CYANOTECH CORP

Board of Directors and Stockholders

Cyanotech Corporation

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of Cyanotech Corporation (a Nevada corporation) and subsidiary (the “Company”) as of March 31, 2024 and 2023, the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2024, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2024 and 2023, and the results of its operations and its cash flows for each of the three years in the period ended March 31, 2024, in conformity with accounting principles generally accepted in the United States of America.

Going concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company sustained operating losses and negative cash flows from operations for the fiscal years ended March 31, 2024 and 2023. Further, the Company was not in compliance with two debt covenant requirements at March 31, 2024 and one debt covenant requirement at March 31, 2023. These conditions, along with other matters as set forth in Note 1, raise substantial doubt about the Company's ability to continue as a going concern. Management's plan in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical audit matters

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.

/s/GRANT THORNTON LLP

We have served as the Company’s auditor since 2008.

Newport Beach, California

June 26, 2024

March 31,

Years ended March 31,

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’** EQUITY**

Years ended March 31, 2024, 2023 and 2022

Years ended March 31,

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Cyanotech Corporation (the “Company”), located in Kailua-Kona, Hawaii, was incorporated in the state of Nevada on* March 3, 1983*and is traded on the OTCQB Market under the symbol “CYAN”. The Company is engaged in the production of natural products derived from microalgae for the dietary 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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements include the accounts of Cyanotech Corporation and its wholly owned subsidiary, Nutrex Hawaii, Inc. (“Nutrex Hawaii” or “Nutrex”). The Company operates inone business segment and usesone measurement of profitability for its business. Intercompany balances and transactions have been eliminated in consolidation.

Liquidity and Going Concern

The accompanying consolidated financial statements, as of and for the fiscal year ended* March 31, 2024and2023,* 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 withtwo debt covenant requirements at* March 31, 2024andone* debt covenant requirement at* March 31, 2023.In June 2023,First Foundation Bank (the “Bank”) instituted a freeze on additional advances from the Revolving Credit Agreement (the “Line of Credit”). These conditions raise substantial doubt about the Company's ability to continue as a going concern. The 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* March 31, 2024,the Company had cash of $707,000 and working capital of $2,037,000 compared to $974,000 and $5,393,000, respectively, at March 31, 2023.The Company had a Line of Credit 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. 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 (the“2023* Loan”). As of* March 31, 2024,the Company had $1,240,000 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* March 31, 2024and 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 Consolidated Balance Sheets. The Revolver expires on April 12, 2025 (see Notes5* and15).

As of* March 31, 2024,the Company had $3,220,000 of debt (“2012* Loan”) payable to the Bank that require the payment of principal and interest monthly through* August 2032.Pursuant to the2012* Loan and2023 Loan, the Company is subject to annual financial covenants, customary affirmative and negative covenants and certain subjective acceleration clauses. As of* March 31, 2024,the Company’s debt service coverage ratio and current ratio fell short of the Bank’s annual requirement. The Company is currently seeking a letter from the Bank waiving the covenant violations as of March 31, 2024,but noting there can beno* assurance that the Bank will provide such a waiver and* maydeclare a default if any covenants remain out of compliance at applicable measurement dates. As of March 31, 2023,the Company’s 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.*

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 $12,000. The net proceeds of $388,000 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, 2022and August 14, 2023,the Company amended this loan (see Notes5* and15). As of both* March 31, 2024and2023,* the Company had $1,000,000 outstanding on the related party note. The loan matures on* April 12, 2025.*

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The Company continues to experience a loss from operations as the impacts from the macroeconomic environment led to lower sales across all of the Company’s portfolio for the fiscal year ended2024. Industry data shows that consumers intake of dietary supplements isnot slowing down but* maybe trading down to private label brands to save on costs. Beginning in thesecond* fiscal quarter of2023 through the end of fiscal year ended2024, the Company drew on its funding sources to provide liquidity. 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 a significant portion of the cash flows necessary to meet all financial 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 the next fiscal years or its projected consolidated financial position as of* March 31, 2025.*Such estimates are subject to change based on future results and such change could cause future results to vary significantly from expected results.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("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.

Financial Instruments and Fair Value

The Company applies a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level1 measurements) and the lowest priority to unobservable inputs (level3 measurements). Thethree levels of the fair value hierarchy are described below:

If the asset or liability has a specified contractual term, the Level2 input must be observable for substantially the full term of the asset or liability.

Cash, Accounts Receivable, Accounts Payable, Accrued Expenses and Customer Deposits - Due to the short-term nature of these instruments, management believes that the carrying amounts approximate fair value.

Line of Credit, Revolver, Short-Term and Long-Term Debt - The carrying amount of our line of credit, Revolver and short and long-term debt approximates fair value as interest rates applied to the underlying debt are adjusted quarterly to market interest rates, which approximate current interest rates for similar debt instruments of comparable maturities.

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Cash

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

Concentration Risk

The Company maintains its cash accounts in banks located in Hawaii, which are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to*$250,000* per bank. The Company had cash balances at* March 31, 2024and2023* that exceeded the balance insured by the FDIC by $166,000 and $422,000, respectively. A significant portion of revenues and accounts receivables are derived from a few major customers. For the year ended* March 31, 2024,two customers individually accounted for 34% and 17% of the Company’s total net sales and for the year ended March 31, 2023,two customers individually accounted for 34% and 6% of the Company’s total net sales. Two customers accounted for 72% and 46% of the Company’s accounts receivable balance as of March 31, 2024and2023,* respectively.

Accounts Receivable

Accounts receivable 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 allowance based on historical experience, specifically identified nonpaying accounts and other currently available evidence. 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.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is determined by thefirst-in,first-out (“FIFO”) method. Net realizable value is defined as estimated sales price less cost to dispose. Inventory costs include materials, labor, overhead andthird-party costs. Management reviews and writes down inventory for known or expected inventory obsolescence based on product age and quality which* may*affect salability.

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.

Equipment and Leasehold Improvements

Equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives for equipment and furniture and fixtures, and the shorter of the land lease term (see Notes4 and7) or estimated useful lives for leasehold improvements as follows (in years):

Capital project costs are accumulated in construction-in-progress until completed, at which time the costs are transferred to the relevant asset and commence depreciation. Repairs and Maintenance costs are expensed in the period incurred. Repairs and maintenance that significantly increase the useful life or value of the asset are capitalized and depreciated over the remaining life of the asset. The Company capitalizes interest cost incurred on funds used to construct property and equipment. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life.

Impairment of Long-Lived Assets

Management reviews long-lived assets, such as equipment, leasehold improvements and purchased intangibles subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset* may**not* be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized to the extent that the carrying amount exceeds the asset’s fair value. Assets to be disposed of and related liabilities would be separately presented in the consolidated balance sheet. Assets to be disposed of would be reported at the lower of the carrying value or fair value less costs to sell and wouldnot be depreciated.

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Accounting for Asset Retirement Obligations

Management evaluates quarterly the potential liability for asset retirement obligations under the Company’s lease for its principal facility and corporate headquarters.No liability has been recognized as of* March**31,* 2024 and2023 (see Note7).

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 the years ended* March 31, 2024and2023,* the Company recognized $26,000 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.

Research and Development

Research and development costs are expensed as incurred and consist primarily of labor, benefits and outside research.

Advertising

Advertising costs are expensed as incurred. Total advertising expense for the years ended* March**31,* 2024, 2023 and2022 was $1,308,000, $1,513,000, and $1,458,000, respectively.

Income Taxes

Income taxes are accounted for under the asset and liability method. The asset and liability method require the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using income tax rates applicable to the period in which the tax difference is expected to reverse.

Judgment is required in determining any valuation allowance recorded against deferred tax assets, specifically net operating loss carryforwards, tax credit carryforwards and deductible temporary differences that* may*reduce taxable income in future periods. In assessing the need for a valuation allowance, the Company considers all available evidence including past operating results, estimates of future taxable income and tax planning opportunities. In the event the Company changes its determination as to the amount of deferred tax assets that can be realized, it will adjust its valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made.

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In evaluating a tax position for recognition, management evaluates whether it is more-likely-than-not that a position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold, the tax position is measured and recognized in the Company’s financial statements as the largest amount of tax benefit that, in management’s judgment, is greater than50% likely of being realized upon settlement. At* March 31, 2024and2023,* there wereno liabilities 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 expense in its consolidated statements of operations. During the years ended* March**31,* 2024 and2023, there wereno accruals for the payment of interest and penalties related to uncertain tax positions.

Share-Based Compensation

The Company accounts for share-based payment arrangements using fair value. The Company currently hasno liability-classified awards. Equity-classified awards, including grants of restricted stock, restricted stock units and employee stock options, are measured at the grant-date fair value of the award and arenot subsequently remeasured unless an award is modified. The cost of equity-classified awards is recognized in the statement of operations over the period during which an employee is required to provide the service in exchange for the award, or the vesting period. All stock-based compensation for restricted stock, restricted stock units and stock options has been classified as general and administrative expense in the consolidated statement of operations.

The Company utilizes the Black-Scholes option pricing model to determine the fair value of each option award. Expected volatilities are based on the historical volatility of the Company’s common stock over a period consistent with that of the expected term of the options. The expected term of the options is estimated based on factors such as vesting periods, contractual expiration dates and historical exercise behavior. The risk-free rates for periods within the contractual life of the options are based on the yields of U.S. Treasury instruments with terms comparable to the estimated option terms. The forfeiture rate of the options is estimated at the time of the grant and is based on historical forfeitures of similar grants. The fair value of restricted stock units is the closing stock price on the grant date.

Per Share Amounts

Basic earnings (loss) per common share is calculated by dividing net income (loss) for the year by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by dividing net income for the year by the sum of the weighted average number of common shares outstanding during the year plus the number of potentially dilutive common shares (“dilutive securities”) that were outstanding during the year. Dilutive securities include restricted stock units and stock options granted pursuant to the Company’s stock option plans. Dilutive securities related to the Company’s stock option plans are included in the calculation of diluted earnings per common share using the treasury stock method. Potentially dilutive securities are excluded from the computation of earnings per share in periods in which a net loss is reported, as their effect would be antidilutive. A reconciliation of the numerators and denominators of the basic and diluted income (loss) per common share calculations for the years ended* March**31,* 2024, 2023 and2022 is presented in Note11.

Reclassifications

Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. There wasno impact on previously reported financial statements for the periods presented.

Recent Accounting Pronouncements

In* June 2016,the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”)2016-13, “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* November 2023,the FASB issued ASU2023*-07, “Segment Reporting (Topic28*): Improvements to Reportable Segment Disclosures*” (“ASU2023-07”), which requires disclosure of incremental segment information on an annual and interim basis. ASU2023-07 is effective for fiscal years beginning after* December 15, 2023,and interim periods within fiscal years beginning after December 15, 2024,and it requires retrospective application to all prior periods presented in the financial statements. The Company is currently evaluating the impact that ASU2023*-07 will have on the presentation of its consolidated financial statements.

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. The company is currently evaluating ASU2023-09 to determine its impact on the Company’s disclosures.

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Inventories consist of the following as of* March**31,* 2024 and2023:

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 expensed abnormal production costs of $206,000, $90,000 and $0 to cost of sales for the fiscal years ended* March 31, 2024,*2023 and2022, respectively. The increase in the current fiscal year was primarily due to abnormally high costs associated with regenerating fallowed spirulina ponds, therefore, these production costs were written off.

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 cultivation 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 $467,000, $269,000 and $136,000 were expensed to cost of sales for the fiscal years ended* March 31, 2024,*2023 and2022, respectively. The increase in the current fiscal year was primarily due to lower overall production volumes with higher than normal excess capacity expense for the full year compared to the prior fiscal year.

Net realizable value adjustments for spirulina products of $256,000 were expensed to cost of sales for the fiscal year ended* March 31, 2024,primarily due to low production volumes with high fixed cost base. There wereno net realizable value adjustments for fiscal year ended March 31, 2023or2022.*

Equipment and leasehold improvements consist of the following as of* March**31,* 2024 and2023:

Management has determined that $0, $5,000 and $21,000 of asset impairment existed as of* March**31,* 2024, 2023 and2022, and the impairment losses were included in other income (expense) on the consolidated statements of operations.

Depreciation and amortization expense were approximately $1,589,000, $1,655,000 and $1,599,000 for the years ended* March 31, 2024,*2023 and2022, respectively.

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Total debt consists of the following at* March**31,* 2024 and2023 as follows:

Line of Credit and Term Loans

On* June 3, 2016,the Company entered into a Credit Agreement with the Bank after the necessary approvals from the State of Hawaii were received, to secure the lien on the Company’s leasehold property in Kona, Hawaii. The Credit Agreement further defined the terms and conditions for the2012* Loan and allowed for the Line of Credit, which was subsequently converted to the2023 Loan. 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.

The Line of Credit 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 the Line of Credit to the2023* 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 monthly payments of at least $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* March 31, 2024,the Company had $1,240,000 outstanding on the2023* Loan which bears interest at 8.5%, plus 2%. As of* March 31, 2023,the outstanding balance under the Line of Credit was $1,540,000. Both the2023* Loan and the Line of Credit were included in current liabilities on the Consolidated Balance Sheets.

In2012, the Company executed a loan agreement with a lender providing for $5,500,000 in aggregate the2012 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 USDA Rural Development Guarantee. 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% at* March 31, 2024and 7.5% at March 31, 2023)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 $3,220,000 and $3,461,000 at* March31,* 2024 and2023, 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 guaranteed 80% of all amounts owing under the2012 Loan. The balance in unamortized debt issuance costs was $80,000 and $92,000 at* March 31, 2024and2023,* 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, Violations and Waiver

The Company’s2023 Loan and2012 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 loan amount of $3,461,000 and the outstanding line of credit balance of $1,540,000. 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.As of March 31, 2024,the Company wasnot* incompliance with the debt service coverage and current ratio, however, was in compliance with thethird covenant. The Company is currently seeking a letter from the Bank waiving the covenant violations as of* March 31, 2024,but there can beno* assurance that the Bank will provide such a waiver and* may*declare a default if any covenants remain out of compliance at applicable measurement dates.

Although the Term Loans mature in* August 2032,it is probable that a debt covenant violation occurs within the nexttwelve* months. Therefore, the Term Loans and related unamortized debt issuance costs are classified as current on the Balance Sheet as of* March 31, 2024and2023.*

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 Note15*). 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* March 31, 2024and2023,* the balance under this loan was $1,000,000, which was included in long-term debt in the debt table above. At* March 31, 2024and2023,* 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* March 31, 2024and2023,* 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 beless than 5.0%.

Future principal payments, excluding unamortized debt issuance costs, under the loans at* March**31,* 2024 are as follows:

Accrued expenses as of* March**31,* 2024 and2023 consist of the following:

The Company’s principal facility and its corporate headquarters are located at the Natural Energy Laboratory of Hawaii Authority (“NELHA”) at Keahole Point in Kailua-Kona, Hawaii. The Company leasestwo properties from the State of Hawaii under a 40-year commercial lease expiring in2035 and a 19-year commercial lease expiring in2037. Under the terms of the existing NELHA leases, the Company could be required to remove improvements at the end of the lease terms. Under generally accepted accounting principles in the United States, an entity should recognize the fair value of a liability for an asset retirement obligation in the period in which the retirement obligation is incurred, if a reasonable estimate of fair value can be made. If such an estimate cannot be made in the period the asset retirement obligation is incurred, the liability should be recognized when the fair value can be reasonably estimated. Based on communications with NELHA, management doesnot believe the projected cost for such removal to be material to the consolidated financial statements, or likely, given historical practices. However, conditions could change in the future. It isnot possible to predict such changes or estimate any impact thereof.

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The Company leases facilities, equipment and land under non-cancelable operating leases expiring through2037. One of its facility leases contains price escalations and the Company exercised its option to renew forfive years expiring on* December 31, 2027.The NELHA land lease provides for contingent rentals in excess of minimum rental commitments based on a percentage of the Company’s sales. For fiscal years ended March 31, 2024and2023,* there wereno contingent rental payments. The contingent rental payment for the year ended* March**31,* 2022 was $73,000.

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 are based on the present value of lease payments over the lease terms, 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 and a 48-month lease for equipment, which are included in the right-of-use assets and liabilities. At* March 31, 2024,the weighted average remaining lease terms of all operating leases was 9.1 years, the weighted average discount rate was 7.3% and the operating lease costs were $818,000. At March 31, 2023,the weighted average remaining lease terms of all operating leases was 9.8 years, the weighted average discount rate was 7.3% and the operating lease costs were $719,000. For fiscal year ended March 31, 2023,noncash right-of-use assets obtained in exchange for operating lease obligations was $1,429,000, representing the lease renewal ofone* of the Company's facility leases. There wereno new leases for fiscal year ended* March 31, 2024.*

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

Maturities of lease liabilities at* March**31,* 2024 are as follows:

Rent expense, including contingent rent, under operating leases were $685,000, $506,000 and $713,000 for the years ended* March**31,* 2024, 2023 and2022, respectively. Property taxes paid to the states of Hawaii and California were $38,000, $37,000 and $30,000 for the years ended* March 31, 2024,*2023 and2022, respectively.

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* March 31, 2024.*

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As of* March 31, 2024,2023 and2022, the Company had purchase obligations of $808,000, $822,000 and $1,105,000, respectively, including agreements to purchase goods or services that are enforceable, are legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The term of the minimum purchase agreement is forten years, expiring in April 2026and purchase obligations donot* include agreements that are cancelable without penalty.

As of* March**31,* 2024, 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.

On* August 25, 2016,the Company’s shareholders approved the2016* Plan, authorizing the Board of Directors to provide incentive to the Company’s officers, employees and certain independent consultants through equity-based compensation in the form of stock options, restricted stock, restricted stock units, stock appreciation rights and other stock-based awards (together, “Stock Awards”) and performance shares and performance units (together, “Performance Awards”). Awards under the2016 Plan are limited to the authorized amount of 1,300,000 shares, up to 600,000 of which are available for issuance in connection with Performance Awards and Stock Awards. As of* March 31, 2024,there were 635,679 shares available for grant under the2016* Plan.

On* August 28, 2014,the Company’s shareholders approved the2014* Directors Plan authorizing the Board of Directors to provide incentive to the Company’s independent directors through equity-based compensation in the form of stock options and restricted stock. Awards under the2014 Directors Plan are limited to the authorized amount of 350,000 shares. At the2021 Annual Meeting of Shareholders, the stockholders of the Company approved an amendment to the2014 Directors Plan to increase the number of shares of common stock available for issuance under the plan by 300,000 shares. As of* March 31, 2024,there were 33,220 shares available for grant under the2014* Directors Plan.

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. Stock 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 stock option grant include vesting, exercise, and other conditions are set forth in a Stock Option Agreement evidencing each grant.No option can have a life in excess 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 $98,000, $90,000 and $63,000 for the fiscal years ended* March**31,* 2024, 2023 and2022, respectively.

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A summary of option activity under the Company’s stock plans for the years ended* March**31,* 2024, 2023 and2022 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 $0.29, $0.88 and $3.37 at* March 31, 2024,*2023 and2022, respectively. No stock options were exercised during fiscal year2024, 2023 or2022.

A summary of the Company’s non-vested options for the year ended* March**31,* 2024 is presented below:

The weighted average grant-date fair value of stock options granted during fiscal years2024, 2023 and2022 was $24,000, $97,000 and $80,000, respectively. The total grant-date fair value of stock options that vested during fiscal years2024, 2023 and2022 were $99,000, $67,000 and $40,000, respectively.

The following table summarizes the weighted average characteristics of outstanding stock options as of* March**31,* 2024:

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The range of fair value assumptions related to options granted during the years ended* March**31,* 2024, 2023 and2022 were as follows:

Total unrecognized stock-based compensation expense related to all unvested stock options was $58,000, $124,000 and $139,000, at* March 31, 2024,*2023 and2022, respectively, which is expected to be expensed over a weighted average period of 1.3 years,1.6 years and 2.1 years, respectively.

Restricted Stock

Grants of fully vested restricted stock issued to Non-Employee Directors during fiscal years2024, 2023 and2022 was 159,493,64,489 and 55,438 shares, respectively. Compensation expense recognized for fully vested restricted stock grants issued under the2014 Directors Plan was $126,000, $158,000 and $158,000 for the fiscal years ended* March**31,* 2024, 2023 and2022, 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 with compensation expense earned and recognized for these fully vested restricted stock grants in the amount of $15,500 in the fiscal year ended* March 31, 2023.On October 13, 2023,12,821 shares of fully vested restricted stock were issued toone* Board member with $10,000 of compensation expense recognized in fiscal year ended* March 31, 2024.*

Restricted Stock Units (“RSUs”)

RSUs are service-based awards granted to eligible employees under our2016 Plan. Compensation expense recognized for RSUs issued under the2016 Plan was $124,000, $62,000 and $123,000 for the years ended* March**31,* 2024, 2023 and2022, respectively.

The following table summarizes information related to awarded RSUs:

Total unrecognized stock-based compensation expense related to unvested restricted stock units was $98,000, $122,000 and $19,000 at* March 31, 2024,*2023 and2022, respectively, which is expected to be expensed over a weighted average period of 1.2 years,2.3 years and 1.2 years, respectively.

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The Company has authorized a total ofsixty million shares of which fifty million shares are authorized common stock andten million shares are authorized preferred stock. None of the preferred stock was issued or outstanding at* March 31, 2024and2023.* Under the terms of the Company’s Amended and Restated Articles of Incorporation, the Board of Directors is authorized to determine or alter the rights, preferences, privileges and restrictions of the Company’s authorized but unissued shares of preferred stock.

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 $12,000 related to this transaction during the fiscal year ended March 31, 2024.*The net proceeds of $388,000 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.

Basic earnings (loss) per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings 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 and unvested restricted stock units using the treasury stock method.

Reconciliations between the numerator and the denominator of the basic and diluted income (loss) per share computations for the years ended* March**31,* 2024, 2023 and2022 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 restricted stock units totaling 3,000 for the fiscal year ended* March 31, 2024,*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 Company sponsors a profit sharing plan for all employeesnot covered under a separate management incentive plan. Under the profit sharing plan, a percentage determined by the Board of Directors of pre-tax profits on a quarterly basis* maybe allocated to non-management employees at management’s discretion. The profit sharing bonus maybe distributed all in cash on an after-tax basis or distributed half in cash (on an after-tax basis) and the remainder deposited in an employee’s401*(k) account on a pre-tax basis. Employees* mayalso make voluntary pre-tax contributions to their401*(k) accounts. There wasno compensation expense under this plan for fiscal years ended* March 31, 2024or2023.* Compensation expense under this plan was approximately $121,000 for the fiscal year ended* March31,* 2022. Additionally, the Company has the discretion to make a retirement contribution to all employees individual401(k) accounts equal totwo percent of each employee’s base pay for each bi-weekly pay period on a pre-tax basis. Retirement expense under this plan was approximately $82,000, $138,000 and $135,000 for fiscal years ended* March31,* 2024, 2023 and2022, respectively.

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Disaggregation of Revenue

The following table represents revenue disaggregated by major product line and extraction services for the years ended* March 31, 2024,*2023 and2022 (in thousands):

Cost of sales for contract extraction and R&D services for the years ended* March 31, 2024,*2023 and2022 were $358,000, $441,000 and $439,000, respectively.

Net sales by geographic region for the years ended* March 31, 2024,*2023 and2022 are as follows:

Income tax (expense) benefit for the years ended* March**31,* 2024, 2023 and2022 consisted of:

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The following table reconciles the amount of income taxes computed at the federal tax rate of 21% for each of the fiscal years ended* March 31, 2024,2023 and2022, to the amount reflected in the Company’s consolidated statements of operations for the years ended March 31, 2024,*2023 and2022:

The tax effects of temporary differences related to various assets, liabilities and carry forwards that give rise to deferred tax assets and deferred tax liabilities as of* March**31,* 2024 and2023 are as follows:

In assessing the valuation allowance for deferred tax assets, management considers whether it is more likely thannot that some portion or all of the deferred tax assets willnot be realized. Ultimately, the realization of deferred tax assets will depend on the existence future taxable income during the periods. In making this assessment, management considers past operating results, the scheduled reversal of deferred tax liabilities, estimates of future taxable income and tax planning strategies.

As of* March 31, 2024,*2023 and2022, the Company has concluded that a valuation allowance was appropriate in light of the significant negative evidence, which was objective and verifiable, primarily the cumulative losses in recent years.

While the Company’s long-term financial outlook remains positive, the Company concluded that its ability to rely on its long-term outlook as to future taxable income was limited due to the relative weight of the negative evidence from its recent cumulative losses. The Company’s conclusion regarding the need for a valuation allowance against its deferred tax assets could change in the future based on improvements in operating performance, which* may*result in the full or partial reversal of the valuation allowance.

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At* March**31,* 2024, the Company has net operating loss carry forwards and tax credit carry forwards available to offset future federal income tax as follows (in thousands):

At* March 31, 2024,the Company has federal net operating loss carry forwards of $17,165,000, of which $7,203,000 of the losses carried forward were generated prior to the2018* tax year and have a 20 year carry forward and are available to offset100% of taxable income. The remaining $9,962,000 of the losses were generated in tax years2018 or later, which have an unlimited carry forward and are limited to80% of taxable income. At* March 31, 2024,the Company had state tax net operating loss carry forwards available to offset future California state taxable income of $4,959,000. These carry forwards expire March 31, 2037through2044.* At* March 31, 2024,the Company had state tax net operating loss carry forwards available to offset future Hawaii state taxable income of $9,718,000. These carry forwards expire March 31, 2030through2044.* At* March 31, 2024,*the Company had $656,000 of net operating loss carry forwards between the remaining states filed in.

The following, in general, represents the open tax years and jurisdictions that the Company used in its evaluation of tax positions. The Company has unused net operating losses carried forward, which cause the statute to remain open up to the amount of unused loss with the statutenot begin until the year in which they are used.

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.

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On* December 14, 2022,the Company entered into a First Amendment (the “Amendment”) to the Skywords Amended Note. The 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 Note from $500,000 to $1,000,000. All other terms of the Skywords 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 increased 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* March 31, 2024and2023,* the Skywords Note principal balance was $1,000,000, and was included in long-term debt on the Consolidated Balance Sheets. At* March 31, 2024and2023,* the balance on the Revolver was $1,250,000 and $500,000, respectively, and was included in line of credit – related party on the Consolidated Balance Sheets. At* March 31, 2024and2023,* the interest rates were 8.5% and 7.5%, respectively.

The Company hadno additional subsequent events.

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