UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended December 31, 1999
Commission File Number 0-14602
CYANOTECH CORPORATION
(Exact name of registrant as specified in its charter)
NEVADA 91-1206026
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
73-4460 Queen Kaahumanu Hwy. #102, Kailua-Kona, HI 96740
(Address of principal executive offices)
(808) 326-1353
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes xx No
Number of common shares outstanding as of January 31, 1999:
Title of Class Shares Outstanding
-------------- ------------------
Common stock - $.005 par value stock 13,838,242
<PAGE>
CYANOTECH CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements Page
----
Consolidated Balance Sheets (unaudited)
December 31, 1999 and March 31, 1999 .................... 3
Consolidated Statements of Operations (unaudited)
Three and nine month periods ended
December 31, 1999 and 1998 ............................. 4
Consolidated Statements of Cash Flows (unaudited)
Nine month periods ended
December 31, 1999 and 1998 ............................. 5
Notes to Consolidated Financial Statements (unaudited) .......... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 11
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings ................................................. 21
Item 3. Defaults Upon Senior Securities ................................... 21
Item 6. Exhibits and Reports on Form 8-K .................................. 22
SIGNATURES ................................................................ 23
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CYANOTECH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
Assets 1999 1999
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 120 $ 323
Accounts receivable, net 1,343 1,012
Refundable income taxes 161 273
Inventories (note 2) 1,767 2,105
Prepaid expenses 81 105
-------- --------
Total current assets 3,472 3,818
Equipment and leasehold improvements, net (note 3) 16,170 19,623
Other assets 51 180
-------- --------
Total assets $ 19,693 $ 23,621
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt (note 7) $ 563 $ 700
Short-term revolving line of credit (note 7) 1,159 994
Current maturities of capital lease obligations -- 67
Accounts payable 788 746
Other accrued liabilities 548 394
-------- --------
Total current liabilities 3,058 2,901
Long-term debt, excluding current maturities -- 13
-------- --------
Total liabilities 3,058 2,914
Stockholders' equity:
Cumulative preferred stock, Series C, of $.001 par value
(aggregate involuntary liquidation preference $2,975 ($5 per
share), plus unpaid cumulative dividends). Authorized 5,000,000
shares; issued and outstanding 595,031 shares at December 31,
1999 and March 31, 1999 (note 4) 1 1
Common Stock of $0.05 par value, authorized 25,000,000 shares;
issued and outstanding 13,833,242 shares at December 31, 1999
and 13,603,572 shares at March 31, 1999 69 68
Additional paid-in capital 24,207 23,956
Accumulated deficit (7,642) (3,318)
-------- --------
Total stockholders' equity 16,635 20,707
-------- --------
Total liabilities and stockholders' equity $ 19,693 $ 23,621
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 2,037 $ 1,675 $ 5,132 $ 4,963
COST OF PRODUCT SALES 1,525 1,553 4,227 4,261
-------- -------- -------- --------
Gross Profit 512 122 905 702
-------- -------- -------- --------
OPERATING EXPENSES:
Research and development 124 185 446 652
General and administrative 393 397 1,117 1,086
Sales and marketing 274 248 659 747
Impairment of long-lived assets (note 9) 2,796 -- 2,796 --
-------- -------- -------- --------
Total operating expenses 3,587 830 5,018 2,485
-------- -------- -------- --------
Loss from operations (3,075) (708) (4,113) (1,783)
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income 2 4 7 7
Interest expense (118) (51) (224) (121)
Other income (expense), net -- (4) 3 (9)
-------- -------- -------- --------
Total other expense (116) (51) (214) (123)
-------- -------- -------- --------
Loss before income taxes (3,191) (759) (4,327) (1,906)
Income taxes 3 40 3 114
-------- -------- -------- --------
NET LOSS $ (3,188) $ (719) $ (4,324) $ (1,792)
======== ======== ======== ========
NET LOSS PER COMMON SHARE
Basic $ (0.24) $ (0.06) $ (0.33) $ (0.14)
Diluted $ (0.24) $ (0.06) $ (0.33) $ (0.14)
SHARES USED IN CALCULATION OF:
Basic 13,778 13,604 13,713 13,601
Diluted 13,778 13,604 13,713 13,601
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,324) $(1,792)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 983 1,036
Impairment of capital assets 2,796 --
Amortization of debt issue costs 93 15
Issuance of stock in exchange for services 118 --
Net (increase) decrease in:
Accounts receivable (331) 338
Refundable income taxes 112 --
Inventories 338 (147)
Prepaid expenses and other assets 60 (28)
Net increase (decrease) in:
Accounts payable 42 (34)
Other accrued liabilities 154 24
------- -------
Net cash provided by (used in) operating activities 41 (588)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements (326) (526)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of warrants and options 15 --
Net proceeds from issuance of common stock 119 --
Debt issue costs paid -- (103)
Proceeds from issuance of long-term debt -- 750
Principal payments on long-term debt (150) (99)
Borrowings (repayment) on short-term revolving line of
credit, net 165 392
Principal payments on note payable -- (975)
Principal payments on capital lease obligations (67) (100)
------- -------
Net cash provided by (used in) financing activities 82 (135)
------- -------
Net decrease in cash and cash equivalents (203) (1,249)
Cash and cash equivalents at beginning of period 323 1,397
------- -------
Cash and cash equivalents at end of period $ 120 $ 148
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
CYANOTECH CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These consolidated financial statements and notes
should be read in conjunction with the Company's consolidated financial
statements contained in the Company's previously filed report on Form 10-K
for the year ended March 31, 1999.
The Company consolidates enterprises in which it has a controlling
financial interest. The accompanying consolidated financial statements
include the accounts of Cyanotech Corporation and its wholly-owned
subsidiaries, Nutrex, Inc. and Cyanotech International FSC, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation. While the financial information furnished for the three and
nine month periods ended December 31, 1999 is unaudited, the statements in
this report reflect all material items which, in the opinion of management,
are necessary for a fair presentation of the results of operations for the
interim periods covered and of the financial condition of the Company at
the dates of the consolidated balance sheets. The operating results for the
interim period presented are not necessarily indicative of the results that
may be expected for the year ending March 31, 2000.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ significantly from
those estimates.
2. INVENTORIES
Inventories are stated at the lower of cost (which approximates first-in,
first-out) or market and consist of the following (dollars in thousands):
December 31, 1999 March 31, 1999
----------------- --------------
Raw materials $ 74 $ 63
Work in process 240 287
Finished goods 1,247 1,555
Supplies 206 200
------ ------
$1,767 $2,105
====== ======
6
<PAGE>
3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Owned equipment and leasehold improvements are stated at cost. Equipment
under capital lease is stated at the lower of the present value of the
minimum lease payments or fair value of the equipment at the inception of
the lease. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives for furniture and
fixtures and the shorter of the lease terms or estimated useful lives for
leasehold improvements and equipment under capital lease as follows:
Equipment 3 to 10 years
Leasehold improvements 10 to 27 years
Furniture and fixtures 7 years
Equipment under capital lease 10 years
Equipment and leasehold improvements consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
December 31, 1999 March 31, 1999
----------------- --------------
<S> <C> <C>
Equipment $ 8,921 $ 8,421
Leasehold improvements 13,848 13,779
Furniture and fixtures 83 83
Equipment under capital lease -- 388
-------- --------
22,852 22,671
Less accumulated depreciation and amortization (7,090) (6,107)
Construction in-progress 408 3,059
-------- --------
Equipment and leasehold improvements, net $ 16,170 $ 19,623
======== ========
</TABLE>
4. SERIES C PREFERRED STOCK
Series C preferred stock is convertible into common stock at the rate of
one share of preferred stock for five shares of common stock through
February 23, 2000, after which date the conversion feature is no longer
applicable. On December 30, 1999, the Company's Board of Directors
approved, as being in the best interests of the Company, an extension of
the conversion deadline to February 23, 2002. Series C preferred stock has
voting rights equal to the number of shares of common stock into which it
is convertible and has a preference in liquidation over all other series of
preferred stock of $5 per share plus any accumulated but unpaid dividends.
Holders of Series C preferred stock are entitled to 8% cumulative annual
dividends at the rate of $.40 per share; cumulative dividends in arrears as
of December 31, 1999 amount to $2,505 ($4.21 per share). Upon conversion of
Series C preferred stock, cumulative dividends in arrears on converted
shares are no longer payable. The consent of Series C preferred
stockholders is required to modify their present rights or sell all or
substantially all of the Company's assets.
7
<PAGE>
5. EARNINGS PER SHARE
For the three, and nine months ended December 31, 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 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 December 31, 1999, warrants and options to acquire 792,800
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
December 31, 1998, warrants and options to acquire 638,925 shares of the
Company's common stock and preferred stock convertible into 2,975,155
shares of the Company's common stock were outstanding
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented (in thousands
except share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Basic Earnings per share December 31, December 31,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss $ (3,188) $ (719) $ (4,324) $ (1,792)
Less: Requirement for Preferred Stock
dividends (59) (59) (179) (179)
------------ ------------ ------------ ------------
Loss to Common stockholders $ (3,247) $ (778) $ (4,503) $ (1,971)
============ ============ ============ ============
Weighted average Common Shares outstanding 13,778,374 13,603,572 13,713,121 13,601,110
============ ============ ============ ============
Net Loss per Common Share $ (0.24) $ (0.06) $ (0.33) $ (0.14)
============ ============ ============ ============
Diluted Earnings per share
Loss to Common stockholders $ (3,247) $ (778) $ (4,503) $ (1,971)
Plus: Requirement for Preferred Stock
dividends -- -- -- --
------------ ------------ ------------ ------------
Loss to Common stockholders, as adjusted $ (3,247) $ (778) $ (4,503) $ (1,971)
============ ============ ============ ============
Weighted average Common Shares outstanding 13,778,374 13,603,572 13,713,121 13,601,110
Effect of dilutive securities:
Stock options and warrants -- -- -- --
------------ ------------ ------------ ------------
Convertible preferred stock -- -- -- --
------------ ------------ ------------ ------------
Weighted average Common Shares
outstanding, as adjusted 13,778,374 13,603,572 13,713,121 13,601,110
============ ============ ============ ============
Net loss per Common Share $ (0.24) $ (0.06) $ (0.33) $ (0.14)
============ ============ ============ ============
</TABLE>
8
<PAGE>
6. ACCOUNTING CHANGES
Accounting for Derivative Instruments and Hedging Activities. In June 1998,
the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments and for hedging activities.
SFAS No. 133 requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. In July 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date for FASB Statement No.
133, an Amendment of FASB Statement No. 133", which defers the effective
date of SFAS No. 133 to be effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. The Company currently holds no
derivative instruments, nor is it currently participating in hedging
activities. Management does not expect adoption of SFAS No. 133 to have a
material effect on the Company's financial condition, results of operations
or liquidity.
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use. 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. Adoption of SOP 98-1 did not have a material effect on the
Company's financial condition, results of operations or liquidity.
Reporting on the Costs of Start-up Activities. 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. Adoption of SOP
98-5 did not have a material effect on the Company's financial condition,
results of operations or liquidity.
7. LINE OF CREDIT AND LONG-TERM DEBT
In July 1998, the Company entered into a Loan and Security Agreement
(Agreement) with a lender which provides for up to $3 million in credit
facilities, secured by all the assets of the Company. This Agreement is
discussed in detail in the section describing Liquidity and Capital
Resources in Item 2 of this report. On October 8, 1999, the lender informed
the Company of its intent to terminate its lending agreement with the
Company, effective December 31, 1999 due to the Company being in default on
certain financial covenants. In January 2000, the lender amended the letter
dated October 8, 1999 and has extended the date for termination of the loan
to March 31, 2000. The conditions of this agreement are discussed in detail
in the section describing Liquidity and Capital Resources in Item 2 of this
report. In January 2000, the Company entered into a letter of intent with a
new lender to refinance its existing debt and provide working capital to
the Company. Subject to favorable completion by the lender of its due
diligence process, the Company expects this new credit facility to be in
place within 90 days of the date of application. There can, however, be no
assurance that the Company will be successful, or that if successful, that
it will be able to obtain replacement financing under favorable terms.
Failure to alternative financing would have a material adverse effect on
the Company's financial condition, results of operations and liquidity.
9
<PAGE>
8. GOING CONCERN STATUS
The consolidated financial statements at December 31, 1999 have been
prepared on a going concern basis, which assumes continuity of operations
and realization of assets and liquidation of liabilities in the ordinary
course of business. During the years ended March 31, 1999 and 1998, the
Company incurred losses of $2,557,000 and $300,000 respectively. During the
nine months ended December 31, 1999, the Company incurred a loss of
$4,324,000 which included an asset impairment charge of $2,796,000 recorded
in December 1999. During these two fiscal years, and for the first six of
nine months of the current fiscal year, the Company experienced declining
sales which management believes can be attributed to increased competition
for sales of Spirulina products in all of its major markets. The major
effect of the decrease in sales has been a significant decrease in
liquidity. Due to the significant decrease in sales and the decline in
working capital, the Company has taken action to reduce expenditures and
obtain additional sources of external financing while concurrently
continuing to diversify its product offerings and explore opportunities for
expanding the markets for its products. Management believes that the
objective of this plan is to increase revenues and to return to
profitability.
The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely basis,
to comply with the terms of its financing agreement, to obtain additional
financing or refinancing as may be required, to attain profitability, or a
combination thereof. The Company is seeking other possible sources of
external financing, but unless it is successful, there may be liquidity
shortfalls in future periods. There can be no assurance that the Company
will be successful in obtaining additional financing or will have
sufficient cash resources to support its continued operations. The
accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
9. IMPAIRMENT OF LONG-LIVED ASSETS
In June 1999, we reached a preliminary agreement with Norsk Hydro ASA
("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. Under the terms of
this Agreement, Norsk Hydro was to fund the optimization of Cyanotech's
production technology for 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
astaxanthin production technology, and subsequently made significant
improvements. Due to the improved production economics, and the initial
interest in the human astaxanthin product, the Company has decided not to
finalize the joint venture relationship. Negotiations are, however,
continuing with Norsk Hydro to find a basis for some kind of long-term
cooperation.
As a result of ending the joint venture negotiations, the projected future
cash flows that were expected from the Norsk Hydro joint venture are now
zero. In accordance with the provisions of Statement of Financial
accounting standards No. 121 - Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, an impairment loss is
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 amounting to $2,796,000 on the
construction-in-progress balance related to the 93-acre astaxanthin
project. The impaired asset consists primarily of the cost incurred to date
to level the 93-acre facility and construction contract termination costs.
10
<PAGE>
CYANOTECH CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report on Form 10-Q contains forward-looking statements regarding the
future performance of Cyanotech and future events that involve risks and
uncertainties that could cause actual results to differ materially from the
statements contained herein. This document, and the other documents that the
Company files from time to time with the Securities and Exchange Commission,
such as its reports on Form 10-K, Form 10-Q, Form 8-K, and its proxy materials,
contain additional important factors that could cause actual results to differ
from the Company's current expectations and the forward-looking statements
contained herein.
Results of Operations
The following table sets forth certain consolidated statement of operations
data as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of product sales 74.9 92.7 82.4 85.9
------ ------ ------ ------
Gross profit 25.1 7.3 17.6 14.1
------ ------ ------ ------
Operating expenses:
Research and development 6.1 11.1 8.7 13.1
General and administrative 19.3 23.7 21.8 21.9
Impairment of capital assets 137.3 -- 54.4 --
Sales and marketing 13.4 14.8 12.8 15.0
------ ------ ------ ------
Total operating expenses 176.1 49.6 97.7 50.0
------ ------ ------ ------
Loss from operations (151.0) (42.3) (80.1) (35.9)
------ ------ ------ ------
Other income (expense):
Interest income 0.1 0.2 0.1 0.1
Interest expense (5.8) (3.0) (4.4) (2.4)
Other income (expense), net -- (0.2) 0.1 (0.2)
------ ------ ------ ------
Total other expense (5.7) (3.0) (4.2) (2.5)
------ ------ ------ ------
Loss before income taxes (156.7) (45.3) (84.3) (38.4)
Income taxes 0.2 2.4 -- 2.3
------ ------ ------ ------
Net loss (156.5)% (42.9)% (84.3)% (36.1)%
====== ====== ====== ======
</TABLE>
11
<PAGE>
Third Quarter of Fiscal 2000 Compared to Third Quarter of Fiscal 1999
Net Sales
Net sales for the three month period ended December 31, 1999 increased 22%
to $2,037,000, from $1,675,000 in the comparable period of fiscal 1999. This
increase in net sales is primarily due to higher sales of bulk Spirulina
products and higher sales of NatuRose(TM) natural astaxanthin.
International sales represented 49% and 44% of total net sales for the
three month periods ended December 31, 1999 and 1998, respectively. This
increase was primarily due to increased sales of bulk Spirulina in all markets
and higher sales of bulk Spirulina tablets to our largest customer, a European
distributor of natural products. Sales to this customer, Spirulina
International, BV, accounted for 17% of total net sales during the quarter ended
December 31, 1999.
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 $512,000
for the three month period ended December 31, 1999, up 320% from $122,000 in the
comparable period of fiscal 1999. Our gross profit margin also increased to 25%
for the three month period ended December 31, 1999, compared to 7% for the
comparable period of fiscal 1999. This increase in gross profit margin from the
prior year period is primarily attributable to greater sales of higher margin
bulk Spirulina tablets and slightly higher margin on sales of packaged consumer
products and bulk organic Spirulina products, offset in part by increased
Spirulina production costs resulting from operating at lower than optimum
production levels during the first six months of the current fiscal year.
Operating Expenses
Operating expenses were $3,587,000 during the three month period ended
December 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. In compliance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", the Company was obligated to record the asset
impairment charge on the construction-in-progress balance relating 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 three
month period amounted to $791,000, a decrease of 5% from $830,000 in the
comparable period of fiscal 1999.
Research and Development. Research and development expenses amounted to
$124,000 for the three month period ended December 31, 1999, a decrease of 33%
from $185,000 for the comparable period of fiscal 1999. This decrease from the
prior year was primarily due to lower expenditures related to completion of
improved production technology for natural astaxanthin at the beginning of
fiscal 2000.
Sales and Marketing. Sales and marketing expenses amounted to $274,000 for
the three month period ended December 31, 1999, an increase of 10% from $248,000
for the comparable period of fiscal 1999. This increase from the prior year is
primarily due to higher consulting service costs related to bulk Spirulina and
NatuRose sales.
12
<PAGE>
Other Expense
Other expense for the three month period ended December 31, 1999 was
$66,000 higher than the $51,000 recorded for the comparable period of fiscal
1999. The increase from the prior year is primarily due to increased interest
rate on borrowings under the Company's current financing agreement.
Income Taxes
An income tax benefit of $3,000 was recorded for the three month period
ended December 31, 1999 due to an increase of the Company's estimated state tax
refund for the fiscal year ended March 31, 1999. The interperiod tax benefit of
$3,000 compares to an interperiod tax benefit of $40,000 recorded for the
comparable period of fiscal 1999.
Net Loss
The Company recorded a net loss of $3,188,000 for the three months ended
December 31, 1999, $2,796,000 of which represents the effect of the
aforementioned asset impairment charge. If the effect of this impairment charge
is omitted for comparison purposes, the Company recorded a loss of $392,000 for
the three months ended December 31, 1999, an improvement of 45% over the net
loss of $719,000 for the comparable period of fiscal 1999. This improvement in
result is primarily attributable to increased sales of bulk Spirulina powder and
tablets, decreased cost of product sales and decreased research and development
expenses, offset by the higher interest rate on borrowings and accelerated of
amortization of acquisition fees pertaining to its present financing agreement
due to the notification received from the lender of its intent to exit the
lending agreement effective December 31, 1999.
Nine Months Ended December 31, 1999 Compared to Nine Months Ended December 31,
1998
Net Sales
Net sales for the nine month period ended December 31, 1999 increased 3% to
$5,132,000 from $4,963,000 in the comparable period of fiscal 1999. This
increase is primarily due to increased sales of bulk Spirulina tablets and our
natural astaxanthin product, NatuRose, offset in part by lower sales of packaged
consumer products.
International sales represented 48% and 44% of total net sales for the nine
month periods ended December 31, 1999 and 1998, respectively. This increase was
primarily due to higher sales of bulk Spirulina tablets to our largest customer,
a European distributor of natural products. Sales to this customer, Spirulina
International, BV, accounted for 19% of total net sales for the nine month
period ended December 31, 1999.
Gross Profit
Gross profit increased 29% to $905,000 for the nine month period ended
December 31, 1999, from $702,000 in the comparable period of fiscal 1999. Our
gross profit margin increased to 18% for the nine month period ended December
31, 1999, compared to 14% for the comparable period of fiscal 1999. This
increase in gross profit margin from the prior year period is primarily
attributable to increased sales of higher margin bulk tablets and decreased
astaxanthin production costs, offset in part by increased Spirulina production
costs related to operating at lower than optimum production levels during the
first six months of fiscal 2000.
13
<PAGE>
Operating Expenses
Operating expenses were $5,018,000 during the nine month period ended
December 31, 1999, as compared to $2,485,000, in the comparable period of fiscal
1999. The aforementioned asset impairment charge of $2,796,000 is included in
the current fiscal year's operating expenses. In compliance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", the Company was obligated to record the asset impairment charge
on the construction-in-progress balance relating to the 93-acre astaxanthin
expansion project. If the effect of this impairment charge is omitted for
comparison purposes, operating expenses during the nine month period amounted to
$2,222,000, a decrease of 11% from $2,485,000 in the comparable period of fiscal
1999. This decrease was primarily due to decreased research and development and
sales and marketing expenses for the nine month period ended December 31, 1999.
Research and Development. Research and development expenses amounted to
$446,000 for the nine month period ended December 31, 1999, a decrease of 32%
from $652,000 for the comparable period of fiscal 1999. This decrease from the
prior year was primarily due to reduced personnel expenditures and lower outside
service expenses related to completing the development of improved production
technology for natural astaxanthin during fiscal 1999.
Sales and Marketing. Sales and marketing expenses amounted to $659,000 for
the nine month period ended December 31, 1999, a decrease of 12% from $747,000
for the comparable period of fiscal 1999. This decrease from the prior year is
primarily due to reduced personnel and travel expenses dictated by lower
revenues, offset in part by increased advertising and consulting service costs.
Other Expense
Other expense for the nine month period ended December 31, 1999 was $91,000
higher than the $123,000 recorded for the comparable period of fiscal 1999. The
increase from the prior year is primarily due to the increased interest rate on
borrowings under the Company's current financing agreement.
Income Taxes
An income tax benefit of $3,000 was recorded for the nine month period
ended December 31, 1999 due to an increase of the Company's estimated state tax
refund for the fiscal year ended March 31, 1999. The interperiod tax benefit of
$3,000 compares to an interperiod tax benefit of $114,000 recorded for the
comparable period of fiscal 1999.
Net Loss
The Company recorded a net loss of $4,324,000 for the nine months ended
December 31, 1999, $2,796,000 of which represents the effect of the
aforementioned asset impairment charge on the construction-in-progress balance
relating to the 93-acre astaxanthin expansion project. If the effect of this
asset impairment charge is omitted for comparison purposes, the Company recorded
a loss of $1,528,000 for the nine months ended December 31, 1999, an improvement
in result of 15% over the net loss of $1,792,000 for the comparable period of
fiscal 1999. This improvement in result is primarily attributable to increased
sales of bulk Spirulina powder and tablets, slightly decreased cost of product
sales and decreased research and development expenses, offset by higher interest
expense and accelerated amortization of fees related to its present financing
agreement due to the notification received from the lender of its intent to exit
the lending agreement effective December 31, 1999.
14
<PAGE>
Variability of Results
The Company has experienced significant quarterly fluctuations in operating
results and anticipates that these fluctuations may continue in future periods.
Future operating results may fluctuate as a result of changes in sales levels to
our largest customers, new product introductions, production difficulties,
weather patterns, the mix between sales of bulk products and packaged consumer
products, start-up costs associated with new facilities, expansion into new
markets, sales promotions, competition, increased energy costs, the announcement
or introduction of new products by competitors, changes in our customer mix,
overall trends in the market for our products, government regulations and other
factors beyond our control. While a significant portion of our expense levels
are relatively fixed, and the timing of increases in expense levels is based in
large part on forecasts of future sales, if net sales are below expectations in
any given period, the adverse impact on results of operations may be magnified
by our inability to adjust spending quickly enough to compensate for the sales
shortfall. We may also choose to reduce prices or increase spending in response
to market conditions, which may have a material adverse effect on financial
condition and results of operations.
The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely basis, to
comply with the terms of its financing agreement, to obtain additional financing
or refinancing as may be required, to attain profitability, or a combination
thereof. There can be no assurance that these efforts will be successful or that
the Company will return to generating profit on either a quarterly or annual
basis.
Liquidity and Capital Resources
Cash Flows
The Company's working capital for the nine month period ended December 31,
1999 decreased by $503,000 to $414,000 from $917,000 at March 31, 1999. Cash and
cash equivalents decreased by $202,000 to $120,000 and is primarily attributable
to cash flows of $326,000 used for investment in property and equipment and
$150,000 used for reduction of long-term debt and capital lease obligations,
offset in part by net proceeds from the exercise of common stock warrants and
options and issuance of stock and common stock warrants totaling $134,000 and an
increase in short-term revolving debt of $165,000.
The primary uses of cash flows in operating activities during the first
nine months of fiscal 2000 was a net loss of $4,324,000 adjusted by depreciation
and amortization totaling $983,000, the impairment charge of $2,796,000, a
decrease in inventories of $338,000, an increase in accounts receivable of
$331,000, and a Hawaii State income tax refund of $112,000. These calculations
indicate that cash flows provided by operating activities for the first nine
months of fiscal 2000 amounted to $41,000 compared to cash used in operating
activities of $588,000 in the comparable period of fiscal 1999.
Cash used in investing activities for capital expenditures during the first
nine months of fiscal 2000 decreased to $326,000 compared to $526,000 for the
comparable period of fiscal 1999.
15
<PAGE>
Cash provided by financing activities during the first nine months of
fiscal 2000 amounted to $82,000, compared to cash used in financing activities
of $135,000 for the comparable period of fiscal 1999. The primary sources of
cash flows from financing activities during the first nine months of fiscal 2000
were net proceeds from issuance of common stock and the exercise of common stock
warrants and options totaling $134,000 and net borrowings on a short-term
revolving line of credit of $165,000 offset in part by principal payments on
long-term debt of $150,000 and repayment of capital lease obligations of
$67,000.
Loan and Security Agreement
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 major components of
the credit facility include 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 $750,000 (amortized in equal payments of $12,500
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 December 31, 1999, the prime rate was 8.5%) until the Company
achieves certain financial performance levels, at which time the interest rate
will decrease to prime plus 1.25%. Interest is calculated on a base amount of $1
million or the outstanding loan balance, whichever is greater. The fee for
renewing the Agreement beyond the maturity date of July 31, 2001 was set at 5%
of the aggregate outstanding balance at the end of the initial term of the
agreement.
The Agreement contains certain restrictive covenants which include, among
other things, the maintenance of minimum consolidated net worth, as defined, and
an acceleration clause 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 has classified the aggregate outstanding balance
on this Agreement of $1,697,000, representing outstanding working capital loans
on a revolving basis of $1,159,000 and an equipment term loan of $538,000, as a
current liability in the consolidated balance sheet at December 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
"going concern" opinion issued by the Company's independent auditors for the
1999 fiscal year and the fact that stockholders' equity has dropped below
$20,000,000. In anticipation of the December 31, 1999 exit date, all remaining
related capitalized loan costs (totaling $61,000) have been fully amortized as
of December 31, 1999. These costs were previously being amortized over the life
of the Agreement since July 1998.
At December 31, 1999, the remaining available credit under the Agreement
was calculated by the lender to be $42,000. This amount excludes the facility
for the acquisition of new machinery and equipment which requires the Company to
maintain a Debt Service Coverage ratio of at least 1.25 : 1 for the two prior
full consecutive quarters.
16
<PAGE>
In January 2000, the lender amended its letter of October 8, 1999 and has
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 will be made on eligible collateral at a rate of 75% for
receivables, a decrease of 5% from the original Agreement dated July 28, 1998.
The receivable advance rate will be reduced on the 24th day of each subsequent
month by 5% until the exit date of March 31, 2000. Advances on eligible
inventories will follow the schedule set in the letter dated October 8, 1999 and
decrease by 1% each subsequent month until the exit date of March 31, 2000.
Repayment of the equipment term loan, with a balance of $538,000 at December 31,
1999, will increase to $20,000 per month from $12,500 per month as originally
set forth in the Agreement dated July 28, 1998.
The Company is currently seeking alternate sources of financing to replace
this Agreement and has reason to believe that it will be successful. In January
2000, the Company entered into a letter of intent with a new lender to refinance
its existing debt and provide working capital to the Company. Subject to
favorable completion by the lender of its due diligence process, the Company
expects this new credit facility to be in place within 90 days of the date of
application. There can, however, be no assurance that the Company will be
successful, or that if successful, that it will be able to obtain replacement
financing under favorable terms. Failure to obtain alternative financing would
have a material adverse effect on the Company's financial position, results of
operations and liquidity.
Norsk Hydro Joint Venture
In June 1999, we reached a preliminary agreement with Norsk Hydro ASA
("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. Under the terms of this Agreement, Norsk Hydro
was to fund the optimization of Cyanotech's production technology for
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 astaxanthin production technology, and
subsequently made significant improvements. Due to the improved production
economics, and the initial interest in the human astaxanthin product, the
Company has decided not to finalize the joint venture relationship. Negotiations
are, however, continuing with Norsk Hydro to find a basis for some kind of
long-term cooperation.
As a result of ending the joint venture negotiations, the projected future
cash flows that were expected from the Norsk Hydro joint venture are now zero.
In accordance with the provisions of Statement of Financial accounting standards
No. 121 - Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, an impairment loss is 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 amounting to
$2,796,000 on the construction-in-progress balance related to the 93-acre
astaxanthin project. The impaired asset consists primarily of the cost incurred
to date to level the 93-acre facility and construction contract termination
costs.
Construction Commitment
The Company has a commitment with a contractor for this 93-acre expansion
project which was suspended in February 1998. On June 15, 1999, we reached an
agreement with the contractor to resume work on the suspended construction
project on or before June 1, 2000. In consideration of this extension of the
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 all work not completed by September 30, 2000. If work does
not resume on or before June 1, 2000, then the contract will be considered to
have been terminated by Cyanotech.
17
<PAGE>
On September 17, 1999, we reached a further agreement with this project
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. 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 agreement
with the contractor for completion of the project, we may proceed with an
alternate contractor after paying the remaining $168,000 plus interest. As of
December 31, 1999, the credit facilities available to Cyanotech, as described
above, unless supplemented by funds from other sources, would not be sufficient
to finance this construction work.
Going Concern Status
The unaudited consolidated financial statements at December 31, 1999 have
been prepared on a going concern basis, which assumes continuity of operations
and realization of assets and liquidation of liabilities in the ordinary course
of business. The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to comply with the terms of its financing agreement, to obtain additional
financing as may be required, to attain profitability, or a combination thereof.
The Company is actively seeking other possible sources of external financing,
but unless it is successful, there may be liquidity shortfalls in future
periods. There can be no assurance that the Company will be successful in
obtaining additional financing or will have sufficient cash resources to support
its continued operations.
Year 2000 Compliance
The Company has not experienced any significant disruptions to financial or
operating activities caused by failure of its computer systems resulting from
Year 2000 issues. Management does not expect Year 2000 issues to have a material
effect on the Company's operations or financial condition.
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.
18
<PAGE>
Outlook
This outlook section contains a number of forward-looking statements, all
of which are based on current expectations. Actual results may differ
materially. See also the note at the beginning of this Item 2.
The Company continues to experience positive results from the downsizing
and asset management program put in place during the fourth quarter of fiscal
1999. We are balancing our production resources between our primary products and
plan to allocate more resources to natural astaxanthin production in future
quarters to meet the anticipated demand of customers for NatuRose, our natural
astaxanthin product for the aquaculture and animal pigmentation markets and
BioAstin, our natural astaxanthin product for the human nutrition market.
During the three months ended December 31, 1999, our gross profit margin on
sales of NatuRose improved significantly due primarily to production
efficiencies resulting from the optimization program begun in the first quarter
of this fiscal year on natural astaxanthin production. We expect these
improvements to continue into future periods but there can be no assurance that
the gross profit margin of our natural astaxanthin products will not be
adversely affected by higher production costs related to operating at lower than
optimal production levels. We are continuing our optimization program targeted
at our PhytoDome CCS(TM) processing systems and production throughput; however,
we may experience increased costs related to production of our natural
astaxanthin products in future periods. During the three months ended December
31, 1999, the Company returned to operating at near capacity for both Spirulina
and astaxanthin products.
In line with our goal of returning to profitability as quickly as possible,
the Company suspended development activities directed at the genetically
engineered mosquitocide project and the Aldolase Catalytic Antibody 38C2 during
the three months ended December 31, 1999. As a result, research and development
costs are expected to decline during the rest of this fiscal year and into
fiscal 2001.
During the three months ended December 31, 1999, the Company initiated
sales through a distribution channel into Chile of its natural astaxanthin
pigment product, NatuRose. Chile is the world's second largest salmon producing
country. Negotiations are also continuing with Norsk Hydro to find a basis for
some kind of long-term cooperation. The Company believes that continuing its
sales efforts in the world's two largest salmon producing regions may lead to
increased sales of its natural astaxanthin pigment product, NatuRose.
Cyanotech believes it is the only company for which natural astaxanthin has
been reviewed without objection by the U.S. Food and Drug Administration (FDA),
allowing the Company to offer the product for sale and use in the United States
as a human dietary supplement. In December 1999, we entered into a licensing
agreement with Banner Pharmacaps ("Banner") for manufacture and distribution of
softgel capsules containing BioAstin. Banner's customers in the United State and
Canada represent many of the major North American pharmaceutical and nutritional
companies. This agreement is aligned with Cyanotech's strategy to address the
health care applications market for its natural astaxanthin product.
Concurrently, Cyanotech filed a U.S. patent application based on the protective
properties of astaxanthin to retard and ameliorate fever blisters (cold sores)
and canker sores and, subsequent to the end of the quarter, filed a U.S. patent
application for retarding and ameliorating carpal tunnel syndrome (CTS) and
tenosynovitis also based on the protective properties of astaxanthin.
19
<PAGE>
Cyanotech's strategy has been, and continues to be, to produce higher value
natural products from microalgae. To continue the implementation of this
strategy, we have broadened our product offerings with the addition of BioAstin,
our natural astaxanthin product for the human nutrition market.
The Company's future results of operations and the other forward-looking
statements contained in this Outlook, in particular the statements regarding
revenues, gross margin, research and development, and capital spending, involve
a number of risks and uncertainties. In addition to the factors discussed above,
among the other factors that could cause actual results to differ materially are
the following: business conditions and growth in the natural products industry
and in the general economy; changes in customer order patterns, and changes in
demand for natural products in general; changes in weather conditions;
competitive factors, such as competing Spirulina producers increasing their
production capacity and their impact on world market prices for Spirulina;
government actions; shortage of manufacturing capacity; and 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.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. 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 regarding its alleged
intellectual property rights. Aquasearch 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 United States District Court denied
Cyanotech's motion for summary judgment of non-infringement and
patent invalidity as to Aquasearch, Inc's ("Aquasearch") 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. The Company intends to continue pursuing
its claim that Aquasearch misappropriated and utilizes Cyanotech
trade secrets. In the opinion of management, the ultimate
disposition of this matter will not have a material adverse
effect on the Company's consolidated financial position, results
of operations or liquidity.
Item 3. In July 1998, the Company entered into a Loan and Security
Agreement (Agreement) with a lender which is described in detail
in the discussion on Liquidity and Capital Resources in Item 2 of
this report. The Agreement contains certain restrictive
covenants, which include, among other things, the maintenance of
minimum consolidated net worth, as defined, and an acceleration
clause to take effect on the occurrence of an event with a
material adverse effect on the Company, as defined. On July 13,
1999, the lender declared the Company to be in technical 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%. On October 8, 1999, the
lender informed the Company of its intent to terminate its
agreement with Cyanotech, effective December 31, 1999, due to the
Company being in default on certain financial covenants. This
resulted from the "going concern" opinion issued by the Company's
independent auditors for the 1999 fiscal year and the fact that
stockholders' equity has dropped below $20,000,000. Consequently,
the Company has classified the aggregate outstanding balance on
this Agreement of $1,697,000, representing outstanding working
capital loans on a revolving basis of $1,159,000 and an equipment
term loan of $538,000, as a current liability in the consolidated
balance sheet at December 31, 1999.
21
<PAGE>
In January 2000, the lender amended its letter of October 8, 1999
and has 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 will be
made on eligible collateral at a rate of 75% for receivables, a
decrease of 5% from the original Agreement dated July 28, 1998.
The receivable advance rate will be reduced on the 24th day of
each subsequent month by 5% until the exit date of March 31,
2000. Advances on eligible inventories will follow the schedule
set in the letter dated October 8, 1999 and decrease by 1% each
subsequent month until the exit date of March 31, 2000. Repayment
of the equipment term loan, with a balance of $538,000 at
December 31, 1999, will increase to $20,000 per month from
$12,500 per month as originally set forth in the Agreement dated
July 28, 1998.
The Company is currently seeking alternate sources of financing
to replace this Agreement and has reason to believe that it will
be successful. In January 2000, the Company entered into a letter
of intent with a new lender to refinance its existing debt and
provide working capital to the Company. Subject to favorable
completion by the lender of its due diligence process, the
Company expects this new credit facility to be in place within 90
days of the date of application. However, there can be no
assurance that the Company will be successful, or that if
successful, that it will be able to obtain replacement financing
under favorable terms. Failure to obtain alternative financing
would have a material adverse effect on the Company's financial
position, results of operations and liquidity.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are furnished with this report:
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1999.
22
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CYANOTECH CORPORATION (Registrant)
February 11, 1999 By: /s/ Gerald R. Cysewski
- --------------------------- ------------------------------
(Date) Gerald R. Cysewski
Chairman of the Board,
President and Chief Executive Officer
By: /s/ Ronald P. Scott
------------------------------
Ronald P. Scott
Executive Vice President - Finance &
Administration
(Principal Financial and
Accounting Officer)
23
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