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 June 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 July 31, 2000:
Title of Class Shares Outstanding
-------------- ------------------
Common stock - $.005 par value stock 15,837,297
<PAGE>
CYANOTECH CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Consolidated Balance Sheets (unaudited)
June 30, 2000 and March 31, 2000.............................3
Consolidated Statements of Operations (unaudited)
Three month periods ended
June 30, 2000 and 1999.......................................4
Consolidated Statements of Cash Flows (unaudited)
Three month periods ended
June 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.............................................15
Item 6. Exhibits and Reports on Form 8-K .............................15
SIGNATURES....................................................................16
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
CYANOTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except share amounts)
June 30, March 31,
2000 2000
ASSETS (Unaudited) (Audited)
Current assets: ----------- -----------
<S> <C> <C>
Cash and cash equivalents $ 2,070 $ 405
Accounts receivable, net 1,564 1,613
Refundable income taxes 162 154
Inventories (note 2) 1,756 1,609
Prepaid expenses 59 50
----------- -----------
Total current assets 5,611 3,831
Equipment and leasehold improvements, net (note 3) 15,495 15,746
Restricted cash 500 --
Other assets 668 112
----------- -----------
Total assets $ 22,274 $ 19,689
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 213 $ 186
Accounts payable 512 1,130
Accrued expenses 279 421
----------- -----------
Total current liabilities 1,004 1,737
Long-term debt, excluding current maturities
Term loan 3,271 1,307
Convertible debentures 1,250 --
----------- -----------
Total liabilities 5,525 3,044
----------- -----------
Stockholders' equity:
Cumulative preferred stock, Series C, of $.001
par value (aggregate involuntary liquidation
preference $1,855 ($5 per share), plus unpaid
cumulative dividends). Authorized 5,000,000
shares; issued and outstanding 371,031 shares at
June 30, 2000 and 471,031 shares at March 31,
2000 -- 1
Common Stock of $0.005 par value, authorized
25,000,000 shares; issued and outstanding
15,087,297 shares at June 30, 2000 and
14,582,297 shares at March 31, 1999 75 73
Additional paid-in capital 24,499 24,374
Accumulated deficit (7,825) (7,803)
----------- ------------
Total stockholders' equity 16,749 16,645
----------- ------------
Total liabilities and stockholders'
equity $ 22,274 $ 19,689
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
June 30,
---------------------------
2000 1999
----------- -----------
NET SALES $ 2,166 $ 1,599
COST OF PRODUCT SALES 1,462 1,332
----------- -----------
Gross Profit 704 267
OPERATING EXPENSES
Research and development 74 166
General and administrative 325 387
Sales and marketing 259 193
----------- -----------
Total operating expenses 658 746
----------- -----------
Income (loss) from operations 46 (479)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income 24 4
Interest expense (98) (55)
Other income, net 6 3
----------- -----------
Total other expense (68) (48)
----------- -----------
Loss before income taxes (22) (527)
Income taxes -- --
----------- -----------
NET LOSS $ (22) $ (527)
=========== ===========
NET LOSS PER COMMON SHARE
Basic $ 0.00 $ (0.04)
Diluted $ 0.00 $ (0.04)
SHARES USED IN CALCULATION OF:
Basic 14,951 13,610
Diluted 14,951 13,610
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
June 30,
----------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (22) $ (527)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 339 328
Amortization of debt issue costs 23 --
Net (increase) decrease in:
Accounts receivable 49 (104)
Inventories (147) 181
Refundable income taxes (8) --
Prepaid expenses and other assets 20 16
Net increase (decrease) in:
Accounts payable (618) 93
Accrued expenses (142) (106)
----------- -----------
Net cash used in operating activities (506) (119)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements (87) (62)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of term loan 3,500 --
Proceeds from issuance of convertible debentures 1,250 --
Net proceeds from exercise of stock options 5 28
Net proceeds from issuance of common stock -- 99
Principal payments on long-term debt (1,509) (50)
Debt issue costs (488) --
Restricted cash requirement (500) --
Repayment of borrowings on short-term revolving line of
credit -- 63
Principal payments on capital lease obligation -- (23)
----------- -----------
Net cash provided by (used in) financing activities 2,258 (9)
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,665 (190)
Cash and cash equivalents at beginning of period 405 323
----------- -----------
Cash and cash equivalents at end of period $ 2,070 $ 133
=========== ===========
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
June 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
subsidiaries, Nutrex, Inc. and Cyanotech International FSC, Inc. All
significant intercompany balances and transactions have been eliminated
in consolidation. While the financial information furnished as of and
for the three month period ended June 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.
As the Company's operations are solely related to microalgae-based
products, management considers its operations to be one industry
segment.
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):
June 30, 2000 March 31, 2000
-------------- --------------
Raw materials $ 72 $ 72
Work in process 227 278
Finished goods 1,188 1,060
Supplies 269 199
-------------- --------------
$ 1,756 $ 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 improvements 10 to 26 years
Furniture and fixtures 7 years
Equipment and leasehold improvements consist of the following (dollars
in thousands):
<TABLE>
<CAPTION>
June 30, 2000 March 31, 2000
--------------- ---------------
<S> <C> <C>
Equipment $ 8,990 $ 8,961
Leasehold improvements 13,664 13,642
Furniture and fixtures 83 83
--------------- --------------
22,737 22,686
Less accumulated depreciation and amortization (7,722) (7,383)
Construction in-progress 480 443
--------------- --------------
Equipment and leasehold improvements, net $ 15,495 $ 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
June 30, 2000 amount to $1,636 ($4.41 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 April 2000, 100,000 shares of Series C preferred stock was converted
into 500,000 shares of common stock.
7
<PAGE>
5. EARNINGS (LOSS) PER SHARE
For the three months ended June 30, 2000 and 1999, warrants and options
to purchase Common Stock 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 months ended June 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
June 30, 2000, warrants and options to acquire 918,430 shares of the
Company's common stock, preferred stock convertible into 1,855,155
shares of the Company's common stock and debentures convertible into
833,333 shares of the Company's common stock were outstanding. As of
June 30, 1999, warrants and options to acquire 802,300 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>
June 30, June 30,
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE 2000 1999
----------- -----------
<S> <C> <C>
Net loss $ (22) $ (527)
Less: Requirement for Preferred Stock dividends (39) (60)
----------- -----------
Loss available to Common stockholders $ (61) $ (587)
=========== ===========
Weighted average Common Shares outstanding 14,951,363 13,610,241
=========== ===========
Net loss per Common Share $ 0.00 $ (0.04)
=========== ===========
</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. 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. Adoption of
FASB Interpretation No. 44 is not expected to have a material effect on
the Company's 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
operations data as a percentage of net sales for the periods indicated:
Three Months Ended
June 30,
2000 1999
------- -------
Net Sales 100.0 % 100.0 %
Cost of product sales 67.5 83.3
------- -------
Gross profit 32.5 16.7
------- -------
Operating expenses:
Research and development 3.4 10.4
General and administrative 15.0 24.2
Sales and marketing 12.0 12.1
------- -------
Total operating expenses 30.4 46.7
------- -------
Income (loss) from operations 2.1 (30.0)
------- -------
Other income (expense):
Interest income 1.1 0.2
Interest expense (4.5) (3.4)
------- -------
Other income, net 0.3 0.2
------- -------
Total other expense (3.1) (3.0)
------- -------
Loss before income taxes (1.0) (33.0)
Income taxes -- --
------- -------
Net Loss (1.0)% (33.0)%
======= =======
10
<PAGE>
FIRST QUARTER OF FISCAL 2001 COMPARED TO FIRST QUARTER OF FISCAL 2000
Net Sales
Net sales for the three month period ended June 30, 2000 were
$2,166,000, an increase of 35% from $1,599,000 recorded in the comparable period
in fiscal 2000. This increase is primarily due to increased sales of bulk
Spirulina powder, natural astaxanthin products and packaged Spirulina products,
partially offset by decreased sales of bulk Spirulina tablets. The decrease in
bulk Spirulina tablet sales was primarily due to lower sales to our largest
customer, a European distributor of natural products. Sales to this customer,
Spirulina International, B.V., accounted for 13 % and 26% of total net sales for
the three month periods ended June 30, 2000 and 1999, respectively.
International sales represented 48% and 53% of net sales for the three
month periods ended June 30, 2000, and 1999, respectively. Although
international sales decreased as a percent of total sales, international sales
increased 21% for the three month period ended June 30, 2000 compared to the
comparable period in fiscal 2000, due to increased total sales volume.
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 $704,000
for the three months ended June 30, 2000, an increase of 164% from $267,000 in
the comparable period of fiscal 2000. Our gross profit margin increased to 33%
for the three month period ended June 30, 2000, compared to 17% for the
comparable period of fiscal 2000. This increase in gross profit from the prior
year period is primarily attributable to improved margins on increased sales of
natural astaxanthin products and packaged Spirulina consumer products.
Operating Expenses
Operating expenses were $658,000 during the three month period ended
June 30, 2000, a decrease of 12% from $746,000 in the comparable period of
fiscal 2000. This decrease was primarily due to reduced research and development
and general and administrative expenses, partially offset by increased sales and
marketing costs.
Research and Development. Research and development expenses amounted to
$74,000 for the three month period ended June 30, 2000, a decrease of 55% from
$166,000 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 and consulting expenses totaling
approximately $90,000 in the aggregate, 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 $259,000
for the three month period ended June 30, 2000, an increase of 34% from $193,000
for the comparable period of fiscal 2000. This increase from the prior year is
primarily due to increased expenditures for sales consulting services and
increased advertising and promotion expenses totaling approximately $62,000 in
the aggregate.
11
<PAGE>
General and Administrative. General and administrative expenses
amounted to $325,000 for the three month period ended June 30, 2000, a decrease
of 16% from $387,000 for the comparable period of fiscal 2000. This decrease
from the prior year is primarily attributable to reduced legal fees, lower
travel expenses and reduced outside services totaling approximately $72,000,
offset in part by higher corporate administrative overhead amounting to
approximately $16,000.
Other Income (Expense)
Other expense amounted to $68,000 for the three month period ended June
30, 2000, an increase of 42% from $48,000 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.
Income Taxes
A provision for income taxes was not recorded in the three month
periods ended June 30, 2000 and 1999, due to the Company's taxable loss
position.
Net Loss
The Company recorded a net loss of $22,000 for the first quarter of
fiscal 2001, compared to the net loss of $527,000 for the comparable period of
fiscal 2000. The improvement in results is primarily attributable to improved
margins on increased sales of natural astaxanthin products and packaged
Spirulina products and reduced operating expenses.
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, 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 our financial condition and results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital at June 30, 2000 increased by $2,513,000 to
$4,607,000 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. Our cash and cash equivalents increased by
$1,665,000 to $2,070,000 at June 30, 2000 and is primarily attributable to cash
flows provided by financing activities of $2,258,000.
12
<PAGE>
Cash used in operating activities during the first three months of
fiscal 2001 increased by $387,000 to $506,000 compared to cash used in operating
activities of $119,000 in the comparable period of fiscal 2000. The primary use
of cash flows in operating activities during the first three months of fiscal
2001 was to satisfy outstanding current liabilities.
Cash used in investing activities (for capital expenditures) during the
first three months of fiscal 2001 increased slightly to $87,000 compared to
$62,000 for the comparable period of fiscal 2000.
Cash provided by financing activities during the first three months of
fiscal 2001 amounted to $2,258,000, compared to cash used in financing
activities of $9,000 for the comparable period of fiscal 2000. The primary
sources of cash flows in financing activities during the first quarter 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 $1,509,000, debt issuance costs of
$488,000 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 June 30, 2000, the prime rate was 10%). 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 per 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.
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.
13
<PAGE>
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.
The Company continues to experience efficiencies from the downsizing
and asset management program initiated during the fourth quarter of fiscal 1999.
Gross margin on sales of astaxanthin products continues to improve due primarily
to production efficiencies resulting from the optimization program begun in
April 1999. Increased demand for Spirulina products and natural astaxanthin
products for animal and human markets continues to result in year-to-year sales
growth.
During the three months ended June 30, 2000, the Company continued its
aquaculture industry sales efforts for NatuRose(R) 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.
Our natural astaxanthin product for the human nutrition market,
BioAstin(TM), was introduced in January 2000. The potential market for human
astaxanthin products is estimated to exceed $1.5 billion annually. Increased
sales of BioAstin during the first quarter of this fiscal year contributed to
the improvement in results compared to the results of the first quarter 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. Patent filings contribute to our business goal
of developing proprietary positions for our present and future products and
support our strategic plan. 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. During the last month
of fiscal 2000, we initiated a clinical trial for the effects of BioAstin on
carpal tunnel syndrome and have plans for other clinical trials on
ultraviolet radiation and muscle soreness. We will be monitoring the results
of these studies closely to uncover potential uses of BioAstin for other
applications. Cyanotech's strategy has been, and continues to be, to produce
higher value natural products from microalgae.
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
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 other factors beyond our control.
14
<PAGE>
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.
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, a competitor in the astaxanthin market,
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. 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 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 June 30, 2000.
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<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)
August 11, 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)
16
