cyan20210930

cyan20210930_10q.htm

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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 September 30, 2021

☐

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.02 par value per share	CYAN	NASDAQ

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, a smaller reporting company, or an emerging growth company. See the 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 November 4, 2021, the number of shares outstanding of the registrant’s common stock was 6,194,166.

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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 22, 2021. 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 subsidiary, are referred to as “the Company.”

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CYANOTECH CORPORATION

FORM 10-Q

INDEX

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets as of September 30, 2021 and March 31, 2021 (unaudited)	4
	Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2021 and 2020 (unaudited)	5
	Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended September 30, 2021 and 2020 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2021 and 2020 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 4.	Controls and Procedures	25

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	26
Item 1A	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults upon Senior Securities	26
Item 5.	Other Information	26
Item 6.	Exhibits	27

SIGNATURES		28

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CYANOTECH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	September 30, 2021			March 31, 2021
ASSETS
Current assets:
Cash	$	2,134		$	3,767
Accounts receivable, net of allowance for doubtful accounts of $113 as of September 30, 2021 and $32 as of March 31, 2021		3,077			2,436
Inventories, net		9,808			8,415
Prepaid expenses and other current assets		339			488
Total current assets		15,358			15,106

Equipment and leasehold improvements, net		11,901			12,136
Operating lease right-of-use assets, net		3,500			3,517
Other assets		118			120
Total assets	$	30,877		$	30,879

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,833		$	2,287
Accrued expenses		1,250			844
Customer deposits		110			124
Operating lease obligations, current portion		373			343
Line of credit		350			1,000
Current maturities of long-term debt		731			1,210
Total current liabilities		4,647			5,808

Long-term debt, less current maturities		4,468			4,823
Long-term operating lease obligations		3,125			3,175
Other long-term liabilities		24			32
Total liabilities		12,264			13,838

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, authorized 50,000,000 shares; issued and outstanding 6,138,728 shares at September 30, 2021 and 6,116,073 shares at March 31, 2021		123			122
Additional paid-in capital		33,347			33,267
Accumulated deficit		(14,857	)		(16,348	)
Total stockholders’ equity		18,613			17,041
Total liabilities and stockholders’ equity	$	30,877		$	30,879

See accompanying notes to condensed consolidated financial statements

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CYANOTECH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended September 30,						Six Months Ended September 30,
	2021			2020			2021			2020

Net sales	$	9,419		$	8,571		$	18,383		$	15,923
Cost of sales		5,657			5,270			10,949			9,647
Gross profit		3,762			3,301			7,434			6,276

Operating expenses:
General and administrative		1,422			1,472			2,768			2,800
Sales and marketing		1,131			1,374			2,681			2,618
Research and development		127			173			284			308
Total operating expenses		2,680			3,019			5,733			5,726

Income from operations		1,082			282			1,701			550

Interest expense, net		(101	)		(121	)		(196	)		(251	)

Income before income taxes		981			161			1,505			299

Income tax expense		11			6			14			6

Net income	$	970		$	155		$	1,491		$	293

Net income per share:
Basic	$	0.16		$	0.03		$	0.24		$	0.05
Diluted	$	0.15		$	0.03		$	0.24		$	0.05

Shares used in calculation of net income per share:
Basic		6,130			6,054			6,124			6,042
Diluted		6,315			6,163			6,312			6,147

See accompanying notes to condensed consolidated financial statements

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CYANOTECH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

Three months ended September 30, 2021 and 2020

	Common Stock Shares			Common Stock Amount		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity
	(in thousands, except per share data)
Balances at June 30, 2021		6,117,719		$	122	$	33,285		$	(15,827	)	$	17,580
Issuance of vested shares of restricted stock		32,210			1		(37	)		—			(36	)
Shares withheld for tax payments		(11,201	)		—		—			—			—
Share-based compensation expense		—			—		99			—			99
Net income		—			—		—			970			970
Balances at September 30, 2021		6,138,728		$	123	$	33,347		$	(14,857	)	$	18,613

Balances at June 30, 2020		6,028,312		$	120	$	32,999		$	(17,130	)	$	15,989
Issuances of common stock for Director Stock Grants		66,385			1		157			—			158
Issuance of vested shares of restricted stock		3,637			1		(3	)		—			(2	)
Shares withheld for tax payments		(1,261	)		—		—			—			—
Share-based compensation expense		—			—		11			—			11
Net income		—			—		—			155			155
Balances at September 30, 2020		6,097,073		$	122	$	33,164		$	(16,975	)	$	16,311

Six months ended September 30, 2021 and 2020

	Common Stock Shares			Common Stock Amount		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity
	(in thousands, except per share data)
Balances at March 31, 2021		6,116,073		$	122	$	33,267		$	(16,348	)	$	17,041
Issuance of vested shares of restricted stock		34,751			1		(40	)		—			(39	)
Shares withheld for tax payments		(12,096	)		—		—			—			—
Share-based compensation expense		—			—		120			—			120
Net income		—			—		—			1,491			1,491
Balances at September 30, 2021		6,138,728		$	123	$	33,347		$	(14,857	)	$	18,613

Balances at March 31, 2020		6,011,885		$	120	$	32,994		$	(17,268	)	$	15,846
Issuances of common stock for Director Stock Grants		66,385			1		157			—			158
Issuance of common stock in connection with severance of former executive		11,400			—		—			—			—
Shares withheld from former executive for tax payments		(3,635	)		—		—			—			—
Issuance of vested shares of restricted stock		17,469			1		(7	)		—			(6	)
Shares withheld for tax payments		(6,431	)		—		—			—			—
Share-based compensation expense		—			—		20			—			20
Net income		—			—		—			293			293
Balances at September 30, 2020		6,097,073		$	122	$	33,164		$	(16,975	)	$	16,311

See accompanying notes to condensed consolidated financial statements

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CYANOTECH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Six Months Ended September 30,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,491		$	293
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		798			918
Amortization of debt issue costs and other assets		32			54
Amortization of operating leases right-of-use assets		144			156
Share-based compensation expense		120			178
Provision for doubtful accounts		85			—
Net (increase) decrease in assets:
Accounts receivable		(726	)		71
Inventories		(897	)		(421	)
Prepaid expenses and other assets		134			73
Net increase (decrease) in liabilities:
Accounts payable		(992	)		(8	)
Accrued expenses		406			129
Customer deposits		(14	)		(129	)
Operating lease obligations		(147	)		(156	)
Deferred rent and other liabilities		(8	)		(17	)
Net cash provided by operating activities		426			1,141
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements		(521	)		(295	)
Net cash used in investing activities		(521	)		(295	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on short-term contract obligation		—			(38	)
Net payments on line of credit		(650	)		—
Net payments on debt – related party		(500	)		—
Proceeds from long-term debt – PPP loan		—			1,381
Principal payments on long-term debt		(349	)		(330	)
Payments on finance leases		—			(17	)
Taxes paid related to net share settlement of restricted stock units		(39	)		(6	)
Net cash (used in) provided by financing activities		(1,538	)		990
Net (decrease) increase in cash		(1,633	)		1,836
Cash at beginning of period		3,767			2,417
Cash at end of period	$	2,134		$	4,253

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	180		$	235
Income taxes	$	2		$	14

See accompanying notes to condensed consolidated financial statements

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CYANOTECH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2021

(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 Capital 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, Condensed Consolidated Statements of Stockholders’ Equity 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, 2021 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, 2021, contained in the Company’s annual report on Form 10-K as filed with the SEC on June 22, 2021.

Liquidity and Capital Resources

As of September 30, 2021, the Company had cash of $2,134,000 and working capital of $10,711,000 compared to $3,767,000 and $9,298,000, respectively, as of March 31, 2021. The Company has a Revolving Credit Agreement (“Credit Agreement”) with First Foundation Bank (“Bank”) that allows the Company to borrow up to $2,000,000 on a revolving basis. At September 30, 2021 and March 31, 2021, the Company had outstanding borrowings of $350,000 and $1,000,000, respectively, on the line of credit. The line of credit is subject to renewal on August 30, 2022 and the Company intends to renew or replace it with another line of credit on or before the expiration date.

As of September 30, 2021, the Company had $4,281,000 in long-term debt (“Term Loans”) payable to the Bank that require the payment of principal and interest monthly through August 2032. Pursuant to the Term Loans and the Credit Agreement, the Company is subject to annual financial covenants, customary affirmative and negative covenants and certain subjective acceleration clauses. As of March 31, 2021, the Company was in compliance with all required annual financial covenants under the Term Loans and the Credit Agreement.

In response to the coronavirus (“COVID-19”) pandemic and the uncertainty surrounding the pandemic, in May 2020, the Company obtained a Paycheck Protection Program (“PPP”) loan in the amount of $1,381,000, under the Coronavirus Aid, Relief, and Economics Security Act (“CARES Act”). The proceeds were used for certain payroll costs in accordance with the PPP and the PPP Flexibility Act of 2020 (“PPP Flexibility Act”). In December 2020, the Company received notice of forgiveness of the PPP loan in whole, including all accrued interest to date. (see Note 6). In April 2019, the Company obtained a loan in the amount of $1,500,000 from a related party. The proceeds were used to pay down accounts payable and for general operating capital purposes. On April 12, 2021, the Company amended this loan (see Notes 6 and 13).

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

Based upon the Company’s operating plan and related cash flow and financial projections, cash flows expected to be generated by operating activities and available financing are expected to be sufficient to fund its operations through at least September 30, 2022, and the Company’s debt service coverage ratio and current ratio covenants are expected to be in compliance with the annual Term Loans and Credit Agreement covenant requirements as of March 31, 2022, the next measurement date. However, no assurances can be provided that the Company will achieve its operating plan and cash flow projections for the next fiscal years or its projected consolidated financial position as of March 31, 2022. Such estimates are subject to change based on future results and such change could cause future results to vary significantly from expected results.

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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

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

Concentration Risk

A significant portion of revenue and accounts receivable are derived from a few major customers. For the three months ended September 30, 2021, two customers individually accounted for 28% and 21% of the Company’s total net sales, and for the three months ended September 30, 2020, two customers individually accounted for 24% and 21% of the Company’s total net sales. For the six months ended September 30, 2021, two customers individually accounted for 21% and 16% of the Company’s total net sales, and for the six months ended September 30, 2020, two customers individually accounted for 19% and 16% of the Company’s total net sales. Two customers accounted for 60% of the Company’s accounts receivable balance as of September 30, 2021, and three customers accounted for 57% of the Company’s accounts receivable balance as of March 31, 2021.

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 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 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 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 three months ended September 30, 2021 and 2020, the Company did not recognize any revenue from deposits that were included in contract liabilities as of March 31, 2021 and 2020, respectively. During the six months ended September 30, 2021 and 2020, the Company recognized $49,000 and $251,000, respectively, of revenue from deposits that were included in contract liabilities as of March 31, 2021 and 2020, 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.

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Disaggregation of Revenue

The following table represents revenue disaggregated by major product line and extraction services for the:

($ in thousands)	Three Months Ended September 30, 2021		Three Months Ended September 30, 2020
Packaged sales
Astaxanthin packaged	$	4,015	$	4,138
Spirulina packaged		1,796		2,126
Total packaged sales		5,811		6,264

Bulk sales
Astaxanthin bulk		509		463
Spirulina bulk		2,985		1,684
Total bulk sales		3,494		2,147

Contract extraction revenue		114		160
Total net sales	$	9,419	$	8,571

($ in thousands)	Six Months Ended September 30, 2021		Six Months Ended September 30, 2020
Packaged sales
Astaxanthin packaged	$	8,054	$	7,354
Spirulina packaged		4,538		3,968
Total packaged sales		12,592		11,322

Bulk sales
Astaxanthin bulk		914		908
Spirulina bulk		4,569		3,214
Total bulk sales		5,483		4,122

Contract extraction revenue		308		479
Total net sales	$	18,383	$	15,923

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes, removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company adopted ASU 2019-12 as of April 1, 2021 with no impact on its consolidated financial statements and related disclosures.

In November 2018, the FASB issued ASU 2018-18 – Collaborative Arrangements (“ASU 2018-18”), 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 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 adopted ASU 2018-18 as of April 1, 2020 with no impact on its financial statements.

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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). The Company adopted ASU No. 2018-15 as of April 1, 2020 with no impact 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 Company adopted this standard as of April 1, 2020, with no impact to its disclosures.

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 as of:

	September 30, 2021		March 31, 2021
	(in thousands)
Raw materials	$	932	$	547
Work in process		4,052		3,206
Finished goods		4,562		4,423
Supplies		262		239
Inventories, net	$	9,808	$	8,415

The Company recognizes abnormal production costs, including fixed cost variances from normal production capacity, fixed production overhead costs, idle facilities, freight handling costs and spoilage, as an expense in the period incurred, without adjusting overhead absorption rates. Normal production capacity is defined as the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The Company had no abnormal productions costs for the three or six months ended September 30, 2021 or September 30, 2020.

In fiscal 2021, cultivation of astaxanthin was completed in the first six months of the fiscal year during the most productive months of the year due to the best growing conditions, compared to year-round production in the prior fiscal years. The same approach is being followed in fiscal year 2022. The Company calculates total production costs for the year based on normal capacity of production expected to be achieved in a year under normal circumstances. These costs are then allocated into inventory based on the period of production, not including abnormal production costs. Allocating fixed and overhead costs requires management’s judgement to determine when production is outside of the normal range of expected variation in production.

Other non-inventoriable fixed costs of $32,000 and $17,000 were expensed to cost of sales for the three months ended September 30, 2021 and 2020, respectively. Other non-inventoriable fixed costs of $36,000 and $46,000 were expensed to cost of sales for the six months ended September 30, 2021 and 2020, respectively.

4.	EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following as of:

	September 30, 2021			March 31, 2021
	(in thousands)
Equipment	$	19,368		$	19,056
Leasehold improvements		14,744			14,703
Furniture and fixtures		376			372
		34,488			34,131
Less accumulated depreciation and amortization		(23,538	)		(22,740	)
Construction-in-progress		951			745
Equipment and leasehold improvements, net	$	11,901		$	12,136

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Management has determined no asset impairment existed as of September 30, 2021 and March 31, 2021, respectively. Depreciation and amortization expense were approximately $398,000 and $451,000 for the three months ended September 30, 2021 and 2020, respectively. Depreciation and amortization expense were approximately $