Note 1 - Description of Business and Summary of Accounting Policies

12 Months Ended

Mar. 31, 2015

Notes to Financial Statements

Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block]

Note 1 Description of Business and Summary of Accounting Policies

Description of Business

Cyanotech Corporation (the “Company”) cultivates and produces high-value, high-quality natural products derived from microalgae for the nutritional supplements market. The Company currently cultivates, on a large-scale basis, two microalgal species from which its two major product lines are derived. The Company manufactures all of its products in the United States and sells its products worldwide. As the Company’s operations are solely related to microalgae-based products, management of the Company considers its operations to be in one industry segment. Correspondingly, the Company records revenue and cost of sales information by product category.

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements include the accounts of Cyanotech Corporation and its wholly owned subsidiary, Nutrex Hawaii, Inc. (“Nutrex Hawaii” or “Nutrex”). All significant intercompany balances and transactions have been eliminated in consolidation.

Estimates and Assumptions

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of any contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the period reported. Management reviews these estimates and assumptions periodically and reflects the effect of revisions in the period that they are determined to be necessary. Actual results could differ significantly from those estimates and assumptions. Significant estimates include inventory valuation and determination of production capacity and abnormal product costs, reserve for inventory, allowance for bad debts and valuation of deferred tax assets.

Financial Instruments

Cash primarily consists of cash on hand and cash in bank deposits.

The Company applies a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:

Level 1 — Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

Level 2 — Inputs to the valuation methodology include:

● Quoted prices for similar assets or liabilities in active markets;

● Quoted prices for identical or similar assets or liabilities in inactive markets;

● Inputs other than quoted prices that are observable for the asset or liability; and

● Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability.

Level 3 — Inputs to the valuation methodology are unobservable and significant to the fair value.

Cash and Cash Equivalents, Accounts Receivable and Accounts Payable

- Due to the short-term nature of these instruments, management believes that the carrying amounts approximate fair value.

Long-Term Debt

- The carrying amount of long-term debt approximates fair value as interest rates applied to the underlying debt are adjusted quarterly to market interest rates, which approximate current interest rates for similar debt instruments of comparable maturities.

Concentration of

C

redit

R

isk

The Company maintains its cash accounts with several banks located in Hawaii. The total cash balances are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per bank. The Company had cash balances at March 31, 2015 that exceeded the balance insured by the FDIC by $2,212,000. One customer accounted for 13% of revenue for the fiscal year ended March 31, 2015. Two customers accounted for 10% or more of accounts receivable at March 31, 2015. No individual customer accounted for more than 10% of accounts receivable or revenue at March 31, 2014 or the fiscal year ended March 31, 2014.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are recorded at the invoiced amount and do not accrue interest. The allowance for doubtful accounts reflects management’s best estimate of probable credit losses inherent in the accounts receivable balance. Management determines the allowance based on historical experience, specifically identified nonpaying accounts and other currently available evidence. Management reviews its allowance for doubtful accounts monthly with a focus on significant individual past due balances over 90 days. All other balances are reviewed on a pooled basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers.

Inventories, net

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Market is defined as sales price less cost to dispose and a normal profit margin. Inventory costs include materials, labor, overhead and third party costs.

Management provides a reserve against inventory for known or expected inventory obsolescence. The reserve is determined by specific review of inventory items for product age and quality which may affect salability. At March 31, 2015 and 2014 the inventory reserve was $4,000 and $6,000, respectively.

The Company recognizes abnormal production costs, including fixed cost variances from normal production capacity, as an expense in the period incurred. Abnormal amounts of freight, handling costs and wasted material (spoilage) are recognized as current period charges and fixed production overhead costs are allocated to inventory based on the normal capacity of production facilities. Normal capacity is defined as “the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance.” The Company expensed abnormal production costs of $639,000, $306,000 and $1,157,000 to cost of sales for the fiscal years ended March 31, 2015, 2014 and 2013, respectively. Non-inventoriable fixed costs were $182,000, $91,000 and $94,000 for the fiscal years ended March 31, 2015, 2014 and 2013, respectively, and have been classified in cost of sales.

Equipment and Leasehold Improvements, net

Equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives for equipment and furniture and fixtures, and the shorter of the land lease term (see Notes 3 and 6) or estimated useful lives for leasehold improvements as follows:

Equipment (in years)	3	to	10
Furniture and fixtures (in years)	3	to	7
Leasehold improvements (in years)	10	to	25

Capital project costs are accumulated in construction-in-progress until completed, at which time the costs are transferred to the relevant asset and commence depreciation. Repair and maintenance cost are expensed in the period incurred. Repairs and maintenance that significantly increase the useful life or value of the asset are capitalized and depreciated over the remaining life of the asset. The Company capitalizes interest cost incurred on funds used to construct property, plant, and equipment. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. Interest cost capitalized was $228,000, $199,000 and $54,000 for the fiscal years ended March 31, 2015, 2014 and 2013, respectively.

Impairment of Long-Lived Assets

Management reviews long-lived assets, such as equipment, leasehold improvements and purchased intangibles subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized to the extent that the carrying amount exceeds the asset’s fair value. Assets to be disposed of and related liabilities would be separately presented in the consolidated balance sheet. Assets to be disposed of would be reported at the lower of the carrying value or fair value less costs to sell and would not be depreciated.

Accounting for Asset Retirement Obligations

Management evaluates quarterly the potential liability for asset retirement obligations under the Company’s lease for its principal facility and corporate headquarters. No liability has been recognized as of March 31, 2015 and 2014 (see Note 6).

Revenue Recognition

We recognize revenues when the customer takes ownership and assumes the risk of loss. We have determined that transfer of title and risk of loss generally occurs when product is received by the customer, except in instances where the shipment terms are explicitly FOB Origin, and accordingly we recognize revenue at the point of delivery to the customer. For shipments with terms of FOB Origin where transfer of title and risk of loss occurs at the point of shipping, revenue is recognized upon shipment to the customer. Sales returns and allowances are estimated and recorded as a reduction to sales in the period in which sales are recorded. We record net shipping charges and sales tax in cost of goods sold.

Research and Development

Research and development costs are expensed as incurred and consist primarily of labor, benefits and outside research.

Advertising

Advertising costs are expensed as incurred. Total advertising expense for the years ended March 31, 2015, 2014 and 2013 was $1,082,000, $1,126,000 and $575,000, respectively.

Income Taxes

Income taxes are accounted for under the asset and liability method. The asset and liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using income tax rates applicable to the period in which the tax difference is expected to reverse. A valuation allowance is recorded when management determines that some or all of the deferred tax assets are not likely to be realized.

In evaluating a tax position for recognition, management evaluates whether it is more-likely-than-not that a position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold, the tax position is measured and recognized in the Company’s financial statements as the largest amount of tax benefit that, in management’s judgment, is greater than 50% likely of being realized upon settlement. As of March 31, 2015 and 2014, there was no significant liability for income tax associated with unrecognized tax benefits.

The Company recognizes accrued interest related to unrecognized tax benefits as well as any related penalties in interest expense in its condensed consolidated statements of operations. As of the date of adoption and during the years ended March 31, 2015, and 2014, there was no accrual for the payment of interest and penalties related to uncertain tax positions.

Share-Based Compensation

The Company accounts for share-based payment arrangements using fair value. If an award vests or becomes exercisable based on the achievement of a condition other than service, such as for meeting certain performance or market condition, the award is classified as a liability. Liability-classified awards are remeasured to fair value at each balance sheet date until the award is settled. The Company currently has no liability-classified awards. Equity- classified awards, including grants of employee stock options, are measured at the grant-date fair value of the award and are not subsequently remeasured unless an award is modified. The cost of equity-classified awards is recognized in the income statement over the period during which an employee is required to provide the service in exchange for the award, or the vesting period. All of the Company’s stock options are service-based awards, and considered equity-classified awards; as such, they are reflected only in Equity and Compensation Expense accounts.

The Company utilizes the Black-Scholes option pricing model to determine the fair value of each option award. Expected volatilities are based on the historical volatility of the Company’s common stock over a period consistent with that of the expected term of the options. The expected term of the options are estimated based on factors such as vesting periods, contractual expiration dates and historical exercise behavior. The risk-free rates for periods within the contractual life of the options are based on the yields of U.S. Treasury instruments with terms comparable to the estimated option terms.

Per Share Amounts

Basic earnings per common share is calculated by dividing net income for the year by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by dividing net income for the year by the sum of the weighted average number of common shares outstanding during the year plus the number of potentially dilutive common shares (“dilutive securities”) that were outstanding during the year. Dilutive securities include options granted pursuant to the Company’s stock option plans, potential shares related to the Employee Stock Purchase Plan and Restricted Stock grants to employees and non-employees. Dilutive securities related to the Company’s stock option plans are included in the calculation of diluted earnings per common share using the treasury stock method. Potentially dilutive securities are excluded from the computation of earnings per share in periods in which a net loss is reported, as their effect would be antidilutive. A reconciliation of the numerators and denominators of the basic and diluted earnings per common share calculations for the years ended March 31, 2015, 2014 and 2013 is presented in Note 10.

 

Correction of Immaterial Errors

During our financial close process for the fourth quarter of fiscal year 2015, management discovered that the Company’s revenue recognition process resulted in errors in the reporting periods of certain sales previously recognized. The cumulative adjustment applicable to prior fiscal years through March 31, 2014 totaled approximately ($296,000). The adjustment applicable to the fiscal years ended March 31, 2013 and March 31, 2014 was approximately ($45,000) and ($225,000), respectively.

Pursuant to the guidance of SEC Staff Accounting Bulletin (“SAB”) No. 99, Materiality, the Company concluded that the errors were not material to any of its prior period financial statements. Although the errors were immaterial to prior periods, the prior period financial statements were revised, in accordance with SAB No. 108,

Considering the

Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements

, due to the significance of the out-of-period corrections in the fourth quarter of fiscal 2015. Prior period amounts stated in this Form 10-K have been revised to facilitate comparability between current and prior year periods.

A reconciliation of the effects of the adjustments to previously reported balance sheet at March 31, 2014 follows:

	March 31, 2014
	As Reported		Adjustment			As Adjusted
	(In Thousands)
Accounts receivable	$	3,347	$	(971	)	$	2,376
Inventories, net		4,876		465			5,341
Deferred tax assets		3,340		173			3,513
Total assets		30,310		(333	)		29,977
Accounts payable		3,184		(37	)		3,147
Total current liabilities		4,192		(37	)		4,155
Total equity		20,847		(296	)		20,551

A reconciliation of the effects of the adjustments to previously reported statement of operations for the fiscal years ended March 31, 2014 and 2013 follows:

	Year Ended March 31, 2014									Year Ended March 31, 2013
	As Reported			Adjustment			As Adjusted			As Reported		Adjustment			As Adjusted
	(In Thousands)									(In Thousands)
Sales	$	28,905		$	(727	)	$	28,178		$	27,581	$	(122	)	$	27,459
Cost of sales		17,341			(352	)		16,989			16,623		(48	)		16,575
Gross profit		11,564			(375	)		11,189			10,958		(74	)		10,884
Income (loss) from operations		165			(375	)		(210	)		2,299		(74	)		2,225
Net income (loss)		(195	)		(225	)		(420	)		4,209		(45	)		4,164
Net income (loss) per share - diluted	$	(0.04	)	$	(0.04	)	$	(0.08	)	$	0.74	$	(0.00	)	$	0.74

A reconciliation of the effects of the adjustments to previously reported statement of cash flows for the fiscal years ended March 31, 2014 and 2013 follows:

	Year Ended March 31, 2014									Year Ended March 31, 2013
	As Reported			Adjustment			As Adjusted			As Reported			Adjustment			As Adjusted
	(In Thousands)									(In Thousands)
Net (loss) income	$	(195	)	$	(225	)	$	(420	)	$	4,209		$	(45	)	$	4,164
Deferred income taxes		199			(131	)		68			(2,095	)		(26	)	$	(2,121	)
Accounts receivable		419			713			1,132			(1,382	)		123			(1,259	)
Inventories		(1,185	)		(325	)		(1,510	)		(108	)		(49	)		(157	)
Accrued expenses		(98	)		(32	)		(130	)		(480	)		(3	)		(483	)

A reconciliation of the effects of the adjustments to previously reported statement of stockholders equity for the fiscal years ended March 31, 2014, 2013 and 2012 follows:

	Year Ended March 31,
	2014			2013			2012
	(In Thousands)
Accumulated deficit - as reported	$	(9,154	)	$	(8,959	)	$	(13,168	)
Adjustment		(296	)		(71	)		(26	)
Accumulated deficit - as adjusted	$	(9,450	)	$	(9,030	)	$	(13,194	)