UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended September 30, 1997
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
(Registrant's telephone number)
Check whether the registrant (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 October 31, 1997:
Title of Class Shares Outstanding
Common stock - $.005 par value stock 12,848,962
<PAGE>
CYANOTECH CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Consolidated Balance Sheets (unaudited)
September 30, 1997 and March 31, 1997........................3
Consolidated Statements of Operations (unaudited)
Three and six month periods ended
September 30, 1997 and 1996..................................4
Consolidated Statements of Cash Flows (unaudited)
Six month periods ended
September 30, 1997 and 1996..................................5
Notes to Consolidated Financial Statements (unaudited)................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders..................16
Item 6. Exhibits and Reports on Form 8-K.....................................16
SIGNATURES ............................................................17
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CYANOTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<S> <C> <C>
September 30, March 31,
1997 1997
(Unaudited) (Audited)
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 346 $ 2,775
Investment securities (note 2) 1,500 3,954
Accounts receivable 1,696 2,791
Inventories (note 3) 2,011 1,138
Prepaid expenses 173 155
Deferred tax assets 411 373
------------- -------------
Total current assets 6,137 11,186
Equipment and leasehold improvements, net (note 5) 19,692 14,666
Other assets 261 163
------------- -------------
Total assets $ 26,090 $ 26,015
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 91 $ 150
Current maturities of capital lease obligations 130 130
Accounts payable 1,918 1,508
Other accrued liabilities 217 333
------------- -------------
Total current liabilities 2,356 2,121
Long-term debt, excluding current maturities 88 363
Obligations under capital leases, excluding current maturities 130 196
------------- -------------
Total liabilities 2,574 2,680
------------- -------------
Stockholders' equity:
Preferred stock (note 6) 1 1
Common Stock - 12,847,312 shares issued and outstanding
on September 30, 1997 and 12,712,682 shares issued and
outstanding on March 31, 1997 64 63
Additional paid-in capital 23,841 23,732
Accumulated deficit (390) (461)
------------- -------------
Total stockholders' equity 23,516 23,335
------------- -------------
Total liabilities and stockholders' equity $ 26,090 $ 26,015
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
September 30, September 30,
1997 1996 1997 1996
---------- ---------- ---------- ----------
NET SALES $ 2,053 $ 2,812 $ 3,827 $ 5,267
COST OF PRODUCT SALES 1,168 1,072 2,070 2,057
---------- ---------- ---------- ---------
Gross Profit 885 1,740 1,757 3,210
---------- ---------- ---------- ---------
OPERATING EXPENSES:
Research and development 173 172 314 333
General and administrative 375 338 706 696
Sales and marketing 410 222 791 414
---------- ---------- ---------- ----------
Total operating expenses 958 732 1,811 1,443
---------- ---------- ---------- ----------
Income (Loss) from operations (73) 1,008 (54) 1,767
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest income 35 116 152 224
Interest expense (16) (22) (27) (44)
Other income, net - 2 - 2
---------- ---------- ---------- ----------
Total other income 19 96 125 182
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (54) $ 1,104 $ 71 $ 1,949
========== ========== ========== ==========
NET INCOME (LOSS)PER COMMON SHARE $(0.00) $0.07 $0.00 $0.12
========== ========== ========== ==========
Weighted average number of common shares
outstanding and common stock equivalents
(note 4) 12,863 16,703 16,639 16,528
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<S> <C> <C>
Six Months Ended
September 30, September 30,
1997 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 71 $ 1,949
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred income taxes (38) -
Depreciation and amortization 434 327
Net (increase) decrease in:
Accounts receivable 853 (693)
Inventories (873) (364)
Prepaid expenses and other assets (116) (63)
Net increase (decrease) in:
Accounts payable 410 (147)
Other accrued liabilities (69) (28)
------------- -------------
Net cash provided by operating activities 672 981
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements (5,460) (3,513)
Proceeds from sales of investment securities 2,454 -
------------- -------------
Net cash used in investing activities (3,006) (3,513)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock - 1,398
Net proceeds from exercise of warrants and options 63 331
Principal payments on capital lease obligations (108) (62)
Principal payments on long-term debt (50) (75)
------------- -------------
Net cash provided by (used in) financing activities (95) 1,592
------------- -------------
Net decrease in cash and cash equivalents (2,429) (940)
Cash and cash equivalents at beginning of period 2,775 9,409
------------- -------------
Cash and cash equivalents at end of period $ 346 $ 8,469
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
CYANOTECH CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(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-Q and Regulation S-X. 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-K for the year ended March 31, 1997.
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, 1997 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, 1998.
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. INVESTMENT SECURITIES
Investment securities held as available-for-sale consist of the
following (fair value approximates amortized cost):
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, March 31,
1997 1997
------------- -------------
U.S. Treasury securities $ 500 $ 2,454
Mortgage-backed securities - 500
Other interest bearing securities 1,000 1,000
------------- -------------
$ 1,500 $ 3,954
============= =============
</TABLE>
6
<PAGE>
3. 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):
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, March 31,
1997 1997
------------- -------------
Raw Materials $ 116 $ 166
Work in process 362 362
Finished goods 1,242 346
Supplies 295 264
------------- -------------
$ 2,011 $ 1,138
============= =============
</TABLE>
4. NET INCOME PER COMMON SHARE INFORMATION
Net income per common share for the three and six month periods ended
September 30, 1997 and 1996 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 have a dilutive
effect on the computation. Primary and fully diluted net income per
share herein are the same.
5. 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 of the equipment at
the inception of the lease. Depreciation and amortization are provided
using the straight-line method over the estimated useful lives for
furniture and fixtures and the shorter of the lease terms or estimated
useful lives for leasehold improvements and equipment under capital
lease as follows:
<TABLE>
<CAPTION>
<S> <C>
Equipment 3 to 10 years
Leasehold improvements Remaining lease term (3 to 29 years)
Furniture and fixtures 7 years
Equipment under capital lease Lease term (3 to 5 years)
</TABLE>
7
<PAGE>
5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS (continued)
Equipment and leasehold improvements consist of the following (dollars
in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, March 31,
1997 1997
------------- -------------
Equipment $ 7,266 $ 5,715
Leasehold improvements 14,615 10,935
Furniture and fixtures 80 67
Equipment under capital lease 602 602
------------- -------------
22,563 17,319
Less accumulated depreciation
and amortization (4,163) (3,729)
Construction in-progress 1,292 1,076
------------- -------------
Equipment and leasehold improvements, net $ 19,692 $ 14,666
============= =============
</TABLE>
6. SERIES C PREFERRED STOCK
Series C preferred stock as of September 30, 1997 and March 31, 1997
consists of the following (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, March 31,
1997 1997
------------- --------------
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, 1997; liquidation value $5.00 per share
plus unpaid accumulated dividends $ 1 $ 1
============= ==============
</TABLE>
7. ACCOUNTING CHANGES
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF
LIABILITIES. In June 1996, the FASB issued SFAS No.125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities". SFAS No. 125 generally is effective for transfers and
servicing of financial assets and extinguishment of liabilities
occurring after December 31, 1996, and is to be applied prospectively.
This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial-components
approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured
borrowings. The company adopted the provisions of SFAS No. 125
effective January 1, 1997. The adoption of SFAS No. 125 did not have a
material effect on the Company's financial condition, results of
operations of liquidity.
8
<PAGE>
EARNINGS PER SHARE. In February 1997, the FASB issued SFAS No. 128,
"Earnings per Share". SFAS No. 128 is effective for both interim and
annual periods ending after December 15, 1997. The Company will adopt
SFAS No. 128 in the third quarter of fiscal 1998. SFAS No. 128 requires
the presentation of "Basic" earnings per share, representing income
available to common shareholders divided by the weighted average number
of common shares outstanding during the period, and "Diluted" earnings
per share, which is similar to the current presentation of fully
diluted earnings per share. SFAS No. 128 requires restatement of all
prior period earnings per share presented. Management does not expect
adoption of SFAS No. 128 to have a material impact on the Company's
previously reported earnings per share data.
COMPREHENSIVE INCOME. In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for the
reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. The
Company will adopt the provisions of SFAS No. 130 on April 1, 1998.
SFAS No. 130 requires reclassification of financial statements for
earlier periods provided for comparative purposes. Management does
not expect adoption of SFAS No. 130 will have a material effect of
the Company's financial statements, financial condition, results of
operations or liquidity.
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. In June 1997, the
FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," which establishes standards for the way that
public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises
report selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 131 is effective for
periods beginning after December 15, 1997. The Company will adopt the
provisions of SFAS No. 131 on January 1, 1998. SFAS No. 131 requires
restatement of comparative information presented for earlier periods.
Management does not expect adoption of SFAS No. 131 will have a
material effect of the Company's financial statements, financial
condition, results of operations or liquidity.
9
<PAGE>
CYANOTECH CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS REGARDING
THE FUTURE PERFORMANCE OF CYANOTECH 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-K, FORM 10-Q, FORM 8-K, AND ITS PROXY MATERIALS,
CONTAIN ADDITIONAL IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
FROM OUR CURRENT EXPECTATIONS AND THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of income
data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
<S> <C> <C> <C> <C>
1997 1996 1997 1996
-------- -------- -------- --------
Net Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of product sales 56.9 38.1 54.1 39.1
-------- -------- -------- --------
Gross profit 43.1 61.9 45.9 60.9
-------- -------- -------- --------
Operating expenses:
Research and development 8.4 6.1 8.2 6.3
General and administrative 18.2 12.0 18.4 13.2
Sales and marketing 20.0 7.9 20.7 7.9
-------- --------- -------- --------
Total operating expenses 46.6 26.0 47.3 27.4
-------- --------- -------- --------
Income (loss) from operations (3.5) 35.9 (1.4) 33.5
-------- --------- -------- --------
Other income (expense):
Interest income 1.7 4.1 4.0 4.4
Interest expense (0.8) (0.8) (0.7) (0.9)
-------- --------- --------- -------
Total other income (expense) 0.9 3.3 3.3 3.5
-------- --------- --------- -------
Net Income (Loss) (2.6)% 39.2 % 1.9 % 37.0 %
======== ========= ========= =======
</TABLE>
10
<PAGE>
SECOND QUARTER OF FISCAL 1998 COMPARED TO SECOND QUARTER OF FISCAL 1997
NET SALES
Net sales for the three month period ended September 30, 1997 decreased
27% to $2,053,000 from the $2,812,000 reported for the three month period ended
September 30, 1996. This decrease is primarily due to lower sales to our largest
customer, a Hong Kong-based natural products marketing and distribution company,
as described in the following paragraph.
International sales represented 34% and 56% of total net sales for the
three month periods ended September 30, 1997 and 1996, respectively. Our largest
customer, a Hong Kong-based natural products marketing and distribution company,
purchases our packaged consumer products and sells them under a private label
through their multilevel marketing organization, primarily in mainland China.
This customer experienced a delay in its annual recertification process by the
Chinese government and has been restricted by local governmental authorities
from hosting any large scale distributor meetings since March 1997. These
regulatory factors adversely impacted our customer's ability to sell and,
consequently, this customer's need for our packaged consumer products was
severly reduced. In September 1997, we were informed by this customer that it
had obtained licenses to operate in six provinces in China and, as a result,
placed an order for approximately $140,000 of packaged consumer prouducts. This
level of purchases, however, was significantly below the orders for
approximately $1.2 million of products in the second quarter of fiscal 1997. See
Outlook section below for additional information regarding this customer.
GROSS PROFIT
Gross profit represents net sales less the cost of goods sold, which
includes the cost of materials, manufacturing overhead costs, direct labor
expenses and depreciation and amortization. Gross profit decreased 49% to
$885,000 for the three month period ended September 30, 1997, from $1,740,000 in
the comparable period of fiscal 1997. Our gross profit margin decreased to 43%
for the three month period ended September 30, 1997, compared to 62% for the
comparable period of fiscal 1997. This decrease in gross profit margin from the
prior year period is primarily attributable to lower net sales, a shift in the
product mix to greater sales of lower priced bulk Spirulina products, and to
unexpected costs associated with the ramp-up in production of our natural
astaxanthin product, NatuRose. Without these additional astaxanthin product
costs, totaling approximately $180,000, the gross profit margin for the second
quarter 1998 would have been approximately 52%.
OPERATING EXPENSES
Operating expenses were $958,000 during the three month period ended
September 30, 1997, an increase of 31% from $732,000 in the comparable period of
fiscal 1997, primarily because of increased sales and marketing expenses.
Operating expenses as a percentage of net sales were 47%, compared with 26% in
the prior year, primarily due to the lower second quarter net sales and higher
sales and marketing expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $375,000 for the three month period ended September 30, 1997, a
increase of 11% from $338,000 for the comparable period of fiscal 1997. This
increase from the prior year was primarily due to higher personnel related
expenditures and increased insurance premiums resulting from increased insurance
coverage.
11
<PAGE>
SALES AND MARKETING. Sales and marketing expenses increased to $410,000
for the three month period ended September 30, 1997, an increase of 85% from
$222,000 for the comparable period of fiscal 1997. This increase from the prior
year is primarily due to increased domestic and international sales and
promotion efforts.
NET INCOME
The Company recorded a net loss of $54,000 for the second quarter of
fiscal 1998, compared to a net income of $1,104,000 for the comparable period of
fiscal 1997. This decrease in net earnings is primarily attributable to lower
sales of Spirulina bulk and packaged consumer products, lower average selling
prices for bulk Spirulina products, increased sales and marketing expenses, and
unexpected costs associated with the ramp-up in production of our natural
astaxanthin product, NatuRose.
SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
NET SALES
Net sales for the six month period ended September 30, 1997 decreased
27% to $3,827,000 from the $5,267,000 reported for the six month period ended
September 30, 1996. This decrease is primarily due to lower sales to our largest
customer, a Hong Kong-based natural products marketing and distribution company,
as described above.
GROSS PROFIT
Gross profit decreased 45% to $1,757,000 for the six month period ended
September 30, 1997 from $3,210,000 in the comparable period of fiscal 1997. Our
gross profit margin decreased to 46% for the six month period ended September
30, 1997, compared to 61% for the comparable period of fiscal 1997. This
decrease in gross profit from the prior year is primarily attributable to lower
net sales, a shift in the product mix to greater sales of lower priced bulk
Spirulina products, and to unexpected costs associated with the ramp-up in
production of our natural astaxanthin product, NatuRose.
OPERATING EXPENSES
Operating expenses were $1,811,000 during the six month period ended
September 30, 1997, an increase of 26% from $1,443,000 in the comparable period
of fiscal 1997, primarily because of increased sales and marketing expenses.
SALES AND MARKETING. Sales and marketing expenses increased to $791,000
for the six month period ended September 30, 1997, an increase of 91% from
$414,000 for the comparable period of fiscal 1997. This increase from the prior
year is primarily due to increased domestic and international sales and
promotion efforts.
12
<PAGE>
NET INCOME
The Company rccorded net income of $71,000 for the first half of fiscal
1998, a decrease of 96% from $1,949,000 for the comparable period of fiscal
1997. This decrease is primarily attributable to lower sales of Spirulina Bulk
and packaged consumer products, lower average selling prices for bulk Spirulina
products, increased sales and marketing expenses, and unexpected start-up costs
associated with the ramp-up in production of our natural astaxanthin product,
NatuRose.
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, 1997, the Company's
accumulated deficit was $390,000. We have experienced quarterly fluctuations in
operating results and anticipate that these fluctuations may continue in future
periods. Future operating results may fluctuate as a result of changes in sales
levels to our largest customers, new product introductions, government action,
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 our competitors, changes in our customer mix,
and overall trends in the market for Spirulina and astaxanthin products. While a
significant portion of our expense levels are relatively fixed, and the timing
of increases in expense levels is based in large part on our 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 our inability to adjust
spending quickly enough to compensate for the sales shortfall. We may also
choose to reduce prices or increase spending in response to market conditions,
which may have a material adverse effect on our financial condition and results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital decreased $5,284,000 during the first six months of
fiscal 1998 to $3,781,000 while our cash, cash equivalents and investment
securities balances decreased by $4,883,000 to $1,846,000. The decrease is
primarily attributable to capital expenditures for equipment and leasehold
improvements and higher operating costs.
Cash flows provided by operating activities during the first six months
of fiscal 1998 amounted to $672,000 compared to cash provided by operating
activities of $981,000 in fiscal 1997. The primary sources of second quarter
fiscal 1998 cash flows from operating activities were a reduction in accounts
receivable and an increase in accounts payable, offset in large part by the
increase in inventories.
At September 30, 1997, the Company had approximately twelve weeks of
Spirulina production in finished goods inventory. See Outlook section below for
information on the Company's plans for reducing Spirulina production capacity.
Cash flows used in investing activities during the first six months of
fiscal 1998 were $3,006,000 compared to $3,513,000 in fiscal 1997. The primary
uses of cash flows in investing activities during 1998 were for capital
expenditures totaling $5,460,000.
Cash flows used in financing activities during the first six months of
fiscal 1998 were only $95,000, compared to cash flows provided by financing
activities of $1,592,000 in fiscal 1997, primarily from the sale of common
stock.
13
<PAGE>
As of September 30, 1997, the Company had construction commitments
totaling $610,000, which we intend to fund from cash reserves, investment
securities, and anticipated cash flows from future operations. We presently
estimate that our existing capital resources, anticipated cash flows from future
operations, and existing credit facilities will be sufficient to fund current
operations. However, we plan to spend, subject to available financing,
approximately $11 million on capital expenditures during the next two fiscal
years, primarily to continue the expansion of NatuRose production on the newly
leased 88 acres. Existing capital resources and anticipated cash flows from
future operations will not be sufficient to fund these capital expenditures. We
are seeking an increase in our credit facility to meet any anticipated
shortfall. We currently have a $1,000,000 bank line of credit which is
collateralized by a certificate of deposit and an additional $1,000,000 bank
line of credit which is collateralized by all the assets of the Company. As of
September 30, 1997, there were no borrowings under either of these credit lines.
OUTLOOK
THIS OUTLOOK SECTION CONTAINS A NUMBER OF FORWARD-LOOKING STATEMENTS,
ALL OF WHICH ARE BASED ON CURRENT EXPECTATIONS. ACTUAL RESULTS MAY DIFFER
MATERIALLY. SEE ALSO THE NOTE AT THE BEGINNING OF THIS ITEM 2.
The Company expects net sales for the third quarter of fiscal 1998 to
be slightly below the prior year's fourth fiscal quarter net sales of
$3,350,000, assuming there are significant shipments to our customer in
Hong-Kong. During the fourth quarter of fiscal 1997, our Hong-Kong customer
purchased approximately $700,000 of Spirulina products from us. With the
reinstatement of their business license, and based on recent discussions with
this customer, we anticipate sales to them of approximately $500,000 during the
third quarter of fiscal 1998. As a result of increasing our Naturose production
during the second quarter of fiscal 1998, we expect third quarter sales of
Naturose to be greater than $400,000.
A shift in product mix to greater sales of bulk products (for which
average selling prices have decreased since last year), and continued start-up
costs associated with the operation of the NatuRose production facility, are
expected to reduce the gross profit margin for the third quarter of fiscal 1998
below the 56% reported during the fourth quarter of fiscal 1997. Gross profit
margins for Naturose are expected to be comparable to the current Spirulina
gross profit margins as the Company increases production throughput and installs
additional processing equipment. Such throughput increases and processing
equipment installations are expected to occur during the third and fourth fiscal
quarter, however, increased costs related to production of Naturose may continue
into the near future.
Cyanotech's strategy has been, and continues to be, to produce
ever-higher value natural products from microalgae. To continue the
implementation of this strategy, we plan to continue our emphasis on selling
higher value packaged Spirulina consumer products over Spirulina bulk products.
Also in line with this strategy, we introduced our natural astaxanthin product,
NatuRose, during the fourth quarter of fiscal 1997 and began full commercial
production in March, 1997. During the secondquarter of fiscal 1998, we expanded
our NatuRose capacity from five acres of culture ponds to 10 acres of culture
ponds. Beginning in November 1997, we plan to convert approximately 15% of our
Spirulina culture ponds to produce astaxanthin. This action is in response to
our changing Spirulina sales mix and should allow us to balance production
resources with market demand for our products. The cost for this conversion,
which is expected to be completed by February 1998, is estimated to be $500,000
and will be funded from cash reserves, investment securities, and anticipated
cash flows from future operations. Construction is also underway on an
14
<PAGE>
additional 88-acre expansion for NatuRose production. The first phase of this
expansion involves the rough leveling of the entire 88 acre site, which should
be completed by the end of November, 1997. The second phase will include the
construction of 25 acres of culture systems, together with a processing facility
sufficient to accommodate the entire 88 acre site. This second phase is
scheduled for completion in the Fall of 1998, subject to obtaining additional
financing on terms that are acceptable to the Company.
Research and development costs are expected to increase throughout this
fiscal year as we continue to optimize the PhytoMax PCS(sm) technology and also
accelerate the research activities directed at the mosquitocide project.
The Company's future results of operations and the other
forward-looking statements contained in this Outlook, in particular the
statements regarding revenues, gross margin, research and development, and
capital spending, involve a number of risks and uncertainties. In addition to
the factors discussed above, among the other factors that could cause actual
results to differ materially are the following: business conditions and growth
in the natural products industry and in the general economy; changes in customer
order patterns, and changes in demand for natural products in general; changes
in weather conditions; competitive factors, such as competing Spirulina
producers increasing their production capacity and their impact on world market
prices for Spirulina; government action in foreign countries; shortage of
manufacturing capacity; and unanticipated delays by contractors.
Cyanotech believes that it has the product offerings, facilities,
personnel, and competitive and financial resources for continued business
success, but future revenues, costs, margins and profits are all influenced by a
number of factors, as discussed above, all of which are inherently difficult to
forecast.
15
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On September 17, 1997, the following matters were submitted to a vote
of stockholders entitled to vote at the Company's Annual Meeting of
Stockholders:
a) The following directors were elected 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,
and Paul C. Yuen, all directors receiving at least 13,948,418 votes and
no more than 614,196 votes against or abstaining.
b) Approval of an amendment to the Company's 1995 Stock Option Plan
increasing the number of shares reserved for issuance of options from
400,000 to 800,000.
For: 13,414,825 Against: 987,121 Abstain: 160,688 Broker non-votes: 0
c) Ratification of the selection of KPMG Peat Marwick LLP as the
Company's independent auditors for the fiscal year ending March 31,
1998.
For: 14,483,349 Against: 33,418 Abstain: 29,147
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, 1997.
16
<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 10, 1997 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)
17
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 768408
<NAME> Cyanotech Corporation
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 346
<SECURITIES> 1500
<RECEIVABLES> 1696
<ALLOWANCES> 0
<INVENTORY> 2011
<CURRENT-ASSETS> 6137
<PP&E> 23855
<DEPRECIATION> 4163
<TOTAL-ASSETS> 26090
<CURRENT-LIABILITIES> 2356
<BONDS> 218
0
1
<COMMON> 64
<OTHER-SE> 23841
<TOTAL-LIABILITY-AND-EQUITY> 26090
<SALES> 3827
<TOTAL-REVENUES> 3827
<CGS> 2070
<TOTAL-COSTS> 2070
<OTHER-EXPENSES> 1811
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> 71
<INCOME-TAX> 0
<INCOME-CONTINUING> 71
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 71
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
