PROFILE
Cyanotech Corporation produces high-value natural products from microalgae, and
is the world's largest commercial producer of natural astaxanthin from
microalgae. Products include BioAstinTM, a natural astaxanthin product for use
as human nutritional supplement; NatuRose(R) natural astaxanthin used worldwide
in the aquaculture and animal feed industry; Spirulina Pacifica(R), a nutrient-
rich dietary supplement; and phycobiliproteins, which are fluorescent pigments
used in the immunological diagnositics market. Corporate and product information
is available at http://www.cyanotech.com
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SELECTED FINANCIAL DATA
Years ended March 31,
($ in thousands, except per share data) 2000 1999 1998 1997 1996
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RESULTS OF OPERATIONS
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Net sales $ 7,398 $ 6,738 $ 7,627 $ 11,399 $ 8,081
Gross profit 1,503 973 3,137 6,809 4,563
Impairment of long-lived assets 2,796 -- -- -- --
Income (loss) from operations (a) (4,312) (2,642) (300) 3,751 2,571
Net income (loss) (a) (4,485) (2,557) (300) 4,159 2,509
Net income (loss) per common share
Basic (a) $ (0.34) $ (0.21) $ (0.05) $ 0.31 $ 0.22
Diluted (a) $ (0.34) $ (0.21) $ (0.05) $ 0.25 $ 0.17
Average Shares Outstanding
Basic 13,775 13,602 12,909 12,583 9,583
Diluted 13,775 13,602 12,909 16,598 14,502
SELECTED BALANCE SHEET DATA
Cash and investment securities $ 405 $ 323 $ 1,397 $ 6,729 $ 9,409
Working capital 2,094 917 2,596 9,065 9,749
Total assets 19,689 23,621 25,667 26,015 19,716
Long-term debt and capital lease
obligations, excluding current
maturities 1,307 13 129 559 838
Stockholders' equity 16,645 20,707 23,174 23,335 17,316
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(a) Loss from operations, net loss and net loss per common share for the
year ended March 31, 2000 reflect the effect of an asset impairment charge of
$2,796. For further detail, see the sections "Operating Expenses-Impairment
of Long-Lived Assets" and "Liquidity and Capital Resources" in Management's
Discussion and Analysis of Financial Condition and Results of Operations from
the Company's fiscal 2000 Annual Report.
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CHART
TO OUR STOCKHOLDERS
Fiscal 2000 was a turnaround period for Cyanotech. The actions we took during
the year, and previously, to cut costs and increase revenues have begun to
result in steady improvements in performance.
Cyanotech enters the new millenium well positioned to capitalize on what could
become sustained growth in demand for our innovative microalgae products.
WHY THIS OPTIMISM?
* Cyanotech is clearly a leader in microalgae production and the only large
commercial producer of natural astaxanthin from microalgae. We have operated
our production facility on a consistent basis since 1985 and have the capacity
to deliver a large volume of high-margin products. We also control additional
acreage to quickly increase our production capacity.
* We have a broader product base than ever before with our Spirulina Pacifica
nutritional supplement and our two natural astaxanthin products -- NatuRose for
animal pigmentation and BioAstin for human nutritional needs.
* We are developing a broader customer base worldwide with sales reaching
throughout North and South America, Europe, Asia and the Indian subcontinent.
International business represents about 50% of net sales.
Our program to commercialize microalgae production and to emerge as a company
with multiple market-leading products has been successful. We believe Cyanotech
is leveraged to increase sales and production quickly, substantially and
profitably.
SPIRULINA DEMAND GROWING AGAIN
Cyanotech's Spirulina product is the leader in quality. Because of this, we
experienced an increase in demand from existing as well as new customers during
fiscal 2000. Recently, we completed a preliminary agreement to supply a company
marketing Spirulina in India, a country with an estimated 200 million middle
and upper income consumers.
NATUROSE ACCEPTANCE INCREASING
With numerous feeding trials successfully completed, NatuRose is becoming
generally accepted in the aquaculture industry as a "natural" pigment source.
Prices of synthetic astaxanthin are lower than NatuRose prices, but we have
decided to maintain a price level consistent with our product's quality for
aqualculture producers seeking a natural pigment.
Although we had planned for NatuRose to become a key driver of our business, the
development of our higher-margin human astaxanthin product has caused us to
place NatuRose in the perspective of an active part of a broader product mix.
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BIOASTIN: EXTRAORDINARY PROMISE
We launched BioAstin in August 1999 after receipt of clearance by the Food and
Drug Administration (FDA) to market it for human nutritional use and began
marketing directly in January 2000. The response to the product has been
enthusiastic and is growing.
While not a panacea, BioAstin appears to have several beneficial effects on
human health. We are in the process of securing patent protection for four of
these health benefits, including amelioration of carpal tunnel syndrome,
protection from sunburn by ultraviolet rays, treatment of fever blisters (cold
sores) and canker sores, and reduction of muscle soreness after strenuous
exercise.
In June 2000, we initiated our first clinical trial for BioAstin to establish
the beneficial effect for carpal tunnel syndrome. A successful completion of the
trial will allow us to petition the FDA to make a label claim for that benefit.
As the world's largest producer of natural astaxanthin, our intent is to secure
a proprietary position for major health claims and develop a unique line of
products that address specific health concerns. Validation of BioAstin's value
for human nutrition should allow us to finalize distribution alliances with
major end-product manufacturers and place BioAstin fully in the marketplace.
GROWTH GOING FORWARD
Cyanotech has achieved a sounder financial condition to pursue its growth
objectives. In April 2000, we refinanced a $1.6-million credit facility with a
$3.5-million, 10-year term loan at market rate. In May 2000, we completed a
private placement of convertible subordinated debentures providing $1.1 million
in net proceeds.
We are operating 67 culture ponds on 90 acres with all systems working well, and
are continuing to increase efficiency and productivity. We are also seeking to
balance sales among our products and by product type to achieve higher margins
overall. Depending upon this mix, our 90 acres could generate from $12 million
to $35 million or more in annual revenue.
We control an adjacent 93 acres that have been partially graded for new culture
ponds. These ponds and added infrastructure would cost about $18 million to
fully complete. If the current sales trend continues, we hope to begin expanding
onto a portion of this acreage in fiscal 2001 using internally generated funds,
if available. Depending on the product mix, this additional acreage could
potentially generate in excess of $35 million in annual revenue when fully
developed.
We look forward to reporting positive results as the year progresses.
Gerald R. Cysewski, Ph.D.
Chairman, President and CEO
June 27, 2000
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations data
as a percentage of net sales for the periods indicated.
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YEARS ENDED MARCH 31, 2000 1999 1998
------------------- ----------------- ------------------
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 79.7 85.6 58.9
------------------- ----------------- ------------------
Gross Profit 20.3 14.4 41.1
------------------- ----------------- ------------------
OPERATING EXPENSES:
Research and development 7.0 13.3 8.8
General and administrative 21.3 26.5 17.3
Sales and marketing 12.5 13.8 18.9
Impairment of long-lived assets 37.8 -- --
------------------- ----------------- ------------------
Total operating expenses 78.6 53.6 45.0
------------------- ----------------- ------------------
Loss from operations (58.3) (39.2) (3.9)
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OTHER INCOME (EXPENSE):
Interest income 0.1 0.2 2.6
Interest expense (3.8) (2.6) (0.4)
Other income (expense), net 1.1 (0.6) 0.1
------------------- ----------------- ------------------
Total other income (expense) (2.6) (3.0) 2.3
------------------- ----------------- ------------------
Loss before income taxes (60.9) (42.2) (1.6)
Income taxes 0.3 4.3 (2.3)
------------------- ----------------- ------------------
Net loss (60.6)% (37.9)% (3.9)%
=================== ================= ==================
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FISCAL 2000 COMPARED TO FISCAL 1999
Net Sales
Net sales for the year ended March 31, 2000 were $7,398,000, a increase of 9.8%
from net sales of $6,738,000 for the year ended March 31, 1999. The increase in
net sales during the year ended March 31, 2000 is primarily due to increased
sales of bulk Spirulina tablets and natural astaxanthin products (both
NatuRose and BioAstin, offset in part by lower sales of bulk Spirulina powder
and packaged consumer products.
International sales represented 46% and 40% of total net sales for the
year ended March 31, 2000 and 1999, respectively. This increase was primarily
due to higher sales of bulk Spirulina products to Spirulina International, BV, a
Spirulina marketing and distribution company based in the Netherlands. Sales to
this customer accounted for 23% of net sales for the year ended March 31, 2000,
compared to 11% for the year ended March 31, 1999, and less than 10% for the
year ended March 31, 1998.
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 20.3% of net sales for
the year ended March 31, 2000, from 14.4% of net sales for the year ended March
31, 1999. This improvement in gross profit from the prior year is primarily
attributable to increased sales of higher margin bulk tablets and decreased
natural astaxanthin production costs, offset in part by increased Spirulina
production costs related to operating at limited production levels which were
below optimal manufacturing efficiency during the first six months of fiscal
2000.
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Operating Expenses
Operating expenses for the year ended March 31, 2000 increased to $5,815,000, an
increase of 60.9% from the $3,615,000 of operating expenses reported for the
year ended March 31, 1999, primarily due to the recognition of an asset
impairment charge of $2,796,000, related to the Company's strategic decision to
discontinue joint venture negotiations with Norsk Hydro ASA (Norsk Hydro). In
accordance with the provisions of Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," the
Company was obligated to record the asset impairment charge on the construction-
in-progress balance related to the 93-acre astaxanthin expansion project. If the
effect of this impairment charge is omitted for the purposes of comparison,
operating expenses during the year ended March 31, 2000 amounted to $3,019,000,
a decrease of 16.5% from $3,615,000 recorded for the year ended March 31, 1999.
Research and Development Expenditures for research and development
decreased 42.6 % to $514,000 for the year ended March 31, 2000, from $895,000
for the year ended March 31, 1999. The decrease from the prior year resulted
primarily from reduced personnel expenditures and lower outside service expenses
due to completion of development work to improve production technology for
natural astaxanthin during the prior fiscal year, and suspension of research
work on the mosquitocide project and the Aldolase Catalytic Antibody 38C2
project.
General and Administrative General and administrative expenses
decreased 11.7% to $1,578,000 for the year ended March 31, 2000, from
$1,788,000 for the year ended March 31, 1999. The decrease from the prior year
is primarily due to lower legal costs related to the ongoing patent litigation
with Aquasearch, Inc. (Aquasearch), (see Note 13, "Commitments and
Contingencies" in Notes to Consolidated Financial Statements).
Sales and Marketing Sales and marketing expenses decreased slightly to
$927,000 for the year ended March 31, 2000, from $932,000 for the year ended
March 31, 1999.
Impairment of Long-Lived Assets In June 1999, we reached a preliminary
agreement with Norsk Hydro to produce and market NatuRose natural astaxanthin
product in a joint venture that would be owned 51% by Norsk Hydro and 49% by
Cyanotech. The intention of the joint venture was to build and operate a
NatuRose production facility in Kailua-Kona, Hawaii. While this arrangement was
being finalized, the Company continued to independently develop its natural
astaxanthin production technology and subsequently made significant
improvements. The Company decided not to finalize the joint venture
relationship.
As a result of the Company's decision to end the negotiations, the
projected future cash flows that were expected from the Norsk Hydro joint
venture were reduced to zero. In accordance with the provisions of SFAS
No. 121, an impairment loss is to be recognized whenever the projected future
cash flows from an asset are less than the carrying value of that asset. The
Company recorded a non-cash asset impairment charge of $2,796,000 on the
construction-in-progress balance related to this project. The impaired asset
consisted primarily of the accumulated cost of the grading work done on the
93-acre facility and construction contract termination costs incurred.
Other Expense
Other expense for the year ended March 31, 2000, did not change materially from
fiscal year 1999.
Income Taxes
The income tax benefit of $20,000 for the year ended March 31, 2000 represents
an adjustment to increase the estimated tax refund of Hawaii State income taxes
resulting from the carryback of net operating losses generated in fiscal 1999
and compares with $289,000 of income tax benefit recorded for the prior fiscal
year.
Net Loss
The Company recorded a net loss of $4,485,000 for the year ended March 31, 2000,
of which $2,796,000 represents the effect of the aforementioned asset impairment
charge. If the effect of this asset impairment charge is omitted for comparison
purposes, the Company recorded a loss of $1,689,000 for the year ended March 31,
2000, an improvement in results of 34% over the net loss of $2,557,000 for the
year ended March 31, 1999. This improvement in results is primarily attributable
to increased sales of bulk Spirulina products, decreased cost of product sales
and lower operating expenses.
5
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FISCAL 1999 COMPARED TO FISCAL 1998
Net Sales
Net sales for the year ended March 31, 1999 were $6,738,000, a decrease of 11.7%
from net sales of $7,627,000 for the year ended March 31, 1998. The decrease in
net sales during the year ended March 31, 1999 was primarily due to reduced
shipment volume of bulk Spirulina products, lower average selling prices for
bulk Spirulina products, and decreased sales of packaged consumer products.
Gross Profit
Gross profit decreased to 14.4% of net sales for the year ended March 31, 1999,
from 41.1% of net sales for the year ended March 31, 1998. This decrease in
gross profit from the prior year was primarily attributable to an increase in
depreciation expense of $391,000, costs associated with producing NatuRose at
limited production levels which were below optimal manufacturing efficiency,
lower per unit selling prices of bulk Spirulina, estimated product potency
losses in NatuRose finished goods inventory and increased Spirulina production
costs incurred in restarting previously idled Spirulina culture ponds.
Operating Expenses
Operating expenses for the year ended March 31, 1999 increased to $3,615,000, an
increase of 5.2% from the $3,437,000 of operating expenses reported for the year
ended March 31, 1998, primarily due to increased general and administrative and
research and development expenses, offset in part by reduced sales and marketing
expenses.
Research and Development Expenditures for research and development
increased 32.2 % to $895,000 for the year ended March 31, 1999, from $677,000
for the year ended March 31, 1998. The increase from the prior year was
primarily the result of research work done on the mosquitocide project, the
Aldolase Catalytic Antibody 38C2 project, additional costs related to new
product development and higher costs related to developing our PhytoDome CCS
closed culture technology.
General and Administrative General and administrative expenses
increased 35.7% to $1,788,000 for the year ended March 31, 1999, from $1,318,000
for the year ended March 31, 1998. The increase from the prior year was
primarily due to increased legal fees related to the ongoing patent litigation
with Aquasearch (see Note 13, "Commitments and Contingencies" in Notes to
Consolidated Financial Statements), and increased depreciation expense.
Sales and Marketing Sales and marketing expenses decreased 35.4% to
$932,000 for the year ended March 31, 1999, from $1,442,000 for the year ended
March 31, 1998. The decrease from the prior year was primarily due to reduced
personnel, advertising and consulting service expenditures dictated by lower
sales.
Other Income (Expense)
Other expense was $204,000 for the year ended March 31, 1999, compared to other
income of $175,000 for the year ended March 31, 1998, a difference of $379,000.
This resulted from a decrease in interest income due to a decrease in investment
securities and an increase in interest expense due to an increase in
outstanding, interest-bearing debt.
Income Taxes
The income tax benefit of $289,000 for the year ended March 31, 1999 represents
the estimated tax refund of Hawaii State income taxes resulting from the
carryback of net operating losses generated in fiscal 1999.
Net Loss
The Company recorded a net loss of $2,557,000 for the year ended March 31, 1999,
compared to a net loss of $300,000 for the year ended March 31, 1998. This
increase in net loss was primarily attributable to reduced sales of bulk
Spirulina powder and tablets, costs associated with producing NatuRose at
limited production levels which were below optimal manufacturing efficiency,
higher operating expenses, increased interest expense due to higher debt, and
decreased interest income.
6
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In February 1998, the Company reduced its workforce by approximately 25%
in order to better align resources with sales levels. The workforce reduction
was part of the Company's plans to enhance its competitive position through
improvements of operational productivity and cost reduction - specifically more
efficient utilization of assets and employees. Production operations, sales, and
administrative functions were restructured and downsized by this action.
VARIABILITY OF RESULTS
Cyanotech Corporation was formed in 1983 and did not become profitable on an
annual basis until fiscal 1992 (the twelve month period ended December 31,
1992). From fiscal 1992 through fiscal 1997, the Company had total net sales of
$29,401,000 and total net income of $7,931,000. In fiscal 1998, 1999 and 2000,
the Company had net sales of $7,627,000, $6,738,000 and $7,398,000 and net
losses of $300,000, $2,557,000 and $4,485,000, respectively. As of March 31,
2000, our accumulated deficit was $7,803,000. There can be no assurance that we
will return to generating profits on either a quarterly or an annual basis. We
have experienced significant 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, 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 our 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 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued 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 of 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. The Company
currently holds no derivative instruments, nor is it currently participating in
hedging activities. Management does not expect adoption of SFAS No. 133 will
have a material effect on the Company's financial condition, results of
operations or liquidity.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Our working capital at March 31, 2000 amounted to $2,094,000, an increase of
$1,177,000 from working capital of $917,000 at March 31, 1999. Our cash and cash
equivalents increased by $82,000 to $405,000, primarily from cash flows provided
by operations of $343,000, offset in part by cash used in investing and
financing activities of $179,000 and $82,000, respectively.
Cash flows provided by operating activities for the year ended March 31,
2000 amounted to $343,000 compared to cash flows used in operating activities of
$874,000 for the year ended March 31, 1999. The improvement in cash flows is due
primarily to an increase in net sales of $660,000 and decreases in research and
development expenses and general and administrative expenses of $381,000 and
$210,000, respectively, for the year ended March 31, 2000 compared to the year
ended March 31, 1999, offset in part by changes in current assets and
liabilities.
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Cash flows used in investing activities for the year ended March 31,
2000, which is net of $218,000 received from the sale of an office building,
decreased significantly to $179,000, down 69.6% from $588,000 for the year ended
March 31, 1999.
Cash flows used in financing activities amounted to $82,000 compared to
cash flows provided by financing activities of $388,000 for the year ended
March 31, 1999. The primary uses of cash flows in financing activities for the
year ended March 31, 2000 were principal payments on long-term debt of $213,000
and satisfaction of capital lease obligations of $67,000, offset in part by
proceeds of $237,000 from issuance of common stock and exercise of stock options
and warrants, net of issuance costs.
Line of Credit
In July 1998, the Company entered into a Loan and Security Agreement (Agreement)
with a lender which provided for up to $3 million in credit facilities, secured
by all the assets of the Company. The Agreement contained restrictive covenants,
which included among others, the maintenance of minimum consolidated net worth,
as defined, and an acceleration clause contingent upon the occurrence of an
event with a material adverse effect on the Company, as defined. On July 13,
1999, the lender gave notice to the Company of a default under the Agreement
because of the uncertainty of the Company's ability to continue as a going
concern. In view of this default, the lender exercised its right under the
Agreement effective July 13, 1999, to increase the interest rate on all
borrowings from prime plus 2.5% to prime plus 5.5%. Consequently, the Company
classified the aggregate outstanding balance on this Agreement of $1,644,000,
representing outstanding working capital loans on a revolving basis of $994,000,
and an equipment term loan of $650,000, as a current liability in the
consolidated balance sheet at March 31, 1999.
On October 8, 1999, the lender informed the Company of its intent to
terminate this Agreement, effective December 31, 1999, and accelerate the
repayment of all outstanding borrowings due to the Company being in default on
certain financial covenants. In January 2000, the lender amended the letter of
October 1999 and extended the termination date to March 31, 2000. In March 2000,
the lender provided an additional amendment in the form of a forbearance
agreement, which further extended the termination date of the Agreement to April
28, 2000. At March 31, 2000, the aggregate outstanding balance on this Agreement
amounted to $1,493,000, representing outstanding working capital loans on a
revolving basis of $993,000 and an equipment term loan of $500,000.
Term Loan Agreement - Subsequent Event
On April 21, 2000, the Company executed a Term Loan Agreement (Term Loan) with a
new lender which provided for $3.5 million in aggregate 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 agreement, 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%). Interest is calculated on the unpaid balance of principal based
on a normal amortization schedule commencing May 1, 2000.
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.
The Company has classified $186,000 of the outstanding balance of the previous
Agreement of $1,493,000 at March 31, 2000, as a current liability in the
consolidated balance sheet at March 31, 2000. This amount represents the current
portion of the Term Loan agreement due by March 31, 2001.
Convertible Debentures - Subsequent Event
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,
8
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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. A warrant to purchase 83,334
shares of the Company's common stock was issued to the placement agent of the
debentures, exercisable for five years from the issue date, at $1.80 per share.
Norsk Hydro Joint Venture
In June 1999, we reached a preliminary agreement with Norsk Hydro, to
produce and market NatuRose natural astaxanthin product in a joint venture.
During the third quarter of fiscal 2000, the Company decided not to finalize the
joint venture relationship. As a result of this strategic decision, the Company
recorded a non-cash asset impairment charge of $2,796,000 on the construction-
in-progress balance related to this project in accordance with the provisions of
SFAS No. 121. The impaired asset consisted primarily of the accumulated cost of
the grading work done on the 93-acre facility and construction contract
termination costs incurred. For further detail, see the section entitled
"Impairment of Long-Lived Assets," located on page 5 in Management's Discussion
and Analysis of Financial Condition and Results of Operation.
Construction Commitment
The Company has a commitment with a contractor for the 93-acre expansion project
which was suspended in February 1998. In June 1999, the Company reached an
agreement with the contractor to resume work on the suspended construction
project on or before June 1, 2000. In consideration for the extension of
contract, the Company agreed to pay an additional $20,000 at the startup of work
and a surcharge of 1.5% on work not completed by September 30, 1999 and a
surcharge of 4% on work not completed by September 30, 2000.
In September 1999, we reached a further agreement with this contractor
on terms for indefinite suspension or termination of our contract. This
agreement becomes effective only if the suspension agreement dated June 15,
1999, expires without a further agreement to continue the suspension. The
contractor has calculated the remaining balance due for work completed under the
contract to be $338,000. If the contract expires without a further agreement to
continue the suspension, we reached a settlement with the contractor to pay
$170,000 for such completed work. The $170,000 is included in accrued expenses
in the consolidated balance sheet at March 31, 2000. In the event we choose to
proceed with the project at a future date, the contractor reserves the right to
negotiate for escalation and remobilization cost increases. If we cannot come
to an agreement with the contractor for completion of the project, we may
proceed with an alternate contractor after paying the remaining $168,000 plus
interest.
On April 28, 2000, we reached an agreement with the contractor for a
modification of the terms of the suspension agreement dated September 1999. The
contractor has agreed to extend the date of resumption of work to December 1,
2000. In consideration for this modification, on May 2, 2000 we paid $85,000 of
the $170,000 remaining on the contract, with the balance of $85,000 to be paid
on or before December 1, 2000. Presently, the 93-acre expansion is dormant and
the ultimate decision to proceed with this expansion project is uncertain at
this time.
We believe working capital provided by our Term Loan agreement,
convertible debentures and estimated cash flows from operations will be
sufficient to sustain operations for fiscal 2001.
9
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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
The Company continues to experience efficiencies from the downsizing and asset
management program initiated during the fourth quarter of fiscal 1999. In the
last six months of fiscal 2000, our gross profit margin on sales of NatuRose
improved due primarily to production efficiencies resulting from the
optimization program begun in April 1999. We expect these benefits to continue
into future periods. We have also experienced improved sales during quarter
three and quarter four of fiscal 2000 due, in large part, to increased demand
for our Spirulina products.
During the last six months of fiscal 2000, the Company initiated sales
of its natural astaxanthin product into Chile, the world's second largest salmon
producing country, and continued its NatuRose sales in Japan. We believe that
our continued sales efforts in Japan, combined with sales into Chile, may lead
to increased sales of NatuRose.
The introduction of BioAstin in January 2000 improved results for the
fourth quarter of fiscal 2000. The market for human astaxanthin products is
estimated to exceed $1.5 billion annually. The Company has filed patent
applications for BioAstin on this product's use 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. By identifying
specific health benefits of our products, we can select applications that have
profit potential and support our proprietary position. 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 product
application. In March 2000, we initiated a clinical trial for the effects
of BioAstin on carpal tunnel syndrome and have plans for other clinical trials
on UV radiation protection and muscle soreness. We will be monitoring the
results of these studies closely to uncover potential uses of BioAstin for
other applications.
The Company's future results of operations and the other forward-
looking statements contained in the Outlook, in particular the statements
regarding revenues, gross margin, research and development, capital spending,
and clinical trials, 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 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.
10
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
March 31,
--------------------------
(in thousands, except share data) 2000 1999
---------- ----------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 405 $ 323
Accounts receivable, net of allowance for doubtful
receivables of $10 in 2000 and $12 in 1999 1,613 1,012
Refundable income taxes 154 273
Inventories 1,609 2,105
Prepaid expenses 50 105
---------- ----------
Total current assets 3,831 3,818
Equipment and leasehold improvements, net 15,746 19,623
Other assets 112 180
---------- ----------
Total assets $ 19,689 $ 23,621
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt $ 186 $ 700
Short-term revolving line of credit -- 994
Current maturities of capital lease obligations -- 67
Accounts payable 1,130 746
Accrued expenses 421 394
---------- ----------
Total current liabilities 1,737 2,901
Long-term debt, excluding current maturities 1,307 13
---------- ----------
Total liabilities 3,044 2,914
---------- ----------
Stockholders' equity:
Cumulative preferred stock, Series C, of $.001 par value
(aggregate involuntary liquidation preference $2,355
($5 per share), plus unpaid cumulative dividends).
Authorized 5,000,000 shares; issued and outstanding
471,031 in 2000 and 595,031 in 1999 1 1
Common stock of $.005 par value, authorized 25,000,000
shares at March 31, 2000 and 1999; issued and
outstanding 14,582,297 at March 31, 2000 and
13,603,572 shares at March 31, 1999 73 68
Additional paid-in capital 24,374 23,956
Accumulated deficit (7,803) (3,318)
---------- ----------
Total stockholders' equity 16,645 20,707
---------- ----------
Total liabilities and stockholders' equity $ 19,689 $ 23,621
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31,
------------------------------------------------------------
(in thousands, except for per-share data) 2000 1999 1998
============== ============= ============
<S> <C> <C> <C>
Net sales $ 7,398 $ 6,738 $ 7,627
Cost of sales 5,895 5,765 4,490
-------------- ------------- ------------
Gross profit 1,503 973 3,137
-------------- ------------- ------------
OPERATING EXPENSES:
Research and development 514 895 677
General and administrative 1,578 1,788 1,318
Sales and marketing 927 932 1,442
Impairment of long-lived assets 2,796 -- --
-------------- ------------- ------------
Total operating expenses 5,815 3,615 3,437
-------------- ------------- ------------
Loss from operations (4,312) (2,642) (300)
-------------- ------------- ------------
OTHER INCOME (EXPENSE):
Interest income 10 13 202
Interest expense, net of interest costs capitalized of nil in
2000 and 1999 and $114 in 1998 (282) (174) (35)
Other income (expense), net 79 (43) 8
-------------- ------------- ------------
Total other income (expense) (193) (204) 175
-------------- ------------- ------------
Loss before income taxes (4,505) (2,846) (125)
Income taxes 20 289 (175)
-------------- ------------- ------------
Net loss (4,485) (2,557) (300)
Undeclared Preferred Stock dividends (237) (238) (289)
-------------- ------------- ------------
Net loss available to Common stockholders $ (4,722) $ (2,795) $ (589)
============== ============= ============
Net loss per Common share
Basic $ (0.34) $ (0.21) $ (0.05)
============== ============= ============
Diluted $ (0.34) $ (0.21) $ (0.05)
============== ============= ============
Weighted average number of common shares outstanding
Basic 13,775 13,602 12,909
============== ============= ============
Diluted 13,775 13,602 12,909
============== ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended March 31, 2000, 1999 and 1998
Preferred Stock Common Stock
--------------- ------------
Additional Total
Number Par Number Par paid-in Accumulated Stockholders'
(in thousands, except share data) of shares value of shares value capital deficit equity
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at March 31, 1997 734,977 $ 1 12,712,682 $ 63 $ 23,732 $ (461) $ 23,335
Exercise of common stock warrants for
cash -- -- 107,880 1 43 -- 44
Exercise of stock options for cash -- -- 84,750 1 102 -- 103
Common stock purchased and
cancelled -- -- (13,470) -- (55) -- (55)
Issuance of common stock to
nonemployee directors for
services, at fair value -- -- 8,000 -- 47 -- 47
Exchange of Series C preferred stock
for common stock (139,946) -- 699,730 3 (3) -- --
Net loss -- -- -- -- -- (300) (300)
--------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1998 595,031 1 13,599,572 68 23,866 (761) 23,174
Issuance of stock options to
consultant for services,
at fair value -- -- -- -- 84 -- 84
Issuance of common stock to
nonemployee directors for
services, at fair value -- -- 4,000 -- 6 -- 6
Net loss -- -- -- -- -- (2,557) (2,557)
--------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1999 595,031 1 13,603,572 68 23,956 (3,318) 20,707
Exercise of stock options for cash -- -- 21,650 -- 20 -- 20
Common stock purchased and
cancelled -- -- (2,603) -- (3) -- (3)
Issuance of common stock warrants
for services, at fair value -- -- -- -- 19 -- 19
Issuance of common stock to
nonemployee directors for
services, at fair value -- -- 32,756 -- 35 -- 35
Issuance of common stock for services
and rent, at fair value -- -- 130,922 1 131 -- 131
Common stock issued for cash, net of
costs of $2 -- -- 203,000 1 219 -- 220
Exchange of Series C preferred stock
for common stock (124,000) -- 620,000 3 (3) -- --
Net loss -- -- -- -- -- (4,485) (4,485)
--------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 2000 471,031 1 14,582,297 73 24,374 (7,803) 16,645
================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended March 31,
-----------------------------------------
(In thousands) 2000 1999 1998
========= ========= =========
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $ (4,485) $ (2,557) $ (300)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Deferred income taxes -- -- 373
Depreciation and amortization 1,310 1,405 978
Impairment of long-lived assets 2,796 -- --
Loss (gain) on disposal of assets (50) 104 --
Amortization of debt issue costs 93 19 --
Issuance of common stock, warrants and options
in exchange for services 186 90 47
Net (increase) decrease in assets:
Accounts receivable (601) 115 1,664
Refundable income taxes 119 (154) (119)
Inventories 496 124 (1,091)
Prepaid expenses and other assets 68 4 67
Net increase (decrease) in liabilities:
Accounts payable 384 (192) (570)
Other accrued liabilities 27 122 (61)
Other -- 46 --
--------- --------- ---------
Net cash provided by (used in) operating activities 343 (874) 988
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements (397) (588) (5,881)
Proceeds from sale of capital assets 218 -- --
Proceeds from sales and maturities of investment securities -- -- 3,954
--------- --------- ---------
Net cash used in investing activities (179) (588) (1,927)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and exercise of stock options
and warrants, net of issuance costs 237 -- 92
Proceeds from issuance of long-term debt -- 750 --
Principal payments on long-term debt (213) (149) (401)
Debt issue costs (38) (103) --
Borrowings (repayment) on short term revolving line of credit, net (1) 994 --
Principal payments on note payable -- (975) --
Principal payments on capital lease obligations (67) (129) (130)
--------- --------- ---------
Net cash provided by (used in) financing activities (82) 388 (439)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 82 (1,074) (1,378)
Cash and cash equivalents at beginning of year 323 1,397 2,775
--------- --------- ---------
Cash and cash equivalents at end of year $ 405 $ 323 $ 1,397
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest, net of amounts capitalized $ 190 $ 160 $ 35
========= ======== =========
Cash paid during the year for income taxes $ -- $ -- $ 56
========= ======== =========
Non-cash investing and financing activity:
Issuance of note payable for construction in progress $ -- $ -- $ 975
========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(all amounts in thousands, except share data)
Note 1 DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
(a) Description of Business
Cyanotech Corporation (Company) develops and commercializes natural products
from microalgae. The Company is currently producing microalgae products for the
nutritional supplement, aquaculture feed/pigments and immunological diagnostics
markets.
(b) Principles of Consolidation
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.
(c) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid debt securities purchased with original or remaining
maturities of three months or less to be cash equivalents.
(d) Inventories
Inventories are stated at the lower of cost (which approximates first-in,
first-out) or market. Market is determined by net realizable value.
(e) 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 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 equipment and furniture and fixtures, the shorter
of the lease terms or estimated useful lives for leasehold improvements and the
lease terms or estimated useful lives for equipment under capital lease as
follows:
<TABLE>
<CAPTION>
<S> <C>
Equipment 3 to 10 years
Leasehold improvements 10 to 26 years
Furniture and fixtures 7 years
Equipment under capital lease 10 years
</TABLE>
Amortization of equipment under capital lease is included in depreciation and
amortization expense in the accompanying consolidated financial statements.
15
<PAGE>
(f) Earnings Per Share
Following is a reconciliation of the numerators and denominators of the Basic
and Diluted net loss per Common Share computations for the periods presented (in
thousands except share data):
<TABLE>
<CAPTION>
Years ended March 31, 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------
BASIC LOSS PER SHARE
<S> <C> <C> <C>
Net loss $ (4,485) $ (2,557) $ (300)
Requirement for Preferred Stock dividends (237) (238) (289)
-------------- -------------- --------------
Net loss available to Common stockholders $ (4,722) $ (2,795) $ (589)
============== ============== ==============
Weighted average Common Shares outstanding 13,775,000 13,602,000 12,909,000
============== ============== ==============
Net loss per Common Share $ (0.34) $ (0.21) $ (0.05)
============== ============== ==============
DILUTED LOSS PER SHARE
Net loss available to Common stockholders $ (4,722) $ (2,795) $ (589)
============== ============== ==============
Weighted average Common Shares outstanding 13,775,000 13,602,000 12,909,000
Effect of dilutive securities
Stock options and warrants -- -- --
Convertible preferred stock -- -- --
-------------- -------------- --------------
Weighted average Common Shares outstanding, as adjusted 13,775,000 13,602,000 12,909,000
============== ============== ==============
Net loss per Common share $ (0.34) $ (0.21) $ (0.05)
============== ============== ==============
</TABLE>
For the years ended March 31, 2000, 1999 and 1998, warrants and options to
purchase Common Stock shares of the Company and convertible preferred stock were
outstanding, but were not included in the 2000, 1999 or 1998 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. As of
March 31, 2000, warrants and options to acquire 842,796 shares of the Company's
common stock and preferred stock convertible into 2,355,155 shares of the
Company's common stock were outstanding. As of March 31, 1999, warrants and
options to acquire 600,375 shares of the Company's common stock and preferred
stock convertible into 2,975,155 shares of the Company's common stock were
outstanding. As of March 31, 1998, warrants and options to acquire 431,725
shares of the Company's common stock and preferred stock convertible into
2,975,155 shares of the Company's common stock were outstanding.
(g) Research and Development
Research and development costs are expensed as incurred. Research and
development costs amounted to $514, $895, and $677 in 2000, 1999 and 1998
respectively.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(i) Stock Option Plan
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations, in accounting for its fixed plan
stock options issued to employees and nonemployee directors. As such,
compensation expense would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. The Company
applies the fair value-based method of accounting prescribed by Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," in accounting for its fixed plan stock options issued to outside
third parties other than nonemployee directors. As such, expenses representing
the fair value of stock-based awards on the date of grant are recognized over
the vesting period.
16
<PAGE>
(j) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
The Company accounts for long-lived assets in accordance with the provisions of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured as the amount the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
(k) Segment Information
As the Company's operations are solely related to microalgae-based products,
management considers its operations to be one industry segment.
(l) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principals 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.
(m) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued 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 of 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. The Company currently holds no derivative instruments, nor is it
currently participating in hedging activities. Management does not expect
adoption of SFAS No. 133 will have a material effect on the Company's financial
condition, results of operations or liquidity.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) Accounting Standards Executive Committee issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which requires that certain costs, including
certain payroll and payroll-related costs, be capitalized and amortized over
the estimated useful life of the software. The provisions of SOP 98-1 are
effective for fiscal years beginning after December 15, 1998. The Company
adopted the provisions of SOP 98-1 effective April 1, 1999. The adoption of SOP
98-1 did not have a material effect on the Company's financial condition,
results of operations or liquidity.
In April 1998, the AICPA Accounting Standards Executive Committee
issued SOP 98-5, "Reporting on the Costs of Start-up Activities." SOP 98-5
requires that costs of start-up activities, including organization costs, be
expensed as incurred. The provisions of SOP 98-5 are effective for fiscal years
beginning after December 15, 1998 and earlier application is encouraged. The
Company adopted the provisions of SOP 98-5 effective April 1, 1999. The adoption
of SOP 98-5 did not have a material effect on the Company's financial condition,
results of operations or liquidity.
(n) Reclassifications
Certain reclassifications have been made to the March 31, 1999 and 1998
consolidated financial statements to conform to the classifications used in the
March 31, 2000 consolidated financial statements. Such reclassifications had no
effect on previously reported results of operations.
17
<PAGE>
NOTE 2 INVENTORIES
Inventories consists of the following as of March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
--------------- ---------------
<S> <C> <C>
Raw materials $ 72 $ 63
Work in process 278 287
Finished goods 1,060 1,555
Supplies 199 200
--------------- ---------------
$ 1,609 $ 2,105
=============== ===============
</TABLE>
NOTE 3 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Equipment and leasehold improvements consists of the following as of March 31,
2000 and 1999:
<TABLE>
<CAPTION>
2000 1999
--------------- -----------------
<S> <C> <C>
Equipment $ 8,961 $ 8,421
Leasehold improvements 13,642 13,779
Furniture and fixtures 83 83
Equipment under capital lease -- 388
--------------- ---------------
22,686 22,671
Less accumulated depreciation and amortization (7,383) (6,107)
Construction in-progress 443 3,059
--------------- ---------------
Equipment and leasehold improvements, net $ 15,746 $ 19,623
=============== ===============
</TABLE>
At March 31, 1999, construction-in-progress included $2,643 of costs incurred on
a construction project on a 93-acre parcel. The Company has a commitment with a
contractor for this 93-acre expansion project which was suspended in February
1998. In June 1999, the Company reached an agreement with the contractor to
resume work on the suspended construction project on or before June 1, 2000. In
consideration for the extension of contract, the Company agreed to pay an
additional $20 at the startup of work and a surcharge of 1.5% on work not
completed by September 30, 1999 and a surcharge of 4% on work not completed by
September 30, 2000.
In September 1999, the Company reached a further agreement with this
contractor on terms for indefinite suspension or termination of our contract.
This agreement becomes effective only if the suspension agreement dated June 15,
1999, expires without a further agreement to continue the suspension. The
contractor has calculated the remaining balance due for work completed under the
contract to be $338. If the contract expires without a further agreement to
continue the suspension, the Company reached a settlement with the contractor to
pay $170 for such completed work. The $170 is included in accrued expenses in
the consolidated balance sheet at March 31, 2000. In the event the Company
chooses to proceed with the project at a future date, the contractor reserves
the right to negotiate for escalation and remobilization cost increases. If the
Company cannot come to an agreement with the contractor for completion of the
project, it may proceed with an alternate contractor after paying the remaining
$168 plus interest.
On April 28, 2000, the Company reached an agreement with the contractor
for a modification of the terms of the suspension agreement dated
September 1999. The contractor has agreed to extend the date of resumption of
work to December 1, 2000. In consideration for this modification, the Company
paid $85 of the $170 remaining on the contract, with the balance of $85 to be
paid on or before December 1, 2000. Presently, the 93-acre expansion is dormant
and the ultimate decision to proceed with this expansion project is uncertain at
this time.
In June 1999, the Company reached a preliminary agreement with Norsk
Hydro to produce and market NatuRose natural astaxanthin product in a joint
venture that would be owned 51% by Norsk Hydro and 49% by Cyanotech. The
intention of the joint venture was to build and operate a NatuRose production
facility on the aforementioned 93-acre parcel. Under the terms of this
agreement, Norsk Hydro was to fund the optimization of Cyanotech's production
technology for natural astaxanthin and in return, was to receive certain
worldwide market rights for the NatuRose product. While this arrangement was
being finalized, the Company continued to independently develop its natural
astaxanthin production technology, and subsequently made significant
improvements. The Company decided not to finalize the joint venture
relationship.
18
<PAGE>
As a result of the Company's decision to end the negotiations, the
projected future cash flows that were expected from the Norsk Hydro joint
venture were reduced to zero. In accordance with the provisions of SFAS No.
121, an impairment loss is to be recognized whenever the projected future cash
flows from an asset are less than the carrying value of that asset. The Company
recorded a non-cash asset impairment charge of $2,796 on the construction-in-
progress balance related to this project. The impaired asset consisted primarily
of the accumulated cost of grading work done on the 93-acre facility and
construction contract termination costs incurred.
Note 4 ACCRUED EXPENSES
Components of accrued expenses as of March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Accrued wages, commissions and royalties $ 155 $ 223
Contractor settlement 170 --
Legal fees 2 111
Other accrued expenses 94 60
-------- --------
$ 421 $ 394
======== ========
</TABLE>
NOTE 5 LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit
In July 1998, the Company entered into a Loan and Security Agreement (Agreement)
with a lender which provided for up to $3 million in aggregate credit
facilities, secured by all the assets of the Company. The major components of
the Agreement included working capital loans on a revolving basis, subject to
the availability of eligible accounts receivable and inventory (as defined), a
sub-limit term loan of up to $750 (amortized in equal payments of $12.5 over
sixty months), secured by eligible machinery and equipment, and a sub-limit term
loan of up to $2 million (amortized over sixty months and subject to the Company
achieving and maintaining specific levels of financial performance) for the
acquisition of new machinery and equipment. The Agreement had a maturity date of
July 31, 2001 with an optional provision for automatic and continuous renewal
for successive, additional terms of one year each. The interest rate on the
credit facility, in the absence of a default under the agreement was prime plus
2.5% (at March 31, 2000, the prime rate was 9%) until the Company achieved
certain financial performance levels, at which time the interest rate was to
decrease to prime plus 1.25%. Interest was calculated on a base amount of $1
million or the outstanding loan balance, whichever was greater.
The Agreement contained restrictive covenants, which included, among
other things, the maintenance of minimum consolidated net worth, as defined, and
an acceleration clause contingent upon the occurrence of an event with a
material adverse effect on the Company, as defined. On July 13, 1999, the lender
gave notice to the Company of a default under the Agreement because of the
uncertainty of the Company's ability to continue as a going concern. In view of
this default, the lender exercised its right under the Agreement effective July
13, 1999, to increase the interest rate on all borrowings from prime plus 2.5%
to prime plus 5.5%. Consequently, the Company classified the aggregate
outstanding balance on this Agreement of $1,644, representing outstanding
working capital loans on a revolving basis of $994 and an equipment term loan of
$650, as a current liability in the consolidated balance sheet at
March 31, 1999.
On October 8, 1999, the lender informed the Company of its intent to
terminate the Agreement with Cyanotech effective December 31, 1999, and
accelerate the repayment of all outstanding borrowings due to the Company being
in default on certain financial covenants. This default was attributed to the
inclusion of "going concern" language in the audit report issued by the
Company's independent auditors for the 1999 fiscal year and the fact that the
Company's consolidated net worth had dropped below the minimum specified level.
In anticipation of the December 31, 1999 exit date, all remaining capitalized
loan costs (totaling $61) were fully amortized during the quarter ended
December 31, 1999. These costs were previously being amortized over the term of
the Agreement.
In January 2000, the lender amended its letter of October 1999 and
agreed to continue to advance funds per the original Agreement at a decreasing
rate until the revised termination date of March 31, 2000. Effective January
24, 2000, advances were made on eligible collateral at a rate of 75% for
receivables, a decrease of 5% from the original Agreement made in July 1998.
The receivable advance rate was reduced on the 24th day of each subsequent
19
<PAGE>
month by 5% until the exit date of March 31, 2000. Advances on eligible
inventories followed the schedule set in the letter dated October 8, 1999, and
was decreased 1% each subsequent month until the exit date of March 31, 2000.
Repayment of the equipment term loan was to increase to $20 per month from $12.5
per month as originally set forth in the Agreement dated July 28, 1998.
In March 2000, the Company finalized a forebearance agreement with this
lender which modified the exit date of March 31, 2000 to April 28, 2000. In
consideration for this extension of the exit date, the Company paid a fee of $25
to the lender.
Term Loan Agreement
On April 21, 2000, the Company executed a Term Loan Agreement (Term Loan) with a
new lender which provided for $3.5 million in aggregate 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, commencing June 1, 2000. The interest
rate under this agreement, 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%). Interest is calculated on the unpaid balance of principal based on a
normal amortization schedule commencing May 1, 2000.
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 of the $3.5 million proceeds
from this Term Loan, was used to repay the balance outstanding, including
interest and related fees, under the Agreement. The Company has classified
$186 of the outstanding balance on the previous Agreement of $1,493 at
March 31, 2000, as a current liability in the consolidated balance sheet at
March 31, 2000. This amount represents the current portion of the Term Loan
Agreement due by March 31, 2001.
Long-Term Debt
Long-term debt consists of the following as of March 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
---------- ----------
<S> <C> <C>
Note payable at the London Interbank Offered Rate (LIBOR) plus 2%, adjusted
quarterly; principal payments of $12.5, due quarterly, plus interest,
through April 1, 2000, repaid in full in March 2000. $ -- $ 63
Note payable at the prime rate plus 5.5% per annum, adjusted monthly; principal
payments of $20, due monthly, plus interest; balance due April 28, 2000,
repaid with proceeds from long-term borrowings from a new lender in
April 2000 as described above. 500 650
Revolving line of credit at the prime rate plus 5.5% per annum, adjusted
monthly; balance due April 28, 2000, repaid with proceeds from long-term
borrowings from a new lender in April 2000 as described above. 993 --
---------- ----------
Total long-term debt 1,493 713
Less current maturities of long-term debt 186 (700)
---------- ----------
Long-term debt, excluding current maturities $ 1,307 $ 13
========== ==========
</TABLE>
Convertible Debentures - Subsequent Event
On May 2, 2000, the Company completed a private placement of $1,250 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. A warrant to purchase
83,334 shares of the Company's common stock was issued to the placement agent
of the debentures, exercisable for five years from the issue date, at $1.80 per
share.
20
<PAGE>
NOTE 6 LEASES
The Company leased certain equipment under a capital lease which expired in
2000, and leases facilities, equipment and land under operating leases expiring
between 2003 and 2025. The capital lease was satisfied in its entirety during
fiscal 2000.
Future minimum lease payments under non-cancelable operating leases at
March 31, 2000 are as follows:
<TABLE>
<CAPTION>
Year ending March 31:
<S> <C>
2001 $ 250
2002 250
2003 250
2004 224
2005 223
Thereafter, through 2025 3,259
--------------------
Total minimum lease payments $ 4,456
====================
</TABLE>
Total rent expense under operating leases amounted to $330, $350, and $211 for
the years ended March 31, 2000, 1999 and 1998 respectively.
The land leases provide for contingent rentals in excess of minimum
rental commitments based on a percentage of the Company's sales. Contingent
rentals for the years ended March 31, 2000, 1999 and 1998 were not material.
The State of Hawaii has agreed to allow the Company to lease an
additional 93-acre parcel on a year to year basis, until such time that the
Company determines the need for a longer lease term. The current lease
agreement is effective through December 31, 2000. In January 2000, the Company
negotiated with the State of Hawaii, the option for payment of one-half of the
monthly fixed fee, or $5 per month, through June 30, 2000, in Common stock based
on the closing bid price on the last trading day of each month. This payment
option is at the sole discretion of the Company.
NOTE 7 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,
2000, after which date the conversion feature is no longer applicable. In
January 2000, the Company's Board of Directors approved extension of this
conversion date to February 23, 2002. This modification was subsequently
ratified by the holders of Series C preferred stock. 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 unpaid accumulated 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 March 31, 2000
amount to $2,030 ($4.31 per share). Upon conversion of Series C preferred stock,
cumulative dividends in arrears on converted shares are no longer payable. The
amount of cumulative dividends foregone due to conversion during the year ended
March 31, 2000 was $533 (nil in 1999 and $457 in 1998). 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 were converted
into 500,000 shares of common stock.
NOTE 8 STOCK OPTIONS AND WARRANTS
Stock Options
The Company's 1995 Stock Option Plan (the "1995 Plan"), reserves a total of
800,000 shares of common stock for issuance under the Plan. The 1995 Plan
provides for the issuance of both incentive and non-qualified stock options.
Options are to be granted at, or above, the fair market value of the Company's
common stock at the date of grant and generally become exercisable over a
five-year period.
The Company also has a Non-employee Director Stock Option and Stock
Grant Plan, which was approved by stockholders in 1994 (the "1994 Plan"). Under
the 1994 Plan, and upon election to the Board of Directors, non-
21
<PAGE>
employee directors are granted a ten-year option to purchase 3,000 shares of the
Company's common stock at its fair market value on the date of grant. In
addition, on the date of each Annual Meeting of Stockholders in each year that
the 1994 Plan is in effect, each non-employee director continuing in office will
be automatically granted, without payment, 2,000 shares of common stock that is
non-transferable for six months following the date of grant. Grants of 6,000,
4,000 and 8,000 shares of common stock were made under the 1994 Plan in August
1999 and September 1998 and 1997, respectively. Expense recognized as a result
of these stock grants amounted to $6 for the years ended March 31, 2000 and
1999, and $47 for the year ended March 31, 1998.
At March 31, 2000, there were 138,529 additional shares available for
grant under the 1995 Plan and 47,000 additional shares available under the 1994
Plan. The per share weighted-average fair value of stock options granted during
2000, 1999 and 1998 was $.78, $2.53 and $4.72, respectively, on the date of
grant using a Black Scholes option-pricing model with the following weighted-
average assumptions: 2000 - expected dividend yield of 0%, risk- free interest
rate of 5.5%, expected volatility of 96%, and an expected life of 4.2 years;
1999 - expected dividend yield of 0%, risk-free interest rate of 5.6%, expected
volatility of 98%, and an expected life of 5.7 years; 1998 - expected dividend
yield of 0%, risk-free interest rate of 6.6%, expected volatility of 99%, and an
expected life of 4.5 years.
The Company applies the provisions of APB Opinion No. 25 in accounting
for employee stock-based compensation and, accordingly, no compensation cost
has been recognized for its employee stock options in the accompanying financial
statements. Had the Company determined compensation cost based on the estimated
fair value at the grant date for its employee stock options under SFAS No. 123,
the Company's net loss available to Common stockholders and net loss per common
share would have been as reflected in the pro forma amounts below:
<TABLE>
<CAPTION>
2000 1999 1998
--------------- ------------- -------------
Net loss available to Common stockholders
<S> <C> <C> <C>
As reported $ (4,722) $ (2,795) $ (589)
Pro forma $ (5,103) $ (3,282) $ (1,041)
Net loss per common share
As reported Basic $ (0.34) $ (0.21) $ (0.05)
Diluted $ (0.34) $ (0.21) $ (0.05)
Pro forma Basic $ (0.37) $ (0.24) $ (0.08)
Diluted $ (0.37) $ (0.24) $ (0.08)
</TABLE>
Pro forma net loss available to Common stockholders and net loss per common
share information reflect only options granted since 1996. Therefore, the full
impact of calculating compensation cost for stock options under SFAS No. 123 is
not reflected in the pro forma net loss available to Common stockholders and net
loss per common share amounts presented above because compensation cost is
reflected over the options' vesting period of 5 years, and compensation cost for
options granted prior to April 1, 1995 is not considered.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted-
Number of average
shares exercise price
--------------- --------------
<S> <C> <C>
Balance at March 31, 1997 420,388 $ 4.42
Granted 125,000 6.31
Exercised (84,750) 1.21
Forfeited (53,913) 5.87
--------------- --------------
Balance at March 31, 1998 406,725 5.48
Granted 213,600 3.22
Expired (20,000) 6.63
Forfeited (24,950) 4.81
--------------- --------------
Balance at March 31, 1999 575,375 4.63
Granted 301,596 1.03
Exercised (21,650) 0.94
Expired (42,025) 0.94
Forfeited (95,500) 2.86
--------------- --------------
Balance at March 31, 2000 717,796 $ 3.68
=============== ==============
</TABLE>
22
<PAGE>
The following table summarizes information about stock options outstanding at
March 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Number Weighted-avg Number
Range of outstanding at remaining Weighted-avg exercisable at Weighted-avg
exercise prices 03/31/00 contractual life exercise price 03/31/00 exercise price
---------------- -------------- ---------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
$.97 to $1.69 275,896 4.3 years $ 1.05 12,096 $ 1.40
$3.13 to $3.69 152,900 4.0 years $ 3.22 40,308 $ 3.24
$5.13 to $7.63 289,000 1.3 years $ 6.43 216,275 $ 6.31
---------------- -------------- ---------------- -------------- ------------ -----------------
$.97 to $7.63 717,796 3.0 years $ 3.68 268,679 $ 5.62
================ ============== ================ ============== ============ =================
</TABLE>
Warrants
At March 31, 2000, the Company has warrants outstanding to acquire 125,000
shares of the Company's common stock. A warrant to acquire 75,000 shares of
common stock was granted in December 1999 in consideration for services provided
by a third party. The warrant is exercisable at $.63 per share, and expires in
December, 2004. A warrant to acquire 50,000 shares of common stock was granted
on January 19,2000 in connection with the purchase of 50,000 shares of the
Company's common stock by an existing stockholder. The warrant is exercisable at
$1.00 per share, and expires in January, 2005. Warrants to acquire 25,000 shares
of common stock at $1.00 per share expired during fiscal 2000.
NOTE 9 MAJOR CUSTOMERS AND EXPORT SALES
Sales to major customers for the years ended March 31, 2000, 1999 and 1998 are
summarized as follows (percent of product sales):
<TABLE>
<CAPTION>
2000 1999 1998
---------------------------------------------------
<S> <C> <C> <C>
Customer A 23% 11% *
===================================================
* Less than 10% of product sales
</TABLE>
Net product sales by geographic area for the years ended March 31, 2000, 1999
and 1998 are summarized as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 3,992 54% $ 4,075 60% $ 4,297 56%
Canada/South America 371 5% 426 6% 404 5%
The Netherlands 1,715 23% 717 11% 496 7%
Europe, excluding the Netherlands 613 8% 498 7% 788 10%
China 73 1% 50 1% 358 5%
Asia/Pacific, excluding China 634 9% 972 15% 1,284 17%
------------------------------------------------------------------
$ 7,398 100% $ 6,738 100% $ 7,627 100%
==================================================================
</TABLE>
Foreign product sales transactions are consummated in U.S. dollars.
23
<PAGE>
NOTE 10 INCOME TAXES
The components of income tax expense (benefit) are as follows for the years
ended March 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
----------- ---------- ----------
CURRENT
<S> <C> <C> <C>
Federal $ -- $ -- $ (13)
State (20) (289) (185)
----------- ---------- ----------
(20) (289) (198)
----------- ---------- ----------
DEFERRED
Federal -- -- 314
State -- -- 59
----------- ---------- ----------
-- -- 373
----------- ---------- ----------
$ (20) $ (289) $ 175
=========== ========== ==========
</TABLE>
A reconciliation of the amount of income taxes computed at the federal statutory
rate of 34% to the amount reflected in the Company's consolidated statements of
operations for the years ended March 31, 2000, 1999 and 1998 follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Amount at the federal statutory income tax rate $ (1,532) $ (968) $ (43)
State income taxes, net of federal income tax effect (13) (191) (83)
Increase in the valuation allowance for deferred tax assets 1,855 889 270
Other (330) (19) 31
------------ ----------- -----------
$ (20) $ (289) $ 175
============ =========== ===========
</TABLE>
The significant components of deferred income tax expense (benefit) for the
years ended March 31, 2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
2000 1999 1998
------------ ----------- -----------
<S> <C> <C> <C>
Deferred tax expense (benefit), exclusive of the change in
beginning-of-the-year valuation allowance balance $ (1,855) $ (889) $ 103
Increase (decrease) in beginning-of-the-year balance of the
valuation allowance for deferred tax assets 1,855 889 270
------------ ----------- -----------
$ -- $ -- $ 373
============ =========== ===========
</TABLE>
24
<PAGE>
The tax effects of temporary differences related to various assets, liabilities
and carryforwards that give rise to deferred tax assets and deferred tax
liabilities as of March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
DEFERRED TAX ASSETS:
<S> <C> <C>
Net operating loss carryforwards $ 3,114 $ 2,020
Leasehold improvement, impairment loss for financial reporting purposes 1,062 --
Tax credit carryforwards 238 252
Other 174 200
----------- -----------
Gross deferred tax assets 4,588 2,472
Less valuation allowance (3,148) (1,293)
----------- -----------
Net deferred tax assets 1,440 1,179
Deferred tax liability - equipment and leasehold improvements, principally due
to differences in depreciation and amortization (1,440) (1,179)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
</TABLE>
The valuation allowance for deferred tax assets as of April 1, 1999, 1998 and
1997 was $1,293, $404 and $134 respectively. The valuation allowance increased
by $1,855, $889 and $270 during the years ended March 31, 2000, 1999 and 1998
respectively. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for
future taxable income over the periods in which the net deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowance at March 31, 2000. The amount of the deferred tax assets
considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
At March 31, 2000, the Company has net operating tax loss carryforwards
and tax credit carryforwards available to offset future federal income taxes as
follows:
<TABLE>
<CAPTION>
Research and
Net operating Investment tax experimentation
Expires March 31, losses credits tax credits
------------------ ------------------ ------------------
<S> <C> <C> <C>
2001 $ -- $ 14 $ 15
2002 -- -- 22
2003 -- -- 15
2004 -- -- 52
2005 -- -- 5
2006 400 -- --
2011 -- -- 23
2012 44 -- 9
2013 1,601 -- --
2019 3,632 -- --
2020 2,663 -- --
------------------ ----------------- ------------------
$ 8,340 $ 14 $ 141
================== ================= ==================
</TABLE>
In addition, at March 31, 2000, the Company has alternative minimum tax credit
carryforwards of approximately $83 which are available to reduce future federal
regular income taxes over an indefinite period.
At March 31, 2000, the Company has tax net operating loss carryforwards
of $4,646, which expire in March 31, 2019 and 2020, available to offset future
Hawaii state taxable income.
Investment tax credits will be recorded as a reduction of the provision
for federal income taxes in the year realized.
25
<PAGE>
NOTE 11 FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS Statement No. 107, "Disclosures about Fair Value of Financial Instruments,"
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments as of March 31, 2000 and 1999.
Cash and Cash Equivalents
The carrying amounts approximate fair value because of the short-term nature of
these instruments.
Short-Term Revolving Line of Credit
The carrying value of the short-term revolving line of credit approximates fair
value because the instruments reprice monthly at market rates.
Long-Term Debt
The carrying amounts approximate fair value because the instruments reprice
monthly or quarterly at market rates.
NOTE 12 PROFIT SHARING PLAN
The Company sponsors a 401(k) profit sharing plan for all associates not covered
under a separate management incentive plan. Under the 401(k) profit sharing
plan, 5% of pre-tax profits may be allocated based on gross wages to
non-management associates on a quarterly basis. Fifty percent of each
associate's profit sharing bonus is distributed in cash on an after-tax basis,
with the remainder deposited in each associate's 401(k) account on a pre-tax
basis with a six year vesting schedule, based on years of service with the
Company. All associates may make voluntary pre-tax contributions to their 401(k)
accounts. Compensation expense relative to this plan was nil for each of the
three years ended March 31, 2000, 1999 and 1998.
NOTE 13 COMMITMENTS AND 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 judgment 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 related motion 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
outcome of this litigation cannot be assured, 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.
As of March 31, 2000, the Company had a commitment for a suspended
construction project on a 93-acre parcel (see Note 3).
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cyanotech Corporation
We have audited the accompanying consolidated balance sheets of Cyanotech
Corporation and subsidiaries as of March 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended March 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Cyanotech
Corporation and subsidiaries as of March 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Honolulu, Hawaii
May 5, 2000
<TABLE>
<CAPTION>
SELECTED QUARTERLY FINANCIAL DATA
First Second Third Fourth Total
($ in thousands, except share data) Quarter Quarter Quarter Quarter Year
----------------------------------------- -------------- -------------- -------------- -------------- --------------
2000
<S> <C> <C> <C> <C> <C>
Net sales $ 1,599 $ 1,496 $ 2,037 $ 2,266 $ 7,398
Gross profit 267 126 512 598 1,503
Net loss (a) (527) (609) (3,188) (161) (4,485)
Net loss per common share
Basic (a) (0.04) (0.05) (0.24) (0.02) (0.34)
Diluted (a) (0.04) (0.05) (0.24) (0.02) (0.34)
1999
Net sales $ 1,763 $ 1,525 $ 1,675 $ 1,775 $ 6,738
Gross profit 179 401 122 271 973
Net loss (631) (442) (719) (765) (2,557)
Net loss per common share
Basic (0.05) (0.04) (0.06) (0.06) (0.21)
Diluted (0.05) (0.04) (0.06) (0.06) (0.21)
</TABLE>
(a) Net loss and net loss per common share for the third quarter and
for the total fiscal year 2000 reflect the effect of an asset impairment charge
of $2,796. For further detail, see the sections "Operating Expenses-Impairment
of Long-Lived Assets" and "Liquidity and Capital Resources" in Management's
Discussion and Analysis of Financial Condition and Results of Operations from
the Company's fiscal 2000 Annual Report.
27
<PAGE>
OFFICERS
Gerald R. Cysewski, Ph.D.
President, Chief Executive Officer
and Chairman of the Board
Glenn D. Jensen
Vice President - Operations
Kelly J. Moorhead
Vice President - Sales and Marketing
Ronald P. Scott
Executive Vice President -
Finance and Administration
Treasurer and Secretary
BOARD OF DIRECTORS
Gerald R. Cysewski, Ph.D.
Eric H. Reichl (1,2)
Ronald P. Scott
John T. Waldron (1,2)
Paul C. Yuen, Ph.D. (1,2)
1 Member of the Audit Committee
2 Member of the Compensation and
Stock Option Committee
CORPORATE INFORMATION
Corporate Headquarters
Cyanotech Corporation
73-4460 Queen Kaahumanu Hwy.
Suite 102
Keahole Point
Kailua-Kona, HI 96740
Tel (808) 326-1353
Fax (808) 329-3597
WHOLLY-OWNED SUBSIDIARIES
Nutrex, Inc.
Cyanotech International FSC, Inc.
<PAGE>
TRANSFER AGENT AND REGISTRAR
American Securities Transfer and Trust, Inc.
12039 West Alameda Parkway
Lakewood, CO 80228
(303) 986-5400
INDEPENDENT ACCOUNTANTS
KPMG LLP
P.O. Box 4150
Honolulu, HI 96812-4150
LEGAL COUNSEL
Goodsill Anderson Quinn & Stifel
P.O. Box 3196
Honolulu, HI 96801-3196
FORM 10-K
A copy of Cyanotech's annual report to the Securities and Exchange Commission on
Form 10-K is available without charge upon written request to:
Secretary, Cyanotech Corporation
73-4460 Queen Kaahumanu Hwy.
Suite 102
Kailua-Kona, HI 96740
NOTICE OF ANNUAL MEETING
The 2000 annual meeting of stockholders will be held
on Thursday, August 24, 2000, at 7:00 p.m. at
Ala Moana Hotel
410 Atkinson Dr.
Honolulu, HI 96814
ADDITIONAL INFORMATION:
As a service to our stockholders and prospective investors, copies of Cyanotech
news releases and financial statements issued in the last 12 months are
available 24 hours a day, seven days a week on the Internet's World Wide Web at
http://www.cyanotech.com.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Cyanotech's Common Stock is traded on the NASDAQ National Market under the
symbol "CYAN." The following table sets forth the high and low selling prices as
reported by the NASDAQ Stock Market for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended High Low
2000
<S> <C> <C>
March 31, 2000 $ 4.88 $ 1.00
December 31, 1999 $ 2.25 $ 0.50
September 30, 1999 $ 1.44 $ 0.72
June 30, 1999 $ 1.59 $ 0.59
1999
March 31, 1999 $ 1.25 $ 0.88
December 31, 1998 $ 1.75 $ 0.91
$eptember 30, 1998 $ 3.69 $ 1.50
June 30, 1998 $ 4.44 $ 3.13
</TABLE>
Cyanotech has never declared or paid cash dividends on its Common
Stock. We currently intend to retain all of our earnings for use in the business
and do not anticipate paying any cash dividends on Series C Preferred Stock or
Common Stock in the foreseeable future.
The approximate number of record holders of outstanding Common Stock as
of June 26, 2000 was 1,368.
FORWARD-LOOKING INFORMATION
Certain statements herein set forth management's intentions, plans, beliefs,
expectations or predictions of the future based on current facts and analyses.
Actual results may differ materially due to a variety of factors including
reduced product demand, price competition, government action, and weather
conditions. Additional information on factors that may affect the Company and
cause actual results to differ from current expectations can be found in
Cyanotech's filings with the SEC.
28
