UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For Quarterly Period Ended December 31, ~~2022~~2023

☐

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period From to

Commission File Number 0-14602

CYANOTECH CORPORATION

(Exact name of registrant as specified in its charter)

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

73-4460 Queen Kaahumanu Hwy. #102, Kailua-Kona, HI 96740

(Address of principal executive offices)

(808) 326-1353

(Registrant’s telephone number)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ~~(Check one)~~:

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☐☒		Smaller reporting company ☒
		Emerging growth company ☐

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

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

As of February ~~3, 2023,~~2, 2024, the number of shares outstanding of the registrant’s common stock was ~~6,271,971.~~6,886,600.

Table of Contents

This Report and other presentations made by Cyanotech Corporation (“CYAN”) and its subsidiary contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as “expects,” “anticipates,” “intends,” “plan,” “believes,” “predicts”, “estimates” or similar expressions. In addition, any statement concerning future financial performance, ongoing business strategies or prospects and possible future actions are also forward-looking statements. Forward-looking statements are based upon current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning CYAN and its subsidiary (collectively, the “Company”), the performance of the industry in which CYAN does business, and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance. You should not place undue reliance on forward-looking statements.

Forward-looking statements speak only as of the date of the Report, presentation or filing in which they are made. Except to the extent required by the Federal Securities Laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our forward-looking statements in this Report include, but are not limited to:

These forward-looking statements are subject to risk, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control, including those factors described in Item 2 of Part I of this quarterly report and in Item 1A of Part I of the Company’s Annual Report on Form 10-K filed on June ~~22, 2022.~~27, 2023. Additionally, the following factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions and expectations expressed in our forward-looking statements:

It is not possible to predict or identify all potential risks and uncertainties and the above referenced factors and list do not comprise a complete list of all potential risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in any forward-looking statement contained in this report. All forward-looking statements speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this report. Except as is required by law, the Company expressly disclaims any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report. Throughout this report, Cyanotech Corporation, together with its subsidiary, are referred to as “the Company.”

	December 31, 2022			March 31, 2022			December 31, 2023			March 31, 2023
ASSETS
Current assets:
Cash	$	513		$	2,589		$	661		$	974
Accounts receivable, net of allowance for doubtful accounts of $35 as of December 31, 2022 and $67 as of March 31, 2022		2,156			3,664
Accounts receivable, net of allowance for credit losses of $11 as of December 31, 2023 and $64 as of March 31, 2023								2,036			1,331
Inventories		11,574			9,466			9,124			10,707
Prepaid expenses and other current assets		284			545			464			484
Total current assets		14,527			16,264			12,285			13,496

Equipment and leasehold improvements, net		11,693			11,885			10,434			11,366
Operating lease right-of-use assets, net		3,463			3,787			4,409			4,776
Other assets		89			109			126			90
Total assets	$	29,772		$	32,045		$	27,254		$	29,728

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,031		$	2,362		$	1,389		$	1,021
Accrued expenses		988			1,412			753			1,101
Customer deposits		97			164			70			89
Operating lease obligations, current portion		243			393			517			483
Line of credit		1,550			—
Short term debt - bank								1,360			—
Line of credit – bank								—			1,540
Line of credit – related party		500			—			1,250			500
Current maturities of long-term debt		261			490			3,199			3,369
Total current liabilities		4,670			4,821			8,538			8,103

Long-term debt, less current maturities		4,166			4,336			1,000			1,000
Long-term operating lease obligations		3,203			3,386			3,883			4,275
Other long-term liabilities		—			15			—			3
Total liabilities		12,039			12,558			13,421			13,381

Commitments and contingencies

Stockholders’ equity:
Preferred stock of $0.01 par value, authorized 10,000,000 shares; no shares issued and outstanding		—			—			—			—
Common stock of $0.02 par value, authorized 50,000,000 shares; issued and outstanding 6,271,971 shares at December 31, 2022 and 6,202,223 shares at March 31, 2022		125			124
Common stock of $0.02 par value, authorized 50,000,000 shares; issued and outstanding 6,886,600 shares at December 31, 2023 and 6,271,971 shares at March 31, 2023								138			125
Additional paid-in capital		33,812			33,557			34,515			33,856
Accumulated deficit		(16,204	)		(14,194	)		(20,820	)		(17,634	)
Total stockholders’ equity		17,733			19,487			13,833			16,347
Total liabilities and stockholders’ equity	$	29,772		$	32,045		$	27,254		$	29,728

	Three Months Ended December 31,						Nine Months Ended December 31,						Three Months Ended December 31,						Nine Months Ended December 31,
	2022			2021			2022			2021			2023			2022			2023			2022

Net sales	$	5,891		$	9,459		$	17,786		$	27,842		$	5,582		$	5,891		$	17,101		$	17,786
Cost of sales		4,127			6,221			11,914			17,170			3,933			4,127			11,831			11,914
Gross profit		1,764			3,238			5,872			10,672			1,649			1,764			5,270			5,872

Operating expenses:
General and administrative		1,021			1,403			3,631			4,171			947			1,021			3,381			3,631
Sales and marketing		1,041			1,127			3,351			3,808			1,387			1,041			4,048			3,351
Research and development		106			200			556			483			163			106			530			556
Total operating expenses		2,168			2,730			7,538			8,462			2,497			2,168			7,959			7,538

(Loss) income from operations		(404	)		508			(1,666	)		2,210
Loss from operations														(848	)		(404	)		(2,689	)		(1,666	)

Interest expense, net		(186	)		(116	)		(333	)		(312	)		(172	)		(186	)		(495	)		(333	)

(Loss) income before income taxes		(590	)		392			(1,999	)		1,898
Loss before income taxes														(1,020	)		(590	)		(3,184	)		(1,999	)

Income tax expense		8			6			11			21			—			8			2			11

Net (loss) income	$	(598	)	$	386		$	(2,010	)	$	1,877
Net loss													$	(1,020	)	$	(598	)	$	(3,186	)	$	(2,010	)

Net (loss) income per share:
Net loss per share:
Basic	$	(0.10	)	$	0.06		$	(0.32	)	$	0.31		$	(0.16	)	$	(0.10	)	$	(0.50	)	$	(0.32	)
Diluted	$	(0.10	)	$	0.06		$	(0.32	)	$	0.30		$	(0.16	)	$	(0.10	)	$	(0.50	)	$	(0.32	)

Shares used in calculation of net (loss) income per share:
Shares used in calculation of net loss per share:
Basic		6,272			6,183			6,235			6,144			6,554			6,272			6,404			6,235
Diluted		6,272			6,195			6,235			6,165			6,554			6,272			6,404			6,235

	Common Stock Shares			Common Stock Amount		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity			Common Stock Shares			Common Stock Amount		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity
	(in thousands, except per share data)														(in thousands, except per share data)
Balances at March 31, 2023																6,271,971		$	125	$	33,856		$	(17,634	)	$	16,347
Proceeds from the sale of common stock, net of expenses																400,000			8		384						392
Issuances of common stock to Directors Stock Grants																159,493			3		123			—			126
Issuances of common stock to Directors in lieu of cash for current year board fees																12,821			1		10			—			11
Issuances of common stock to Directors in lieu of cash for prior year board fees																17,672			—		15			—			15
Issuances of vested shares of restricted stock																37,996			1		(12	)		—			(11	)
Shares withheld for tax payments																(13,353	)		—		—			—			—
Share-based compensation expense																—			—		139			—			139
Net loss																—			—		—			(3,186	)		(3,186	)
Balances at December 31, 2023																6,886,600		$	138	$	34,515		$	(20,820	)	$	13,833

Balances at March 31, 2022		6,202,223		$	124	$	33,557		$	(14,194	)	$	19,487			6,202,223		$	124	$	33,557		$	(14,194	)	$	19,487
Issuance of common stock for Director Stock Grants		64,489			1		157			—			158
Issuance of vested shares of restricted stock		8,312			—		(10	)		—			(10	)
Issuances of common stock to Directors Stock Grants																64,489			1		157			—			158
Issuances of vested shares of restricted stock																8,312			—		(10	)		—			(10	)
Shares withheld for tax payments		(3,053	)		—		—			—			—			(3,053	)		—		—			—			—
Share-based compensation expense		—			—		108			—			108			—			—		108			—			108
Net loss		—			—		—			(2,010	)		(2,010	)		—			—		—			(2,010	)		(2,010	)
Balances at December 31, 2022		6,271,971		$	125	$	33,812		$	(16,204	)	$	17,733			6,271,971		$	125	$	33,812		$	(16,204	)	$	17,733

Balances at March 31, 2021		6,116,073		$	122	$	33,267		$	(16,348	)	$	17,041
Issuance of common stock for Director Stock Grants		55,438			1		157			—			158
Issuance of vested shares of restricted stock		34,751			1		(40	)		—			(39	)
Shares withheld for tax payments		(12,096	)		—		—			—			—
Share-based compensation expense		—			—		160			—			160
Net income		—			—		—			1,877			1,877
Balances at December 31, 2021		6,194,166		$	124	$	33,544		$	(14,471	)	$	19,197

	Nine Months Ended December 31,						Nine Months Ended December 31,
	2022			2021			2023			2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(2,010	)	$	1,877
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Net loss							$	(3,186	)	$	(2,010	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		1,243			1,202			1,206			1,243
Amortization of debt issue costs and other assets		33			45			(19	)		33
Amortization of operating leases right-of-use assets		324			232			366			324
Share-based compensation expense		266			318			276			266
Provision for doubtful accounts		35			124			11			35
Net (increase) decrease in assets:
Accounts receivable		1,473			(2,214	)		(716	)		1,473
Inventories		(2,108	)		(309	)		1,583			(2,108	)
Prepaid expenses and other assets		267			180			12			267
Net increase (decrease) in liabilities:
Accounts payable		(1,368	)		(269	)		417			(1,368	)
Accrued expenses		(424	)		447			(333	)		(424	)
Customer deposits		(67	)		(41	)		(19	)		(67	)
Operating lease obligations		(333	)		(236	)		(357	)		(333	)
Deferred rent and other liabilities		(14	)		(12	)
Net cash (used in) provided by operating activities		(2,683	)		1,344
Other liabilities								(3	)		(14	)
Net cash used in operating activities								(762	)		(2,683	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements		(1,018	)		(745	)		(323	)		(1,018	)
Net cash used in investing activities		(1,018	)		(745	)		(323	)		(1,018	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net draws (payments) on line of credit		1,550			(1,000	)
Net (payments) draws on short term debt and line of credit – bank								(180	)		1,550
Net draws on line of credit – related party		500			—			750			500
Net payments on debt – related party		—			(500	)
Principal payments on long-term debt		(415	)		(529	)
Principal payments on long-term debt – bank								(179	)		(415	)
Proceeds from the issuance of common stock, net of expenses								392			—
Taxes paid related to net share settlement of restricted stock units		(10	)		(39	)		(11	)		(10	)
Net cash provided by (used in) financing activities		1,625			(2,068	)
Net cash provided by financing activities								772			1,625
Net decrease in cash		(2,076	)		(1,469	)		(313	)		(2,076	)
Cash at beginning of period		2,589			3,767			974			2,589
Cash at end of period	$	513		$	2,298		$	661		$	513

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	242		$	268		$	420		$	242
Income taxes	$	27		$	2		$	6		$	27

Cyanotech Corporation (the “Company”), located in Kailua-Kona, Hawaii, was incorporated in the state of Nevada on March 3, 1983, and is listed on the NASDAQ Capital Market under the symbol “CYAN”. The Company is engaged in the production of natural products derived from microalgae for the nutritional supplements market.

The Company is an agricultural company that produces high value natural products derived from microalgae grown in complex and intricate open-pond agricultural systems on the Kona coast of Hawaii. The Company's products include Hawaiian Spirulina Pacifica®, a superfood with numerous benefits, including boosting the immune system and overall cellular health; and BioAstin® Hawaiian Astaxanthin®, a powerful antioxidant shown to support and maintain the body's natural inflammatory response.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information pursuant to the instructions to Form 10-Q and Regulation S-X of the Securities and Exchange Commission (“SEC”). These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the periods presented in accordance with GAAP.

Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year. The Condensed Consolidated Balance Sheet as of March 31, ~~2022~~2023 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, ~~2022,~~2023, contained in the Company’s annual report on Form 10-K as filed with the SEC on June ~~22, 2022.~~27, 2023.

The accompanying condensed consolidated financial statements as of and for the three and nine months ended December 31, 2023 and 2022, and as of March 31, 2023, have been prepared assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company sustained operating losses and negative cash flows from operations for these same periods. Further, as discussed below, the Company was not in compliance with a debt covenant requirement at March 31, 2023 and First Foundation Bank (the “Bank”) instituted a freeze on additional advances from the Revolving Credit Agreement (“Credit Agreement”). These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expense that may be necessary if the Company was unable to continue as a going concern.

As of December 31, ~~2022,~~2023, the Company had cash of ~~$513,000~~$661,000 and working capital of ~~$9,857,000~~$3,747,000 compared to ~~$2,589,000~~$974,000 and ~~$11,443,000,~~$5,393,000, respectively, as of March 31, ~~2022.~~2023. The Company ~~has~~had a ~~Revolving~~ Credit Agreement ~~(“Credit Agreement”)~~ with ~~First Foundation~~the Bank ~~(“Bank”)~~ that ~~allows the Company to borrow~~provided for borrowings up to $2,000,000 on a revolving ~~basis. At~~basis, however, as part of the covenant waiver at March 31, 2023, the borrowings under this line of credit were frozen at $1,770,000. On October 13, 2023, the Bank converted this line of credit to a term loan in the amount of $1,480,000 with a maturity date of August 30, 2024. As of December 31, ~~2022~~ ~~and~~ ~~March 31, 2022,~~2023, the Company had ~~$1,550,000~~$1,360,000 outstanding on this loan and ~~$0, respectively,~~as of March 31, 2023, the Company had outstanding borrowings of $1,540,000 on the line of credit. ~~The line of credit is subject to renewal on~~(See Note ~~August 30, 2023~~ 5~~and the Company intends to renew or replace it with another line of credit on or before the expiration date.~~).

The Company also has a loan facility with a related party that allows the Company to borrow up to ~~$1,000,000~~$2,000,000 on a revolving basis (the “Revolver”). At December 31, ~~2022~~2023 and March 31, ~~2022,~~2023, the Company had ~~$500,000~~$1,250,000 and ~~$0,~~$500,000, respectively, outstanding borrowings on the Revolver, which were included in line of credit – related party on the Condensed Consolidated Balance Sheets. The Revolver expires on April 12, 2025 (see Notes 5 and 1213).

As of December 31, ~~2022,~~2023, the Company had ~~$3,523,000 in long-term~~$3,282,000 of 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, ~~2022,~~2023, the Company ~~was~~debt service coverage ratio fell short of the Bank’s annual requirement. On June 22, 2023, the Bank provided the Company with a letter waiving the covenant violation as of March 31, 2023, but noting that the Bank reserved its right to declare a default in the future if any covenants remain out of compliance ~~with all required annual financial covenants under~~ at applicable measurement dates.

On December 15, 2023, the ~~Term Loans~~Company completed a private placement (the “Private Placement”) for 400,000 shares of its common stock at a price of $1.00 per share, and incurred legal costs related to the ~~Credit Agreement.~~ Private Placement of $8,000. The net proceeds of $392,000 were used by the Company for general working capital. (See Note 10).

In April 2019, the Company obtained a loan in the amount of $1,500,000 from a related party. The proceeds were used to pay down accounts payable and for general operating capital purposes. On April 12, 2021, ~~and~~ December 14, 2022,and August 14, 2023, the Company amended this loan (see Notes 5 and 1213). As of both December 31, ~~2022~~2023 and March 31, ~~2022,~~2023, the Company had $1,000,000 outstanding on the related party note. The loan ~~expires~~matures on April 12, 2025.

~~In fiscal year~~ ~~2023,~~The Company continues to experience a loss from operations as the impacts from the macroeconomic environment ~~have~~ led to lower sales across ~~all of~~ the Company's portfolio ~~and cash flows from operating activities. During this period,~~on a year-to-date basis. Industry data shows that consumers intake of dietary supplements is not slowing down but may be trading down to private label brands to save on costs. The market for bulk material is increasingly price sensitive with many companies sourcing lower priced international ingredients. Since the second quarter of fiscal year 2023, the Company drew ~~$1,550,000~~a net of $1,360,000 on its line of credit and ~~$500,000~~$1,250,000 on the Revolver. To address the resulting cash flow challenges, ~~beginning~~the Company continues to monitor cost savings initiatives implemented in ~~the~~ ~~third~~ ~~quarter of~~ fiscal year 2023, ~~the Company implemented some cost savings initiatives,~~ including stopping or slowing production of inventory in alignment with current customer demand, ~~reducing~~maintaining a reduced headcount and compensation, primarily through attrition and furloughs, respectively, and eliminating certain discretionary selling, general and administrative expenses. The Company has also made changes in the sales and marketing team starting with the Chief Commercial Officer and strengthening the sales team, updating the Company’s marketing materials to emphasize its competitive strengths and raising capital by completing a private placement in the third fiscal quarter of 2024.

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. The Company has developed its operating plan to produce the cash flows necessary to meet all financing requirements. Although the Company has a history of either being in compliance with debt covenants, or obtaining the necessary waivers, execution of its operating plan is dependent on many factors, some of which are not within the control of the Company. ~~Taking into account the Company's financial results for the~~However, ~~first~~no ~~three~~ ~~quarters of the~~ ~~2023~~ ~~fiscal year, it is possible~~assurances can be provided that the Company will ~~not~~ ~~be in compliance with~~achieve its ~~debt covenants~~operating plan and cash flow projections for this fiscal year or its projected consolidated financial position as of ~~March~~December 31, ~~2023~~2024. ~~measurement date. If the Company is~~ ~~not~~ ~~in compliance, the Company would intend~~Such estimates are subject to ~~seek a waiver~~change based on future results and such change could cause future results to vary significantly from ~~the Bank. The Bank has provided such a waiver in the past when the Company has been in default, but there is~~ no ~~assurance that the Bank would do so again. A failure to maintain compliance along with the Bank~~ ~~not~~ ~~agreeing to a waiver for the non-compliance would cause the outstanding borrowings to be in default and payable on demand, which would have a material adverse effect on the Company.~~expected results.

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.

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.

A significant portion of ~~revenue~~revenues and accounts ~~receivable~~receivables are derived from a few major customers. For the three months ended December 31, ~~2022,~~2023, ~~one customer~~two customers individually accounted for ~~36%~~34% and 22% of the Company’s total net sales, and for the three months ended December 31, ~~2021,~~2022, ~~two customers individually~~one customer accounted for ~~22% and 21%~~36% of the Company’s total net sales. For the nine months ended December 31, ~~2022,~~2023, two customers individually accounted for ~~35%~~36% and 8%18% of the Company’s total net sales, and for the nine months ended December 31, ~~2021,~~2022, two customers individually accounted for ~~21%~~35% and ~~18%~~8% of the Company’s total net sales. Two customers accounted for ~~97%~~82% and ~~63%~~46% of the Company’s accounts receivable balance as of December 31, ~~2022~~2023 and March 31, ~~2022,~~2023, respectively.

Accounts receivable balances are recorded at the invoiced amount and do not accrue interest. Credit is extended based on evaluation of the customer’s financial condition. Collateral is not required. The allowance for credit losses reflects management’s best estimate of expected credit losses inherent in the accounts receivable balance. Management determines the allowances based on historical experience, specifically identified nonpaying customers and other currently available evidence, including the likelihood of each customer not being able to pay, due to the Company’s small customer and recurring customer base. Management reviews its customer account balances monthly with a focus on significant individual past due balances over 90 days. All other balances are reviewed on a pooled basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers or otherwise.

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

Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling a performance obligation. The Company has elected to exclude sales, use and similar taxes from the measurement of the transaction price. The amount of consideration expected to be received and revenue recognized includes estimates of variable consideration, which includes costs for trade promotion programs, coupons, returns and early payment discounts. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. The Company reviews and updates these estimates at the end of each reporting period and the impact of any adjustments are recognized in the period the adjustments are identified. In assessing whether collection of consideration from a customer is probable, the Company considers the customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in the underlying customer agreement, typically 30 days from the invoice date, which occurs on the date of transfer of control of the products to the customer. Revenue is recognized at the point in time that control of the ordered products is transferred to the customer. Generally, this occurs when the product is delivered, or in some cases, picked up from one of the Company’s distribution centers by the customer. Revenue from extraction services is recognized when control is transferred upon completion of the extraction process.

Customer contract liabilities consist of customer deposits received in advance of fulfilling an order and are shown separately on the consolidated balance sheets. During the three months ended December 31, ~~2022~~2023 and ~~2021,~~2022, the Company ~~recognize~~recognized $6,000 and $2,000, ~~and $6,000,~~ respectively, of revenue from deposits that were included in contract liabilities as of March 31, ~~2022~~2023 and ~~2021,~~2022, respectively. During the nine months ended December 31, ~~2022~~2023 and ~~2021,~~2022, the Company recognized ~~$94,000~~$24,000 and ~~$55,000,~~$94,000, respectively, of revenue from deposits that were included in contract liabilities as of March 31, ~~2022~~2023 and ~~2021,~~2022, 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.

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

In ~~December 2019,~~June 2016, the FASB issued ASU ~~2019~~2016-~~12,~~13, “~~Simplifying the Accounting for Income Taxes~~Financial Instruments – Credit Losses”~~(“ASU~~ (“Topic ~~2019~~-~~12”~~326”), which ~~as part of its Simplification Initiative~~was subsequently amended in November 2018 through ASU 2018-19, “Codification Improvements to ~~reduce the cost~~Topic 326, Financial Instruments – Credit Losses” (“CECL”). CECL requires entities to estimate lifetime expected credit losses for trade and ~~complexity~~other receivables, net investment in ~~accounting for income taxes, removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes~~leases, financing receivables, debt securities and other instruments, which will result in ~~an interim period and the~~earlier recognition of ~~deferred tax liabilities for outside basis differences. ASU~~ ~~2019~~-12 ~~also amends other aspects of the guidance to help simplify and promote consistent application of GAAP.~~credit losses. The guidance is effective for ~~fiscal years,~~interim and ~~interim~~annual periods ~~within those fiscal years,~~ beginning after December 15, ~~2020,~~2022. The Company adopted this standard as of April 1, 2023, however, due to the relatively short-term nature of its accounts receivable and history of limited bad debt expense, the impact of this guidance was not significant to the Company’s consolidated financial statements and related disclosure. The Company will continue to evaluate the impact of CECL going forward.

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosure” (“ASU 2023-09”), which enhances the transparency and decision usefulness of income tax disclosures. Adjustments to the annual disclosure of income taxes include: a tabulate rate reconciliation comprised of eight specific categories; income taxes paid, disaggregated between significant federal, state, and foreign jurisdictions; eliminating requirements to disclose the nature and estimate of reasonably possible changes to unrecognized tax benefits in the next 12 months or that an estimated range cannot be made; and adds a requirement to disclose income (or loss) from continuing operations before income tax expense (or benefit) and income tax expense (or benefit) from continuing operations disaggregated between domestic and foreign. ASU 2023-09 is effective for public business entities for fiscal years beginning on or after December 15, 2024, with early adoption permitted. The ~~Company adopted~~amendments in ASU ~~2019~~2023-1209 ~~as of~~ ~~April 1, 2021~~ ~~with~~ no ~~impact~~should be applied on ~~its consolidated financial statements and related disclosures.~~a prospective basis. Retrospective application is permitted.

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

The Company recognizes abnormal production costs, including fixed cost variances from normal production capacity, fixed production overhead costs, idle facilities, freight handling costs and spoilage, as an expense in the period incurred, without adjusting overhead absorption rates. Normal production capacity is defined as the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. ~~For~~The Company had abnormal production cost recovery of $73,000 and costs of $64,000 to cost of sales for the three months ended December 31, ~~2022~~2023 and ~~2021,~~2022, ~~the~~respectively. The Company had ~~$64,000~~abnormal production costs of $60,000 and ~~$0, respectively,~~$90,000 to cost of ~~abnormal productions costs. For~~sales for the nine months ended December 31, ~~2022~~2023 and ~~2021,~~2022, ~~the Company had $90,000 and $0, respectively, of abnormal productions costs.~~respectively.

Beginning in fiscal year 2021 through fiscal year 2023, cultivation of astaxanthin was completed in the first six months of the fiscal year during the most productive months of the year due to the best growing conditions, compared to year-round production in the prior fiscal years. ~~A similar approach is being followed in~~In fiscal year ~~2023.~~2024, cultivation of astaxanthin reverted back to year-round in order to manage staffing constraints. The Company calculates total production costs for the year based on normal capacity of production expected to be achieved in a year under normal circumstances. These costs are then allocated into inventory based on the period of production, not including abnormal production costs. Allocating fixed and overhead costs requires management’s judgement to determine when production is outside of the normal range of expected variation in production.

Other non-inventoriable fixed costs of ~~$72,000~~$71,000 and ~~$76,000~~$72,000 were expensed to cost of sales for the three months ended December 31, ~~2022~~2023 and ~~2021,~~2022, respectively. Other non-inventoriable fixed costs of ~~$115,000~~$396,000 and ~~$113,000~~$115,000 were expensed to cost of sales for the nine months ended December 31, ~~2022~~2023 and ~~2021,~~2022, respectively.

Management has determined that no asset impairment existed as of December 31, ~~2022.~~2023. Depreciation and amortization expense were approximately ~~$409,000~~$395,000 and ~~$404,000~~$409,000 for the three months ended December 31, ~~2022~~2023 and ~~2021,~~2022, respectively. Depreciation and amortization expense were approximately ~~$1,243,000~~$1,206,000 and ~~$1,202,000~~$1,243,000 for the nine months ended December 31, ~~2022~~2023 and ~~2021,~~2022, respectively.

On August 30, 2016, the Credit Agreement, which the Company entered into with the Bank 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~~allowed 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 ~~(6.25% at~~ ~~December 31, 2022~~ ~~and 3.25%~~(8.0% at March 31, ~~2022)~~2023) plus 2%, floating, provided that at no time shall the annual interest rate be less than 5.25%.

AtOn October 13, 2023, the Bank converted this line of credit to a term loan (“2023 Loan”) in the amount of $1,480,000, with no further advances or disbursements under this line and matures on August 30, 2024. The 2023 Loan requires a least monthly payments of $40,000 plus interest accrued on the unpaid balance of the loan at the Wall Street Journal prime rate plus 2%, floating, provided that at no time shall the annual interest rate be less than 7.0%. As of December 31, ~~2022~~2023, the Company had $1,360,000 outstanding on the 2023 Loan and bears interest at 8.5%, plus 2%. As of March 31, ~~2022,~~2023, the outstanding balance under the Credit Agreement was ~~$1,550,000~~$1,540,000, respectively. Both the 2023 Loan and ~~$0, respectively, and at~~ ~~December 31, 2022~~ ~~was~~the line of credit were included in current liabilities on the Condensed Consolidated Balance Sheets. ~~The line of credit, which is subject to annual renewal, was renewed on~~ ~~August 30, 2022~~ ~~and will be subject to renewal upon expiration on~~ ~~August 30, 2023.~~

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.

In ~~2015,~~ ~~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 assets, pursuant to a Term Loan Agreement dated~~ ~~July 30, 2015 (~~~~the~~ ~~“2015~~ ~~Loan Agreement”). The~~ ~~2015~~ ~~Loan was evidenced by a promissory note in the amount of~~ ~~$2,500,000,~~ ~~the repayment of which was partially guaranteed under the provisions of the United States Department of Agriculture (“USDA”) Rural Development Guarantee program.~~

~~The provisions of the~~ ~~2015~~ ~~Loan require the payment of principal and interest until its maturity on~~ ~~September 1, 2022.~~ ~~Interest on the~~ ~~2015~~ ~~Loan accrued on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate (3.25% at~~ ~~March~~ ~~31,~~~~2022~~~~) plus 2.0% and was adjustable on the~~ ~~first~~ ~~day of each calendar quarter and fixed for that quarter, provided that at~~ no ~~time shall the annual interest rate be less than 6.0%. The~~ ~~2015~~ ~~Loan was paid off in~~ ~~September 2022~~ ~~and the balance under the~~ ~~2015~~ ~~Loan was $218,000 at~~ ~~March~~ ~~31,~~~~2022,~~ ~~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, pursuant to a Term Loan Agreement dated August 14, 2012 (the “2012 Loan Agreement”). The 2012 Loan 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~~United States Department of Agriculture (“USDA”) Rural Development ~~Guarantee.~~Guarantee program. The proceeds of the 2012 Loan were used to acquire processing equipment and leasehold improvements at its Kona, Hawaii facility.

The provisions of the 2012 Loan 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 2012 Loan accrues on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate ~~(6.25%~~(8.5% and ~~3.25%~~7.5% at December 31, ~~2022~~2023 and March 31, ~~2022,~~2023, respectively) plus 1.0% and is adjustable on the first day of each calendar quarter and fixed for that quarter, provided that at no time shall the annual interest rate be less than 5.5%. The balance under the 2012 Loan was ~~$3,523,000~~$3,282,000 and ~~$3,720,000~~$3,461,000 at December 31, ~~2022~~2023 and March 31, ~~2022,~~2023, respectively, and was included in current maturities of long-term debt in the debt table above. See Loan Covenants, Violations and Waiver below.

~~The~~ ~~2015~~ ~~Loan includes a~~ ~~one~~~~-time origination and guaranty fee totaling $113,900 and an annual renewal fee payable in the amount of 0.5% of the USDA guaranteed portion of the outstanding principal balance as of~~ ~~December~~ 31 ~~of each year, beginning~~ ~~December~~ ~~31,~~~~2015.~~ ~~The USDA had guaranteed 80% of all amounts owing under the~~ ~~2015~~ ~~Loan until~~ ~~September 2022,~~ ~~when the loan was paid off.~~ The 2012 Loan included 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 USDA has guaranteed 80% of all amounts owing under the 2012 Loan. The balance in unamortized debt issuance costs was ~~$96,000~~$83,000 and ~~$112,000~~$92,000 at December 31, ~~2022~~2023 and March 31, ~~2022,~~2023, ~~respectively.~~respectively, and was included in current maturities of long-term debt in the debt table above. See Loan Covenants, Violations and Waiver below.

The Company’s Credit Agreement and the 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, ~~2022,~~2023, the Company was notin compliance with the required debt service coverage ratio, however, was in compliance with the two other covenants. Due to this violation, the Bank would be contractually entitled to require immediate repayment of the outstanding term loans and the outstanding line of credit balance. However, on June 22, 2023, the Bank issued the Company a letter waiving the covenant violation as of March 31, 2023, and implemented an immediate freeze on any and all ~~required annual financial covenants.~~ further advances of the Credit Agreement through the maturity date, with an outstanding balance in the amount of $1,770,000 as of June 21, 2023. The next remeasurement date will be March 31, ~~2023.~~2024.

In April 2019, the Company obtained a loan in the amount of $1,500,000 with a related party and the interest was payable quarterly. The loan was originally due in April 2021. In April 2021, the Company amended the loan, which extended the expiration to April 2024, converted $500,000 into the Revolver, adjusted the interest rate to reflect a floor of 5%, and granted a security interest in substantially all of the Company’s personal property assets, subject to limited exceptions. Concurrently, with the amendment and conversion of the original loan, the Company repaid in cash the principal amount of $500,000 plus accrued interest to date of $1,900 (see Note 1213). In December 2022, the Company amended the loan to extend the expiration to April 2025 and increase the Revolver to $1,000,000. On August 14, 2023, the Company amended the loan to increase the Revolver to $2,000,000.

At both December 31, ~~2022~~2023 and March 31, ~~2022,~~2023, the balance under this loan was $1,000,000, which was included in long-term debt in the debt table above. At December 31, ~~2022~~2023 and March 31, ~~2022,~~2023, the balance under the Revolver was ~~$500,000~~$1,250,000 and ~~$0,~~$500,000, respectively, which was included in line of credit – related party in the debt table above. Interest accrues on the outstanding principal balance and the Revolver at an annual variable rate equal to the published Wall Street Journal prime rate ~~(6.25%~~(8.5% and ~~3.25%~~7.5% at December 31, ~~2022~~2023 and March 31, ~~2022,~~2023, respectively) plus 1.0% and is adjustable on the first day of each calendar quarter and fixed for that quarter, provided that at no time shall the annual interest rate be less than 5.0%.

Future principal payments under the loans at December 31, 2023 ~~31,~~~~2022~~are as follows:

The Company leases facilities, equipment and land under non-cancelable operating leases expiring through 2037. One of its facility leases contains price escalations and a renewal option for five ~~years, which was renewed effective~~ ~~January 1, 2023.~~ years. 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 recognition, and the Company has elected to exclude non-lease components. The Company also leases two 84-month solar leases for two of its buildings, which are included in the right-of-use assets and liabilities. At December 31, ~~2022,~~2023, the weighted average remaining lease terms of all operating leases was ~~12.0~~9.3 years, the weighted average discount rate was 7.3%, and for the nine months ended December 31, ~~2022~~2023 and ~~2021,~~2022, the operating lease costs were ~~$517,000~~$615,000 and ~~$445,000,~~$517,000, respectively.

Supplemental balance sheet information related to leases consist of the following as of:

From time to time, the Company may be involved in litigation and investigations relating to claims and matters arising out of its operations in the normal course of business. There were no significant legal matters outstanding at December 31, ~~2022.~~2023.

The Company has share-based compensation plans, which are more fully described in Note ~~10,~~9, Share-Based Compensation, to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the fiscal year ended March 31, ~~2022~~2023 as filed with the SEC on June ~~22, 2022.~~27, 2023.

As of December 31, ~~2022,~~2023, the Company had two equity-based compensation plans: the 2016 Equity Incentive Plan (the “2016 Plan”) and the 2014 Independent Director Stock Option and Restricted Stock Grant Plan and Amendment (the “2014 Directors Plan”). ~~The Company has also issued stock options, which remain outstanding as of~~ ~~December 31, 2022,~~ ~~under an equity-based compensation plan which has expired according to its terms: the~~ ~~2004~~ ~~Independent Director Stock Option and Stock Grant Plan (the~~ ~~“2004~~ ~~Directors Plan”). The 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~~ ~~2004~~ ~~Directors Plan.~~

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

All stock option grants made under the equity-based compensation plans were issued at exercise prices no less than the Company’s closing stock price on the date of grant. Options under the 2016 Plan and 2014 Directors Plan were determined by the Board of Directors or the 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 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 all Plans was ~~$25,000~~$24,000 and ~~$17,000~~$25,000 for the three months ended December 31, ~~2022~~2023 and ~~2021,~~2022, respectively. Compensation expense recognized for options issued under all Plans was ~~$66,000~~$73,000 and ~~$47,000~~$66,000 for the nine months ended December 31, ~~2022~~2023 and ~~2021,~~2022, respectively.

A summary of option activity under the Company’s stock plans for the nine months ended December 31, ~~2022~~2023 is presented below:

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 closing stock price of ~~$1.10~~$0.89 and ~~$3.37~~$0.88 at December 31, ~~2022~~2023 and March 31, ~~2022,~~2023, respectively.

A summary of the Company’s non-vested options for the nine months ended December 31, ~~2022~~2023 is presented below:

The weighted average grant-date fair value of stock options granted during the nine months ended December 31, ~~2022~~2023 was ~~$97,000.~~$24,000. As of December 31, ~~2022,~~2023, total unrecognized stock-based compensation expense related to all unvested stock options was ~~$146,000,~~$79,000, which is expected to be expensed over a weighted average period of ~~1.8~~1.4 years.

Grants of fully vested restricted stock issued to Non-Employee Directors during the nine months ended December 31, ~~2022~~2023 and ~~2021~~2022 were ~~64,489~~159,493 and ~~55,438,~~64,489, respectively. Compensation expense recognized for fully vested restricted stock grants under the 2014 Directors Plan was $0$126,000 and $158,000 for the~~three~~ ~~months ended~~ ~~December 31, 2022~~ ~~and~~ ~~2021,~~ ~~respectively, and $158,000 for both~~ nine months ended December 31, ~~2022~~2023 and ~~2021,~~2022, respectively.

To reduce the Company’s ongoing cash expenses, the Nominating and Corporate Governance Committee of the Board of Directors adopted a resolution allowing each director to elect to receive his or her quarterly director fees in the form of restricted stock in lieu of cash. Two Board members elected to receive shares of restricted stock in lieu of cash for the third fiscal quarter of 2023 and one Board member elected to receive shares of restricted stock in lieu of cash for the second fiscal quarter of 2024. On April 3, 2023, 17,672 shares of fully vested restricted stock were issued to the two Board members with no compensation expense related to the issuance of this stock, as it was earned and recognized in fiscal year 2023 in the amount of $15,500. On October 13, 2023, 12,821 shares of fully vested restricted stock were issued, and compensation expense recognized for the nine months ended December 31, 2023 was $10,000.

RSUs are service-based awards granted to eligible employees under the 2016 Plan. Compensation expense recognized for RSUs issued under the 2016 Plan was $20,000 ~~and $23,000~~ for both the three months ended December 31, ~~2022~~2023 and ~~2021,~~2022. ~~respectively.~~ Compensation expense recognized for RSUs issued under the 2016 Plan was ~~$42,000~~$66,000 and ~~$113,000~~$42,000 for the nine months ended December 31, ~~2022~~2023 and ~~2021,~~2022, respectively.

The following table summarizes information related to awarded ~~RSUs for the~~ ~~nine~~ ~~months ended~~ ~~December 31, 2022:~~RSUs:

As of December 31, ~~2022,~~2023, total unrecognized stock-based compensation expense related to unvested restricted stock units was ~~$139,000,~~$92,000, which is expected to be expensed over a weighted average period of ~~2.5~~1.6 years.

On December 15, 2023, the Company completed the Private Placement of an aggregate of 400,000 shares (the “Shares”) of its common stock, par value $0.02 per share (the “Common Stock”), at a price of $1.00 per share for gross proceeds of $400,000. The Shares were issued pursuant to the exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”), provided by Section 4(a)(2) of the Securities Act to one investor, the Company’s Chairman of the Board, and pursuant to a Subscription Agreement (the “Subscription Agreement”), dated December 15, 2023. The Company incurred legal expenses of $8,000 related to this transaction. The net proceeds of $392,000 from the Private Placement were used by the Company for general working capital.

The Shares are restricted securities under applicable federal securities laws and are subject to certain piggyback registration rights as provided for in the Subscription Agreement.

The Company utilizes its estimated annual effective tax rate to determine its provision or benefit for income taxes for interim periods. The income tax provision or benefit is computed by multiplying the estimated annual effective tax rate by the year-to-date pre-tax book income (loss). The Company recorded an$0 and $8,000 of income tax expense ~~of $8,000 and $6,000~~ for the three months ended December 31, ~~2022~~2023 and ~~2021,~~2022, respectively. The Company’s effective tax rate was (1.4%) ~~and 1.5%~~ for the three months ended December 31, ~~2022~~2022. ~~and~~ ~~2021,~~ ~~respectively.~~ The Company recorded an$2,000 and $11,000 of income tax expense ~~of $11,000 and $21,000~~ for the nine months ended December 31, ~~2022~~2023 and ~~2021,~~2022, respectively. The Company’s effective tax rate was ~~(0.6%~~(0.1%) and ~~1.1%~~(0.6%) for the nine months ended December 31, ~~2022~~2023 and ~~2021,~~2022, respectively. The effective tax rates ~~for all periods~~ differ from the statutory rate of 21% 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 continues to carry a full valuation allowance on its net deferred tax assets.

The Company is subject to taxation in the United States and eight 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 December 31, ~~2022~~2023 and ~~2021,~~2022, 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 Condensed 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 ~~2018.~~2019.

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 (loss) income per share computations for the three and nine months ended December 31, ~~2022~~2023 and ~~2021~~2022 are as follows:

Basic and diluted per share amounts 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 and restricted stock units totaling 4,000 and 1,000 for the three months ended December 31, 2023 and 2022, respectively, and 600 and 4,000 for the nine months ended December 31, 2023 and 2022, 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 then included in the calculation of basic earnings per share. ~~The denominator for effective dilutive shares for the prior year have been restated to conform to current year presentation, to included unvested restricted stock units that have a dilutive effect.~~

In April 2019, the Company obtained an unsecured subordinated loan from Skywords Family Foundation, Inc. (“Skywords”) in the principal amount of $1,500,000 pursuant to a Promissory Note (the "Skywords Note”) executed by the Company in favor of Skywords. Skywords is controlled by the Company’s Chairman of the Board of Directors and largest stockholder. The Skywords Note bore interest at a rate of 1% plus the prime rate (as published by the Wall Street Journal), which was recalculated and payable on a quarterly basis. The principal amount and any accrued and unpaid interest were due and payable on April 12, 2021. The proceeds of the Skywords Note were used to pay down accounts payable and for general operating capital purposes.

On April 12, 2021, the Company entered into an Amended and Restated Promissory Note (the “Skywords Amended Note”) with Skywords. The Company and Skywords agreed to amend, restate, replace and otherwise modify without novation, the Skywords Note in order to convert $500,000 of the outstanding principal amount into revolving loans that may be prepaid and reborrowed from time to time in principal amounts not to exceed ~~$500,000,~~$500,000, extend the maturity date by three years, adjust the interest rate to reflect a floor of 5% and secure Skywords’ interest by granting a security interest in substantially all of the Company’s personal property assets, subject to limited exceptions (the “Collateral”). On April 12, 2021, concurrently with the conversion, the Company repaid in cash to Skywords, the principal amount of $500,000 plus accrued interest to date of $1,900. The Skywords Amended Note bears interest at a rate of 1% plus the prime rate (as published by the Wall Street Journal), which will be recalculated and payable on a quarterly basis, provided that at no time shall the annual interest rate be less than 5%. The Company may prepay the Skywords Amended Note at any time without penalty.

On April 12, 2021, in connection with the grant of a security interest in the Collateral, the Company also entered into an Intercreditor and Subordination Agreement with the Bank and Skywords. The Company is indebted to the Bank pursuant to two Term Loans and a Credit Agreement, each of which granted the Bank a security interest in substantially all of the Company’s personal property assets. The Bank’s security interest in the Company’s personal property assets ranks senior to Skywords’ security interest in the Collateral, and the Intercreditor and Subordination Agreement generally governs the relationship between the Bank and Skywords as secured lenders to the Company and includes customary terms.

On December 14, 2022, the Company entered into a First Amendment (the ~~“Amendment”~~“First Amendment”) to the Skywords Amended Note. The First Amendment extends the maturity date to April 12, 2025 and increases the revolving amount that the Company may borrow from time to time under the Skywords Amended Note from $500,000 to $1,000,000. All other terms of the Skywords Amended Note remain the same.

On August 14, 2023, the Company entered into a Second Amendment (the “Second Amendment”) to the Skywords Amended Note. The Second Amendment increases the revolving amount that the Company may borrow from time to time under the Skywords Amended Note from $1,000,000 to $2,000,000. All other terms of the Skywords Amended Note remain the same.

At both December 31, ~~2022~~2023 and March 31, ~~2022,~~2023, the Skywords Note principal balance was ~~$1,000,000~~,$1,000,000, and was included in long-term debt on the Condensed Consolidated Balance Sheets. At December 31, ~~2022~~2023 and March 31, ~~2022,~~2023, the balance on the Revolver was ~~$500,000~~$1,250,000 and ~~$0,~~$500,000, respectively, and was included in line of credit – ~~Revolver~~related party on the Condensed Consolidated Balance Sheets. At December 31, ~~2022~~2023 and March 31, ~~2022,~~2023, the interest rates were ~~7.25%~~9.5% and ~~5.0%~~8.5%, respectively.

See Note 10 regarding the Private Placement with the Company’s Chairman of the Board.

We are an agricultural company and a world leader in the production of ~~high value~~ natural products derived from ~~microalgae.~~microalgae grown in complex and intricate agricultural systems on the Kona coast of Hawaii. 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 are Good Manufacturing Practices (“GMP”) certified by the Merieux NutriSciences, 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:

*These statements have not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure or prevent any disease.

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 dietary supplement products derived from microalgae.

Our production of these products at the 96-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 our Ocean-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”). 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.

The following tables present selected consolidated financial data for each of the periods indicated ($ in thousands):

	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	December 31,						December 31,						December 31,						December 31,
	2022			2021			2022			2021			2023			2022			2023			2022
Net sales	$	5,891		$	9,459		$	17,786		$	27,842		$	5,582		$	5,891		$	17,101		$	17,786
Net sales (decrease) increase		(37.7	)%					(36.1	)%
Net sales decrease														(5.2	)%					(3.9	)%
Gross profit	$	1,764		$	3,238		$	5,872		$	10,672		$	1,649		$	1,764		$	5,270		$	5,872
Gross profit as % of net sales		29.9	%		34.2	%		33.0	%		38.3	%		29.5	%		29.9	%		30.8	%		33.0	%
Operating expenses	$	2,168		$	2,730		$	7,538		$	8,462		$	2,497		$	2,168		$	7,959		$	7,538
Operating expenses as % of net sales		36.8	%		28.9	%		42.4	%		30.4	%		44.7	%		36.8	%		46.5	%		42.4	%
Operating(loss) income	$	(404	)	$	508		$	(1,666	)	$	2,210
Operating (loss) income as % of net sales		(6.8	)%		5.4	%		(9.4	)%		7.9	%
Operating loss													$	(848	)	$	(404	)	$	(2,689	)	$	(1,666	)
Operating loss as % of net sales														(15.2	)%		(6.8	)%		(15.7	)%		(9.4	)%
Income tax expense	$	8		$	6		$	11		$	21		$	—		$	8		$	2		$	11
Net (loss) income	$	(598	)	$	386		$	(2,010	)	$	1,877
Net loss													$	(1,020	)	$	(598	)	$	(3,186	)	$	(2,010	)

*Net Sales* (in thousands)
	Three Months Ended										Three Months Ended
	December 31,				$			%			December 31,				$			%
	2022		2021		Change			Change			2023		2022		Change			Change
Packaged sales
Astaxanthin	$	3,113	$	3,563	$	(450	)		(12.6	)%	$	3,691	$	3,113	$	578			18.6	%
Spirulina		1,147		1,612		(465	)		(28.8	)%		1,277		1,147		130			11.3	%
Total Packaged sales	$	4,260	$	5,175	$	(915	)		(17.7	)%	$	4,968	$	4,260	$	708			16.6	%

Bulk sales
Astaxanthin	$	378	$	1,128	$	(750	)		(66.5	)%	$	261	$	378	$	(117	)		(31.0	)%
Spirulina		967		2,990		(2,023	)		(67.7	)%		312		967		(655	)		(67.7	)%
Total Bulk sales	$	1,345	$	4,118	$	(2,773	)		(67.3	)%	$	573	$	1,345	$	(772	)		(57.4	)%

Contract extraction revenue	$	286	$	166	$	120			72.3	%
Contract extraction and R&D services revenue											$	41	$	286	$	(245	)		(85.7	)%

Total sales
Astaxanthin	$	3,491	$	4,691	$	(1,200	)		(25.6	)%	$	3,952	$	3,491	$	461			13.2	%
Spirulina		2,114		4,602		(2,488	)		(54.1	)%		1,589		2,114		(525	)		(24.8	)%
Contract extraction revenue		286		166		120			72.3	%
Contract extraction and R&D services revenue												41		286		(245	)		(85.7	)%
Total sales	$	5,891	$	9,459	$	(3,568	)		(37.7	)%	$	5,582	$	5,891	$	(309	)		(5.2	)%

Net Sales The net sales decrease of ~~37.7%~~5.2% for the current quarter compared to the same period last year was driven by a decrease in ~~both packaged~~astaxanthin and spirulina bulk sales, ~~offset by higher~~as well as contract extraction ~~services due to timing of orders.~~services. During the ~~period,~~current year quarter, we ~~continued to experience~~saw overall lower demand ~~resulting from higher inflation and consumers reducing spend~~ in ~~non-discretionary areas. Given the lower demand combined with global supply chain constraints, our~~ bulk ~~customers continue to have higher than normal inventory levels. For our packaged~~ sales, ~~in addition to the macroeconomic~~as well as some impacts ~~noted above, there was a decrease in~~of timing of customer orders for astaxanthin bulk, offset by increased sales primarily due to the timing of shipments ~~to a significant customer in the prior year. As a result, in the current period, consumer movement was not fully reflected in the packaged sales.~~and increased demand for one of our key customers.

Gross Profit Gross profit as a percent of net sales for the third quarter of fiscal ~~2023~~2024 decreased by ~~4.3~~0.4 percentage points compared to the same period last year, which was the result of higher costs ~~per kilogram of astaxanthin and spirulina due~~related to ~~the impact of inflation on our underlying costs and~~ lower production volumes.

Operating Expenses Operating expenses ~~decreased by $0.6~~of $2.5 million ~~or 20.6%,~~ for the ~~current year~~ third quarter of fiscal 2024 compared to the prior year same quarter, increased $0.3 million. Sales and marketing expenses increased primarily due to higher online selling fees, offset by lower ~~advertising costs~~general and ~~lower incentive compensation expense resulting from net operating loss in the current quarter versus operating income in the prior year.~~administrative costs.

Income Taxes We ~~recorded a state~~did not record income tax expense ~~of $8,000~~ for the third quarter of ~~this~~ fiscal ~~year~~2024 compared to an$8,000 income tax expense ~~of $6,000~~ for the same period last year. We continue to carry a full valuation allowance on our net deferred tax assets.

*Net Sales* (in thousands)
	Nine Months Ended										Nine Months Ended
	December 31,				$			%			December 31,				$			%
	2022		2021		Change			Change			2023		2022		Change			Change
Packaged sales
Astaxanthin	$	9,492	$	11,618	$	(2,126	)		(18.3	)%	$	10,195	$	9,492	$	703			7.4	%
Spirulina		3,719		6,150		(2,431	)		(39.5	)%		4,447		3,719		728			19.6	%
Total Packaged sales	$	13,211	$	17,768	$	(4,557	)		(25.6	)%	$	14,642	$	13,211	$	1,431			10.8	%

Bulk sales
Astaxanthin	$	1,204	$	2,041	$	(837	)		(41.0	)%	$	1,168	$	1,204	$	(36	)		(3.0	)%
Spirulina		2,844		7,558		(4,714	)		(62.4	)%		1,033		2,844		(1,811	)		(63.7	)%
Total Bulk sales	$	4,048	$	9,599	$	(5,551	)		(57.8	)%	$	2,201	$	4,048	$	(1,847	)		(45.6	)%

Contract extraction revenue	$	527	$	475	$	52			10.9	%
Contract extraction and R&D services revenue											$	258	$	527	$	(269	)		(51.0	)%

Total sales
Astaxanthin	$	10,696	$	13,659	$	(2,963	)		(21.7	)%	$	11,363	$	10,696	$	667			6.2	%
Spirulina		6,563		13,708		(7,145	)		(52.1	)%		5,480		6,563		(1,083	)		(16.5	)%
Contract extraction revenue		527		475		52			10.9	%
Contract extraction and R&D services revenue												258		527		(269	)		(51.0	)%
Total sales	$	17,786	$	27,842	$	(10,056	)		(36.1	)%	$	17,101	$	17,786	$	(685	)		(3.9	)%

Net Sales The net sales decrease of ~~36.1%~~3.9% for the first nine months of fiscal ~~2023~~year 2024 compared to the same period last year was ~~primarily~~ driven by a decrease in spirulina ~~and astaxanthin packaged and~~ bulk sales, primarily due to the market for bulk material being increasingly price sensitive with ~~an increase~~many companies sourcing lower priced international ingredients. This was partially offset by increases in ~~contract extraction services. During the current fiscal year, we continue to experience overall lower demand resulting from higher inflation~~astaxanthin and consumers reducing spend in non-discretionary areas. Earlier in the fiscal year, our international customers have delayed, or reduced orders based on the appreciation of the U.S. dollar impacting exchange rates. Given the lower demand combined with global supply chain constraints, our bulk customers continue to have higher than normal inventory levels. For ourspirulina packaged sales, ~~in addition to the macroeconomic impacts noted above, there was a decrease in sales~~primarily due to the timing of shipments ~~to a significant customer in the prior year same period. As a result, in the current fiscal year, consumer movement was not fully reflected in the packaged sales.~~and higher demand at one of our key customers.

Gross Profit Gross profit as a percent of net sales for the first nine months of fiscal 2024 decreased by ~~5.3~~2.2 percentage points compared to the same period last year, which was the result of higher costs ~~per kilogram of astaxanthin and spirulina due~~related to ~~the impact of inflation on our underlying costs,~~ lower production ~~volumes and customer mix.~~volumes.

Operating Expenses Operating expenses ~~decreased by $0.9~~of $8.0 million ~~or 10.9%,~~ for the first nine months of fiscal ~~2023~~2024 compared to the prior year same period, increased primarily due to higher online selling fees, offset by lower ~~advertising costs~~general and ~~lower incentive compensation expense resulting from net operating losses in the current year versus operating income in the prior year.~~administrative and research and development costs.

Income Taxes We recorded ~~a state~~an income tax expense of ~~$11,000~~$2,000 for the first nine months of fiscal ~~2023~~2024 compared to an income tax expense of ~~$21,000~~$11,000 for the same period last year. We continue to carry a full valuation allowance on our net deferred tax assets.

The accompanying condensed consolidated financial statements as of and for the three and nine months ended December 31, 2023 and 2022, and as of March 31, 2023, have been prepared assuming we will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We sustained operating losses and negative cash flows from operations for these same periods. Further, as discussed below, we were not in compliance with a debt covenant requirement at March 31, 2023 and the Bank instituted a freeze on additional advances from the Credit Agreement. These conditions raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expense that may be necessary if we were unable to continue as a going concern.

As of December 31, ~~2022,~~2023, we had cash of ~~$0.5~~$0.7 million and working capital of ~~$9.9~~$3.7 million compared to ~~$2.6~~$1.0 million and ~~$11.4~~$5.4 million, respectively, at March 31, ~~2022.~~2023. We ~~have~~had a Credit Agreement with the Bank that ~~allows us to borrow~~provided for borrowings up to $2.0 million on a revolving ~~basis. At~~basis, however, as part of the covenant waiver at March 31, 2023, the borrowings under this line of credit were frozen at $1.8 million. On October 13, 2023, the Bank converted this line of credit to a term loan in the amount of $1.48 million with a maturity date of August 30, 2024. As of December 31, ~~2022~~2023, we had $1.36 million outstanding on this loan and as of March 31, ~~2022,~~2023, we had ~~$1.6 million and $0, respectively,~~ outstanding borrowings of $1.54 million on the line of credit. ~~The line of credit is subject~~(See Note 5 in the notes to ~~renewal on August 30, 2023, and we intend to renew or replace it with another line of credit on or before the expiration date.~~ our condensed consolidated financial statements).

We also have a loan facility with a related party that allows us to borrow up to ~~$1.0~~$2.0 million on the Revolver. At December 31, ~~2022~~2023 and March 31, ~~2022,~~2023, we had ~~$0.5~~$1.25 million and ~~$0,~~$0.5, respectively, outstanding borrowings on the Revolver, ~~and was~~which were included in line of credit – related party on the Condensed Consolidated Balance Sheets. The Revolver expires on April 12, ~~2025.~~2025 (see Notes 5 and 13 in the notes to our condensed consolidated financial statements).

As of December 31, ~~2022,~~2023, we had ~~$3.5~~$3.3 million in 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, we are subject to annual financial covenants, customary affirmative and negative covenants and certain subjective acceleration clauses. As of March 31, ~~2022, we were~~2023, our debt service coverage ratio fell short of the Bank’s annual requirement. On June 22, 2023, the Bank provided us with a letter waiving the covenant violation as of March 31, 2023, but noting that the Bank reserved its right to declare a default in the future if any covenants remain out of compliance ~~with all required annual financial covenants under the Term Loans and the Credit Agreement.~~ at applicable measurement dates.

In April 2019, we obtained a loan in the amount of $1.5 million from a related party. The proceeds were used to pay down accounts payable and for general operating capital purposes. On April 12, 2021, ~~and~~ December 14, 2022 and August 14, 2023, we amended this loan (see Notes 5 and 1213 in the ~~Notes~~notes to ~~Condensed Consolidated Financial Statements)~~condensed consolidated financial statements). As of both December 31, ~~2022~~2023 and March 31, ~~2022,~~2023, we had $1.0 million outstanding on the related party note. The loan ~~expires~~matures on April 12, 2025.

~~In fiscal year 2023,~~We continue to experience a loss from operations as the impacts from the macroeconomic environment ~~have~~ led to lower sales across ~~all of~~ our portfolio ~~and cash flows from operating activities. During this period,~~on a year-to-date basis. Industry data shows that consumers intake of dietary supplements is not slowing down but may be trading down to private label brands to save on costs. The market for bulk material is increasingly price sensitive with many companies sourcing lower priced international ingredients. Since the second quarter of fiscal year 2023, we drew ~~$1.6~~a net of $1.36 million on our line of credit and ~~$0.5~~$1.25 million on the Revolver. To address the resulting cash flow challenges, ~~beginning~~we continue to monitor cost savings initiatives implemented in ~~the third quarter of~~ fiscal year 2023, ~~we have implemented some cost savings initiatives,~~ including stopping or slowing production of inventory in alignment with current customer demand, ~~reducing~~maintaining a reduced headcount and compensation, primarily through attrition and furloughs, respectively, and eliminating certain discretionary selling, general and administrative expenses. We have also made changes in the sales and marketing team starting with the Chief Commercial Officer and strengthening the sales team, updating our marketing materials to emphasize our competitive strengths and raising capital by completing a private placement in the third fiscal quarter of 2024.

Funds generated by operating activities and available cash are ~~expected to continue to be~~ our most significant sources of liquidity for working capital requirements, debt service and funding of maintenance levels of capital expenditures. We have developed our operating plan to produce the cash flows necessary to meet all financing requirements. Although we have a history of either being in compliance with debt covenants or obtaining the necessary waivers, execution of our operating plan is dependent on many factors, some of which are not within the control of the Company. ~~Taking into account our financial results for the first three quarters of the 2023 fiscal year, it is possible~~However, no assurances can be provided that we will ~~no be in compliance with~~achieve our ~~debt covenants~~operating plan and cash flow projections for this fiscal year or our projected consolidated financial position as of ~~March~~December 31, ~~2023 measurement date. If we~~2024. Such estimates are ~~not in compliance, we would intend~~subject to ~~seek a waiver~~change based on future results and such change could cause future results to vary significantly from the Bank. The Bank has provided such a waiver in the past when we have been in default, but there is no assurance that the Bank would do so again. A failure to maintain compliance along with the Bank not agreeing to a waiver for the non-compliance would cause the outstanding borrowings to be in default and payable on demand, which would have a material adverse affect on us.expected results.

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

Cash used in operating activities for the nine months ended December 31, ~~2022~~2023 was the result of a net loss of ~~$2.0~~$3.2 million, ~~an increase of $2.1 million in inventories,~~ offset by non-cash ~~charges~~items of ~~$1.9 million.~~$1.8 million and an increase in accounts receivable due to timing of sales, offset by a decrease in inventories.

Cash used in investing activities for the nine months ended December 31, ~~2022~~2023 primarily includes costs for ~~acquiring equipment~~capital improvements at our Kona facility.

Cash provided by financing activities for the nine months ended December 31, ~~2022~~2023 consists primarily of ~~draws on~~ the ~~line~~proceeds from the Private Placement of ~~credit of $1.6 million~~$392,000 and draws on the related party line of credit of ~~$0.5 million~~$750,000 offset by debt service payments of ~~$0.4 million.~~$179,000 and the paydown of the Bank line of credit of $180,000.

As of December 31, ~~2022,~~2023, our working capital was ~~$9.9~~$3.7 million, a decrease of $1.6 million compared to March 31, ~~2022.~~2023. There was ~~an increase~~a decrease in inventories in the first nine months of fiscal ~~2023, due to lower bulk~~year 2024 as we manage our production in line with sales ~~and completing~~demand, offset by the ~~cultivation~~start-up of astaxanthin cultivation in ~~the first part~~April, as well as draws on our related party line of ~~the fiscal year. Cultivation improvements that we have made allow us to produce all of the required demand for astaxanthin during the most favorable growing season.~~credit.

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 and working capital will be sufficient to finance current operating requirements, debt service requirements, and routine planned capital expenditures, for the next twelve (12) months.

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 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 96-acre facility in Hawaii, and integrating those raw materials into finished products. Our primary focus is stabilizing our production volume, rationalizing market channel participation, and leveraging our centers of core competence. We will continue to place emphasis on our Nutrex Hawaiian consumer products while exploring further opportunities for bulk sales orders for Spirulina and Astaxanthin, both domestically and internationally. Extraction services to third party customers utilizing our 1,000 bar super critical CO2 extractor process are expected to generate additional income throughout the year. We will leverage our experience and reputation for quality, nutritional products 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® antioxidant in extract and softgel 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.

Gross profit margin percentages going forward can be impacted by lower production volumes along with pressure on input costs as well as 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 and strive for continuous improvements in processes and production methods to stabilize costs and production levels for the future. However, significant sales variability between periods may occur based on historical results.

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 balance production with sales demand, minimizing the cost associated with inventory levels when appropriate and manage our expenses judiciously. 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 hamper our ability to attract additional capital investment which could become necessary to maintain optimal production levels and efficiencies.

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; changes in health and growing conditions of our astaxanthin and spirulina products; 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, ~~2022.~~2023.

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.

As of December 31, ~~2022,~~2023, we had no off-balance sheet arrangements or obligations.

Inflationary factors such as increases in the costs of materials, utilities and labor ~~are affecting~~affected our ~~operations.~~operations in fiscal year 2023. In the first nine months of fiscal year 2024, we have seen stabilization in our underlying costs. We are also experiencing overall lower demand as consumers are feeling the impacts of higher inflation and reducing spend in non-discretionary areas. Our international customers have delayed, or reduced orders based on the appreciation of the US dollar impacting exchange rates. Given the lower demand, our bulk customers have higher than normal inventory levels.are closely managing their discretionary spend. The exact impact on our results is difficult to isolate and quantify given the macroeconomic environment. Most of our leases provide for cost-of-living adjustments and require us to pay for insurance and maintenance expenses, all of which are subject to inflation. Additionally, our future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that we will be able to pass on increased costs to our customers.

Depreciation expense is based on the historical cost of fixed assets and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.

Our critical accounting policies and estimates are disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the fiscal year ended March 31, ~~2022~~2023, filed with the SEC on June ~~22, 2022.~~27, 2023. In the nine months ended December 31, ~~2022,~~2023, there were no changes to the application of critical accounting policies previously disclosed in our most recent Annual Report on Form 10-K.

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.

The 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 December 31, ~~2022.~~2023. 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 our assessment, using those criteria, management concluded that our internal control over financial reporting was effective as of December 31, ~~2022.~~2023.

There were no changes 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 nine months ended December 31, ~~2022~~2023, that has materially affected, or was reasonably likely to materially affect, our internal control over financial reporting.

Our management, including our CEO and CFO, 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.

The inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors 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, ~~2022,~~2023, filed June ~~22, 2022.~~27, 2023.

From time to time, the Company may be involved in litigation and investigations relating to claims and matters arising out of its operations in the normal course of business. There were no significant legal matters outstanding at December 31, ~~2022.~~2023.

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, ~~2022,~~2023, which is incorporated by reference herein.

~~None.~~As disclosed previously, on August 10, 2023, the Company received a notification letter from the Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq") notifying the Company that, for the last 30 consecutive business days, the bid price for the Company's common stock had closed below the minimum $1.00 per share requirement for continued listing on the Nasdaq under Nasdaq Listing Rule 5550(a)(2) (“Bid Price Rule”). The notification letter provided that, in accordance with the Nasdaq Listing Rule 5810(c)(3)(A), the Company had an initial period of 180 days from the date of the notification letter, or until February 6, 2024 (the “Compliance Date”), to regain compliance with the Bid Price Rule.

On February 7, 2024, the Company was notified by the Staff of the Company's failure to demonstrate compliance by the Compliance Date and the Company expects to receive a Staff Delist Determination from Nasdaq notifying the Company that its common stock will be delisted from Nasdaq for failing to comply with the Bid Price Rule. The Company does not expect to appeal the Staff Delist Determination within the prescribed time period. The delisting is expected to be effective February 20, 2024, and a Form 25-NSE will be filed with the Securities and Exchange Commission to remove the Company's common stock from listing on the Nasdaq Stock Market.

The Company expects that its common stock will be eligible to be traded over-the-counter. However, no assurance can be given that trading of the Company's common stock will be commenced or maintained on an over-the-counter market or any other quotation medium.

2527

Table of Contents

Item 6.

Exhibits

~~Item 6.~~		~~Exhibits~~

10.1		~~First Amendment to Amended and Restated Promissory Note,~~Subscription Agreement, dated December ~~14, 2022,~~15, 2023, by and between ~~Skywords Family Foundation, Inc.~~The Michael Arlen Davis Revocable Trust and Cyanotech Corporation (Incorporated by reference to Exhibit 10.1 to the ~~Company's~~Company’s Current Report on Form 8-K filed December 19, ~~2022)~~2023)

	31.1*		Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February ~~9, 2023~~8, 2024

	31.2*		Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February ~~9, 2023~~8, 2024

	32*		Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of February ~~9, 2023~~8, 2024

	99.1*		Press Release dated February ~~9, 2023~~8, 2024

	101		The following financial statements from Cyanotech Corporation’s Quarterly Report on Form 10-Q for the quarter ended December 31, ~~2022,~~2023, formatted in Inline 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.

	104		Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101)

		*Included herewith. Other exhibits were filed as shown above.

2628

Table of Contents

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)


February ~~9, 2023~~8, 2024	By:	/s/ Matthew K. Custer
(Date)		Matthew K. Custer
		President and Chief Executive Officer


February ~~9, 2023~~8, 2024	By:	/s/ Felicia Ladin
(Date)		Felicia Ladin
		Chief Financial Officer, Vice President — Finance & Administration, and Treasurer
		(Principal Financial Officer)

2729

Table of Contents

EXHIBIT INDEX

Exhibit Number		Description
10.1		~~First Amendment to Amended and Restated Promissory Note,~~Subscription Agreement, dated December ~~14, 2022,~~15, 2023, by and between ~~Skywords Family Foundation, Inc.~~The Michael Arlen Davis Revocable Trust and Cyanotech Corporation (Incorporated by reference to Exhibit 10.1 to the ~~Company's~~Company’s Current Report on Form 8-K filed December 19, ~~2022)~~ 2023)

31.1*		Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February ~~9, 2023~~8, 2024

31.2*		Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February ~~9, 2023~~8, 2024

32*		Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of February ~~9, 2023~~8, 2024

99.1*		Press Release dated February ~~9, 2023~~8, 2024

101		The following financial statements from Cyanotech Corporation’s Quarterly Report on Form 10-Q for the quarter ended December 31, ~~2022,~~2023, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements

104		Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101)

		*Included herewith. Other exhibits were filed as shown above.

2830

PARTI.FINANCIALINFORMATION

Item 1.	Financial Statements
	~~Condensed Consolidated Balance Sheets as of December 31, 2022 and March 31, 2022 (unaudited)~~	4
	Condensed Consolidated Balance Sheets as of December 31, 2023 and March 31, 2023 (unaudited)	4
	Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2023 and 2022 ~~and 2021~~ (unaudited)	5
	Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended December 31, 2023 and 2022 ~~and 2021~~ (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2023 and 2022 ~~and 2021~~ (unaudited)	7
	Notes to Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1920
Item 4.	Controls and Procedures	2426

PARTII.OTHER INFORMATION

Item 1.	Legal Proceedings	2527
Item 1A	Risk Factors	2527
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2527
Item 3.	Defaults upon Senior Securities	2527
Item 5.	Other Information	2527
Item 6.	Exhibits	2628

SIGNATURES		2729

	December 31, 2022		March 31, 2022		December 31, 2023		March 31, 2023
	(in thousands)				(in thousands)
Raw materials	$	1,947	$	1,490	$	1,369	$	1,887
Work in process		2,793		2,868		2,508		2,049
Finished goods		6,448		4,595		4,977		6,502
Supplies		386		513		270		269
Inventories	$	11,574	$	9,466	$	9,124	$	10,707

	December 31, 2022			March 31, 2022			December 31, 2023			March 31, 2023
	(in thousands)						(in thousands)
Equipment	$	21,568		$	20,231		$	21,864		$	21,649
Leasehold improvements		15,021			14,751			15,071			15,038
Furniture and fixtures		408			394			419			407
		36,997			35,376			37,354			37,094
Less accumulated depreciation and amortization		(25,537	)		(24,339	)		(27,127	)		(25,947	)
Construction-in-progress		233			848			207			219
Equipment and leasehold improvements, net	$	11,693		$	11,885		$	10,434		$	11,366

Fiscal year payments due	(in thousands)
Remainder of 2023	$	65
2024		267
2025		288
2026		1,309
2027		332
Thereafter		2,262
Total principal payments	$	4,523

Fiscal year payments due	(in thousands)
Remainder of 2024	$	3,282
2026		1,000
Total principal payments	$	4,282

($ in thousands)	Three Months Ended December 31, 2022		Three Months Ended December 31, 2021		Three Months Ended December 31, 2023		Three Months Ended December 31, 2022
Packaged sales
Astaxanthin packaged	$	3,113	$	3,563	$	3,691	$	3,113
Spirulina packaged		1,147		1,612		1,277		1,147
Total packaged sales		4,260		5,175		4,968		4,260

Bulk sales
Astaxanthin bulk		378		1,128		261		378
Spirulina bulk		967		2,990		312		967
Total bulk sales		1,345		4,118		573		1,345

Contract extraction revenue		286		166
Contract extraction and R&D services revenue						41		286
Total net sales	$	5,891	$	9,459	$	5,582	$	5,891

($ in thousands)	Nine Months Ended December 31, 2022		Nine Months Ended December 31, 2021		Nine Months Ended December 31, 2023		Nine Months Ended December 31, 2022
Packaged sales
Astaxanthin packaged	$	9,492	$	11,618	$	10,195	$	9,492
Spirulina packaged		3,719		6,150		4,447		3,719
Total packaged sales		13,211		17,768		14,642		13,211

Bulk sales
Astaxanthin bulk		1,204		2,041		1,168		1,204
Spirulina bulk		2,844		7,558		1,033		2,844
Total bulk sales		4,048		9,599		2,201		4,048

Contract extraction revenue		527		475
Contract extraction and R&D services revenue						258		527
Total net sales	$	17,786	$	27,842	$	17,101	$	17,786

Operating leases	Balance Sheet Classification	December 31, 2022			March 31, 2022			Balance Sheet Classification	December 31, 2023			March 31, 2023
		(in thousands)							(in thousands)
Right-of-use assets	Operating lease right-of-use assets	$	4,720		$	4,720		Operating lease right-of-use assets	$	6,149		$	6,149
Accumulated lease amortization	Operating lease right-of-use assets		(1,257	)		(933	)	Operating lease right-of-use assets		(1,740	)		(1,373	)

Total right-of-use assets	Total right-of-use assets	$	3,463		$	3,787		Total right-of-use assets	$	4,409		$	4,776

Current lease liabilities	Operating lease obligations	$	243		$	393		Operating lease obligations	$	517		$	483
Non-current lease liabilities	Long-term operating lease obligations		3,203			3,386		Long-term operating lease obligations		3,883			4,275

Total lease liabilities	Total lease liabilities	$	3,446		$	3,779		Total lease liabilities	$	4,400		$	4,758

Payments	(in thousands)			(in thousands)
Remainder of 2023	$	120
2024		480
Remainder of 2024				$	204
2025		457			805
2026		437			795
2027		437			775
2028					429
Thereafter		3,228			3,054
Total undiscounted lease payments		5,159			6,062
Less: present value discount		(1,713	)		(1,662	)
Total lease liability balance	$	3,446		$	4,400

	As of December 31, 2022						As of December 31, 2023
	Authorized		Available		Outstanding		Authorized		Available		Outstanding

2016 Plan		1,300,000		880,011		306,760		1,300,000		805,359		343,416
2014 Directors Plan		650,000		223,206		12,000		650,000		33,220		12,000
2004 Directors Plan		—		—		6,000
Total		1,950,000		1,103,217		324,760		1,950,000		838,579		355,416

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, 2022		252,500		$	3.34		6.5	$	159,650
Outstanding at March 31, 2023											253,000		$	2.88		7.5	$	—
Granted		50,000		$	3.43						50,000		$	0.79
Expired		(49,500	)	$	5.80						(6,000	)	$	5.56
Outstanding at December 31, 2022		253,000		$	2.88		7.7	$	—
Exercisable at December 31, 2022		111,333		$	2.90		6.8	$	—
Outstanding at December 31, 2023											297,000		$	2.47		7.4	$	4,995
Exercisable at December 31, 2023											172,000		$	2.76		6.6	$	—

Nonvested Options	Shares			Weighted Average Grant-Date Fair Value		Shares			Weighted Average Grant-Date Fair Value
Nonvested at March 31, 2022		141,667		$	1.33
Nonvested at March 31, 2023							141,667		$	1.55
Granted		50,000			1.94		50,000			0.48
Vested		(50,000	)		1.33		(66,667	)		1.49
Nonvested at December 31, 2022		141,667		$	1.55
Nonvested at December 31, 2023							125,000		$	1.16

Nonvested Restricted Stock Units	Shares			Weighted Average Grant Price		Shares			Weighted Average Grant Price
Nonvested restricted stock units at March 31, 2022		14,465		$	2.22
Nonvested restricted stock units at March 31, 2023							70,334		$	3.04
Granted		66,423			3.13		28,018			0.83
Vested		(8,312	)		2.35		(37,996	)		2.35
Forfeited		(816	)		2.78		(1,940	)		1.99
Nonvested restricted stock units at December 31, 2022		71,760		$	3.04
Nonvested restricted stock units at December 31, 2023							58,416		$	2.48

	Three Months Ended December 31, 2023
	Net Loss			Shares		Per Share
	(Numerator)			(Denominator)		Amount
	(in thousands)
Basic and diluted loss per share	$	(1,020	)		6,554	$	(0.16	)

	Three Months Ended December 31, 2022
	Net Loss			Shares		Per Share
	(Numerator)			(Denominator)		Amount
	(in thousands)
Basic and diluted loss per share	$	(598	)		6,272	$	(0.10	)

	Three Months Ended December 31, 2021
	Net Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands)
Basic income per share	$	386		6,183	$	0.06
Effective dilutive securities – common stock options and restricted stock units		—		12		—
Diluted income per share	$	386		6,195	$	0.06

	Nine Months Ended December 31, 2023
	Net Loss			Shares		Per Share
	(Numerator)			(Denominator)		Amount
	(in thousands)
Basic and diluted loss per share	$	(3,186	)		6,404	$	(0.50	)

	Nine Months Ended December 31, 2022
	Net Loss			Shares		Per Share
	(Numerator)			(Denominator)		Amount
	(in thousands)
Basic and diluted loss per share	$	(2,010	)		6,235	$	(0.32	)

	Nine Months Ended December 31, 2021
	Net Income		Shares		Per Share
	(Numerator)		(Denominator)		Amount
	(in thousands)
Basic income per share	$	1,877		6,144	$	0.31
Effective dilutive securities – common stock options and restricted stock units		—		21		—
Diluted income per share	$	1,877		6,165	$	0.30