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

Cash primarily consists of cash on hand and cash in bank deposits. Proceeds from equipment loans are classified as restricted cash until drawn upon. There was

restricted cash as of

December 31, 2019

March 31, 2019.

Concentration Risk

A significant portion of revenue and accounts receivable are derived from a few major customers. For the

three

months ended

December 31, 2019

and

2018,

two

customers accounted for

33%

and

17%,

and

35%

and

31%,

respectively, of the Company’s net sales. For the

nine

months ended

December 31, 2019

and

2018,

two

customers accounted for

36%

and

17%,

and

35%

and

27%,

respectively, of the Company’s net sales. At

December 31, 2019

and

March 31, 2019,

three

customers accounted for

76%

and

60%,

respectively, of the Company’s accounts receivable balance.

Revenue Recognition

The Company records revenue based on the

five

-step model which includes: (

) identifying the contract with the customer; (

) identifying the performance obligations in the contract; (

) determining the transaction price; (

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

) recognizing revenue when the performance obligations are satisfied. Substantially all of the Company’s revenue is generated by fulfilling orders for the purchase of our microalgal 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.

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 amount of consideration expected to be received and revenue recognized includes estimates of variable consideration, which includes costs for trade promotion programs, coupons, returns and early payment discounts. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. The Company reviews and updates these estimates at the end of each reporting period and the impact of any adjustments are recognized in the period the adjustments are identified. In assessing whether collection of consideration from a customer is probable, the Company considers the customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in the underlying customer agreement, typically

days from the invoice date, which occurs on the date of transfer of control of the products to the customer. Revenue is recognized at the point in time that 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. Revenue from extraction services is recognized when control is transferred upon completion of the extraction process.

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, 2019

and

2018,

the Company recognized

$33,000

and

$0,

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

March 31, 2019

and

2018,

respectively. During the

nine

month periods ended

December 31, 2019

and

2018,

the Company recognized

$550,000

and

$114,000,

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

March 31, 2019

and

2018,

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 major product line and extraction services for the:

($ in thousands)	Three Months Ended December 31, 2019		Three Months Ended December 31, 2018
Packaged sales
Astaxanthin packaged	$	4,513	$	6,012
Spirulina packaged		1,878		3,212
Total packaged sales		6,391		9,224

Bulk sales
Astaxanthin bulk		377		229
Spirulina bulk		613		533
Total bulk sales		990		762

Contract extraction revenue		123		58
Total net sales	$	7,504	$	10,044

($ in thousands)	Nine Months Ended December 31, 2019		Nine Months Ended December 31, 2018
Packaged sales
Astaxanthin packaged	$	13,870	$	15,388
Spirulina packaged		5,523		6,208
Total packaged sales		19,393		21,596

Bulk sales
Astaxanthin bulk		879		823
Spirulina bulk		2,590		1,663
Total bulk sales		3,469		2,486

Contract extraction revenue		403		61
Total net sales	$	23,265	$	24,143

Recently Adopted Accounting Pronouncements

Effective

April 1, 2019,

the Company adopted Accounting Standards Update (“ASU”)

2016

02,

Leases (Topic

842

): Accounting for Leases

and issued subsequent amendments to the initial guidance and implementation guidance including ASU

No.

2018

01,

2018

10,

2018

11,

2018

and

2019

(collectively including ASU

No.

2016

02,

“ASC

842”

). ASC

842

requires that lessees recognize right-of-use assets and lease liabilities that are measured at the present value of the future lease payments at lease commencement date. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will largely remain unchanged and shall continue to depend on its classification as a finance or operating lease. The Company elected the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and did

not

restate prior periods. Under the new guidance, the majority of the Company’s leases continue to be classified as operating. Based on the Company’s lease portfolio, the impact of adopting ASC

842

increased both total assets and total liabilities, however, it did

not

have a significant impact on the Company’s consolidated statements of operations or cash flows. Finance leases continue to be classified with long-term debt on the Condensed Consolidated Balance Sheets and are described in Note

See Note

for operating leases.

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

expands the scope of Topic

718

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

No.

2018

is effective for the Company in the

first

quarter of fiscal year

2020.

The Company adopted ASU

No.

2018

as of

April 1, 2019

with

impact on its consolidated financial statements and related disclosures.

May 2017,

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

2017

09,

Compensation-Stock Compensation (Topic

718

) Scope of Modification Accounting

("ASU

No.

2017

09"

)

ASU

No.

2017

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

718,

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

December 15, 2017

and interim periods within those fiscal years. The amendments in ASU

No.

2017

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

April 1, 2018

with

impact on its consolidated financial statements.

November 2016,

the FASB issued ASU

2016

18,

“

Statement of Cash Flows (Topic

230

): Restricted Cash”

(“ASU

No.

2016

18”

)

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

230,

Statement of Cash Flows

. ASU

No.

2016

became effective for public companies for the fiscal years beginning after

December 15, 2017,

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

April 1, 2018

by using the retrospective method, which required reclassification of restricted cash in the accompanying consolidated statement of cash flows as of the beginning of the fiscal year ended

March 31, 2017.

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

clarifies and provides specific guidance on

eight

cash flow classification issues that are

not

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

No.

2016

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

December 15, 2017.

The Company adopted this standard as of

April 1, 2018

with

impact on its consolidated financial statements and related disclosures.

May 2014,

the FASB issued their converged standard on revenue recognition, ASU

No.

2014

09,

Revenue from Contracts with Customers (Topic

606

)

(“ASU

No.

2014

09”

), updated in

December 2016

with the release of ASU

2016

20.

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

August 2015,

the FASB issued ASU

2015

Revenue from Contracts with Customers (Topic

606

Deferral of the Effective Date,

which deferred the effective date of ASU

No.

2014

to annual reporting periods beginning after

December 15, 2017.

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

April 1, 2018

for contracts that were

not

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

not

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

not

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

Recently Issued Accounting Pronouncements

November 2018,

the FASB issued ASU

2018

–

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 the Company in the

first

quarter of fiscal

2021

with early adoption permitted. This ASU requires retrospective adoption to the date the Company 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.

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

)

. ASU

2018

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.

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 becomes effective for the Company in the

first

quarter of fiscal year

2021.

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