,904		8,403		41,416		33,645		2,854		1,971
	$	19,277	$	19,290	$	90,102	$	85,207	$	796	$	956	$	20,882	$	19,290	$	98,456	$	85,207	$	4,149	$	2,937