Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

For Quarterly Period Ended December 31, 2018

September 30, 2019

Or

For the Transition Period From               to

Commission File Number 0-14602

CYANOTECH CORPORATION

(Exact name of registrant as specified in its charter)

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:

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  No ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, 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): 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

As of February 12,November 7, 2019, the number of shares outstanding of the registrant’s sole class of common stock par value $0.02 per share, was 5,836,110.5,917,511.

CYANOTECH CORPORATION

FORM 10-Q

INDEX

Cyanotech Corporation (the “Company”), located in Kailua-Kona, Hawaii, was incorporated in the state of Nevada on March 3, 1983 and is listed on the NASDAQ Global SelectCapital 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-Q10-Q and Regulation S-XS-X of the Securities and Exchange Commission (SEC)(“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 31,2018 2019 was derived from the audited consolidated financial statements. These condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements for the year ended March 31,2018, 2019, contained in the Company’s annual report on Form 10-K10-K as filed with the SEC on July 1, 2019. 

Liquidity and Capital Resources

As of September 30, 2019, the Company had cash of $1,094,000 and working capital of $7,319,000 compared to $840,000 and $5,104,000, respectively, at March 31, 2019. In April 2019, the Company obtained an unsecured subordinated loan in the amount of $1,500,000 from a related party (see Notes 6 and 13). On August 30, 2016, the Revolving Credit Agreement (the Credit Agreement), which the Company entered into with First Foundation Bank (the Bank) on June 15,2018.3, 2016, became effective. The Credit Agreement allows us to borrow up to $2.0 million on a revolving basis. At September 30, 2019 and March 31, 2019, the Company had outstanding borrowings of $2.0 million on the line of credit.  The line of credit is subject to renewal on August 30, 2020 and the Company intends to renew or replace it with another line of credit on or before the expiration date.

As of September 30, 2019, the Company had $5,547,000 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, 2019, the Company’s debt service coverage ratio of -0.66:1 fell short of the Bank's annual requirement of 1.25:1. Additionally, on March 31, 2019, the Company’s current ratio of 1.49:1 fell short of the Bank’s annual requirement of 1.50:1.  On June 17, 2019, the Bank provided the Company with a letter waiving the covenant violations as of March 31, 2019, but noting that the Bank reserved its rights to declare a default in the future if any covenants remain out of compliance at applicable measurement dates.

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. In the first and second quarter of fiscal year 2020, the Company undertook strategic cost cutting, including the elimination of positions through attrition and the elimination of open positions to create a leaner organization.  Given recent strong astaxanthin production and resulting high inventory levels, the Company also imposed a temporary reduction of astaxanthin production in order to eliminate variable production costs as inventory levels are reduced.

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, 2020, and its 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, 2020, 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, 2020. Such estimates are subject to change based on future results and such change could cause future results to vary significantly from expected results.

Consolidation

The accompanying condensed consolidated financial statements include the accounts of Cyanotech Corporation and its wholly owned subsidiary, Nutrex Hawaii, Inc. (“Nutrex Hawaii” or “Nutrex”, collectively the “Company”). All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of any contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods reported.  Management reviews these estimates and assumptions periodically and reflects the effect of revisions in the period that they are determined to be necessary.  Actual results could differ from those estimates and assumptions.

Cash and Restricted Cash

The Company considers only its monetary liquid assets with original maturitiesCash primarily consists of three months or less as cash on hand and cash equivalents.in bank deposits. Proceeds from equipment loans are classified as restricted cash until drawn upon. 

The following table provides a reconciliation of cash andThere was no restricted cash reported within the Company's consolidated balance sheets to the total amount presented in the consolidated statementas of cash flows:September 30, 2019 or March 31, 2019.

Concentration of Accounts Receivable and RevenuesRisk

A significant portion of revenue and accounts receivable are derived from a few major customers. For the three months ended September 30, 2019 and 2018, two customers accounted for 40% and 17%, and 32% and 14%, respectively, of the Company’s net sales. For the six months ended September 30, 2019 and 2018, two customers accounted for 36% and 17, and 34% and 25%, respectively, of the Company’s net sales. At DecemberSeptember 30, 2019 and March 31, 2018, 2019, three customers accounted for 67% and 60%, respectively, of the Company’s accounts receivable was comprised of two customer balances of 43% and 24%, respectively. At March 31, 2018, 76% of the Company’s accounts receivable was comprised of three customer balances of 45%,16% and 15%, respectively. Two customers accounted for 66% of total net sales for the three months ended December 31, 2018, comprised of 35% and 31%, respectively. Two customers accounted for 50% of total net sales for the three months ended December 31, 2017, comprised of 26% and 24%, respectively. Two customers accounted for 62% of total net sales for the nine months ended December 31, 2018, comprised of 35% and 27%, respectively. Two customers accounted for 47% of total net sales for the nine months ended December 31, 2017, comprised of 30% and 17%, respectively.balance.

Revenue Recognition

The Company records revenue based on the five-stepfive-step model which includes: (1)(1) identifying the contract with the customer; (2)(2) identifying the performance obligations in the contract; (3)(3) determining the transaction price; (4)(4) allocating the transaction price to the performance obligations; and (5)(5) recognizing revenue when the performance obligations are satisfied. Substantially all of the Company’s revenue is generated by fulfilling orders for the purchase of our micro algalmicroalgal nutritional supplements to retailers, wholesalers, or direct to consumers via online channels, with each order considered to be a distinct performance obligation. These orders may be formal purchase orders, verbal phone orders, e-mail orders or orders received online. Shipping and handling activities for which the Company is responsible under the terms and conditions of the order are not accounted for as performance obligations but as fulfillment costs. These activities are required to fulfill the Company’s promise to transfer the goods and are expensed when revenue is recognized. The impact of this policy election is insignificant as it aligns with our current practice.

Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling a performance obligation. The Company has elected to exclude sales, use and similar taxes from the measurement of the transaction price.  The impact of this policy election is insignificant, as it aligns with our current practice.  The amount of consideration expected to be received and revenue recognized includes estimates of variable consideration, which includes costs for trade promotion programs, coupons, returns and early payment discounts.  Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. The Company reviews and updates these estimates at the end of each reporting period and the impact of any adjustments are recognized in the period the adjustments are identified. In assessing whether collection of consideration from a customer is probable, the Company considers the customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in the underlying customer agreement, typically 30 days from the invoice date, which occurs on the date of transfer of control of the products to the customer. Revenue is recognized at the point in time that control of the ordered products is transferred to the customer. Generally, this occurs when the product is delivered, or in some cases, picked up from one of our distribution centers by the customer. 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-monththree-month periods ended December 31,September 30, 2019 and 2018, and December 31, 2017, the Company recognized $0$6,000 and $20,000,$0, respectively, of revenue from deposits that were included in contract liabilities as of March 31, 2019 and 2018, and March 31, 2017, respectively. During the nine-monthsix-month periods ended December 31,September 30, 2019 and 2018, and December 31, 2017, the Company recognized $114,000$517,000 and $91,000,$114,000, respectively, of revenue from deposits that were included in contract liabilities as of March 31, 2019 and 2018, and March 31, 2017, respectively. The Company’s contracts have a duration of one year or less and therefore, the Company has elected the practical expedient of not disclosing revenues allocated to partially unsatisfied performance obligations.

Disaggregation of Revenue

The following table represents revenue disaggregatedby major product in the threeline and nine months ended December 31, 2018 and December 31, 2017 (in thousands):extraction services for the:

Reclassification

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

Recently Adopted Accounting Pronouncements

Effective April 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842): Accounting for Leases and issued subsequent amendments to the initial guidance and implementation guidance including ASU No. 2018-01, 2018-10, 2018-11, 2018-20 and 2019-01 (collectively including ASU No. 2016-02, “ASC 842”). ASC 842 requires that lessees recognize right-of-use assets and lease liabilities that are measured at the present value of the future lease payments at lease commencement date. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will largely remain unchanged and shall continue to depend on its classification as a finance or operating lease. The Company elected the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and did not restate prior periods. Under the new guidance, the majority of the Company’s leases continue to be classified as operating. Based on the Company’s lease portfolio, the impact of adopting ASC 842 increased both total assets and total liabilities, however, it did not have a significant impact on the Company’s consolidated statements of operations or cash flows. Finance leases continue to be classified with long-term debt on the Condensed Consolidated Balance Sheets and are described in Note 6. See Note 7 for operating leases.

In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718)” (“ASU No. 2018-07”): Improvements to Nonemployee Share-Based Payment Accounting. ASU No. 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees, and as a result, the accounting for share-based payments to non-employees will be substantially aligned. ASU No. 2018-07 is effective for the Company in the first quarter of fiscal year 2020.  The Company adopted ASU No. 2018-07 as of April 1, 2019 with no impact on its consolidated financial statements and related disclosures.

In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-09,ASU 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting ("ASU No.2017-09" 2017-09"). ASU No.2017-09 2017-09 will clarify and reduce both (i) diversity in practice and (ii) cost and complexity when applying the guidance in Topic 718, to a change to the terms and conditions of a share-based payment award. This guidance became effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The amendments in ASU No.2017-09 2017-09 are applied prospectively to awards modified on or after the adoption date. The Company adopted this standard as of April 1, 2018 with no impact on its consolidated financial statements. 

In November 2016, the FASB issued ASU 2016-18,2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU No.2016-18” 2016-18”).  This update addresses the fact that diversity exists in the classification and presentation of changes in restricted cash on the statement of cash flows under Topic 230, Statement of Cash Flows. ASU No.2016-18 2016-18 became effective for public companies for the fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company adopted this standard as of April 1, 2018 by using the retrospective method, which required reclassification of restricted cash in the accompanying consolidated statement of cash flows as of the beginning of the period for the nine monthsfiscal year ended DecemberMarch 31, 2018. 2017. 

In August 2016, FASB issued ASU 2016-15,2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU No.2016-15” 2016-15”). ASU No.2016-15 2016-15 clarifies and provides specific guidance on eight cash flow classification issues that are not currently addressed by current GAAP and thereby reduces the current diversity in practice. ASU No.2016-15 2016-15 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. The Company adopted this standard as of April 1, 2018 with no impact on its consolidated financial statements and related disclosures.

In May 2014, the FASB issued their converged standard on revenue recognition, Accounting Standards Update ASU No.2014-09, “ 2014-09, Revenue from Contracts with Customers (Topic 606)”("“ASU No.2014-09" 2014-09”), updated in December 2016 with the release of ASU 2016-20.2016-20. This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods and services in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.  In August 2015, the FASB issued ASU No2015-14 “ 2015-14 Revenue from Contracts with Customers (Topic 606)606): Deferral of the Effective Date," which deferred the effective date of ASU No.2014-09 2014-09 to annual reporting periods beginning after December 15, 2017.

The new revenue standard is required to be applied either retrospectively to each prior reporting period presented or prospectively with the cumulative effect of initially applying the standard recognized at the date of the initial application, supplemented with certain disclosures related to the effect of adoption on previously reported amounts, if any (the modified retrospective method). The Company adopted the standard on April 1, 2018 for contracts that were not completed before the adoption date, using the modified retrospective method.  The Company has evaluated the effect of the standard and concluded it is not material to the timing or amount of revenues or expenses recognized in the Company’s historical consolidated financial statements. As a result, the Company has concluded that the application of the standard does not have a material effect that requires a retrospective adjustment to any previously reported amounts in the Company’s historical consolidated financial statements for reporting disclosure purposes.

  Recently Issued Accounting Pronouncements

In November 2018, the FASB issued ASU 2018-182018-18 – Collaborative Arrangements, which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is not a customer. This ASU will be effective for usthe Company in the first quarter of fiscal 2021 with early adoption permitted. This ASU requires retrospective adoption to the date wethe Company adopted ASC 606,April 1, 2018, by recognizing a cumulative-effect adjustment to the opening balance of retained earnings of the earliest annual period presented. The Company is currently evaluating the impact of the adoption of this standard on its financial statements.

In August 2018, the FASB issued ASU 2018-15,2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU No.2018-15” 2018-15”), which aligns the capitalization requirements for implementation costs incurred in a hosting arrangement that is a service contract with the existing capitalization requirements for implementation costs incurred to develop or obtain internal-use software (Subtopic 350-40). ASU 2018-152018-15 becomes effective for the Company in the first quarter of fiscal 2021 and may be adopted either retrospectively or prospectively. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of this standard on its financial statements.

In August 2018, the FASB issued ASU 2018-13,2018-13, “Fair Value Measurement - Disclosure Framework (Topic 820)” (“ASU No.2018-13” 2018-13”). The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance isbecomes effective for the Company in the first quarter of fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. year 2021. Early adoption is permitted for any removed or modified disclosures. The Company is currently assessing the timing and impact of adopting the updated provisions.

In June 2018, the FASB issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718)” (“ASU No.2018-07”): Improvements to Nonemployee Share-Based Payment Accounting. ASU No.2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees, and as a result, the accounting for share-based payments to non-employees will be substantially aligned. ASU No.2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted but no earlier than an entity’s adoption date of Topic 606. The Company is currently evaluating the impact this new guidance will have on its financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU No.2016-02”). The principle objective of ASU No.2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet. ASU No.2016-02 continues to retain a distinction between finance and operating leases but requires lessees to recognize a right-of-use asset representing its right to use the underlying asset for the lease term and a corresponding lease liability on the balance sheet for all leases with terms greater than twelve months. ASU No.2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. Early adoption of ASU No.2016-02 is permitted. Entities were required to apply the amendments at the beginning of the earliest period presented using a modified retrospective approach. This guidance is applicable to the Company’s fiscal year beginning April 1, 2019. In July 2018, the FASB issued ASU 2018-10 “Codification Improvements to Topic 842, Leases” (“ASU No.2018-02”).  ASU No.2018-02 affects narrow aspects of the guidance issued in the amendments in ASU No.2016-02 including those regarding residual value guarantees, rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase option, variable lease payments that depend on an index or a rate, investment tax credits, lease term and purchase option, transition guidance for amounts previously recognized in business combinations, certain transition adjustments, transition guidance for leases previously classified as capital leases under Topic 840, transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic 840, transition guidance for sale and leaseback transactions, impairment of net investment in the lease, unguaranteed residual asset, effect of initial direct costs on rate implicit in the lease, and failed sale and leaseback transactions.  In July 2018, the FASB issued ASU No.2018-11, "Leases (Topic 842): Targeted Improvements," which provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, the prior comparative period’s financials will remain the same as those previously presented. Entities that elect this optional transition method must provide the disclosures that were previously required. The Company expects it will elect this optional transition method. The Company has selected resources to track and record leases and is starting the assessment and valuation process by evaluating the population of leases under the revised definition of what qualifies as a leased asset, and expects to have the assessment completed by March 2019. The Company is the lessee under various agreements for facilities and equipment that are currently accounted for as operating and capital leases. The Company expects this guidance will have a material impact on its consolidated balance sheets due to the recognition of lease rights and obligations as assets and liabilities, respectively. The Company does not expect this guidance to have a material effect on its consolidated results of operations and cash flows. 

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

Equipment and leasehold improvements consist of the following:following at:

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

The short -termterm obligation is comprised of two separate loans in the principal amount of $180,000$180,000 and $215,000.$215,000. The first loan of $180,000$180,000 bears an interest rate of 6.25% and iswas payable in four monthly installments which includes principal and interest. The loan commenced on December 1, 2018 and maturesmatured on July 15, 2019. The principal amounts outstanding at September 30, 2019 and March 31, 2019. The principal amount outstanding at December 31, 2018 was $137,000.2019 were $0 and $137,000, respectively.

The second loan in thehas a principal amount of $215,000$215,000 and is a non-interest bearing loan that is payable in twelve monthly installments comprised of two monthly payments of $10,000$10,000 and ten monthly payments of $19,543.$19,543. The loan commenced on December 1, 2018 and matures on October 15, 2019. This contract contains a hold back of $38,000$38,000 pending resolution of certain closing items by the seller. The principal amountamounts outstanding at DecemberSeptember 30, 2019 and March 31, 2018 was $195,000.2019 were $54,000 and $148,000, respectively.

Total debt consists of the following at September 30, 2019 and March 31, 2019:

Line of Credit and Term Loans

On August 30, 2016, the Revolving Credit Agreement (the “Credit Agreement”), which the Company and First Foundation Bank (“the Bank”) entered into on June 3, 2016, became effective after the Company and the Bank received the necessary approvals from the State of Hawaii to secure the lien on the Company’s leasehold property in Kona, Hawaii. The Credit Agreement allows the Company to borrow up to $2,000,000$2,000,000 on a revolving basis. Borrowings under the Credit Agreement bear interest at the Wall Street Journal prime rate (5.50%(5.5% at December both September 30, 2019 and March 31,2018) 2019) plus 2%, floating. The

At both September 30, 2019 and March 31, 2019, the outstanding balance under the Credit Agreement includes various covenants as defined in the Credit Agreement. The Credit Agreement also contains standard acceleration provisions in the event of a default by the Company. As of December 31, 2018, the Company had borrowed $1,750,000 and had $250,000 available on the line.was $2,000,000. The line of credit, which is subject to annual renewal, and was renewed on August 30, 2018 2019 and will be subject to renewal upon expiration on August 30, 2019. 2020. Pursuant to the August 30, 2018 2019 renewal, the current ratio covenant was changed from 2.10:1 to 1.50:1 and is applicable to both the Lineline of Creditcredit and Long-Term Debtterm loans with the Bank.

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

Accrued expenses consist of the following:

Long-term debt consists of the following:

Term Loans

On August 14, 2012, In 2015, the Company entered intoexecuted a loan agreement with a lender providing for $2,500,000 in aggregate credit facilities (the “August 2012 “2015 Loan”) secured by substantially all the Company’s assets, pursuant to a Term Loan Agreement dated July 30, 2015 (the “2015 Loan Agreement”) that provides. The 2015 Loan is evidenced by a term loanpromissory note in an aggregate principalthe amount of $5,500,000$2,500,000, the repayment of which is partially guaranteed under the provisions of the 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 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 (5.5% at September 30, 2019 and March 31, 2019) 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 6.0%. The 2015 Loan has a prepayment penalty of 5.0% for any prepayment made prior to the first anniversary of the date of the 2015 Loan Agreement, which penalty is reduced by 1.0% each year thereafter until the fifth anniversary of such date, after which there is no prepayment penalty. The balance under the 2015 Loan was $1,212,000 and $1,389,000 at September 30, 2019 and March 31, 2019, respectively, and was included in long-term debt in the debt table above.

In 2012, the Company executed a loan agreement with a lender providing for $5,500,000 in aggregate credit facilities (the “2012 Loan”) secured by substantially all the Company’s assets, including a mortgage on the Company's interest in its lease at the National Energy Laboratory of Hawaii Authority.Authority, pursuant to a Term Loan Agreement dated August 14, 2012 (the “2012 Loan Agreement”). The August 2012 Loan Agreementis 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 the U.S. Department of Agriculture (“USDA”)a USDA Rural Development Guarantee program.Guarantee. The proceeds of the 2012 Loan were used to acquire processing equipment and leasehold improvements at its Kona, Hawaii facility.

In accordance with terms

The provisions of the August 2012 Loan Agreement, monthly paymentsrequired the payment of principalinterest only for the first 12 months of the term; thereafter, and interest are required until the loan’sits maturity on August 14,2032. 2032, the obligation fully amortizes over nineteen (19) years. Interest on the loan2012 Loan accrues on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate (5.50%(5.5% at December September 30, 2019 and March 31,2018) 2019) 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%5.5%. The balance under the August 2012 Loan Agreement was $4,492,000$4,335,000 and $4,648,000$4,439,000 at DecemberSeptember 30, 2019 and March 31, 2018 2019, respectively, and March 31,2018, respectively.was included in long-term debt in the debt table above.

The 2015 Loan includes a one-timeone-time origination and guaranty feesfee totaling $214,500$113,900 and an annual renewal fee payable in the amount of 0.25%0.5% of the USDA guaranteed portion of the outstanding principal balance as of December 31 of each year, beginning December 31,2012. 2015. The USDA has guaranteed 80% of all amounts owing under the August2015 Loan. The 2012 Loan Agreement. The Company is subject to financial covenants and customary affirmative and negative covenants.  

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

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

 The 2015 Loan includes a one-timeone-time origination and guaranty feefees totaling $113,900$214,500 and an annual renewal fee payable in the amount of 0.50%0.25% of the USDA guaranteed portion of the outstanding principal balance as of December 31 of each year, beginning December 31,2015. 2012. The USDA has guaranteed 80% of all amounts owing under the 20152012 Loan. The Company isbalance in unamortized debt issuance costs was $184,000 and $200,000 at September 30, 2019 and March 31, 2019.

Loan Covenant Violations and Waiver

The Company’s Credit Agreement, 2015 Loan and 2012 Loan are subject to annual debt service and other financial covenants, including covenants which require the Company to meet key financial ratios and customary affirmative and negative covenants.  As of March 31, 2019, the Company was not in compliance with the required debt service coverage ratio or the current ratio and due to these violations, the Bank would be contractually entitled to require immediate repayment of the outstanding term loan amounts of $5,828,000 and the outstanding line of credit balance of $2,000,000.  However, on June 17, 2019, the bank issued the Company a letter waiving the covenant violations as of March 31, 2019.  The outstanding balance of the terms loans is presented as a non-current liability at September 30, 2019 and March 31, 2019.

At no time shallLong-term Debt – Related Party

In April 2019, the annualCompany obtained an unsecured subordinated loan in the amount of $1,500,000.  Interest accrues at a rate of 6.5% and is payable quarterly.  The principal amount and any accrued and unpaid interest rate be less than 6.00%are due in April 2021 (see Note 13). The 2015 Loan Agreement has a prepayment penalty of 5% for any prepayment made prior to the first anniversary of the date of the loan and each year thereafter the penalty is reduced by 1% each year until the fifth anniversary of such date when there will no longer be a prepayment penalty.  The balance under the 2015 Loanthis loan was $1,500,000 at September 30, 2019.

 Equipment Finance Agreement was $1,475,000 and $1,726,000 at December 31, 2018 and March 31,2018, respectively.

On October 6, 2017, the Company entered into an Equipment Finance Agreement (the “Equipment Agreement”), with a lender, which provides up to $175,000$175,000 of financing for equipment. The interest rate on this loan is 4.75%. In accordance with terms in The provisions of the Equipment Agreement require the payment of principleprincipal and interest are required until its maturity on October 31, 2022. The balance under this loan was $134,000$110,000 and $156,000$126,000 at December 31, 2018 September 30, 2019 and March 31, 2018, respectively. 2019, respectively, and was included in long-term debt in the debt table above.

Capital Leases Finance Lease Obligations

TheIn August 2016, the Company has three capital leasesexecuted a finance lease agreement with Thermo Fisher Financial providing for $278,000$52,000 in equipment, secured by the equipment financed. The capital leases mature at various dates between finance lease matured in May 2019 and March 2021 and arewas payable in 60 equal monthly payments, except for one which is payable in 36 equal monthly payments. The interest ratesrate under thesethis capital leases range from 4.18% to lease was 12.90%. The aggregate balancesbalance under these leases were $98,000this lease was $0 and $148,000$7,800 at December 31,2018September 30, 2019 and March 31, 2018, respectively.2019, respectively, and was included in long-term debt in the debt table above.

In February 2016, the Company executed a finance lease agreement with Bank of the West providing for $51,000 in equipment, secured by the equipment financed. The finance lease matures in March 2021 and is payable in 60 equal monthly payments. The interest rate under this finance lease is 4.18%. The balance under this lease was $16,000 and $22,000 at September 30, 2019 and March 31, 2019, respectively, and was included in long-term debt in the debt table above.

In July 2015, the Company executed a finance lease agreement with Huntington Technology Finance providing for $174,000 in equipment, secured by the equipment financed. The finance lease matures in July 2020 and is payable in 60 equal monthly payments. The interest rate under this lease is 6.57%. The balance under this lease was $33,000 and $52,000 at September 30, 2019 and March 31, 2019, respectively, and was included in long-term debt in the debt table above.

Future principal payments under the loans and finance lease obligations at September 30, 2019 are as follows:

The Company leases it facilities, equipment and land under non-cancelable operating leases expiring through 2037. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Right-of-use assets and liabilities were recognized at April 1, 2019 based on the present value of lease payments over the lease term, using the Bank’s incremental borrowing rate based on the information available. At September 30, 2019, the weighted average remaining lease terms is 13.5 years, the weighted average discount rate is 7.5% and the operating lease costs are $296,000.

Supplemental balance sheet information related to leases at September 30, 2019 is as follows:

Maturities of lease liabilities at September 30, 2019 are as follows:

Accrued expenses consist of the following: