cyan20220930

cyan20220930_10q.htm

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒

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

For Quarterly Period Ended September 30, 2022

☐

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

For the Transition Period From to

Commission File Number 0-14602

CYANOTECH CORPORATION

(Exact name of registrant as specified in its charter)

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

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

(Address of principal executive offices)

(808) 326-1353

(Registrant’s telephone number)

Not Applicable

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

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

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

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

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

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

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

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

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

As of November 4, 2022, the number of shares outstanding of the registrant’s common stock was 6,271,971.

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

●

Statements relating to our business strategy;

●

Statements relating to our business objectives; and

●

Expectations concerning future operations, profitability, liquidity and financial resources.

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

●

The added risks associated with or attributed to the current local, national and world economic conditions, including but not limited to, the volatility of crude oil prices, inflation and currency fluctuations;

●

Access to available and reasonable financing on a timely basis;

●

The Company’s inability to generate enough revenues to meet its obligations or repay maturing indebtedness; and

●

Failure of capital projects to operate as expected or meet expected results.

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

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CYANOTECH CORPORATION

FORM 10-Q

INDEX

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets as of September 30, 2022 and March 31, 2022 (unaudited)	4
	Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2022 and 2021 (unaudited)	5
	Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended September 30, 2022 and 2021 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 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	19
Item 4.	Controls and Procedures	24

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	25
Item 1A	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults upon Senior Securities	25
Item 5.	Other Information	25
Item 6.	Exhibits	26

SIGNATURES		27

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CYANOTECH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	September 30, 2022			March 31, 2022
ASSETS
Current assets:
Cash	$	379		$	2,589
Accounts receivable, net of allowance for doubtful accounts of $67 as of September 30, 2022 and March 31, 2022		2,118			3,664
Inventories		12,088			9,466
Prepaid expenses and other current assets		356			545
Total current assets		14,941			16,264

Equipment and leasehold improvements, net		11,747			11,885
Operating lease right-of-use assets, net		3,573			3,787
Other assets		92			109
Total assets	$	30,353		$	32,045

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,544		$	2,362
Accrued expenses		1,078			1,412
Customer deposits		92			164
Operating lease obligations, current portion		294			393
Line of credit		1,300			—
Current maturities of long-term debt		277			490
Total current liabilities		4,585			4,821

Long-term debt, less current maturities		4,212			4,336
Long-term operating lease obligations		3,265			3,386
Other long-term liabilities		5			15
Total liabilities		12,067			12,558

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 September 30, 2022 and 6,202,223 shares at March 31, 2022		125			124
Additional paid-in capital		33,767			33,557
Accumulated deficit		(15,606	)		(14,194	)
Total stockholders’ equity		18,286			19,487
Total liabilities and stockholders’ equity	$	30,353		$	32,045

See accompanying notes to condensed consolidated financial statements

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CYANOTECH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended September 30,						Six Months Ended September 30,
	2022			2021			2022			2021

Net sales	$	5,179		$	9,419		$	11,895		$	18,383
Cost of sales		3,389			5,657			7,787			10,949
Gross profit		1,790			3,762			4,108			7,434

Operating expenses:
General and administrative		1,279			1,422			2,608			2,768
Sales and marketing		1,142			1,131			2,310			2,681
Research and development		206			127			452			284
Total operating expenses		2,627			2,680			5,370			5,733

(Loss) income from operations		(837	)		1,082			(1,262	)		1,701

Interest expense, net		(103	)		(101	)		(147	)		(196	)

(Loss) income before income taxes		(940	)		981			(1,409	)		1,505

Income tax expense		—			11			3			14

Net (loss) income	$	(940	)	$	970		$	(1,412	)	$	1,491

Net (loss) income per share:
Basic	$	(0.15	)	$	0.16		$	(0.23	)	$	0.24
Diluted	$	(0.15	)	$	0.16		$	(0.23	)	$	0.24

Shares used in calculation of net (loss) income per share:
Basic		6,228			6,130			6,216			6,124
Diluted		6,228			6,139			6,216			6,136

See accompanying notes to condensed consolidated financial statements

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CYANOTECH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

Three months ended September 30, 2022 and 2021

	Common Stock Shares			Common Stock Amount		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity
	(in thousands, except per share data)
Balances at June 30, 2022		6,203,643		$	124	$	33,576		$	(14,666	)	$	19,034
Issuances of common stock for Director Stock Grants		64,489			1		157			—			158
Issuances of vested shares of restricted stock		6,035			—		(7	)		—			(7	)
Shares withheld for tax payments		(2,196	)		—		—			—			—
Share-based compensation expense		—			—		41			—			41
Net loss		—			—		—			(940	)		(940	)
Balances at September 30, 2022		6,271,971		$	125	$	33,767		$	(15,606	)	$	18,286

Balances at June 30, 2021		6,117,719		$	122	$	33,285		$	(15,827	)	$	17,580
Issuances of vested shares of restricted stock		32,210			1		(37	)		—			(36	)
Shares withheld for tax payments		(11,201	)		—		—			—			—
Share-based compensation expense		—			—		99			—			99
Net income		—			—		—			970			970
Balances at September 30, 2021		6,138,728		$	123	$	33,347		$	(14,857	)	$	18,613

Six months ended September 30, 2022 and 2021

	Common Stock Shares			Common Stock Amount		Additional Paid-in Capital			Accumulated Deficit			Total Stockholders’ Equity
	(in thousands, except per share data)
Balances at March 31, 2022		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	)
Shares withheld for tax payments		(3,053	)		—		—			—			—
Share-based compensation expense		—			—		63			—			63
Net loss		—			—		—			(1,412	)		(1,412	)
Balances at September 30, 2022		6,271,971		$	125	$	33,767		$	(15,606	)	$	18,286

Balances at March 31, 2021		6,116,073		$	122	$	33,267		$	(16,348	)	$	17,041
Issuance of vested shares of restricted stock		34,751			1		(40	)		—			(39	)
Shares withheld for tax payments		(12,096	)		—		—			—			—
Share-based compensation expense		—			—		120			—			120
Net income		—			—		—			1,491			1,491
Balances at September 30, 2021		6,138,728		$	123	$	33,347		$	(14,857	)	$	18,613

See accompanying notes to condensed consolidated financial statements

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CYANOTECH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Six Months Ended September 30,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(1,412	)	$	1,491
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization		834			798
Amortization of debt issue costs and other assets		23			32
Amortization of operating leases right-of-use assets		214			144
Share-based compensation expense		221			120
Provision for doubtful accounts		—			85
Net (increase) decrease in assets:
Accounts receivable		1,546			(726	)
Inventories		(2,622	)		(897	)
Prepaid expenses and other assets		197			134
Net increase (decrease) in liabilities:
Accounts payable		(826	)		(992	)
Accrued expenses		(334	)		406
Customer deposits		(72	)		(14	)
Operating lease obligations		(220	)		(147	)
Deferred rent and other liabilities		(9	)		(8	)
Net cash (used in) provided by operating activities		(2,460	)		426
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements		(690	)		(521	)
Net cash used in investing activities		(690	)		(521	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net draws (payments) on line of credit		1,300			(650	)
Net payments on debt – related party		—			(500	)
Principal payments on long-term debt		(350	)		(349	)
Taxes paid related to net share settlement of restricted stock units		(10	)		(39	)
Net cash provided by (used in) financing activities		940			(1,538	)
Net decrease in cash		(2,210	)		(1,633	)
Cash at beginning of period		2,589			3,767
Cash at end of period	$	379		$	2,134

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	149		$	180
Income taxes	$	28		$	2

See accompanying notes to condensed consolidated financial statements

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CYANOTECH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022

(Unaudited)

1.	ORGANIZATION AND BASIS OF PRESENTATION

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

The Company is an agricultural company that produces high value natural products derived from microalgae grown in complex and intricate open-pond agricultural systems on the Kona coast of Hawaii. The Company's products include Hawaiian Spirulina Pacifica®, a superfood with numerous benefits, including boosting the immune system and overall cellular health; and 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 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, contained in the Company’s annual report on Form 10-K as filed with the SEC on June 22, 2022.

Liquidity and Capital Resources

As of September 30, 2022, the Company had cash of $379,000 and working capital of $10,356,000 compared to $2,589,000 and $11,443,000, respectively, as of March 31, 2022. The Company has a Revolving Credit Agreement (“Credit Agreement”) with First Foundation Bank (“Bank”) that allows the Company to borrow up to $2,000,000 on a revolving basis. At September 30, 2022 and March 31, 2022, the Company had $1,300,000 and $0, respectively, outstanding borrowings on the line of credit. The line of credit is subject to renewal on August 30, 2023 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 $500,000 on a revolving basis (the “Revolver”). At September 30, 2022 and March 31, 2022, the Company had no outstanding borrowings on the Revolver. The Revolver expires on April 12, 2024.

As of September 30, 2022, the Company had $3,588,000 in long-term debt (“Term Loans”) payable to the Bank that require the payment of principal and interest monthly through August 2032. Pursuant to the Term Loans and the Credit Agreement, the Company is subject to annual financial covenants, customary affirmative and negative covenants and certain subjective acceleration clauses. As of March 31, 2022, the Company was in compliance with all required annual financial covenants under the Term Loans and the Credit Agreement.

In April 2019, the Company obtained a loan in the amount of $1,500,000 from a related party. The proceeds were used to pay down accounts payable and for general operating capital purposes. On April 12, 2021, the Company amended this loan (see Notes 5 and 12). As of both September 30, 2022 and March 31, 2022, the Company had $1,000,000 outstanding on the related party note.

In the second quarter of fiscal 2023, 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, the Company drew $1,300,000 on its line of credit. To address the resulting cash flow challenges beginning in the third quarter of fiscal 2023, the Company has implemented some cost savings initiatives, including stopping or slowing production of inventory in alignment with current customer demand, reducing headcount and compensation, primarily through attrition and furloughs, respectively, and eliminating certain discretionary selling, general and administrative expenses.

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. Consequently, future results may vary significantly from expected results.

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2.	SIGNIFICANT ACCOUNTING POLICIES

Consolidation

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

Use of Estimates

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

Cash

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

Concentration Risk

A significant portion of revenue and accounts receivable are derived from a few major customers. For the three months ended September 30, 2022, one customer individually accounted for 48% of the Company’s total net sales, and for the three months ended September 30, 2021, two customers individually accounted for 28% and 21% of the Company’s total net sales. For the six months ended September 30, 2022, two customers individually accounted for 35% and 10% of the Company’s total net sales, and for the six months ended September 30, 2021, two customers individually accounted for 21% and 16% of the Company’s total net sales. Two customers accounted for 76% and 63% of the Company’s accounts receivable balance as of September 30, 2022 and March 31, 2022, respectively.

Revenue Recognition

The Company records revenue based on the five-step model which includes: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue when the performance obligations are satisfied. Substantially all of the Company’s revenue is generated by fulfilling orders for the purchase of our microalgal 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 September 30, 2022 and 2021, the Company did not recognize any revenue from deposits that were included in contract liabilities as of March 31, 2022 and 2021, respectively. During the six months ended September 30, 2022 and 2021, the Company recognized $91,000 and $49,000, respectively, of revenue from deposits that were included in contract liabilities as of March 31, 2022 and 2021, respectively. The Company’s contracts have a duration of one year or less and therefore, the Company has elected the practical expedient of not disclosing revenues allocated to partially unsatisfied performance obligations.

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Disaggregation of Revenue

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

($ in thousands)	Three Months Ended September 30, 2022		Three Months Ended September 30, 2021
Packaged sales
Astaxanthin packaged	$	2,854	$	4,015
Spirulina packaged		1,061		1,796
Total packaged sales		3,915		5,811

Bulk sales
Astaxanthin bulk		333		509
Spirulina bulk		784		2,985
Total bulk sales		1,117		3,494

Contract extraction revenue		147		114
Total net sales	$	5,179	$	9,419

($ in thousands)	Six Months Ended September 30, 2022		Six Months Ended September 30, 2021
Packaged sales
Astaxanthin packaged	$	6,379	$	8,054
Spirulina packaged		2,572		4,538
Total packaged sales		8,951		12,592

Bulk sales
Astaxanthin bulk		827		914
Spirulina bulk		1,877		4,569
Total bulk sales		2,704		5,483

Contract extraction revenue		240		308
Total net sales	$	11,895	$	18,383

Recently Adopted Accounting Pronouncements

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

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3.	INVENTORIES

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

	September 30, 2022		March 31, 2022
	(in thousands)
Raw materials	$	1,843	$	1,490
Work in process		4,461		2,868
Finished goods		5,349		4,595
Supplies		435		513
Inventories	$	12,088	$	9,466

The Company recognizes abnormal production costs, including fixed cost variances from normal production capacity, fixed production overhead costs, idle facilities, freight handling costs and spoilage, as an expense in the period incurred, without adjusting overhead absorption rates. Normal production capacity is defined as the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The Company had no abnormal productions costs for the three months ended September 30, 2022 or 2021.

Beginning in fiscal 2021, cultivation of astaxanthin was completed in the first six months of the fiscal year during the most productive months of the year due to the best growing conditions, compared to year-round production in the prior fiscal years. A similar approach is being followed in fiscal year 2023. 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 $34,000 and $32,000 were expensed to cost of sales for the three months ended September 30, 2022 and 2021, respectively. Other non-inventoriable fixed costs of $69,000 and $36,000 were expensed to cost of sales for the six months ended September 30, 2022 and 2021, respectively.

4.	EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements consist of the following as of:

	September 30, 2022			March 31, 2022
	(in thousands)
Equipment	$	20,493		$	20,231
Leasehold improvements		14,786			14,751
Furniture and fixtures		401			394
		35,680			35,376
Less accumulated depreciation and amortization		(25,164	)		(24,339	)
Construction-in-progress		1,231			848
Equipment and leasehold improvements, net	$	11,747		$	11,885

Management has determined that no asset impairment existed as of September 30, 2022. Depreciation and amortization expense were approximately $417,000 and $398,000 for the three months ended September 30, 2022 and 2021, respectively. Depreciation and amortization expense were approximately $834,000 and $798,000 for the six months ended September 30, 2022 and 2021, respectively.

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5.	LINE OF CREDIT AND LONG-TERM DEBT

Total debt consists of the following as of:

	September 30, 2022			March 31, 2022
	(in thousands)
Line of credit	$	1,300		$	—
Long-term debt		3,588			3,938
Debt - related party		1,000			1,000
Less current maturities		(1,577	)		(490	)
Long-term debt, excluding current maturities		4,311			4,448
Less unamortized debt issuance costs		(99	)		(112	)
Total long-term debt, net of current maturities and unamortized debt issuance costs	$	4,212		$	4,336

Line of Credit and Term Loans

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 the Company to borrow up to $2,000,000 on a revolving basis. Borrowings under the Credit Agreement bear interest at the Wall Street Journal prime rate (4.75% at September 30, 2022 and 3.25% at March 31, 2022) plus 2%, floating, provided that at no time shall the annual interest rate be less than 5.25%.

At September 30, 2022 and March 31, 2022, the outstanding balance under the Credit Agreement was $1,300,000 and $0, respectively, and at September 30, 2022 was 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 is evidenced by a promissory note in the amount of $2,500,000, the repayment of which is partially guaranteed under the provisions of the United States Department of Agriculture (“USDA”) Rural Development Guarantee program. The proceeds of the 2015 Loan were used to pay off a $500,000 short term note payable that matured on September 18, 2015, and to acquire new processing equipment and leasehold improvements at the Company’s Kona, Hawaii facility.

The provisions of the 2015 Loan require the payment of principal and interest until its maturity on September 1, 2022, the obligation fully amortizes over seven (7) years. Interest on the 2015 Loan accrues on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate (4.75% and 3.25% at September 30, 2022 and March 31, 2022, respectively) plus 2.0% 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 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 Rural Development Guarantee. 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 (4.75% and 3.25% at September 30, 2022 and March 31, 2022, 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 $3,588,000 and $3,720,000 at September 30, 2022 and March 31, 2022, respectively, and was included in long-term debt in the debt table above.

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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 has guaranteed 80% of all amounts owing under the 2015 Loan. 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 $99,000 and $112,000 at September 30, 2022 and March 31, 2022, respectively.

Loan Covenants

The Company’s Credit Agreement, 2015 Loan and 2012 Loan are subject to annual debt service and other financial covenants, including covenants which require the Company to meet key financial ratios and customary affirmative and negative covenants. As of March 31, 2022, the Company was in compliance with all required annual financial covenants. The next remeasurement date will be March 31, 2023.

Debt – Related Party

In April 2019, the Company obtained a loan in the amount of $1,500,000 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 revolving loans, 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 12). At September 30, 2022 and March 31, 2022, the balance under this loan was $1,000,000 and was included in long-term debt, in the debt table above. Interest accrues on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate (4.75% and 3.25% at September 30, 2022 and March 31, 2022, 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 and finance lease obligations at September 30, 2022 are as follows:

Payments Due	(in thousands)
Remainder of 2023	$	277
2024		293
2025		1,310
2026		328
2027		348
Thereafter		2,032
Total principal payments	$	4,588

6.	OPERATING LEASES

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. 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, which are included in the right-of-use assets and liabilities. At September 30, 2022, the weighted average remaining lease terms was 12.1 years, the weighted average discount rate was 7.2%, and for the six months ended September 30, 2022 and 2021, the operating lease costs were $344,000 and $296,000, respectively.

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

Operating leases	Balance Sheet Classification	September 30, 2022			March 31, 2022
		(in thousands)
Right-of-use assets	Operating lease right-of-use assets	$	4,720		$	4,720
Accumulated lease amortization	Operating lease right-of-use assets		(1,147	)		(933	)

Total right-of-use assets		$	3,573		$	3,787

Current lease liabilities	Operating lease obligations	$	294		$	393
Non-current lease liabilities	Long-term operating lease obligations		3,265			3,386

SEC Form 10-Q filed by Cyanotech Corporation