(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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,” ~~and~~ “smaller reporting ~~company”~~ company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

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 ☒

See ~~Accompanying~~accompanying Notes to Condensed Consolidated Financial Statements.

3.	EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET

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, or the shorter of the land lease term or estimated useful lives for leasehold improvements as follows:

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

Equipment and leasehold improvements consist of the following:

	September 30, 2016			March 31, 2016			June 30, 2017			March 31, 2017
	(in thousands)						(in thousands)
Equipment	$	17,418		$	17,040		$	17,427		$	17,492
Leasehold improvements		13,887			13,797			13,892			13,892
Furniture and fixtures		376			354			380			380
		31,681			31,191			31,699			31,764
Less accumulated depreciation and amortization		(14,985	)		(14,067	)		(16,315	)		(15,835	)
Construction-in-progress		449			672			905			783
Equipment and leasehold improvements, net	$	17,145		$	17,796		$	16,289		$	16,712

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~~asset’s fair value. Management has determined no asset impairment existed as of ~~September~~June 30, ~~2016. The Company recognized a gain on disposal of assets in the amount of $16,000~~2017 and ~~$13,000 for the three and six months ended September 30,~~ 2016, respectively. ~~The Company recognized a gain on disposal of assets in the amount of $29,000 and $29,000 for the three and six months ended September 30, 2015, respectively.~~

The Company has no capitalized interest for the three and six months ended September 30, 2016. $78,000 and $137,000 of interest was capitalized for the three and six month period ended September 30, 2015, respectively.

4.	~~NOTES PAYABLE~~LINE OF CREDIT

~~Line of~~C~~redit~~

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~~Company’s leasehold property in ~~Kona.~~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 (4.25% at June 30, 2017) + 2%, floating. The Credit Agreement’s initial term expires on August 30, 2017, and the term may be extended at the Bank’s sole discretion. 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. Proceeds from the revolving line were used to repay a $600,000 short-term loan from First Foundation Bank. At ~~September~~June 30, ~~2016,~~2017, the Company had borrowed ~~$611,000~~$500,000 under the Credit Agreement and had ~~$1,389,000~~$1,500,000 available on the line.The line of credit is subject to renewal on August 30, 2017 and the Company is working proactively with the Bank to renew the line of credit or replace it with another line of credit on or before the expiration date. The Bank has issued a letter to the Company dated June 12, 2017 indicating it intends to renew the line of credit subject to approval by its credit committee.

The Credit Agreement grants the Bank the following security interests in the ~~Company’s~~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.

5.5.	ACCRUED EXPENSES

Accrued expenses consist of the following:

September 30,
2016

March 31,
2016

(in thousands)

Wages, bonus and profit sharing
$ 836 $ 972
Legal
386 95
Use tax
141 140
Customer rebates
— 74
Rent and utilities
66 49
Other expenses
74 100
Total accrued expenses
$ 1,503 $ 1,430

	June 30, 2017		March 31, 2017
	(in thousands)
Wages, commissions, bonus and profit sharing	$	912	$	793
Rent and utilities		78		69
Other accrued expenses		153		151
Total accrued expenses	$	1,143	$	1,013

6.6.	LONG-TERM DEBT

Long-term debt consists of the following:

	September 30, 2016			March 31, 2016			June 30, 2017			March 31, 2017
	(in thousands)						(in thousands)
Long-term debt	$	7,439		$	7,668		$	6,988		$	7,139
Less current maturities		(605	)		(574	)		(624	)		(623	)
Long-term debt, excluding current maturities		6,834			7,094			6,364			6,516
Less unamortized debt issuance costs		(285	)		(304	)		(259	)		(267	)
Total long-term debt, net of current maturities and unamortized debt issuance costs	$	6,549		$	6,790		$	6,105		$	6,249

Term Loans

The Company executed a loan agreement with a lender providing for $2,500,000 in aggregate credit facilities (the “2015 Loan”) secured by substantially all the ~~Company’s~~Company’s assets, pursuant to a Term Loan Agreement dated July 30, 2015 (the “2015 Loan Agreement”). The 2015 Loan Agreement is evidenced by a promissory note in the amount of $2,500,000, the repayment of which is partially guaranteed under the provisions of a United States Department of Agriculture (“USDA”) Rural Development Guarantee program. The proceeds of the 2015 Loan were used to pay off a $500,000 short term note payable that matured on September 18, 2015, ~~and to~~ acquire new processing equipment and leasehold improvements at the Company’s Kona, Hawaii facility.

The provisions of the 2015 Loan Agreement require the payment of principal and interest until its maturity on September 1, 2022, the obligation fully amortizes over seven (7) years. Interest on the 2015 Loan accrues on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate ~~(3.50%~~(4.25% at ~~September~~June 30, ~~2016)~~2017) plus 2.0% 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 6.00%. The 2015 Loan has a prepayment penalty of 5% for any prepayment made prior to the first anniversary of the date of the 2015 Loan Agreement, which penalty is reduced by 1% each year thereafter until the fifth anniversary of such date, after which there is no prepayment penalty. The balance under the 2015 Loan was ~~$2,204,000~~$1,970,000 and ~~$2,354,000~~$2,049,000 at ~~September~~June 30, ~~2016~~2017 and March 31, ~~2016,~~2017, respectively.

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 amount of unamortized debt issuance cost was $93,000 and $102,000 as September 30, 2016 and March 31, 2016, respectively.~~ 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.

The Company executed a loan agreement with a lender providing for $5,500,000 in aggregate credit facilities (the “Loan”) secured by substantially all the ~~Company’s~~Company’s assets, including a mortgage on the Company's interest in its lease at the National Energy Laboratory of Hawaii Authority, pursuant to a Term Loan Agreement dated August 14, 2012 (the “Loan Agreement”). The Loan Agreement is evidenced by promissory notes in the amounts of $2,250,000 and $3,250,000, the repayment of which is partially guaranteed under the provisions of a USDA Rural Development Guarantee. The proceeds of the Loan have been used to acquire new processing equipment and leasehold improvements at the Company’s Kona, Hawaii facility.

The provisions of the Loan ~~Agreement~~ required the payment of interest only for the first 12 months of the term; thereafter, and until its maturity on August 14, 2032, the obligation fully amortizes over nineteen (19) years. Interest on the Loan accrues on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate ~~(3.50%~~(4.25% at ~~September~~June 30, ~~2016)~~2017) 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 Loan has a prepayment penalty of 5% for any prepayment made prior to the first anniversary of the date of the Loan Agreement, which penalty is reduced by 1% each year thereafter until the fifth anniversary of such date, after which there is no prepayment penalty. The balance under this Loan was ~~$4,954,000~~$4,804,000 and ~~$5,049,000~~$4,854,000 at ~~September~~June 30, ~~2016~~2017 and March 31, ~~2016,~~2017, respectively. Proceeds from the Loan were classified as restricted cash until drawn upon to acquire new processing equipment and leasehold improvements.

The Loan ~~Agreement included~~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 ~~amount of unamortized debt issuance cost was $193,000 and $202,000 as September 30, 2016 and March 31, 2016, respectively. The~~ USDA has guaranteed 80% of all amounts owing under the Loan. The Company is subject to financial covenants and customary affirmative and negative covenants.

The Company’s current ratio of 1.92 to 1 and 1.97 to 1 as of March 31, 2017 and 2016, respectively, fell short of the bank’s requirement of 2.10 to 1; however, the Company has received letters from its bank stating that they found the Company to be in compliance with this and all other financial covenants as of March 31, 2017 and 2016, and do not consider these shortfalls to be a defaults under the Loan Agreements.

Capital Leases

The Company has four capital leases providing for $364,000 in equipment, secured by the equipment financed. The capital leases mature at various dates between March 2018 and March ~~2021and~~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 balance under these leases was ~~$281,000~~$214,000 and ~~$261,000~~$236,000 at ~~September~~June 30, ~~2016~~2017 and March 31, ~~2016,~~2017, respectively.

Future principal payments under the term ~~loans~~loan and capital lease agreements as of ~~September~~June 30, ~~2016~~2017 are as follows:

Payments Due	(in thousands)		(in thousands)
Next 12 Months	$	605	$	624
Year 2		626		636
Year 3		640		653
Year 4		655		652
Year 5		655		678
Thereafter		4,258		3,745
Total principal payments	$	7,439	$	6,988

7.7.	OPERATING LEASES

The Company leases facilities, equipment and land under operating leases expiring through 2035. The land lease provides for contingent rentals in excess of minimum rental commitments based on a percentage of the ~~Company’s~~Company’s sales. Management has accrued for the estimated contingent rent as of ~~September~~June 30, ~~2016.~~2017.

Future minimum lease payments under all non-cancelable operating leases at ~~September~~June 30, ~~2016~~2017 are as follows:

Payments Due

(in thousands)

Next 12 Months
$ 610
Year 2
608
Year 3
617
Year 4
581
Year 5
526
Thereafter
4,556
Total minimum lease payments
$ 7,498

Payments Due	(in thousands)
Next 12 Months	$	614
Year 2		618
Year 3		608
Year 4		526
Year 5		532
Thereafter		4,157
Total minimum lease payments	$	7,055

8.	OTHER COMMITMENTS AND CONTINGENCIES

~~On May 24, 2016, one of our shareholders, Meridian OHC Partners, LP, initiated an action in the United States District Court, District of Nevada, entitled~~~~Meridian OHC Partners, LP vs. Cyanotech Corporation, Michael Davis and Rudolf Steiner Foundation (RSF), Inc.~~ The operative amended complaint makes certain derivative claims on behalf of the Company, direct claims on behalf of Meridian, and alleges, among other things, (i) that there were deficiencies in the beneficial ownership reports of Mr. Davis, the Chairman of our Board of Directors, and RSF, a shareholder of the Company, including that Mr. Davis and RSF are an undisclosed group with respect to their shares of Company Common Stock, and (ii) that Mr. Davis has breached fiduciary duties to the Company. Meridian seeks, among other things, declaratory and injunctive relief to reform this conduct.

On August 26, 2016, the Company moved to dismiss Meridian’s initial complaint on the ground that Meridian lacked standing to proceed derivatively on behalf of the Company. In response, on September 19, 2016, Meridian filed an amended complaint. On November 4, 2016, the Company filed a motion to dismiss the amended complaint, again arguing that Meridian lacks standing to proceed derivatively on behalf of the Company.

As previously disclosed, the Board of Directors of the Company formed a Special Committee comprised of independent directors to investigate, review and analyze the Meridian allegations and provide its recommendations to the Board. The Special Committee completed its investigation and presented its findings and recommendations to the Board on September 2, 2016. The special committee concluded, among other things, that (i) Mr. Davis should be filing his reports pursuant to Section 13 of the Exchange act (“Section 13”) on schedule 13D rather than on the short form schedule 13G; (ii) it has not found sufficient information to conclude that a “group” exists under Section 13; and (iii) it has not found any material corporate governance issues. The Special Committee did not recommend that the Board take legal action in response to Meridian’s allegations. The Board unanimously approved the findings and adopted the recommendations of the Special Committee. Additional details regarding the Special Committee’s findings and recommendations are set forth in the Company’s Form 8-K filed with the SEC on September 9, 2016.

On March 31, 2016, the Company entered into a Separation Agreement and Release of Claims (the “Separation Agreement”), pursuant to which Brent Bailey, now-former CEO, resigned from the Company effective as of the date of the Separation Agreement. Under the Separation Agreement, Mr. Bailey was eligible to receive (i) an aggregate of $325,000 in separation payments, payable monthly through the end of April 2017, and (ii) up to 155,000 shares of the Company’s Common Stock, to be granted in two tranches. On April 29, 2016, the Company issued 48,467 shares of its Common Stock to Mr. Bailey in accordance with the Separation Agreement. On October 19, 2016 (the “Notification Date”), the Board notified Brent Bailey that, as a result of Mr. Baileys material breach of certain provisions of the Separation Agreement and his Employment Letter Agreement, dated November 5, 2010, the Board has exercised its right to terminate all future severance payments, healthcare benefits and share grants that would otherwise be payable to Mr. Bailey under the Separation Agreement, effective as of the Notification Date. In connection with the Separation and Release of Claims, the Company accrued separation expenses of $216,000 as of September 30, 2016. By letter dated October 27, 2016, Mr. Bailey informed the Company that he disputes the Company’s termination of his benefits, and he intends to initiate the mediation procedures set forth in the Separation Agreement.

From time to time, the Company may be involved in ~~other~~ 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.

9.9.	SHARE-BASED COMPENSATION

The Company accounts for share-based payment arrangements using fair value. If an award vests or becomes exercisable based on the achievement of a condition other than service, such as for meeting certain performance or market conditions, the award is classified as a liability. Liability-classified awards are remeasured to fair value at each balance sheet date until the award is settled. The Company currently has no liability-classified awards. Equity-classified awards, including grants of 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~~Company’s stock options are service-based awards, and because the Company’s stock options are “plain vanilla,” as defined by the U.S. Securities and Exchange Commission in Staff Accounting Bulletin No. 107, they are reflected only in equity and compensation expense accounts.

~~Stock Options~~

As of ~~September~~June 30, ~~2016,~~2017, the Company had two equity-based compensation plans: the 2016 ~~Cyanotech~~ Equity Incentive Plan (the ~~“2016 Plan”)~~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 ~~September~~June 30, ~~2016,~~2017, 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.

On August 25, 2016, the ~~Company’s~~Company’s shareholders approved the 2016 Plan as a successor to the 2005 Plan, authorizing the Board of Directors to provide incentive to the Company’s officers, employees and certain independent consultants through equity based compensation in the form of stock options, restricted stock, restricted stock units, stock appreciation rights and other stock based awards (together, “Stock Awards”) and performance shares and performance units (together, “Performance Awards”). Awards under the 2016 Plan are limited to the authorized amount of 1,300,000 shares, up to 600,000 of which are available for issuance in connection with Performance Awards and Stock Awards. As of ~~September~~June 30, ~~2016,~~2017, there were ~~1,300,000~~1,247,656 shares available for grant under the 2016 Plan.

On August 28, 2014, the ~~Company’s~~Company’s shareholders approved the 2014 Directors Plan authorizing the Board of Directors to provide incentive to the Company’s independent directors through equity based compensation in the form of stock options and restricted stock. Awards under the 2014 Directors Plan are limited to the authorized amount of 350,000 shares. As of ~~September~~June 30, ~~2016,~~2017, there were 289,124 shares available for grant under the 2014 Directors Plan.

~~The 2005 Plan and the 2004 Directors Plan have expired, and therefore no additional awards will be issued under those plans.~~

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

	As ofSeptember 30, 2016						As of June 30, 2017
	Authorized		Available		Outstanding		Authorized		Available		Outstanding

2016 Plan		1,300,000		1,300,000		—		1,300,000		1,247,656		52,344
2014 Plan		350,000		289,124		12,000
2014 Directors Plan								350,000		289,124		12,000
2005 Plan		—		—		642,500		—		—		477,500
2004 Directors Plan		—		—		12,000		—		—		12,000
Total		1,650,000		1,589,124		666,500		1,650,000		1,536,780		553,844

Stock Options

All stock option grants made under the equity-based compensation plans were issued at exercise prices no less than the ~~Company’s~~Company’s closing stock price on the date of grant. Options under the 2005 Plan and 2014 Directors Plan were determined by the Board of Directors or the ~~Stock Option and~~ 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 are 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 ~~the 2005 Plan~~all Plans was ~~$58,000~~$15,000 and ~~$136,000~~$77,000 for the three ~~and six~~ months ended ~~September~~June 30, 2017 and 2016, respectively. Compensation expense recognized for options issued under the 2005 Plan was $161,000 and $324,000 for the three and six months ended September 30, 2015, respectively. Compensation expense recognized for options issued under the 2014 Directors Plan was $1,000 and $1,500 for the three and six months ended September 30, 2016. Compensation expense recognized for restricted stock issued under the 2014 Directors Plan was ~~$78,000~~$16,000 and $0 for the three ~~and six~~ months ended ~~September~~June 30, ~~2016. No compensation expense was recognized under the 2014 Directors Plan for the three~~2017 and ~~six months ended September 30, 2015.~~2016, respectively. All ~~share-based~~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~~Company’s stock plans for the ~~six~~three months ended ~~September~~June 30, ~~2016~~2017 is presented below:

Option Activity	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value		Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value
Outstanding at March 31, 2016		685,000		$	4.65		5.7	$	566,323
Outstanding at March 31, 2017											503,000		$	4.10		4.7	$	145,946
Granted		6,000		$	4.08						—			—
Exercised		(1,500	)	$	3.11						—			—
Forfeited		(23,000	)	$	5.02						(1,500	)	$	3.11
Outstanding at September 30, 2016		666,500		$	4.63		5.2	$	136,596
Exercisable at September 30, 2016		578,000		$	4.41		5.0	$	136,596
Outstanding at June 30, 2017											501,500		$	4.10		4.4	$	103,461
Exercisable at June 30, 2017											482,000		$	4.07		4.3	$	103,461

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~~Company’s closing stock price of ~~$3.69~~$3.55 for such day.

A summary of the ~~Company’s~~Company’s non-vested options for the ~~six~~three months ended ~~September~~June 30, ~~2016~~2017 is presented below:

Nonvested Options	Shares		Weighted Average Grant-Date Fair Value
Nonvested at March 31, 2017		19,500	$	2.93
Granted		—		—
Vested		—		—
Forfeited		—		—
Nonvested at June 30, 2017		19,500	$	2.93

Nonvested Options

Shares

Weighted
Average
Grant-Date
Fair Value

Nonvested at March 31, 2016
171,250 $ 3.75
Granted
6,000 .83
Vested
(83,750
)
3.29
Forfeited
(5,000
)
3.48
Nonvested at September 30, 2016
88,500 $ 4.00

The following table summarizes the weighted average characteristics of outstanding stock options as of ~~September~~June 30, ~~2016:~~2017:

			Outstanding Options						Exercisable Options						Outstanding Options						Exercisable Options
Range of Exercise Prices	Range of Exercise Prices		Number of Shares		Remaining Life (Years)		Weighted Average Price		Number of Shares		Weighted Average Price		Range of Exercise Prices		Number of Shares		Remaining Life (Years)		Weighted Average Price		Number of Shares		Weighted Average Price
$1.60	-	$3.70		146,920		3.5	$	2.76		146,920	$	2.76	-	$3.70		124,620		2.7	$	2.73		124,620	$	2.73
$3.71	-	$4.42		200,580		5.0	$	3.82		194,580	$	3.82	-	$4.42		197,380		4.3		3.83		197,380		3.83
$4.43	-	$5.40		95,000		6.7	$	5.00		66,500	$	5.01	-	$5.40		95,000		5.9		5.00		75,500		5.04
$5.41	-	$7.08		224,000		5.9	$	6.42		170,000	$	6.26	-	$7.08		84,500		5.4		5.77		84,500		5.77
Total stock options	Total stock options			666,500		5.2	$	4.64		578,000	$	4.41	Total stock options			501,500		4.4	$	4.10		482,000	$	4.07

The range of fair value assumptions related to options granted during the ~~six months~~year ended ~~September 30, 2016~~March 31, 2017 were as follows:

	2016			2017
Exercise Price	$	4.08		$	4.08
Volatility		51.13	%		51.13	%
Risk Free Rate		0.60	%		0.60	%
Vesting Period (years)		0.5			0.5
Forfeiture Rate		0.00	%		0.00	%
Expected Life (in years)		1.00			1.00
Dividend Rate		0	%		0	%

As of ~~September~~June 30, ~~2016,~~2017, total unrecognized stock-based compensation expense related to all unvested stock options was ~~$245,000,~~$11,000, which is expected to be expensed over a weighted average period of ~~2.2~~0.3 years.

Subsequent to June 30, 2017, 75,000 stock options were granted from the 2016 Plan.

Restricted Stock Units (“RSUs”)

RSUs are service-based awards granted to eligible employees under the 2016 Plan.

On March 31, 2017, 25,000 restricted stock units (“RSUs”) were awarded to the CEO. This award is valued at $3.85 per share, the closing market price of Cyanotech common stock on the grant date, and vest over a period of three years.

On April 5, 2017, 28,074 RSUs were awarded to employees of the Company. This award is valued at $3.92 per share, the closing market price of Cyanotech common stock on the grant date, and vests over a period of three 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, 2017		25,000		$	3.85
Granted		28,074			3.92
Vested		—			—
Exercised		—			—
Forfeited		(730	)		3.92
Nonvested restricted stock units at June 30, 2017		52,344		$	3.89

As of June 30, 2017, total unrecognized stock-based compensation expense related to unvested restricted stock units was $183,000, which is expected to be expensed over a weighted average period of 2.8 years.

10.10.

INCOME TAXES

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 income tax expense of ~~$26,000~~$11,000 and income tax benefit of ~~$204,000~~($51,000) for the three months ended ~~September 31,~~June 30, 2017 and 2016, ~~and 2015, respectively. We recorded income tax benefits of $24,000 and $318,000 for the six months ended September 30, 2016 and 2015,~~ respectively. Our effective tax rate ~~differs from the statutory rate of 34% as a result of non deductible stock option expense~~was 2.1% and ~~the state taxes (net of federal benefit) and permanent differences. Our effective tax rate was 21.0% and 3.9%~~6.8% for the ~~three~~quarters ended June 30, 2017 and ~~six months ended September~~June 30, 2016, ~~respectively, and 107.4% and 77.8% for the three and six months ended September 30, 2015,~~ respectively. The effective tax rate for the three ~~and six~~ months ended ~~September~~June 30, ~~2016 differ~~2017 differs from the statutory rate of 34% 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 two 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 ~~September~~June 30, ~~2016,~~2017, 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 ~~2011.~~2012.

11.11.

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 (loss) 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 (loss) per share computations for the three months ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016 are as follows:

	Three Months Ended September 30, 2016
	Net Income		Shares		Per Share		Three Months Ended June 30, 2017
	(Numerator)		(Denominator)		Amount		Net Income (Numerator)		Shares (Denominator)		Per Share Amount
	(in thousands)						(in thousands)
Basic income per share	$	99		5,657	$	0.02	$	501		5,685	$	0.09
Effect of dilutive securities—Common stock options		—		70		—
Effect of dilutive securities-Common stock options								—		34		—
Diluted income per share	$	99		5,727	$	0.02	$	501		5,719	$	0.09

Three Months Ended September 30, 2015

Net Income

Shares

Per Share

(Numerator)

(Denominator)

Amount

(in thousands)

Basic income per share
$ 14 5,568 $ 0.00
Effect of dilutive securities — Common stock options
— 479 —
Diluted income per share
$ 14 6,047 $ 0.00

~~Reconciliations between the numerator and the denominator of the basic and diluted earnings per share computations for the six months ended September 30, 2016 and 2015 are as follows:~~

Six Months Ended September 30, 2016

Net Income
Shares
Per Share

(Numerator)
(Denominator)
Amount

(in thousands)

Basic and diluted loss per share
$ (592
)
5,645 $ (0.10
)

Six Months Ended September 30, 2015

Net Income

Shares

Per Share

(Numerator)

(Denominator)

Amount

(in thousands)

Basic and diluted loss per share
$ (91
)
5,566 $ (0.02
)

	Three Months Ended June 30, 2016
	Net Loss (Numerator)			Shares (Denominator)		Per Share Amount
	(in thousands)
Basic and diluted loss per share	$	(691	)		5,633	$	(0.12	)

Basic and diluted ~~earnings~~loss per share are the same in periods of a net loss, because common share equivalents are anti-dilutive when a net loss is recorded. Diluted earnings per share does not include the impact of common stock options totaling ~~6,000~~0 and ~~134,063~~45,000 for the three months ended ~~September~~June 30, ~~2016~~2017 and ~~2015, respectively, and 6,000 and 105,000 for the six months ended September 30,~~ 2016, ~~and 2015,~~ respectively, 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. Diluted earnings per share does not include the impact of restricted stock units totaling 27,344 for the three months ended June 30, 2017, as the effect of their inclusion would be anti-dilutive.

12.12.

CONCENTRATIONS OF RISK

Concentration of Accounts Receivable and Revenues

~~Concentration of Accounts Receivable and Revenues~~

At ~~September~~June 30, ~~2016, 58.7%~~2017, 46% of the Company’s accounts receivable was comprised of ~~two~~three customer balances of ~~48.2%~~21%, 15% and ~~10.5%~~10%, respectively. At March 31, ~~2016, 44.4%~~2017, 59% of the Company’s accounts receivable was comprised of ~~two~~three customer balances of ~~30.7%~~38%, 12% and ~~13.4%~~9%, respectively. ~~International~~There were two customers with sales ~~represented 27%~~equaling 32% and ~~31%~~13% of ~~net sales for the three and six months ended September 30, 2016, respectively, compared to 29% and 28% for the same periods, respectively, a year ago. One customer accounted for 28% and 17% of~~our total net sales for the three months ended ~~September~~June 30, ~~2016 and 2015, respectively, and accounted for 24% and 16%~~2017. There was one customer with sales equaling 19% of our total net sales for the ~~six~~three months ended ~~September~~June 30, ~~2016 and 2015, respectively.~~2016.

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

FORWARD-LOOKING STATEMENTS

This Report and other presentations made by ~~the Company~~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~~“Company”), the performance of the industry in which ~~the Company~~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. 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:

●

Environmental restrictions, soil and water conditions, levels of sunlight and seasonal weather patterns, particularly heavy rain, wind and other hazards;

●

Consumer perception of our products due to adverse scientific research or findings, publicity regarding nutritional supplements, litigation, regulatory investigations or other events, conditions and circumstances involving the Company which receive national media coverage;

●

Effects of competition, including tactics and locations of competitors and operating and market competition;

●

Demand for our products, the quantities and qualities thereof available for sale and levels of customer satisfaction, including significant unforeseen fluctuations in global demand for products similar to our products;

●

Our dependence on the experience, continuity and competence of our executive officers and other key employees;

●

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;

●

Changes in domestic and/or foreign laws, regulations or standards, affecting nutraceutical products or our methods of operation;

●

Access to available and reasonable financing on a timely basis;

●

The ~~Company’s~~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;

●

Changes in laws, corporate governance requirements and tax rates, regulations, accounting standards and the application to us or the nutritional products industry of new decisions by courts, regulators or other government authorities;

●

Legal costs associated with any legal proceedings, and the potential direct and indirect cost and other effects on our business or financial condition resulting from any legal proceedings.

●

Risk associated with the geographic concentration of our business;

●

Acts of war, terrorist incidents or natural disasters; and

●

Other risks or uncertainties described elsewhere in this Report and in other periodic reports previously and subsequently filed by us with the Securities and Exchange Commission.

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 operate under GMP (Good Manufacturing Practices), 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 ~~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 ~~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 90-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 ourOcean-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						Six Months Ended
	September 30,						September 30,						Three Months Ended
	2016			2015			2016			2015			June 30, 2017			June 30, 2016
Net sales	$	9,862		$	8,516		$	17,184		$	16,110		$	8,809		$	7,322
Net sales increase		15.8	%					6.7	%					20.3	%
Gross profit	$	3,885		$	3,100		$	6,706		$	6,024		$	3,603		$	2,821
Gross profit as % of net sales		39.4	%		36.4	%		39.0	%		37.4	%		40.9	%		38.5	%
Operating expenses	$	3,638		$	3,239		$	7,069		$	6,358		$	2,983		$	3,431
Operating expenses as % of net sales		36.9	%		38.0	%		41.1	%		39.5	%		33.9	%		46.9	%
Operating income (loss)	$	247		$	(139	)	$	(363	)	$	(334	)	$	620		$	(610	)
Operating income (loss) as % of net sales		2.5	%		(1.6	)%		(2.1	)%		(2.1	)%		7.0	%		(8.3	)%
Income tax expense (benefit)	$	26		$	(204	)	$	(24	)	$	(318	)	$	11		$	(51	)
Net income (loss)	$	99		$	14		$	(592	)	$	(91	)	$	501		$	(691	)

Net sales by product
Packaged sales
Astaxanthin packaged	$	5,987		$	5,119		$	9,635		$	9,627		$	5,505		$	3,648
Astaxanthin packaged sales increase		17.0	%					1.1	%					50.9	%
Spirulina packaged	$	2,087		$	1,744		$	3,668		$	3,325		$	1,927		$	1,581
Spirulina packaged sales increase	19.7			%							10.3	%					21.9	%
Total packaged sales	$	8,074		$	6,863		$	13,303		$	12,952
Total packaged sales increase		17.7	%					2.7	%
Total Packaged sales													$	7,432		$	5,229
Total Packaged sales increase														42.1	%

Bulk sales
Astaxanthin bulk	$	216		$	417		$	634		$	751		$	221		$	418
Astaxanthin bulk sales decrease		(48.2	)%					(15.6	)%					(47.1	)%
Spirulina bulk	$	1,572		$	1,236		$	3,247		$	2,407		$	1,156		$	1,675
Spirulina bulk sales increase		27.2	%					34.9	%
Total bulk sales	$	1,788		$	1,653		$	3,881		$	3,158
Total bulk sales increase		8.2	%					22.9	%
Spirulina bulk sales decrease														(31.0	)%
Total Bulk sales													$	1,377		$	2,093
Total Bulk sales decrease														(34.2	)%

Comparison of the Three Months Ended ~~September~~June 30, ~~2016~~2017 and ~~2015~~2016

Net Sales ~~The net~~ Net sales ~~growth of 16%~~increased 20% for the quarter, ~~was~~ driven by ~~an 18%~~a 42% increase in our packaged products, offset by a 34% decrease in bulk sales. The increase in sales of our packaged products was the result of our continued focus on Costco and Amazon. The 51% increase in our packaged astaxanthin sales was primarily the result of an 8% increase in sales ~~of our bulk products. Growth~~to Costco. Sales growth at Amazon contributed to the 22% increase in our packaged ~~products was made up~~spirulina sales. Compared to the fourth quarter of ~~a 20% increase~~fiscal 2017, sales to Costco increased 100% and sales to Amazon increased 149%. Due to inventory shortages following low spirulina production in ~~spirulina sales, following lower~~the fourth quarter of fiscal 2017, we were not able to fulfill all of the demand for packaged spirulina products ~~in the second quarter of last year, and a 17% increase in astaxanthin sales, primarily due to our Costco expansion.~~this quarter. The ~~8% increase~~34% decrease in sales of our bulk products ~~was made up~~is primarily the result of ~~a 27% increase in sales~~the lack of available spirulina ~~due to higher international demand, and a 48% decrease in sales of astaxanthin, due to the discontinuation of low margin products.~~supply. International sales represented 27% of net sales for the ~~three months ended September 30, 2016~~current quarter compared to ~~29%~~35% for the same period ~~a year ago. One customer accounted for 28%~~last year. Two customers made up 32% and ~~17%~~13% of total net sales for the ~~three months ended September 30, 2016 and 2015,~~quarter, respectively.

Gross Profit Our gross profit ~~margin~~as a percent of net sales increased by ~~3.0~~2.4 percentage points in the current quarter. Gross profit was favorably impacted by the increase in higher margin packaged product sales, along with a reduction of promotional discounts and lower cost per unit of spirulina due to higher production compared to the same period last year. ~~Gross profit~~The current period was ~~unfavorably~~favorably impacted by ~~$0.07 million~~the higher mix of ~~non-inventoriable~~packaged sales this quarter, which deliver a higher gross profit percent. Additionally, the current quarter reflect lower astaxanthin production costs ~~related to astaxanthin~~resulting from improved production in the fourth quarter of fiscal 2017 compared to the fourth quarter of fiscal 2016. Astaxanthin production for the current ~~quarter.~~quarter increased by over 20% compared to the same period last year as a result of new cultivation techniques and farm management practices that have been integrated over the last two years. These changes have resulted in stabilized open pond cultivation and improved consistency of our production over recent quarters.

Operating Expenses Operating expenses ~~increased by $399,000~~decreased $0.4 million (13%) for the ~~second~~first quarter of fiscal 2018 compared to the same period in last year. Included in this is an increase in general and administrative expenses of $546,000, or 37%, including an increase in legal costs of $761,000 due to the matters that arose in the first quarter of the this fiscal year (see Part II, Item 1, Legal Proceedings), offset by a decrease of $176,000 in accounting and auditing fees as compared to the same period of the prior year. Sales and marketing expenses decreased $146,000, or 9%,2017, primarily due to a ~~decrease~~reduction in ~~advertising~~legal fees. Our sales and marketing spending includes labor savings of $120,000, half of which was deployed back into marketing programs ~~for~~to drive sales growth in our ~~packaged products.~~areas of strategic focus.

Income Taxes We recorded an income tax expense of ~~$26,000~~$11,000 in the current quarter ~~compared to income tax benefit of $204,000 for the same period last year. Our~~with an effective tax rate was 21.0% for the current quarter and 107.4% for the same period last year. The change in effective tax relates primarily to the current period change in valuation allowance against the net deferred tax asset we believe is not more likely than not to be realized.

~~Comparison~~ of ~~the Six Months Ended September 30, 2016 and 2015~~

~~Net Sales~~ The net sales growth of 7% for the first six months of this year was driven by a 23% increase in sales of our bulk products and a 3% increase in sales of our packaged products. The 23% increase in sales of our bulk products was made up of a 35% increase in sales of spirulina, due to higher international demand, and a 16% decrease in sales of astaxanthin, due to the discontinuation of low margin products. Growth in our packaged products was made up of a 10% increase in spirulina sales, following lower demand for spirulina products in the same period of last year, and a 1% increase in astaxanthin sales. International sales represented 31% of net sales for the six months ended September 30, 2016 compared to 28% for the same period a year ago. One customer accounted for 24% and 16% of total net sales for the six months ended September 30, 2016 and 2015, respectively.

~~Gross Profit~~ Our gross profit margin increased by 1.6 percentage points in the first six months of this year. Gross profit was favorably impacted by the increase in higher margin packaged product sales with a reduction of promotional discounts. Additionally, gross profit was unfavorably impacted by $0.1 million in non-inventoriable costs related to astaxanthin production in the current fiscal year. Astaxanthin production was basically unchanged from the same period in the prior year while spirulina production was up 4% from the same period in the prior year.

~~Operating Expenses~~ Operating expenses increased by $711,000 for the six months ended September 30, 2016, compared to the same period last year. Included in this is an increase in general and administrative expenses of $1,043,000, or 39%2.1%, primarily due to an increase in legal costs of $1,301,000 related to the matters described above comparing the three months ended September 30, 2016 with the comparable 2015 period. Sales and marketing expenses decreased $323,000, or 10%, due to a decrease in advertising programs for our packaged products.

~~Income Taxes~~ ~~We recorded an income tax benefit of $24,000 for the first six months of this year~~ compared to a benefit of ~~$318,000~~$51,000 for the same period ~~last year. Our~~in fiscal 2017 with an effective tax rate ~~was 3.9% for the first six months compared~~of 6.8%. We continue to ~~77.8% for the same period last year. The change in effective tax relates primarily to the current period change in~~carry a full valuation allowance ~~against the net~~on our deferred tax ~~asset we believe is not more likely than not to be realized.~~asset.

Liquidity and Capital Resources

As of June 30, 2017, we had cash of $1.3 million and working capital of $6.8 million compared to $1.4 million and $6.0 million, respectively, at March 31, 2017. 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. At June 30, 2017, we had borrowed $0.5 million and had $1.5 million available on the line. The line of credit is subject to renewal on August 30, 2017 and we are working proactively with the Bank to renew the line of credit or replace it with another line of credit on or before the expiration date. The Bank has issued a letter to us dated June 12, 2017 indicating it intends to renew the line of credit subject to approval by its credit committee.

As of June 30, 2017, we had $6.8 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. As of March 31, 2017 and 2016, our current ratio of 1.92:1 and 1.97:1, respectively, fell short of the Bank's annual requirement of 2.10:1. The Bank has provided us with letters stating they found us to be in compliance with this covenant requirement and all other financial covenants as of March 31, 2017 and 2016, and do not consider these shortfalls to be defaults under the Loan Agreement.

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 2018 operating plan and related cash flow projections and our projected consolidated financial position as of March 31, 2018, 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, 2018. However, no assurances can be provided that we will achieve our operating plan and cash flow objectives for the next fiscal year ended March 31, 2018 or our projected consolidated financial position as of March 31, 2018. Such estimates are subject to change based on future results and such change could cause future results to vary significantly from expected results.

As indicated above, the Bank has not considered the shortfalls as of March 31, 2017 and 2016 in our current ratio relative to the covenant requirement to be violations of the Loan Agreements. However, in the event we have a shortfall under the Loan Agreements as of March 31, 2018 or future fiscal year ends, there is no assurance that the Bank will not consider such to be a violation of the Loan Agreements and pursue its rights under the arrangements to call for the repayment of the outstanding borrowings payable to the Bank. If this occurs, we may need to raise additional funds to repay the loans; however, we may not be able to secure such funding on acceptable terms, or at all.

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

	Six months ended September 30						Three months ended June 30
	2016			2015			2017			2016
Total cash (used in) provided by:
Total cash provided by (used in):
Operating activities	$	911		$	135		$	210		$	172
Investing activities		(277	)		(2,728	)		(56	)		(170	)
Financing activities		181			2,429			(262	)		312

Increase (decrease) in cash and cash equivalents	$	815		$	(164	)
(Decrease) increase in cash							$	(108	)	$	314

Cash provided by operating activities ~~increased $776,000~~for the three months ended June 30, 2017 was the result of net earnings, excluding non-cash charges, of $1.0 million and an increase in working capital of $0.8 million. The increase in working capital was primarily the result of a $0.5 million increase in accounts receivable due to higher sales in the current quarter compared to the ~~same period last year~~fourth quarter of fiscal 2017, and a $0.5 million decrease in accounts payable and accrued expenses resulting from timing of disbursements.

Cash provided by operating activities for the three months ended June 30, 2016 was the result of a net loss, excluding non-cash charges and credits, of $0.1 million offset by a decrease in working capital of $0.3 million. The decrease in working capital was primarily the result of a $0.7 million decrease in accounts receivable due ~~primarily~~ to a decrease in days sales outstanding and an increase in ~~depreciation and decreases in inventories and receivables,~~accrued expenses related to the accrual of legal expenses, offset by a ~~higher net loss and a reduction in the~~$0.5 million increase in ~~payables as compared with the same period in the prior year.~~astaxanthin inventory.

Cash used in investing activities infor the ~~current period reflects the reduction in capital expenditures~~three months ended June 30, 2017 and June 30, 2016 includes costs for leasehold improvements and equipment acquisitions at our Kona ~~facility compared to the same period in the last year.~~facility.

Cash used in financing activities for the three months ended June 30, 2017 consists of $0.3 million in principal payments on debt in the normal course of business.

Cash provided by financing activities for the three months ended June 30, 2016 consists of a $0.6 million advance against our line of credit, offset by $0.14 million in principal payments on debt in the ~~period reflects a reduction mainly due to the net proceeds from long term debt~~normal course of ~~$2.6~~business and $0.15 million in taxes paid upon issuance of stock connected with the ~~prior year.~~severance agreement of our former CEO.

Sources and Uses of Capital

At ~~September~~June 30, ~~2016,~~2017, our working capital was ~~$6.4~~$6.8 million, ~~a decrease~~an increase of ~~$0.1~~$0.6 million compared to March 31, ~~2016. Cash and cash equivalents at September 30, 2016 totaled $2.1 million, an~~2017. The increase is due primarily to the reduction of ~~$0.8 million compared to March 31, 2016.~~trade payables.

On August 30, 2016, the Credit Agreement, which the Company and First Foundation Bank entered into on June 3, 2016, became effective. The Credit Agreement allows the Company to borrow up to $2.0 million on a revolving basis. At September 30, 2016, the Company had borrowed $0.6 million and had $1.4 million available on the line. The line of credit is secured by substantially all the Company’s assets.

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, ~~other components of~~and working capital ~~and availability under our revolving line of credit~~ will be sufficient to finance current operating requirements, debt service requirements, and routine planned capital expenditures, for ~~at least~~ the next twelve (12) months.

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 90-acre facility in Hawaii, and integrating those raw materials into finished products. In fiscal ~~2017,~~2018, 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™~~Astaxanthin® antioxidant in extract and softgel caplet 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. 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; 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, ~~2016.~~2017.

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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

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.

Management’s Report on Internal Control over Financial ~~Reporting.~~Reporting

The ~~Company’s~~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 ~~September~~June 30, ~~2016.~~2017. 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 ~~September~~June 30, ~~2016.~~2017.

Changes to Internal Control Over Financial Reporting

There was no change 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 ~~September~~June 30, ~~2016~~2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of ~~Controls.~~Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, 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, ~~2016,~~2017, filed June ~~23, 2016.~~22, 2017.

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 ~~September~~June 30, ~~2016.~~

The operative amended complaint makes certain derivative claims on behalf of the Company, direct claims on behalf of Meridian, and alleges, among other things, (i) that there were deficiencies in the beneficial ownership reports of Mr. Davis, the Chairman of our Board of Directors, and RSF, a shareholder of the Company, including that Mr. Davis and RSF are an undisclosed group with respect to their shares of Company Common Stock, and (ii) that Mr. Davis has breached fiduciary duties to the Company. Meridian seeks, among other things, declaratory and injunctive relief to reform this conduct.

On ~~August 26, 2016,~~April 6, 2017, after a mediation session before Dispute Resolution & Prevention in Honolulu, Hawaii, the Company moved to dismiss Meridian’s initial complaint on the ground that Meridian lacked standing to proceed derivatively on behalf of the Company. In response, on September 19, 2016, Meridian filed an amended complaint. On November 4, 2016,and Brent D. Bailey, our former Chief Executive Officer, entered into a Settlement Agreement (the “Settlement Agreement”) resolving all disputes between the Company ~~filed a motion~~and Mr. Bailey with respect to ~~dismiss the amended complaint, again arguing~~ that ~~Meridian lacks standing to proceed derivatively on behalf~~certain Separation Agreement and Release of ~~the Company.~~

As previously disclosed, the Board of Directors of the Company formed a Special Committee comprised of independent directors to investigate, review and analyze the Meridian allegations and provide its recommendations to the Board. The Special Committee completed its investigation and presented its findings and recommendations to the Board on September 2,Claims, dated March 31, 2016. The special committee concluded, among other things, that (i) Mr. Davis should be filing his reports pursuant to Section 13 of the Exchange act (“Section 13”) on schedule 13D rather than on the short form schedule 13G; (ii) it has not found sufficient information to conclude that a “group” exists under Section 13; and (iii) it has not found any material corporate governance issues. The Special Committee did not recommend that the Board take legal actionSettlement Agreement is further described in response to Meridian’s allegations. The Board unanimously approved the findings and adopted the recommendations of the Special Committee. Additional details regarding the Special Committee’s findings and recommendations are set forth in the Company’sour Form 8-K filed with the ~~SEC~~Securities and Exchange Commission on ~~September 9, 2016.~~April 11, 2017.

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, ~~2016,~~2017, which is incorporated by reference ~~herein, in addition to the following information.~~

~~Our three largest shareholders own a substantial portion of our common stock and could exert substantial influence over our business, particularly if any of them choose to work together.~~herein.

Our three largest shareholders collectively own approximately 46.4% of our common stock. According to publicly filed beneficial ownership reports, Michael Davis, chairman of our board of directors, beneficially held 1,104,011 of shares representing a 19.5% beneficial ownership, the Rudolph Steiner Foundation, or RSF, beneficially owned 767,133 shares representing a 13.6% beneficial ownership, and Meridian OHC Partners held 749,610 shares representing a 13.3% beneficial ownership. The shares held by RSF were originally donated by a foundation affiliated with Mr. Davis or acquired from the proceeds of donations made by that foundation. As further described in Part II, Item 1 of this report (Legal Proceedings), Meridian OHC Partners, LP has alleged that the shares held by Mr. Davis and RSF constitute an undisclosed group under the federal securities laws with respect to their shares of common stock. This allegation was investigated by a Special Committee of the Board of Directors comprised entirely of independent directors. The Special Committee completed its investigation and presented its findings and recommendations to the Board on September 2, 2016. The Special Committee concluded, among other things, that it has not found sufficient information to conclude that a “group” exists under Section 13. Additional details regarding the Special Committee’s findings and recommendations are set forth in the Company’s Form 8-K filed with the SEC on September 9, 2016. Mr. Davis provided additional details about his relationship with RSF regarding shares of our common stock in a Schedule 13D filed with the SEC on September 21, 2016.

Our significant stockholders, particularly if they choose to work together, may have the ability to exert significant influence over our business policies and affairs on matters submitted to our stockholders for approval, such as the election or removal of directors, amendments to our certificate of incorporation, the approval of a business combination or certain corporate financing activities. The interests of our significant stockholders could differ from those of other stockholders in ways that could be adverse to the interests of other shareholders. For example, this concentration of ownership could have the effect of delaying or preventing a change of control of our company even if such a transaction is at a premium to the prevailing market price of our common stock and is supported by other shareholders. Concentration of ownership could also harm the market price of our common stock because investors may perceive disadvantages in owning stock in a company that a substantial portion of common stock is controlled by a small number of stockholders.

~~Some provisions of our charter documents and Nevada law may discourage an acquisition of us by others, even if the acquisition may be in the best interest of our stockholders.~~

Provisions in our Restated Articles of Incorporation and Amended and Restated Bylaws, as well as certain provisions of Nevada law, could make it more difficult for a third-party to acquire us, even if doing so may benefit our stockholders. These provisions include the authorization of “blank check” preferred stock, the rights, preferences and privileges of which may be established and shares of which may be issued by our board of directors at its discretion from time to time and without stockholder approval.

Because we are incorporated in Nevada, we may be governed by Nevada’s statutes governing combinations with interested stockholders and control share acquisitions, which may discourage, delay or prevent someone from acquiring us or merging with us, whether or not it is desired by or beneficial to our stockholders. We have not opted out of the application of these laws but may elect to opt out in the future. Under Nevada’s laws governing combinations with interested stockholders, a Nevada corporation may not, in general, engage in certain types of business combinations with any beneficial owner of 10% or more of the corporation’s voting shares or an affiliate of the corporation who at any time within two years immediately prior to the date in question was the beneficial owner of 10% or more of the corporation’s voting shares, unless the holder has held the stock for two years or the board of directors approved the beneficial owner’s acquisition of its shares, the board of directors approved the transaction before the beneficial owner acquired its shares, or holders of at least a majority of the outstanding voting power approve the transaction after the beneficial owner acquired its shares. In addition, Nevada’s control share acquisition laws prohibit a purchaser of the shares of an issuing corporation from voting those shares, under certain circumstances and subject to certain limitations, after crossing specified threshold ownership percentages, unless the purchaser obtains the approval of the issuing corporation’s disinterested stockholders.

Any provision of our Restated Articles of Incorporation or Amended and Restated Bylaws or of Nevada law that is applicable to us that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock in the event that a potentially beneficial acquisition is discouraged, and could also affect the price that some investors are willing to pay for our common stock.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 5. Other Information

None.

Item~~Item~~ 6. Exhibits

a) The following exhibits are furnished with this report:

	10.1	~~2016 Equity Incentive Plan~~Settlement Agreement, by and between Brent D. Bailey and the Company, dated April 6, 2017 (Incorporated by reference as Exhibit 10.1 to ~~our Definitive Proxy Statement~~the Company’s Report on Form 8-K filed ~~July 15, 2016,~~on April 11, 2017, File No. 0-14602).

31.1	~~10.2~~	Revolving Credit Agreement, by and between First Foundation Bank and the Company, dated June 3, 2016. (Incorporated by reference to our Current Report on Form 8-K filed August 30, 2016, File No. 0-14602).

	~~31.1~~	Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of ~~November~~August 10, ~~2016.~~ 2017.

	31.2	Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of ~~November~~August 10, ~~2016.~~2017.

	32	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of ~~November~~August 10, ~~2016.~~2017.

	99.1	Press Release dated ~~November~~ August 10, ~~2016~~2017.

	101	The following financial statements from Cyanotech ~~Corporation’s~~Corporation’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2016,~~2017, 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.

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)


~~November~~August 10, ~~2016~~2017	By:	/s/ Gerald R. Cysewski
(Date)		Gerald R. Cysewski
		~~President and~~ Chief Executive Officer; Director


~~November~~August 10, ~~2016~~2017	By:	/s/ Jole E. Deal
(Date)		Jole E. Deal
		Vice President — Finance & Administration and CFO
		(Principal Financial and Accounting Officer)

EXHIBIT INDEX

Exhibit~~Exhibit~~ Number		Description

10.1		~~2016 Equity Incentive Plan~~Settlement Agreement, by and between Brent D. Bailey and the Company, dated April 6, 2017 (Incorporated by reference as Exhibit 10.1 to ~~our Definitive Proxy Statement~~the Company’s Report on Form 8-K filed ~~July 15, 2016,~~on April 11, 2017, File No. 0-14602).

~~10.2~~ 31.1		Revolving Credit Agreement, by and between First Foundation Bank and the Company, dated June 3, 2016. (Incorporated by reference to our Current Report on Form 8-K filed August 30, 2016, File No. 0-14602).

~~31.1~~	Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of ~~November~~August 10, ~~2016.~~ 2017.

31.2		Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of ~~November~~August 10, ~~2016.~~2017.

32		Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of ~~November~~August 10, ~~2016.~~2017.

99.1		Press Release dated ~~November~~ August 10, ~~2016~~2017.

101		The following financial statements from Cyanotech ~~Corporation’s~~Corporation’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~June 30, ~~2016,~~2017, 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~~Statements.

2625

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

Large accelerated filer ☐		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☒
(Do not check if a smaller reporting company)
		Emerging growth company ☐

Title~~Title~~ of Class		Shares~~Shares~~ Outstanding
Common stock - $0.02 par value		~~5,668,881~~5,685,381

	September 30, 2016			March 31, 2016			June 30, 2017			March 31, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	2,055		$	1,240
Accounts receivable, net of allowance for doubtful accounts of $49 at September 30, 2016 and $136 at March 31, 2016		3,053			2,983
Cash							$	1,299		$	1,407
Accounts receivable, net of allowance for doubtful accounts of $31 at June 30, 2017 and $49 at March 31, 2017								2,619			2,135
Inventories, net		7,459			7,856			7,981			7,972
Deferred tax assets		74			74
Prepaid expenses and other current assets		761			502			427			565
Total current assets		13,402			12,655			12,326			12,079

Equipment and leasehold improvements, net		17,145			17,796			16,289			16,712
Other assets		374			392			207			213
Total assets	$	30,921		$	30,843		$	28,822		$	29,004

LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	611		$	—		$	500		$	611
Current maturities of long-term debt		605			574			624			623
Customer deposits		50			117			80			119
Accounts payable		4,184			4,000			3,132			3,666
Accrued expenses		1,503			1,430			1,143			1,013
Total current liabilities		6,953			6,121			5,479			6,032

Long-term debt, net		6,549			6,790
Deferred tax liabilities		74			74
Deferred rent		38			30
Long-term debt, less current maturities								6,105			6,249
Other long-term liabilities								99			116
Total liabilities		13,614			13,015			11,683			12,397

Commitments and contingencies

Stockholders’ equity:
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; 5,668,881 shares issued and outstanding at September 30, 2016 and 5,599,797 shares at March 31, 2016		113			112
Common stock of $0.02 par value, authorized 50,000,000 shares; 5,685,381 shares issued and outstanding at June 30, 2017 and March 31, 2017								114			114
Additional paid-in capital		31,656			31,585			31,608			31,577
Accumulated deficit		(14,462	)		(13,869	)		(14,583	)		(15,084	)
Total stockholders’ equity		17,307			17,828

Total liabilities and stockholders’ equity	$	30,921		$	30,843
Total stockholders’ equity								17,139			16,607
Total liabilities and stockholders’ equity							$	28,822		$	29,004

	Six Months Ended September 30,						Three Months Ended June 30,
	2016			2015			2017			2016

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(592	)	$	(91	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Gain on disposal of equipment and leasehold improvements		(13	)		(29	)
Net income (loss)							$	501		$	(691	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Loss on disposal of assets								—			3
Depreciation and amortization		1,007			637			479			493
Amortization of debt issue costs and other assets		28			29			15			13
Share based compensation expense		215			324
Provision for doubtful accounts		(87	)		22
Deferred income tax benefit		—			(338	)
Share-based compensation expense								31			78
Net (increase) decrease in assets:
Accounts receivable		17			(990	)		(484	)		737
Inventories		397			(491	)		(9	)		(532	)
Prepaid expenses		(259	)		(146	)
Other assets		—			39
Prepaid expenses and other assets								138			(102	)
Net increase (decrease) in liabilities:
Customer deposits		(67	)		66			(40	)		(52	)
Accounts payable		184			1,068			(534	)		(9	)
Accrued expenses		73			36			130			230
Deferred rent		8			(1	)
Deferred rent and other liabilities								(17	)		4
Net cash provided by operating activities		911			135			210			172

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from restricted cash		—			486
Investment in equipment and leasehold improvements		(277	)		(3,214	)		(56	)		(170	)
Net cash used in investing activities		(277	)		(2,728	)		(56	)		(170	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short term notes payable		600			500
Net draw down on line of credit		611			—
Payment of short term notes payable		(600	)		(500	)
Proceeds from long-term debt, net of costs		—			2,580
Capitalized leases		(35	)		(174	)
Payments for debt issuance costs		—			94
Proceeds from short term note payable								—			600
Net payments on line of credit								(111	)		—
Payments in stock withheld for tax payment on issuance								—			(147	)
Principal payments on long-term debt		(252	)		(122	)		(130	)		(124	)
Payments in stock withheld for tax payment on issuance		(147	)		—
Proceeds from stock options exercised		4			51
Net cash provided by financing activities		181			2,429
Payments on capitalized leases								(21	)		(17	)
Net cash (used in) provided by financing activities								(262	)		312

Net increase (decrease) in cash and cash equivalents		815			(164	)
Net (decrease) increase in cash								(108	)		314

Cash and cash equivalents at beginning of period		1,240			2,226
Cash at beginning of period								1,407			1,240

Cash and cash equivalents at end of period	$	2,055		$	2,062
Cash at end of period							$	1,299		$	1,554

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	213		$	180		$	104		$	105
Income taxes	$	—		$	21		$	—		$	—

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements ~~(unaudited)~~	3
	Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2016~~2017 and March 31, ~~2016~~2017 (unaudited)	3
	Condensed Consolidated Statements of Operations for the three months ended June 30, 2017 and ~~six month periods ended September 30,~~ 2016 ~~and 2015~~(unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the ~~six month periods~~three months ended ~~September~~June 30, 2017 and 2016 ~~and 2015~~(unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	~~Management’s~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21

PART~~PART~~ II. OTHER INFORMATION

Item 1.	Legal Proceedings	22
Item 1A	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2322
Item 3.	Defaults upon Senior Securities	2322
Item 5.	Other Information	2322
Item 6.	Exhibits	2423
SIGNATURES		2524

	Three Months Ended September 30,						Six Months Ended September 30,						Three Months Ended June 30,
	2016			2015			2016			2015			2017		2016

NET SALES	$	9,862		$	8,516		$	17,184		$	16,110		$	8,809	$	7,322
COST OF SALES		5,977			5,416			10,478			10,086			5,206		4,501
Gross profit		3,885			3,100			6,706			6,024
Gross Profit														3,603		2,821

OPERATING EXPENSES:
General and administrative		2,032			1,486			3,739			2,696			1,352		1,710
Sales and marketing		1,470			1,616			3,025			3,348			1,489		1,555
Research and development		152			166			318			343			142		166
Gain on disposal of equipment and leasehold improvements		(16	)		(29	)		(13	)		(29	)
Total operating expenses		3,638			3,239			7,069			6,358			2,983		3,431

Income (loss) from operations		247			(139	)		(363	)		(334	)
Income (loss) from operations														620		(610	)

Interest expense, net		(122	)		(51	)		(253	)		(75	)		108		132

Income (loss) before income taxes		125			(190	)		(616	)		(409	)
Income (loss) before income tax														512		(742	)

INCOME TAX EXPENSE (BENEFIT)		26			(204	)		(24	)		(318	)		11		(51	)

NET INCOME (LOSS)	$	99		$	14		$	(592	)	$	(91	)	$	501	$	(691	)

NET INCOME (LOSS) PER SHARE:
Basic	$	0.02		$	0.00		$	(0.10	)	$	(0.02	)	$	0.09	$	(0.12	)
Diluted	$	0.02		$	0.00		$	(0.10	)	$	(0.02	)	$	0.09	$	(0.12	)

SHARES USED IN CALCULATION OF NET INCOME (LOSS) PER SHARE:
Basic		5,657			5,568			5,645			5,566			5,685		5,633
Diluted		5,727			6,047			5,645			5,566			5,719		5,633

	Six Months Ended September 30, 2016
	Net Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount
	(in thousands)
Basic and diluted loss per share	$	(592	)		5,645	$	(0.10	)

	Six Months Ended September 30, 2015
	Net Income			Shares		Per Share
	(Numerator)			(Denominator)		Amount
	(in thousands)
Basic and diluted loss per share	$	(91	)		5,566	$	(0.02	)