2.	SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("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.

Financial Instruments

The Company applies a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level

measurements) and the lowest priority to unobservable inputs (level

measurements). The

three

levels of the fair value hierarchy are described below:

	Level 1 —	Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.
	Level 2 —	Inputs to the valuation methodology include:

	●	Quoted prices for similar assets or liabilities in active markets;
	●	Quoted prices for identical or similar assets or liabilities in inactive markets;
	●	Inputs other than quoted prices that are observable for the asset or liability; and
	●	Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

If the asset or liability has a specified (contractual) term, the Level

input must be observable for substantially the full term of the asset or liability.

Level

—

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

Cash, Restricted Cash, Accounts Receivable, Accounts Payable, Accrued Expenses and Customer Deposits

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

Line of Credit, Short-Term Contract Obligations and Long-Term Debt

- The carrying amount of our line of credit and long-term debt approximates fair value as interest rates applied to the underlying debt are adjusted quarterly to market interest rates, which approximate current interest rates for similar debt instruments of comparable maturities. The carrying amount of our short-term contract obligation approximates fair value due to its short maturity.

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.

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:

	March 31, 20 20		March 31, 201 9
	(in thousands)
Cash	$	840	$	1,329
Restricted cash		—		65
Cash and restricted cash at beginning of period	$	840	$	1,394

Cash	$	2,417	$	840
Restricted cash		—		—
Cash and restricted cash at end of period	$	2,417	$	840

Concentration Risk

The Company maintains its cash accounts in banks located in Hawaii, which are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to

$250,000

per bank. The Company had cash balances at

March 31, 2020

and

2019

that exceeded the balance insured by the FDIC by

$1,917,000

and

$340,000,

respectively. A significant portion of revenues and accounts receivables are derived from a few major customers. For the year ended

March 31, 2020,

two

customers accounted for

33%

and

18%

of the Company’s total net sales and for the year ended

March 31, 2019,

two

customers accounted for

33%

and

24%

of the Company’s total net sales. For the year ended

March 31, 2017,

two

customers accounted for

32%

and

15%

of our total net sales.

Two

and

three

customers accounted for

80%

and

60%

, respectively, of the Company’s accounts receivable balance as of

March 31, 2020

and

2019,

respectively.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and do

not

accrue interest. Credit is extended based on evaluation of the customer's financial condition. Collateral is

not

required. The allowance for doubtful accounts reflects management’s best estimate of probable credit losses inherent in the accounts receivable balance. Management determines the allowance based on historical experience, specifically identified nonpaying accounts and other currently available evidence. Management reviews its allowance for doubtful accounts monthly with a focus on significant individual past due balances over

days. All other balances are reviewed on a pooled basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does

not

have any off-balance sheet credit exposure related to its customers or otherwise.

Inventories

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

first

-in,

first

-out (“FIFO”) method. Net realizable value is defined as estimated sales price less cost to dispose. Inventory costs include materials, labor, overhead and

third

-party costs. Management provides a reserve against inventory for known or expected inventory obsolescence. The reserve is determined by specific review of inventory items for product age and quality which

may

affect salability.

The Company recognizes abnormal production costs, including fixed cost variances from normal production capacity, as an expense in the period incurred. Abnormal amounts of freight, handling costs and wasted material (spoilage) are recognized as current period charges and fixed production overhead costs are allocated to inventory based on the normal capacity of production facilities. Normal capacity is defined as the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance.

Equipment and Leasehold Improvements

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

and

) or estimated useful lives for leasehold improvements as follows (in years):

Equipment	3	to	10
Furniture and fixtures	3	to	7
Leasehold improvements	10	to	25

Capital project costs are accumulated in construction-in-progress until completed, at which time the costs are transferred to the relevant asset and commence depreciation. Repairs and Maintenance costs are expensed in the period incurred. Repairs and maintenance that significantly increase the useful life or value of the asset are capitalized and depreciated over the remaining life of the asset. The Company capitalizes interest cost incurred on funds used to construct property and equipment. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life.

Impairment of Long-Lived Assets

Management reviews long-lived assets, such as equipment, leasehold improvements and purchased intangibles subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset

may

not

be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized to the extent that the carrying amount exceeds the asset’s fair value. Assets to be disposed of and related liabilities would be separately presented in the consolidated balance sheet. Assets to be disposed of would be reported at the lower of the carrying value or fair value less costs to sell and would

not

be depreciated.

Accounting for Asset Retirement Obligations

Management evaluates quarterly the potential liability for asset retirement obligations under the Company’s lease for its principal facility and corporate headquarters.

liability has been recognized as of

March

31,

2020

and

2019

(see Note

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 the Company’s 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 years ended

March 31, 2020

and

2019,

the Company recognized

$550,000

and

$133,000,

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.

Research and Development

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

Advertising

Advertising costs are expensed as incurred. Total advertising expense for the years ended

March

31,

2020,

2019

and

2018

was

$1,992,000,

$2,413,000,

and

$1,548,000,

respectively.

Income Taxes

Income taxes are accounted for under the asset and liability method. The asset and liability method require the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using income tax rates applicable to the period in which the tax difference is expected to reverse.

Judgment is required in determining any valuation allowance recorded against deferred tax assets, specifically net operating loss carryforwards, tax credit carryforwards and deductible temporary differences that

may

reduce taxable income in future periods. In assessing the need for a valuation allowance, the Company considers all available evidence including past operating results, estimates of future taxable income and tax planning opportunities. In the event the Company changes its determination as to the amount of deferred tax assets that can be realized, it will adjust its valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made.

In evaluating a tax position for recognition, management evaluates whether it is more-likely-than-

not

that a position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-

not

recognition threshold, the tax position is measured and recognized in the Company’s financial statements as the largest amount of tax benefit that, in management’s judgment, is greater than

50%

likely of being realized upon settlement. At

March 31, 2020

and

2019,

there were

liabilities for income tax associated with unrecognized tax benefits.

The Company recognizes accrued interest related to unrecognized tax benefits as well as any related penalties in interest expense in its consolidated statements of operations. During the years ended

March

31,

2020

and

2019,

there was

accrual for the payment of interest and penalties related to uncertain tax positions.

Share-Based Compensation

The Company accounts for share-based payment arrangements using fair value. The Company currently has

liability-classified awards. Equity-classified awards, including grants of restricted stock, restricted stock units and employee stock options, are measured at the grant-date fair value of the award and are

not

subsequently remeasured unless an award is modified. The cost of equity-classified awards is recognized in the statement of operations over the period during which an employee is required to provide the service in exchange for the award, or the vesting period. All of the Company’s restricted stock, restricted stock units and stock options are service-based awards, and considered equity-classified awards; as such, they are reflected in Equity and Stock Compensation Expense accounts. All stock-based compensation has been classified as general and administrative expense in the consolidated statement of operations.

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

Per Share Amounts

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

March

31,

2020,

2019

and

2018

is presented in Note

12.

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 Consolidated Balance Sheets and are described in Note

See Note

for operating leases.

June 2018,

the Financial Accounting Standards Board ("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 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.