1.	ORGANIZATION AND BASIS OF PRESENTATION

Cyanotech Corporation (the “Company”), located in Kailua-Kona, Hawaii, was incorporated in the state of Nevada on

March 3, 1983

and is listed on the NASDAQ Capital Market under the symbol “CYAN”. The Company is engaged in the production of natural products derived from microalgae for the nutritional supplements market.

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information pursuant to the instructions to Form

-Q and Regulation S-

of the Securities and Exchange Commission (“SEC”). These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the periods presented in accordance with GAAP.

Accordingly, they do

not

include all of the information and notes required by GAAP for complete financial statements. The results of operations for the interim periods are

not

necessarily indicative of the results to be expected for the full fiscal year. The Condensed Consolidated Balance Sheet as of

March

31,

2019

was derived from the audited consolidated financial statements. These condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements for the year ended

March

31,

2019,

contained in the Company’s annual report on Form

-K as filed with the SEC on

July 1, 2019.

Liquidity and Capital Resources

As of

December 31, 2019,

the Company had cash of

$1,609,000

and working capital of

$7,761,000

compared to

$840,000

and

$5,104,000,

respectively, at

March 31, 2019.

April 2019,

the Company obtained an unsecured subordinated loan in the amount of

$1,500,000

from a related party (see Notes

and

). On

August 30, 2016,

the Revolving Credit Agreement (the Credit Agreement), which the Company entered into with First Foundation Bank (the Bank) on

June 3, 2016,

became effective. The Credit Agreement allows us to borrow up to

$2,000,000

on a revolving basis. At

December 31, 2019

and

March 31, 2019,

the Company had outstanding borrowings of

$2,000,000

on the line of credit. The line of credit is subject to renewal on

August 30, 2020

and the Company intends to renew or replace it with another line of credit on or before the expiration date.

As of

December 31, 2019,

the Company had

$5,410,000

in long-term debt (Term Loans) payable to the Bank that require the payment of principal and interest monthly through

August 2032.

Pursuant to the Term Loans and the Credit Agreement, the Company is subject to annual financial covenants, customary affirmative and negative covenants and certain subjective acceleration clauses. As of

March 31, 2019,

the Company’s debt service coverage ratio of -

0.66:1

fell short of the Bank's annual requirement of

1.25:1.

Additionally, on

March 31, 2019,

the Company’s current ratio of

1.49:1

fell short of the Bank’s annual requirement of

1.50:1.

June 17, 2019,

the Bank provided the Company with a letter waiving the covenant violations as of

March 31, 2019,

but noting that the Bank reserved its rights to declare a default in the future if any covenants remain out of compliance at applicable measurement dates.

Funds generated by operating activities and available cash are expected to continue to be the Company’s most significant sources of liquidity for working capital requirements, debt service and funding of maintenance levels of capital expenditures. In fiscal year

2020,

the Company has undertaken strategic cost cutting, including the elimination of positions through attrition and the elimination of open positions to create a leaner organization.

Based upon the Company’s operating plan and related cash flow and financial projections, cash flows expected to be generated by operating activities and available financing are expected to be sufficient to fund its operations through at least

December 31, 2020,

and its debt service coverage ratio and current ratio covenants are expected to be in compliance with the annual Term Loans and Credit Agreement covenant requirements as of

March 31, 2020,

the next measurement date. However,

assurances can be provided that the Company will achieve its operating plan and cash flow projections for the next fiscal years or its projected consolidated financial position as of

March 31, 2020.

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