<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
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 December 31, 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 February 9, 1998:
Title of Class Shares Outstanding
Common stock - $.005 par value stock 12,863,912
</TABLE>
1
<PAGE>
CYANOTECH CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page
<S> <C> <C>
Consolidated Balance Sheets (unaudited)
December 31, 1997 and March 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Consolidated Statements of Operations (unaudited)
Three and nine month periods ended
December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows (unaudited)
Nine month periods ended
December 31, 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 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CYANOTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<S> <C> <C>
December 31, March 31,
1997 1997
(Unaudited) (Audited)
----------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 284 $ 2,775
Investment securities (note 2) 1,000 3,954
Accounts receivable 1,051 2,791
Inventories (note 3) 2,419 1,138
Prepaid expenses 98 155
Deferred tax assets 411 373
----------------- -----------------
Total current assets 5,263 11,186
Equipment and leasehold improvements, net (note 4) 19,905 14,666
Other assets 173 163
----------------- -----------------
Total assets $ 25,341 $ 26,015
================= =================
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt $ 50 $ 150
Current maturities of capital lease obligations 132 130
Accounts payable 1,559 1,508
Other accrued liabilities 198 333
----------------- -----------------
Total current liabilities 1,939 2,121
Long-term debt, excluding current maturities 75 363
Obligations under capital leases, excluding current maturities 96 196
----------------- -----------------
Total liabilities 2,110 2,680
----------------- -----------------
Stockholders' equity:
Preferred stock (note 5) 1 1
Common Stock - 12,863,912 shares issued and outstanding
on December 31, 1997 and 12,712,682 shares issued and
outstanding on March 31, 1997 64 63
Additional paid-in capital 23,842 23,732
Accumulated deficit (676) (461)
----------------- -----------------
Total stockholders' equity 23,231 23,335
----------------- -----------------
Total liabilities and stockholders' equity $ 25,341 $ 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)
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 1,564 $ 2,782 $ 5,391 $ 8,049
COST OF PRODUCT SALES 1,022 1,051 3,092 3,108
--------- --------- --------- ---------
Gross Profit 542 1,731 2,299 4,941
--------- --------- --------- ---------
OPERATING EXPENSES:
Research and development 183 121 497 454
General and administrative 336 367 1,042 1,063
Sales and marketing 342 255 1,133 669
--------- --------- --------- ---------
Total operating expenses 861 743 2,672 2,186
--------- --------- --------- ---------
Income (loss) from operations (319) 988 (373) 2,755
--------- --------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 39 153 191 377
Interest expense (14) (17) (41) (61)
Other income, net 8 7 8 9
--------- --------- --------- ---------
Total other income 33 143 158 325
--------- --------- --------- ---------
Income (loss) before income
taxes (286) 1,131 (215) 3,080
--------- --------- --------- ---------
Income taxes - 175 - 175
--------- --------- --------- ---------
NET INCOME (LOSS) $ (286) $ 956 $ (215) $ 2,905
========= ========= ========= =========
NET INCOME (LOSS) PER COMMON
SHARE
Basic $(0.02) $0.08 $ (0.02) $0.23
========= ========= ======== ========
Diluted $(0.02) $0.06 $ (0.02) $0.18
========= ========= ======== ========
For detailed description of EPS calculations, see Note 6.
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Nine Months Ended
December 31, December 31,
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ (215) $ 2,905
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferred income taxes (38) -
Depreciation and amortization 678 506
Common stock issued for services 47 37
Net (increase) decrease in:
Accounts receivable 1,440 (1,181)
Inventories (1,281) (708)
Prepaid expenses and other assets 47 (79)
Net increase (decrease) in:
Accounts payable 51 (41)
Other accrued liabilities (135) (82)
----------- ------------
Net cash provided by operating activities 594 1,357
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements (5,917) (4,947)
Proceeds from sales of investment securities 2,954 -
----------- ------------
Net cash used in investing activities (2,963) (4,947)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock - 1,398
Net proceeds from exercise of warrants and options 64 332
Principal payments on capital lease obligations (98) (87)
Principal payments on long-term debt (88) (113)
----------- ------------
Net cash provided by (used in) financing activities (122) 1,530
----------- ------------
Net decrease in cash and cash equivalents (2,491) (2,060)
Cash and cash equivalents at beginning of period 2,775 9,409
----------- ------------
Cash and cash equivalents at end of period $ 284 $ 7,349
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CYANOTECH CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 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 nine month periods ended
December 31, 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 (dollars in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
------------ ------------
<S> <C> <C>
U.S. Treasury securities $ - $ 2,454
Mortgage-backed securities - 500
Other interest bearing securities 1,000 1,000
------------ ------------
$ 1,000 $ 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>
December 31, March 31,
1997 1997
------------ ------------
<S> <C> <C>
Raw Materials $ 97 $ 166
Work in process 362 362
Finished goods 1,666 346
Supplies 294 264
------------ ------------
$ 2,419 $ 1,138
============ ============
</TABLE>
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 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> <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>
Equipment and leasehold improvements consist of the following (dollars
in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
------------- -------------
<S> <C> <C>
Equipment $ 7,680 $ 5,715
Leasehold improvements 12,977 10,935
Furniture and fixtures 81 67
Equipment under capital lease 602 602
------------- -------------
21,340 17,319
Less accumulated depreciation and amortization (4,407) (3,729)
Construction in-progress 2,972 1,076
------------- -------------
Equipment and leasehold improvements, net $ 19,905 $ 14,666
============= =============
</TABLE>
5. SERIES C PREFERRED STOCK
Series C preferred stock as of December 31, 1997 and March 31, 1997
consists of the following (dollars in thousands):
7
<PAGE>
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
------------- -------------
<S> <C> <C>
Preferred stock, authorized 5,000,000 shares;
$.001 par value, issued and outstanding:
Series C, 8% cumulative, convertible;
734,977 shares on December 31 and March
31, 1997; liquidation value $5.00 per share
plus unpaid accumulated dividends $ 1 $ 1
============= =============
</TABLE>
6. EARNINGS PER SHARE
The company adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128") during the quarter ended
December 31, 1997. SFAS 128 requires presentation of both Basic EPS and
Diluted EPS on the face of the statemen of operations. Basic EPS, which
replaces primary EPS, is computed by dividing net income available to
stockholders (numerator) by the weighted average number of common
shares outstanding (denominator) during the period. Unlike the
computation of primary EPS, Basic EPS excludes the dilutive effect of
common stock equivalents. Diluted EPS replaces fully diluted EPS and
gives effect to all potential dilutive common shares outstanding during
a period. In computing Diluted EPS, the average stock price for the
period is used in determining the number of shares assumed to be
purchased from exercise of stock options rather than the higher of the
average or ending stock price as used in the computation of fully
diluted EPS. The computation of Diluted EPS assumes no conversion,
exercise, or contingent issuance of securities that would have an
antidilutive effect on earnings per share. All prior period earnings
per share information has been restated to reflect the provisions of
SFAS No. 128.
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented (in
thousands except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1997 1996 1997 1996
---------- ---------- --------- ---------
Numerator:
<S> <C> <C> <C> <C>
Net income (loss) $ (286) $ 956 $ (215) $ 2,905
========== =========== ========= =========
Denominator for basic earnings per
common share 12,863 12,692 12,846 12,558
Effect of dilutive securities:
Stock options and warrants - 3,970 - 4,019
----------- ----------- --------- ---------
Denominator for diluted earnings
per common share 12,863 16,662 12,846 16,577
=========== =========== ========= =========
Net income (loss) per common share:
Basic $(0.02) $0.08 $(0.02) $0.23
=========== =========== ========= =========
Diluted $(0.02) $0.06 $(0.02) $0.18
=========== =========== ========= =========
</TABLE>
8
<PAGE>
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.
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 adopted
SFAS No. 128 for the quarter ended December 31, 1997 (see Note 6).
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. The
adoption of SFAS No. 128 did not have a material effect on the
Company's 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 on 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 effective with the quarter beginning 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 on the Company's reported
financial information.
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 Nine Months Ended
December 31, December 31,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of product sales 65.3 37.8 57.4 38.6
------- ------- ------- -------
Gross profit 34.7 62.2 42.6 61.4
------- ------- ------- -------
Operating expenses:
Research and development 11.7 4.4 9.2 5.7
General and administrative 21.5 13.2 19.3 13.2
Sales and marketing 21.9 9.2 21.0 8.3
-------- ------- ------- -------
Total operating expenses 55.1 26.8 49.5 27.2
-------- ------- ------- -------
Income (loss) from operations (20.4) 35.4 (6.9) 34.2
-------- ------- ------- -------
Other income (expense):
Interest income 2.5 5.5 3.6 4.7
Interest expense (0.9) (0.6) (0.8) (0.8)
Miscellaneous other income 0.5 0.3 0.1 0.1
-------- ------- ------- -------
Total other income 2.1 5.2 2.9 4.0
-------- ------- ------- -------
Income taxes 0.0 6.3 0.0 2.2
-------- ------- ------- -------
Net Income (Loss) (18.3)% 34.3 % (4.0)% 36.0 %
======== ======= ======= =======
</TABLE>
10
<PAGE>
THIRD QUARTER OF FISCAL 1998 COMPARED TO THIRD QUARTER OF FISCAL 1997
NET SALES
Net sales for the three month period ended December 31, 1997 decreased
44% to $1,564,000 from the $2,782,000 reported for the three month period ended
December 31, 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 39% and 71% of total net sales for the
three month periods ended December 31, 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
severely 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 products during
the second quarter of fiscal 1998. During the third quarter of fiscal 1998, this
customer ordered $160,000 of products, of which $73,000 was packaged consumer
products. This level of purchases, however, was significantly below the orders
for approximately $1.5 million of products in the third 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 69% to
$542,000 for the three month period ended December 31, 1997, from $1,731,000 in
the comparable period of fiscal 1997. Our gross profit margin decreased to 35%
for the three month period ended December 31, 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 Spirulina
production slowdown, a shift in the product mix to greater sales of lower priced
bulk Spirulina products, and higher depreciation expense. The Spirulina
production slowdown during December resulted in an additional charge of
approximately $125,000 during the three month period ended December 31, 1997.
OPERATING EXPENSES
Operating expenses were $861,000 during the three month period ended
December 31, 1997, an increase of 16% from $743,000 in the comparable period of
fiscal 1997, primarily due to increased sales and marketing expenses and
research and development costs. Operating expenses as a percentage of net sales
were 55%, compared with 27% in the prior year, primarily due to the lower sales
and higher sales and marketing expenses in the third quarter of fiscal 1998.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
to $183,000 for the three month period ended December 31, 1997, an increase of
51% from $121,000 for the comparable period of fiscal 1997. This increase from
the prior year was primarily due to higher personnel related expenditures
and development costs associated with our natural astaxanthin product, NATUROSE,
and our natural mosquitocide development program.
11
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased to $336,000 for the three month period ended December 31, 1997, a
decrease of 8% from $367,000 for the comparable period of fiscal 1997. This
decrease from the prior year was primarily due to lower profit sharing expense
and was partially offset by higher insurance and facilities costs.
SALES AND MARKETING. Sales and marketing expenses increased to $342,000
for the three month period ended December 31, 1997, an increase of 34% from
$255,000 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 (LOSS)
The Company recorded a net loss of $286,000 for the third quarter of
fiscal 1998, compared to a net income of $956,000 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
the December 1997 Spirulina production slowdown.
NINE MONTHS ENDED DECEMBER 31, 1997 AND 1996
NET SALES
Net sales for the nine month period ended December 31, 1997 decreased
33% to $5,391,000 from the $8,049,000 reported for the nine month period ended
December 31, 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 54% to $2,299,000 for the nine month period
ended December 31, 1997 from $4,941,000 in the comparable period of fiscal 1997.
Our gross profit margin decreased to 43% for the nine month period ended
December 31, 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, unexpected costs associated with the ramp-up in
production of our natural astaxanthin product, NATUROSE, and higher depreciation
expense.
OPERATING EXPENSES
Operating expenses were $2,672,000 during the nine month period ended
December 31, 1997, an increase of 22% from $2,186,000 in the comparable period
of fiscal 1997, primarily due to increased sales and marketing expenses.
12
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expenses increased
to $497,000 for the nine month period ended December 31, 1997, an increase of 9%
from $454,000 for the comparable period of fiscal 1997. This increase from the
prior year was primarily due to higher personnel related expenditures and
development costs associated with our natural astaxanthin product, NATUROSE, and
our natural mosquitocide development program.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased slightly to $1,042,000 for the nine month period ended December 31,
1997, from $1,063,000 for the comparable period of fiscal 1997. This decrease
from the prior year was primarily due to lower profit sharing expense and was
partially offset by higher insurance and facilities costs.
SALES AND MARKETING. Sales and marketing expenses increased to
$1,133,000 for the nine month period ended December 31, 1997, an increase of 69%
from $669,000 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 net loss of $215,000 for the first three quarters
of fiscal 1998, compared to a net income of $2,905,000 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 and maintained profitability until the quarter
ended September 30, 1997. As of December 31, 1997, the Company's accumulated
deficit was $676,000. 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. 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 $5,741,000 during the first nine months
of fiscal 1998 to $3,324,000 while our cash, cash equivalents and investment
securities balances decreased by $5,445,000 to $1,284,000. The decrease is
primarily attributable to capital expenditures for equipment and leasehold
improvements.
13
<PAGE>
Cash flows provided by operating activities during the first nine
months of fiscal 1998 amounted to $594,000 compared to cash provided by
operating activities of $1,357,000 in fiscal 1997, most of the decrease being
accounted for by reduced net income. The primary sources of 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 December 31, 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
and inventory.
Cash flows used in investing activities during the first nine months of
fiscal 1998 were $2,963,000 compared to $4,947,000 in fiscal 1997, being
provided by sales of investment securities in fiscal 1998. The primary uses of
cash flows in investing activities during 1998 were for capital expenditures
totaling $5,917,000.
Cash flows used in financing activities during the first nine months of
fiscal 1998 were only $122,000, compared to cash flows provided by financing
activities of $1,530,000 in fiscal 1997, primarily from the sale of common
stock.
As of December 31, 1997, the Company had construction commitments
totaling $55,000, which we intend to fund from cash and investment securities.
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 and increased product demand, approximately $11 million on capital
expenditures, 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. As of December 31, 1997, the Company had a $1,000,000 bank line of
credit which was collateralized by a certificate of deposit and an additional
$1,000,000 bank line of credit which was collateralized by all the assets of the
Company. As of December 31, 1997, there were no borrowings under either of these
credit lines. The bank lines of credit expired on January 31, 1998 and are being
renegotiated with current and additional lenders for new bank lines of up to $2
million.
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 fourth quarter of fiscal 1998 to
be approximately $2.6 million, which is 21% below the prior year's fourth fiscal
quarter net sales of $3,350,000. This forecast assumes that packaged product
shipments to our customer in Hong Kong will continue to increase slowly over the
fourth quarter of fiscal 1998. With the reinstatement of their business license,
and based on recent discussions with this customer, we anticipate sales to them
of approximately $200,000 during the fourth quarter of fiscal 1998. As a result
of increasing acceptance and promotion of our natural astaxanthin product,
NATUROSE, during the second and third quarters of fiscal 1998, we expect fourth
quarter sales of NATUROSE to be approximately $275,000. However, industry
acceptance and sales of NATUROSE are, to a large extent, dependent upon the
completion of aquaculture feeding trials by potential customers, and such
feeding trials may take longer than anticipated to complete or may not yield
positive results. As a result, the timing of future sales of NATUROSE is
uncertain.
14
<PAGE>
A shift in product mix to greater sales of bulk products (for which
average selling prices have decreased since last year together with lower net
sales), and continued development costs associated with the operation of the
NATUROSE production facility, are expected to reduce the gross profit margin for
the fourth 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
optimizes processing systems and production throughput; 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.
At the beginning of the third quarter of fiscal 1998, we completed
expansion of our NATUROSE capacity from five acres of culture ponds to ten acres
of culture ponds and began conversion of 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 scheduled
for completion by the end of February 1998, has been funded from cash reserves,
investment securities, and cash flows from operations. Construction also
continues on an additional 88-acre expansion for NATUROSE production. The first
phase of this expansion involves the rough leveling of the entire 88 acre site,
which is scheduled to be completed by the end of February, 1998. 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 Spring of 1999, 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 actions; 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 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
December 31, 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)
February 12, 1998 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
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