10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For Quarterly Period Ended December 31, 2018

Or

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From               to               

Commission File Number 0-14602

CYANOTECH CORPORATION

(Exact name of registrant as specified in its charter)

NEVADA	91-1206026
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

73-4460 Queen Kaahumanu Hwy. #102, Kailua-Kona, HI 96740

(Address of principal executive offices)

 (808) 326-1353

(Registrant’s telephone number)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant 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 the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No ☐ 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☒
	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 the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

As of February 12, 2019, the number of shares outstanding of the registrant’s sole class of common stock, par value $0.02 per share, was 5,836,110.

1

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Report and other presentations made by Cyanotech Corporation (“CYAN”) and its subsidiary contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as “expects,” “anticipates,” “intends,” “plan,” “believes,” “predicts”, “estimates” or similar expressions. In addition, any statement concerning future financial performance, ongoing business strategies or prospects and possible future actions are also forward-looking statements. Forward-looking statements are based upon current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning CYAN and its subsidiary (collectively, the “Company”), the performance of the industry in which CYAN does business, and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance. You should not place undue reliance on forward-looking statements.

Forward-looking statements speak only as of the date of the Report, presentation or filing in which they are made. Except to the extent required by the Federal Securities Laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our forward-looking statements in this Report include, but are not limited to:

● Statements relating to our business strategy;

● Statements relating to our business objectives; and

● Expectations concerning future operations, profitability, liquidity and financial resources.

These forward-looking statements are subject to risk, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control, including those factors described in Item 2 of Part I of this quarterly report and in Item 1A of Part I of the Company’s annual report on Form 10-K filed on June 15, 2018. Additionally, the following factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions and expectations expressed in our forward-looking statements:

● The added risks associated with or attributed to the current local, national and world economic conditions, including but not limited to, the volatility of crude oil prices, inflation and currency fluctuations;

● Access to available and reasonable financing on a timely basis;

● The Company’s inability to generate enough revenues to meet its obligations or repay maturing indebtedness;

● Failure of capital projects to operate as expected or meet expected results;

It is not possible to predict or identify all potential risks and uncertainties and the above referenced factors and list do not comprise a complete list of all potential risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in any forward-looking statement contained in this report. All forward-looking statements speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this report. Except as is required by law, the Company expressly disclaims any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report. Throughout this report, Cyanotech Corporation, together with its subsidiaries, are referred to as “the Company.”

2

CYANOTECH CORPORATION

FORM 10-Q

INDEX

PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets as of December 31, 2018 and March 31, 2018 (unaudited)	4
	Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2018 and 2017 (unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2018 and 2017 (unaudited)	6
	Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults upon Senior Securities	24
Item 5.	Other Information	24
Item 6.	Exhibits	25
SIGNATURES		26

3

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

CYANOTECH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	December 31, 2018			March 31, 2018
ASSETS
Current assets:
Cash	$	1,573		$	1,329
Accounts receivable, net of allowance for doubtful accounts of $27 at December 31, 2018 and $27 at March 31, 2018		1,883			2,664
Inventories, net		10,112			9,034
Prepaid expenses and other current assets		641			590
Total current assets		14,209			13,617
Equipment and leasehold improvements, net		15,183			15,734
Restricted cash		—			65
Other assets		291			291
Total assets	$	29,683		$	29,707
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,055		$	3,527
Accrued expenses		1,073			892
Short-term contract obligation		332			—
Line of credit		1,750			500
Current maturities of long-term debt		663			655
Customer deposits		172			133
Total current liabilities		8,045			5,707
Long-term debt, less current maturities		5,328			5,790
Other long-term liabilities		57			103
Total liabilities		13,430			11,600
Commitments and contingencies
Stockholders’ equity:
Preferred stock of $0.01 par value, authorized 10,000,000 shares; no shares issued and outstanding		—			—
Common stock of $0.02 par value, shares authorized 50,000,000; 5,836,110 shares issued and outstanding at December 31, 2018 and 5,772,032 shares at March 31, 2018		117			115
Additional paid-in capital		32,318			32,051
Accumulated deficit		(16,182	)		(14,059	)
Total stockholders’ equity		16,253			18,107
Total liabilities and stockholders’ equity	$	29,683		$	29,707

See accompanying Notes to Condensed Consolidated Financial Statements.

4

CYANOTECH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended December 31,						Nine Months Ended December 31,
	2018			2017			2018			2017
NET SALES	$	10,044		$	9,150		$	24,143		$	26,014
COST OF SALES		5,928			4,910			15,906			14,551
Gross profit		4,116			4,240			8,237			11,463
OPERATING EXPENSES:
General and administrative		1,337			1,368			4,190			4,132
Sales and marketing		2,068			1,620			5,088			4,549
Research and development		216			142			635			433
Total operating expenses		3,621			3, 130			9,913			9,114
Income (loss) from operations		495			1,110			(1,676	)		2,349
Interest expense, net		(134	)		(130	)		(414	)		(371	)
Income(loss) before income taxes		361			980			(2,090	)		1,978
INCOME TAX EXPENSE (BENEFIT)		73			(127	)		33			(105	)
NET INCOME (LOSS)	$	288		$	1,107		$	(2,123	)	$	2,083
NET INCOME (LOSS) PER SHARE:
Basic	$	0.05		$	0.19		$	(0.37	)	$	0.36
Diluted	$	0.05		$	0.19		$	(0.37	)	$	0.36
SHARES USED IN CALCULATION OF NET INCOME (LOSS) PER SHARE:
Basic		5,836			5,749			5,809			5,714
Diluted		5,862			5,831			5,809			5,774

See accompanying Notes to Condensed Consolidated Financial Statements.

5

CYANOTECH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Nine Months Ended December 31,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(2,123	)	$	2,083
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		1,421			1,403
Share-based compensation expense		282			369
Amortization of debt issue costs and other assets		57			52
Net (increase) decrease in assets:
Accounts receivable		781			(791	)
Inventories		(1,078	)		(1,730	)
Prepaid expenses and other assets		(84	)		(86	)
Net increase (decrease) in liabilities:
Accounts payable		528			(76	)
Accrued expenses		181			332
Customer deposits		39			(80	)
Other long-term liabilities		(46	)		(8	)
Net cash (used in) provided by operating activities		(42	)		1,468
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements		(375	)		(667	)
Investment in Cellana asset purchase		(100	)		—
Investment in restricted cash		—			(65	)
Net cash used in investing activities		(475	)		(732	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net draws (payments) on line of credit		1,250			(111	)
Payments on short term contract obligation		(63	)		—
Payments on capitalized leases		(49	)		(67	)
Principal payments on long-term debt		(429	)		(394	)
Proceeds from long-term debt, net of costs		—			166
Withholding on restricted stock unit vesting		(32	)		—
Proceeds from stock options exercised		19			26
Net cash provided by (used in) financing activities		696			(380	)
Net increase in cash		179			356
Cash and restricted cash at beginning of period		1,394			1,407
Cash at end of period	$	1,573		$	1,763
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	358		$	313
Income taxes	$	17		$	—
Purchase of Cellana assets	$	495,000		$	—
Less: Issuance of short-term obligation		395,000			—
Cash paid to acquire Cellana assets	$	100,000		$	—

See accompanying Notes to Condensed Consolidated Financial Statements. 

6

CYANOTECH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2018

(Unaudited)

1. ORGANIZATION AND BASIS OF PRESENTATION

Cyanotech Corporation (the “Company”), located in Kailua-Kona, Hawaii, was incorporated in the state of Nevada on March 3, 1983 and is listed on the NASDAQ Global Select Market under the symbol “CYAN”. The Company is engaged in the production of natural products derived from microalgae for the nutritional supplements market.

The Company is an agricultural company that produces high value natural products derived from microalgae grown in complex and intricate open-pond agricultural systems on the Kona coast of Hawaii.  The Company's products include Hawaiian Spirulina Pacifica, a superfood with numerous benefits, including boosting the immune system and overall cellular health; and Hawaiian BioAstin, a powerful antioxidant shown to support and maintain the body's natural inflammatory response.

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 10-Q and Regulation S-X 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 10-K as filed with the SEC on June 15, 2018. 

2. SIGNIFICANT ACCOUNTING POLICIES

Consolidation

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 intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

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.

Cash and Restricted Cash

The Company considers only its monetary liquid assets with original maturities of three months or less as cash and cash equivalents. Proceeds from equipment loans are classified as restricted cash until drawn upon. 

The following table provides a reconciliation of cash and restricted cash reported within the Company's consolidated balance sheets to the total amount presented in the consolidated statement of cash flows:

	December 31, 2018		March 31, 2018
	(in thousands)
Cash	$	1,329	$	1,407
Restricted Cash		65		—
Cash and restricted cash at beginning of period	$	1,394	$	1,407
Cash	$	1,573	$	1,329
Restricted Cash		—		65
Cash and restricted cash at end of period	$	1,573	$	1,394

7

Concentration of Accounts Receivable and Revenues

At December 31, 2018, 67% of the Company’s accounts receivable was comprised of two customer balances of 43% and 24%, respectively. At March 31, 2018, 76% of the Company’s accounts receivable was comprised of three customer balances of 45%, 16% and 15%, respectively. Two customers accounted for 66% of total net sales for the three months ended December 31, 2018, comprised of 35% and 31%, respectively. Two customers accounted for 50% of total net sales for the three months ended December 31, 2017, comprised of 26% and 24%, respectively. Two customers accounted for 62% of total net sales for the nine months ended December 31, 2018, comprised of 35% and 27%, respectively. Two customers accounted for 47% of total net sales for the nine months ended December 31, 2017, comprised of 30% and 17%, respectively.

Revenue Recognition

The Company records revenue based on the five-step model which includes: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) 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 30 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 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 December 31, 2018 and December 31, 2017, the Company recognized $0 and $20,000, respectively, of revenue from deposits that were included in contract liabilities as of March 31, 2018 and March 31, 2017, respectively. During the nine-month periods ended December 31, 2018 and December 31, 2017, the Company recognized $114,000 and $91,000, 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.

Disaggregation of Revenue

The following table represents revenue disaggregated by product in the three and nine months ended December 31, 2018 and December 31, 2017 (in thousands):

	Three months ended December 31, 2018						Nine months ended December 31, 2018
	Astaxanthin		Spirulina		Total		Astaxanthin		Spirulina		Total
Packaged products	$	6,012	$	3,212	$	9,224	$	15,388	$	6,208	$	21,596
Bulk products		287		533		820		884		1,663		2,547
Total	$	6,299	$	3,745	$	10,044	$	16,272	$	7,871	$	24,143

8

	Three months ended December 31, 2017						Nine months ended December 31, 2017
	Astaxanthin		Spirulina		Total		Astaxanthin		Spirulina		Total
Packaged products	$	5,746	$	2,268	$	8,014	$	15,649	$	6,560	$	22,209
Bulk products		317		819		1,136		748		3,057		3,805
Total	$	6,063	$	3,087	$	9,150	$	16,397	$	9,617	$	26,014

Reclassification

Certain amounts previously reported in the fiscal 2018 consolidated financial statements have been reclassified to conform with the fiscal 2019 financial presentation. These reclassifications have no impact on net income.

Recently Adopted Accounting Pronouncements

In 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. 2017-09 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 ASU No. 2017-09 are applied prospectively to awards modified on or after the adoption date. The Company adopted this standard as of April 1, 2018 with no impact on its consolidated financial statements. 

In 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. 2016-18 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 nine months ended December 31, 2018. 

In 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”). ASU No. 2016-15 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. 2016-15 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 no impact on its consolidated financial statements and related disclosures. 

In 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 No 2015-14 “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which deferred the effective date of ASU No. 2014-09 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

In November 2018, the FASB issued ASU 2018-18 – Collaborative Arrangements, which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is not a customer. This ASU will be effective for us in the first quarter of fiscal 2021 with early adoption permitted. This ASU requires retrospective adoption to the date we adopted ASC 606, April 1, 2018, by recognizing a cumulative-effect adjustment to the opening balance of retained earnings of the earliest annual period presented. The Company is currently evaluating the impact of the adoption of this standard on its financial statements.

9

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU No. 2018-15”), which aligns the capitalization requirements for implementation costs incurred in a hosting arrangement that is a service contract with the existing capitalization requirements for implementation costs incurred to develop or obtain internal-use software (Subtopic 350-40). ASU 2018-15 becomes effective for the Company in the first quarter of fiscal 2021 and may be adopted either retrospectively or prospectively. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement - Disclosure Framework (Topic 820)” (“ASU No. 2018-13”). The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.

In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718)” (“ASU No. 2018-07”): Improvements to Nonemployee Share-Based Payment Accounting. ASU No. 2018-07 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. 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted but no 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.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU No. 2016-02”). The principle objective of ASU No. 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet. ASU No. 2016-02 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. 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption of ASU No. 2016-02 is permitted. Entities were 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. In July 2018, the FASB issued ASU 2018-10 “Codification Improvements to Topic 842, Leases” (“ASU No. 2018-02”).  ASU No. 2018-02 affects narrow aspects of the guidance issued in the amendments in ASU No. 2016-02 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.  In July 2018, the FASB issued ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements," which provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, the prior comparative period’s financials will remain the same as those previously presented. Entities that elect this optional transition method must provide the disclosures that were previously required. The Company expects it will elect this optional transition method. The Company has selected resources to track and record leases and is starting the assessment and valuation 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. 

10

3. INVENTORIES

Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out method. Inventories consist of the following:

	December 31, 2018		March 31, 2018
	(in thousands)
Raw materials	$	460	$	410
Work in process		4,649		2,602
Finished goods		4,828		5,878
Supplies		175		144
Inventories, net	$	10,112	$	9,034

The Company recognizes abnormal production costs, including fixed cost variances from normal production capacity, as an expense in the period incurred. Abnormal costs related to spirulina production of $0 and $250,000 were charged to cost of sales for the three and nine months ended December 31, 2018, respectively. There were no abnormal production costs for the three and nine months ended December 31, 2017. Non-inventoriable fixed costs related to production of $35,000 (astaxanthin) and $176,000 ($35,000 astaxanthin and $141,000 spirulina) were charged to cost of sales for the three and nine months ended December 31, 2018, respectively. Non-inventoriable fixed costs related to spirulina production of $4,000 and $88,000 were charged to cost of sales for the three and nine months ended December 31, 2017, respectively.

4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following:

	December 31, 2018			March 31, 2018
	(in thousands)
Equipment	$	18,312		$	17,935
Leasehold improvements		14,288			14,248
Furniture and fixtures		348			348
		32,948			32,531
Less accumulated depreciation and amortization		(18,767	)		(17,346	)
Construction-in-progress		1,002			549
Equipment and leasehold improvements, net	$	15,183		$	15,734

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amount to forecasted undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future cash flows, then an impairment charge is recognized to the extent that the carrying amount exceeds the asset’s fair value. Management has determined no asset impairment existed as of December 31, 2018 and March 31, 2018, respectively.

5. SHORT TERM CONTRACT OBLIGATION

On November 30, 2018 the Company completed the purchase of a six acre production and research facility from Cellana LLC (“Cellana”) under a purchase agreement that was signed August 31, 2018. In accordance with the terms of the third amendment to the asset purchase agreement, the Company acquired the asset for $495,000 with a cash down payment of $100,000 leaving a short-term obligation of $395,000 on the asset purchase.

The short -term obligation is comprised of two separate loans in the principal amount of $180,000 and $215,000. The first loan of $180,000 bears an interest rate of 6.25% and is payable in four monthly installments which includes principal and interest. The loan commenced on December 1, 2018 and matures on March 31, 2019. The principal amount outstanding at December 31, 2018 was $137,000.

The second loan in the amount of $215,000 is a non-interest bearing loan that is payable in twelve monthly installments comprised of two monthly payments of $10,000 and ten monthly payments of $19,543. The loan commenced on December 1, 2018 and matures on October 15, 2019. This contract contains a hold back of $38,000 pending resolution of certain closing items by the seller. The principal amount outstanding at December 31, 2018 was $195,000.

6. LINE OF CREDIT

On August 30, 2016, the Revolving Credit Agreement (the “Credit Agreement”), which the Company and First Foundation Bank (“the Bank”) entered into on June 3, 2016, became effective after the Company and the Bank received the necessary approvals from the State of Hawaii to secure the lien on the Company’s leasehold property in Kona, Hawaii. The Credit Agreement allows the Company to borrow up to $2,000,000 on a revolving basis. Borrowings under the Credit Agreement bear interest at the Wall Street Journal prime rate (5.50% at December 31, 2018) plus 2%, floating. The Credit Agreement includes various covenants as defined in the Credit Agreement. The Credit Agreement also contains standard acceleration provisions in the event of a default by the Company. As of December 31, 2018, the Company had borrowed $1,750,000 and had $250,000 available on the line. The line of credit is subject to annual renewal and was renewed on August 30, 2018 and will be subject to renewal upon expiration on August 30, 2019. Pursuant to the August 30, 2018 renewal, the current ratio covenant was changed from 2.10:1 to 1.50:1 and is applicable to both the Line of Credit and Long-Term Debt with the Bank.

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The Credit Agreement grants the Bank the following security interests in the Company’s property: (a) a lien on the Company’s leasehold interest in its Kona facility; (b) an assignment of the Company’s interest in leases and rents on its Kona facility; and (c) a security interest in all fixtures, furnishings and equipment related to or used by the Company at the Kona facility. Each security interest is further subject to the terms of the Credit Agreement.

7. ACCRUED EXPENSES

Accrued expenses consist of the following:

	December 31, 2018		March 31, 2018
	(in thousands)
Wages, commissions, bonus and profit sharing	$	799	$	707
Other accrued expenses		274		185
Total accrued expenses	$	1,073	$	892

8. LONG-TERM DEBT

Long-term debt consists of the following:

	December 31, 2018			March 31, 2018
	(in thousands)
Long-term debt	$	6,101		$	6,530
Capital lease obligations		98			148
Less current maturities		(663	)		(655	)
Long-term debt, excluding current maturities		5,536			6,023
Less unamortized debt issuance costs		(208	)		(233	)
Total long-term debt, net of current maturities and unamortized debt issuance costs	$	5,328		$	5,790

Term Loans

On August 14, 2012, the Company entered into a loan agreement (the “August 2012 Loan Agreement”) that provides a term loan in an aggregate principal amount of $5,500,000 which is secured by substantially all the Company’s assets, including a mortgage on the Company's interest in its lease at the National Energy Laboratory of Hawaii Authority. The August 2012 Loan Agreement is partially guaranteed under the provisions of the U.S. Department of Agriculture (“USDA”) Rural Development Guarantee program.

In accordance with terms of the August 2012 Loan Agreement, monthly payments of principal and interest are required until the loan’s maturity on August 14, 2032. Interest on the loan accrues on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate (5.50% at December 31, 2018) plus 1.0% and is adjustable on the first day of each calendar quarter and fixed for that quarter. At no time shall the annual interest rate be less than 5.50%. The balance under the August 2012 Loan Agreement was $4,492,000 and $4,648,000 at December 31, 2018 and March 31, 2018, respectively.

The Loan includes a one-time origination and guaranty fees totaling $214,500 and an annual renewal fee payable in the amount of 0.25% of the USDA guaranteed portion of the outstanding principal balance as of December 31 of each year, beginning December 31, 2012. The USDA has guaranteed 80% of all amounts owing under the August 2012 Loan Agreement. The Company is subject to financial covenants and customary affirmative and negative covenants.  

On July 30, 2015, the Company entered into a loan agreement (the “2015 Loan Agreement”) that provides a term loan in an aggregate principal amount of $2,500,000 and is secured by all the Company’s assets. The 2015 Loan Agreement is partially guaranteed under the provisions of the USDA Rural Development Guarantee program.

In accordance with terms in the 2015 Loan Agreement, payment of principal and interest are required until its maturity on September 1, 2022. Interest on the loan accrues on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate (5.50% at December 31, 2018) plus 2.0% and is adjustable on the first day of each calendar quarter and fixed for that quarter.

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 The 2015 Loan includes a one-time origination and guaranty fee totaling $113,900 and an annual renewal fee payable in the amount of 0.50% of the USDA guaranteed portion of the outstanding principal balance as of December 31 of each year, beginning December 31, 2015. The USDA has guaranteed 80% of all amounts owing under the 2015 Loan. The Company is subject to financial covenants and customary affirmative and negative covenants.

At no time shall the annual interest rate be less than 6.00%. The 2015 Loan Agreement has a prepayment penalty of 5% for any prepayment made prior to the first anniversary of the date of the loan and each year thereafter the penalty is reduced by 1% each year until the fifth anniversary of such date when there will no longer be a prepayment penalty. The balance under the 2015 Loan Agreement was $1,475,000 and $1,726,000 at December 31, 2018 and March 31, 2018, respectively.

On October 6, 2017, the Company entered into an Equipment Finance Agreement (the “Equipment Agreement”), which provides up to $175,000 of financing for equipment. The interest rate on this loan is 4.75%. In accordance with terms in the Equipment Agreement, payment of principle and interest are required until its maturity on October 31, 2022. The balance under this loan was $134,000 and $156,000 at December 31, 2018 and March 31, 2018, respectively. 

Capital Leases 

The Company has three capital leases providing for $278,000 in equipment, secured by the equipment financed. The capital leases mature at various dates between May 2019 and March 2021 and are payable in 60 equal monthly payments, except for one which is payable in 36 equal monthly payments. The interest rates under these capital leases range from 4.18% to 12.90%. The aggregate balances under these leases were $98,000 and $148,000 at December 31, 2018 and March 31, 2018, respectively.

9. CONTINGENCIES

From time to time, the Company may be involved in litigation and investigations relating to claims and matters arising out of its operations in the normal course of business. The Company believes that it currently is not a party to any legal proceedings or claims which, individually or in aggregate, would have a material effect on its consolidated financial position, results of operations or cash flows. 

10. SHARE-BASED COMPENSATION

The Company has share-based compensation plans, which are more fully described in Note 9, Share-Based Compensation, to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K as filed with the SEC on June 15, 2018.

As of December 31, 2018, the Company had two equity-based compensation plans: the 2016 Equity Incentive Plan (the “2016 Plan”) and the 2014 Independent Director Stock Option and Restricted Stock Grant Plan (the “2014 Directors Plan”). The Company has also issued stock options, which remain outstanding as of December 31, 2018, under two equity-based compensation plans which have expired according to their terms: the 2005 Stock Option Plan (the “2005 Plan”) and the 2004 Independent Director Stock Option and Stock Grant Plan (the “2004 Directors Plan”). These plans allowed the Company to award stock options and shares of restricted common stock to eligible employees, certain outside consultants and independent directors. No additional awards will be issued under the 2005 Plan or the 2004 Directors Plan. 

The following table presents shares authorized, available for future grant and outstanding under each of the Company’s plans:

	As of December 31, 2018
	Authorized		Available		Outstanding
2016 Plan		1,300,000		1,113,022		170,975
2014 Directors Plan		350,000		184,400		12,000
2005 Plan		—		—		434,400
2004 Directors Plan		—		—		12,000
Total		1,650,000		1,297,422		629,375

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Stock Options

All stock option grants made under the equity-based compensation plans were issued at exercise prices no less than the Company’s closing stock price on the date of grant, determined by the Board of Directors or the Compensation Committee of the Board of Directors in accordance with the provisions of the respective plans.  The terms of each option grant include vesting, exercise, and other conditions set forth in a Stock Option Agreement evidencing each grant. No option can have a life in excess of ten (10) years. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The model requires various assumptions, including a risk-free interest rate, the expected term of the options, the expected stock price volatility over the expected term of the options, and the expected dividend yield. Compensation expense for employee stock options is recognized ratably over the vesting term. Compensation expense recognized for options issued under all Plans was $18,000 and $54,000 for the three and nine months ended December 31, 2018, respectively. Compensation expense recognized for options issued under all Plans was $13,000 and $47,000 for the three and nine months ended December 31, 2017, respectively. All stock-based compensation has been classified as general and administrative expense in the condensed consolidated statement of operations.

A summary of option activity under the Company’s stock plans for the nine months ended December 31, 2018 is presented below: 

Option Activity	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at March 31, 2018		589,400		$	4.06		4.9	$	675,300
Granted		—		$	—
Exercised		(6,000	)	$	2.85
Forfeited		(5,000	)	$	5.75
Outstanding at December 31, 2018		578,400		$	4.06		4.2	$	43,804
Exercisable at December 31, 2018		483,400		$	4.15		3.3	$	43,804

The aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise price optionees would have received if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price of $3.02 for such day.

A summary of the Company’s non-vested options for the nine months ended December 31, 2018 is presented below:

Nonvested Options	Shares			Weighted Average Grant-Date Fair Value
Nonvested at March 31, 2018		120,000		$	1.81
Granted		—			—
Vested		(25,000	)		1.71
Forfeited		—			—
Nonvested at December 31, 2018		95,000		$	1.83

As of December 31, 2018, total unrecognized stock-based compensation expense related to all unvested stock options was $127,000, which is expected to be expensed over a weighted average period of 1.6 years.

Subsequent to December 31, 2018, 50,000 stock options were granted from the 2016 Plan at an exercise price of $3.00 per share.

Restricted Stock

There were no grants of fully vested restricted stock issued to Non-Employee Directors for the three months ended December 31, 2018 and December 31, 2017. Grants of fully vested restricted stock issued to Non-Employee Directors was 47,223 shares and 57,501 shares for the nine months ended December 31, 2018 and December 31, 2017, respectively. Compensation expense recognized for fully vested restricted stock was $0 and $170,000 for the three and nine months ended December 31, 2018, respectively. Compensation expense recognized for fully vested restricted stock was $0 and $276,000 for the three and nine months ended December 31, 2017, respectively.

Restricted Stock Units (“RSUs”) 

RSUs are service-based awards granted to eligible employees under the 2016 Plan. Compensation expense recognized for RSUs issued under the 2016 Plan was $20,000 and $58,000 for the three and nine months ended December 31, 2018, respectively. Compensation expense recognized for RSUs issued under the 2016 Plan was $15,000 and $48,000 for the three and nine months ended December 31, 2017, respectively.

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On July 13, 2018, 22,449 RSUs were awarded to employees of the Company. This award is valued at $4.0252 per share, the closing market price of the Company’s common stock on the grant date, and vests over a period of two years. 

The following table summarizes information related to awarded RSUs: 

Nonvested Restricted Stock Units	Shares			Weighted Average Grant Price
Nonvested restricted stock units at March 31, 2018		39,675		$	3.89
Granted		23,923			4.10
Vested		(7,670	)		3.92
Forfeited		(4,953	)		4.08
Nonvested restricted stock units at December 31, 2018		50,975		$	3.97

As of December 31, 2018, total unrecognized stock-based compensation expense related to unvested restricted stock units was $140,000, which is expected to be expensed over a weighted average period of 1.8 years.

11. INCOME TAXES

On December 22, 2017 H.R. 1, originally known as the Tax Cuts and Jobs Act, (the “Tax Act”) was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from 34% to 21% effective January 1, 2018. The Company will compute its income tax expense for the March 31, 2019 fiscal year using a Federal Tax Rate of 21%. The 21% Federal Tax Rate will apply to fiscal years ending March 31, 2019 and each year thereafter. The Company completed the accounting for the income tax effects of the Tax Act as of March 31, 2018 and determined that the amount identified as provisional in the quarter ended December 31, 2017 was a materially correct amount. As a result, no measurement period adjustments have been recorded.

We utilize our estimated annual effective tax rate to determine our provision (benefit) for income taxes for interim periods. The income tax provision (benefit) is computed by multiplying the estimated annual effective tax rate by the year to date pre-tax book income (loss). We recorded an income tax expense of $73,000 and ($127,000) for the three months ended December 31, 2018 and 2017, respectively. We recorded an income tax expense of $33,000 and income tax benefit of ($105,000) for the nine months ended December 31, 2018 and 2017, respectively. Our effective tax rate was 20.2% and (1.6%) for the three and nine months ended December 31, 2018, respectively, and (13.0%) and (5.3%) for the three and nine months ended December 31, 2017, respectively. The effective tax rate for the three and nine months ended December 31, 2018 differs from the statutory rate of 21% as a result of state taxes (net of federal benefit) and the net change in valuation allowance against the net deferred tax asset the Company believes is not more likely than not to be realized.

The Company is subject to taxation in the United States and six state jurisdictions. The preparation of tax returns requires management to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. Management, in consultation with its tax advisors, files its tax returns based on interpretations that are believed to be reasonable under the circumstances. The income tax returns, however, are subject to routine reviews by the various taxing authorities.  As part of these reviews, a taxing authority may disagree with respect to the tax positions taken by management (“uncertain tax positions”) and therefore may require the Company to pay additional taxes. Management evaluates the requirement for additional tax accruals, including interest and penalties, which the Company could incur as a result of the ultimate resolution of its uncertain tax positions. Management reviews and updates the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, completion of tax audits, expiration of statute of limitations, or upon occurrence of other events.

As of December 31, 2018, there was no 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 income or expense in its consolidated condensed statements of operations, which is consistent with the recognition of these items in prior reporting periods.

With few exceptions, the Company is no longer subject to U.S. federal, state, local, and non-U.S. income tax examination by tax authorities for tax years before 2013.

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12. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the potentially dilutive effect of outstanding stock options using the “treasury stock” method.

Reconciliations between the numerator and the denominator of the basic and diluted earnings per share computations for the three months ended December 31, 2018 and 2017 are as follows:

	Three Months Ended December 31, 2018
	Net Loss		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands)
Basic income per share	$	288		5,836	$	0.05
Effect of dilutive securities — Common stock options		—		26		—
Diluted income per share	$	288		5,862	$	0.05

	Three Months Ended December 31, 2017
	Net Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands)
Basic income per share	$	1,107		5,749	$	0.19
Effect of dilutive securities — Common stock options		—		82		—
Diluted income per share	$	1,107		5,831	$	0.19

Reconciliations between the numerator and the denominator of the basic and diluted (loss) earnings per share computations for the nine months ended December 31, 2018 and 2017 are as follows:

	Nine Months Ended December 31, 2018
	Net Loss			Shares		Per Share
	(Numerator)			(Denominator)		Amount
	(in thousands)
Basic and diluted loss per share	$	(2,123	)		5,809	$	(0.37	)

	Nine Months Ended December 31, 2017
	Net Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands)
Basic income per share	$	2,083		5,714	$	0.36
Effect of dilutive securities—Common stock options		—		60		—
Diluted income per share	$	2,083		5,774	$	0.36

Potentially dilutive securities include 75,000 outstanding options to purchase common stock for the three and nine months ended December 31, 2018 and 20,991 restricted stock units for the three and nine months ended December 31, 2018. Diluted earnings per share does not include the impact of 75,000 options to purchase common stock for the three month period ended December 31, 2018, as the effect of their inclusion would be anti-dilutive. As a result of the net loss for the nine month period ended December 31, 2018, no potentially dilutive securities are included in the calculation of diluted loss per share because such effect would be anti-dilutive. Diluted earnings per share does not include the impact of 75,000 options to purchase common stock for the three and nine month period ended December 31, 2017, as the effect of their inclusion would be anti-dilutive. Restricted stock units become dilutive within the period granted and remain dilutive until the units vest and are issued as common stock.

13. RELATED PARTY TRANSACTIONS AND BALANCES

During the nine months ended December 31, 2018, the Company entered into a consulting agreement with an effective date of May 5, 2018 with a vendor that employs one of our independent directors.  The Company’s independent director is not named in or involved in the performance of the consulting agreement. The contract amount of $120,000 is reflected in general and administrative expense during the nine months ended December 31, 2018 and $120,000 in payments have been made against the contract during the nine months ended December 31, 2018.  

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

Overview:

We are a world leader in the production of high value natural products derived from microalgae. Incorporated in 1983, we are guided by the principle of providing beneficial, quality microalgal products for health and human nutrition in a sustainable, reliable and environmentally sensitive operation. We are GMP (Good Manufacturing Practices) certified by the Natural Products Association™, reinforcing our commitment to quality in our products, quality in our relationships (with our customers, suppliers, employees and the communities we live in), and quality of the environment in which we work. Our products include:

● Hawaiian BioAstin® natural astaxanthin - a powerful dietary antioxidant shown to support and maintain the body’s natural inflammatory response, to enhance skin, and to support eye and joint health. It has expanding applications as a human nutraceutical and functional food ingredient; and

● Hawaiian Spirulina Pacifica® - a nutrient-rich dietary supplement used for extra energy, a strengthened immune system, cardiovascular benefits and as a source of antioxidant carotenoids

Microalgae are a diverse group of microscopic plants that have a wide range of physiological and biochemical characteristics and contain, among other things, high levels of natural protein, amino acids, vitamins, pigments and enzymes. Microalgae have the following properties that make commercial production attractive: (1) microalgae grow much faster than land grown plants, often up to 100 times faster; (2) microalgae have uniform cell structures with no bark, stems, branches or leaves, permitting easier extraction of products and higher utilization of the microalgae cells; and (3) the cellular uniformity of microalgae makes it practical to control the growing environment in order to optimize a particular cell characteristic. Efficient and effective cultivation of microalgae requires consistent light, warm temperatures, low rainfall and proper chemical balance in a very nutrient-rich environment, free of environmental contaminants and unwanted organisms. This is a challenge that has motivated us to design, develop and implement proprietary production and harvesting technologies, systems and processes in order to commercially produce human nutritional products derived from microalgae.

Our production of these products at the 96-acre facility on the Kona Coast of the island of Hawaii provides several benefits. We selected the Keahole Point location in order to take advantage of relatively consistent warm temperatures, sunshine and low levels of rainfall needed for optimal cultivation of microalgae. This location also offers us access to cold deep ocean water, drawn from an offshore depth of 2,000 feet, which we use in our Ocean-Chill Drying system to eliminate the oxidative damage caused by standard drying techniques and as a source of trace nutrients for microalgal cultures. The area is also designated a Biosecure Zone, with tight control of organisms allowed into the area and free of genetically modified organisms (GMO’s). We believe that our technology, systems, processes and favorable growing location generally permit year-round harvest of our microalgal products in a cost-effective manner.

Results of Operations

The following tables present selected consolidated financial data for each of the periods indicated ($ in thousands):

	Three Months Ended						Nine Months Ended
	December 31,						December 31,
	2018			2017			2018			2017
Net sales	$	10,044		$	9,150		$	24,143		$	26,014
Net sales increase (decrease)		9.8	%					(7.2	)%
Gross profit	$	4,116		$	4,240		$	8,237		$	11,463
Gross profit as % of net sales		41.0	%		46.3	%		34.1	%		44.1	%
Operating expenses	$	3,621		$	3,130		$	9,913		$	9,114
Operating expenses as % of net sales		36.0	%		34.2	%		41.1	%		35.0	%
Operating income (loss)	$	495		$	1,110		$	(1,676	)	$	2,349
Operating income (loss) as % of net sales		4.9	%		12.1	%		(6.9	)%		9.0	%
Income tax expense (benefit)	$	73		$	(127	)	$	33		$	(105	)
Net income (loss)	$	288		$	1,107		$	(2,123	)	$	2,083

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Comparison of the Three Months Ended December 31, 2018 and 2017

Net Sales (in thousands)

	Three Months Ended
	December 31,				$			%
	2018		2017		Change			Change
Packaged sales
Astaxanthin	$	6,012	$	5,746	$	266			4.6	%
Spirulina		3,212		2,268		944			41.6	%
Total Packaged sales	$	9,224	$	8,014	$	1,210			15.0	%
Bulk sales
Astaxanthin	$	287	$	317	$	(30	)		(9.5	)%
Spirulina		533		819		(286	)		(34.9	)%
Total Bulk sales	$	820	$	1,136	$	(316	)		(27.8	)%
Total sales
Astaxanthin	$	6,299	$	6,063	$	236			3.9	%
Spirulina		3,745		3,087		658			21.3	%
Total sales	$	10,044	$	9,150	$	894			9.8	%

The net sales increase of 9.8% for the current quarter compared to the same period last year was driven by higher spirulina sales (up 21.3%) due to a 16% improvement in spirulina production over the same period in the prior year. This resulted in a 41.6% increase in packaged spirulina sales offset by a 34.9% decrease in bulk spirulina sales. The decrease in bulk spirulina sales is attributed to the lack of inventory available for bulk customers. One customer made up 84% of the $0.7 million increase in packaged spirulina sales, this occurred in October 2018 with orders placed to build customers inventory. International sales represented 9% of net sales for the current quarter compared to 24% for the same period last year. International sales were negatively impacted by the lack of spirulina inventory available for bulk customers.

Gross Profit Our gross profit margin for the current quarter decreased 5.3 percentage points compared to the same period last year, due to increased astaxanthin cost resulting from an 18% reduction in astaxanthin production as compared to the same three month period in the prior year.

Operating Expenses Operating expenses increased $0.5 million for the current quarter compared to the same period in last year. General and administrative expenses remained consistent with the same period of the prior year.  Sales and marketing expenses increased $0.4 million due to a $0.5 million increase in advertising and promotion costs, offset by a $0.1 million decrease in outside services expense. Research and development expenses increased $0.1 million due to a reallocation of personnel resulting from changes in responsibilities.

 Income Taxes We recorded income tax expense of $0.1 million for the third quarter of this fiscal year with an effective tax rate of 20.2%, compared to an income tax benefit of $0.1 million for the same period last year with an effective rate of (13.0%). Income tax expense for the quarter included a discrete tax expense of approximately $15,000 as a result of greater state tax expense and greater AMT credit benefit than was originally estimated in our tax provision for our fiscal year ended March 30, 2018. This increased the effective tax rate for this quarter by 4.1%.We continue to carry a full valuation allowance on our net deferred tax assets.

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Comparison of the Nine Months Ended December 31, 2018 and 2017

Net Sales (in thousands)

	Nine Months Ended
	December 31,				$			%
	2018		2017		Change			Change
Packaged sales
Astaxanthin	$	15,388	$	15,649	$	(261	)		(1.7	)%
Spirulina		6,208		6,560		(352	)		(5.4	)%
Total Packaged sales	$	21,596	$	22,209	$	(613	)		(2.8	)%
Bulk sales
Astaxanthin	$	884	$	748	$	136			18.2	%
Spirulina		1,663		3,057		(1,394	)		(45.6	)%
Total Bulk sales	$	2,547	$	3,805	$	(1,258	)		(33.1	)%
Total sales
Astaxanthin	$	16,272	$	16,397	$	(125	)		(0.8	)%
Spirulina		7,871		9,617		(1,746	)		(18.2	)%
Total sales	$	24,143	$	26,014	$	(1,871	)		(7.2	)%

The net sales decrease of 7.2% for the first nine months of fiscal 2019 compared to the same period last year was driven by an 18.2% decrease in sales of our spirulina due to lower supply that was the result of the complete re-inoculation that took place in the first quarter of this fiscal year. International sales represented 14% of net sales for the current quarter compared to 23% for the same period last year. International sales were negatively impacted by the lack of spirulina inventory available for bulk customers.

Gross Profit Our gross profit margin for the first nine months of fiscal 2019 decreased 10.0 percentage points compared to the same period last year due primarily to the spirulina re-inoculation and the resulting decrease in supply. The lower spirulina production levels in both Q4 of fiscal 2018 (-63% compared to Q4 of fiscal 2017) and in Q1 of the current fiscal year (-76% compared to Q1 of fiscal 2018) has had a negative impact on our year-to-date performance. In addition to decreased sales volume, the lower production levels resulted in a $1.4 million increase in cost of goods and reduced gross profit margin by 5.8 percentage points for the first nine months of the current fiscal year. The 15% reduction in astaxanthin production resulted in a $0.8 million reduction in gross profit, or 3.3 percentage points, as compared to the prior.

Operating Expenses Operating expenses increased $0.8 million for the first nine months of fiscal 2019 compared to the same period in last year. General and administrative expenses remained consistent with the same period of the prior year.  Sales and marketing expenses increased $0.5 million due to a $0.9 million increase in advertising and promotion costs, offset by a $0.4 million decrease in outside services expense. Research and development expenses increased $0.2 million due to a reallocation of personnel resulting from changes in responsibilities.

 Income Taxes We recorded income tax expense of $33,000 for the first nine months of this year with an effective tax rate of 1.6%, compared to an income tax benefit of $105,000 for the same period last year with an effective rate of (5.3%). Income tax expense for the first nine months of this year included a discrete tax expense of approximately $15,000 as a result of greater state tax expense and greater AMT credit benefit than was originally estimated in our tax provision for our fiscal year ended March 30, 2018. This reduced the effective tax rate for this period by 0.7%.We continue to carry a full valuation allowance on our net deferred tax assets.

Liquidity and Capital Resources

As of December 31, 2018, we had cash of $1.6 million and working capital of $6.2 million compared to $1.3 million and $7.9 million, respectively, at March 31, 2018. On August 30, 2016, the Credit Agreement, which we and First Foundation Bank (the Bank) entered into on June 3, 2016, became effective. The Credit Agreement allows us to borrow up to $2.0 million on a revolving basis. The line of credit was renewed on August 30, 2018 and will expire on August 30, 2019. At December 31, 2018, we had borrowed $1.75 million and had $0.25 million available on the line. Along with the renewal, the bank reduced the current ratio requirement on the credit line and all term loans to 1.50:1; the former requirement was 2.10:1.

As of December 31, 2018, we had $6.0 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, we are subject to annual financial covenants, customary affirmative and negative covenants and certain subjective acceleration clauses. We were in compliance with these financial covenants at March 31, 2018.

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Funds generated by operating activities and available cash continue to be our most significant sources of liquidity for working capital requirements, debt service and funding of maintenance levels of capital expenditures. Based upon our fiscal year 2019 operating plan and related cash flow projections and our 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 our operations for at least the next twelve months, and our current ratio is expected to be in compliance with the annual term loan covenant requirement as of March 31, 2019. However, no assurances can be provided that we will achieve our operating plan and cash flow objectives for the fiscal year ended March 31, 2019 or our 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.

Cash Flows The following table summarizes our cash flows for the periods indicated ($ in thousands):

	Nine months ended December 31
	2018			2017
Total cash provided by (used in):
Operating activities	$	(42	)	$	1,468
Investing activities		(475	)		(732	)
Financing activities		696			(380	)
Increase in cash	$	179		$	356

Cash used in operating activities for the nine months ended December 31, 2018 was the result of a net loss, offset by non-cash charges of $1.8 million and a decrease in working capital of $0.3 million. The decrease in working capital was primarily the result of a $1.1 million increase in inventory, offset by a $0.5 million increase in accounts payable and a $0.8 million decrease in accounts receivable. The $1.1 million increase in inventory is comprised primarily of a $0.9 million increase in spirulina inventory and related nutrient supplies, and a $0.3 million increase in astaxanthin inventory.

Cash used in investing activities for the nine months ended December 31, 2018 includes costs for leasehold improvements and equipment acquisitions at our Kona facility, including the cash payment for the purchase of assets from Cellana LLC.

Cash provided by financing activities for the nine months ended December 31, 2018 consists of a $1.3 million increase in our line of credit offset by $0.06 principal payments made on the short-term contract obligation to acquire the Cellana assets and by the $0.5 million in principal payments on debt in the normal course of business. The line of credit advance was used to fund operations during the re-inoculation period and is expected to be repaid through cash flow from operating activities in future quarters.

Sources and Uses of Capital

At December 31, 2018, our working capital was $6.2 million, a decrease of $1.7 million compared to March 31, 2018. The decrease is due primarily to an increase in short term debt and accounts payable.

Our results of operations and financial condition can be affected by numerous factors, many of which are beyond our control and could cause future results of operations to fluctuate materially as it has in the past. Future operating results may fluctuate as a result of changes in sales volumes to our largest customers, weather patterns, increased competition, increased materials, nutrient and energy costs, government regulations and other factors beyond our control.

A significant portion of our expense levels are relatively fixed, so the timing of increases in expenses is based in large part on forecasts of future sales. If net sales are below expectations in any given period, the adverse impact on results of operations may be magnified by our inability to adjust spending quickly enough to compensate for the sales shortfall. We may also choose to reduce prices or increase spending in response to market conditions, which may have a material adverse effect on financial condition and results of operations.

Based upon our current operating plan, analysis of our consolidated financial position and projected future results of operations, we believe that our operating cash flows, cash balances and working capital will be sufficient to finance current operating requirements, debt service requirements, and routine planned capital expenditures, for the next twelve (12) months.

20

Outlook 

This outlook section contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially.

Our strategic direction has been to position the Company as a world leader in the production and marketing of high-value natural products from microalgae. We are vertically aligned, producing raw materials in the form of microalgae processed at our 96-acre facility in Hawaii, and integrating those raw materials into finished products. In fiscal 2019, our primary focus is on building our consumer brands, increasing our astaxanthin production volume and improving the consistency of our production for both astaxanthin and spirulina. We will continue to put emphasis on our Nutrex Hawaii consumer products to introduce them to a broader consumer market, and leverage our experience and reputation for quality, building nutritional brands which promote health and well-being. The foundation of our nutritional products is naturally cultivated Hawaiian Spirulina Pacifica® in powder and tablet form; and BioAstin® Hawaiian Astaxanthin® antioxidant in extract and softgel form. Information about our Company and our products can be viewed at www.cyanotech.com and www.nutrex-hawaii.com. Consumer products can also be purchased online at www.nutrex-hawaii.com.

We are focused on sustainability of production levels in order to promote growth in our astaxanthin and spirulina product lines. We will continue to improve and expand these lines to meet the demand of consumers. Our recent re-inoculation of our spirulina ponds was a necessary step toward sustaining long-term production levels.  We will continue to promote the nutritional superiority of Hawaiian grown microalgae to maintain and expand market share. Significant sales variability between periods and even across several periods can be expected based on historical results.

Gross profit margin percentages going forward will be impacted by production volumes and continued pressure on input costs and greater competition in the market place. This could cause margins to decline in future periods. We will continue to focus on higher margin consumer products that promote health and well-being. We are dedicated to continuous improvements in process and production methods to stabilize and increase production levels for the future.

Producing the highest quality microalgae is a complex biological process which requires balancing numerous factors including microalgal strain variation, temperature, acidity, nutrient and other environmental considerations, some of which are not within our control. An imbalance or unexpected event can occur resulting in production levels below normal capacity. The allocation of fixed production overheads (such as depreciation, rent and general insurance) to inventories is determined based on normal production capacity. When our production volumes are below normal capacity limits, certain fixed production overhead costs cannot be inventoried and are recorded immediately in cost of sales. In addition, when production costs exceed historical averages, we evaluate whether such costs are one-time-period charges or an ongoing component of inventory cost.

To manage our cash resources effectively, we will continue to balance production in light of sales demand, minimizing the cost associated with build-ups in inventory when appropriate. We could experience unplanned cash outflows and may need to utilize other cash resources to meet working capital needs. A prolonged downturn in sales could impair our ability to generate sufficient cash for operations and minimize our ability to attract additional capital investment which could become necessary in order to expand facilities, enter into new markets or maintain optimal production levels.

Our future results of operations and the other forward-looking statements contained in this Outlook, in particular the statements regarding revenues, gross margin and capital spending, involve a number of risks and uncertainties. In addition to the factors discussed above, any of the following could cause actual results to differ materially: business conditions and growth in the natural products industry and in the general economy; changes in customer order patterns; changes in demand for natural products in general; changes in weather conditions; changes in health and growing conditions of our astaxanthin and spirulina products; competitive factors, such as increased production capacity from competing spirulina and astaxanthin producers and the resulting impact, if any, on world market prices for these products; government actions and increased regulations both domestic and foreign; shortage of manufacturing capacity; and other factors beyond our control. Risk factors are discussed in detail in Part II, Item 1A of this quarterly report and in Part I, Item 1A of our Form 10-K report for the year ended March 31, 2018.

We believe that our technology, systems, processes and favorable growing location generally permit year-round harvest of our microalgal products in a cost-effective manner. However, previously experienced imbalances in the highly complex biological production systems, together with volatile energy costs and rapidly changing world markets, suggest a need for continuing caution with respect to variables beyond our reasonable control. Therefore, we cannot, and do not attempt to, provide any definitive assurance with regard to our technology, systems, processes, location, or cost-effectiveness.

Off-Balance Sheet Arrangements

As of December 31, 2018, we had no off-balance sheet arrangements or obligations.

21

Impact of Inflation

Inflationary factors such as increases in the costs of materials and labor directly affect the Company's operations. Most of the Company's leases provide for cost-of-living adjustments and require it to pay for insurance and maintenance expenses, all of which are subject to inflation. Additionally, the Company’s future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that the Company will be able to pass on increased costs to its customers.

Depreciation expense is based on the historical cost to the Company of its fixed assets, and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.

Critical Accounting Policies and Estimates

Our critical accounting policies and estimates are disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended March 31, 2018 filed with the SEC on June 15, 2018. In the nine months ended December 31, 2018, 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 April 1, 2018, as described below.

Revenue Recognition

The Company records revenue based on the five-step model which includes: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) 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 30 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.

Item 3.   Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes to our market risk during the nine months ended December 31, 2018. For additional information, refer to our Annual Report on Form 10-K for the year ended March 31, 2018.

Item 4.    Controls and Procedures 

Disclosure Controls and Procedures 

Under the supervision and with the participation of our management, including our chief executive officer (“CEO”) and chief financial officer (“CFO”), we have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act as of the end of the period covered by this Report. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.  

22

Management’s Report on Internal Control over Financial Reporting 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2018. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control - Integrated Framework” (2013 Framework). Based on that assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2018. 

Changes to Internal Control Over Financial Reporting 

On April 1, 2018, the Company adopted the new revenue recognition accounting standard, “Revenue from Contracts with Customers.” As a result, we made additions and/or modifications to policies, procedures, and controls that have affected our internal control over financial reporting, including changes to accounting policies and procedures, operational processes and documentation practices.

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 December 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  

Limitations on the Effectiveness of Controls 

Our management, including our CEO and CFO, do not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errors and all fraud. A control system no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected. 

The inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistakes. Controls can also be circumvented by the individual acts of some persons, or by collusion of two or more people. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 

This Form 10-Q should be read in conjunction with Item 9A “Controls and Procedures” of the Company’s Form 10-K for the fiscal year ended March 31, 2018, filed June 15, 2018.

23

PART II.     OTHER INFORMATION

Item 1.     Legal Proceedings 

From time to time the Company may become party to lawsuits and claims that arise in the ordinary course of business relating to employment, intellectual property, and other matters. There were no significant legal matters outstanding at December 31, 2018. 

Item 1A.     Risk Factors

For a discussion of the risk factors relating to our business, please refer to Part I, Item 1A of our Form 10-K for the year ended March 31, 2018, which is incorporated by reference herein.

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

None.

Item 3.    Defaults upon Senior Securities

None.

Item 5.    Other Information

None.

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Item 6. Exhibits

a)     The following exhibits are furnished with this report:

31.1	Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 13, 2019.
31.2	Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 13, 2019.
32	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of February 13, 2019.
99.1	Press Release dated February 13, 2019.
101	The following financial statements from Cyanotech Corporation’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements.

25

SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	CYANOTECH CORPORATION
	(Registrant)
February 13, 2019	By:	/s/ Mawae R. Morton
(Date)		Mawae R. Morton
		Chief Executive Officer; Director
February 13, 2019	By:	/s/ Brian B. Orlopp
(Date)		Brian B. Orlopp
		Vice President — Finance & Administration and CFO
		(Principal Financial and Accounting Officer)

26

EXHIBIT INDEX

Exhibit Number	Description
31.1	Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 13, 2019.
31.2	Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 13, 2019.
32	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of February 13, 2019.
99.1	Press Release dated February 13, 2019.
101	The following financial statements from Cyanotech Corporation’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements

27

EX-31.1

Exhibit 31.1

Certification Pursuant

To 18 U. S. C. Section 1350,

As Adopted Pursuant To

Section 302 of the Sarbanes-Oxley Act of 2002

I, Mawae R. Morton, Chief Executive Officer certify that:

1. I have reviewed this quarterly report on Form 10-Q of Cyanotech Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: February 13, 2019	/s/ Mawae R. Morton
	Mawae R. Morton
	Chief Executive Officer; Director

EX-31.2

Exhibit 31.2

Certification Pursuant

To 18 U. S. C. Section 1350,

As Adopted Pursuant To

Section 302 of the Sarbanes-Oxley Act of 2002

I, Brian B. Orlopp, Chief Financial Officer certify that:

1. I have reviewed this quarterly report on Form 10-Q of Cyanotech Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 (e) and 15d-15 (e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: February 13, 2019	/s/ Brian B. Orlopp
	Brian B. Orlopp
	Vice President—Finance & Administration and CFO
	(Principal Financial and Accounting Officer)

EX-32

Exhibit 32

Certification of CEO and CFO

Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906

of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Cyanotech Corporation (the “Company”) on Form 10-Q for the period ended December 31, 2018 (the “Report”) as filed with the Securities and Exchange Commission on the date hereof, each of the undersigned certifies that:

1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act (15 U.S.C. 78m or 78o (d)); and

2) The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

Date: February 13, 2019	/s/ Mawae R. Morton
	Mawae R. Morton
	Chief Executive Officer; Director
Date: February 13, 2019	/s/ Brian B. Orlopp
	Brian B. Orlopp
	Vice President—Finance & Administration and CFO
	(Principal Financial and Accounting Officer)

EX-99.1

Exhibit 99.1

News Release  Contact: Bruce Russell (310) 346-6131 brussell@cyanotech.com

Cyanotech Reports Financial Results for the Third Quarter

and First Nine Months of Fiscal Year 2019

— Net Sales Increase 9.8% to Record $10,044,000 —

KAILUA KONA, Hawaii (February 13, 2019) — Cyanotech Corporation (Nasdaq Capital Market: CYAN), a world leader in microalgae-based, high-value nutrition and health products, announced financial results for the third quarter and first nine months of fiscal year 2019, ended December 31, 2018.

Third Quarter Fiscal 2019

Cyanotech Corporation achieved its highest quarterly net sales total during the third quarter of fiscal 2019 with net sales of $10,044,000 compared to $9,150,000 in the third quarter of fiscal 2018. Gross profit was $4,116,000, with gross profit margin of 41.0%, compared to gross profit of $4,240,000 and gross profit margin of 46.3%. Operating income was $495,000 compared to operating income of $1,110,000. Net income was $288,000 or $0.05 per diluted share, compared to net income of $1,107,000 or $0.19 per diluted share.

Commenting on the third quarter results (changes shown vs. same period of fiscal 2018), Cyanotech’s Chief Executive Officer, Mawae Morton, said:

“Though we are encouraged by the record sales numbers for the quarter, we remain unsatisfied with current profit margins. To improve margins, we intend to continue to adjust and improve our cultivation techniques and technologies, and we will continue to focus on deepening our brand awareness in the consumer market. We are also continuing to explore potential new revenue streams, including leveraging our extraction capacity and expertise to perform extraction services for other algae producers. With improved profitability, the Company will be better positioned to self-fund the various opportunities for growth that are both directly in front of us and over the horizon.”

Providing further detail about the quarterly results, company CFO Brian Orlopp added,

“Net sales reflected an increase of 9.8%, which was driven by higher spirulina sales (up 21.3%) due to a 16% improvement in spirulina production over the same period in the prior year. This resulted in a 41.6% increase in packaged spirulina sales to Nutrex Hawaii customers who were previously constrained by limited product availability. Bulk spirulina sales declined 34.9% as we focused on Nutrex Hawaii orders and rebuilding inventory of finished products. Demand for Hawaiian Spirulina remains high since we have returned to full production, and at the end of the quarter we continued to have a large number of open orders for both our packaged and bulk spirulina products.

“Astaxanthin sales were up 3.9% compared to the same quarter last year. International sales represented 9% of net sales for the current quarter compared to 24% for the same period last year. Direct sales of finished products into the Canadian market continue to build on the amazon.ca online marketplace after its launch in Q2 of fiscal 2019, and sale of the BioAstin Eye Formula continued to grow after its re-launch on costco.com in Q1 of fiscal 2019.

73-4460 Queen Kaahumanu Highway, #102  ~  Kailua-Kona, Hawaii 96740

(808) 326-1353  fax (808) 329-3597  ~ www.cyanotech.com

“Our gross profit margin decreased 5.3 percentage points compared to the same period last year. This reduction was mainly due to higher costs in the production of astaxanthin, driven by an 18% reduction in astaxanthin production compared with the third quarter of fiscal 2018. Operating expenses increased $0.5 million. General and administrative expenses remained consistent while sales and marketing expenses increased $0.4 million due to a $0.5 million increase in advertising and promotion costs, offset by a $0.1 million decrease in outside services expense. Research and development expenses increased $0.1 million due to a reallocation of personnel resulting from changes in responsibilities and reporting.”

“Additionally”, Mr. Morton reported, “the Company continues to transition with the restructuring of its executive team, in order to provide the diversity and quality of products that our customers expect, and the sound and consistent financial performance that our long term partners and shareholders do as well.”

First Nine Months Fiscal 2019

For the first nine months ended December 31, 2018 compared to the first nine months ended December 31, 2017, net sales were $24,143,000 compared to $26,014,000. Gross profit was $8,237,000, with gross profit margin of 34.1%, compared to $11,463,000 and 44.1%. Net loss was ($2,123,000) or ($0.37) per diluted share, compared to net income of $2,083,000 or $0.36 per diluted share.

Trailing 12 Months

For the trailing 12 months ended December 31, 2018 compared to the trailing 12 months ended December 31, 2017, net sales were $32,244,000 compared to $33,267,000. Gross profit was $10,145,000, with gross profit margin of 31.5%, compared to $14,124,000 and 42.5%. Net loss was ($3,181,000) or ($0.55) per diluted share, compared to net income of $1,810,000 or $0.32 per diluted share.

Please review the Company’s Form 10-Q for the period ended December 31, 2018 for more detailed information.

— Cyanotech will host a Skype broadcast at 8 p.m. EDT on Thursday, February 14, 2019 to respond to questions about its operating results and other topics of interest. Interested parties are asked to submit questions to questions@cyanotech.com before 12 p.m. EDT on Thursday, February 14, 2019. The Company will respond only to relevant questions relating to the Company’s third quarter fiscal 2019 financial performance, and will not be accepting any questions or comments during the broadcast.

To join the broadcast, please browse http://cyanotech.com/meet approximately five minutes prior to the start time.

About Cyanotech — Cyanotech Corporation, a world leader in microalgae technology for over 30 years, produces BioAstin® Hawaiian Astaxanthin® and Hawaiian Spirulina Pacifica®. These all natural, dietary ingredients and supplements leverage our experience and reputation for quality, building nutritional brands which promote health and well-being. The Company’s mission is to fulfill the promise of whole health through Hawaiian microalgae. Cyanotech’s BioAstin® offers superior antioxidant activity which supports skin, eye and joint health, as well as recovery from exercise*. Cyanotech's Spirulina products offer nutrition that supports cardiovascular health and immunity.* All Cyanotech products are produced from microalgae grown at our 96-acre facility in Kona, Hawaii using patented and proprietary technology and are Generally Recognized as Safe (GRAS) for use in food products. Cyanotech sells its products direct to consumers at retail locations in the United States and online at www.nutrex-hawaii.com and also distributes to dietary supplement, nutraceutical and cosmeceutical manufacturers and marketers. The Company is regulated by the FDA. Visit www.cyanotech.com for more information.

73-4460 Queen Kaahumanu Highway, #102  ~  Kailua-Kona, Hawaii 96740

(808) 326-1353  fax (808) 329-3597  ~ www.cyanotech.com

*These statements have not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure or prevent any disease.

“Safe Harbor” Statement under the U.S. Private Securities Litigation Reform Act of 1995 Besides statements of present fact and historical fact, this press release may contain forward-looking statements. Forward-looking statements relate to the future and are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by forward-looking statements. We caution against relying on forward-looking statements. Important factors that could change actual, future results include: changes in sales levels to our largest customers, weather patterns in Hawaii, production problems, risks associated with new products, foreign exchange fluctuations, and availability of financing, as well as national and global political, economic, business, competitive, market and regulatory conditions. Other factors are more fully detailed in the Company’s annual Form 10-K filings with the Securities and Exchange Commission.

Financial Tables Follow: The following tables do not contain footnotes or other information contained in the Company’s Form 10-Q for the period ended December 31, 2018, which can be found on the Cyanotech website (www.cyanotech.com) under Investors>Investor Filings upon filing. As such the following Financial Tables are provided only as a guide and other factors are more fully detailed in the Company’s annual Form 10-K filings with the Securities and Exchange Commission.

73-4460 Queen Kaahumanu Highway, #102  ~  Kailua-Kona, Hawaii 96740

(808) 326-1353  fax (808) 329-3597  ~ www.cyanotech.com

CYANOTECH CORPORATION 

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	December 31, 2018			March 31, 2018
ASSETS
Current assets:
Cash	$	1,573		$	1,329
Accounts receivable, net of allowance for doubtful accounts of $27 at December 31, 2018 and $27 at March 31, 2018		1,883			2,664
Inventories, net		10,112			9,034
Prepaid expenses and other current assets		641			590
Total current assets		14,209			13,617
Equipment and leasehold improvements, net		15,183			15,734
Restricted cash		—			65
Other assets		291			291
Total assets	$	29,683		$	29,707
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,055		$	3,527
Accrued expenses		1,073			892
Short term contract obligation		332			—
Line of credit		1,750			500
Current maturities of long-term debt		663			655
Customer deposits		172			133
Total current liabilities		8,045			5,707
Long-term debt, less current maturities		5,328			5,790
Other long-term liabilities		57			103
Total liabilities		13,430			11,600
Commitments and contingencies
Stockholders’ equity:
Preferred stock of $0.01 par value, authorized 10,000,000 shares; no shares issued and outstanding		—			—
Common stock of $0.02 par value, shares authorized 50,000,000; 5,836,110 shares issued and outstanding at December 31, 2018 and 5,772,032 shares at March 31, 2018		117			115
Additional paid-in capital		32,318			32,051
Accumulated deficit		(16,182	)		(14,059	)
Total stockholders’ equity		16,253			18,107
Total liabilities and stockholders’ equity	$	29,683		$	29,707

73-4460 Queen Kaahumanu Highway, #102  ~  Kailua-Kona, Hawaii 96740

(808) 326-1353  fax (808) 329-3597  ~ www.cyanotech.com

CYANOTECH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended December 31,						Nine Months Ended December 31,
	2018			2017			2018			2017
NET SALES	$	10,044		$	9,150		$	24,143		$	26,014
COST OF SALES		5,928			4,910			15,906			14,551
Gross profit		4,116			4,240			8,237			11,463
OPERATING EXPENSES:
General and administrative		1,337			1,368			4,190			4,132
Sales and marketing		2,068			1,620			5,088			4,549
Research and development		216			142			635			433
Total operating expenses		3,621			3, 130			9,913			9,114
Income (loss) from operations		495			1,110			(1,676	)		2,349
Interest expense, net		(134	)		(130	)		(414	)		(371	)
Income(loss) before income taxes		361			980			(2,090	)		1,978
INCOME TAX EXPENSE (BENEFIT)		73			(127	)		33			(105	)
NET INCOME (LOSS)	$	288		$	1,107		$	(2,123	)	$	2,083
NET INCOME (LOSS) PER SHARE:
Basic	$	0.05		$	0.19		$	(0.37	)	$	0.36
Diluted	$	0.05		$	0.19		$	(0.37	)	$	0.36
SHARES USED IN CALCULATION OF NET INCOME (LOSS) PER SHARE:
Basic		5,836			5,749			5,809			5,714
Diluted		5,862			5,831			5,809			5,774

73-4460 Queen Kaahumanu Highway, #102  ~  Kailua-Kona, Hawaii 96740

(808) 326-1353  fax (808) 329-3597  ~ www.cyanotech.com

XML

Document And Entity Information - shares	9 Months Ended
	Dec. 31, 2018	Feb. 12, 2019
Document Information [Line Items]
Entity Registrant Name	Cyanotech Corp
Entity Central Index Key	0000768408
Trading Symbol	cyan
Current Fiscal Year End Date	--03-31
Entity Filer Category	Non-accelerated Filer
Entity Current Reporting Status	Yes
Entity Emerging Growth Company	false
Entity Small Business	true
Entity Common Stock, Shares Outstanding (in shares)		5,836,110
Document Type	10-Q
Document Period End Date	Dec. 31, 2018
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Amendment Flag	false

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) - USD ($) $ in Thousands	Dec. 31, 2018	Mar. 31, 2018
Current assets:
Cash	$ 1,573	$ 1,329
Accounts receivable, net of allowance for doubtful accounts of $27 at December 31, 2018 and $27 at March 31, 2018	1,883	2,664
Inventories, net	10,112	9,034
Prepaid expenses and other current assets	641	590
Total current assets	14,209	13,617
Equipment and leasehold improvements, net	15,183	15,734
Restricted cash		65
Other assets	291	291
Total assets	29,683	29,707
Current liabilities:
Accounts payable	4,055	3,527
Accrued expenses	1,073	892
Short-term contract obligation	332
Line of credit	1,750	500
Current maturities of long-term debt	663	655
Customer deposits	172	133
Total current liabilities	8,045	5,707
Long-term debt, less current maturities	5,328	5,790
Other long-term liabilities	57	103
Total liabilities	13,430	11,600
Commitments and contingencies
Stockholders’ equity:
Preferred stock of $0.01 par value, authorized 10,000,000 shares; no shares issued and outstanding
Common stock of $0.02 par value, shares authorized 50,000,000; 5,836,110 shares issued and outstanding at December 31, 2018 and 5,772,032 shares at March 31, 2018	117	115
Additional paid-in capital	32,318	32,051
Accumulated deficit	(16,182)	(14,059)
Total stockholders’ equity	16,253	18,107
Total liabilities and stockholders’ equity	$ 29,683	$ 29,707

XML

Condensed Consolidated Balance Sheets (Current Period Unaudited) (Parentheticals) - USD ($) shares in Thousands, $ in Thousands	Dec. 31, 2018	Mar. 31, 2018
Accounts receivable, allowance for doubtful accounts	$ 27	$ 27
Preferred stock, par value (in dollars per share)	$ 0.01	$ 0.01
Preferred, authorized shares (in shares)	10,000,000	10,000,000
Preferred, issued shares (in shares)	0	0
Preferred outstanding, shares (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.02	$ 0.02
Common stock, shares authorized (in shares)	50,000,000	50,000,000
Common stock, shares issued (in shares)	5,836,110	5,772,032
Common stock, shares outstanding (in shares)	5,836,110	5,772,032

XML

Condensed Consolidated Statements of Operations (Unaudited) - USD ($) shares in Thousands	3 Months Ended		9 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2018	Dec. 31, 2017
NET SALES	$ 10,044,000	$ 9,150,000	$ 24,143,000	$ 26,014,000
COST OF SALES	5,928,000	4,910,000	15,906,000	14,551,000
Gross profit	4,116,000	4,240,000	8,237,000	11,463,000
OPERATING EXPENSES:
General and administrative	1,337,000	1,368,000	4,190,000	4,132,000
Sales and marketing	2,068,000	1,620,000	5,088,000	4,549,000
Research and development	216,000	142,000	635,000	433,000
Total operating expenses	3,621,000	3,130,000	9,913,000	9,114,000
Income (loss) from operations	495,000	1,110,000	(1,676,000)	2,349,000
Interest expense, net	(134,000)	(130,000)	(414,000)	(371,000)
Income(loss) before income taxes	361,000	980,000	(2,090,000)	1,978,000
INCOME TAX EXPENSE (BENEFIT)	73,000	(127,000)	33,000	(105,000)
NET INCOME (LOSS)	$ 288,000	$ 1,107,000	$ (2,123,000)	$ 2,083,000
NET INCOME (LOSS) PER SHARE:
Basic (in dollars per share)	$ 0.05	$ 0.19	$ (0.37)	$ 0.36
Diluted (in dollars per share)	$ 0.05	$ 0.19	$ (0.37)	$ 0.36
SHARES USED IN CALCULATION OF NET INCOME (LOSS) PER SHARE:
Basic (in shares)	5,836	5,749	5,809	5,714
Diluted (in shares)	5,862	5,831	5,809	5,774

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)	9 Months Ended
	Dec. 31, 2018	Dec. 31, 2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$ (2,123,000)	$ 2,083,000
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization	1,421,000	1,403,000
Share-based compensation expense	282,000	369,000
Amortization of debt issue costs and other assets	57,000	52,000
Net (increase) decrease in assets:
Accounts receivable	781,000	(791,000)
Inventories	(1,078,000)	(1,730,000)
Prepaid expenses and other assets	(84,000)	(86,000)
Net increase (decrease) in liabilities:
Accounts payable	528,000	(76,000)
Accrued expenses	181,000	332,000
Customer deposits	39,000	(80,000)
Other long-term liabilities	(46,000)	(8,000)
Net cash (used in) provided by operating activities	(42,000)	1,468,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements	(375,000)	(667,000)
Investment in Cellana asset purchase	(100,000)
Investment in restricted cash		(65,000)
Net cash used in investing activities	(475,000)	(732,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net draws (payments) on line of credit	1,250,000	(111,000)
Payments on short term contract obligation	(63,000)
Payments on capitalized leases	(49,000)	(67,000)
Principal payments on long-term debt	(429,000)	(394,000)
Proceeds from long-term debt, net of costs		166,000
Withholding on restricted stock unit vesting	(32,000)
Proceeds from stock options exercised	19,000	26,000
Net cash provided by (used in) financing activities	696,000	(380,000)
Net increase in cash	179,000	356,000
Cash and restricted cash at beginning of period	1,394,000	1,407,000
Cash at end of period	1,573,000	1,763,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest	358,000	313,000
Income taxes	17,000
Cash paid to acquire Cellana assets	100,000
Cellana Asset Purchase [Member]
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Cellana asset purchase	(100,000)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Purchase of Cellana assets	495,000
Less: Issuance of short-term obligation	395,000
Cash paid to acquire Cellana assets	$ 100,000

XML

Note 1 - Organization and Basis of Presentation

9 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Business Description and Basis of Presentation [Text Block]

1. ORGANIZATION AND BASIS OF PRESENTATION

Cyanotech Corporation (the “Company”), located in Kailua-Kona, Hawaii, was incorporated in the state of Nevada on

March 3, 1983

and is listed on the NASDAQ Global Select Market under the symbol “CYAN”. The Company is engaged in the production of natural products derived from microalgae for the nutritional supplements market.

The Company is an agricultural company that produces high value natural products derived from microalgae grown in complex and intricate open-pond agricultural systems on the Kona coast of Hawaii.  The Company's products include Hawaiian Spirulina Pacifica, a superfood with numerous benefits, including boosting the immune system and overall cellular health; and Hawaiian BioAstin, a powerful antioxidant shown to support and maintain the body's natural inflammatory response.

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 

10

-Q and Regulation S-

X

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 

10

-K as filed with the SEC on

June 

15,

2018.

 

XML

Note 2 - Significant Accounting Policies

9 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Significant Accounting Policies [Text Block]

2. SIGNIFICANT ACCOUNTING POLICIES

Consolidation

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 intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

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.

Cash and Restricted Cash

The Company considers only its monetary liquid assets with original maturities of

three

months or less as cash and cash equivalents. Proceeds from equipment loans are classified as restricted cash until drawn upon. 

The following table provides a reconciliation of cash and restricted cash reported within the Company's consolidated balance sheets to the total amount presented in the consolidated statement of cash flows:

	Dec ember 3 1 , 2018		March 31, 2018
	(in thousands)
Cash	$	1,329	$	1,407
Restricted Cash		65		—
Cash and restricted cash at beginning of period	$	1,394	$	1,407
Cash	$	1,573	$	1,329
Restricted Cash		—		65
Cash and restricted cash at end of period	$	1,573	$	1,394

Concentration of Accounts Receivable and Revenues

At

December 31, 2018,

67%

of the Company’s accounts receivable was comprised of

two

customer balances of

43%

and

24%,

respectively. At

March 31, 2018,

76%

of the Company’s accounts receivable was comprised of

three

customer balances of

45%,

16%

and

15%,

respectively.

Two

customers accounted for

66%

of total net sales for the

three

months ended

December 31, 2018,

comprised of

35%

and

31%,

respectively.

Two

customers accounted for

50%

of total net sales for the

three

months ended

December 31, 2017,

comprised of

26%

and

24%,

respectively.

Two

customers accounted for

62%

of total net sales for the

nine

months ended

December 31, 2018,

comprised of

35%

and

27%,

respectively.

Two

customers accounted for

47%

of total net sales for the

nine

months ended

December 31, 2017,

comprised of

30%

and

17%,

respectively.

Revenue Recognition

The Company records revenue based on the

five

-step model which includes: (

1

) identifying the contract with the customer; (

2

) identifying the performance obligations in the contract; (

3

) determining the transaction price; (

4

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

5

) 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

30

 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 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

December 31, 2018 

and

December 31, 2017,

the Company recognized

$0

and

$20,000,

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

March 31, 2018

and

March 31, 2017,

respectively. During the

nine

-month periods ended

December 31, 2018 

and

December 31, 2017,

the Company recognized

$114,000

and

$91,000,

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.

Disaggregation of Revenue

The following table represents revenue disaggregatedby product in the

three

and

nine

months ended

December 31, 2018

and

December 31, 2017 (

in thousands):

	Three months ended December 31, 2018						Nine months ended December 31, 2018
	Astaxanthin		Spirulina		Total		Astaxanthin		Spirulina		Total
Packaged products	$	6,012	$	3,212	$	9,224	$	15,388	$	6,208	$	21,596
Bulk products		287		533		820		884		1,663		2,547
Total	$	6,299	$	3,745	$	10,044	$	16,272	$	7,871	$	24,143

	Three months ended December 31, 2017						Nine months ended December 31, 2017
	Astaxanthin		Spirulina		Total		Astaxanthin		Spirulina		Total
Packaged products	$	5,746	$	2,268	$	8,014	$	15,649	$	6,560	$	22,209
Bulk products		317		819		1,136		748		3,057		3,805
Total	$	6,063	$	3,087	$	9,150	$	16,397	$	9,617	$	26,014

Reclassification

Certain amounts previously reported in the fiscal

2018

consolidated financial statements have been reclassified to conform with the fiscal

2019

financial presentation. These reclassifications have

no

impact on net income.

Recently Adopted Accounting Pronouncements

In

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

-

09

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 ASU

No.

2017

-

09

are applied prospectively to awards modified on or after the adoption date. The Company adopted this standard as of

April 1, 2018

with

no

impact on its consolidated financial statements. 

In

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

-

18

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

nine

months ended

December 31, 2018. 

In

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”

). ASU

No.

2016

-

15

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

-

15

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

no

impact on its consolidated financial statements and related disclosures. 

In

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

No

2015

-

14

“

Revenue from Contracts with Customers (Topic

606

):

Deferral of the Effective Date,

" which deferred the effective date of ASU

No.

2014

-

09

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

In

November 2018,

the FASB issued ASU 

2018

-

18

 – 

Collaborative Arrangements

, which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is

not

a customer. This ASU will be effective for us in the

first

quarter of fiscal

2021

with early adoption permitted. This ASU requires retrospective adoption to the date we adopted ASC

606,

April 1, 2018,

by recognizing a cumulative-effect adjustment to the opening balance of retained earnings of the earliest annual period presented. The Company is currently evaluating the impact of the adoption of this standard on its financial statements.

In

August 2018,

the FASB issued ASU

2018

-

15,

 “

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”

(“ASU

No.

2018

-

15”

), which aligns the capitalization requirements for implementation costs incurred in a hosting arrangement that is a service contract with the existing capitalization requirements for implementation costs incurred to develop or obtain internal-use software 

(Subtopic

350

-

40

)

. ASU

2018

-

15

becomes effective for the Company in the

first

quarter of fiscal

2021

and

may

be adopted either retrospectively or prospectively. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its financial statements.

In

August 2018,

the FASB issued ASU 

2018

-

13,

 “

Fair Value Measurement - Disclosure Framework (Topic

820

)”

(“ASU

No.

2018

-

13”

).The updated guidanceimproves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2019.

Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.

In

June 2018,

the FASB issued ASU

2018

-

07,

“

Compensation - Stock Compensation (Topic

718

)”

(“ASU

No.

2018

-

07”

): Improvements to Nonemployee Share-Based Payment Accounting. ASU

No.

2018

-

07

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

-

07

is effective for fiscal years beginning after

December 15, 2018,

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

no

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.

In

February 2016,

the FASB issued ASU

2016

-

02,

“

Leases (Topic

842

)”

(

“

ASU

No.

2016

-

02”

). The principle objective of ASU

No.

2016

-

02

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

No.

2016

-

02

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

-

02

is effective for fiscal years and interim periods beginning after

December 15, 2018.

Early adoption of ASU

No.

2016

-

02

is permitted. Entities were 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.

In

July 2018,

the FASB issued ASU

2018

-

10

“

Codification Improvements to Topic

842,

Leases

” (“ASU

No.

2018

-

02”

).  ASU

No.

2018

-

02

affects narrow aspects of the guidance issued in the amendments in ASU

No.

2016

-

02

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.  In

July 2018,

the FASB issued ASU

No.

2018

-

11,

"

Leases (Topic

842

): Targeted Improvements

," which provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, the prior comparative period’s financials will remain the same as those previously presented. Entities that elect this optional transition method must provide the disclosures that were previously required. The Company expects it will elect this optional transition method. The Company has selected resources to track and record leases and is starting the assessment and valuation 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. 

XML

Note 3 - Inventories

9 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Inventory Disclosure [Text Block]

3. INVENTORIES

Inventories are stated at the lower of cost or net realizable value. Cost is determined by the

first

-in,

first

-out method. Inventories consist of the following:

	Dec ember 3 1 , 2018		March 31, 2018
	(in thousands)
Raw materials	$	460	$	410
Work in process		4,649		2,602
Finished goods		4,828		5,878
Supplies		175		144
Inventories, net	$	10,112	$	9,034

The Company recognizes abnormal production costs, including fixed cost variances from normal production capacity, as an expense in the period incurred. Abnormal costs related to spirulina production of

$0

and

$250,000

were charged to cost of sales for the

three

and

nine

months ended

December 

31,

2018,

respectively. There were

no

abnormal production costs for the

three

and

nine

months ended

December 

31,

2017.

Non-inventoriable fixed costs related to production of

$35,000

(astaxanthin) and

$176,000

(

$35,000

astaxanthin and

$141,000

spirulina) were charged to cost of sales for the

three

and

nine

months ended

December 

31,

2018,

respectively. Non-inventoriable fixed costs related to spirulina production of

$4,000

and

$88,000

were charged to cost of sales for the

three

and

nine

months ended

December 

31,

2017,

respectively.

XML

Note 4 - Equipment and Leasehold Improvements

9 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Property, Plant and Equipment Disclosure [Text Block]

4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following:

	Dec ember 3 1 , 2018			March 31, 2018
	(in thousands)
Equipment	$	18,312		$	17,935
Leasehold improvements		14,288			14,248
Furniture and fixtures		348			348
		32,948			32,531
Less accumulated depreciation and amortization		(18,767	)		(17,346	)
Construction-in-progress		1,002			549
Equipment and leasehold improvements, net	$	15,183		$	15,734

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets

may

not

be recoverable. Recoverability of these assets is measured by a comparison of the carrying amount to forecasted undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future cash flows, then an impairment charge is recognized to the extent that the carrying amount exceeds the asset’s fair value. Management has determined

no

asset impairment existed as of

December 

31,

2018

and

March 31, 2018,

respectively.

XML

Note 5 - Short Term Contract Obligation

9 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Short-term Debt [Text Block]

5. SHORT TERM CONTRACT OBLIGATION

On

November 30, 2018

the Company completed the purchase of a

six

acre production and research facility from Cellana LLC (“Cellana”) under a purchase agreement that was signed

August 31, 2018.

In accordance with the terms of the

third

amendment to the asset purchase agreement, the Company acquired the asset for

$495,000

with a cash down payment of

$100,000

leaving a short-term obligation of

$395,000

on the asset purchase.

The short -term obligation is comprised of

two

separate loans in the principal amount of

$180,000

and

$215,000

. The

first

loan of

$180,000

bears an interest rate of

6.25%

and is payable in

four

monthly installments which includes principal and interest. The loan commenced on

December 1, 2018

and matures on

March 31, 2019.

The principal amount outstanding at

December 31, 2018

was

$137,000.

The

second

loan in the amount of

$215,000

is a non-interest bearing loan that is payable in

twelve

monthly installments comprised of

two

monthly payments of

$10,000

and

ten

monthly payments of

$19,543.

The loan commenced on

December 1, 2018

and matures on

October 15, 2019.

This contract contains a hold back of

$38,000

pending resolution of certain closing items by the seller. The principal amount outstanding at

December 31, 2018

was

$195,000.

XML

Note 6 - Line of Credit

9 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Debt Disclosure [Text Block]

6 . LINE OF CREDIT

On

August 30, 2016,

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

June 3, 2016,

became effective after the Company and the Bank received the necessary approvals from the State of Hawaii to secure the lien on the Company’s leasehold property in Kona, Hawaii. The Credit Agreement allows the Company to borrow up to

$2,000,000

on a revolving basis. Borrowings under the Credit Agreement bear interest at the Wall Street Journal prime rate (

5.50%

at

December 

31,

2018

) plus

2%,

floating. The Credit Agreement includes various covenants as defined in the Credit Agreement. The Credit Agreement also contains standard acceleration provisions in the event of a default by the Company. As of

December 31, 2018,

the Company had borrowed

$1,750,000

and had

$250,000

available on the line. The line of credit is subject to annual renewal and was renewed on

August 30, 2018

and will be subject to renewal upon expiration on

August 30, 2019.

Pursuant to the

August 30, 2018

renewal, the current ratio covenant was changed from

2.10:1

to

1.50:1

and is applicable to both the Line of Credit and Long-Term Debt with the Bank.

The Credit Agreement grants the Bank the following security interests in the Company’s property: (a) a lien on the Company’s leasehold interest in its Kona facility; (b) an assignment of the Company’s interest in leases and rents on its Kona facility; and (c) a security interest in all fixtures, furnishings and equipment related to or used by the Company at the Kona facility. Each security interest is further subject to the terms of the Credit Agreement.

XML

Note 7 - Accrued Expenses

9 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Accounts Payable and Accrued Liabilities Disclosure [Text Block]

7 . ACCRUED EXPENSES

Accrued expenses consist of the following:

	Dec ember 3 1 , 2018		March 31, 2018
	(in thousands)
Wages, commissions, bonus and profit sharing	$	799	$	707
Other accrued expenses		274		185
Total accrued expenses	$	1,073	$	892

XML

Note 8 - Long-term Debt

9 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Long-term Debt [Text Block]

8 . LONG-TERM DEBT

Long-term debt consists of the following:

	Dec ember 3 1 , 2018			March 31, 2018
	(in thousands)
Long-term debt	$	6,101		$	6,530
Capital lease obligations		98			148
Less current maturities		(663	)		(655	)
Long-term debt, excluding current maturities		5,536			6,023
Less unamortized debt issuance costs		(208	)		(233	)
Total long-term debt, net of current maturities and unamortized debt issuance costs	$	5,328		$	5,790

Term Loans

On

August 14, 2012,

the Company entered into a loan agreement (the

“August 2012

Loan Agreement”) that provides a term loan in an aggregate principal amount of

$5,500,000

which is secured by substantially all the Company’s assets, including a mortgage on the Company's interest in its lease at the National Energy Laboratory of Hawaii Authority. The

August 2012

Loan Agreement is partially guaranteed under the provisions of the U.S. Department of Agriculture (“USDA”) Rural Development Guarantee program.

In accordance with terms of the

August 2012

Loan Agreement, monthly payments of principal and interest are required until the loan’s maturity on

August 

14,

2032.

Interest on the loan accrues on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate (

5.50%

at

December 

31,

2018

) plus

1.0%

and is adjustable on the

first

day of each calendar quarter and fixed for that quarter. At

no

time shall the annual interest rate be less than

5.50%.

The balance under the

August 2012

Loan Agreement was

$4,492,000

and

$4,648,000

at

December 31, 2018

and

March 

31,

2018,

respectively.

The Loan includes a

one

-time origination and guaranty fees totaling

$214,500

and an annual renewal fee payable in the amount of

0.25%

of the USDA guaranteed portion of the outstanding principal balance as of

December 

31

of each year, beginning

December 

31,

2012.

The USDA has guaranteed

80%

of all amounts owing under the

August 2012

Loan Agreement. The Company is subject to financial covenants and customary affirmative and negative covenants.  

On

July 30, 2015,

the Company entered into a loan agreement (the

“2015

Loan Agreement”) that provides a term loan in an aggregate principal amount of

$2,500,000

and is secured by all the Company’s assets. The

2015

Loan Agreement is partially guaranteed under the provisions of the USDA Rural Development Guarantee program.

In accordance with terms in the

2015

Loan Agreement, payment of principal and interest are required until its maturity on

September 

1,

2022.

Interest on the loan accrues on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate (

5.50%

at

December 

31,

2018

) plus

2.0%

and is adjustable on the

first

day of each calendar quarter and fixed for that quarter.

 The

2015

Loan includes a

one

-time origination and guaranty fee totaling

$113,900

and an annual renewal fee payable in the amount of

0.50%

of the USDA guaranteed portion of the outstanding principal balance as of

December 

31

of each year, beginning

December 

31,

2015.

The USDA has guaranteed

80%

of all amounts owing under the

2015

Loan. The Company is subject to financial covenants and customary affirmative and negative covenants.

At

no

time shall the annual interest rate be less than

6.00%.

The

2015

Loan Agreement has a prepayment penalty of

5%

for any prepayment made prior to the

first

anniversary of the date of the loan and each year thereafter the penalty is reduced by

1%

each year until the

fifth

anniversary of such date when there will

no

longer be a prepayment penalty. The balance under the

2015

Loan Agreement was

$1,475,000

and

$1,726,000

at

December 31, 2018

and

March 

31,

2018,

respectively.

On

October 6, 2017,

the Company entered into an Equipment Finance Agreement (the “Equipment Agreement”), which provides up to

$175,000

of financing for equipment. The interest rate on this loan is

4.75%.

In accordance with terms in the Equipment Agreement, payment of principle and interest are required until its maturity on

October 31, 2022.

The balance under this loan was

$134,000

and

$156,000

at

December 31, 2018

and

March 31, 2018,

respectively. 

Capital Leases

 

The Company has

three

capital leases providing for

$278,000

in equipment, secured by the equipment financed. The capital leases mature at various dates between

May 2019

and

March 2021

and are payable in

60

equal monthly payments, except for

one

which is payable in

36

equal monthly payments. The interest rates under these capital leases range from

4.18%

to

12.90%.

The aggregate balances under these leases were

$98,000

and

$148,000

at

December 

31,

2018

and

March 31, 2018,

respectively.

XML

Note 9 - Contingencies

9 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

9 . CONTINGENCIES

From time to time, the Company

may

be involved in litigation and investigations relating to claims and matters arising out of its operations in the normal course of business. The Company believes that it currently is

not

a party to any legal proceedings or claims which, individually or in aggregate, would have a material effect on its consolidated financial position, results of operations or cash flows. 

XML

Note 10 - Share-based Compensation

9 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

10 . SHARE-BASED COMPENSATION

The Company has share-based compensation plans, which are more fully described in Note

9,

Share-Based Compensation, to the Consolidated Financial Statements included in the Company’s annual report on Form

10

-K as filed with the SEC on

June 15, 2018.

As of

December 

31,

2018,

the Company had

two

equity-based compensation plans: the

2016

Equity Incentive Plan (the

“2016

Plan”) and the

2014

Independent Director Stock Option and Restricted Stock Grant Plan (the

“2014

Directors Plan”). The Company has also issued stock options, which remain outstanding as of

December 31, 2018,

under

two

equity-based compensation plans which have expired according to their terms: the

2005

Stock Option Plan (the

“2005

Plan”) and the

2004

Independent Director Stock Option and Stock Grant Plan (the

“2004

Directors Plan”). These plans allowed the Company to award stock options and shares of restricted common stock to eligible employees, certain outside consultants and independent directors.

No

additional awards will be issued under the

2005

Plan or the

2004

Directors Plan. 

The following table presents shares authorized, available for future grant and outstanding under each of the Company’s plans:

	As of Dec ember 3 1 , 2018
	Authorized		Available		Outstanding
2016 Plan		1,300,000		1,113,022		170,975
2014 Directors Plan		350,000		184,400		12,000
2005 Plan		—		—		434,400
2004 Directors Plan		—		—		12,000
Total		1,650,000		1,297,422		629,375

Stock Options

All stock option grants made under the equity-based compensation plans were issued at exercise prices

no

less than the Company’s closing stock price on the date of grant, determined by the Board of Directors or the Compensation Committee of the Board of Directors in accordance with the provisions of the respective plans.  The terms of each option grant include vesting, exercise, and other conditions set forth in a Stock Option Agreement evidencing each grant.

No

option can have a life in excess of

ten

(

10

) years. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The model requires various assumptions, including a risk-free interest rate, the expected term of the options, the expected stock price volatility over the expected term of the options, and the expected dividend yield. Compensation expense for employee stock options is recognized ratably over the vesting term. Compensation expense recognized for options issued under all Plans was

$18,000

and

$54,000

for the

three

and

nine

months ended

December 

31,

2018,

respectively. Compensation expense recognized for options issued under all Plans was

$13,000

and

$47,000

for the

three

and

nine

months ended

December 

31,

2017,

respectively. All stock-based compensation has been classified as general and administrative expense in the condensed consolidated statement of operations.

A summary of option activity under the Company’s stock plans for the

nine

months ended

December 

31,

2018

is presented below: 

Option Activity	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at March 31, 2018		589,400		$	4.06		4.9	$	675,300
Granted		—		$	—
Exercised		(6,000	)	$	2.85
Forfeited		(5,000	)	$	5.75
Outstanding at December 31, 2018		578,400		$	4.06		4.2	$	43,804
Exercisable at December 31, 2018		483,400		$	4.15		3.3	$	43,804

The aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise price optionees would have received if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price of

$3.02

for such day.

A summary of the Company’s non-vested options for the

nine

months ended

December 

31,

2018

is presented below:

Nonvested Options	Shares			Weighted Average Grant-Date Fair Value
Nonvested at March 31, 2018		120,000		$	1.81
Granted		—			—
Vested		(25,000	)		1.71
Forfeited		—			—
Nonvested at December 31, 2018		95,000		$	1.83

As of

December 

31,

2018,

total unrecognized stock-based compensation expense related to all unvested stock options was

$127,000,

which is expected to be expensed over a weighted average period of

1.6

years.

Subsequent to

December 31, 2018,

50,000

stock options were granted from the

2016

Plan at an exercise price of

$3.00

per share.

Restricted Stock

There were

no

grants of fully vested restricted stock issued to Non-Employee Directors for the

three

months ended

December 31, 2018

and

December 31, 2017.

Grants of fully vested restricted stock issued to Non-Employee Directors was

47,223

shares and

57,501

shares for the

nine

months ended

December 31, 2018

and

December 31, 2017,

respectively. Compensation expense recognized for fully vested restricted stock was

$0

and

$170,000

for the

three

and

nine

months ended

December 31, 2018,

respectively. Compensation expense recognized for fully vested restricted stock was

$0

and

$276,000

for the

three

and

nine

months ended

December 31, 2017,

respectively.

Restricted Stock Units (“RSUs”)

 

RSUs are service-based awards granted to eligible employees under the

2016

Plan. Compensation expense recognized for RSUs issued under the

2016

Plan was

$20,000

and

$58,000

for the

three

and

nine

months ended

December 31, 2018,

respectively. Compensation expense recognized for RSUs issued under the

2016

Plan was

$15,000

and

$48,000

for the

three

and

nine

months ended

December 31, 2017,

respectively.

On

July 13, 2018,

22,449

RSUs were awarded to employees of the Company. This award is valued at

$4.0252

per share, the closing market price of the Company’s common stock on the grant date, and vests over a period of

two

years. 

The following table summarizes information related to awarded RSUs: 

Nonvested Restricted Stock Units	Shares			Weighted Average Grant Price
Nonvested restricted stock units at March 31, 2018		39,675		$	3.89
Granted		23,923			4.10
Vested		(7,670	)		3.92
Forfeited		(4,953	)		4.08
Nonvested restricted stock units at December 31, 2018		50,975		$	3.97

As of

December 

31,

2018,

total unrecognized stock-based compensation expense related to unvested restricted stock units was

$140,000,

which is expected to be expensed over a weighted average period of

1.8

years.

XML

Note 11 - Income Taxes

9 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Income Tax Disclosure [Text Block]

11 . INCOME TAXES

On

December 22, 2017

H.R.

1,

originally known as the Tax Cuts and Jobs Act, (the “Tax Act”) was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from

34%

to

21%

effective

January 1, 2018.

The Company will compute its income tax expense for the

March 31, 2019

fiscal year using a Federal Tax Rate of

21%.

The

21%

Federal Tax Rate will apply to fiscal years ending

March 31, 2019

and each year thereafter. The Company completed the accounting for the income tax effects of the Tax Act as of

March 31, 2018

and determined that the amount identified as provisional in the quarter ended

December 31, 2017

was a materially correct amount. As a result,

no

measurement period adjustments have been recorded.

We utilize our estimated annual effective tax rate to determine our provision (benefit) for income taxes for interim periods. The income tax provision (benefit) is computed by multiplying the estimated annual effective tax rate by the year to date pre-tax book income (loss). We recorded an income tax expense of

$73,000

and (

$127,000

) for the

three

months ended

December 31, 2018

and

2017,

respectively. We recorded an income tax expense of

$33,000

and income tax benefit of (

$105,000

) for the

nine

months ended

December 31, 2018

and

2017,

respectively. Our effective tax rate was

20.2%

and (

1.6%

) for the

three

and

nine

months ended

December 

31,

2018,

respectively, and (

13.0%

) and (

5.3%

) for the

three

and

nine

months ended

December 

31,

2017,

respectively. The effective tax rate for the

three

and

nine

months ended

December 31, 2018

differs from the statutory rate of

21%

as a result of state taxes (net of federal benefit) and the net change in valuation allowance against the net deferred tax asset the Company believes is

not

more likely than

not

to be realized.

The Company is subject to taxation in the United States and

six

state jurisdictions. The preparation of tax returns requires management to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. Management, in consultation with its tax advisors, files its tax returns based on interpretations that are believed to be reasonable under the circumstances. The income tax returns, however, are subject to routine reviews by the various taxing authorities.  As part of these reviews, a taxing authority

may

disagree with respect to the tax positions taken by management (“uncertain tax positions”) and therefore

may

require the Company to pay additional taxes. Management evaluates the requirement for additional tax accruals, including interest and penalties, which the Company could incur as a result of the ultimate resolution of its uncertain tax positions. Management reviews and updates the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, completion of tax audits, expiration of statute of limitations, or upon occurrence of other events.

As of

December 

31,

2018,

there was

no

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 income or expense in its consolidated condensed statements of operations, which is consistent with the recognition of these items in prior reporting periods.

With few exceptions, the Company is

no

longer subject to U.S. federal, state, local, and non-U.S. income tax examination by tax authorities for tax years before

2013.

XML

Note 12 - Earnings (Loss) Per Share

9 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Earnings Per Share [Text Block]

12 . EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the potentially dilutive effect of outstanding stock options using the “treasury stock” method.

Reconciliations between the numerator and the denominator of the basic and diluted earnings per share computations for the

three

months ended

December 

31,

2018

and

2017

are as follows:

	Three Months Ended Dec ember 3 1 , 2018
	Net Loss		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands)
Basic income per share	$	288		5,836	$	0.05
Effect of dilutive securities — Common stock options		—		26		—
Diluted income per share	$	288		5,862	$	0.05

	Three Months Ended Dec ember 3 1 , 2017
	Net Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands)
Basic income per share	$	1,107		5,749	$	0.19
Effect of dilutive securities — Common stock options		—		82		—
Diluted income per share	$	1,107		5,831	$	0.19

Reconciliations between the numerator and the denominator of the basic and diluted (loss) earnings per share computations for the

nine

months ended

December 

31,

2018

and

2017

are as follows:

	Nine Months Ended Dec ember 3 1 , 2018
	Net Loss			Shares		Per Share
	(Numerator)			(Denominator)		Amount
	(in thousands)
Basic and diluted loss per share	$	(2,123	)		5,809	$	(0.37	)

	Nine Months Ended Dec ember 3 1 , 2017
	Net Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands)
Basic income per share	$	2,083		5,714	$	0.36
Effect of dilutive securities—Common stock options		—		60		—
Diluted income per share	$	2,083		5,774	$	0.36

Potentially dilutive securities include

75,000

outstanding options to purchase common stock for the

three

and

nine

months ended

December 31, 2018

and

20,991

restricted stock units for the

three

and

nine

months ended

December 31, 2018.

Diluted earnings per share does

not

include the impact of

75,000

options to purchase common stock for the 

three

month period ended

December 31, 2018,

as the effect of their inclusion would be anti-dilutive. As a result of the net loss for the

nine

month period ended

December 31, 2018,

no

potentially dilutive securities are included in the calculation of diluted loss per share because such effect would be anti-dilutive. Diluted earnings per share does

not

include the impact of

75,000

options to purchase common stock for the 

three

and

nine

month period ended

December 31, 2017,

as the effect of their inclusion would be anti-dilutive. Restricted stock units become dilutive within the period granted and remain dilutive until the units vest and are issued as common stock.

XML

Note 13 - Related Party Transactions and Balances

9 Months Ended

Dec. 31, 2018

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

13 . RELATED PARTY TRANSACTIONS AND BALANCES

During the

nine

months ended

December 31, 2018,

the Company entered into a consulting agreement with an effective date of

May 5, 2018

with a vendor that employs

one

of our independent directors.  The Company’s independent director is

not

named in or involved in the performance of the consulting agreement. The contract amount of

$120,000

is reflected in general and administrative expense during the

nine

months ended

December 31, 2018

and

$120,000

in payments have been made against the contract during the

nine

months ended

December 31, 2018.  

XML

Significant Accounting Policies (Policies)

9 Months Ended

Dec. 31, 2018

Accounting Policies [Abstract]

Consolidation, Policy [Policy Text Block]

Consolidation

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 intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

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.

Cash and Cash Equivalents, Restricted Cash and Cash Equivalents, Policy [Policy Text Block]

Cash and Restricted Cash

The Company considers only its monetary liquid assets with original maturities of

three

months or less as cash and cash equivalents. Proceeds from equipment loans are classified as restricted cash until drawn upon. 

The following table provides a reconciliation of cash and restricted cash reported within the Company's consolidated balance sheets to the total amount presented in the consolidated statement of cash flows:

	Dec ember 3 1 , 2018		March 31, 2018
	(in thousands)
Cash	$	1,329	$	1,407
Restricted Cash		65		—
Cash and restricted cash at beginning of period	$	1,394	$	1,407
Cash	$	1,573	$	1,329
Restricted Cash		—		65
Cash and restricted cash at end of period	$	1,573	$	1,394

Concentration Risk, Credit Risk, Policy [Policy Text Block]

Concentration of Accounts Receivable and Revenues

At

December 31, 2018,

67%

of the Company’s accounts receivable was comprised of

two

customer balances of

43%

and

24%,

respectively. At

March 31, 2018,

76%

of the Company’s accounts receivable was comprised of

three

customer balances of

45%,

16%

and

15%,

respectively.

Two

customers accounted for

66%

of total net sales for the

three

months ended

December 31, 2018,

comprised of

35%

and

31%,

respectively.

Two

customers accounted for

50%

of total net sales for the

three

months ended

December 31, 2017,

comprised of

26%

and

24%,

respectively.

Two

customers accounted for

62%

of total net sales for the

nine

months ended

December 31, 2018,

comprised of

35%

and

27%,

respectively.

Two

customers accounted for

47%

of total net sales for the

nine

months ended

December 31, 2017,

comprised of

30%

and

17%,

respectively.

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

The Company records revenue based on the

five

-step model which includes: (

1

) identifying the contract with the customer; (

2

) identifying the performance obligations in the contract; (

3

) determining the transaction price; (

4

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

5

) 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

30

 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 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

December 31, 2018 

and

December 31, 2017,

the Company recognized

$0

and

$20,000,

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

March 31, 2018

and

March 31, 2017,

respectively. During the

nine

-month periods ended

December 31, 2018 

and

December 31, 2017,

the Company recognized

$114,000

and

$91,000,

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.

Disaggregation of Revenue

The following table represents revenue disaggregatedby product in the

three

and

nine

months ended

December 31, 2018

and

December 31, 2017 (

in thousands):

	Three months ended December 31, 2018						Nine months ended December 31, 2018
	Astaxanthin		Spirulina		Total		Astaxanthin		Spirulina		Total
Packaged products	$	6,012	$	3,212	$	9,224	$	15,388	$	6,208	$	21,596
Bulk products		287		533		820		884		1,663		2,547
Total	$	6,299	$	3,745	$	10,044	$	16,272	$	7,871	$	24,143

	Three months ended December 31, 2017						Nine months ended December 31, 2017
	Astaxanthin		Spirulina		Total		Astaxanthin		Spirulina		Total
Packaged products	$	5,746	$	2,268	$	8,014	$	15,649	$	6,560	$	22,209
Bulk products		317		819		1,136		748		3,057		3,805
Total	$	6,063	$	3,087	$	9,150	$	16,397	$	9,617	$	26,014

Reclassification, Policy [Policy Text Block]

Reclassification

Certain amounts previously reported in the fiscal

2018

consolidated financial statements have been reclassified to conform with the fiscal

2019

financial presentation. These reclassifications have

no

impact on net income.

New Accounting Pronouncements, Policy [Policy Text Block]

Recently Adopted Accounting Pronouncements

In

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

-

09

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 ASU

No.

2017

-

09

are applied prospectively to awards modified on or after the adoption date. The Company adopted this standard as of

April 1, 2018

with

no

impact on its consolidated financial statements. 

In

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

-

18

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

nine

months ended

December 31, 2018. 

In

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”

). ASU

No.

2016

-

15

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

-

15

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

no

impact on its consolidated financial statements and related disclosures. 

In

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

No

2015

-

14

“

Revenue from Contracts with Customers (Topic

606

):

Deferral of the Effective Date,

" which deferred the effective date of ASU

No.

2014

-

09

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

In

November 2018,

the FASB issued ASU 

2018

-

18

 – 

Collaborative Arrangements

, which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is

not

a customer. This ASU will be effective for us in the

first

quarter of fiscal

2021

with early adoption permitted. This ASU requires retrospective adoption to the date we adopted ASC

606,

April 1, 2018,

by recognizing a cumulative-effect adjustment to the opening balance of retained earnings of the earliest annual period presented. The Company is currently evaluating the impact of the adoption of this standard on its financial statements.

In

August 2018,

the FASB issued ASU

2018

-

15,

 “

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract”

(“ASU

No.

2018

-

15”

), which aligns the capitalization requirements for implementation costs incurred in a hosting arrangement that is a service contract with the existing capitalization requirements for implementation costs incurred to develop or obtain internal-use software 

(Subtopic

350

-

40

)

. ASU

2018

-

15

becomes effective for the Company in the

first

quarter of fiscal

2021

and

may

be adopted either retrospectively or prospectively. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its financial statements.

In

August 2018,

the FASB issued ASU 

2018

-

13,

 “

Fair Value Measurement - Disclosure Framework (Topic

820

)”

(“ASU

No.

2018

-

13”

).The updated guidanceimproves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after

December 15, 2019.

Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.

In

June 2018,

the FASB issued ASU

2018

-

07,

“

Compensation - Stock Compensation (Topic

718

)”

(“ASU

No.

2018

-

07”

): Improvements to Nonemployee Share-Based Payment Accounting. ASU

No.

2018

-

07

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

-

07

is effective for fiscal years beginning after

December 15, 2018,

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

no

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.

In

February 2016,

the FASB issued ASU

2016

-

02,

“

Leases (Topic

842

)”

(

“

ASU

No.

2016

-

02”

). The principle objective of ASU

No.

2016

-

02

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

No.

2016

-

02

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

-

02

is effective for fiscal years and interim periods beginning after

December 15, 2018.

Early adoption of ASU

No.

2016

-

02

is permitted. Entities were 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.

In

July 2018,

the FASB issued ASU

2018

-

10

“

Codification Improvements to Topic

842,

Leases

” (“ASU

No.

2018

-

02”

).  ASU

No.

2018

-

02

affects narrow aspects of the guidance issued in the amendments in ASU

No.

2016

-

02

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.  In

July 2018,

the FASB issued ASU

No.

2018

-

11,

"

Leases (Topic

842

): Targeted Improvements

," which provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, the prior comparative period’s financials will remain the same as those previously presented. Entities that elect this optional transition method must provide the disclosures that were previously required. The Company expects it will elect this optional transition method. The Company has selected resources to track and record leases and is starting the assessment and valuation 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. 

XML

Note 2 - Significant Accounting Policies (Tables)

9 Months Ended

Dec. 31, 2018

Notes Tables

Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents [Table Text Block]

	Dec ember 3 1 , 2018		March 31, 2018
	(in thousands)
Cash	$	1,329	$	1,407
Restricted Cash		65		—
Cash and restricted cash at beginning of period	$	1,394	$	1,407
Cash	$	1,573	$	1,329
Restricted Cash		—		65
Cash and restricted cash at end of period	$	1,573	$	1,394

Disaggregation of Revenue [Table Text Block]

	Three months ended December 31, 2018						Nine months ended December 31, 2018
	Astaxanthin		Spirulina		Total		Astaxanthin		Spirulina		Total
Packaged products	$	6,012	$	3,212	$	9,224	$	15,388	$	6,208	$	21,596
Bulk products		287		533		820		884		1,663		2,547
Total	$	6,299	$	3,745	$	10,044	$	16,272	$	7,871	$	24,143

	Three months ended December 31, 2017						Nine months ended December 31, 2017
	Astaxanthin		Spirulina		Total		Astaxanthin		Spirulina		Total
Packaged products	$	5,746	$	2,268	$	8,014	$	15,649	$	6,560	$	22,209
Bulk products		317		819		1,136		748		3,057		3,805
Total	$	6,063	$	3,087	$	9,150	$	16,397	$	9,617	$	26,014

XML

Note 3 - Inventories (Tables)

9 Months Ended

Dec. 31, 2018

Notes Tables

Schedule of Inventory, Current [Table Text Block]

	Dec ember 3 1 , 2018		March 31, 2018
	(in thousands)
Raw materials	$	460	$	410
Work in process		4,649		2,602
Finished goods		4,828		5,878
Supplies		175		144
Inventories, net	$	10,112	$	9,034

XML

Note 4 - Equipment and Leasehold Improvements (Tables)

9 Months Ended

Dec. 31, 2018

Notes Tables

Property, Plant and Equipment [Table Text Block]

	Dec ember 3 1 , 2018			March 31, 2018
	(in thousands)
Equipment	$	18,312		$	17,935
Leasehold improvements		14,288			14,248
Furniture and fixtures		348			348
		32,948			32,531
Less accumulated depreciation and amortization		(18,767	)		(17,346	)
Construction-in-progress		1,002			549
Equipment and leasehold improvements, net	$	15,183		$	15,734

XML

Note 7 - Accrued Expenses (Tables)

9 Months Ended

Dec. 31, 2018

Notes Tables

Schedule of Accrued Liabilities [Table Text Block]

	Dec ember 3 1 , 2018		March 31, 2018
	(in thousands)
Wages, commissions, bonus and profit sharing	$	799	$	707
Other accrued expenses		274		185
Total accrued expenses	$	1,073	$	892

XML

Note 8 - Long-term Debt (Tables)

9 Months Ended

Dec. 31, 2018

Notes Tables

Schedule of Long-term Debt Instruments [Table Text Block]

	Dec ember 3 1 , 2018			March 31, 2018
	(in thousands)
Long-term debt	$	6,101		$	6,530
Capital lease obligations		98			148
Less current maturities		(663	)		(655	)
Long-term debt, excluding current maturities		5,536			6,023
Less unamortized debt issuance costs		(208	)		(233	)
Total long-term debt, net of current maturities and unamortized debt issuance costs	$	5,328		$	5,790

XML

Note 10 - Share-based Compensation (Tables)

9 Months Ended

Dec. 31, 2018

Notes Tables

Schedule of Share-based Compensation Shares Authorized Available and Outstanding by Plan [Table Text Block]

	As of Dec ember 3 1 , 2018
	Authorized		Available		Outstanding
2016 Plan		1,300,000		1,113,022		170,975
2014 Directors Plan		350,000		184,400		12,000
2005 Plan		—		—		434,400
2004 Directors Plan		—		—		12,000
Total		1,650,000		1,297,422		629,375

Share-based Compensation, Stock Options, Activity [Table Text Block]

Option Activity	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at March 31, 2018		589,400		$	4.06		4.9	$	675,300
Granted		—		$	—
Exercised		(6,000	)	$	2.85
Forfeited		(5,000	)	$	5.75
Outstanding at December 31, 2018		578,400		$	4.06		4.2	$	43,804
Exercisable at December 31, 2018		483,400		$	4.15		3.3	$	43,804

Schedule of Nonvested Share Activity [Table Text Block]

Nonvested Options	Shares			Weighted Average Grant-Date Fair Value
Nonvested at March 31, 2018		120,000		$	1.81
Granted		—			—
Vested		(25,000	)		1.71
Forfeited		—			—
Nonvested at December 31, 2018		95,000		$	1.83

Schedule of Nonvested Restricted Stock Units Activity [Table Text Block]

Nonvested Restricted Stock Units	Shares			Weighted Average Grant Price
Nonvested restricted stock units at March 31, 2018		39,675		$	3.89
Granted		23,923			4.10
Vested		(7,670	)		3.92
Forfeited		(4,953	)		4.08
Nonvested restricted stock units at December 31, 2018		50,975		$	3.97

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Note 12 - Earnings (Loss) Per Share (Tables)

9 Months Ended

Dec. 31, 2018

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three Months Ended Dec ember 3 1 , 2018
	Net Loss		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands)
Basic income per share	$	288		5,836	$	0.05
Effect of dilutive securities — Common stock options		—		26		—
Diluted income per share	$	288		5,862	$	0.05

	Three Months Ended Dec ember 3 1 , 2017
	Net Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands)
Basic income per share	$	1,107		5,749	$	0.19
Effect of dilutive securities — Common stock options		—		82		—
Diluted income per share	$	1,107		5,831	$	0.19

	Nine Months Ended Dec ember 3 1 , 2018
	Net Loss			Shares		Per Share
	(Numerator)			(Denominator)		Amount
	(in thousands)
Basic and diluted loss per share	$	(2,123	)		5,809	$	(0.37	)

	Nine Months Ended Dec ember 3 1 , 2017
	Net Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands)
Basic income per share	$	2,083		5,714	$	0.36
Effect of dilutive securities—Common stock options		—		60		—
Diluted income per share	$	2,083		5,774	$	0.36

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Note 2 - Significant Accounting Policies (Details Textual)	3 Months Ended		9 Months Ended		12 Months Ended
	Dec. 31, 2018 USD ($)	Dec. 31, 2017 USD ($)	Dec. 31, 2018 USD ($)	Dec. 31, 2017 USD ($)	Mar. 31, 2018
Deposit Account [Member]
Contract with Customer, Liability, Revenue Recognized	$ 0	$ 20,000	$ 114,000	$ 91,000
Customer Concentration Risk [Member] | Accounts Receivable [Member]
Concentration Risk, Percentage			67.00%		76.00%
Number of Major Customers			2		3
Customer Concentration Risk [Member] | Accounts Receivable [Member] | Customer Number 1 [Member]
Concentration Risk, Percentage			43.00%		45.00%
Customer Concentration Risk [Member] | Accounts Receivable [Member] | Customer Number 2 [Member]
Concentration Risk, Percentage			24.00%		16.00%
Customer Concentration Risk [Member] | Accounts Receivable [Member] | Customer Number 3 [Member]
Concentration Risk, Percentage					15.00%
Customer Concentration Risk [Member] | Sales Revenue, Net [Member]
Concentration Risk, Percentage	66.00%	50.00%	62.00%	47.00%
Number of Major Customers	2	2	2	2
Customer Concentration Risk [Member] | Sales Revenue, Net [Member] | Customer Number 1 [Member]
Concentration Risk, Percentage	35.00%	26.00%	35.00%	30.00%
Customer Concentration Risk [Member] | Sales Revenue, Net [Member] | Customer Number 2 [Member]
Concentration Risk, Percentage	31.00%	24.00%	27.00%	17.00%

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Note 2 - Significant Accounting Polices - Reconciliation of Cash and Restricted Cash (Details) - USD ($)	Dec. 31, 2018	Mar. 31, 2018	Dec. 31, 2017	Mar. 31, 2017
Cash	$ 1,573,000	$ 1,329,000		$ 1,407,000
Restricted Cash		65,000
Cash and restricted cash at beginning of period	$ 1,573,000	$ 1,394,000	$ 1,763,000	$ 1,407,000

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Note 2 - Significant Accounting Policies - Revenue By Product (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2018	Dec. 31, 2017
Revenue	$ 10,044	$ 9,150	$ 24,143	$ 26,014
Packaged Astaxanthin [Member]
Revenue	6,012	5,746	15,388	15,649
Packaged Spirulina [Member]
Revenue	3,212	2,268	6,208	6,560
Packaged Products [Member]
Revenue	9,224	8,014	21,596	22,209
Bulk Astaxanthin [Member]
Revenue	287	317	884	748
Bulk Spirulina [Member]
Revenue	533	819	1,663	3,057
Bulk Products [Member]
Revenue	820	1,136	2,547	3,805
Astaxanthin [Member]
Revenue	6,299	6,063	16,272	16,397
Spirulina [Member]
Revenue	$ 3,745	$ 3,087	$ 7,871	$ 9,617

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Note 3 - Inventories (Details Textual) - USD ($)	3 Months Ended		9 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2018	Dec. 31, 2017
Inventory Abnormal Production Costs	$ 0	$ 0	$ 250,000	$ 0
Non Inventoriable Fixed Costs			176,000
Astaxanthin [Member]
Non Inventoriable Fixed Costs	$ 35,000		35,000
Spirulina [Member]
Non Inventoriable Fixed Costs		$ 4,000	$ 141,000	$ 88,000

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Note 3 - Inventories - Components of Inventory (Details) - USD ($) $ in Thousands		Dec. 31, 2018	Mar. 31, 2018
Raw materials		$ 460	$ 410
Work in process		4,649	2,602
Finished goods	[1]	4,828	5,878
Supplies		175	144
Inventories, net		$ 10,112	$ 9,034

[1] Net of reserve for obsolescence of $1,000 and $5,000 at June 30, 2018 and March 31, 2018, respectively.

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Note 4 - Equipment and Leasehold Improvements (Details Textual) - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Dec. 31, 2018	Mar. 31, 2018
Asset Impairment Charges, Total	$ 0	$ 0

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Note 4 - Equipment and Leasehold Improvements, Net - Components of Equipment and Leasehold Improvements (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Mar. 31, 2018
Equipment and leasehold improvements, gross	$ 32,948	$ 32,531
Less accumulated depreciation and amortization	(18,767)	(17,346)
Construction-in-progress	1,002	549
Equipment and leasehold improvements, net	15,183	15,734
Equipment [Member]
Equipment and leasehold improvements, gross	18,312	17,935
Leasehold Improvements [Member]
Equipment and leasehold improvements, gross	14,288	14,248
Furniture and Fixtures [Member]
Equipment and leasehold improvements, gross	$ 348	$ 348

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Note 5 - Short Term Contract Obligation (Details Textual)		9 Months Ended
	Nov. 30, 2018 USD ($) a	Dec. 31, 2018 USD ($)	Dec. 31, 2017 USD ($)	Mar. 31, 2018 USD ($)
Payments to Acquire Buildings		$ 100,000
Short-term Non-bank Loans and Notes Payable		332,000
Short-term Obligation for Cellana Asset Purchase [Member]
Debt Instrument, Face Amount	$ 180,000
Debt Instrument, Interest Rate, Stated Percentage	6.25%
Short-term Non-bank Loans and Notes Payable		137,000
Short-term Obligation for Cellana Asset Purchase 2 [Member]
Debt Instrument, Face Amount	$ 215,000
Short-term Non-bank Loans and Notes Payable	195,000
Debt Instrument, Hold-back, Amount	38,000
Short-term Obligation for Cellana Asset Purchase 2 [Member] | Redeemed in Two Monthly Payments [Member]
Debt Instrument, Periodic Payment, Total	10,000
Short-term Obligation for Cellana Asset Purchase 2 [Member] | Redeemed in Ten Monthly Payments [Member]
Debt Instrument, Periodic Payment, Total	19,543
Cellana Asset Purchase [Member]
Noncash or Part Noncash Acquisition, Value of Assets Acquired, Total	495,000	495,000
Payments to Acquire Buildings	100,000	100,000
Issuance of Short Term Obligations	$ 395,000	$ 395,000
Research Facility Owned by Cellana [Member]
Area of Real Estate Property | a	6

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Note 6 - Line of Credit (Details Textual)	Aug. 30, 2016 USD ($)	Dec. 31, 2018 USD ($)	Mar. 31, 2018 USD ($)	Mar. 31, 2017
Line of Credit, Current		$ 1,750,000	$ 500,000
First Foundation Bank [Member] | Revolving Credit Facility [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 2,000,000
Line of Credit, Current		1,750,000
Line of Credit Facility, Remaining Borrowing Capacity		$ 250,000
Debt Covenant, Minimum Current Ratio		1.5		2.1
First Foundation Bank [Member] | Revolving Credit Facility [Member] | Prime Rate [Member]
Debt Instrument Reference Rate		5.50%
Debt Instrument, Basis Spread on Variable Rate	2.00%

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Note 7 - Accrued Expenses - Components of Accrued Expenses (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Mar. 31, 2018
Wages, commissions, bonus and profit sharing	$ 799	$ 707
Other accrued expenses	274	185
Total accrued expenses	$ 1,073	$ 892

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Note 8 - Long-term Debt (Details Textual)		1 Months Ended	9 Months Ended
	Aug. 14, 2012 USD ($)	Jul. 30, 2015 USD ($)	Dec. 31, 2018 USD ($)	Mar. 31, 2018 USD ($)	Oct. 06, 2017 USD ($)
Long-term Debt, Total			$ 6,101,000	$ 6,530,000
Capital Lease Obligations, Total			98,000	148,000
Bank of the West Finance [Member]
Capital Leased Assets, Gross, Total			$ 278,000
Debt Instrument Periodic Payments Number			60
Capital Lease Obligations, Total			$ 98,000	148,000
Bank of the West Finance [Member] | Capital Lease Asses Payable in 36 Equal Monthly Payments [Member]
Debt Instrument Periodic Payments Number			36
Capital Leased Assets, Number of Units			1
Minimum [Member] | Bank of the West Finance [Member]
Debt Instrument, Interest Rate, Stated Percentage			4.18%
Maximum [Member] | Bank of the West Finance [Member]
Debt Instrument, Interest Rate, Stated Percentage			12.90%
Term Loan Agreement, Maturing on August 14, 2032 [Member]
Proceeds from Issuance of Debt	$ 5,500,000
Debt Instrument Reference Rate			5.50%
Debt Instrument, Basis Spread on Variable Rate	1.00%
Long-term Debt and Capital Lease Obligations, Current and Noncurrent			$ 4,492,000	4,648,000
Debt Instrument One Time Origination and Guaranty Fees	$ 214,500
Debt Instrument Annual Renewal Fee Payable Percentage	0.25%
Debt Instrument Guaranteed Portion	80.00%
Term Loan Agreement, Maturing on August 14, 2032 [Member] | Minimum [Member]
Debt Instrument, Interest Rate During Period	5.50%
The 2015 Loan Agreement [Member]
Proceeds from Issuance of Debt		$ 2,500,000
Debt Instrument Reference Rate			5.50%
Long-term Debt and Capital Lease Obligations, Current and Noncurrent			$ 1,475,000	1,726,000
Debt Instrument One Time Origination and Guaranty Fees		$ 113,900
Debt Instrument Annual Renewal Fee Payable Percentage		0.50%
Debt Instrument Guaranteed Portion		80.00%
Debt Instrument, Prepayment Penalty Percentage			5.00%
Debt Instrument, Prepayment Penalty Percentage Reduction During Each Year			1.00%
The 2015 Loan Agreement [Member] | Prime Rate [Member]
Debt Instrument, Basis Spread on Variable Rate			2.00%
The 2015 Loan Agreement [Member] | Minimum [Member]
Debt Instrument, Interest Rate, Stated Percentage			6.00%
Equipment Finance Agreement [Member]
Debt Instrument, Interest Rate, Stated Percentage					4.75%
Debt Agreement, Maximum Borrowing Capacity					$ 175,000
Long-term Debt, Total			$ 134,000	$ 156,000

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Note 8 - Long-term Debt - Summary of Long-term Debt (Details) - USD ($) $ in Thousands	Dec. 31, 2018	Mar. 31, 2018
Long-term debt	$ 6,101	$ 6,530
Capital lease obligations	98	148
Less current maturities	(663)	(655)
Long-term debt, excluding current maturities	5,536	6,023
Less unamortized debt issuance costs	(208)	(233)
Total long-term debt, net of current maturities and unamortized debt issuance costs	$ 5,328	$ 5,790

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Note 10 - Share-based Compensation (Details Textual)		1 Months Ended	3 Months Ended		9 Months Ended
	Jul. 13, 2018 $ / shares shares	Feb. 11, 2019 $ / shares shares	Dec. 31, 2018 USD ($) $ / shares shares	Dec. 31, 2017 USD ($) shares	Dec. 31, 2018 USD ($) $ / shares shares	Dec. 31, 2017 USD ($) shares
Number of Shareholder Approved Share-based Compensation Plans			2		2
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant			1,297,422		1,297,422
Share Price | $ / shares			$ 3.02		$ 3.02
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value | $ / shares
Subsequent Event [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross		50,000
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Weighted Average Grant Date Fair Value | $ / shares		$ 3
Employee Stock Option [Member]
Allocated Share-based Compensation Expense, Total | $			$ 18,000	$ 13,000	$ 54,000	$ 47,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Total | $			127,000		$ 127,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition					1 year 219 days
Restricted Stock [Member] | Non-employee Directors [Member]
Allocated Share-based Compensation Expense, Total | $			$ 0	$ 0	$ 170,000	$ 276,000
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period			0	0	47,223	57,501
Restricted Stock Units (RSUs) [Member]
Allocated Share-based Compensation Expense, Total | $			$ 20,000	$ 15,000	$ 58,000	$ 48,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Total | $			$ 140,000		$ 140,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition					1 year 292 days
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period					23,923
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period, Weighted Average Grant Date Fair Value | $ / shares					$ 4.10
Restricted Stock Units (RSUs) [Member] | Employees [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period	22,449
Share-based Compensation Arrangement by Share-based Payment Award, Equity Instruments Other than Options, Grants in Period, Weighted Average Grant Date Fair Value | $ / shares	$ 4.0252
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	2 years
Maximum [Member] | Employee Stock Option [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Expiration Period					10 years
The 2005 Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant			0		0
2004 Directors Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant			0		0

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Note 10 - Share-based Compensation - Shares Authorized, Available for Future Grant and Outstanding Under Each Plan (Details) - shares	Dec. 31, 2018	Mar. 31, 2018
Authorized (in shares)	1,650,000
Available (in shares)	1,297,422
Outstanding (in shares)	629,375
Restricted Stock Units (RSUs) [Member]
Outstanding (in shares)	50,975	39,675
The 2016 Plan [Member] | Restricted Stock Units (RSUs) [Member]
Authorized (in shares)	1,300,000
Available (in shares)	1,113,022
Outstanding (in shares)	170,975
2014 Directors Plan [Member]
Authorized (in shares)	350,000
Available (in shares)	184,400
Outstanding (in shares)	12,000
The 2005 Plan [Member]
Authorized (in shares)
Available (in shares)	0
Outstanding (in shares)	434,400
2004 Directors Plan [Member]
Authorized (in shares)
Available (in shares)	0
Outstanding (in shares)	12,000

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Note 10 - Share-based Compensation - Summary of Option Activity Under Stock Plans (Details) - USD ($)	9 Months Ended	12 Months Ended
	Dec. 31, 2018	Mar. 31, 2018
Outstanding (in shares)	589,400
Outstanding, weighted average exercise price (in dollars per share)	$ 4.06	$ 4.06
Outstanding, weighted average remaining contractual term (Year)	4 years 73 days	4 years 328 days
Outstanding, aggregate intrinsic value	$ 43,804	$ 675,300
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Gross
Granted, weighted average exercise price (in dollars per share)
Exercised (in shares)	(6,000)
Exercised, weighted average exercise price (in dollars per share)	$ 2.85
Forfeited (in shares)	(5,000)
Forfeited, weighted average exercise price (in dollars per share)	$ 5.75
Outstanding (in shares)	578,400	589,400
Exercisable (in shares)	483,400
Exercisable, weighted average exercise price (in dollars per share)	$ 4.15
Exercisable, weighted average remaining contractual term (Year)	3 years 109 days
Exercisable, aggregate intrinsic value	$ 43,804

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Note 10 - Share-based Compensation - Summary of Non-vested Options (Details)	9 Months Ended
	Dec. 31, 2018 $ / shares shares
Nonvested (in shares) | shares	120,000
Nonvested (in dollars per share) | $ / shares	$ 1.81
Granted (in shares) | shares
Granted (in dollars per share) | $ / shares
Vested (in shares) | shares	(25,000)
Vested (in dollars per share) | $ / shares	$ 1.71
Forfeited (in shares) | shares
Forfeited (in dollars per share) | $ / shares
Nonvested (in shares) | shares	95,000
Nonvested (in dollars per share) | $ / shares	$ 1.83

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Note 10 - Share-based Compensation - Restricted Stock Units (Details)	9 Months Ended
	Dec. 31, 2018 $ / shares shares
Nonvested restricted stock units (in shares)	629,375
Restricted Stock Units (RSUs) [Member]
Nonvested restricted stock units (in shares)	39,675
Nonvested restricted stock units, weighted average grant price (in dollars per share) | $ / shares	$ 3.89
Granted (in shares)	23,923
Granted, weighted average grant price (in dollars per share) | $ / shares	$ 4.10
Vested (in shares)	(7,670)
Vested, weighted average grant price (in dollars per share) | $ / shares	$ 3.92
Forfeited (in shares)	(4,953)
Forfeited, weighted average grant price (in dollars per share) | $ / shares	$ 4.08
Nonvested restricted stock units (in shares)	50,975
Nonvested restricted stock units, weighted average grant price (in dollars per share) | $ / shares	$ 3.97

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Note 11 - Income Taxes (Details Textual) - USD ($)	3 Months Ended		9 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2018	Dec. 31, 2017
Income Tax Expense (Benefit), Continuing Operations, Adjustment of Deferred Tax (Asset) Liability	$ 73,000	$ 127,000	$ 33,000	$ 105,000
Effective Income Tax Rate Reconciliation, Percent, Total	20.20%	(13.00%)	(1.60%)	(5.30%)
Effective Income Tax Rate Reconciliation, at Federal Statutory Income Tax Rate, Percent			21.00%
Unrecognized Tax Benefits, Ending Balance	$ 0		$ 0

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Note 12 - Earnings (Loss) Per Share (Details Textual) - shares	3 Months Ended		9 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2018	Dec. 31, 2017
Employee Stock Option [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	75,000	75,000	75,000	75,000
Restricted Stock Units (RSUs) [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	20,991		20,991

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Note 12 - Earnings (Loss) Per Share - Summary of Reconciliations Between the Numerator and the Denominator of the Basic and Diluted Earnings Per Share Computations (Details) - USD ($) $ / shares in Units, shares in Thousands	3 Months Ended		9 Months Ended
	Dec. 31, 2018	Dec. 31, 2017	Dec. 31, 2018	Dec. 31, 2017
Net income (loss)	$ 288,000	$ 1,107,000	$ (2,123,000)	$ 2,083,000
Shares outstanding - basic (in shares)	5,836	5,749	5,809	5,714
Earnings per share - basic (in dollars per share)	$ 0.05	$ 0.19	$ (0.37)	$ 0.36
Effect of dilutive securities on net income
Shares - dilutive securities (in shares)	26	82		60
Net income - diluted	$ 288,000	$ 1,107,000
Shares outstanding - diluted (in shares)	5,862	5,831	5,809	5,774
Earnings per share - diluted (in dollars per share)	$ 0.05	$ 0.19	$ (0.37)	$ 0.36
Shares outstanding - basic and diluted (in shares)			5,809	5,774
Earnings per share - basic and diluted (in dollars per share)			$ (0.37)	$ 0.36

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Note 13 - Related Party Transactions and Balances (Details Textual) - Director [Member]	9 Months Ended
	Dec. 31, 2018 USD ($)
Due to Related Parties, Total	$ 120,000
Related Party Transaction, Selling, General and Administrative Expenses from Transactions with Related Party	$ 120,000