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, 2000
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, 2000:
Title of Class Shares Outstanding
-------------- ------------------
Common stock - $.005 par value stock 16,343,872
<PAGE>
CYANOTECH CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
-------------------------------
Item 1. Financial Statements Page
----
Consolidated Balance Sheets (unaudited)
September 30, 2000 and March 31, 2000 . . . . . . . . . . . . 3
Consolidated Statements of Operations (unaudited)
Three and six month periods ended
September 30, 2000 and 1999 . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows (unaudited)
Six month periods ended
September 30, 2000 and 1999 . . . . . . . . . . . . . . . . . 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 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . .17
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . .18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
----------
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CYANOTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
September 30, March 31,
2000 2000
(Unaudited) (Audited)
ASSETS ------------- ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,901 $ 405
Accounts receivable, net 1,878 1,613
Refundable income taxes 178 154
Inventories (note 2) 2,003 1,609
Prepaid expenses 58 50
------------- ------------
Total current assets 6,018 3,831
Equipment and leasehold improvements, net (note 3) 15,253 15,746
Other assets 1,162 112
------------- ------------
Total assets $ 22,433 $ 19,689
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 215 $ 186
Accounts payable 733 1,130
Accrued Expenses 293 421
------------- ------------
Total current liabilities 1,241 1,737
Long-term debt, excluding current maturities:
Term loan 3,219 1,307
Convertible debentures 1,250 --
------------- ------------
Total liabilities 5,710 3,044
------------- ------------
Stockholders' equity:
Cumulative preferred stock, Series C, of $.001 par value
(aggregate involuntary liquidation preference $1,105 ($5 per
share), plus unpaid cumulative dividends). Authorized
5,000,000 shares; issued and utstanding 221,031 shares at
September 30, 2000 and 471,031 shares at March 31, 2000. -- 1
Common Stock of $0.05 par value, authorized 25,000,000
shares; issued and outstanding 15,843,872 shares at September
30, 2000 and 14,582,297 shares at March 31, 2000 79 73
Additional paid-in capital 24,509 24,374
Accumulated deficit (7,865) (7,803)
------------- ------------
Total stockholders' equity 16,723 16,645
------------- ------------
Total liabilities and stockholders' equity $ 22,433 $ 19,689
============= ============
</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 Six Months Ended
September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 2,360 $ 1,496 $ 4,526 $ 3,095
COST OF PRODUCT SALES 1,566 1,370 3,028 2,702
------------- ------------- ------------- -------------
Gross Profit 794 126 1,498 393
------------- ------------- ------------- -------------
OPERATING EXPENSES:
Research and development 66 156 140 322
General and administrative 379 337 704 724
Sales and marketing 270 192 529 385
------------- ------------- ------------- -------------
Total operating expenses 715 685 1,373 1,431
------------- ------------- ------------- -------------
Income (loss) from operations 79 (559) 125 (1,038)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 36 1 60 5
Interest expense (167) (51) (265) (106)
Other income, net 12 -- 18 3
------------- ------------- ------------- -------------
Total other expense (119) (50) (187) (98)
------------- ------------- ------------- -------------
Loss before income taxes (40) (609) (62) (1,136)
Income taxes -- -- -- --
------------- ------------- ------------- -------------
NET LOSS $ (40) $ (609) $ (62) $ (1,136)
============= ============= ============= =============
NET LOSS PER COMMON SHARE
Basic and Diluted $ (0.00) $ (0.05) $ (0.01) $ (0.09)
SHARES USED IN CALCULATION OF:
Basic and Diluted 15,644 13,744 15,300 13,678
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended
September 30,
2000 1999
-------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (62) $ (1,136)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 663 656
Amortization of debt issue costs 71 19
Issuance of stock in exchange for services 10 31
Net (increase) decrease in:
Accounts receivable (265) 165
Refundable income taxes (24) 116
Inventories (394) 361
Prepaid expenses and other assets (15) 32
Net increase (decrease) in:
Accounts payable (397) (11)
Deferred revenue -- 30
Accrued expenses (128) (49)
-------------------- -------------------
Net cash provided by (used in) operating activities (541) 214
-------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements (170) (173)
-------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of term loan debt 3,500 --
Proceeds from issuance of convertible debentures 1,250 --
Net proceeds from exercise of warrants and options 9 16
Net proceeds from issuance of common stock -- 98
Principal payments on long-term debt (1,559) (138)
Debt issue costs (493) --
Restricted cash deposit (500) --
Borrowings (repayment) on short-term revolving line of
credit, net -- (52)
Principal payments on capital lease obligations -- (67)
-------------------- -------------------
Net cash provided by (used in) financing activities 2,207 (143)
-------------------- -------------------
Net increase (decrease) in cash and cash equivalents 1,496 (102)
Cash and cash equivalents at beginning of period 405 323
-------------------- -------------------
Cash and cash equivalents at end of period $ 1,901 $ 221
==================== ===================
Supplemental disclosure of non-cash financing activity - issuance
of warrants in connection with issuance of long-term debt $ 121 $ --
==================== ===================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CYANOTECH CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(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 consolidated
financial statements and notes should be read in conjunction with the
Company's consolidated financial statements contained in the Company's
previously filed report on Form 10-K for the year ended March 31, 2000.
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, 2000 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, 2001.
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, 2000 March 31, 2000
--------------------- -------------------
Raw materials $ 129 $ 72
Work in process 270 278
Finished goods 1,378 1,060
Supplies 226 199
--------------------- -------------------
$ 2,003 $ 1,609
===================== ===================
6
<PAGE>
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Owned equipment and leasehold improvements are stated at cost.
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 as follows:
Equipment 3 to 10 years
Leasehold impovements 10 to 26 years
Furniture and fixtures 7 years
Equipment and leasehold improvements consist of the following (dollars
in thousands):
<TABLE>
<CAPTION>
September 30, 2000 March 31, 2000
-------------------- --------------------
<S> <C> <C>
Equipment $ 9,037 $ 8,961
Leasehold improvements 13,719 13,642
Furniture and fixtures 83 83
-------------------- --------------------
22,839 22,686
Less accumulated depreciation and amortization (8,046) (7,383)
Construction in-progress 460 443
-------------------- --------------------
Equipment and leasehold improvements, net $ 15,253 $ 15,746
==================== ====================
</TABLE>
4. SERIES C PREFERRED STOCK
Series C preferred stock is convertible into common stock at the rate
of one share of preferred stock for five shares of common stock through
February 23, 2002, after which date the conversion feature is no longer
applicable. Series C preferred stock has voting rights equal to the
number of shares of common stock into which it is convertible and has a
preference in liquidation over all other series of preferred stock of
$5 per share plus any accumulated but unpaid dividends. Holders of
Series C preferred stock are entitled to 8% cumulative annual dividends
at the rate of $.40 per share; cumulative dividends in arrears as of
September 30, 2000 amount to $997 ($4.51 per share). Upon conversion of
Series C preferred stock, cumulative dividends in arrears on converted
shares are no longer payable. The consent of Series C preferred
stockholders is required to modify their present rights or sell all or
substantially all of the Company's assets.
In October, 2000, 100,000 shares of Series C preferred stock were
converted into 500,000 shares of common stock.
7
<PAGE>
5. EARNINGS (LOSS) PER SHARE
For the three and six months ended September 30, 2000 and 1999,
warrants and options to purchase Common Stock shares of the Company and
convertible preferred stock were outstanding, but were not included in
the computation of Diluted net loss per common share because the
inclusion of these securities would have had an antidilutive effect on
the net loss per common share. For the three and six months ended
September 30, 2000, convertible debentures were outstanding, but were
not included in the computation of diluted net loss per common share
because the inclusion of these instruments would have had an
antidilutive effect on the net loss per common share. As of September
30, 2000, warrants and options to acquire 1,054,130 shares of the
Company's common stock, preferred stock convertible into 1,105,155
shares of the Company's common stock and debentures convertible into
833,333 shares of the Company's common stock were outstanding. As of
September 30, 1999, warrants and options to acquire 784,700 shares of
the Company's common stock and preferred stock convertible into
2,975,155 shares of the Company's common stock were outstanding.
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented (in
thousands except share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE September 30, September 30,
2000 1999 2000 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss $ (40) $ (609) $ (62) $ (1,136)
Less: Requirement for Preferred Stock dividends (27) (59) (66) (119)
-------------- -------------- --------------- --------------
Loss to Common stockholders $ (67) $ (668) $ (128) $ (1,255)
============== ============== =============== ==============
Weighted average Common Shares outstanding 15,643,880 13,743,993 15,300,396 13,677,826
============== ============== =============== ==============
Net Loss per Common Share $ (0.00) $ (0.05) $ (0.01) $ (0.09)
============== ============== =============== ==============
</TABLE>
6. RECENT ACCOUNTING PRONOUNCEMENTS
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In June
1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS
No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. In July 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date for FASB Statement No. 133, an Amendment of FASB
Statement No. 133", which defers the effective date of SFAS No. 133 to
be effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities,
An Amendment of FASB Statement No. 133," which addresses a limited
number of issues causing implementation difficulties for certain
entities that apply SFAS No. 133. The Company currently holds no
derivative instruments, nor is it currently participating in hedging
activities. Management does not expect adoption of SFAS No. 133, as
amended by SFAS No. 137 and SFAS No. 138, will have a material effect
on the Company's financial condition, results of operations or
liquidity.
8
<PAGE>
ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION. In
March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation, an Interpretation of
APB Opinion No. 25." FASB Interpretation No. 44 clarifies the
application of APB Opinion No. 25 for certain issues involving employee
stock compensation and is generally effective July 1, 2000. The Company
adopted the provisions of FASB Interpretation No. 44 effective July 1,
2000. Adoption of FASB Interpretation No. 44 did not have a material
effect on the Company's financial condition, results of operations or
liquidity.
7. CONTINGENCIES
On July 13, 1998, the Company filed a complaint, (Case No. CV98-00600)
in United States District Court for the District of Hawaii (Court)
against Aquasearch, Inc. (Aquasearch), seeking declaratory judgement of
patent noninfringement, patent invalidity and non-misappropriation of
trade secrets relating to closed culture production of astaxanthin. The
complaint was filed in response to assertions by Aquasearch regarding
its alleged intellectual property rights. Aquasearch has answered the
complaint and filed counter claims alleging patent infringement, trade
secret misappropriation, unfair competition and breach of contract. The
Court later granted Cyanotech's motion to amend its complaint against
Aquasearch to add claims of misappropriation of trade secrets regarding
open pond technology, unfair competition and breach of contract.
On December 30, 1999, the Court denied Cyanotech's motion for summary
judgment of non-infringement and patent invalidity as to Aquasearch's
U.S. Patent No. 5,541,056 and granted Aquasearch's partial summary
judgment motion finding that Cyanotech infringes its patent. The Court
also granted Aquasearch's partial summary judgment motion finding that
Cyanotech misappropriated Aquasearch trade secrets and committed a
breach of contract. In response, Cyanotech filed a motion for
reconsideration on January 14, 2000, with the Court. On March 3, 2000,
United States District Court Judge Alan C. Kay denied Cyanotech's
motion for reconsideration.
On August 29, 2000, Cyanotech filed a motion for partial summary
judgment for the invalidity of the Aquasearch patent No. 5,541,056,
based on prior art. This motion is scheduled to be heard on December 4,
2000. Although the resolution of this matter is uncertain, management
does not expect that damages, if any, against Cyanotech will have a
material adverse effect on the Company's consolidated financial
position, 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 the Company's current expectations and the forward-looking statements
contained herein.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of
operations data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of product sales 66.4 91.6 66.9 87.3
----------- ----------- ----------- -----------
Gross profit 33.6 8.4 33.1 12.7
----------- ----------- ----------- -----------
Operating expenses:
Research and development 2.8 10.4 3.1 10.4
General and administrative 16.1 22.5 15.5 23.4
Sales and marketing 11.4 12.9 11.7 12.4
----------- ----------- ----------- -----------
Total operating expenses 30.3 45.8 30.3 46.2
----------- ----------- ----------- -----------
Income (loss) from operations 3.3 (37.4) 2.8 (33.5)
----------- ----------- ----------- -----------
Other income (expense):
Interest income 1.5 0.1 1.3 0.2
Interest expense (7.0) (3.4) (5.8) (3.4)
Other income, net 0.5 -- 0.4 0.1
----------- ----------- ----------- -----------
Total other expense (5.0) (3.3) (4.1) (3.1)
----------- ----------- ----------- -----------
Loss before income taxes (1.7) (40.7) (1.3) (36.7)
Income taxes -- -- -- --
----------- ----------- ----------- -----------
Net Loss (1.7)% (40.7)% (1.3)% (36.7)%
=========== =========== =========== ===========
</TABLE>
10
<PAGE>
SECOND QUARTER OF FISCAL 2001 COMPARED TO SECOND QUARTER OF FISCAL 2000
Net Sales
Net sales for the three month period ended September 30, 2000 were
$2,360,000, an increase of 58% from $1,496,000 in the comparable period of
fiscal 2000. This increase is primarily due to higher sales of bulk Spirulina
Pacifica(R) tablets and greater sales of both NatuRose(R) and BioAstin(TM)
natural astaxanthin products, offset in part by lower sales of bulk Spirulina
Pacifica powder.
International sales represented 63% and 45% of total net sales for the
three month periods ended September 30, 2000 and 1999, respectively. This
increase was primarily due to increased bulk sales of Spirulina Pacifica tablets
to our largest customer, a European distributor of natural products. Sales to
this customer, Spirulina International, B. V. (Spirulina International),
accounted for 41% and 15% of total net sales for the three month periods ended
September 30, 2000 and 1999, respectively.
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 increased to $794,000
for the three month period ended September 30, 2000, an increase of 530% from
$126,000 in the comparable period of fiscal 2000. Our gross profit margin
increased to 34% for the three month period ended September 30, 2000, compared
to 8% for the comparable period of fiscal 2000. This increase in gross profit
margin from the prior year period is primarily attributable to higher sales of
bulk Spirulina Pacifica tablets and greater sales of NatuRose and BioAstin
natural astaxanthin products and decreased Spirulina and astaxanthin production
costs resulting from operating at full production capacity.
Operating Expenses
Operating expenses were $715,000 during the three month period ended
September 30, 2000, an increase of 4% from $685,000 in the comparable period of
fiscal 2000. This increase was primarily due to increased expenditures for Sales
and Marketing and General and Administrative expenses.
Research and Development. Research and development expenses amounted
to $66,000 for the three month period ended September 30, 2000, a decrease of
58% from $156,000 for the comparable period of fiscal 2000. This decrease from
the prior year was due to reduced personnel expenditures, lower supply and
material costs and reduced outside service and consulting expenses, resulting
from suspension of research work on the mosquitocide project and the Aldolase
Catalytic Antibody 38C2 project during the third quarter of fiscal 2000.
General and Administrative. General and administrative expenses
amounted to $379,000 for the three months ended September 30, 2000, an increase
of 12% from $337,000 for the comparable period of fiscal 2000. This increase
from the prior year is primarily due to higher legal and stockholder relations
expenses.
Sales and Marketing. Sales and marketing expenses amounted to $270,000
for the three month period ended September 30, 2000, an increase of 41% from
$192,000 for the comparable period of fiscal 2000. This increase from the prior
year is primarily due to higher trade show, travel and consulting service costs.
11
<PAGE>
Other Income (Expense)
Other expense amounted to $119,000 for the three month period ended
September 30, 2000, an increase of 138% from $50,000 for the same period of
fiscal 2000, primarily from an increase in interest expense on higher balances
of outstanding debt and higher amortization of capitalized debt issuance costs,
offset in part by higher interest income.
Income Taxes
No provision for income taxes was recorded for the three month periods
ended September 30, 2000 and 1999, due to the Company's taxable loss position.
Net Loss
The Company recorded a net loss of $40,000 for the three months ended
September 30, 2000, compared to the net loss of $609,000 for the comparable
period of fiscal 2000. The improvement in results is primarily attributable to
improved margins on increased sales of bulk Spirulina Pacifica tablets and both
natural astaxanthin products.
SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1999
Net Sales
Net sales for the six month period ended September 30, 2000 were
$4,526,000, an increase of 46% from $3,095,000 in the comparable period of
fiscal 2000. This increase is primarily due to increased sales in all categories
of products.
International sales represented 55% and 48% of total net sales for the
six month periods ended September 30, 2000 and 1999, respectively.
Gross Profit
Gross profit increased 281% to $1,498,000 for the six month period
ended September 30, 2000, from $393,000 in the comparable period of fiscal 2000.
Our gross profit margin increased to 33% for the six month period ended
September 30, 2000, compared to 13% for the comparable period of fiscal 2000.
This increase in gross profit margin from the prior year period is primarily
attributable to greater sales of higher margin bulk Spirulina Pacifica tablets
and decreased production costs resulting from operating at more optimal
production levels.
Operating Expenses
Operating expenses were $1,373,000 during the six month period ended
September 30, 2000, a decrease of 4% from $1,431,000 in the comparable period of
fiscal 2000. This decrease was primarily due to decreased research and
development expenses, offset in part by increased sales and marketing expenses.
12
<PAGE>
Research and Development. Research and development expenses amounted
to $140,000 for the six month period ended September 30, 2000, a decrease of 57%
from $322,000 for the comparable period of fiscal 2000. This decrease from the
prior year was primarily due to reduced personnel expenditures, lower supply and
material costs and reduced outside service expenses resulting from suspension of
research work on the mosquitocide project and the Aldolase Catalytic Antibody
38C2 project during the third quarter of fiscal 2000.
Sales and Marketing. Sales and marketing expenses amounted to $529,000
for the six month period ended September 30, 2000, an increase of 37% from
$385,000 for the comparable period of fiscal 2000. This increase from the prior
year is due to increased sales consulting services, advertising and promotion
expenses and sales commissions.
Other Income (Expense)
Other expense amounted to $187,000 for the six month period ended
September 30, 2000, an increase of 91% from $98,000 for the same period of
fiscal 2000, primarily from an increase in interest expense on higher balances
of outstanding debt and higher amortization of capitalized debt issue costs,
offset in part by higher interest income.
Income Taxes
No provision for income taxes was recorded for the six month periods
ended September 30, 2000 and 1999 due to the Company's taxable loss position.
Net Loss
The Company recorded a net loss of $62,000 for the six months ended
September 30, 2000, compared to a net loss of $1,136,000 for the comparable
period of fiscal 2000. This improvement in results is primarily attributable to
improved margins on increased sales of bulk Spirulina Pacifica products and
natural astaxanthin products and, to a lesser degree, packaged consumer
products.
VARIABILITY OF RESULTS
The Company has experienced significant 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 our largest customers, new product introductions, production
difficulties, 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, foreign exchange fluctuations, the announcement or introduction of new
products by competitors, changes in our customer mix, overall trends in the
market for our products, government regulations and other factors beyond our
control. 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
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 financial
condition and results of operations.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Our working capital for the six month period ended September 30, 2000
increased by $2,683,000 to $4,777,000 from $2,094,000 at March 31, 2000,
primarily as a result of the convertible debenture and term loan transactions
that were completed during the quarter ended June 30, 2000. Compared to our cash
and cash equivalents of $405,000 at March 31, 2000, cash and cash equivalents
increased by $1,496,000 to $1,901,000 at September 30, 2000 and is primarily
attributable to cash flows provided by financing activities of $2,207,000.
Cash used in operating activities during the first six months of fiscal
2001 amounted to $541,000 compared to cash provided by operating activities of
$214,000 for the comparable period of fiscal 2000. The primary uses of cash
flows in operating activities during the first six months of fiscal 2001 were
payments on outstanding current liabilities and an increase of finished goods
inventories in anticipation of increased sales.
Cash used in investing activities (for capital expenditures) during the
first six months of fiscal 2001 decreased slightly to $170,000 from $173,000 for
the comparable period of fiscal 2000.
Cash provided by financing activities during the first six months of
fiscal 2001 amounted to $2,207,000, compared to cash used in financing
activities of $143,000 for the comparable period of fiscal 2000. The primary
sources of cash flows in financing activities during the first six months of
fiscal 2001 were proceeds from completion of a new term loan agreement of
$3,500,000 and proceeds from issuance of convertible debentures of $1,250,000,
offset in part by repayment of long-term debt of $1,559,000, debt issuance costs
of $493,000 paid in connection with obtaining the term loan and issuing the
convertible debentures and the deposit of $500,000 in an interest-bearing
restricted cash account as required by the term loan agreement.
Term Loan Agreement
On April 21, 2000, the Company executed a Term Loan Agreement (Term
Loan) with a lender which provided for up to $3.5 million in credit facilities,
secured by substantially all the assets of the Company. The Term Loan has a
maturity date of May 1, 2010 and is payable in 120 equal monthly principal and
interest payments of approximately $48,000, commencing June 1, 2000. The
interest rate under this Term Loan, in the absence of a default under the
agreement, is the prime rate, as defined, in effect as of the close of business
on the first day of each calendar quarter, plus 1% (at April 21, 2000, the prime
rate was 9.5%, at September 30, 2000, the prime rate was 10.5%). Interest is
calculated on the unpaid balance of principal based on a normal amortization
schedule commencing May 1, 2000. $500,000 of the loan proceeds have been
deposited in an interest-bearing restricted cash account, by the terms of the
loan.
A warrant to purchase 20,000 shares of the Company's common stock was
issued in conjunction with this Term Loan agreement. The warrant expires in
April 2011 and has an exercise price of $2.55 per share. The warrant may only be
exercised after the Company has repaid the Term Loan in full.
On April 26, 2000, approximately $1,593,000 of the $3.5 million
proceeds from this Term Loan was used to repay the balance outstanding,
including interest and related fees, under the Loan and Security Agreement of
July 1998.
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Convertible Debentures
On May 2, 2000, the Company completed a private placement of $1,250,000
principal amount 6% convertible subordinated debentures due April 30, 2002. This
transaction provided net proceeds to the Company of approximately $1.1 million.
Interest on these debentures is payable quarterly, in arrears, on April 1, July
1, October 1, and January 2 in each year commencing on July 1, 2000, at a rate
of 6% per annum. The debentures are convertible into shares of common stock of
the Company at a conversion price equal to $1.50 per share, the market price of
the Company's common stock at the date of issuance. Warrants to purchase 83,334
shares of the Company's common stock were issued to the placement agent of the
debentures, exercisable for five years from the issue date, at $1.80 per share.
The Company believes that working capital provided by its Term Loan
Agreement, convertible debentures and estimated cash flows from operations will
be sufficient to sustain operations for fiscal 2001.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believe that our exposure to
market risk associated with other financial instruments is not material.
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.
Cyanotech's strategy has been and continues to be, to produce higher
value natural products from microalgae.
During the six months ended September 30, 2000, the Company continued
its aquaculture industry sales efforts for NatuRose natural astaxanthin into
Chile and Japan. We believe that our efforts in both of these markets may lead
to increased sales of NatuRose in future periods. In August 2000, the Company
received approval from the United States Food and Drug Administration (FDA) for
the use of NatuRose natural astaxanthin as a color additive in the feed of
salmon and trout to enhance the color of their flesh. This approval allows
Cyanotech to sell NatuRose to US salmon and trout producers and to foreign
producers whose products are destined for the US market. Combined with recent
significant improvements in astaxanthin productivity, we intend to increase our
efforts to supply NatuRose to the worldwide aquaculture feed market.
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Our natural astaxanthin product for the human nutrition market,
BioAstin, was introduced in January 2000. The total market that human
astaxanthin products potentially could address is estimated to exceed $1.5
billion annually. Increased sales of BioAstin during the first six months of
this fiscal year contributed to the improvement in results compared to the
results of the first six months of the prior fiscal year. The Company has filed
patent applications for the use of natural astaxanthin in the treatment of fever
blisters (cold sores) and canker sores, carpal tunnel syndrome, ultraviolet (UV)
radiation (sunburn) sensitivity, and relief of muscle soreness. Our strategy is
to combine the results of clinical trials with patent protection and to develop
strategic alliances with companies that target the specific areas of our product
application. The Company has one clinical trial underway assessing the
effectiveness of BioAstin in relieving carpal tunnel syndrome. That
double-blind, randomized clinical trial is expected to produce preliminary
results by the end of the calendar year. We anticipate launching two new
clinical trials by the end of the calendar year to assess the effectiveness of
BioAstin for relief of delayed onset muscle soreness, which results from intense
physical activity, and as a systemic sunscreen for protection from ultraviolet
light. We will be monitoring the results of these studies closely to uncover
potential uses of BioAstin for other applications.
For the third quarter ending December 31, 2000, orders from Spirulina
International are expected to decrease significantly from the levels experienced
during the first two quarters of fiscal 2001, but orders are expected to
increase during the fourth quarter ending March 31, 2001. Spirulina
International has indicated that they expect to purchase Spirulina Pacifica
products from the Company at the same level, or greater, in calendar 2001, as
they did in calendar 2000, and that they expect their purchases to continue to
fluctuate from quarter to quarter in response to their seasonal business
conditions and other factors. Increased shipments to other customers are
expected to partially offset the decrease in shipments to Spirulina
International during the third quarter of fiscal 2001, but total net sales for
the quarter ending December 31, 2000 will probably be less than total net sales
reported in the second quarter ended September 30, 2000.
Due to our forecast of lower shipments in the third quarter and the
increased level of finished goods inventories, the Company took action at the
end of October 2000 to reduce production. As a result of production system
improvements implemented during the first six months of fiscal 2001, recent
organizational changes, and lower production level requirements, the Company was
able to eliminate six full-time production positions. This adjustment of
production resources is a continuation of the Company's ongoing asset management
program and does not affect the Company's ability to supply and service its
customers in the foreseeable future.
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; foreign exchange fluctuations;
shortage of manufacturing capacity; and other factors beyond our control.
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.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On July 13, 1998, the Company filed a complaint, (Case No. CV98-00600)
in United States District Court for the District of Hawaii (Court) against
Aquasearch, Inc. (Aquasearch), seeking declaratory judgement of patent
noninfringement, patent invalidity and non-misappropriation of trade secrets
relating to closed culture production of astaxanthin. The complaint was filed in
response to assertions by Aquasearch regarding its alleged intellectual property
rights. Aquasearch has answered the complaint and filed counter claims alleging
patent infringement, trade secret misappropriation, unfair competition and
breach of contract. The Court later granted Cyanotech's motion to amend its
complaint against Aquasearch to add claims of misappropriation of trade secrets
regarding open pond technology, unfair competition and breach of contract.
On December 30, 1999, the Court denied Cyanotech's motion for summary
judgment of non-infringement and patent invalidity as to Aquasearch's U.S.
Patent No. 5,541,056 and granted Aquasearch's partial summary judgment motion
finding that Cyanotech infringes its patent. The Court also granted Aquasearch's
partial summary judgment motion finding that Cyanotech misappropriated
Aquasearch trade secrets and committed a breach of contract. In response,
Cyanotech filed a motion for reconsideration on January 14, 2000, with the
Court. On March 3, 2000, United States District Court Judge Alan C. Kay denied
Cyanotech's motion for reconsideration.
On August 29, 2000, Cyanotech filed a motion for partial summary
judgment for the invalidity of the Aquasearch patent No. 5,541,056, based on
prior art. This motion is scheduled to be heard on December 4, 2000. Although
the resolution of this matter is uncertain, management does not expect that
damages, if any, against Cyanotech will have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Item 4. Submission of Matters to a Vote of Security Holders
On August 24, 2000, 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: Gerald R. Cysewski,
Eric H. Reichl, Ronald P. Scott, John T. Waldron and Paul C. Yuen,
all directors receiving at least 11,111,839 votes and there were no
more than 287,604 votes against or abstaining.
b) Ratification of the selection of KPMG LLP as the Company's
independent auditors for the fiscal year ending March 31, 2001.
For: 11,283,929 Against: 19,932 Abstaining: 95,582
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Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are furnished with this report:
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 2000.
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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 8, 2000 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)
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