A. Organization and Summary of Significant Accounting Policies

Organization

We provide 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. We also seek to commercialize our patent and trademark estate related to the ingredient known as beta-alanine sold under our CarnoSyn® and SR Carnosyn® tradenames through direct raw material sales and various license and similar arrangements.

Subsidiaries

January

22,

1999,

Natural Alternatives International Europe S.A. (NAIE) was formed as our wholly-owned subsidiary, based in Manno, Switzerland. In

September 1999,

NAIE opened a manufacturing facility and currently possesses manufacturing capability in encapsulation, powders, tablets, finished goods packaging, quality control laboratory testing, warehousing, distribution and administration.

Principles of Consolidation

The consolidated financial statements include the accounts of Natural Alternatives International, Inc. (NAI) and our wholly-owned subsidiary, NAIE. All intercompany accounts and transactions have been eliminated. The functional currency of NAIE, our foreign subsidiary, is the U.S. Dollar. The financial statements of NAIE have been translated at either current or historical exchange rates, as appropriate, with gains and losses included in the consolidated statements of operations.

Recently Adopted Accounting Pronouncements

April 2017,

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

No.

2017

10,

Revenue from Contracts with Customers (Topic

606

)(ASU

2017

), which amends and adds clarity to certain aspects of the guidance set forth in the revenue standard ASU

2014

that is related to identifying performance obligations and licensing. In

May 2017,

the FASB issued Accounting Standards Update

No.

2017

11,

Revenue Recognition (Topic

605

) and Derivatives and Hedging (Topic

815

) (ASU

2017

), which amends and rescinds certain revenue recognition guidance previously released within ASU

2014

09.

May 2017,

the FASB issued Accounting Standards Update

No.

2017

12,

Revenue from Contracts with Customers (Topic

606

) (ASU

2017

), which provides narrow scope improvements and practical expedients related to ASU

2014

09.

All of these ASUs have been codified under Accounting Standards Codification (ASC)

606.

ASC

606

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

The new revenue model is required to be applied either retrospectively to each prior reporting period presented or prospectively with the cumulative effect of initially applying the model used at the date of the initial application, supplemented with certain disclosures related to the effect of adoption on previously reported amounts, if any (the modified retrospective method). We adopted this revenue model on

July 1, 2018

for contracts that were

not

completed before the adoption date, using the modified retrospective method. We evaluated the effect of the use of the new model and concluded it was

not

material to the timing or amount of revenues or expenses recognized in our historical consolidated financial statements. As a result, we concluded the application of the new model did

not

have a material effect that required a retrospective adjustment for reporting disclosure purposes to any previously reported amounts in our historical consolidated financial statements.

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,

we calculated our taxes for fiscal

2018

to the best of our ability and finalized our fiscal

2018

tax estimate by the end of the

one

-year measurement period ending

December 22, 2018.

The impact of finalizing our fiscal

2018

provision during this period did

not

result in a material impact on our consolidated financial statements.

February 2018,

the FASB issued ASU

2018

03,

Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic

825

): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU

2018

is intended to improve certain aspects of recognition, measurement, presentation, and disclosure of certain financial instruments, i.e. forward contracts, purchased options and option liabilities. ASU

2018

is effective for us beginning in our

first

quarter of fiscal

2019.

This ASU did

not

have a material impact on our consolidated financial statements.

March 2019,

the SEC issued its Final Rule Release

No.

10618,

FAST Act Modernization and Simplification of Regulation S-K

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

third

quarter of fiscal

2019.

The adoption of this Release did

not

have a material impact on our consolidated financial statements.

Recently Issued

Accounting Pronouncements

March 2016,

the FASB issued Accounting Standards Update

No.

2016

02,

Leases (Topic

842

) (ASU

2016

), which amends existing standards for leases to increase transparency and comparability among organizations by requiring recognition of lease assets and liabilities on the balance sheet and requiring disclosure of key information about such arrangements. In

July 2018,

the FASB issued ASU

2018

10,

Codification Improvements to Topic

842,

Leases. This ASU affects narrow aspects of the guidance issued in the amendments in ASU

No.

2016

including those regarding residual value guarantees, the interest rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase option, variable lease payments that depend on an index or a rate, investment tax credits, lease term and purchase option, transition guidance for amounts previously recognized in business combinations, certain transition adjustments, transition guidance for leases previously classified as capital leases under Topic

840,

transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic

840,

transition guidance for sale and leaseback transactions, impairment of net investment in the lease, unguaranteed residual asset, the effect of initial direct costs on the interest rate implicit in the lease, and failed sale and leaseback transactions. In addition, Topic

842

was subsequently amended by ASU

2018

11,

Targeted Improvements; ASU

2018

Narrow Scope Improvements; and ASU

2019

Codification Improvements. These ASUs will be effective for us beginning in our

first

quarter of fiscal

2020.

We will adopt ASC

842

using a modified retrospective approach for all leases existing at

July 1, 2019.

Substantially all of our leases are operating leases. Accordingly, the adoption of ASC

842

will have a material impact on our consolidated balance sheet, and an immaterial impact on our consolidated statement of operations. The most significant impact will be the recognition of the right-of-use assets and the related lease liability. The lease liability will be based on the present value of the remaining lease payments discounted using our secured incremental borrowing rate using

July 1, 2019,

as the effective date and the original lease term will be used as the tenor. Based on current foreign exchange rates, the lease liability will be approximately

$20.4

million and the right of use asset will approximately be

$20.3

million.

As permitted under ASC

842,

upon adoption we will elect a package of practical expedients that allows us

not

to reassess (

) whether a contract is or contains a lease, (

) the lease classification and (

) whether previously capitalized costs continue to qualify as initial indirect costs. The use of the package of practical expedients will

not

have a significant impact on the measurement of the operating lease liability.

August 2017,

the FASB issued ASU

2017

12,

Derivatives and Hedging (Topic

815

): Targeted Improvements to Accounting for Hedging Activities. ASU

2017

is intended to improve and simplify accounting rules around hedge accounting and improve the disclosures of hedging arrangements. Under this ASU, we will record forward points as component of Net Sales, rather than as a component of Other Income. We recorded interest income from forward points in Other Income in the amount of

$1.6

million for the year ended

June 30, 2019

and

$0.9

million for the year ended

June 30, 2018.

ASU

2017

will be effective for us beginning in our

first

quarter of fiscal

2020

and will be applied on a prospective basis.

February 2018,

the FASB issued ASU

2018

02,

Income Statement-Reporting Comprehensive Income (Topic

220

): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU

2018

allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Under this ASU, we currently expect to reclassify

$134,000

of gains from OCI to retained earnings. ASU

2018

will be effective for us beginning in our

first

quarter of fiscal

2020.

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 do

not

expect this ASU to have a material impact on our consolidated financial statements. ASU

2018

will be effective for us beginning in our

first

quarter of fiscal

2020.

Other recently issued accounting pronouncements

not

discussed in this report did

not

have, or are

not

believed by management to have, a material impact on our present or future financial statements.

Cash and Cash Equivalents

We consider all highly liquid investments with a maturity of

three

months or less when purchased to be cash equivalents.

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a

three

-level hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available under the circumstances.

The fair value hierarchy is broken down into

three

levels based on the source of inputs. In general, fair values determined by Level

inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. We classify cash, cash equivalents, and marketable securities balances as Level

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

inputs are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are

not

active and models for which all significant inputs are observable or can be corroborated, either directly or indirectly by observable market data. Level

inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. These include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

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

June 30, 2019

and

June 30, 2018,

we did

not

have any financial assets or liabilities classified as Level

We classify derivative forward exchange contracts as Level

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

June 30, 2019

included a net asset of

$2.3

million. The fair value as of

June

30,

2018

was a net asset of

$55,000

and a net liability of

$55,000,

with

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

third

party bank. As of

June

30,

2019

and

June

30,

2018,

we did

not

have any financial assets or liabilities classified as Level

We did

not

transfer any assets or liabilities between any levels during fiscal

2019.

Accounts Receivable

We perform ongoing credit evaluations of our customers and adjust credit limits based on payment history and customer credit-worthiness. An allowance for estimated doubtful accounts is maintained based on historical experience, including anticipated early payment discounts and identified customer credit issues. We monitor collections regularly and adjust the allowance for doubtful accounts as necessary to recognize any changes in credit exposure. Upon conclusion that a receivable is uncollectible, we record the respective amount as a charge against allowance for doubtful accounts. To date, such doubtful accounts reserves, in the aggregate, have been adequate to cover collection losses.

Notes Receivable

September 30, 2017,

we accepted a

-month note (Loan Agreement) from Kaged Muscle, LLC (“Kaged Muscle”),

one

of our contract manufacturing customers, in exchange for

$1.5

million of trade receivables due to us from Kaged Muscle. On

September 30, 2018,

we entered into a First Amendment (the “First Amendment”) with Kaged Muscle in connection with the Loan Agreement. The First Amendment modified the Loan Agreement and related promissory note by extending the maturity date from

September 30, 2018

December 28, 2018

in exchange for an extension fee in the amount of

$25,000.

Kaged Muscle is

one

of our fastest growing sports nutrition customers and we executed this note receivable conversion, and subsequent amendment, to assist them with their near term financing needs. The note carried an interest rate of

fifteen

percent (

15%

) per annum with payments of interest only. The note was paid in full before the amended maturity date. In association with this note, we recognized

$104,000

in interest income during the year ended

June 30, 2019

and

$171,000

the year ended

June 30, 2018.

Inventories

We operate primarily as a private-label contract manufacturer. We build products based upon anticipated demand or following receipt of customer specific purchase orders. From time to time, we build inventory for private-label contract manufacturing customers under a specific purchase order with delivery dates that

may

subsequently be rescheduled or canceled at the customer’s request. We value inventory at the lower of cost (

first

-in,

first

-out) or net realizable value on an item-by-item basis, including costs for raw materials, labor and manufacturing overhead. We establish reserves equal to all or a portion of the related inventory to reflect situations in which the cost of the inventory is

not

expected to be recovered. This requires us to make estimates regarding the market value of our inventory, including an assessment for excess and obsolete inventory. Once we establish an inventory reserve in a fiscal period, the reduced inventory value is maintained until the inventory is sold or otherwise disposed of. In evaluating whether inventory is stated at the lower of cost or net realizable value, management considers such factors as the amount of inventory on hand, the estimated time required to sell such inventory, the remaining shelf life and efficacy, the foreseeable demand within a specified time horizon and current and expected market conditions. Based on this evaluation, we record adjustments to cost of goods sold to adjust inventory to its net realizable value.

For the year ended

June 30, 2019,

we established an inventory reserve of

$686,000

related to our

first

generation of SR CarnoSyn® powder. This material was reserved as we have developed a new and superior SR CarnoSyn® powder which has rendered this

first

generation powder obsolete.

Property and Equipment

We state property and equipment at cost. Depreciation of property and equipment is provided using the straight-line method over their estimated useful lives, generally ranging from

years. We amortize leasehold improvements using the straight-line method over the shorter of the useful life of the improvement or the term of the lease. Maintenance and repairs are expensed as incurred. Significant expenditures that increase economic useful lives of property or equipment are capitalized and expensed over the useful life of such expenditure.

Impairment of Long-Lived Assets

We periodically evaluate the carrying value of long-lived assets to be held and used when events and circumstances indicate that the carrying amount of an asset

may

not

be recovered. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. We did

not

recognize any impairment losses during fiscal

2019

or fiscal

2018.

Derivative Financial Instruments

We currently

may

use derivative financial instruments in the management of our foreign currency exchange risk inherent in our forecasted transactions denominated in Euros. We

may

hedge our foreign currency exposures by entering into offsetting forward exchange contracts and currency options. To the extent we use derivative financial instruments, we account for them using the deferral method, which recognizes income or expense at the time when such instruments are intended to hedge identifiable, firm foreign currency commitments or anticipated transactions and are designated as, and effective as, hedges. Foreign exchange exposures arising from certain transactions that do

not

meet the criteria for the deferral method are marked-to-market through the Consolidated Statements of Operations and Comprehensive Income. Historically, our derivative instruments have met the criteria for the deferral method.

We recognize any unrealized gains and losses associated with derivative instruments in income in the period in which the underlying hedged transaction is realized. To the extent the derivative instrument is deemed ineffective we would recognize the resulting gain or loss in income at that time. As of

June

30,

2019,

we held derivative 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, which is primarily the Euro. As of

June

30,

2019,

the notional amounts of our foreign exchange contracts were

$39.9

million (€

32.5

million). These contracts will mature over the next

months.

Defined Benefit Pension Plan

We formerly sponsored a defined benefit pension plan. Effective

June

21,

1999,

we adopted an amendment to freeze benefit accruals to the participants. The plan obligation and related assets of the plan are presented in the notes to the consolidated financial statements. Plan assets, which consist primarily of marketable equity and debt instruments, are valued based upon

third

party market quotations. Independent actuaries, through the use of a number of assumptions, determine plan obligations and annual pension expense. Key assumptions in measuring the plan obligations include the discount rate and estimated future return on plan assets. In determining the discount rate, we use an average long-term bond yield. Asset returns are based on the historical returns of multiple asset classes to develop a risk free rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk free rate of return and the associated risk premium. A weighted average rate is developed based on the overall rates and the plan’s asset allocation.

Revenue Recognition

We record revenue based on a

five

-step model which includes: (

) identifying a contract with a customer; (

) identifying the performance obligations in the contract; (

) determining the transaction price; (

) allocating the transaction price among the performance obligations; and (

) recognizing revenue as each of the various performance obligations are satisfied.

Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling

one

or more performance obligations. We identify purchase orders from customers as contracts. The amount of consideration expected to be received and revenue recognized includes estimates of variable consideration, including estimates for early payment discounts and volume rebates. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. We review and update these estimates at the end of each reporting period and the impact of any adjustments is recognized in the period the adjustments are identified. In assessing whether collection of consideration from a customer is probable, we consider both the customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in the underlying customer agreement, which is typically

days from the invoice date. Invoices are generally issued on the date of transfer of control of the products ordered to the customer.

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

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

Except for product defects,

right of return exists on the sale of our products. We estimate returns based on historical experience and recognize a returns liability for any estimated returns. As of

June 30, 2019,

we have

known returns liability.

August 7, 2017,

we entered into

three

agreements (“Agreements”), with The Juice Plus+ Company LLC (“Juice Plus+”). The Agreements are an Exclusive Manufacturing Agreement, a Restricted Stock Award Agreement, and an Irrevocable Proxy. Pursuant to the Exclusive Manufacturing Agreement, Juice Plus+ has granted us exclusive rights to manufacture and supply them with certain of their products within

countries where Juice Plus+ currently sells those products. Pursuant to the Restricted Stock Award Agreement, NAI granted

500,000

shares of NAI common stock to Juice Plus+, (the “Shares”), and Juice Plus+ agreed the Shares are subject to certain restrictions and risk of forfeiture. Pursuant to the Irrevocable Proxy, Juice Plus+ also granted the NAI Board of Directors the right to vote the Shares that remain subject to risk of forfeiture. Each of the Agreements is for a term of

years, and each

may

be terminated by either party only upon the occurrence of specified events.

March 31, 2019,

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

August 6, 2025.

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

400,000

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

one

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

$82,000

of “Non-Cash Sales Discount” and

$395,000

of “Cash Sales Discount” for the year ended

June 30, 2019,

with both discount amounts recorded as a reduction to net sales. We recorded

$898,000

of “Non-Cash Sales Discount” and

“Cash Sales Discount” during the year ended

June 30, 2018,

with such amounts recorded as a reduction to net sales.

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 the 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

$16.7

million during fiscal

2019

and

$21.4

million during fiscal

2018.

These royalty income and raw material sale amounts resulted in royalty expense paid to the original patent holders from whom NAI acquired its patents and patent rights. We recognized royalty expense as a component of cost of goods sold in the amount of

$686,000

during fiscal

2019

and

$854,000

during fiscal

2018.

Cost of Goods Sold

Cost of goods sold includes raw material, labor, manufacturing overhead, and royalty expense.

Shipping and Handling Costs

We include fees earned on the shipment of our products to customers in sales and include costs incurred on the shipment of product to customers in costs of goods sold.

Research and Development Costs

As part of the services we provide to our private-label contract manufacturing customers, we

may

perform, but are

not

obligated to perform, certain research and development activities related to the development or improvement of their products. While our customers typically do

not

pay directly for this service, the cost of this service is included as a component of the price we charge to manufacture and deliver their products. We also direct and participate in clinical research studies, often in collaboration with scientists and research institutions, to validate the benefits of a product and provide scientific support for product claims and marketing initiatives.

Research and development costs are expensed when incurred. Our research and development expenses for the last

two

fiscal years ended

June

were

$1.8

million for fiscal

2019

and

$1.5

million for fiscal

2018.

These costs were included in selling, general and administrative expenses and cost of goods sold.

Advertising Costs

We expense the production costs of advertising the

first

time the advertising takes place. We incurred and expensed advertising costs in the amount of

$1.6

million during the fiscal year ended

June

30,

2019

and

$2.4

million during fiscal

2018.

These costs were included in selling, general and administrative expenses.

Income Taxes

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on

December 22, 2017.

Among other things, the Tax Act reduced the U.S. federal corporate tax rate to

21%

and required companies to pay a

one

-time deemed repatriation transition tax on earnings of U.S.-owned foreign subsidiaries that were previously tax deferred. As of

June 30, 2018,

as described below and in accordance with SAB

118,

we made a reasonable estimate of the effects on our existing deferred tax balances and the

one

-time transition tax, for which we recognized a provisional amount as a discrete component of our provision for income taxes. The

one

-year measurement period ended

December 22, 2018.

Our final tax amount associated with the Tax Act for the year ended

June 30, 2018,

did

not

materially differ from the discrete tax expense recorded for the fiscal year ended

June 30, 2018.

To determine our quarterly provision for income taxes, we use an estimated annual effective tax rate that 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.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are measured and recorded using enacted tax rates for each of the jurisdictions in which we operate, and adjusted using 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 in income or expense in the period that includes the enactment date.

We account for uncertain tax positions using the more-likely-than-

not

recognition threshold. It is our policy to establish reserves based on management’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 reserves. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of

June

30,

2019

and

June

30,

2018,

we did

not

record any tax liabilities for uncertain tax positions.

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 based on whether future taxable income will be generated during the periods in which those temporary differences become deductible. During the year ended

June 30, 2019,

there was

change to our valuation allowance.

We are subject to taxation in the U.S., Switzerland and various U.S. state jurisdictions. Our tax returns for the fiscal years ended

June 30, 2016

and forward are subject to examination by U.S. tax authorities and for fiscal years ended

June 30, 2007

and forward are subject to examination by state tax authorities. Our tax filings for the fiscal year ended

June 30, 2018

and forward are subject to examination by Swiss tax authorities.

Stock-Based Compensation

We have an omnibus incentive plan that was approved by our Board of Directors effective as of

October

15,

2009

and approved by our stockholders at the Annual Meeting of Stockholders held on

November

30,

2009.

Under the

2009

Plan, we

may

grant nonqualified and incentive stock options and other stock-based awards to employees, non-employee directors and consultants. Between

October 15, 2009,

and

June

30,

2019,

a total of

1.4

million shares of common stock have been authorized under the

2009

Plan for issuance to our employees, non-employee directors and consultants. As of

June 30, 2019,

there were

229,000

remaining shares available for grant under the

2009

Plan.

We estimate the fair value of stock option awards at the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have

vesting restrictions and are fully transferable. Option valuation models require the use of highly subjective assumptions. Black-Scholes uses assumptions related to volatility, the risk-free interest rate, the dividend yield (which we assume to be zero, as we have

not

paid any cash dividends) and employee exercise behavior. Expected volatilities used in the model are based on the historical volatility of our stock price. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect in the period of grant. The expected life of stock option grants is derived from historical experience. The fair value of restricted stock shares granted is based on the market price of our common stock on the date of grant. We amortize the estimated fair value of our stock awards to expense over the related vesting periods.

We recognize forfeitures as they occur.

We did

not

grant any options during fiscal

2019

2018.

We had

5,000

options exercised during the fiscal year ended

June 30, 2019

and did

not

have any options exercised during the fiscal year ended

June 30, 2018.

All remaining outstanding stock options are fully vested and all related compensation cost was fully recognized at

June

30,

2014.

options vested during the fiscal years ended

June 30, 2019

and

June 30, 2018.

During fiscal

2019,

we granted a total of

190,000

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

2009

Plan. During fiscal

2018,

we granted a total of

175,000

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

2009

Plan. These restricted stock grants vest over

three

five

years from the date of grant and the unvested shares cannot be sold or otherwise transferred and the right to receive dividends, if declared by our Board of Directors, is forfeitable until the shares become vested. The total remaining unrecognized compensation cost related to unvested restricted stock shares amounted to

$3.5

million at

June 30, 2019

and the weighted average remaining requisite service period of unvested restricted stock shares was

2.3

years. The weighted average fair value of restricted stock shares granted during fiscal

2019

was

$11.57

per share. The weighted average fair value of restricted stock shares granted during fiscal

2018

was

$11.30

per share.

Use of Estimates

Our management has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenue and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP). Actual results could differ from those estimates and our assumptions

may

prove to be inaccurate.

Net Income per Common Share

We compute basic 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 and restricted shares account 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):

	For the Years Ended June 30,
	201 9		2018
Numerator
Net income	$	6,541	$	5,051
Denominator
Basic weighted average common shares outstanding		6,809		6,641
Dilutive effect of stock options and restricted stock shares		289		245
Diluted weighted average common shares outstanding		7,098		6,886
Basic net income per common share	$	0.96	$	0.76
Diluted net income per common share	$	0.92	$	0.73

We did

not

exclude shares related to restricted stock for the year ended

June 30, 2019.

We excluded shares related to restricted stock totaling

41,661

shares for the year ended

June 30, 2018,

as their impact would have been anti-dilutive.

Concentrations of Credit Risk

Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. We place our cash and cash equivalents with highly rated financial institutions. Credit risk with respect to receivables is primarily concentrated with our

three

largest customers, whose receivable balances collectively represented

76.8%

of gross accounts receivable at

June

30,

2019

and

76.6%

June

30,

2018.

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

8.0%

of gross accounts receivable at

June 30, 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.