1.	SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information pursuant to the instructions to Form

-Q and Regulation S-

of the Securities and Exchange Commission (SEC). These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, and Condensed Consolidated Statements of Cash Flows for the periods presented in accordance with GAAP. Accordingly, they do

not

include all of the information and notes required by GAAP for complete financial statements. The results of operations for the interim periods are

not

necessarily indicative of the results to be expected for the full fiscal year. The Condensed Consolidated Balance Sheet as of

March

31,

2018

was derived from the audited consolidated financial statements. These condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements for the year ended

March

31,

2018,

contained in the Company’s annual report on Form

-K as filed with the SEC on

June

15,

2018.

The accompanying condensed consolidated financial statements include the accounts of Cyanotech Corporation and its wholly owned subsidiary, Nutrex Hawaii, Inc. (“Nutrex Hawaii” or “Nutrex”, collectively the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of any contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods 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 from those estimates and assumptions.

Liquidity

As of

June 30, 2018,

the Company had cash of

$0.9

million and working capital of

$6.9

million compared to

$1.3

million and

$7.9

million, respectively, at

March 31, 2018.

August 30, 2016,

the Credit Agreement, which the Company and First Foundation Bank (the Bank) entered into on

June 3, 2016,

became effective. The Credit Agreement allows the Company to borrow up to

$2.0

million on a revolving basis. At

June 30, 2018,

the Company had borrowed

$1.25

million and had

$0.75

million available on the line. The line of credit was renewed on

August 30, 2017

and will expire on

August 30, 2018.

The Company intends to renew or replace it with another line of credit on or before the expiration date.

As of

June 30, 2018,

the Company had

$6.2

million of term loans payable to the Bank that require the payment of principal and interest monthly through

August 2032.

Pursuant to the term loans, the Company is subject to annual financial covenants, customary affirmative and negative covenants and certain subjective acceleration clauses. As of

March 31, 2018,

the Company was in compliance with these financial covenants.

Funds generated by operating activities and available cash continue to be the Company’s most significant sources of liquidity for working capital requirements, debt service and funding of maintenance levels of capital expenditures. Based upon the Company’s fiscal year

2019

operating plan and related cash flow projections and the Company’s projected consolidated financial position as of

March 31, 2019,

cash flows expected to be generated by operating activities and available financing are expected to be sufficient to fund the Company’s operations for at least the next

twelve

months, and the Company’s current ratio is expected to be in compliance with the annual term loan covenant requirement as of

March 31, 2019.

However,

assurances can be provided that the Company will achieve its operating plan and cash flow objectives for the next fiscal year or its projected consolidated financial position as of

March 31, 2019.

Such estimates are subject to change based on future results and such change could cause future results to vary significantly from expected results.

Revenue Recognition

The Company records revenue based on the

five

-step model which includes: (

) identifying the contract with the customer; (

) identifying the performance obligations in the contract; (

) determining the transaction price; (

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

) recognizing revenue when the performance obligations are satisfied. Substantially all of the Company’s revenue is generated by fulfilling orders for the purchase of our micro algal nutritional supplements to retailers, wholesalers, or direct to consumers via online channels, with each order considered to be a distinct performance obligation. These orders

may

be formal purchase orders, verbal phone orders, e-mail orders or orders received online. Shipping and handling activities for which the Company is responsible under the terms and conditions of the order are

not

accounted for as performance obligations but as fulfillment costs. These activities are required to fulfill the Company’s promise to transfer the goods and are expensed when revenue is recognized. The impact of this policy election is insignificant as it aligns with our current practice.

Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling a performance obligation. The Company has elected to exclude sales, use and similar taxes from the measurement of the transaction price. The impact of this policy election is insignificant, as it aligns with our current practice. The amount of consideration expected to be received and revenue recognized includes estimates of variable consideration, which includes costs for trade promotion programs, coupons, returns and early payment discounts. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. The Company reviews and updates these estimates at the end of each reporting period and the impact of any adjustments are recognized in the period the adjustments are identified. In assessing whether collection of consideration from a customer is probable, the Company considers 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, typically

days from the invoice date, which occurs on the date of transfer of control of the products to the customer.

Revenue is recognized at the point in time that the control of the ordered products is transferred to the customer. Generally, this occurs when the product is delivered, or in some cases, picked up from

one

of our distribution centers by the customer.

Customer contract liabilities consist of customer deposits received in advance of fulfilling an order and are shown separately on the consolidated balance sheets. During the

three

-month periods ended

June 30, 2018,

and

June 30, 2017,

the Company recognized

$112,000

and

$45,000,

respectively of revenue from deposits that were included in contract liabilities as of

March 31, 2018

and

March 31, 2017,

respectively. The Company’s contracts have a duration of

one

year or less and therefore, the Company has elected the practical expedient of

not

disclosing revenues allocated to partially unsatisfied performance obligations.

The following table represents revenue disaggregated

by product in the

three

months ended

June 30, 2018

and

June 30, 2017 (

in thousands):

	Three months ended June 30, 2018
	Astaxanthin		Spirulina		Total
Packaged products	$	5,095	$	1,068	$	6,163
Bulk products		263		719		982
Total	$	5,358	$	1,787	$	7,145

	Three months ended June 30, 2017
	Astaxanthin		Spirulina		Total
Packaged products	$	5,505	$	1,927	$	7,432
Bulk products		221		1,156		1,377
Total	$	5,726	$	3,083	$	8,809

Recently Adopted Accounting Pronouncements

May 2017,

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

2017

09,

Compensation-Stock Compensation (Topic

718

) Scope of Modification Accounting

("ASU

No.

2017

09"

)

ASU

No.

2017

will clarify and reduce both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic

718,

to a change to the terms and conditions of a share-based payment award. This guidance became effective for fiscal years beginning after

December 15, 2017

and interim periods within those fiscal years. The amendments in this ASU are applied prospectively to awards modified on or after the adoption date. The Company adopted this standard as of

April 1, 2018

with

impact on its consolidated financial statements.

November 2016,

the FASB issued ASU

2016

18,

“

Statement of Cash Flows (Topic

230

): Restricted Cash”

(“ASU

No.

2016

18”

)

This update addresses the fact that diversity exists in the classification and presentation of changes in restricted cash on the statement of cash flows under Topic

230,

Statement of Cash Flows

. ASU

No.

2016

became effective for public companies for the fiscal years beginning after

December 15, 2017,

and interim periods within those fiscal years. The Company adopted this standard as of

April 1, 2018

by using the retrospective method, which required reclassification of restricted cash in the accompanying consolidated statement of cash flows as of the beginning of the period for the

three

months ended

June 30, 2018.

August 2016,

FASB issued ASU

2016

15,

“

Statement of Cash Flows (Topic

230

)

Classification of Certain Cash Receipts and Cash Payments”

(“ASU

No.

2016

15”

). This ASU clarifies and provides specific guidance on

eight

cash flow classification issues that are

not

currently addressed by current GAAP and thereby reduces the current diversity in practice. ASU

No.

2016

is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after

December 15, 2017.

The Company adopted this standard as of

April 1, 2018

with

impact on its consolidated financial statements and related disclosures.

May 2014,

the FASB issued their converged standard on revenue recognition, Accounting Standards Update

No.

2014

09,

“

Revenue from Contracts with Customers (Topic

606

)”

("ASU

No.

2014

09"

), updated in

December 2016

with the release of ASU

2016

20.

This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the 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 in exchange for those goods and services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In

August 2015,

the FASB issued ASU

2015

“

Revenue from Contracts with Customers (Topic

606

Deferral of the Effective Date,

" which deferred the effective date of ASU

No.

2014

to annual reporting periods beginning after

December 15, 2017.

The new revenue standard 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 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). The Company adopted the standard on

April 1, 2018

for contracts that were

not

completed before the adoption date, using the modified retrospective method. The Company has evaluated the effect of the standard and concluded it is

not

material to the timing or amount of revenues or expenses recognized in the Company’s historical consolidated financial statements. As a result, the Company has concluded that the application of the standard does

not

have a material effect that requires a retrospective adjustment to any previously reported amounts in the Company’s historical consolidated financial statements for reporting disclosure purposes.

Recently Issued Accounting Pronouncements

July 2018,

the FASB issued ASU

2018

“

Codification Improvements to Topic

842,

Leases

” (“ASU

No.

2018

02”

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

No.

2016

including those regarding residual value guarantees, 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 rate implicit in the lease, and failed sale and leaseback transactions. The Company is currently evaluating the impact this ASU will have on its implementation of ASU

No.

2016

02.

June 2018,

the FASB issued ASU

2018

“

Compensation - Stock Compensation (Topic

718

)

”

(“ASU

No.

2018

07”

): Improvements to Nonemployee Share-Based Payment Accounting. This ASU expands the scope of Topic

718

to include share-based payment transactions for acquiring goods and services from non-employees, and as a result, the accounting for share-based payments to non-employees will be substantially aligned. ASU

No.

2018

is effective for fiscal years beginning after

December 15, 2018,

including interim periods within that fiscal year. Early adoption is permitted but

earlier than an entity’s adoption date of Topic

606.

The Company is currently evaluating the impact this new guidance will have on its financial statements and related disclosures.

February 2016,

the FASB issued ASU

2016

02,

“

Leases (Topic

842

)”

(

“

ASU

No.

2016

02”

). The principle objective of ASU

No.

2016

is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet. ASU

No.

2016

continues to retain a distinction between finance and operating leases but requires lessees to recognize a right-of-use asset representing its right to use the underlying asset for the lease term and a corresponding lease liability on the balance sheet for all leases with terms greater than

twelve

months. ASU

No.

2016

is effective for fiscal years and interim periods beginning after

December 15, 2018.

Early adoption of ASU

No.

2016

is permitted. Entities are required to apply the amendments at the beginning of the earliest period presented using a modified retrospective approach. This guidance is applicable to the Company’s fiscal year beginning

April 1, 2019.

July 2018,

the FASB issued ASU

No.

2018

11,

Leases (Topic

842

): Targeted Improvements

," which provides an additional transition method that permits changes to be applied by means of a cumulative-effect adjustment recorded in retained earnings as of the beginning of the fiscal year of adoption. The Company has started the assessment process by evaluating the population of leases under the revised definition of what qualifies as a leased asset, and expects to have the assessment completed by

March 2019.

The Company is the lessee under various agreements for facilities and equipment that are currently accounted for as operating and capital leases. The Company expects this guidance will have a material impact on its consolidated balance sheets due to the recognition of lease rights and obligations as assets and liabilities, respectively. The Company does

not

expect this guidance to have a material effect on its consolidated results of operations and cash flows.