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 Global Select 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 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”). Intercompany balances and transactions have been eliminated in consolidation.

Liquidity and Debt Covenant Compliance

As of

March 31,

, the Company had cash of

$2,417,000

and working capital of

$8,369,000

compared to

$840,000

and

$5,104,000,

respectively, at

March 31, 2019.

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 the Company to borrow up to

$2,000,000

on a revolving basis. At

March 31, 2020

and

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

March 31, 2020,

the Company had

$5,249,000

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.

In fiscal

2019,

the Company experienced events that led to a reduction in sales and cash flows from operating activities, and a degradation of relationships with key vendors due to the Company’s inability to pay these vendors on a timely basis. The most significant of these events was a necessary re-inoculation of its spirulina ponds in the

first

quarter of fiscal

2019,

resulting in abnormally low spirulina production through

August 2018.

During this period, the Company drew

$1,250,000

on its line of credit to fund operations. In the

fourth

quarter of fiscal

2019,

the Company experienced a sharp reduction in sales related the timing of customer orders and changes in its customers’ inventory practices. To address the resulting cash flow shortage, the Company drew the remaining balance on its credit line in the

fourth

quarter of fiscal

2019.

April 2019,

the Company obtained an unsecured loan of

$1,500,000

from Skywords Family Foundation, Inc., (Note

and

) the proceeds of which were used to pay down accounts payable and for general operating capital purposes. As of

March 31, 2020,

the Company met all required annual financial and debt covenants.

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 undertook 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 the Company's operations through at least

June 30, 2021,

and the Company's 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, 2021,

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, 2021.

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