<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended June 30, 1996
Commission File Number 0-14602
CYANOTECH CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 91-1206026
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
73-4460 Queen Kaahumanu Hwy. #102, Kailua-Kona, HI 96740
(Address of principal executive offices)
(808) 326-1353
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes XX No
------ ------
Number of common shares outstanding as of August 7, 1996:
Title of Class Shares Outstanding
-------------- ------------------
Common stock - $.005 par value stock 12,657,520
Transitional Small Business Disclosure Format: Yes ; No X
----- -----
<PAGE>
CYANOTECH CORPORATION
FORM 10-QSB
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Consolidated Balance Sheets
June 30, 1996 and March 31, 1996 ........................ 3
Consolidated Statements of Income
Three month periods ended
June 30, 1996 and 1995 .................................. 4
Consolidated Statements of Cash Flows
Three month periods ended
June 30, 1996 and 1995 .................................. 5
Notes to Consolidated Financial Statements ................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ........................ 12
SIGNATURES ........................................................ 13
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CYANOTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, March 31
1996 1996
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 9,798 $ 9,409
Accounts receivable 1,972 1,288
Inventories (note 2) 623 494
Prepaid expenses 145 120
------- -------
Total current assets 12,538 11,311
Equipment and leasehold improvements, net (note 4) 9,440 8,349
Other assets 125 56
------- -------
Total assets $22,103 $19,716
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 150 $ 150
Current maturities of capital lease obligations 126 126
Accounts payable 803 852
Other accrued liabilities (note 5) 378 434
------- -------
Total current liabilities 1,457 1,562
------- -------
Long-term debt, excluding current maturities 475 513
Obligations under capital leases, excluding
current maturities 294 325
------- -------
Total liabilities 2,226 2,400
Stockholders' equity:
Preferred stock (note 6) 1 1
Common Stock - 12,657,270 shares issued and outstanding
on June 30, 1996 and 11,755,650 shares issued and
outstanding on March 31, 1996 63 59
Additional paid-in capital 23,588 21,876
Accumulated deficit (3,775) (4,620)
------- -------
Total stockholders' equity 19,877 17,316
------- -------
Total liabilities and stockholders' equity $22,103 $19,716
------- -------
------- -------
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
June 30, June 30,
1996 1995
-------- --------
NET SALES $2,455 $1,568
COST OF PRODUCT SALES 985 790
------ ------
Gross Profit 1,470 778
------ ------
OPERATING EXPENSES:
Research and development 161 69
General and administrative 358 206
Sales and marketing 192 85
------ ------
Total operating expenses 711 360
------ ------
Income from operations 759 418
------ ------
OTHER INCOME (EXPENSE):
Interest income 108 6
Interest expense (22) (10)
Other income, net -- (1)
------ ------
Total other income (expense) 86 (5)
------ ------
NET INCOME $845 $413
------ ------
------ ------
NET INCOME PER COMMON SHARE $0.05 $0.03
------ ------
------ ------
Weighted average number of common
shares outstanding and
common stock equivalents (note 3) 16,353 14,242
------ ------
------ ------
See accompanying notes to consolidated financial statements
4
<PAGE>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
June 30, June 30,
1996 1995
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 845 $ 413
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 163 127
Net increase in:
Accounts receivable (684) (137)
Inventories (129) (53)
Prepaid expenses and other assets (94) (164)
Net decrease in:
Accounts payable (49) (123)
Other accrued liabilities (56) (47)
------ -----
Net cash provided by (used in) operating activities (4) 16
------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements (1,254) (712)
------ -----
Net cash used in investing activities (1,254) (712)
------ -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,398 --
Net proceeds from exercise of warrants and options 318 243
Proceeds from issuance of long-term debt -- 250
Principal payments on capital lease obligations (31) (13)
Principal payments on long-term debt (38) (3)
------ -----
Net cash provided by financing activities 1,647 477
------ -----
Net increase (decrease) in cash and cash equivalents 389 (219)
Cash and cash equivalents at beginning of period 9,409 496
------ -----
Cash and cash equivalents at end of period $ 9,798 $ 277
------ -----
------ -----
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
CYANOTECH CORPORATION
FORM 10-QSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-QSB and
Regulation S-B. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. These financial statements and notes should
be read in conjunction with the Company's financial statements contained in
the Company's previously filed report on Form 10-KSB for the year ended
March 31, 1996.
The Company consolidates enterprises in which it has a controlling
financial interest. The accompanying consolidated financial statements
include the accounts of Cyanotech Corporation and its wholly-owned
subsidiary, Nutrex, Inc. All significant intercompany balances and
transactions have been eliminated in consolidation. While the financial
information furnished for the three month period ended June 30, 1996 is
unaudited, the statements in this report reflect all material items which,
in the opinion of management, are necessary for a fair presentation of the
results of operations for the interim periods covered and of the financial
condition of the Company at the dates of the consolidated balance sheets.
The operating results for the interim period presented are not necessarily
indicative of the results that may be expected for the year ending March
31, 1997.
2. INVENTORIES
Inventories are stated at the lower of cost (which approximates first-in,
first-out) or market (net realization value) and consist of the following
(dollars in thousands):
June 30, March 31,
1996 1996
------- -------
Raw materials $ 78 $ 73
Work in process 200 200
Finished goods 193 105
Supplies 152 116
------- -------
$ 623 $ 494
------- -------
------- -------
6
<PAGE>
CYANOTECH CORPORATION
FORM 10-QSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
3. NET INCOME PER COMMON SHARE INFORMATION
Net income per common share for the three month periods ended June 30, 1996
and 1995 is computed based on net income after preferred stock dividend
requirements and the weighted average number of common shares outstanding
during the period, adjusted to reflect the assumed exercise of outstanding
stock options and warrants and the conversion of preferred stock to the
extent these items had a dilutive effect on the computation. Primary and
fully diluted net income per share herein are the same.
4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Owned equipment and leasehold improvements are stated at cost. Equipment
under capital lease is stated at the lower of the present value of the
minimum lease payments or fair value at the inception of the lease.
Equipment and furniture and fixtures are depreciated using the straight-
line method over the estimated useful lives of the assets. Leasehold
improvements and equipment under capital lease are amortized using the
straight-line method over the remaining term of the lease. Equipment and
leasehold improvements consist of the following (dollars in thousands):
June 30, March 31,
1996 1996
------- ---------
Equipment $ 3,573 $ 3,538
Leasehold improvements 8,024 6,815
Furniture and fixtures 36 36
Equipment under capital lease 602 602
------- -------
12,235 10,991
Less accumulated depreciation
and amortization (3,201) (3,038)
Construction in-progress 406 396
------- -------
Equipment and leasehold improvements, net $ 9,440 $ 8,349
------- -------
------- -------
5. OTHER ACCRUED LIABILITIES
Other accrued liabilities as of June 30, 1996 and March 31, 1996 consist of
the following (dollars in thousands):
June 30, March 31,
1996 1996
------- ---------
Accrued payroll and related benefits $ 243 $ 341
Accrued directors' fees 30 30
Other accrued expenses 105 63
------- -------
$ 378 $ 434
------- -------
------- -------
7
<PAGE>
CYANOTECH CORPORATION
FORM 10-QSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
6. PREFERRED STOCK
Preferred stock as of June 30, 1996 and March 31, 1996 consists of the
following (dollars in thousands):
June 30, March 31,
1996 1996
------- ---------
Preferred stock, authorized 5,000,000
shares; $.001 par value, issued
and outstanding:
Series C, 8% cumulative, convertible;
734,977 shares on June 30 and
March 31, 1996; liquidation value $5.00
per share plus unpaid accumulated dividends $ 1 $ 1
------- -------
------- -------
7. ACCOUNTING CHANGES
LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of the
expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, an impairment loss is
recognized. Measurement of that loss would be based on the fair value of
the asset.
Generally, SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell.
The Company adopted the provisions of SFAS No. 121 effective April 1, 1996.
The adoption of SFAS No. 121 did not have a material effect on the
Company's financial condition or results of operations.
STOCK-BASED COMPENSATION In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 123 establishes a fair
value based method of accounting for stock-based compensation, but does not
require an entity to adopt the new method for purposes of preparing its
basic financial statements. For entities not adopting the new method, SFAS
No. 123 requires footnote disclosure of pro forma net income and earnings
per share information as if the fair value based method had been adopted.
The disclosure requirements of SFAS No. 123 are effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
will comply with the disclosure requirements of SFAS No. 123 in its
consolidated financial statements as of and for the year ending March 31,
1997.
8
<PAGE>
CYANOTECH CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
THIS REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS REGARDING
THE FUTURE PERFORMANCE OF THE COMPANY AND FUTURE EVENTS THAT INVOLVE RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
STATEMENTS CONTAINED HEREIN. THIS DOCUMENT, AND THE DOCUMENTS THAT THE COMPANY
FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, SUCH AS ITS
REPORTS ON FORM 10-KSB, FORM 10-QSB, FORM 8-KSB, AND ITS PROXY MATERIALS,
CONTAIN ADDITIONAL IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
FROM THE COMPANY'S CURRENT EXPECTATIONS AND THE FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN.
Substantially all of the Company's resources are currently dedicated to
the production of SPIRULINA PACIFICA, a beta carotene-rich nutritional
microalgae. The Company sells SPIRULINA PACIFICA to health food
manufacturers, health food distributors and retail consumers on a worldwide
basis. Through the application of its Integrated Culture Biology Management
("ICBM") technology, the Company maintains continuous algae cultures and
produces a new crop from each of its fifty-one algae culture ponds
(aggregating approximately forty acres) approximately every week on average.
Historically, a majority of the Company's net sales have been derived
from the Company's bulk SPIRULINA PACIFICA products, which have lower
associated gross profit (measured in dollars) but higher associated gross
margin (measured as a percentage of net sales) than the Company's packaged
consumer products. Accordingly, an increase in the percentage of net sales
attributable to bulk products would increase the Company's gross margin.
Conversely, an increase in the percentage of net sales attributable to the
Company's packaged consumer products would decrease its gross margin but
likely increase gross profit. The Company expects that its product mix will
vary from period to period, and a decrease in orders from a customer such as
the Company's largest current customer which purchases primarily packaged
consumer products could require the Company to reallocate greater portions of
its production capacity to its lower gross profit bulk products.
The Company is currently producing SPIRULINA PACIFICA at full capacity
and is planning to significantly increase the rate of production by October
1996 with the completion of twenty-one acres of additional culture ponds.
There can be no assurance that the favorable supply/demand characteristics of
the market for SPIRULINA PACIFICA will continue.
On July 25, 1996, the Company announced that it was ending its
participation in the BetaPharm International joint venture partnership with
Hauser Chemical Research, Inc. ("Hauser") to produce natural beta carotene
from the microalgae DUNALIELLA SALINA. The Company had decided to apply its
resources to its own proprietary projects. Hauser is currently evaluating the
possibility of continuing to pursue the beta carotene product by itself or
with another partner. Under the terms of the 1994 joint venture, Cyanotech
will grant Hauser a license to use its beta carotene technology in
consideration for the payment of aggregate out-of-pocket expenses incurred by
Cyanotech on the joint venture project since August 1, 1994, which are
estimated to be approximately $400,000. Cyanotech has been informed by Hauser
that it intends to complete the pilot project and evaluate whether or not to
acquire the Cyanotech technology license and proceed with the final
commercialization phase. Cyanotech has agreed to allow Hauser until March 31,
1997 to complete this evaluation phase. Hauser and Cyanotech are working on
an agreement whereby Cyanotech will be available in a technical advisory role
on the growing and harvesting of microalgae for the BetaPharm International
project.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of income
data as a percentage of net sales for the periods indicated:
Three Months Ended June 30, 1996 1995
--------------------------- ---- ----
Net sales 100.0% 100.0%
Cost of product sales 40.1 50.4
----- -----
Gross profit 59.9 49.6
----- -----
Operating expenses:
Research and development 6.6 4.4
General and administrative 14.6 13.1
Sales and marketing 7.8 5.4
----- -----
Total operating expenses 29.0 22.9
----- -----
Income from operations 30.9 26.7
----- -----
Other income (expense):
Interest income 4.4 0.2
Interest expense (0.9) (0.6)
Other income, net -- --
----- -----
Total other income (expense) 3.5 (0.4)
----- -----
Net income 34.4% 26.3%
----- -----
----- -----
NET SALES
Net sales for the three months ended June 30, 1996 increased 57% to
$2,455,000 from the $1,568,000 reported for the three months ended June 30,
1995. The increase is attributable to significantly higher production and
sales of bulk Spirulina powder and tablets and increased sales of packaged
consumer products, which carry a higher sales price than bulk Spirulina
Pacifica products. The increased production is a result of the Spirulina
production expansions that were completed in September and December of 1995
and February of 1996.
International sales represented 62% and 51% of total net sales for the
three month periods ended June 30, 1996 and 1995, respectively. The Company's
largest customer, a Hong Kong-based natural products marketing and
distribution company, accounted for approximately 19% and 20% of Cyanotech's
net sales in the first quarter of fiscal 1997 and 1996, respectively. The
Hong Kong-based company is a multilevel marketing organization which
purchases the Company's packaged consumer products and sells them under a
private label, primarily in mainland China.
10
<PAGE>
GROSS PROFIT
Gross profit increased 89% to $1,470,000 for the three months from
$778,000 in the comparable period of fiscal 1996 and increased 7% from
$1,375,000 in the immediately preceding quarter. The Company's gross margin
was 59.9% for the three months ended June 30, 1996 compared to 49.6% for the
comparable period of 1995. This increase from the prior year period is
attributable to increased economies of scale and a slight shift in product
mix to greater sales of the higher gross margin bulk SPIRULINA PACIFICA
products.
OPERATING EXPENSES
Operating expenses were $711,000 during the first three months of
fiscal 1997, an increase of 97.5% from $360,000 in the comparable period of
1995, and represented 29.0% of net sales compared to 22.9% of net sales for
the three months ended June 30, 1995. The increase as a percentage of net
sales is attributable to higher expenses in all areas.
RESEARCH AND DEVELOPMENT. Expenditures for research and development
increased to $161,000 from $69,000 from the comparable period of 1995. The
increase from the prior year was primarily the result of the research work
being done on beta carotene products for the joint venture partnership with
Hauser Chemical Research, Inc. ("Hauser") and on a natural astaxanthin
product. Research and development costs are expected to increase further
during fiscal 1997 and through fiscal 1998 as the Company continues work on
commercializing the astaxanthin product and a mosquitocidal microalgae
product.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $358,000 during the first quarter of fiscal 1997 from $206,000
in the prior year period. This increase was due to higher payroll costs, the
payment of associate incentive bonuses indexed to the Company's profitability
during the first quarter, higher insurance costs, and estimated compensation
expense associated with future grants of Common Stock to non-employee
directors.
SALES AND MARKETING. Sales and marketing expenses for the first
quarter of fiscal 1997 increased 126% from the prior year quarter primarily
due to higher payroll, travel, advertising and promotion costs, related to
increasing domestic and international marketing efforts.
VARIABILITY OF RESULTS
The Company was formed in 1983 and did not become profitable on an
annual basis until fiscal 1992. As of June 30, 1996, the Company's
accumulated deficit was $3.8 million. There can be no assurance that the
Company will be consistently profitable on either a quarterly or an annual
basis. The Company has experienced quarterly fluctuations in operating
results and anticipates that these fluctuations may continue in future
periods. Future operating results may fluctuate as a result of changes in
sales levels to the Company's largest customers, new product introductions,
weather patterns, the mix between sales of bulk products and packaged
consumer products, start-up costs associated with new facilities, expansion
into new markets, sales promotions, competition, increased energy costs, the
announcement or introduction of new products by the Company's competitors,
changes in the Company's customer mix, and overall trends in the market for
Spirulina products. While a significant portion of the Company's expense
levels are relatively fixed, and the timing of increases in expense levels is
based in large part on the Company's forecasts of future sales, if net sales
are below expectations in any given period, the adverse impact on results of
operations may be magnified by the Company's inability to adjust spending
quickly enough to compensate for the sales shortfall. The
11
<PAGE>
Company may also choose to reduce prices or increase spending in response to
market conditions, which may have a material adverse effect on the Company's
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents balance increased by $389,000
during the first quarter of fiscal 1997. The major sources of cash during the
quarter were: $1,398,000 in net proceeds from the sale of 225,000 shares of
common stock to the underwriters in connection with the exercise of an
over-allotment option, and $318,000 from the exercise of stock warrants and
options. The major uses of cash during the quarter were: $1,254,000 invested
in capital equipment and leasehold improvements, $684,000 in additional
accounts receivable, and $129,000 in increased inventory balances. Largely
as a result of the above items, working capital increased $1,332,000 during
the quarter to $11,081,000. The Company believes that its existing cash
balances, together with cash expected to be provided by operations, will
provide adequate funding for its financial requirements, during fiscal 1997
and 1998. The Company has current commitments for capital expenditures
totaling $1,558,000. As of the date of this report, the Company has a $1
million bank line of credit secured by a time deposit.
CURRENT OPERATING STRATEGY
In order to meet the increasing demand for the Company's Spirulina
product, the Company completed construction of six additional 36,000 square
foot culture ponds during February, 1996, bringing the total number of ponds
to 51. The Company is currently constructing 21 acres of additional ponds
and installing the associated processing equipment. This work is expected to
be completed by October, 1996.
The Company is currently producing its bulk Spirulina product at full
capacity. As other Spirulina producers throughout the world increase their
capacity, the Company expects the average selling price to decrease during
fiscal 1997. However, as a result of economies of scale and production
process changes, the Company expects to maintain comparable gross margins
through corresponding cost savings, although no assurance can be given in
this regard.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are furnished with this report:
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
June 30, 1996.
12
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CYANOTECH CORPORATION (Registrant)
August 13, 1996 By: /s/ Gerald R. Cysewski
- - ----------------- -----------------------------
(Date) Gerald R. Cysewski
Chairman of the Board,
President and Chief Executive Officer
By: /s/ Ronald P. Scott
-----------------------------
Ronald P. Scott
Executive Vice President - Finance &
Administration
(Principal Financial and
Accounting Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 9,798
<SECURITIES> 0
<RECEIVABLES> 1,972
<ALLOWANCES> 0
<INVENTORY> 623
<CURRENT-ASSETS> 12,538
<PP&E> 12,641
<DEPRECIATION> 3,201
<TOTAL-ASSETS> 22,103
<CURRENT-LIABILITIES> 1,457
<BONDS> 769
0
1
<COMMON> 63
<OTHER-SE> 19,813
<TOTAL-LIABILITY-AND-EQUITY> 22,103
<SALES> 2,455
<TOTAL-REVENUES> 2,455
<CGS> 985
<TOTAL-COSTS> 985
<OTHER-EXPENSES> 711
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> 845
<INCOME-TAX> 0
<INCOME-CONTINUING> 845
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 845
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
