CYANOTECH CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2023

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 includeHawaiian Spirulina Pacifica®, a superfood with numerous benefits, including boosting the immune system and overall cellular health; andBioAstin®* 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 Form10-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 donot include all of the information and notes required by GAAP for complete financial statements. The results of operations for the interim periods arenot necessarily indicative of the results to be expected for the full fiscal year. The Condensed Consolidated Balance Sheet as of* March31,* 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* March31,* 2023, contained in the Company’s annual report on Form10-K as filed with the SEC on* June 27, 2023.*

Liquidity and Going Concern

The accompanying condensed consolidated financial statements as of and for thethree andnine months ended* December 31, 2023and2022,* 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 wasnot* in compliance with a debt covenant requirement at* March 31, 2023and 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 donot* 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, 2023,the Company had cash of $661,000 and working capital of $3,747,000 compared to $974,000 and $5,393,000, respectively, as of March 31, 2023.The Company had a Credit Agreement with the Bank that provided for borrowings up to $2,000,000 on a revolving 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, 2023,the Company had $1,360,000 outstanding on this loan and as of March 31, 2023,the Company had outstanding borrowings of $1,540,000 on the line of credit. (See Note5*).

The Company also has a loan facility with a related party that allows the Company to borrow up to $2,000,000 on a revolving basis (the “Revolver”). At* December 31, 2023and March 31, 2023,the Company had $1,250,000 and $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 Notes5* and13).

As of* December 31, 2023,the Company had $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, 2023,the Company 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 at applicable measurement dates.

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On* December 15, 2023,the 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 Private Placement of $8,000. The net proceeds of $392,000 were used by the Company for general working capital. (See Note10*).

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,** December 14, 2022,and August 14, 2023,the Company amended this loan (see Notes5* and13). As of both* December 31, 2023and March 31, 2023,the Company had $1,000,000 outstanding on the related party note. The loan matures on April 12, 2025.*

The Company continues to experience a loss from operations as the impacts from the macroeconomic environment led to lower sales across the Company's portfolio on a year-to-date basis. Industry data shows that consumers intake of dietary supplements isnot slowing down but* maybe 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 thesecond* quarter of fiscal year2023, the Company drew a net of $1,360,000 on its line of credit and $1,250,000 on the Revolver. To address the resulting cash flow challenges, the Company continues to monitor cost savings initiatives implemented in fiscal year2023, including stopping or slowing production of inventory in alignment with current customer demand, 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 thethird fiscal quarter of2024.

Funds generated by operating activities and available cash are 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 arenot within the control of the Company. However,no assurances can be provided that the Company will achieve its operating plan and cash flow projections for this fiscal year or its projected consolidated financial position as of* December 31, 2024.*Such estimates are subject to change based on future results and such change could cause future results to vary significantly from expected results.

Consolidation

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

Use of Estimates

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

Cash

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

Concentration Risk

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

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Accounts Receivable

Accounts receivable balances are recorded at the invoiced amount and donot accrue interest. Credit is extended based on evaluation of the customer’s financial condition. Collateral isnot 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 customernot 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 over90 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 doesnot have any off-balance sheet credit exposure related to its customers or otherwise.

Revenue Recognition

The Company records revenue based on thefive-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 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* maybe 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 arenot* 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, typically30 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 fromone 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 thethree months ended* December 31, 2023and2022,* the Company recognized $6,000 and $2,000, respectively, of revenue from deposits that were included in contract liabilities as of* March 31, 2023and2022,* respectively. During thenine months ended* December 31, 2023and2022,* the Company recognized $24,000 and $94,000, respectively, of revenue from deposits that were included in contract liabilities as of* March 31, 2023and2022,* respectively. The Company’s contracts have a duration ofone year or less and therefore, the Company has elected the practical expedient ofnot 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:

Recent Accounting Pronouncements

In* June 2016,the FASB issued ASU2016*-13, “Financial Instruments–* Credit Losses*” (“Topic326”), which was subsequently amended in* November 2018through ASU2018*-19, “Codification Improvements to Topic326,* Financial Instruments*–* Credit Losses*” (“CECL”). CECL requires entities to estimate lifetime expected credit losses for trade and other receivables, net investment in leases, financing receivables, debt securities and other instruments, which will result in earlier recognition of credit losses. The guidance is effective for interim and annual periods beginning after* December 15, 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 wasnot* 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 ASU2023*-09, “Income Taxes (Topic740*): Improvements to Income Tax Disclosure*” (“ASU2023-09”), 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 ofeight 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 next12 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. ASU2023-09 is effective for public business entities for fiscal years beginning on or after* December 15, 2024,with early adoption permitted. The amendments in ASU2023*-09 should be applied on a prospective basis. Retrospective application is permitted.

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Inventories are stated at the lower of cost or net realizable value. Cost is determined by thefirst-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. The Company had abnormal production cost recovery of $73,000 and costs of $64,000 to cost of sales for thethree months ended* December 31, 2023and2022,* respectively. The Company had abnormal production costs of $60,000 and $90,000 to cost of sales for thenine months ended* December 31, 2023and2022,* respectively.

Beginning in fiscal year2021 through fiscal year2023, cultivation of astaxanthin was completed in thefirst 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. In fiscal year2024, 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 $71,000 and $72,000 were expensed to cost of sales for thethree months ended* December 31, 2023and2022,* respectively. Other non-inventoriable fixed costs of $396,000 and $115,000 were expensed to cost of sales for thenine months ended* December 31, 2023and2022,* respectively.

Equipment and leasehold improvements consist of the following as of:

Management has determined thatno asset impairment existed as of* December 31, 2023.Depreciation and amortization expense were approximately $395,000 and $409,000 for thethree* months ended* December 31, 2023and2022,* respectively. Depreciation and amortization expense were approximately $1,206,000 and $1,243,000 for thenine months ended* December 31, 2023and2022,* respectively.

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Total debt consists of the following as of:

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 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 (8.0% at March 31, 2023)plus 2%, floating, provided that atno* time shall the annual interest rate be less than 5.25%.

On* October 13, 2023,the Bank converted this line of credit to a term loan (“2023* Loan”) in the amount of $1,480,000, withno further advances or disbursements under this line and matures on* August 30, 2024.The2023* 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 atno time shall the annual interest rate be less than 7.0%. As of* December 31, 2023,the Company had $1,360,000 outstanding on the2023* Loan and bears interest at 8.5%, plus 2%. As of* March 31, 2023,the outstanding balance under the Credit Agreement was $1,540,000, respectively. Both the2023* Loan and the line of credit were included in current liabilities on the Condensed Consolidated Balance Sheets.

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.

In2012, 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”). The2012 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 United States Department of Agriculture (“USDA”) Rural Development Guarantee program. The proceeds of the2012 Loan were used to acquire processing equipment and leasehold improvements at its Kona, Hawaii facility.

The provisions of the2012 Loan required the payment of interest only for thefirst 12 months of the term; thereafter, and until its maturity on* August14,* 2032, the obligation fully amortizes over nineteen (19) years. Interest on the2012 Loan accrues on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate (8.5% and 7.5% at* December 31, 2023and March31,* 2023, respectively) plus 1.0% and is adjustable on thefirst day of each calendar quarter and fixed for that quarter, provided that atno time shall the annual interest rate be less than 5.5%. The balance under the2012 Loan was $3,282,000 and $3,461,000 at* December 31, 2023and March**31,* 2023, respectively, and was included in current maturities of long-term debt in the debt table above. See Loan Covenants, Violations and Waiver below.

The2012 Loan included aone-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* December31* of each year, beginning* December31,* 2012. The USDA has guaranteed 80% of all amounts owing under the2012 Loan. The balance in unamortized debt issuance costs was $83,000 and $92,000 at* December 31, 2023and March 31, 2023,*respectively, and was included in current maturities of long-term debt in the debt table above. See Loan Covenants, Violations and Waiver below.

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Loan Covenants, Violation and Waiver

The Company’s Credit Agreement and the2012 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, 2023,the Company wasnot* in compliance with the required debt service coverage ratio, however, was in compliance with thetwo 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 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, 2024.*

Line of Credit and Debt–* Related Party*

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 Note13*). In* December 2022,the Company amended the loan to extend the expiration to April 2025and 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, 2023and March 31, 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, 2023and March 31, 2023,the balance under the Revolver was $1,250,000 and $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 (8.5% and 7.5% at December 31, 2023and March**31,* 2023, respectively) plus 1.0% and is adjustable on thefirst day of each calendar quarter and fixed for that quarter, provided that atno time shall the annual interest rate be less than 5.0%.

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

The Company leases facilities, equipment and land under non-cancelable operating leases expiring through2037. One of its facility leases contains price escalations and a renewal option forfive 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, 2019based 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 leasestwo 84-month solar leases fortwo* of its buildings, which are included in the right-of-use assets and liabilities. At* December 31, 2023,the weighted average remaining lease terms of all operating leases was 9.3 years, the weighted average discount rate was 7.3%, and for thenine* months ended* December 31, 2023and2022,* the operating lease costs were $615,000 and$517,000, respectively.

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

Maturities of lease liabilities at* December 31, 2023*are as follows:

Accrued expenses consist of the following as of:

From time to time, the Company* maybe involved in litigation and investigations relating to claims and matters arising out of its operations in the normal course of business. There wereno* significant legal matters outstanding at* December 31, 2023.*

The Company has share-based compensation plans, which are more fully described in Note9, Share-Based Compensation, to the Consolidated Financial Statements included in the Company’s annual report on Form10-K for the fiscal year ended* March 31, 2023as filed with the SEC on June 27, 2023.*

As of* December 31, 2023,the Company hadtwo equity-based compensation plans: the2016* Equity Incentive Plan (the*“2016* Plan”) and the2014 Independent Director Stock Option and Restricted Stock Grant Plan and Amendment (the*“2014* Directors Plan”). These plans allowed the Company to award stock options and shares of restricted common stock to eligible employees, certain outside consultants and independent directors.

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

Stock Options

All stock option grants made under the equity-based compensation plans were issued at exercise pricesno less than the Company’s closing stock price on the date of grant. Options under the2016 Plan and2014 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 often (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 $24,000 and $25,000 for thethree months ended* December 31, 2023and2022,* respectively. Compensation expense recognized for options issued under all Plans was $73,000 and $66,000 for thenine months ended* December 31, 2023and2022,* respectively.

A summary of option activity under the Company’s stock plans for thenine months ended* December 31, 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 $0.89 and $0.88 at* December 31, 2023and March 31, 2023,*respectively.

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

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

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Restricted Stock

Grants of fully vested restricted stock issued to Non-Employee Directors during thenine months ended* December 31, 2023and2022* were 159,493 and 64,489, respectively. Compensation expense recognized for fully vested restricted stock grants under the2014 Directors Plan was $126,000 and $158,000 for thenine months ended* December 31, 2023and2022,* 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 thethird fiscal quarter of2023 andone Board member elected to receive shares of restricted stock in lieu of cash for thesecond fiscal quarter of2024. On* April 3, 2023,17,672 shares of fully vested restricted stock were issued to thetwo* Board members withno compensation expense related to the issuance of this stock, as it was earned and recognized in fiscal year2023 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 thenine* months ended* December 31, 2023*was $10,000.

Restricted Stock Units (“RSUs”)

RSUs are service-based awards granted to eligible employees under the2016 Plan. Compensation expense recognized for RSUs issued under the2016 Plan was $20,000 for both thethree months ended* December 31, 2023and2022.* Compensation expense recognized for RSUs issued under the2016 Plan was $66,000 and $42,000 for thenine months ended* December 31, 2023and2022,* respectively.

The following table summarizes information related to awarded RSUs:

As of* December 31, 2023,*total unrecognized stock-based compensation expense related to unvested restricted stock units was $92,000, which is expected to be expensed over a weighted average period of 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 of1933,* as amended (the “Securities Act”), provided by Section4(a)(2) of the Securities Act toone 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 $0 and $8,000 of income tax expense for thethree months ended* December 31, 2023and2022,* respectively. The Company’s effective tax rate was (1.4%) for thethree months ended* December 31, 2022.The Company recorded $2,000 and $11,000 of income tax expense for thenine* months ended* December 31, 2023and2022,* respectively. The Company’s effective tax rate was (0.1%) and (0.6%) for thenine months ended* December 31, 2023and2022,* respectively. The effective tax rates 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 isnot more likely thannot to be realized. The Company continues to carry a full valuation allowance on its net deferred tax assets.

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The Company is subject to taxation in the United States andeight 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* maydisagree 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, 2023and2022,* there wasno 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 Statements of Operations, which is consistent with the recognition of these items in prior reporting periods.

With few exceptions, the Company isno longer subject to U.S. federal, state, local, and non-U.S. income tax examination by tax authorities for tax years before2019.

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 thethree andnine months ended* December 31, 2023and2022* 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 doesnot include the impact of common stock options and restricted stock units totaling 4,000 and 1,000 for thethree months ended* December 31, 2023and2022,* respectively, and 600 and 4,000 for thenine months ended* December 31, 2023and2022,* 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.

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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 maybe prepaid and reborrowed from time to time in principal amountsnot* to exceed $500,000, extend the maturity date bythree 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 atno* 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 totwo* 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 “First Amendment”) to the Skywords Amended Note. The First Amendment extends the maturity date to April 12, 2025and 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, 2023and March 31, 2023,the Skywords Note principal balance was $1,000,000, and was included in long-term debt on the Condensed Consolidated Balance Sheets. At December 31, 2023and March 31, 2023,the balance on the Revolver was $1,250,000 and $500,000, respectively, and was included in line of credit – related party on the Condensed Consolidated Balance Sheets. At December 31, 2023and March 31, 2023,*the interest rates were 9.5% and 8.5%, respectively.

See Note10 regarding the Private Placement with the Company’s Chairman of the Board.

The Company hadno subsequent events.

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