<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 September 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 November 5, 1996:
Title of Class Shares Outstanding
Common stock - $.005 par value stock 12,691,570
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 (unaudited)
September 30, 1996 and March 31, 1996.................... 3
Consolidated Statements of Income (unaudited)
Three and six month periods ended
September 30, 1996 and 1995.............................. 4
Consolidated Statements of Cash Flows (unaudited)
Six month periods ended
September 30, 1996 and 1995.............................. 5
Notes to Consolidated Financial Statements (unaudited)........ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...... 15
Item 6. Exhibits and Reports on Form 8-K......................... 15
SIGNATURES ........................................................ 16
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CYANOTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
1996 1996
------------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,469 $ 9,409
Accounts receivable 1,981 1,288
Inventories (note 2) 858 494
Prepaid expenses 112 120
------------- ---------
Total current assets 11,420 11,311
Equipment and leasehold improvements, net (note 4) 11,535 8,349
Other assets 127 56
------------- ---------
Total assets $ 23,082 $ 19,716
------------- ---------
------------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 150 $ 150
Current maturities of capital lease obligations 130 126
Accounts payable 705 852
Other accrued liabilities (note 5) 406 434
------------- ---------
Total current liabilities 1,391 1,562
Long-term debt, excluding current maturities 438 513
Obligations under capital leases, excluding
current maturities 259 325
------------- ---------
Total liabilities 2,088 2,400
------------- ---------
Stockholders' equity:
Preferred stock (note 6) 1 1
Common Stock - 12,691,570 shares issued and outstanding
on September 30, 1996 and 11,755,650 shares issued
and outstanding on March 31, 1996 63 59
Additional paid-in capital 23,601 21,876
Accumulated deficit (2,671) (4,620)
------------- ---------
Total stockholders' equity 20,994 17,316
------------- ---------
Total liabilities and stockholders' equity $ 23,082 $ 19,716
------------- ---------
------------- ---------
</TABLE>
See accompanying notes to consolidated financial statements. (unaudited)
3
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CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30, September 30,
---------------- ----------------
1996 1995 1996 1995
------- ------- -------- -------
<S> <C> <C> <C> <C>
NET SALES $2,812 $2,056 $5,267 $3,624
COST OF PRODUCT SALES 1,072 944 2,057 1,734
------- ------- -------- -------
Gross Profit 1,740 1,112 3,210 1,890
------- ------- -------- -------
OPERATING EXPENSES:
Research and development 172 89 333 158
General and administrative 338 315 696 521
Sales and marketing 222 87 414 172
------- ------- -------- -------
Total operating expenses 732 491 1,443 851
------- ------- -------- -------
Income from operations 1,008 621 1,767 1,039
------- ------- -------- -------
OTHER INCOME (EXPENSE):
Interest income 116 4 224 10
Interest expense (22) (21) (44) (31)
Other income, net 2 1 2 -
------- ------- -------- -------
Total other income (expense) 96 (16) 182 (21)
------- ------- -------- -------
NET INCOME $1,104 $605 $1,949 $1,018
------- ------- -------- -------
------- ------- -------- -------
NET INCOME PER COMMON SHARE $0.07 $0.04 $0.12 $0.07
------- ------- -------- -------
------- ------- -------- -------
Weighted average number of common
shares outstanding and
common stock equivalents (note 3) 16,703 14,534 16,528 14,388
------- ------- -------- -------
------- ------- -------- -------
</TABLE>
See accompanying notes to consolidated financial statements. (unaudited)
4
<PAGE>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
September 30,
--------------------
1996 1995
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,949 $1,018
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 327 229
Net (increase) decrease in:
Accounts receivable (693) (494)
Inventories (364) 36
Prepaid expenses and other assets (63) (59)
Net decrease in:
Accounts payable (147) (54)
Other accrued liabilities (28) (24)
-------- -------
Net cash provided by operating activities 981 652
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES -
Investment in equipment and leasehold improvements (3,513) (1,270)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 1,398 -
Net proceeds from exercise of warrants and options 331 386
Proceeds from issuance of long-term debt - 750
Principal payments on capital lease obligations (62) (36)
Principal payments on long-term debt (75) (18)
-------- -------
Net cash provided by financing activities 1,592 1,082
-------- -------
Net increase (decrease) in cash and cash equivalents (940) 464
Cash and cash equivalents at beginning of period 9,409 496
-------- -------
Cash and cash equivalents at end of period $8,469 $960
-------- -------
-------- -------
Supplemental schedule of noncash investing and
financing activities:
Purchase of equipment under
capital lease obligation - $303
-------- -------
-------- -------
</TABLE>
See accompanying notes to consolidated financial statements (unaudited).
5
<PAGE>
CYANOTECH CORPORATION
FORM 10-QSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(Unaudited)
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 and six month periods ended
September 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly
from those estimates.
2. INVENTORIES
Inventories are stated at the lower of cost (which approximates first-in,
first-out) or market and consist of the following (dollars in thousands):
September 30, March 31,
1996 1996
------------- ----------
Raw materials $ 91 $ 73
Work in process 232 200
Finished goods 406 105
Supplies 129 116
------------- ----------
$ 858 $ 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 and six month periods ended
September 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):
September 30, March 31,
1996 1996
------------- -----------
Equipment $ 4,193 $ 3,538
Leasehold improvements 9,651 6,815
Furniture and fixtures 52 36
Equipment under capital lease 602 602
------------- -----------
14,498 10,991
Less accumulated depreciation
and amortization (3,365) (3,038)
Construction in-progress 402 396
------------- -----------
Equipment and leasehold improvements, net $11,535 $ 8,349
------------- -----------
------------- -----------
5. OTHER ACCRUED LIABILITIES
Other accrued liabilities as of September 30, 1996 and March 31, 1996
consist of the following (dollars in thousands):
September 30, March 31,
1996 1996
------------- -----------
Accrued payroll and related benefits $ 303 $ 341
Accrued directors' fees 30 30
Other accrued expenses 73 63
------------- -----------
$ 406 $ 434
------------- -----------
------------- -----------
7
<PAGE>
CYANOTECH CORPORATION
FORM 10-QSB
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued
6. PREFERRED STOCK
Preferred stock as of September 30, 1996 and March 31, 1996 consists of
the following (dollars in thousands):
September 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 September 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 OTHER 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 as of September 30, 1996)
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.
During the second quarter of fiscal 1997, the Company was producing
SPIRULINA PACIFICA at full capacity from its forty acres of ponds. In early
November, 1996, the Company increased the total pond area from forty to sixty
acres. Although there can be no assurance in this regard, the Company
expects to sell the additional output from these new ponds 1) to new
customers, 2) in new markets/geographic areas and, to a lesser extent, 3) to
its existing customers. During the second quarter of fiscal 1997, the
Company experienced increased competition from Asian producers which resulted
in downward pricing pressure in certain markets. In future periods, the
Company may need to further reduce the selling prices of its SPIRULINA
PACIFICA products in order to maintain and increase its market share. The
Company believes that it will continue to realize further per unit production
cost reductions as a result of economies of scale and production process
changes, and that such production cost reductions may partially or wholly
offset any possible future selling price decreases, although there can be no
assurance in this regard.
The Company is moving forward on its astaxanthin product with the
construction beginning in October 1996 on a new 3200-square foot astaxanthin
processing plant. In addition, the Company is continuing work on a
genetically-engineered mosquitocide. There can be no assurance that the
9
<PAGE>
Company can successfully develop these or any other additional products, that
any such products will be capable of being produced in commercial quantities
at reasonable cost, or that any such products will achieve market acceptance.
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 Six Months Ended
September 30, September 30,
1996 1995 1996 1995
------- ------- ------- ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of product sales 38.1 45.9 39.1 47.9
------- ------- ------- ------
Gross profit 61.9 54.1 60.9 52.1
------- ------- ------- ------
Operating expenses:
Research and development 6.1 4.3 6.3 4.4
General and administrative 12.0 15.3 13.2 14.4
Sales and marketing 7.9 4.2 7.9 4.7
------- ------- ------- ------
Total operating expenses 26.0 23.9 27.4 23.5
------- ------- ------- ------
Income from operations 35.9 30.2 33.5 28.6
------- ------- ------- ------
Other income (expense):
Interest income 4.1 0.2 4.3 0.3
Interest expense (0.8) (1.0) (0.8) (0.9)
------- ------- ------- ------
Total other income (expense) 3.4 (0.8) 3.5 (0.6)
------- ------- ------- ------
Net income 39.3% 29.4% 37.0% 28.1%
------- ------- ------- ------
------- ------- ------- ------
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET SALES
Net sales for the three months ended September 30, 1996 increased 37% to
$2,812,000 from the $2,056,000 reported for the three months ended September
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 56% and 51% of total net sales for the
three month periods ended September 30, 1996 and 1995, respectively. The
Company's largest customer, a Hong Kong-
10
<PAGE>
based natural products marketing and distribution company, accounted for
approximately 43% and 32% of Cyanotech's net sales in the second 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. The Company anticipates that sales of Spirulina to this customer will
continue to represent a significant portion of the Company's total net sales
in the year ending March 31, 1997.
GROSS PROFIT
Gross profit increased 56% to $1,740,000 for the three month period
ended September 30, from $1,112,000 in the comparable period of fiscal 1996.
The Company's gross margin increased to 62% for the three months ended
September 30, 1996 compared to 54% for the comparable period of fiscal 1996.
This increase in gross margin from the prior year period is attributable to
increased economies of scale related to the production of both bulk and
packaged consumer SPIRULINA PACIFICA products.
OPERATING EXPENSES
Operating expenses were $732,000 during the three months ended September
30, 1996, an increase of 49% from $491,000 in the comparable period of fiscal
1996, and represented 26% of net sales compared to 24% of net sales for the
three months ended September 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
were $172,000 for the three months ended September 30, 1996, an increase of
93% from $89,000 for the comparable period of fiscal 1996. The increase from
the prior year was primarily the result of the research work being done on
the natural astaxanthin product which has been in pilot production since
January of 1996. 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 the mosquitocidal
microalgae product.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $338,000 for the three months ended September 30, 1996, an
increase of 7% from $315,000 for the comparable period of fiscal 1996. The
increase from the prior year was due to higher payroll costs, the payment of
associate incentive bonuses indexed to the Company's profitability during the
second 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 increased to
$222,000 for the three months ended September 30, 1996, an increase of 155%
from $87,000 for the comparable period of fiscal 1996. The increase from the
prior year was due to higher payroll, travel, advertising and promotion costs
related to increasing domestic and international marketing efforts.
NET INCOME
The Company recorded $499,000 more net income for the second quarter of
fiscal 1997 than for the comparable period of fiscal 1996. The increase is
primarily attributable to significantly higher production and sales of bulk
Spirulina powder and tablets and increased sales of packaged consumer
products.
11
<PAGE>
SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
NET SALES
Net sales for the six months ended September 30, 1996 increased 45% to
$5,267,000 from $3,624,000 for the comparable period of fiscal 1996. 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 60% and 57% of total net sales for the
six month periods ended September 30, 1996 and 1995, respectively. The
Company's largest customer, a Hong Kong-based natural products marketing and
distribution company, accounted for approximately 34% and 23% of Cyanotech's
net sales in the first six months 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. The Company anticipates that
sales of Spirulina to this customer will continue to represent a significant
portion of the Company's total net sales in the year ending March 31, 1997.
GROSS PROFIT
Gross profit increased 70% to $3,210,000 for the six month period ended
September 30, 1996 from $1,890,000 in the comparable period of fiscal 1996.
The Company's gross margin increased to 61% for the six months ended
September 30, 1996 compared to 52% for the comparable period of fiscal 1996.
This increase in gross margin from the prior year period is attributable to
increased economies of scale related to the production of both bulk and
packaged consumer SPIRULINA PACIFICA products.
OPERATING EXPENSES
Operating expenses were $1,443,000 during the six months ended September
30, 1996, an increase of 70% from $851,000 in the comparable period of fiscal
1996, and represented 27% of net sales for the six months ended September 30,
1996 compared to 24% of net sales for the six months ended September 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
were $333,000 for the six months ended September 30, 1996, an increase of
111% from $158,000 for the comparable period of fiscal 1996. The increase
from the prior year was primarily the result of the research work being done
on the natural astaxanthin product which has been in pilot production since
January of 1996. 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 the mosquitocidal
microalgae product.
12
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $696,000 for the six months ended September 30, 1996, an
increase of 34% from $521,000 for the comparable period of fiscal 1996. The
increase from the prior year was due to higher payroll costs, the payment of
associate incentive bonuses indexed to the Company's profitability during the
first and second quarters, 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 increased to
$414,000 for the six months ended September 30, 1996, an increase of 141%
from $172,000 for the comparable period of fiscal 1996. The increase from
the prior year was due to higher payroll, travel, advertising and promotion
costs related to increasing domestic and international marketing efforts.
NET INCOME
The Company recorded $931,000 more net income for the first six months
of fiscal 1997 than for the comparable period of fiscal 1996. The increase is
primarily attributable to significantly higher production and sales of bulk
Spirulina powder and tablets and increased sales of packaged consumer
products.
MANAGEMENT
In June of 1996, Cyanotech successfully recruited Walter Rick to become
the National Sales Manager for Nutrex, Incorporated. Mr. Rick has extensive
experience in the natural foods industry and was previously employed by one
of Cyanotech's largest competitors. In August of 1996, the Company expanded
its management staff with the hiring of Brent F. Kunimoto as Vice President,
Sales and Marketing. Prior to joining the Company, Mr. Kunimoto was in
marketing management at Nestle Food Co., brand manager for General Mills and
a senior consultant for Arthur Anderson & Co. Kelly Moorhead, who
previously held the position of Vice President, Sales and Marketing, assumed
the newly created position of Vice President, International Sales.
VARIABILITY OF RESULTS
The Company was formed in 1983 and did not become profitable on an
annual basis until fiscal 1992. As of September 30, 1996, the Company's
accumulated deficit was $2.7 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 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
financial condition and results of operations.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased $280,000 during the first six
months of fiscal 1997 to $10,029,000 while its cash and cash equivalents
balance decreased by $940,000 during the first six months of fiscal 1997 to
$8,469,000. The major sources of cash other than that provided by operating
activities during the six months ended September 30, 1996 were: $1,398,000
in net proceeds from the sale of 225,000 shares of common stock to the
underwriters and $331,000 from the exercise of common stock warrants and
options. The major uses of cash during the first six months of fiscal 1997
were: $3,513,000 invested in capital equipment and leasehold improvements
(including process enhancements and a 21-acre capacity expansion project),
$693,000 in additional accounts receivable and $364,000 in increased
inventory balances. 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
$1,741,000. As of the date of this report, the Company has available a $1
million bank line of credit secured by a time deposit.
14
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On September 19, 1996, the following matters were submitted to a vote of
stockholders entitled to vote at the Company's Annual Meeting of
Stockholders:
a) Election of the following directors by the holders of Common Stock, to
serve until the next Annual Meeting or until their successors are elected:
Julian C. Baker, Gerald R. Cysewski, Eva R. Reichl, Ronald P. Scott,
John T. Ushijima, Paul C. Yuen.
b) Approve an amendment to the Company's Articles of Incorporation to
increase the number of authorized shares of Common Stock from 18,000,000
to 25,000,000.
For: 13,376,699 Against: 679,866 Abstain: 55,246 Broker non-votes: 48,600
c) Ratification of the selection of KPMG Peat Marwick LLP as the Company's
independent auditors for the fiscal year ending March 31, 1997.
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
September 30, 1996.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYANOTECH CORPORATION (Registrant)
November 11, 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)
16
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