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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR COMMISSION FILE
ENDED OCTOBER 31, 1996 NUMBER: 33-23460-LA
AQUASEARCH, INC.
(Exact name of Registrant as specified in its charter)
COLORADO 33-0034535
(State of Incorporation) (I.R.S. Employer
Identification No.)
73-4460 QUEEN KA'AHUMANU HIGHWAY
SUITE 110
KAILUA-KONA, HAWAII 96740
(808) 326-9301
(Address and telephone of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Check whether issuer (1) has filed all reports required to be filed by
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 [ X ] Yes [ ] No.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
Registrant's revenues for its most recent fiscal year: $10,000
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the
average bid and asked prices of such stock, as of a specified date within the
past 60 days was $15,515,146 as of October 31, 1996.
The number of shares outstanding of each of issuer's classes of common
equity, as of October 31, 1996, was 40,829,331 shares of Common Stock,
$0.0001 par value.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure
Format (check one): [ ] Yes [X] No
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PART I
THIS ANNUAL REPORT ON FORM 10-KSB (THE "ANNUAL REPORT") CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, (THE "EXCHANGE ACT"), INCLUDING
STATEMENTS THAT INDICATE WHAT THE COMPANY "BELIEVES", "EXPECTS" AND
"ANTICIPATES" OR SIMILAR EXPRESSIONS. THESE STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM
THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. SUCH FACTORS
INCLUDE, AMONG OTHERS, THE INFORMATION CONTAINED UNDER THE CAPTION "PART II,
ITEM 6, MANAGEMENT'S PLAN OF OPERATION - FACTORS THAT MAY AFFECT FUTURE
OPERATING RESULTS" AND ELSEWHERE IN THIS ANNUAL REPORT. THE READER IS
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS,
WHICH REFLECT MANAGEMENT'S ANALYSIS ONLY AS OF THE DATE OF THIS ANNUAL
REPORT. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS
OF ANY REVISION OF THESE FORWARD-LOOKING STATEMENTS. THE READER IS STRONGLY
URGED TO READ THE INFORMATION SET FORTH UNDER THE CAPTION "PART II, ITEM 6,
MANAGEMENT'S PLAN OF OPERATION-FACTORS THAT MAY AFFECT FUTURE OPERATING
RESULTS" FOR A MORE DETAILED DESCRIPTION OF THESE SIGNIFICANT RISKS AND
UNCERTAINTIES.
ITEM 1. DESCRIPTION OF BUSINESS.
BACKGROUND
Aquasearch, Inc. ("Aquasearch" or the "Company") is a development stage
company that is developing a proprietary, photosynthetic, closed-system known
as the Aquasearch Growth Module (the "AGM") to cultivate microalgae. The
Company was founded in February 1988 as a Colorado corporation and acquired
all the assets of Aquasearch, Inc., a California corporation, in May 1988 in
a stock-for-stock exchange. The Company commenced operations in Borrego
Springs, California and developed its first prototype of the AGM in the
summer of 1988. During the period from the summer of 1988 until March 1993,
the Company conducted additional research and development to refine its
production technology.
In March 1993, the Company formed a joint venture company with Cyanotech
Corporation ("Cyanotech"), an unaffiliated producer of microalgae, to produce
astaxanthin-rich microalgae. Aquasearch contributed approximately $147,000
in capital to the joint venture company and licensed its AGM technology to
the joint venture company. Cyanotech contributed approximately $15,000 in
capital to the joint venture company and made available its facilities and
personnel at the Hawaii Ocean Science and Technology ("HOST") Business Park
at Keahole Point, Kailua-Kona, Hawaii. AGMs were constructed in July 1993
which demonstrated the economics of the production process and provided
samples of astaxanthin-rich microalgae for analysis and trial applications.
In the summer of 1994, Aquasearch initiated discussions with Cultor Ltd.
("Cultor") regarding the purchase of astaxanthin-rich microalgae. While
awaiting a response from Cultor, Cyanotech elected to discontinue its
participation in the joint venture company and the joint venture agreement
was terminated by mutual
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consent in November 1994. The dissolution agreement provided that all
intellectual property rights to the AGM technology reverted to Aquasearch.
In December 1994, Cultor initiated a series of feeding trials with
farmed salmon using astaxanthin-rich microalgae produced by the Company.
In April 1995, the Company leased a half-acre site within the HOST
Business Park and began construction of a small research and development
facility capable of producing small amounts of microalgae containing
astaxanthin for marketing purposes. This half-acre facility, comprised of
AGMs and an operating laboratory, was completed in June 1995.
In July 1995, the Company entered into a Supply Agreement (the "Svenska
Foder Supply Agreement") with Svenska Foder ("Svenska Foder"), then a
subsidiary of Cultor, pursuant to which Svenska Foder agreed to act as the
exclusive distributor of the Company's natural astaxanthin product for animal
feed and animal nutrition applications in Sweden, Norway and Finland for
poultry, pigs, cattle and horses. In December 1996, Cultor sold its majority
stake in Svenska Foder and acquired all of Svenska's Foder rights in the
Svenska Foder Supply Agreement.
In July 1995, the Company leased additional space in the HOST Business
Park to expand its half-acre research and development facility to a one-acre
research and development/production facility. Construction of the one-acre
research and development/production facility was completed in October 1995.
In May 1996, the Company entered into a three-year Distribution and
Development Agreement with Cultor (the "Cultor Distribution and Development
Agreement") pursuant to which the Company will act as the exclusive worldwide
supplier of natural astaxanthin derived from microalgae to Cultor in the
field of animal feed and animal nutrition and Cultor will act as the
exclusive worldwide distributor of Aquasearch's natural astaxanthin product
in the field of animal feed and animal nutrition. Under the Cultor
Distribution and Development Agreement, Cultor and Aquasearch may, at
Cultor's option, mutually develop a new joint venture company for the sole
purpose of producing and selling natural astaxanthin derived from microalgae
in the field of animal feed and animal nutrition. The terms of the Cultor
Distribution and Development Agreement are more fully described below under
the caption "Corporate Partner Relationships - Cultor."
The Company believes that strategic relationships and collaborations
will continue to be an important part of its business strategy. There can be
no assurance that the Company will be able to maintain existing corporate
partner relationships, enter into future relationships to develop additional
applications for natural astaxanthin or to develop new microalgae products or
that any such relationships will be successful.
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SUMMARY DESCRIPTION OF BUSINESS
Aquasearch develops and commercializes natural products from microalgae
using its proprietary, photosynthetic, closed-system technology known as the
AGM. Microalgae are a diverse group of over 30,000 species of microscopic
plants that have a wide range of physiological and biochemical
characteristics. Microalgae produce many different and unusual fats, sugars,
proteins, amino acids, vitamins, enzymes, pigments and other bioactive
compounds that have existing and potential commercial applications in such
fields as animal and human nutrition, food colorings, cosmetics, diagnostic
products, pharmaceuticals, research grade chemicals, pigments and dyes.
Microalgae grow ten times faster than the fastest growing land-based crops
and represent a largely unexploited and renewable natural resource with a
biodiversity comparable to that of land-based plants.
Aquasearch believes that its AGM platform technology can be used to
cultivate hundreds of species of microalgae. The AGM utilizes
computer-controlled equipment to monitor and adjust the turbulence rate, pH,
gas exchange, temperature and nutrient levels within the AGM to optimize
microalgae growth rates. Aquasearch believes that the AGM offers significant
technical and economic advantages compared with the open pond systems
currently used by certain competitors, including increased yields and the
ability to economically cultivate hundreds of microalgal species at
commercial scale that cannot be produced in open pond systems due to
substantially higher risks of contamination and lack of control. Aquasearch
also believes that the AGM compares favorably with other known closed systems
with respect to both capital and operating costs. Notwithstanding these
perceived advantages of the Company's technology, the production of various
species of microalgae on a commercial scale involves various risks and
uncertainties.
Aquasearch's first commercial product is astaxanthin, a naturally
occurring red pigment derived from HAEMATOCOCCUS PLUVIALIS, a freshwater
microalga. The primary market for astaxanthin currently is aquaculture.
According to the most recent published data available from the Food and
Agricultural Organization of the United Nations (the "UN-FAO"), the global
aquaculture market steadily doubled in value from $13 billion in 1985 to $26
billion in 1990, and is projected to grow to more than $50 billion by the
year 2000. UN-FAO data also indicates that farmed salmon and shrimp (the
fastest and fourth fastest growing aquaculture products) will account for
more than half the total value of world aquaculture production by the year
2000. Free swimming salmon and shrimp acquire pink flesh from natural
astaxanthin contained in microalgae and other species ingested in the wild.
Farmed salmon and shrimp, however, currently acquire pink flesh only from the
addition of synthetic astaxanthin (or a less effective substitute product) to
their feed. The world market for astaxanthin in aquaculture is estimated to
be approximately $125 million in 1996, and continued growth is expected.
Aquasearch believes it is the first company to develop technology to
produce commercial quantities of natural astaxanthin from microalgae at
economically viable production costs. The world market for astaxanthin is
currently dominated by a single producer, Hoffman-LaRoche, which has
maintained the market price of its synthetic astaxanthin product (which is
derived from petrochemicals) at approximately $2,500 per kilogram for more
than a decade. Aquasearch's natural astaxanthin product will compete directly
with Hoffman-LaRoche's synthetic astaxanthin product. There can be no
assurance
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that the market price of synthetic astaxanthin will be maintained at
historical levels or what effect this may have on the market price of
Aquasearch's natural astaxanthin product.
In May 1996, the Company entered into a three-year Distribution and
Development Agreement with Cultor pursuant to which the Company will act as
the exclusive worldwide supplier of natural astaxanthin derived from
microalgae to Cultor in the field of animal feed and animal nutrition and
Cultor will act as the exclusive worldwide distributor of Aquasearch's
natural astaxanthin product in the field of animal feed and animal nutrition.
Under the Cultor Distribution and Development Agreement, Cultor and
Aquasearch may, at Cultor's option, mutually develop a new joint venture
company for the sole purpose of producing and selling natural astaxanthin
derived from microalgae in the field of animal feed and animal nutrition.
The terms of the Cultor Distribution and Development Agreement are more fully
described below under the caption "Corporate Partner Relationships - Cultor."
INDUSTRY BACKGROUND
Microalgae have the following properties that make their commercial
production attractive: (i) microalgae grow ten times faster than sugar cane,
the fastest growing land-based crop (which makes it possible to harvest new
crops every two to three days utilizing optimal culture and processing
technologies), (ii) microalgae have a uniform cell structure with no bark,
stems, branches or leaves (which permits easier extraction of products and
higher utilization of cells and makes it practical to manipulate and control
growing conditions in order to optimize particular cell characteristics),
(iii) microalgae naturally produce many different and unusual fats, sugars,
proteins, amino acids, vitamins, enzymes, pigments and other bioactive
compounds and (iv) the raw materials required for microalgae growth are
abundant and include sunlight, carbon dioxide and nitrogen.
Existing and potential commercial applications for microalgae include
animal and human nutrition, natural food colorings, cosmetics ingredients and
colorings, diagnostic products, pharmaceuticals, research grade chemicals and
pigments and dyes. The largest volume of microalgae products produced today
are algae used as human food and nutritional supplements. These include
forms of SPIRULINA spp., CHLORELLA spp., lake grown blue green algae
(APHANIZOMENON FLOS-AQUAE) and natural beta carotene from DUNALIELLA SALINA.
These microalgae food supplements contain, in varying degrees, highly
absorbable sources of phytonutrients including mixed carotenoids, B vitamins,
GLA, protein and essential amino acids. Emerging commercial applications for
microalgae include products for drug design, pharmaceuticals and diagnostics.
One company has developed an infant formula ingredient from microbial oils
enriched with microbial fatty acid components derived from microalgae and
fungi that may be linked to the development and function of the human brain
and retina.
Although many potentially valuable compounds have been identified in
microalgae, until recently there was no technology to provide for cost
effective production of multiple species of microalgae in commercial
quantities. To the Company's knowledge, and with the exception of the infant
formula product, substantially all other commercial quantities of microalgae
products are currently produced in open pond environments with microalgae
species that thrive in harsh environments which eliminate or neutralize
competing species, predators and contaminants. These few species, such as
SPIRULINA spp.,
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CHLORELLA spp., and DUNALIELLA SALINA require a medium for growth
characterized by either an extremely high salinity or pharmaceuticals or
another chemistry that is hostile to most competing species, predators and
contaminants. Accordingly, the problem of contamination is drastically
reduced in such abnormal environments, as is the number of microalgae species
that can be produced.
Commercial cultivation of the other three principal groups of microbes
- -- bacteria, yeasts and fungi -- is currently accomplished in closed,
controlled bioreactors (fermentors), and provides the basis for multi-billion
dollar industries (such as pharmaceuticals) based on natural products
produced by these microbes. The Company believes that microalgae are the
only major group of microbes that are not currently widely cultivated in
closed, controlled cultivation systems and that such closed systems are
essential for commercial exploitation of the estimated 30,000 species of
microalgae.
THE AQUASEARCH SOLUTION
Aquasearch has designed, developed and implemented proprietary
production technologies, systems and processes that provide a controlled
environment for the principal conditions required to optimize and maintain
microalgae growth. This technology includes the AGM, which is a
closed-system, photosynthetic, bioreactor, that utilizes computer-controlled
equipment to monitor and adjust the turbulence rate, pharmaceuticals, gas
exchange, temperature and nutrient levels within the AGM to optimize
microalgae growth rates. To date, the AGM has produced at least a doubling
of growth rate in tested species compared with conventional open pond
technology. Equally important, the AGM is a closed, sterile, controlled,
photosynthetic system that protects the cultured microalgal species from many
bacteria and other microbial contaminants that frequently destroy them in
conventional open pond systems.
As a result, the AGM enables the continuous growth and harvesting of
microalgae for periods of weeks or months without re-inoculation, thus
enabling a semi-batch continuous production cycle. The specific processes
and controlled conditions are designed to meet the unique requirements of
each microalgal species. To date, Aquasearch has conducted experiments on
five different microalgal species, each with significantly different optimal
growth environments. In each case, the AGM has provided a stable environment
that fostered sustained continuous growth. Based on these preliminary
studies, the Company believes that the AGM can be used to cultivate hundreds
of species of microalgae.
The Company has also designed, developed and implemented proprietary
harvesting technologies, systems and processes for the production of
microalgae that it believes provide significant competitive advantages over
traditional microalgae production techniques.
Aquasearch believes that the capital costs of operating the AGM compares
favorably with other known closed, cultivation systems, thus reducing the
Company's costs of production and potentially expanding the number of
microalgae species that can be commercially exploited.
Notwithstanding these perceived advantages of the Company's technology,
the production of certain species of microalgae on a commercial scale
involves many significant risks and uncertainties.
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The Company believes that the location of its research and development
and production facility in the HOST Business Park at Keahole Point,
Kailua-Kona, Hawaii is an important competitive advantage. Aquasearch
believes that the combination of consistent warm temperatures, abundant
sunlight, low rainfall and the provision of cold, clean deep seawater at this
facility makes this a favorable location to economically cultivate microalgae
on a large scale year round. The Company believes that, in contrast to its
facility (and others in the HOST Business Park and elsewhere in Hawaii),
other microalgae production facilities located in areas lacking these
characteristics are likely to be subject to significantly higher costs of
production and fewer production days per year.
At the HOST Business Park, Aquasearch has access to cold, clean deep
seawater that is pumped up from a depth of 2,000 feet. This seawater is used
as a means of controlling the temperature of the AGM and may be used by
Aquasearch as a source of nutrients for culture of marine microalgae.
Additionally, Aquasearch's facility has access to a complete industrial
infrastructure and is located 30 miles from a deep water port and immediately
adjacent to an international airport.
The concentration of the Company's existing and planned production
capacity in the HOST Business Park (as well as any other production sites on
the Big Island of Hawaii) involves certain risks and uncertainties relating
to potential natural disasters such as volcanic eruptions, earthquakes, tidal
waves, hurricanes and related matters indigenous to Hawaii.
AQUASEARCH'S STRATEGY
The Company's objective is to become the leader in cost effective
cultivation technology to produce natural products from microalgae. The
Company's strategies to achieve this goal may be summarized as follows:
- BUILD SIGNIFICANT MARKET SHARE IN THE ASTAXANTHIN MARKET.
Aquasearch intends to build upon its position as one of the first
producers of commercial quantities of natural astaxanthin from
microalgae. Through its collaboration with Cultor, Aquasearch's
products will gain faster access to the world market than would
have been possible if Aquasearch had attempted to build its own
marketing and distribution channel first. The Company believes
that the combination of its microalgae cultivation technology and
expertise with Cultor's animal feed and animal nutrition research
and development capabilities and worldwide sales, marketing and
distribution network is an important competitive advantage.
Aquasearch plans to independently develop and/or collaborate with
Cultor and other corporate partners with respect to the development
of additional applications for its natural astaxanthin product.
- CONTINUALLY IMPROVE AND ENHANCE ITS CORE PLATFORM TECHNOLOGY.
Aquasearch has developed proprietary, microalgae cultivation and
harvesting technologies and processes that it believes provide it
with a significant competitive advantage over other known
cultivation technologies. Aquasearch plans to continue to improve
upon its AGM technology and other technologies in order to improve
yields of natural astaxanthin from HAEMATOCOCCUS PLUVIALIS and to
develop additional products from other microalgae species.
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- DEVELOP OTHER COMMERCIAL PIGMENTS. Aquasearch plans to undertake
additional research and development of potential commercial pigments
from other species of microalgae. In particular, Aquasearch plans
to determine whether canthaxanthin, another carotenoid pigment, can
be derived cost-effectively from microalgae in commercial quantities.
Synthetic canthaxanthin is currently used in cakes, candy, soda and
processed meats. The Company believes that the world market for
synthetic canthaxanthin is currently approximately $200 million
per year.
- EXPAND STRATEGIC ALLIANCES. Aquasearch intends to develop new, and
strengthen existing, relationships with companies interested in
commercializing microalgae products. In particular, Aquasearch
is targeting potential partners, like Cultor, that have greater
research and development, scientific, technical, financial,
marketing, sales and/or distribution resources than Aquasearch.
The Company's primary objective in expanding relationships with
these companies is to gain visibility into their product
requirements in order further develop Aquasearch's technology and
expand the markets for its existing and potential products.
- DEVELOP PHARMACEUTICALS, COSMETICS AND OTHER APPLICATIONS.
Aquasearch currently plans to conduct research and development
of potential pharmaceutical, cosmetics and other applications
from microalgae. Aquasearch intends to identify such potentially
marketable compounds through the efforts of its existing technical
staff, its Scientific Advisory Board and existing academic
relationships with scientific institutes and universities such as
Scripps Institute of Oceanography, University of California, San
Diego; University of Hawaii at Manoa and the University of
Southern Mississippi.
PRODUCTS AND POTENTIAL PRODUCTS
The following discussion describes the Company's existing natural
astaxanthin product and potential future products:
EXISTING PRODUCT: ASTAXANTHIN
Substantially all of Aquasearch's efforts to date have been focused on the
development of its AGM technology and the initial production of natural
astaxanthin derived from HAEMATOCOCCUS PLUVIALIS. The two primary markets for
natural astaxanthin are currently aquaculture and poultry feed.
AQUACULTURE. Astaxanthin is the red pigment that occurs in the natural
diets of a number of marine species (including, but not limited to, salmon,
shrimp, carp, trout, red sea bream, ornamental fish, lobsters and crabs) which
provides the red coloring in their flesh or shells. In nature, astaxanthin,
like other marine pigments, is produced only by microalgae and is then passed
up the food chain. Farmed salmon, trout and shrimp do not obtain astaxanthin
in non-pigmented commercial fish feed. The resulting salmon, trout and
shrimp taste the same as pink salmon, trout and shrimp, but, due to consumer
preference, fetch about half the price. (Studies have demonstrated that
color is the most significant factor influencing consumer salmon purchases.)
For this reason, fish farmers have an important incentive to add astaxanthin
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(in synthetic or natural form) or an alternative product into their fish feed
in order to increase the value of their produce.
The aquaculture market for synthetic astaxanthin is currently estimated
to be approximately $125 million per annum, and continued growth is expected.
This market is currently dominated by a single producer, Hoffman-LaRoche,
which has maintained the market price of synthetic astaxanthin at about
$2,500 per kilogram for more than a decade. Aquasearch has entered into an
exclusive distribution and development agreement with Cultor with respect to
the production and distribution of Aquasearch's natural astaxanthin product
derived from HAEMATOCOCCUS PLUVIALIS for use in animal feed and animal
nutrition. Cultor owns Ewos, a Finnish company with production facilities
worldwide, which Aquasearch believes currently sells approximately one-third
of the world's salmon feed. Aquasearch's natural astaxanthin product has
compared favorably with synthetic astaxanthin in tests conducted by Cultor.
Aquasearch's natural astaxanthin product will compete directly with
Hoffman-LaRoche's synthetic astaxanthin product in the aquaculture feed
market. There can be no assurance that the market price of synthetic
astaxanthin will be maintained at historical levels or what effect this may
have on the market price of Aquasearch's natural astaxanthin product.
POULTRY FEED. The amount of natural pigments ingested in the diet
determines the hue of the egg yolks produced by poultry. For many years,
poultry producers have added synthetic canthaxanthin -- a closely related
pigment to astaxanthin -- and other natural pigments (such as marigolds) to
livestock feeds in order to satisfy consumer preferences for various colored
egg yolks. Recent legislation in Sweden, however, requires that all
colorants added to animal feeds be derived from natural sources. This
legislation prompted Svenska Foder, the largest poultry feed producer in
Sweden (and, prior to December 1996, a subsidiary of Cultor), to seek out
Aquasearch to provide natural astaxanthin as an alternative colorant for
poultry feed. Aquasearch's natural astaxanthin product has compared
favorably with synthetic astaxanthin in tests performed by Svenska Foder. In
addition, recently published studies demonstrate that natural astaxanthin (as
compared with synthetic astaxanthin) may have additional benefits with
respect to fertility, weight gain, growth efficiency, survival and reduced
susceptibility to disease in broiler chickens and layer hens. In December
1996, Cultor sold its majority interest in Svenska Foder to KKR, a Danish
animal feeds company. In connection with this sale, Cultor acquired all
of Svenska Foder's rights under the Svenska Foder Supply Agreement.
OTHER POTENTIAL APPLICATIONS. Aquasearch intends to explore,
independently and jointly with its corporate partners, additional
applications of natural astaxanthin in the field of animal feed and animal
nutrition and in other fields, such as human nutrition and food coloring.
The Company believes that the potential market for astaxanthin in human
health and nutrition is large. No assurance can be given that Aquasearch or
any of its corporate partners will be successful in developing additional
commercial applications for the Company's natural astaxanthin product.
POTENTIAL PRODUCTS
OTHER PIGMENTS FROM MICROALGAE. Using its AGM technology, Aquasearch
has the capability of cultivating additional microalgal species rich in
pigments. Microalgae contain the entire spectrum of colors found in aquatic
environments, including more than 1,000 specific pigments. These pigments
may
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be useful in other feeds for the aquaculture and animal feed markets. In
addition, the Company believes that natural pigments found in microalgae can
be substituted for synthetic pigments currently used in the food processing
industry. For example, canthaxanthin is used widely in the food industry
today for colorings in cakes, candy, soda and processed meats. The Company
believes that the worldwide market for synthetic canthaxanthin is currently
in excess of $200 million. Aquasearch is aware of a number of microalgal
species which contain a high percentage of canthaxanthin. Similarly, there
is a growing demand for natural pigments in cosmetics, skin and hair care
products that could be derived from microalgal species. Aquasearch believes
it has the technical expertise to identify microalgal species that produce
pigments that could be useful in the food processing, cosmetics and consumer
products industries, among others. The Company believes that the combined
worldwide market for canthaxanthin and several other pigments currently being
evaluated by the Company is in excess of $1 billion. The Company's
development of additional microalgal pigmentation products involves many
significant risks and uncertainties.
AQUACULTURE FEEDS. Microalgae are the primary source of food for most
aquatic species in their larval stages. According to the UN-FAO, the
aquaculture market currently produces approximately 18% of the world's
fisheries consumption based on 1994 figures (which are the most recent data
available) and was estimated to be a $35 billion market in 1996.
Aquaculture feeds typically represent the highest cost of production for the
aquaculture farmer and many are required to grow or purchase microalgae or
microalgae sources for their hatcheries. Problems of contamination are a
significant business risk and some farmers are currently purchasing prepared
larval feeds. One of the significant obstacles to the development of
aquaculture has been the difficulty of feeding the larvae. Aquasearch
believes that the AGM can provide a cost effective technology for growing
feed for the aquaculture industry, both for existing species and future
aquaculture species. The Company's development of microalgal aquaculture
feed products involves many significant risks and uncertainties.
COSMETICS. Aquasearch believes that microalgae contain several
significant features of importance to the cosmetics industry. First, the
natural colors that occur in microalgae can be used directly as coloring
agents in cosmetics. Second, many species of microalgae possess light
blocking compounds that regulate the amount of ultraviolet and other
wavelengths they absorb and have potential applications in sunscreens and
other products containing sun blocking agents. Last, bioactive agents
derived from microalgae may be useful as cosmetics themselves. For example,
Aquasearch is aware that an extract from a marine organism is an active
ingredient in a wrinkle-reducing skin cream marketed by Estee Lauder. This
product currently generates more than a million dollars a year in royalties
to its developer. Aquasearch believes that the market for cosmetics derived
from microalgae is a potentially large market. Aquasearch does not currently
have the expertise to develop and commercialize cosmetics products on its
own. Aquasearch's strategy will be to establish the AGM as a core technology
for the cultivation of commercial quantities of microalgae and to seek
collaborative research and development and marketing, sales and distribution
relationships with established cosmetics and consumer goods companies in
order to develop and commercialize potential microalgal cosmetics products.
The Company's development of microalgal cosmetics products involves many
significant risks and uncertainties.
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PHARMACEUTICALS. Most pharmaceutical products developed to date have
been derived from land-based plants, and the biodiversity of microalgae is
comparable to that of land-based plants. Aquasearch is aware of at least one
company, Martek Biosciences Corporation, that is collaborating with Merck &
Co. and others to develop pharmaceuticals from microalgae. Aquasearch is
also aware that in clinical trials certain compounds derived from microalgae
enhanced the production of an anti-cancer drug. In connection with this
project, Aquasearch was awarded a Master Agreement from the U.S. National
Cancer Institute for large scale production of biomass for isolation of
agents from natural sources, although no contracts have yet been issued.
Aquasearch believes that the market for pharmaceuticals derived from
microalgae is potentially a large market. Aquasearch does not currently have
the expertise to develop and commercialize pharmaceutical products on its
own. Aquasearch's strategy will be to establish the AGM as a core technology
for the cultivation of commercial quantities of microalgae and to seek
collaborative research and development and sales, marketing and distribution
relationships with established pharmaceutical companies in order to develop
and commercialize potential microalgal pharmaceutical products. The
Company's development of pharmaceutical products from microalgae involves
many significant risks and uncertainties
MANUFACTURING
ASTAXANTHIN
Aquasearch began culturing HAEMATOCOCCUS PLUVIALIS at its current
facility in the HOST Business Park in November 1995. HAEMATOCOCCUS PLUVIALIS
is cultured using a series of photobioreactors of varying sizes to achieve
culturing consistency before entering the AGM. The AGM is a large
photobioreactor that utilizes computer-controlled equipment to monitor and
adjust the turbulence rate, pH, gas exchange, temperature and nutrient levels
within the AGM to optimize microalgal growth rates.
The AGMs are harvested regularly and the extracted amount is pumped from
the AGM into open ponds where, using proprietary processes, the microalgae is
caused to turn red (biosynthesis of astaxanthin). Once the optimal reddening
has occurred, the microalgae are drained from the ponds and dewatered. The
microalgae slurry is then further processed, dried and packaged using
proprietary equipment and processes.
Over the past twelve months, Aquasearch has been producing natural
astaxanthin at varying rates of between one and eight kilograms per month at
its HOST Business Park production facility. In order to meet the Cultor
Distribution and Development Agreement production targets of 40 and 120
kilograms of natural astaxanthin per month by September 1997 and September
1998, respectively, the Company will have to significantly increase its plant
and production capacity in the near future. Aquasearch plans to accomplish
this expansion in two steps: first, the existing one-acre facility will be
expanded to four acres and second, a separate, stand-alone facility of
approximately ten acres will be constructed. The ten-acre site will be
designed and developed as a dedicated facility solely for the production of
natural astaxanthin to meet the production targets under the Cultor
Distribution and Development Agreement. After construction of the ten-acre
site is completed, the remaining four-acre facility will be used primarily
for the research and development of new microalgal products and the
enhancement of the AGM technology. This expansion and improvement will place
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significant additional responsibilities on management; require massive
scale-up of the Company's existing manufacturing facility and techniques;
require significant additional capital; and require additional scientific,
technical and manufacturing expertise. Although there can be no assurances
that Aquasearch will be successful in meeting these challenges, management is
in the process of securing the necessary expertise and resources to
accomplish them.
OTHER MICROALGAL SPECIES
In addition to HAEMATOCOCCUS PLUVIALIS, the Company has used its AGM
technology to successfully culture the following species of microalgae:
CHLORELLA SOROKINIENSIS, LYNGBYA LAGERHEIMII, SPIRULINA PLATENSIS and
HAEMATOCOCCUS LACUSTRIS. Commercial production of additional species of
microalgae will require the development of custom processes to create optimal
conditions for the cultivation and harvesting of each species. Based on
preliminary studies, Aquasearch believes that the fundamental aspects of the
technology used to produce HAEMATOCOCCUS PLUVIALIS will be directly
applicable to the production of hundreds other species of microalgae and that
principal variations are likely to occur in the modification of harvesting
processes rather than adaptation of the AGM.
MARKETING AND SALES
Aquasearch's primary business strategy is to continue development of its
platform technology and to establish its expertise and reputation as a cost
effective developer and manufacturer of microalgal products. The Company
presently plans to develop strategic research and development, sales and
marketing and distribution arrangements with established companies that have
significant market shares in the fields in which Aquasearch intends to
develop and sell products. The Company believes that this approach reduces
the time to market for its products and increases the likelihood of market
acceptance for its products. Alternatively, Aquasearch does not believe that
acquiring or developing the legal, regulatory, sales and marketing expertise
necessary to compete with established vertically integrated companies with
significant market shares is likely to yield the best return on investment
for the Company or its shareholders. In general, Aquasearch intends to
follow substantially the same strategy with respect to the development,
marketing and sale of future products that it followed in connection with the
development, marketing and sale of its natural astaxanthin product; namely,
to identify potential corporate partners already familiar with the potential
product and markets as part of their own research and development efforts and
to enter into strategic development agreements to manufacture value-added
products to the specifications of these corporate partners. Once new
products are in production, the Company may create one or more separate
operating companies with licenses to use the technology solely for the
specific microalgal species and end use.
CORPORATE PARTNER RELATIONSHIPS
SVENSKA FODER
In July 1995, Aquasearch signed the Svenska Foder Supply Agreement with
Svenska Foder, pursuant to which Svenska Foder agreed to act as the exclusive
distributor of Aquasearch's natural
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astaxanthin for animal feed and animal nutrition applications in Sweden,
Denmark, Norway and Finland for poultry, pigs, cattle and horses. The
Svenska Foder Supply Agreement had a term of three years and required
Aquasearch to deliver five kilograms of natural astaxanthin per month.
Svenska Foder used the natural astaxanthin in place of synthetic astaxanthin
in chicken feed to increase the reddish hue in egg yolks. Recently published
studies demonstrate that natural astaxanthin (as compared with synthetic
astaxanthin) may have additional benefits with respect to fertility, weight
gain, growth efficiency, survival and reduced susceptibility to disease in
broiler chickens and layer hens. Development of additional commercial
applications for the Company's natural astaxanthin product involves many
significant risks and uncertainties.
CULTOR
In May 1996, Aquasearch entered into a three-year exclusive Distribution
and Development Agreement with Cultor pursuant to which Aquasearch will act
as the exclusive worldwide supplier of natural astaxanthin from microalgae to
Cultor in the field of animal feed and animal nutrition and Cultor will act
as the exclusive worldwide distributor of Aquasearch's natural astaxanthin in
the field of animal feed and animal nutrition. The following description of
certain terms and conditions of the Cultor Distribution and Development
Agreement does not purport to be complete and is qualified in its entirety by
reference to the definitive Agreement.
The Cultor Distribution and Development Agreement provides that from and
after September 24, 1997 the target production requirement for the Company
and the target purchase requirement for Cultor is 40 kilograms of natural
astaxanthin per month. The target production requirement for the Company and
the target purchase requirement for Cultor from and after September 24, 1998
is 120 kilograms of natural astaxanthin per month. Cultor has the obligation
to obtain all governmental approvals for, promote and distribute the product,
at its own expense, in each country in which it proposes to sell the product.
During the term of the Cultor Distribution and Development Agreement, the
Company and Cultor will share equally in the margin (the "Transfer Price")
between the production costs of Aquasearch (the "Aquasearch Production
Costs") and the net sales price (which is equal to the gross sales price to
the end user less volume bonuses, freight and agent's commissions).
The Cultor Distribution and Development Agreement provides that Cultor
and Aquasearch may, at Cultor's option, mutually develop a new joint venture
company for the sole purpose of producing and selling natural astaxanthin in
the field of animal feed and animal nutrition. Pursuant to this arrangement,
Aquasearch would contribute a ten-acre natural astaxanthin production
facility to be constructed in 1997 in return for its 50% stake in the new
company and Cultor would contribute cash equal to the appraised replacement
value of the ten-acre production facility in return for its 50% stake. Under
the Cultor Distribution and Development Agreement, Cultor also has the option
to increase its stake in the new company by purchasing from Aquasearch a
further 25% of the new company (thus increasing Cultor's stake to 75%) for
cash based on a formula. The formula provides that the purchase price for
the additional shares to be acquired by Cultor from Aquasearch will equal the
greater of (i) $1 million, (ii) half of the current replacement value of the
astaxanthin production facilities initially contributed by Aquasearch or
(iii) an amount equal to X multiplied by Y; where "X" equals the difference
between the Transfer Price and the
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Aquasearch Production Costs for the six-month period commencing on November
1, 1998 and ending on April 30, 1999 and "Y" equals six (or, in other words,
an amount equal to twelve times annualized operating profit in the last six
months of the third year of the contract).
Under the Cultor Distribution and Development Agreement, Aquasearch will
license certain technology to the new company to make, use and sell natural
astaxanthin within the field of animal feed and animal nutrition only and
will retain the right (i) to make, use and sell natural astaxanthin in all
fields other than animal feed and nutrition and (ii) to make, use and sell
any microalgal products other than natural astaxanthin in all fields,
including the field of animal feed and animal nutrition. The Cultor
Distribution and Development Agreement contains detailed provisions regarding
the financing and management of the new company, procedures for resolving
deadlocks between the parties, mechanisms governing the buy-out of one party
by the other, covenants mandating the distribution of 40% of the annual
profits of the new company to its shareholders and establishing royalty rates
under a marketing agreement that may be entered into between the new company
and Cultor, provisions restricting the transfer of ownership interests by
Aquasearch and Cultor and providing for rights of first refusal and
registration rights, termination provisions and detailed provisions governing
the allocation of intellectual property rights upon termination.
In connection with the execution of the Cultor Distribution and
Development Agreement, Cultor and Aquasearch also entered into a Stock
Subscription Agreement (the "Cultor Stock Subscription Agreement") pursuant
to which Cultor purchased 400,000 shares of Aquasearch Common Stock at a
purchase price of $0.50 per share.
The Company believes that the Cultor Distribution and Development
Agreement is beneficial to the Company for the following reasons. First, the
arrangement will substantially reduce the time to market for the Company's
natural astaxanthin product because Cultor, at its own expense, will be
responsible for obtaining all regulatory approvals and promoting and selling
the product. Second, by establishing an exclusive arrangement with Cultor
(along with its affiliated entities, the second largest consumer of synthetic
astaxanthin in the world), the Company believes it has established an
additional barrier to entry to potential competitors. Third, the Company
retains all of its intellectual property rights to develop applications for
astaxanthin outside the field of animal feed and animal nutrition and will
obtain an exclusive license to use all microalgae technology developed by the
new company, if any. Fourth, the Company believes that the collaboration
with Cultor to develop the market for astaxanthin in animal feed and
nutrition will enhance the Company's reputation in the industry and stimulate
additional research and development with respect to microalgal products other
than astaxanthin. The Company's obligations and performance under the Cultor
Distribution and Development Agreement and the potential formation of a new
joint venture company with Cultor involve many significant risks and
uncertainties. In addition, in order to meet the production targets under
the Cultor Distribution and Development Agreement, Aquasearch must
significantly expand and improve its production facilities and processes,
which will involve many significant risks and uncertainties.
Notwithstanding the foregoing, if the Company is unable to develop any
commercial uses for natural astaxanthin outside of the field of animal feed
and animal nutrition and if the Company is unable
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to develop, cultivate and sell microalgal products other than astaxanthin,
then the Company and its shareholders will have sold the Company's sole
product and source of revenues to Cultor for the purchase price and royalties
set forth in the Cultor Distribution and Development Agreement. The Company
believes that its ability to develop additional uses for astaxanthin outside
of the field of animal feed and nutrition and its ability to develop
microalgal products other than astaxanthin will be significantly enhanced by
its collaboration with Cultor in developing the astaxanthin market for animal
feed and animal nutrition.
COMPETITION
The Company's natural astaxanthin product will compete directly with the
synthetic astaxanthin product developed and marketed worldwide by
Hoffman-LaRoche. Hoffman-LaRoche has significantly greater research and
development, technical, financial, management, marketing and sales resources
than Aquasearch as well as a worldwide reputation and a dominant market
share. In addition, at least three companies, Astacarotene, Heliosynthese
and Cyanotech, have either announced plans to produce natural astaxanthin
from microalgae or are producing small quantities for test and commercial
purposes. Moreover, Cyanotech has recently announced plans to enter into
large scale commercial production of natural astaxanthin during the next six
months. Aquasearch believes that competition in the astaxanthin market will
intensify significantly in the near future. Alternative sources of
pigmentation that have been tested include astaxanthin from shrimp shells,
paprika and a yeast strain PFAFFIA RHODOZYMA. Aquasearch believes that only
PFAFFIA RHODOZYMA continues to be evaluated as a potential alternative to
synthetic or natural astaxanthin. Aquasearch's natural astaxanthin product
is expected to compete with synthetic astaxanthin (and any other alternative
products) primarily on the basis of product performance, price and
proprietary position. In this regard, although Hoffman-LaRoche maintained
the market price of synthetic astaxanthin at approximately $2,500 per
kilogram for more than a decade when there was no viable competitive product
available, there can be no assurance that Hoffman-LaRoche will not cut the
price of its synthetic astaxanthin product significantly in response to the
introduction of a competitive natural astaxanthin product. Any such pricing
or other competitive pressure could have a material adverse effect on
Aquasearch's business, financial condition, results of operations and
relationships with corporate partners. The existence of products of which
Aquasearch is not aware, or products that may be developed in the future, may
also adversely affect the marketability of Aquasearch's natural astaxanthin
product.
Aquasearch intends to develop other natural products from microalgae
that will compete with existing natural and synthetic products. Aquasearch
anticipates that competition to develop additional microalgal products will
be intense. Aquasearch's future competitors are expected to include major
pharmaceutical, food processing, chemical and specialized biotechnology
companies, many of which will have financial, technical and marketing
resources significantly greater than those of Aquasearch. In addition,
specialized biotechnology companies may form collaborations with large
established companies to support research, development and commercialization
of products that may be competitive with future products of Aquasearch.
Also, academic institutions, governmental agencies and other public and
private research organizations are conducting research activities and seeking
patent protection and may commercialize products competitive with those of
Aquasearch on their own or through joint ventures.
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The existence of products of which Aquasearch is not aware, or products that
may be developed in the future, may adversely affect the marketability of
additional products developed by Aquasearch.
Aquasearch believes that its AGM and related microalgal cultivation and
harvesting technologies currently offer significant technical and economic
advantages compared with the open pond systems currently used by certain
competitors, including increased yields and the ability to cultivate hundreds
of microalgal species that cannot be produced in open pond systems due to
substantially higher risks of contamination and lack of control. Aquasearch
also believes that its AGM and related microalgal cultivation and harvesting
technologies compare favorably with other known closed systems with respect
to capital and operating costs. However, the existence of technology of
which Aquasearch is not aware, or technology that may be developed in the
future, may adversely affect the technical and competitive advantages that
Aquasearch currently believes it holds compared with competing open pond and
known closed system microalgal cultivation technologies.
Aquasearch's competitive position will also depend on its ability to
attract and retain qualified scientific and other personnel, develop
effective proprietary products, successfully perform under the Cultor
Distribution and Development Agreement, implement research and development
and production plans, obtain patent protection and secure adequate capital
sources.
PATENTS, LICENSES AND PROPRIETARY TECHNOLOGY
Aquasearch relies upon a combination of patents, copyright protection,
trade secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain its competitive position. The
Company's future prospects depend in part on its ability to obtain patent
protection for its products and processes, to preserve its copyright and
trade secrets and to operate without infringing the proprietary rights of
third parties. Aquasearch has been awarded one patent in the United States
for its closed system microalgal cultivation process and one patent in
Australia for both its process and its closed system cultivation apparatus.
The Company has additional patents pending internationally and in the United
States.
The patent positions of pharmaceutical, biopharmaceutical and
biotechnology companies, which are analogous to the Company, are generally
uncertain and involve complex legal and factual questions. There can be no
assurance that any of the Company's pending patent applications will result
in issued patents, that the Company will develop additional proprietary
technologies that are patentable, that any patents issued to the Company or
its strategic partners will provide a basis for commercially viable products
or will provide the Company with any competitive advantages or will not be
challenged by third parties, or that the patents of others will not have a
material adverse effect on the ability of the Company to do business. In
addition, patent law relating to the scope of claims in the technology fields
in which the Company operates is still evolving. The degree of future
protection for the Company's proprietary rights, therefore, is uncertain.
Furthermore, there can be no assurance that others will not independently
develop similar or alternative technologies, duplicate any of the Company's
technologies, or, if patents are issued to the Company, design around the
patented technologies developed by the Company. In
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addition, the Company could incur substantial costs in litigation if it is
required to defend itself in patent suits brought by third parties or if it
initiates such suits.
Others may have filed and in the future are likely to file patent
applications that are similar or identical to those of the Company. To
determine the priority of inventions, the Company may have to participate in
interference proceedings declared by the United States Patent and Trademark
Office that could result in substantial cost to the Company. No assurance
can be given that any such patent application will not have priority over
patent applications filed by the Company. In addition, the laws of certain
foreign countries may not protect the Company's patent and other intellectual
property rights to the same extent as the laws of the United States.
The Company's future prospects also depend in part on the Company
neither infringing patents or proprietary rights of third parties nor
breaching any licenses that may relate to the Company's technologies and
products. There can be no assurance that the Company will not infringe the
patents, licenses or other proprietary rights of third parties. In addition,
the Company may in the future receive notices claiming infringement from
third parties as well as invitations to take licenses under third party
patents. Any legal action against the Company or its strategic partners
claiming damages and seeking to enjoin commercial activities relating the
affected products and processes could, in addition to subjecting the Company
to potential liability for damages, require the Company or its strategic
partners to obtain a license in order to continue to manufacture or market
the affected products and processes. There can be no assurance that the
Company or its strategic partners would prevail in any such action or that
any license (including licenses proposed by third parties) required under any
such patent would be made available on commercially acceptable terms, if at
all. The Company has not conducted an exhaustive patent search and no
assurance can be given that patents do not exist or could not be filed that
would have a material adverse effect on the Company's ability to develop and
market its products. There are a significant number of United States and
foreign patents and patent applications in the Company's area of interest,
and the Company believes that there may be significant litigation in the
industry regarding patent and other intellectual property rights. If the
Company becomes involved in such litigation, it could consume a substantial
portion of the Company's managerial and financial resources, which could have
a material adverse effect on the Company's business, financial condition,
results of operations and relationships with corporate partners.
The enactment of legislation implementing the General Agreement on Trade
and Tariffs has resulted in certain changes in United States patent laws that
became effective on June 8, 1995. Most notably, the term of patent protection
for patent applications filed on or after June 8, 1995 is no longer a period of
seventeen years from the date of grant. The new term of United States patents
will commence on the date of issuance and terminate twenty years after the
effective date of filing may result in a substantially shortened term of the
Company's patent protection which may adversely affect the Company's patent
position.
While the disclosure and use of the Company's proprietary technology,
know-how and trade secrets are generally controlled under agreements with the
parties involved, there can be no assurance that all confidentiality
agreements will be honored, that others will not independently develop
similar or
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superior technology, that disputes will not arise concerning the ownership
of intellectual property, or that dissemination of the Company's proprietary
technology, know-how and trade secrets will not occur.
GOVERNMENT REGULATION AND PRODUCT TESTING
Aquasearch's natural astaxanthin product, potential products and its
manufacturing and research activities are or may become subject to varying
degrees of regulation by a number of government authorities in the United
States and other countries, including the United States Food and Drug
Administration ("FDA") pursuant to the Federal Food, Drug and Cosmetic Act.
Each existing or potential microalgal product that is developed or marketed
by Aquasearch, its licensees or its strategic partners for use by humans may
present unique regulatory problems and risks, depending on the product type,
uses and method of manufacture. The FDA regulates, in varying degrees and in
different ways, dietary supplements, other food products, medical devices
and pharmaceutical products, including their manufacture, testing,
exportation, labeling, and, in some cases, advertising. Generally,
prescription pharmaceuticals and certain types of medical devices are
regulated more vigorously than foods, such as dietary supplements. As of the
date hereof, the Company has not applied for FDA clearance for the Company's
natural astaxanthin product as a food additive. The FDA approval process is a
lengthy and expensive process and there can be no assurance that such FDA
approval will be obtained. The inability to obtain, or delays in obtaining,
such approval would adversely affect the Company's ability to commence
marketing any of its existing or future products for human consumption.
Any future products developed by Aquasearch for use in human nutrition,
pharmaceuticals or cosmetics, will require Aquasearch to develop and adhere
to Good Manufacturing Practices ("GMP") as required by the FDA, ISO standards
as required in Europe, and any other applicable standards mandated by
federal, state, local or foreign laws, regulations and policies. Currently,
the Company's production facilities do not comply with GMP or ISO standards
and significant capital expenditures and compliance procedures would have to
be made and implemented before the Company's production facilities could meet
GMP and ISO qualifications.
The Company is or may become subject to other federal, state and foreign
laws, regulations and policies with respect to labeling of its products,
importation of organisms, and occupational safety, among others. Federal,
state and foreign laws, regulations and policies are always subject to change
and depend heavily on administrative policies and interpretations. The
Company is working with Cultor with respect to compliance with foreign laws,
regulations and policies pertaining to use of its natural astaxanthin product
in the field of animal feed and animal nutrition. There can be no assurance
that any changes with respect to federal, state and foreign laws, regulations
and policies, and, particularly with respect to the FDA or other such
regulatory bodies, with possible retroactive effect, will not have a material
adverse effect on the Company's business, financial condition, results of
operations and relationships with corporate partners. There can be no
assurance that any of the Company's potential products will satisfy
applicable regulatory requirements.
The Company's natural astaxanthin product is viewed as a food ingredient
by regulatory authorities in Sweden. Regulatory authorities in other
jurisdictions may view the Company's natural
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astaxanthin product as a food additive. All new color additives for ultimate
human consumption in the United States require premarket clearances from the
FDA. Therefore, Aquasearch's natural astaxanthin product and any additional
food color products for use in the United States will require FDA clearance,
unless they meet the requirements of current color additive regulations. The
process of obtaining clearances for a new color additive is expensive and
time consuming. Extensive information is required on the toxicity of the
additive, including carcinogenicity studies and other animal testing. No
assurances can be given that any potential Aquasearch food color product will
be cleared by the FDA on a timely basis, if at all.
Although the FDA approved the Hoffman-LaRoche synthetic astaxanthin
product as a feed ingredient in 1995, there can be no assurances that the FDA
will grant similar approval for Aquasearch's natural astaxanthin product.
Regulatory approvals in other markets in which Aquasearch's natural
astaxanthin product is likely to be distributed, including in particular, the
EEC, Japan, Canada and Australia, vary by market. Currently, the Aquasearch
natural astaxanthin product has been approved in Sweden for use in poultry
feed and is considered by the Swedish authorities as a feed ingredient rather
than a food additive. The Company believes that the approval process in
Australia, Japan and certain other Asian countries will come under their
"natural" status and be approved within a short time frame; however, there
can be no assurances in this regard. The Aquasearch natural astaxanthin
product has not yet been submitted for approval by the EEC, and there can be
no assurance that the determination by Swedish authorities will have any
influence on the determination to be made by the EEC.
Under the terms of the Cultor Distribution and Development Agreement,
Cultor has the responsibility to obtain any FDA and other approvals necessary
in each country in which Cultor determines to distribute the product.
The Company is also subject to numerous environmental and safety laws
and regulations, including those governing the use and disposal of hazardous
materials. Any violation of, and the cost of compliance with, these
regulations could have a material adverse effect on the Company's business,
financial condition, results of operations and relationships with corporate
partners.
EMPLOYEES
As of October 31, 1996, Aquasearch had fourteen full-time employees, of
whom three have Ph.D.s, nine are involved in research and development and
production and harvesting and two are involved in administration and support.
The Company considers relations with its employees to be good. None of the
Company's employees is covered by a collective bargaining agreement.
SCIENTIFIC ADVISORY BOARD
The Aquasearch Scientific Advisory Board is composed of leading experts
in aquaculture, marine biology and fluid dynamics and the chemistry,
photobiology and mass culture of microalgae. The
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Scientific Advisory Board provides guidance to the Company regarding the
optimization of its production and processing methods and research and
development pertaining to both existing and potential microalgal products.
The Scientific Advisory Board held its inaugural meeting in May 1996 and is
scheduled to meet approximately four times per year. Between meetings,
individual Scientific Advisory Board members consult with the Company on an
as-needed basis. Aquasearch believes that the individual and collective
knowledge and experience of its Scientific Advisory Board provides the
Company with an important competitive advantage. The current members of the
Aquasearch Scientific Advisory Board are as follows:
JOHN BARDACH, Ph.D. received a B.Sc. in Zoology from Queen's University,
Canada in 1946 and a Ph.D. in Zoology from University of Wisconsin in 1949.
Dr. Bardach has served as Director of the Bermuda Biological Station, the
Hawaii Institute of Marine Biology and the East-West Center, as well as
Professor at the University of Hawaii. Dr. Bardach's numerous international
appointments have included Chairmanship of the U.S. National Academy of
Sciences Panel on Aquatic Food Sources, the World Bank-FAO Panel on
Aquaculture Research Needs of Developing Countries, and the State of Hawaii
Aquaculture Advisory Council. Two of his books, HARVEST OF THE SEA and
AQUACULTURE (now in its 25th printing), establish him as one of the fathers
of modern aquaculture.
ROBERT R. BIDIGARE, Ph.D. received a B.S. (SUMMA CUM LAUDE) in Aquatic
Biology from Eastern Michigan University in 1977 and a Ph.D. in Biological
Oceanography from Texas A&M University in 1981. Dr. Bidigare currently is
Associate Professor of Oceanography at University of Hawaii. Dr. Bidigare
serves on the Advisory Board for the National Center for the Culture of
Marine Phytoplankton, is a member of the NASA SeaWIFS Science Working Team
and an observer on the International Oceanographic Commission Group of
Experts on Standards and Reference Materials. Dr. Bidigare has authored more
than 75 scientific papers, and is a recognized expert on plant pigment
chemistry, bio-optics and biochemistry of microalgae.
JOHN CULLEN, Ph.D. received a B.Sc. (Honors in Biology) from University
of California, Santa Cruz in 1974 and a Ph.D. in Biological Oceanography from
Scripps Institution of Oceanography, University of California, San Diego, in
1980. Dr. Cullen has held faculty positions at the University of Texas, the
Bigelow Laboratory for Ocean Sciences and Dalhousie University in Halifax,
Canada, where he now holds the Chair of Environmental Observation Technology.
Dr. Cullen's research has focused in the area of microalgae growth rates,
productivity, nutrient requirements and bio-optics.
WILLIAM FENICAL, Ph.D. received a B.S. in Biochemistry from California
State Polytechnic University in 1963, an M.S. in Organic Chemistry from San
Jose State University in 1965 and a Ph.D. in Organic Chemistry from
University of California, Riverside in 1968. Dr. Fenical joined the faculty
of Scripps Institution of Oceanography, University of California, San Diego,
in 1973, where he has served as Director of the University of California-wide
Institute of Marine Resources (1988-1993) and Director of the Marine Research
Division since 1989. Dr. Fenical is recognized as one of the world's
authorities on chemistry of marine natural products, an area in which he has
published more than 250 scientific articles. Dr. Fenical has served as an
advisor on marine natural product chemistry to the National Institutes of
Health, the National Research Council, and numerous pharmaceutical companies,
including
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Sterling Winthrop, Ligand, Pharmagenesis and Bristol-Myers. He serves on the
editorial boards of the JOURNAL OF NATURAL PRODUCTS, MOLECULAR MARINE BIOLOGY
AND BIOTECHNOLOGY, and the JOURNAL OF MARINE BIOTECHNOLOGY. He holds seven
patents for novel chemical compounds of a biomedical nature, including a
wrinkle reducing agent that is the active ingredient in a skin cream marketed
by Estee Lauder, which produces more than $1 million per year in royalties
for the University of California.
MARK E. HUNTLEY, Ph.D. received a B.Sc. degree (SUMMA CUM LAUDE) in
Biology from the University of Victoria, Canada in 1976 and earned a Ph.D. in
Biological Oceanography from Dalhousie University in Halifax, Canada in 1980.
Dr. Huntley is a research biologist at Scripps Institution of Oceanography,
University of California, San Diego, and President, Chief Executive Officer
and Chairman of the Board of Directors of Aquasearch. Dr. Huntley has won
numerous awards and grants in his field, published more than 75 articles and
a book, and lectured throughout the world. He serves on the Executive
Committee of the Global Ocean Ecosystem Dynamics program, a component of the
U.S. Global Change Research Program, and the only element of the
International Geosphere-Biosphere Program that is examining the impact of
global climate change on marine ecosystems. He has served as an advisor to
numerous international, national and state agencies, including the United
States State Department, the United States Department of Interior and the
White House Office of Science and Technology Policy. Dr. Huntley is a
co-founder of Aquasearch and a co-inventor of the Aquasearch Growth Module.
EDWARD A. LAWS, Ph.D. received an A.B. (MAGNA CUM LAUDE) in Chemistry
from Harvard College in 1967 and a Ph.D. in Chemical Physics from Harvard
College in 1971. He was an instructor in Oceanography at Florida State
University from 1971 through 1974, and then joined the faculty at the
University of Hawaii, where he is now a Professor of Oceanography. Dr. Laws
has served as Chairman of the Oceanography Department, School of Ocean and
Earth Science and Technology at the University of Hawaii, which was ranked by
the National Academy of Sciences in 1995 as the fifth best program of its
kind in the nation. Dr. Laws recently was appointed Assistant Vice
President, Graduate Research and Education, of the University of Hawaii. Dr.
Laws is an expert on the large-scale cultivation of microalgae, an area in
which he has focused his research and has graduated a number of Ph.D.s.
PETER P. NIILER, Ph.D. received his B.S. in Mechanical Engineering from
Lehigh University in 1960, earned honors as a Fulbright Scholar at Cambridge
University, England in 1961, and was awarded a Ph.D. in Applied Mathematics
as a Woodrow Wilson Fellow from Brown University in 1964. Dr. Niiler has
taught and conducted research at Harvard College, Nova University and Oregon
State University. He is currently a Professor of Oceanography at Scripps
Institution of Oceanography, University of California, San Diego, where he
heads one of the largest oceanographic research programs in the nation. Dr.
Niiler has published more than 125 scientific papers and has invented various
oceanographic instrumentation technologies that are now in commercial
production with sales of $6 million annually. Dr. Niiler is an expert in
applied mathematics and fluid mechanics and was a co-inventor of processes
used in the Aquasearch Growth Module.
DONALD REDALJE, Ph.D. received his B.S. in Environmental Biology from
the University of California, Santa Barbara in 1971 and his Ph.D. in
Biological Oceanography from University of Hawaii
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in 1980. He has conducted research and taught at Scripps Institution of
Oceanography, University of California, San Diego, the Naval Postgraduate
School, Moss Landing Marine Laboratory, and the University of Southern
Mississippi, where he recently served as Director of the Center for Marine
Science. Dr. Redalje is internationally recognized for his development of a
method to measure the productivity of microalgae, and is an expert on the
biochemistry and physiology of marine plants. Dr. Redalje is a co-founder of
Aquasearch and co-inventor of the Aquasearch Growth Module.
Most members of the Scientific Advisory Board are not employed by the
Company and each of these members may have commitments to other entities that
could limit their availability to the Company. There can be no assurance that
the Company will be able to retain its key Scientific Advisory Board members.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's principal executive office and its production facility are
located at 73-4460 Queen Ka'ahumanu Highway, Suite 110,Kailua-Kona, Hawaii
96740, which is part of the HOST business park at Keahole Point, Kailua-Kona,
Hawaii. The facility consists of approximately one acre containing AGMs,
reddening ponds, a processing facility, a laboratory, administrative offices
and additional space for production and research and development. All of
the Company's research and development activities and production are being
conducted at this facility. The property is currently leased from the State
of Hawaii under a one-year lease expiring in March 31, 1997. This lease is
renewable on an annual basis and the Company is currently negotiating for a
longer-term lease. Aquasearch has no production facilities or offices
outside the State of Hawaii.
The Company has initiated the application process for a thirty-year
lease of its current five acre parcel from the Natural Energy Laboratory of
Hawaii Authority ("NELHA"), the state entity which administers the HOST
Business Park. The government-administered process to award a thirty-year
lease has usually taken less than two years. More than half of the 800-acre
HOST Business Park facility is currently undeveloped and the Company believes
that, as one of the fastest growing and largest employers in HOST Business
Park, its lease application is likely to be considered favorably, although
there can be no assurances in this regard.
Construction to expand the Company's existing one-acre research and
development/production facility to a four-acre facility is scheduled to begin
in the third quarter of fiscal 1997. The design and engineering process for
this expansion was initiated in April 1996 when Aquasearch solicited bids
from various engineering firms. As a result of the bidding process,
Aquasearch retained Harris Group, Inc. of Seattle, an engineering firm with
extensive experience in the design of biotech, microbe-based production
plants, to design the build-out of the facility. The initial phase of the
engineering process for this expansion was completed in September 1996.
On November 13, 1996, Aquasearch announced that it would acquire between
80 and 90 acres of property in the Ka'u region on the Big Island of Hawaii
valued at between $900,000 and $1,000,000 (the "C. Brewer Transaction") from
C. Brewer and Company, Limited ("C. Brewer"), a privately-held
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$230 million diversified agribusiness concern, in exchange for C. Brewer's
acquisition of approximately 6% of the outstanding Common Stock of the
Company. In connection with this transaction, C. Brewer also acquired a
warrant to purchase up to 500,000 shares of Aquasearch Common Stock at an
exercise price of $1.25 per share. Aquasearch and C. Brewer are still
involved in the process of site selection regarding this property.
During the last three years, the Company has also paid rent for the use
of office space at Dr. Huntley's residence located at 3222 Diamond Head Road,
Honolulu, Hawaii 96815.
ITEM 3. LEGAL PROCEEDINGS.
Aquasearch is not currently a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At a Special Meeting of Shareholders held on September 24, 1996, the
Company's shareholders (i) approved the Cultor Distribution and Development
Agreement and the Cultor Stock Subscription Agreement, (ii) approved
amendments to the Company's Articles of Incorporation to increase the number
of shares of Common Stock that the Company is authorized to issue from
50,000,000 to 100,000,000 shares and authorized the creation and issuance
from time to time of up to 5,000,000 shares of Preferred Stock in one or more
series with such designations, rights, preferences, privileges and
restrictions as the Board of Directors may determine and (iii) ratified and
approved indemnification agreements with directors, officers, employees and
agents.
The number of votes cast for, against or withheld, as well as the number
of abstentions and broker non-votes with respect to each matter were as
follows:
1. Proposal to approve the Cultor Distribution and Development Agreement and
the Cultor Stock Subscription Agreement:
Votes cast for: 19,635,030
Votes cast against: 1,335,093
Absentions: 6,000
Broker non-votes 6,034,470
2. Proposal to amend Articles of Incorporation to increase the authorized
number of shares of Common Stock from 50,000,000 shares to 100,000,000
shares and to authorize the creation and issuance from time to time of up
to 5,000,000 shares of Preferred Stock in one or more series with such
designations, rights, preferences, privileges and restrictions as the
Board of Directors may determine:
Votes cast for: 19,126,740
Votes cast against: 1,767,978
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Absentions: 161,405
Broker non-votes 6,034,470
3. Proposal to ratify and approve indemnification agreements with directors
and officers:
Votes cast for: 25,156,325
Votes cast against: 1,515,443
Absentions: 418,825
Broker non-votes None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock is currently traded in the "pink sheets" (OTC
Bulletin Board Symbol: AQSE). The following table sets forth for the periods
indicated the high and low closing bid quotations for the Company's Common
Stock as reported by M.H. Myerson & Company, one of the Company's market
makers. These quotations are believed to represent inter-dealer quotations,
without adjustment for retail mark-up, mark-down or commissions and may not
represent actual transactions.
LOW BID HIGH BID
FISCAL 1996:
First Quarter $0.21 $0.74
Second Quarter $0.50 $0.75
Third Quarter $0.53 $0.97
Fourth Quarter $0.52 $0.92
FISCAL 1995:
First Quarter $0.10 $0.20
Second Quarter $0.10 $0.25
Third Quarter $0.125 $0.25
Fourth Quarter $0.125 $0.36
As of October 31, 1996, the Company had approximately 2,000 record holders
of its 40,829,331 shares of Common Stock.
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The Company has never paid cash dividends on its Common Stock and has no
present plan to do so. The Company expects to retain future earnings, if any,
to fund research and development activities and future expansion.
RECENT SALES OF UNREGISTERED SECURITIES
In October 1996, the Company sold an aggregate of 1,008,843 Units,
consisting of one share of Common Stock and one Common Stock Purchase Warrant
(the "Warrants"), to 26 individuals in a private placement under Section 4(2)
of the Securities Act of 1933, as amended. The purchase price of the Units
ranged from $0.21 per Unit to $0.23 per Unit. The Warrants have a term of
three years and are exercisable at $1.00 per share, subject to adjustment.
The Warrants are redeemable by the Company at $.01 per Warrant during their
three-year exercise period upon 30 days' notice anytime that the closing bid
price per share of the Common Stock exceeds $1.50 per share (subject to
adjustment) for 20 trading days out of 30 consecutive trading days ending on
the third day prior to the date of the notice of redemption. The gross
proceeds from this offering through October 31, 1996 were $215,000. The
Placement Agent for this offering, First Honolulu Securities, Inc., received
total commissions of $12,900 (equal to 6% of the gross proceeds from the sale
of the Units) and 60,531 Common Stock Purchase Warrants (equal to 6% of the
number of Units sold) through October 31, 1996. The terms of the Warrants
issued to First Honolulu Securities, Inc. are identical to the terms of the
Warrants issued to the purchasers in the offering.
In October 1996, the Company sold 400,000 shares of Common Stock at $0.50
per share to Cultor pursuant to the Cultor Stock Subscription Agreement. The
total proceeds to the Company from this transaction were $200,000. No
underwriters were used. This offering was made in reliance on the exemption
provided under Section 4(2) of the Securities Act.
In February 1996, the Company issued 40,000 shares of Common Stock at
$0.62 per share, to Seth Huntley, one of the Company's production
technicians, for services rendered during the period from August 1995 through
January 1996. No underwriter was used. This offering was made to Mr.
Huntley without registration pursuant to the exemption provided under Section
4(2) of the Securities Act.
In January 1996, the Company sold 4,000,000 shares of Common Stock at
$0.15 per share to 15 individuals in a private placement under Section 4(2)
of the Securities Act. The total proceeds to the Company from this
transaction were $600,000. No underwriters were used.
In January 1996, the Company sold 2,492,800 shares of Common Stock at
$0.125 per share to one non-U.S. purchaser under Regulation S under the
Securities Act. The total proceeds to the Company from this transaction were
$311,600. No underwriters were used.
In December 1995, the Company issued 40,000 shares of Common Stock at
$0.125 per share to John J. Emerick, the Company's Vice President of
Operations, for services rendered during the period from July 1995 through
December 1995. No underwriter was used. This offering was made to Mr.
Emerick without registration pursuant to the exemption provided under Section
4(2) of the Securities Act.
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In November 1995, the Company issued an aggregate of 264,000 shares of
Common Stock at $0.125 per share to nine persons as partial payment for their
services in constructing the Company's research and development facility at
Keahole Point. No underwriters were used. This offering was made in
reliance on the exemption provided under Section 4(2) of the Securities Act.
In October 1995, the Company issued 127,875 shares at $0.0625 to 8
individuals for prior services rendered to the Company. No underwriters were
used. This offering was made under Section 4(2) of the Securities Act.
In September 1995, the Company sold 2,712,500 shares of Common Stock at
$0.08 per share to 15 individuals in a private placement under Section 4(2)
of the Securities Act. No underwriters were used.
In August 1995, the Company returned to Mark E. Huntley, Ph.D., the
Company's President and Chief Executive Officer, 1,320,000 shares of Common
Stock out of the 4,635,575 shares of Common Stock gifted to the Company by
Dr. Huntley in 1989. The closing bid price of the Company's Common Stock on
the date the 1,320,000 shares were returned to Dr. Huntley was $0.15 per
share. No underwriters were used. This offering was made to Dr. Huntley
under Section 4(2) of the Securities Act.
In July 1995, the Company sold 3,200,000 shares of Common Stock at
$0.0625 per share to one non-U.S. purchaser under Regulation S under the
Securities Act. The total proceeds to the Company from this transaction were
$200,000. No underwriters were used.
In June 1995, the Company issued 50,000 shares of Common Stock at $0.10
per share to Robert Bidigare, Ph.D., for services rendered in connection with
the analysis of scientific data from feed trials with Cultor. No
underwriters were used. These shares were issued to Dr. Bidigare without
registration pursuant to the exemption provided under Section 4(2) of the
Securities Act.
In March 1995, the Company sold 1,710,000 shares of Common Stock at
$0.10 per share to 33 individuals in a private placement under Section 4(2)
of the Securities Act. No underwriters were used. The total proceeds to the
Company were $171,000.
In June 1994, the Company issued 250,000 shares of Common Stock at $0.08
per share to 3 individuals for prior services rendered to the Company. No
underwriters were used. This offering was made under Section 4(2) of the
Securities Act.
In May 1994, the Company issued 775,000 shares of Common Stock at $0.08
per share to 3 individuals for prior services rendered to the Company. No
underwriters were used. This offering was made under Section 4(2) of the
Securities Act.
In January 1994, the Company sold 250,000 shares of Common Stock at
$0.03 per share to one individual in a private placement under Section 4(2)
of the Securities Act. No underwriters were used. The total proceeds to the
Company were $7,500.
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ITEM 6. MANAGEMENT'S PLAN OF OPERATION.
THE FOLLOWING DISCUSSION OF MANAGEMENT'S PLAN OF OPERATION CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE EXCHANGE
ACT, INCLUDING STATEMENTS THAT INDICATE WHAT THE COMPANY "BELIEVES",
"EXPECTS" AND "ANTICIPATES" OR SIMILAR EXPRESSIONS. THESE STATEMENTS INVOLVE
KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE
ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING
STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE INFORMATION CONTAINED
UNDER THE CAPTION "FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS" AND
ELSEWHERE IN THIS ANNUAL REPORT. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENT'S
ANALYSIS ONLY AS OF THE DATE OF THIS ANNUAL REPORT. THE COMPANY UNDERTAKES
NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISION OF THESE
FORWARD-LOOKING STATEMENTS. THE FOLLOWING DESCRIPTION OF MANAGEMENT'S PLAN
OF OPERATION CONTAINS MANY REFERENCES TO THE SIGNIFICANT RISKS AND
UNCERTAINTIES RELATING TO THE COMPANY'S BUSINESS AND PROSPECTS. THE READER
IS STRONGLY URGED TO READ THE INFORMATION SET FORTH UNDER THE CAPTION
"FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS" FOR A MORE DETAILED
DESCRIPTION OF THESE SIGNIFICANT RISKS AND UNCERTAINTIES.
OVERVIEW
Aquasearch has been engaged, since its inception in 1989, in the
development of proprietary photobioreactor technology for commercial
cultivation of microalgae. In 1994, the Company initiated discussions with
Cultor, a Helsinki-based foods conglomerate that is the second largest
producer of salmon and trout feed in the world, regarding the purchase of
microalgae rich in astaxanthin - the primary pigment used in salmon and trout
feed. In early 1995, Cultor completed a series of feeding trials with farmed
salmon, using the Company's microalgae product. In July 1995, the Company
entered into the Svenska Foder Supply Agreement with Svenska Foder, then a
subsidiary of Cultor, pursuant to which Svenska Foder agreed to act as
exclusive distributor of the Company's natural astaxanthin product for animal
feed and animal nutrition applications in Sweden, Norway and Finland for
poultry, pigs, cattle and horses. The Svenska Foder Supply Agreement had a
term of three years, and target production of five kilograms of natural
astaxanthin per month. In October 1995, the Company completed construction
of a one-acre research and development/production facility. In the second
quarter of fiscal 1996, the Company realized its first revenue from the sale
of its natural astaxanthin product to Svenska Foder.
In the fiscal year ended October 31, 1996, the Company experienced
several significant developments.
On May 14, 1996, the Company entered into the Cultor Distribution and
Development Agreement, which was approved by the Company's shareholders on
September 24, 1996, pursuant to which the Company will act as the exclusive
worldwide supplier of natural astaxanthin derived from microalgae to Cultor
in the field of animal feed and animal nutrition and Cultor will act as the
exclusive worldwide distributor of Aquasearch's natural astaxanthin product
in the field of animal feed and animal nutrition. Production targets under
the Cultor Distribution and Development Agreement are 40 kilograms per month
at the end of the first year (September 24, 1997) and 120 kilograms per month
at the end of the second year (September 24, 1998). In order to meet the
agreed
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production targets, the Company must significantly expand and improve its
production facilities, which will involve many significant risks and
uncertainties. Under the Cultor Distribution and Development Agreement,
Cultor and Aquasearch may, at Cultor's option, mutually develop a new joint
venture company for the sole purpose of producing and selling natural
astaxanthin derived from microalgae in the field of animal feed and animal
nutrition. The terms of the Cultor Distribution and Development Agreement
are more fully described above under the caption "Part I, Description of
Business-Corporate Partner Relationships-Cultor."
On July 30, 1996, the Company was awarded U.S. Patent Number 5,541,056
for a "Method of Control of Microorganism Growth Process," which claims
certain processes that operate in the Company's proprietary, closed-system
photobioreactor system, the Aquasearch Growth Module. The Company's U.S.
filing was made under provisions of the Patent Cooperation Treaty, and the
Company is in the process of pursuing international patents pursuant thereto.
On September 24, 1996, the Company's shareholders approved (i) the
Cultor Distribution and Development Agreement, (ii) the Cultor Stock
Subscription Agreement and (iii) an amendment to the Company's Articles of
Incorporation to increase the number of shares of Common Stock that the
Company is authorized to issue from 50,000,000 shares to 100,000,000 shares
and authorized the creation and issuance from time to time of up to 5,000,000
shares of Preferred Stock in one or more series with such designations,
rights, preferences, privileges and restrictions as the Board of Directors
may determine.
In October 1996, the Company commenced a private placement of units,
consisting of one share of Common Stock and one Common Stock Purchase Warrant,
to accredited investors. As of October 31, 1996, the gross proceeds from this
offering were $215,000.
On October 22, 1996, Cultor acquired 400,000 shares of the Company's
Common Stock at a purchase price of $0.50 per share pursuant to the terms of
the Cultor Stock Subscription Agreement.
As a result of a nationwide bidding process, Aquasearch has retained the
engineering firm, Harris Group, of Seattle, Washington to design and engineer
its expanded production facilities. At October 31, 1996, Harris Group had
completed the initial phase of its design work for the Company's planned
intermediate expansion from one acre to four acres. Construction of expanded
production facilities is anticipated to begin in late 1997 or early 1998 and
is expected to take approximately four to six months. The construction of
these expanded facilities is dependent upon a broad variety of contractors
and subcontractors, availability of supplies, equipment, and the availability
of requisite capital. While the Company has certain plans to address all
these requirements, there can be no assurance that the Company will be able
to complete its expansion in a timely manner.
On November 14, 1996, the Company executed a Letter of Intent with
C. Brewer and Company, Limited ("C. Brewer") with respect to the acquisition
by the Company of between 80 and 90 acres of property in the Ka'u region of
the Big Island of Hawaii valued at between $900,000 and $1,000,000 in
exchange for C. Brewer's acquisition of approximately 6% of the outstanding
Common Stock of the Company. In addition, C. Brewer acquired a three-year
warrant to purchase up to 500,000 shares of Aquasearch Common Stock at a
purchase price of $1.25 per share.
Aquasearch intends, during the coming year, to focus its research and
development activities not only in the area of working jointly with Cultor to
further develop its natural astaxanthin production processes and products
with the
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goal of demonstrating its superiority over competitive products but also to
initiate the development of new products from microalgae, particularly
natural pigments. The Company believes it has identified several markets in
which additional pigments from microalgae might be sold, and, based on
industry sources, estimates the value of these markets to be in excess of $1
billion. To finance new product development, the Company intends not to only
rely on whatever internal resources may be at its disposal but also to
compete for state and federal grants under such programs for which it may be
eligible. Sources of financing for product development are subject to many
significant risks and uncertainties, and no assurances can be made that such
funds will become available nor that their application will necessarily
result in new products with accessible markets.
Following the execution of the Svenska Foder Supply Agreement, the
Cultor Distribution and Development Agreement, and the issuance of its first
U.S. patent, the Company believes it has commenced the transition toward
becoming a full-scale commercial producer of microalgae products. These
changes in its business have placed and will continue to place significant
demands on the Company's management, working capital and financial management
control systems.
The Company believes that strategic alliances, patent applications and
licenses for the use of those patents are important parts of its business
strategy. There can be no assurance that the Company will be able to
maintain existing corporate partner relationships, enter into future
relationships, or develop additional proprietary technology, or that any such
relationships or patent applications will be successful.
Aquasearch has incurred net losses in each year since its inception. At
October 31, 1996, the Company's accumulated deficit was approximately $2.9
million. Aquasearch expects its annual losses to increase for the next two
years as it expands and develops the physical plant facilities required to
increase its production capacity for microalgae rich in astaxanthin and
continues its research and development activities to develop additional
commercial products from microalgae. In addition, the Company anticipates
quarter-to-quarter and year-to-year fluctuations in revenues, expenses and
losses, some of which could be significant. The timing and extent of such
fluctuations will depend, in part, on the timing and receipt of
astaxanthin-related revenues, the costs of developing additional products
from microalgae, and the time required for the introduction of any new
products to certain markets.
RESULTS OF OPERATIONS
Revenues for the year ended October 31, 1996 were $10,000 compared with
$0 for the prior year. The increase was due to the Company's first shipment
of product to Svenska Foder under the Svenska Foder Supply Agreement. No
revenues were generated in subsequent quarters due to significant
fluctuations in the Company's production process that prohibited it from
consistently meeting the production targets under the Svenska Foder Supply
Agreement. Initial trials conducted by Cultor have demonstrated that the
Company's product was equivalent in efficacy to competing sources of
astaxanthin. The mutual objective of Cultor and Aquasearch in the ongoing
trials is to develop a product that is superior to competing products,
although there can be no assurances that the Company and Cultor will be
successful in this regard. The Aquasearch Scientific Advisory Board convened
in late May and again
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in late July to review the Company's production procedures and to recommend
actions that would improve productivity. The Scientific Advisory Board, in
conjunction with the Company's engineers and representatives from Cultor,
have recommended certain improvements in hardware and procedures that are
designed to effect such increases in production. The Company plans to
implement these recommendations as soon as financial resources permit.
Although the Company incurred obstacles in the scale-up of its
production during fiscal 1996, the Company believes that its AGM technology
is capable of meeting the 1997 and 1998 production targets under the Cultor
Distribution and Development Agreement. At the same time, Aquasearch
believes that substantial increases in productivity are not likely to occur
within the first six months of this period due to anticipated interruptions
caused by construction of the expanded facility and the retro-fitting and
upgrading of certain parts of its current production system.
Consistent with the Company's efforts to implement improvements in its
production system, research and development costs increased by $559,337, or
more than 600%, during fiscal 1996 compared with fiscal 1995.
General and administrative expenses increased $247,531, or 63%, during
fiscal 1996 compared with fiscal 1995. This increase was primarily due to the
fact that, prior to mid-1995, the Company had not begun construction of its
HOST Business Park research and development/production facility, had not
hired any full time administrative personnel, had only nominal administrative
expenses and relatively small legal and filing fees related to its domestic
and international patent filings. Additional expenses were incurred in
fiscal 1996 compared with fiscal 1995 with respect to the hiring of
additional administrative personnel (including an Acting Chief Financial
Officer and an investor relations specialist), the formation and convening of
the Company's Scientific Advisory Board, the retention of the engineering
firm of Harris Group to design and engineer the Company's expansion plant,
and other corporate overhead costs.
Total other income and expense increased to $2,597 in fiscal 1996 from a
net expense of $4,378 in fiscal 1995, due primarily to an increase in
interest income.
The net loss for fiscal 1996 was $1,297,932, or $0.03 per share,
compared with a net loss of $486,813 or $0.02 per share in fiscal 1995. This
larger loss in fiscal 1996 resulted primarily from the increased research
and development and general and administrative costs incurred as a result of
the Company's significantly expanded operations.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1996, the Company had a cash balance of $187,166 compared
with $27,208 at October 31, 1995. Purchases of fixed assets of $289,026 were
made in the fourth quarter, primarily to upgrade certain aspects of the
Company's equipment and production systems, bringing the Company's net plant
and equipment assets to $709,182, and total assets to $1,367,940, which
represents an increase in total assets of $878,381, or 179%, during fiscal
1996.
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As of October 31, 1996, the Company projects that it will consume
between $1.2 million and $1.5 million of operating capital in fiscal 1997
prior to any planned capital expenditures. Aquasearch expects to incur
significant additional capital expenditures as a result of its plans to
expand and upgrade its present production facility from a one-acre to a
four-acre production facility. Furthermore, the Company expects to incur
significant additional expenditures as a result of its plans to undertake
research and development of new pigment products from microalgae. Aquasearch
anticipates that the largest fraction of its future capital needs will be
dedicated to expanding production capability in order to meet the production
targets under the Cultor Distribution and Development Agreement. To complete
this expansion, the Company must raise between $5 and $15 million of
additional capital, the exact amount of which will depend upon a variety of
factors that may include: the further optimization of production processes;
the time and costs related to construction of its expanded production
facilities, the availability of materials, supplies, equipment and
contractors with appropriate expertise; the costs involved in research and
development of additional products; the costs required for filing, protecting
and enforcing patents and other intellectual property rights; the costs of
commercializing its products; the time and costs associated with the pursuit
of state and federal research and development grants; and the extent to which
the Company is successful in forming other strategic alliances, joint
ventures or partnerships for the sale and distribution of its products. The
Company anticipates additional modifications to its production hardware and
processes both before and during any expansion, some of which may be
significant.
The Company believes that its existing capital resources, and funds
raised through its current private placement offering, are sufficient for
continued operations through the first quarter of fiscal 1997. Aquasearch is
presently pursuing additional sources of capital in order to maintain and
expand its operations in fiscal 1997. These capital sources include
government contracts and grants, product sales, license agreements and equity
or debt financing. There can be no assurances that the Company will be
successful in raising the additional capital necessary to sustain or expand
its operations, or that such capital will be available on terms that would
not result in substantial dilution to existing investors.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
HISTORY OF LOSSES AND EXPECTATION OF FUTURE LOSSES. The Company was
founded in 1988 and has experienced quarterly and annual operating losses
since its inception. The Company's net loss in fiscal 1996 was approximately
$1.3 million and the Company's accumulated deficit at October 31, 1996 was
approximately $2.9 million. The Company's losses to date have resulted
primarily from costs incurred in research and development and from general
and administrative costs associated with the Company's operations. The
Company expects to continue to incur operating losses for the next two years
as it expands its production facilities to meet the production targets under
the Cultor Distribution and Development Agreement and increases its research
and development efforts. The Company expects to have quarter-to-quarter and
year-to-year fluctuations in revenues, expenses and losses, some of which
could be significant. Future financial results will be affected by, among
other things, the following factors: the Company's ability to successfully
manage the transition from a research and development company to a
commercial-scale enterprise, the Company's ability to complete successfully
the commercialization and cost optimization of its natural astaxanthin
product; manufacturing costs and yield issues associated with the scale-up of
production of its natural astaxanthin product; the progress of the
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Company's research and development programs with respect to the development
of additional microalgal products; the time and costs of obtaining regulatory
approvals for those products subject to such approval; the Company's ability
to protect its proprietary rights; the costs of filing, protecting and
enforcing the Company's patent claims; competing technological and market
developments and the costs of commercializing and marketing the Company's
existing and potential products. There can be no assurance that the Company
will ever be able to achieve or sustain profitability in the future.
RISKS INHERENT IN COMMERCIAL PRODUCTION OF MICROALGAE. The development
of technology to cultivate and harvest a wide variety of microalgae species
is a lengthy and technically challenging process. The Company has faced a
number of significant technical problems in the development of its AGM
technology and in its initial production of natural astaxanthin derived from
HAEMATOCOCCUS PLUVIALIS, including various forms of microbial contamination,
variability in production cycle times due to technical and biological
factors, and proportional losses of final product due to processing
inefficiencies. As a result of these factors and, to a lesser extent,
ongoing experimentation with processes and methods and limited capacity, the
Company's production has fluctuated between one and eight kilograms per month
during the past twelve months.
The Company expects to encounter additional technical problems in
connection with the scale-up in production of HAEMATOCOCCUS PLUVIALIS (and
any other potential microalgae products). Some of these problems may be
presently unknown, may never have been faced, and may have the effect of
lowering production yields. There can be no assurance that the Company will
be successful in correcting these technical problems. The Company's failure
to satisfy its production targets under the Cultor Distribution and
Development Agreement for an extended period could have a material adverse
effect on the Company's business, financial condition, results of operations
and its relationships with its corporate partners.
LIMITED MANUFACTURING EXPERIENCE. To be successful, the Company must be
able to produce its products at acceptable costs in compliance with
contractual requirements, regulatory requirements and local health, safety
and environmental regulations. The Company is at an early stage of
development and has only limited experience producing products derived from
microalgae. To date, the Company's only shipments of its first product,
natural astaxanthin derived from microalgae, have been made to Cultor
pursuant to the Svenska Foder Supply Agreement and/or pursuant to the Cultor
Distribution and Development Agreement. In connection with the sale of
Svenska Foder to KKR, a Danish animal feeds company, in December 1996, Cultor
acquired all of Svenska Foder's rights under the Svenska Foder Supply
Agreement. The Company has not been able consistently to meet the five
kilograms of natural astaxanthin production targets initially set forth in
the Svenska Foder Supply Agreement. The Company may continue to experience
lower than anticipated production yields or production constraints from time
to time that may adversely affect its ability to satisfy customer orders,
including, in particular, the production requirements under the Cultor
Distribution and Development Agreement. While the Company's inability to
satisfy its production targets to date has not disrupted relations with its
corporate partners, continued inability to satisfy demand may have a material
adverse effect on the Company's business, financial condition, results of
operations and its relationships with its corporate partners.
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RISKS ASSOCIATED WITH SCALE-UP OF PRODUCTION FACILITIES. To date, the
Company has not produced large quantities of natural astaxanthin. The
Company has experienced significant delays in product development and
cultivation and harvesting process development from time to time and its
product development and cultivation and harvesting processes will require
additional research and development as well as substantial additional capital
and other resources prior to full scale commercialization. The Company
estimates that it will require approximately $5 million in financing during
fiscal 1997 to complete the expansion of its existing research and
development/production facility from a one-acre facility to a four-acre
facility and an additional $10 million over the subsequent eighteen months to
complete the construction and commence operation of a ten-acre production
facility dedicated solely to the production of natural astaxanthin derived
from microalgae and to fund research and development of new microalgae
products. Construction and facility scale-up costs as well as research and
development and production costs could substantially exceed budgeted amounts
and estimated time frames may require significant extension. Any such
additional costs or delays could have a material adverse effect on the
Company's business, financial condition, results of operations and
relationships with its corporate partners.
The Company believes that its existing one-acre research and
development/production facility is not sufficient to meet the September 1997
40 kilogram per month production target under the Cultor Distribution and
Development Agreement. After completion of the expansion of the existing
one-acre research and development/production facility to a four-acre
facility, the Company believes that it will have sufficient production
capacity, based on existing technology and processes, to meet the September
1997 40 kilogram per month production target under the Cultor Distribution
and Development Agreement, but not the September 1998 120 kilogram per month
production target. In order to meet the September 1998 120 kilogram per
month production target under the Cultor Distribution and Development
Agreement, the Company must complete construction and scale-up of the new
ten-acre production facility.
In order to meet the September 1997 40 kilogram per month production
target and the September 1998 120 kilogram per month production target under
the Cultor Distribution and Development Agreement, the Company will be
required to significantly increase its current production capacity. This
scale-up of the Company's current production technology poses a number of
significant risks that presently cannot be quantified or fully assessed. For
example, the Company's production process is critically dependent upon
supplies of freshwater, cold seawater and utilities provided by the Natural
Energy Laboratory of Hawaii Authority, and any interruption in these supplies
could have a material adverse effect on the Company's production capability.
Furthermore, microbial contamination of the Company's water supplies also
poses significant risks to productivity that may override the Company's
existing efforts and capability to maintain the sterility of its water
supply. The success of the Company's proposed expansion plans will be
dependent upon the timely performance of a large number of contractors,
sub-contractors, suppliers and various agencies of the State of Hawaii that
regulate and license construction, each of which is beyond the control of the
Company. Any failure by these contractors, suppliers or state agencies to
perform in a timely manner could cause delays, cost overruns or changes in
the Company's construction and expansion plans, which could have a material
adverse effect on the Company's business, financial condition, results of
operations and relationships with its corporate partners.
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The Company has projected a cost of manufacture for natural astaxanthin
that assumes that its current manufacturing processes can be scaled to larger
AGMs. To date, the Company has not demonstrated that it can culture and
harvest HAEMATOCOCCUS PLUVIALIS using such larger AGMs. If the Company's
current AGM design and processes are not readily scalable to larger sizes,
then the Company may have to expend substantial additional research effort
and capital resources to scale its technology in order to increase yields.
Difficulty in scaling the Company's current processes may translate into
higher than projected product costs or entail significant reengineering
efforts in order to meet commercially viable cost targets, which could have a
material adverse effect on the Company's business, financial condition,
results of operations and relationships with its corporate partners.
There can be no assurance that the Company will be successful in
resolving known or unknown biological and engineering development problems,
that the Company will be able to develop its products within the estimated
time schedule, or in accordance with present cost projections, or that the
products developed by the Company will be commercially viable or widely
accepted.
SUBSTANTIAL NEAR-TERM CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING;
DILUTION. The Company currently projects that it will require between $1.2
million and $1.5 in operating capital in 1997 before any planned capital
expenditures. In addition, the Company will require approximately $5 million
in funding during fiscal 1997 and an additional $10 million over the
subsequent eighteen months in order to further commercialize its natural
astaxanthin product and scale-up its production facilities to satisfy the
1998 production targets under the Cultor Distribution and Development
Agreement and to fund research and development into new microalgae products.
The Company expects to obtain this funding primarily from sales of equity
and/or convertible debt securities in the private and/or public markets. The
Company's capital requirements will depend on many factors including, but not
limited to, the timing of development of the Company's products, the timing
of the scale-up of the existing one-acre research and development/production
facility to a four-acre facility, the timing of the construction and scale-up
of the new ten-acre natural astaxanthin production facility, market
acceptance of the Company's natural astaxanthin product, and the response of
competitors to the Company's natural astaxanthin product and technology. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of the current shareholders of the Company will be
reduced and such equity securities may have rights, preferences, and
privileges senior to those of the holders of the Units offered in the October
1996 private placement. There can be no assurance that additional capital
will be available on terms favorable to the Company or its shareholders, if
at all. Moreover, the Company's cash requirements may vary materially due to
production yield problems, research and development results, product testing
results, changing relationships with its corporate partners, changes in the
focus and direction of the Company's research and development programs,
competitive and technological advances, litigation and other factors. If
adequate funds are not available, the Company may be required to curtail
operations significantly or to obtain funds through entering into
collaboration agreements on unattractive terms that may require the Company
to relinquish certain technology or product rights, including patent and
other intellectual property rights. The Company's inability to raise capital
would have a material adverse effect on the Company's business, financial
condition, results of operations and relationships with its corporate
partners.
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SUBSTANTIAL LONG-TERM CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING;
DILUTION. Substantial expenditures will be required to enable the Company to
continue its research and development activities and to manufacture and
market its products. The level of expenditures required for these activities
will depend in part on whether the Company develops, manufactures and markets
its products independently or with other companies through collaborative
arrangements. The Company's future capital requirements will also depend on
one or more of the following factors: the Company's ability to scale-up and
manufacture its natural astaxanthin product in cost-effective commercial
quantities; market acceptance of the Company's natural astaxanthin product;
the extent and progress of its research and development programs; the time
and costs of obtaining regulatory clearances (for those products subject to
such clearance); the progress of preclinical and clinical studies (where
applicable); the costs involved in filing, protecting and enforcing patent
claims; competing technological and market developments; the cost of
developing and/or operating production facilities for its existing product
and potential products (depending on which products the Company decides to
produce itself); and the costs of commercializing the Company's products.
There can be no assurance that funding to carry on these activities will be
available at all or on favorable terms to permit successful commercialization
of the Company's products. In addition, the Company has no credit facility
or other committed sources of capital, and there can be no assurance that it
will be able to establish such arrangements on satisfactory terms, if at all.
To the extent that capital resources are insufficient to meet future capital
requirements, the Company will have to raise additional funds to continue
development of its technologies and products. There can be no assurance that
such funds will be available on favorable terms, or at all. To the extent
that additional capital is raised through the sale of equity and/or
convertible debt securities, the issuance of such securities could result in
dilution to the Company's shareholders. If adequate funds are not available,
the Company may be required to curtail operations significantly or to obtain
funds through entering into collaboration agreements on unattractive terms
that may require the Company to relinquish certain technology or product
rights, including patent and other intellectual property rights. The
Company's inability to raise capital would have a material adverse effect on
the Company's business, financial condition, results of operations and
relationships with its corporate partners.
EFFECT OF INCREASED COMPETITION ON MARKET PRICE OF SYNTHETIC AND NATURAL
ASTAXANTHIN. The primary competition for the Company's natural astaxanthin
product is currently synthetic astaxanthin. The synthetic astaxanthin market
is currently dominated by a single producer, Hoffman-LaRoche, which has
maintained the market price of its synthetic astaxanthin (derived from
petrochemicals) at approximately $2,500 per kilogram for more than a decade.
The Company does not know Hoffman-LaRoche's cost of production for synthetic
astaxanthin or its probable response to the introduction of the Company's
competitive product. Hoffman-LaRoche has significantly greater research and
development, technical, financial, sales and marketing resources than the
Company and holds a commanding market share. There can be no assurance that
the market price for synthetic astaxanthin will remain at $2,500 after
commercial introduction of a competitive natural astaxanthin product. Any
significant decrease in the market price for synthetic astaxanthin is likely
to have an adverse effect on the market price for the Company's natural
astaxanthin product, which could have a material adverse effect on the
Company's business, financial condition, results of operations and
relationships with its corporate partners.
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RISKS ASSOCIATED WITH POTENTIAL JOINT VENTURE. Pursuant to the Cultor
Distribution and Development Agreement, Cultor and Aquasearch may, at
Cultor's option, mutually develop a new joint venture company for the sole
purpose of producing and selling natural astaxanthin in the field of animal
feed and animal nutrition. Pursuant to this arrangement, Aquasearch would
contribute the ten-acre natural astaxanthin production facility in return for
its 50% stake in the new company and Cultor would contribute cash equal to
the appraised replacement value of this production facility in return for its
50% stake. Under the Cultor Distribution and Development Agreement, Cultor
also has the option to acquire a further 25% stake in the new company (thus
increasing Cultor's stake to 75%) for cash based on a formula. The formula
provides that the purchase price for the additional shares to be acquired by
Cultor from Aquasearch will equal the greater of (i) $1 million, (ii) half of
the current replacement value of the astaxanthin production facility
initially contributed by Aquasearch or (iii) an amount equal to X multiplied
by Y; where "X" equals the difference between the Transfer Price (as defined)
and the Aquasearch Production Costs (as defined) for the six-month period
commencing on November 1, 1998 and ending on April 30, 1999 and "Y" equals
six (or, in other words, an amount equal to twelve times annualized operating
profit in the last six months of the third year of the contract).
The decision to form, and the timing of the decision to form, the new
joint venture company is solely within the discretion of Cultor and may occur
at any time prior to September 24, 1999. Similarly, the decision to
exercise, and the timing of the decision to exercise, the option to purchase
from Aquasearch a further 25% stake in the new joint venture company (thus
increasing Cultor's stake to 75%) is solely within the discretion of Cultor
and may occur at any time prior to September 24, 1999. There can be no
assurance that the Company will have developed markets for its natural
astaxanthin product other than animal feed and animal nutrition at the time,
if any, that Cultor exercises its option to form the joint venture company.
Similarly, there can be no assurance that the Company will have developed
microalgal products other than natural astaxanthin at the time, if any, that
Cultor exercises its option to form the joint venture company.
CUSTOMER CONCENTRATION. The Company has entered into a three-year
exclusive Distribution and Development Agreement with Cultor with respect to
the production, sale and use of natural astaxanthin in the field of animal
feed and animal nutrition worldwide. The failure of the Company to gain
additional customers for its natural astaxanthin product in other
applications and customers for its other potential products, the loss of
Cultor or any potential corporate partner as a customer, or a significant
reduction in the level of sales to Cultor or any potential corporate partner
could have a material adverse effect on the Company's business, financial
condition, results of operations and relationships with its corporate
partners.
RELIANCE ON CORPORATE PARTNER RELATIONSHIPS. An important element of
the Company's business strategy involves developing strategic relationships
with companies that have established research and development, sales,
marketing and distribution capabilities for the microalgal products that the
Company intends to develop. In May 1996, the Company executed the three-year
exclusive Cultor Distribution and Development Agreement with Cultor covering
the production and distribution of the Company's natural astaxanthin product
worldwide in the field of animal feed and animal nutrition.
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The Company intends to enter into strategic relationships with other
companies to apply its technology, fund development, commercialize future
products, and assist in obtaining regulatory approvals. There can be no
assurance that any of the Company's present or future corporate partners will
perform their obligations as expected or devote sufficient resources to the
development, testing or marketing of the Company's potential products
developed under such arrangements. Any parallel development by a strategic
partner of alternative technologies or products, preclusion of the Company
from entering into competitive arrangements, failure to obtain timely
regulatory approvals, premature termination of an agreement, or failure by a
strategic partner to devote sufficient resources to the development and
commercialization of the Company's products could have a material adverse
effect on the Company's business, financial condition, results of operations
and relationships with its corporate partners.
The Company's agreements with its consultants and corporate partners are
complex. There may be provisions within such agreements that give rise to
disputes regarding the rights and obligations of the parties. These and
other possible disagreements could lead to delays in research, development or
commercialization of certain products, or could result in litigation or
arbitration, which could be time-consuming and expensive, and could have a
material adverse effect on the Company's business, financial condition,
results of operations and relationships with its corporate partners.
There can be no assurance that the Company will be able to maintain or
expand its relationships with its existing corporate partners or to replace
its existing corporate partners in the event any such relationship were
terminated. In the event of the termination of the Cultor Distribution and
Development Agreement, the Company's ability to distribute its natural
astaxanthin product in the field of animal feed and animal nutrition would be
materially adversely affected, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's primary strategy for the development, regulatory approval,
production and commercialization of certain of its products is to enter into
collaborations with various corporate partners, licensors, licensees and
others. There can be no assurance that the Company will be able to negotiate
collaborative arrangements in the future on acceptable terms, if at all, or
that such collaborative arrangements will be beneficial to the Company. To
the extent that the Company is not able to establish such arrangements, it
would face increased capital requirements to undertake such activities at its
own expense and might encounter significant delays in introducing its
products into certain markets or find that the development, manufacture or
sale of its products in such markets is adversely affected.
COMPETITION. Competition in the world market for astaxanthin is intense
and is expected to increase significantly in the near future. The Company's
natural astaxanthin product will compete directly with the synthetic
astaxanthin product developed and marketed worldwide by Hoffman-LaRoche.
Hoffman-LaRoche has significantly greater research and development,
technical, financial, management, marketing and sales resources than the
Company as well as a worldwide reputation and dominant market share. In
addition, at least three companies, Astacarotene, Heliosynthese and
Cyanotech, have either announced plans to produce natural astaxanthin from
microalgae or have produced small quantities for
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test and commercial purposes. Moreover, Cyanotech has recently announced
plans to enter into large scale commercial production of natural astaxanthin
during the next six months.
The Company's natural astaxanthin product is expected to compete with
synthetic astaxanthin (and any other alternative products) primarily on the
basis of product performance, price and proprietary position. Although
Hoffman-LaRoche has maintained the market price of synthetic astaxanthin at
approximately $2,500 per kilogram for more than a decade, there can be no
assurance that Hoffman-LaRoche will maintain the price of its synthetic
astaxanthin product in response to the introduction of any competing natural
astaxanthin product. Any such pricing or other competitive pressure could
have a material adverse effect on the Company's business, financial
condition, results of operations and relationships with its corporate
partners. The existence of products of which the Company is not aware, or
products that may be developed in the future, may also adversely affect the
marketability of the Company's natural astaxanthin product.
Aquasearch anticipates that competition to develop microalgal products
other than natural astaxanthin will also be intense. The Company's
competitors for these potential products are expected to include major
pharmaceutical, food processing, chemical and specialized biotechnology
companies, many of which will have financial, technical and marketing
resources significantly greater than those of Aquasearch. In addition, other
emerging marine bioscience companies, similar to Aquasearch, may form
collaborations with large established companies to support research,
development and commercialization of products that may be competitive with
future products of Aquasearch. Also, academic institutions, governmental
agencies and other public and private research organizations are conducting
research activities and seeking patent protection and may commercialize
products competitive with those of Aquasearch on their own or through joint
ventures. The existence of products of which Aquasearch is not aware, or
products that may be developed in the future, may adversely affect the
marketability of additional products developed by Aquasearch.
Aquasearch believes that its AGM and related microalgae cultivation
technologies currently offer significant technical and economic advantages
compared with the open pond systems currently used by certain competitors,
including increased yields and the ability to cultivate hundreds of
microalgal species at commercial scale that cannot be produced in open pond
systems due to substantially higher risks of contamination and lack of
control. Aquasearch also believes that its AGM and related microalgae
cultivation technologies compare favorably with other known closed systems
with respect to capital and operating costs. However, the existence of
technology of which Aquasearch is not aware, or technology that may be
developed in the future, may adversely affect the technical and competitive
advantages that Aquasearch currently believes it holds compared with
competing open pond and known closed system microalgae cultivation
technologies.
Aquasearch's competitive position will also depend on its ability to
attract and retain qualified scientific and other personnel, develop
effective proprietary products, successfully perform its collaboration
agreements with its corporate partners, implement research and development
and production plans, obtain patent protection and secure adequate capital
sources.
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DEPENDENCE ON KEY PERSONNEL. The Company's prospects depend to a
significant extent upon certain members of senior management, including, in
particular, Mark E. Huntley, Ph.D., the Company's Chairman, President and
Chief Executive Officer. The Company does not maintain key man life
insurance on Dr. Huntley and has no employment agreement with Dr. Huntley or
any other senior executives. The loss of any senior executive or other key
employee could have a material adverse effect on the Company's business,
financial condition, results of operations and relationships with its
corporate partners.
The Company is highly dependent on its ability to attract and retain key
scientific, technical, management and operating personnel, including
consultants and members of its Scientific Advisory Board. As the number of
qualified marine and aquatic microbiologists is limited, competition for such
personnel is intense. The Company will need to develop expertise and add
skilled employees or retain consultants in such areas as research and
development, clinical testing, government approvals, manufacturing and
marketing in the future. There can be no assurance that the Company will be
able to attract and retain the qualified personnel or develop the expertise
needed in these areas. The Company currently has a small research and
management group with limited operating experience. The loss of the services
of one or more members of the research or management group or the inability
to hire additional personnel and develop expertise as needed would have a
material adverse effect on the Company's business, financial condition,
results of operations and relationships with its corporate partners.
Members of the Company's Scientific Advisory Board assist the Company
in optimizing its production and processing methods and formulating research
and development strategy pertaining to both existing and potential microalgal
products. Most members of the Scientific Advisory Board are not employed by
the Company and each of these members may have commitments to other entities
that could limit their availability to the Company. There can be no
assurance that the Company will be able to retain its key Scientific Advisory
Board members.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH. To date, the Company has
been engaged almost exclusively in research and development activities. The
Company is in the process of transitioning toward becoming a full-scale
commercial producer of microalgae products. These changes in its business
have placed and will continue to place significant demands on the Company's
management, working capital and financial and management control systems.
Failure to upgrade the Company's operating, management and financial control
systems or difficulties encountered during such upgrades could adversely
affect the Company's business, financial condition, results of operations and
relationships with its corporate partners. Although the Company believes
that its systems and controls are adequate to address its current needs,
there can be no assurance that such systems will be adequate to address
future expansion of the Company's business. The Company's results of
operations will be adversely affected if revenues do not increase
sufficiently to compensate for the increase in operating expenses resulting
from any expansion and there can be no assurance that any expansion will be
profitable or that it will not adversely affect the Company's results of
operations. In addition, the success of any future expansion plans will
depend in part upon the Company's ability to continue to improve and expand
its management and financial control systems, to attract, retain and motivate
key personnel, and to raise additional required capital. There can be no
assurance that the Company will be successful in these efforts.
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RISKS ASSOCIATED WITH EXPANSION INTO ADDITIONAL MARKETS AND PRODUCT
DEVELOPMENT. Other than its natural astaxanthin product, the Company
currently has no products actively under development. The Company believes
that its near-term prospects are substantially dependent on the expansion of
the worldwide market for natural astaxanthin and the Company's ability to
successfully develop and commercialize new products and penetrate new
markets. There can be no assurance that the Company can successfully develop
its natural astaxanthin or any other potential microalgae products, that any
such products will be capable of being produced in commercial quantities at
reasonable cost, or that any such products will achieve market acceptance.
The Company has no experience marketing its products directly and is
presently entirely dependent on the marketing skills and efforts of its
corporate partners. There can be no assurance that the marketing efforts of
such corporate partners will be successful or whether such corporate partners
will eventually compete with the Company or assist the Company's competitors.
Many other companies have significantly greater marketing and product
development experience and resources to devote to marketing and product
development than the Company. The Company has entered into, and expects to
enter into additional, selected strategic alliances with third parties for
product development, marketing and sales. There can be no assurances
regarding the performance of such third parties, or the overall success, if
any, of such strategic alliances. The inability of the Company to
successfully develop or commercialize its natural astaxanthin or any
potential microalgae products would have a material adverse effect on the
Company's business, financial condition, results of operations and its
relationships with its corporate partners.
DEPENDENCE ON PROPRIETARY TECHNOLOGY AND UNPREDICTABILITY OF
INTELLECTUAL PROPERTY PROTECTION. Aquasearch relies upon a combination of
patents, copyright protection, trade secrets, know-how, continuing
technological innovation and licensing opportunities to develop and maintain
its competitive position. The Company's future prospects depend in part on
its ability to obtain patent protection for its products and processes, to
preserve its copyright and trade secrets and to operate without infringing
the proprietary rights of third parties. For further information regarding
the risks associated with intellectual property matters, see "Part I, Item 1,
Description of Business - Patents, Licenses and Proprietary Technology."
UNCERTAINTY REGARDING OBTAINING AND MAINTAINING GOVERNMENT APPROVALS.
Aquasearch's natural astaxanthin product, potential products and its research
and production activities are or may become subject to varying degrees of
regulation by a number of government authorities in the United States and
other countries, including the FDA. For further information regarding the
risks associated with obtaining and maintaining government approvals, see
"Part I, Item 1, Description of Business - Government Regulation."
CONCENTRATION OF PRODUCTION CAPACITY; RELIANCE ON CLIMATIC CONDITIONS.
All of the Company's production capacity is currently located at its
Kailua-Kona, Hawaii facility, on property leased from the State of Hawaii and
situated on a 200-year-old lava flow adjacent to a dormant volcano. The
Company maintains minimal finished goods inventory. In the event that
production at, or transportation from, such facility (or any other facility
that the Company might construct in the Ka'u Region of the Big Island of
Hawaii pursuant to the C. Brewer Transaction) were interrupted by fire,
volcanic eruption, earthquake, tidal wave, hurricane, or other natural
disaster, work stoppage, termination or suspension of the
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Company's facility lease at the Host Park by the State of Hawaii for public
use or similar purposes, other regulatory actions or any other cause, the
Company would be unable to continue to produce its products at such facility.
Such an interruption would have a material adverse effect on the Company's
business, financial condition, results of operations and relationships with
its corporate partners.
Due to the importance of sunlight and a consistent warm temperature for
microalgae growth, the Company's production may be significantly affected by
weather patterns. Any unseasonably cool or cloudy weather would adversely
impact the Company's production and could have a material adverse effect on
the Company's business, financial condition, results of operations and
relationships with its corporate partners.
RISKS ASSOCIATED WITH INTERNATIONAL SALES. The Company currently has a
distribution arrangement with Cultor, a Finnish company. The Company expects
that international sales will represent a significant portion of its revenue
for the foreseeable future because aquaculture production, the primary market
for natural astaxanthin today, is more highly developed in Europe and Asia
than in the United States. The Company's business, financial condition and
results of operations may be materially and adversely affected by any
difficulties associated with managing accounts receivable from international
customers, tariff regulations, imposition of governmental controls, political
and economic instability or other trade restrictions. Although the Cultor
Distribution and Development Agreement provides that sales will be
denominated in United States dollars, fluctuations in currency exchange rates
could cause the Company's products to become relatively more expensive to
customers in the affected country, leading to a reduction in sales in that
country.
PRODUCT LIABILITY. The Company faces an inherent business risk of
exposure to product liability claims alleging that the use of its technology
or products resulted in adverse effects. There can be no assurance that the
Company's current level of product liability insurance together with
indemnification rights under its existing license agreements and other
collaborative arrangements will be adequate to protect the Company. It is
uncertain whether the Company will be able to obtain increased levels of
insurance as the Company grows, that any level of insurance would be
economically practical or that it would be able to renew its current or
future policies. A product liability claim or recall in excess of insured
amounts or amounts recoverable under applicable contractual arrangements
could have a material adverse effect on the Company's business, financial
condition, results of operations and relationships with its corporate
partners.
CONCENTRATION OF STOCK OWNERSHIP. Based upon shares of Common Stock
that will be outstanding as of the date hereof, the Company's directors and
executive officers, as a group, beneficially own approximately 22.55% of the
Company's outstanding Common Stock. As a result, these stockholders will
have the ability to strongly influence the actions of the Board of Directors
and the outcome of actions that are brought before the stockholders for
approval. Such a high level of ownership may have the effect of delaying or
preventing a change in control of the Company and may adversely affect the
voting and other rights of the holders of Common Stock.
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<PAGE>
POSSIBLE VOLATILITY OF STOCK PRICE; LIMITED LIQUIDITY; ABSENCE OF
DIVIDENDS. The market price of the Common Stock has historically experienced
a high level of volatility and may continue to experience high volatility in
the foreseeable future. Announcements of technological innovations or new
commercial products by the Company or its competitors, developments or
disputes concerning patent or proprietary rights, publicity regarding actual
or potential benefits relating to products under development by the Company
or its competitors, general regulatory developments affecting the Company's
products in both the United States and foreign countries, market conditions
for life sciences companies in general and economic and other internal and
external factors, as well as period-to-period fluctuations in financial
results, may have a significant impact on the Company's business or the
future market price of the Common Stock. Since the Company's initial public
offering of Common Stock in January 1989, the average daily trading volume in
the Common Stock as reported on the Nasdaq Electronic Bulletin Board has been
relatively low. See "Price Range of Common Stock." There can be no
assurance that a more active public trading market will develop for the
Common Stock in the near future. The Company has never declared or paid any
cash dividends on its Common Stock and does not intend to do so for the
foreseeable future.
RISKS ASSOCIATED WITH LOW-PRICED "OVER-THE-COUNTER" SECURITIES. The
Company's Common Stock is currently traded in the "over-the-counter market"
in the "Electronic Bulletin Board" of the National Association of Securities
Dealers, Inc. (the "NASD"). See "Price Range of Common Stock." Securities
of companies traded on the NASD Electronic Bulletin Board are generally more
difficult to dispose of and to obtain accurate quotations as to price than
securities of companies that are traded on the Nasdaq National Market, the
Nasdaq SmallCap Market or the major stock exchanges.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection
with trades in any stock defined as a penny stock. The rules and regulations
of the Securities and Exchange Commission (the "Commission") generally define
a penny stock to be an equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. Such exceptions include any
equity security listed on Nasdaq or a national securities exchange and any
equity security issued by an issuer that has (i) net tangible assets of at
least $2,000,000, if such issuer has been in continuous operation for three
years, (ii) net tangible assets of at least $5,000,000, if such issuer has
been in continuous operation for less than three years, or (iii) average
annual revenue of at least $6,000,000, if such issuer has been in continuous
operation for less than three years. Unless an exception is available, the
regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the
risks associated therewith.
In addition, trading in the Company's securities is currently subject to
Rule 15g-9 promulgated under the Exchange Act for non-Nasdaq and non-exchange
listed securities. Pursuant to Rule 15g-9, broker/dealers who recommend the
Company's securities to persons other than established customers and
accredited investors must make a special written suitability determination
for the purchaser and receive the purchaser's written agreement to a
transaction prior to sale. Securities are exempt from this rule if their
market price is at least $5.00 per share.
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<PAGE>
The impact of the regulations applicable to penny stocks on the
Company's securities is to reduce the market liquidity of the Company's
securities by limiting the ability of broker/dealers to trade the Company's
securities and the ability of purchasers of the Company's securities to sell
their securities in the secondary market. The low price of the Company's
Common Stock also has a negative effect on the amount and percentage of
transaction costs paid by individual shareholders and the potential ability
of the Company to raise additional capital by issuing additional shares. The
primary reasons for these effects include the internal policies of certain
institutional investors that prohibit the purchase of low-priced stocks, the
fact that many brokerage houses do not permit low-priced stocks to be used as
collateral for margin accounts or to be purchased on margin and certain
brokerage house policies and practices that tend to discourage individual
brokers from dealing in low-priced stocks. In addition, since broker's
commissions on low-priced stocks represent a higher percentage of the stock
price than commissions on higher priced stocks, the current low share price
of the Common Stock results in individual shareholders paying transaction
costs that are a higher percentage of their total share value than would be
the case if the Company's share price were substantially higher.
The Company intends to apply for listing on the Nasdaq SmallCap Market
as soon as it meets the eligibility requirements. Under existing Nasdaq
rules, in order to be eligible for listing on the Nasdaq SmallCap Market, the
Company's Common Stock must maintain a minimum bid price of $3.00, the
Company must have a minimum shareholders' equity of $2 million, total assets
of at least $4 million and at least two market makers. Nasdaq has recently
proposed more stringent financial requirements for listing on the Nasdaq
SmallCap Market that would require that (i) the Common Stock have a minimum
bid price of $4.00, (ii) the Company have minimum tangible net assets (total
assets less total liabilities and goodwill) of $4 million or a market
capitalization of at least $50 million or net income of at least $750,000 in
two of the three prior years, (iii) the Company have a public float of at
least one million shares with a market value of at least $5 million and (iv)
the Common Stock have at least three market makers and be held of record by
at least 300 shareholders. The Company's Board of Directors believes that it
is in the best interests of the Company and its shareholders for the
Company's Common Stock to be included for trading on the Nasdaq SmallCap
Market. If and when the Company were to meet all of the requirements to be
listed on the Nasdaq SmallCap Market other than the minimum trading price
requirement, the Company's Board of Directors would probably recommend that
the Company effect a reverse stock split in order to meet the minimum trading
price listing requirement. Any such reverse stock split would require
shareholder approval. There can be no assurance that the Company will attain
the listing requirements for the Nasdaq SmallCap Market or that any proposed
reverse stock split will be approved by the shareholders or successfully
implemented following such approval.
POTENTIAL ADVERSE EFFECT OF EXERCISE OF WARRANTS AND SALES OF WARRANT
COMMON STOCK. As of October 31, 1996, the Company had outstanding 1,008,950
Common Stock Purchase Warrants (the "Warrants") that have an exercise price
of $1.00 per share and 25,974 Common Stock Purchase Warrants that have an
exercise price of $0.21 per share. The exercise of the outstanding Warrants
will dilute the percentage ownership of the holders of the Common Stock, and
any sales in the public market of Common Stock issuable upon the exercise of
the Warrants (the "Warrant Common Stock") may adversely affect prevailing
market prices for the Common Stock. Moreover, the terms upon which the
Company will be able to obtain additional equity capital may be adversely
affected since the holders of such Warrants can be expected to exercise them
at a time when the Company would, in all likelihood,
-43-
<PAGE>
be able to obtain any needed capital on terms more favorable to the Company
than those provided in the outstanding Warrants.
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants are
subject to redemption by the Company at a price of $.01 each, commencing on
February 1, 1997, on at least 30 days' prior written notice, if the average
closing bid price of the Common Stock as reported on The Nasdaq SmallCap
Market, if traded thereon, or, if not traded thereon, the average closing
sale price if listed on a national securities exchange (or other reporting
system that provides last sale prices), or, if not traded thereon, the
average of the closing bid prices on the NASD Electronic Bulletin Board,
equals or exceeds $1.50 per share (subject to adjustment for stock splits,
stock dividends and similar events) for a period of 20 trading days during
any 30 consecutive trading days ending on the third day prior to the date on
which the Company gives notice of redemption. Upon the giving of such notice
of redemption, holders of the Warrants will lose their right to exercise the
Warrants, except during such 30-day notice of redemption period. Upon the
receipt of a notice of redemption of the Warrants, the holders thereof would
be required to (i) exercise the Warrants and pay the exercise price at a time
when it may be disadvantageous for them to do so; (ii) sell the Warrants at
the then market price, if any, when they might otherwise wish to hold the
Warrants; or (iii) accept the redemption price which is likely to be
substantially less than the market value of the Warrants at the time of
redemption.
POTENTIAL ADVERSE EFFECT OF ISSUANCE OF PREFERRED STOCK. The Company's
Articles of Incorporation authorize the issuance of up to 5,000,000 shares of
"blank check" Preferred Stock, with such designations, rights, preferences,
privileges and restrictions as determined by the Board of Directors from time
to time. As a result, the Board of Directors is empowered, without further
shareholder approval, to issue Preferred Stock with dividend, liquidation,
conversion, voting or other rights that could adversely affect the voting
power or other rights of the holders of the Common Stock. In the event of
issuance, the Preferred Stock could be used, under certain circumstances, as
a method of discouraging, delaying or preventing a change in control of the
Company. Although the Company has no present plans to issue any shares of
Preferred Stock, there can be no assurance that the Company will not issue
Preferred Stock at some time in the future.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. As of October 31,
1996, the Company had 40,829,331 shares of Common Stock outstanding, of which
31,996,488 are freely tradeable under the Securities Act. The 8,832,843
shares are "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act and may be sold pursuant to Rule 144
during certain periods noted below. All of such 8,832,843 securities will
become eligible for resale without registration under the Securities Act of
1933 after April 29, 1997. No prediction can be made as to the effect, if
any, that sales of shares of Common Stock or the availability of such shares
for sale will have on the market prices prevailing from time to time. The
possibility exists, however, that substantial amounts of Common Stock may be
sold in the public market which may adversely affect prevailing market prices
for the Common Stock and could impair the Company's ability to raise capital
through the sale of its equity securities.
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<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
Audited balance sheets as of October 31, 1996, 1995 and 1994 and the
related statements of loss and accumulated deficit, cash flows and
Stockholders' equity for the years ended October 31, 1996, 1995 and 1994 (and
from inception to October 31, 1996) together with related notes and the
reports of Ernst & Young LLP and Johnson, Holscher & Co., independent
auditors, appear on pages F-1 through F-19 of this Report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in or disagreements with accountants on accounting
and financial disclosure during fiscal 1996.
In connection with the preparation of the audited financial statements
for fiscal 1996, the Company determined that it would be in the best
interests of the Company and its stockholders to retain the national
accounting firm of Ernst & Young LLP to serve as its independent auditors.
This change was more time consuming than the Company initially anticipated
and was not completed until February 7, 1997. On February 9, 1997, the
Company filed a Current Report on Form 8-K with the Commission to announce
the change in auditors, as is required by the rules and regulations of the
Commission. Set forth below is the text of that Form 8-K:
"ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Johnson, Holscher & Company, P.C. ("Johnson Holscher") was
previously the principal accountants for Aquasearch, Inc. (the "Company").
On February 9, 1997, that firm's appointment as principal accountants was
terminated by dismissal and Ernst & Young LLP was engaged as principal
accountants. The decision to change accountants was approved by the Audit
Committee of the Board of Directors.
In connection with the audits of the two fiscal years ended October 31,
1994 and 1995 and the subsequent interim period through February 9, 1997,
there were no disagreements between Johnson Holscher and the Company with
respect to any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which disagreements if
not resolved to Johnson Holscher's satisfaction would have caused them to
make reference in connection with their opinion to the subject matter of the
disagreement.
The audit reports of Johnson Holscher on the financial statements of the
Company as of and for the years ended October 31, 1995 and 1994, did not
contain any adverse opinion or disclaimer of opinion, nor were they qualified
or modified as to uncertainty, audit scope, or accounting principles, except
as follows with respect to the 1994 audit report:
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<PAGE>
As shown in the financial statements, the Company incurred a net loss of
$240,090 for the year ended October 31 1994, and has incurred substantial
net losses for each of the past five years. These factors, and others
discussed in Note 6, indicate that there is substantial doubt about the
Company being able to continue in existence. Accordingly, the assets and
the liabilities of the Company have been written down to liquidation
basis."
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS: COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The Company has a total of three (3) directors, constituting the entire
Board of Directors. The Company's Bylaws provide that the directors shall hold
office for one-year terms and thereafter until their successors shall have been
elected and qualified. The executive officers serve at the pleasure of the
Board of Directors. The names, ages, positions and terms of office of the
executive officers and directors of the Company are:
<TABLE>
<S> <C>
Name and Age: Dr. Mark E. Huntley (46)
Address: 73-4460 Queen Ka'ahumanu Highway, Suite 110, Kailua-Kona, Hawaii 96740
Office: Director; President, Chief Executive Officer & Chairman of the Board
Since: 1988
Name and Age: Dr. Pearn P. Niiler (59)
Address: 73-4460 Queen Ka'ahumanu Highway, Suite 110, Kailua-Kona, Hawaii 96740
Office: Director
Since: 1988
Name and Age: Mr. Michael C.B. Smith (41)
Address: 73-4460 Queen Ka'ahumanu Highway, Suite 110, Kailua-Kona, Hawaii 96740
Office: Director
Since: 1996
The names, ages, positions and duration of employment of other key employees are:
Name and Age: John J. Emerick, Jr.; (32)
Address: 73-4460 Queen Ka'ahumanu Highway, Suite 110, Kailua-Kona, Hawaii 96740
Position: Vice President of Operations
Since: 1996
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Name and Age: Alexander B. Leonard, Ph.D.; (34)
Address: 73-4460 Queen Ka'ahumanu Highway, Suite 110, Kailua-Kona, Hawaii 96740
Position: Vice President of Manufacturing
Since: 1996
</TABLE>
BUSINESS EXPERIENCE
MARK E. HUNTLEY, Ph.D., is a co-founder of Aquasearch, a co-inventor of
the Aquasearch Growth Module and has served as the President, Chief Executive
Officer and Chairman of the Board since inception. Dr. Huntley has served as
a research biologist at Scripps Institution of Oceanography, University of
California, San Diego since 1980. Dr. Huntley has won numerous awards and
grants in his field, published more than 75 articles and a book, and lectured
throughout the world. Dr. Huntley serves on the Executive Committee of the
Global Ocean Ecosystem Dynamics program, a component of the United States
Global Change Research Program, and the only element of the International
Geosphere-Biosphere Program that is examining the impact of global climate
change on marine ecosystems. Dr. Huntley has served as an advisor to
numerous international, national and state agencies, including The United
States State Department, the United States Department of the Interior and the
White House Office of Science and Technology Policy. Dr. Huntley received a
B.Sc. degree (SUMMA CUM LAUDE) in Biological Oceanography from the University
of Victoria, Canada 1976 and a Ph.D. in Biological Oceanography from
Dalhousie University in Halifax, Canada in 1980.
PEARN P. NIILER, Ph.D., has been a consultant to the Company since 1990
and has served as a director of the Company since 1991. Dr. Niiler is an
expert in applied mathematics and fluid dynamics and was a co-inventor of
various processes used in the Aquasearch Growth Module. Dr. Niiler is a
Professor of Oceanography at Scripps Institution of Oceanography, University
of California, San Diego, where he heads one of the largest oceanographic
research programs in the nation. Dr. Niiler has taught and conducted
research at Harvard College, Nova University and Oregon State University and
has published more than 125 scientific papers. Dr. Niiler received his B.S.
in Mechanics Engineering from Lehigh University, earned honors as a Fulbright
Scholar at Cambridge University, England, and was awarded a Ph.D. in Applied
Mathematics as a Woodrow Wilson Fellow from Brown University. Dr. Niiler has
invented certain oceanographic instrumentation technologies that are now in
commercial production with sales of $6 million annually.
MICHAEL C.B. SMITH has been a consultant to the Company since 1993 and
has served as a director of the Company since March 1996. Mr. Smith was
primarily responsible for structuring and negotiating the terms of the
Company's strategic relationships with Svenska Foder and Cultor. Mr. Smith
spent ten years as a senior executive with Whitbread Plc of England (one of
Britain's largest leisure retailers and brewers). With Whitbread he held
positions of President and CEO of Keg Restaurants Ltd (a $200
million-turnover company operating in Canada, USA and Australia); CEO of a
franchised fast food chain based in Britain; and VP Marketing for Whitbread's
most profitable retail concept. Mr. Smith received his MBA from Cranfield
Institute of Technology.
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<PAGE>
JOHN J. EMERICK has served as the Company's Business Manager since July
1995 and its Vice President of Operations since August 1996. Prior to
joining Aquasearch, Mr. Emerick served as Team Manager in a Florida pulp mill
for Proctor & Gamble, where he was engaged in production management and
engineering development during the period from June 1985 to June 1987. From
June 1987 to March 1992, Mr. Emerick served in various positions, including
Top Engineering Executive, for Tetra-Pak Materials, Inc., an international
packaging conglomerate, in which he was responsible for all engineering
processes in the plant, including research, implementation and training.
During the period from July 1992 to February 1995, Mr. Emerick served as
General Manager of Advanced Neuro Dynamics of Honolulu, the largest NLP
seminar and training company in the world. Mr. Emerick received his B.A. in
Mechanical Engineering (HIGH HONORS) from Georgia Tech University in 1985.
ALEXANDER B. LEONARD, Ph.D., has served as the Company's Director of
Manufacturing since August 1995 and as Vice President of Manufacturing since
March 1996. Prior to joining Aquasearch, Dr. Leonard served as Project
Manager and Principal Scientist for CalBioMarine Technologies, Inc., a
research-stage marine biotechnology company, from October 1992 to July 1995.
At CalBioMarine Technologies, Inc., Dr. Leonard designed and operated
cultivation systems for marine microalgae and invertebrates on projects
funded by the National Science Foundation and the National Institutes of
Health. Dr. Leonard received a B.A. in Zoology (SUMMA CUM LAUDE) from
Trinity College, Dublin in 1984 and a Ph.D. in Marine Biology from Scripps
Institution of Oceanography, University of California, San Diego in 1992.
OTHER DIRECTORSHIPS
No directors held directorships in any other reporting companies.
FAMILY RELATIONSHIPS
There are no family relationships among directors, executive officers or
persons nominated or chosen by the Company to become directors or executive
officers.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
No director, executive officer, or control person of the Company has
been involved in any of the following legal proceedings: (1) any bankruptcy
petition filed by or against any business of which such person was a general
partner or executive officer either at the time of the bankruptcy or within
two years prior at that time; (2) any conviction in a criminal proceeding or
being subject to a pending criminal proceeding (excluding traffic violations
and other minor offenses); (3) being subject to any order, judgment, or
decree, not subsequently reversed, suspended or vacated, of any court of
competent jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of business,
securities or banking activities; and (4) being found by a court of competent
jurisdiction (in a civil action), the Commission or the Commodity Future
Trading Commission to have violated a federal or state securities or
commodities law, and the judgment has not been reversed, suspended, or
vacated.
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<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table sets forth the information, on an accrual basis, with
respect to the compensation of Mark E. Huntley, Ph.D., the Chief Executive
Officer of the Company, for the three fiscal years ended October 31, 1996.
<TABLE>
<CAPTION>
YEAR ENDED SALARY/OTHER STOCK NO. OF SECURITIES
NAME AND POSITION OCTOBER 31, COMPENSATION AWARDS(1) UNDERLYING OPTIONS
- -------------------------- ----------- ------------ ----------- ------------------
<S> <C> <C> <C> <C>
Mark E. Huntley,Ph.D., 1996 $ 0(2) $0 0
President and Chief 1995 $ 0(2) $198,000(3) 1,665,250(4)
Executive Officer 1994 $ 0(2) $ 60,000(5) 0
</TABLE>
(1) The dollar value of each of the restricted stock awards in the table above
was determined by multiplying the closing bid price of the Company's
Common Stock on the date of grant of the stock award by the number of
shares awarded.
(2) Dr. Huntley has at all times during 1994, 1995 and 1996 served as a
consultant to the Company while continuing his employment as a research
biologist at Scripps Institute of Oceanography, University of California,
San Diego. Pursuant to the rules and regulations of the Commission,
however, Dr. Huntley's position as President and Chief Executive Officer
of the Company qualifies him as an employee of the Company.
Notwithstanding this, all compensation paid to Dr. Huntley to date has
been as though he was an independent consultant to the Company.
(3) On August 24, 1995, the Company returned to Dr. Huntley 1,320,000 shares of
Common Stock from the 4,635,575 shares of Common Stock that Dr. Huntley had
gifted to the Company in 1989. Although the Company had intended this
transaction to qualify as a return of capital to Dr. Huntley without any
tax or other consequences to the Company or Dr. Huntley, under the rules
and regulations of the Commission, this transaction qualifies as a stock
grant in return for prior services. The closing bid price of the Common
Stock on the date of grant was $0.15 per share.
(4) On August 1, 1995, the Board of Directors granted a stock option to Dr.
Huntley, with a term of seven years, payable, if exercised, by a
promissory note payable over 3 years with interest at 5% per annum, to
purchase up to 1,665,250 shares of Common Stock at an exercise price of
$0.0625 per share.
(5) On May 2, 1994, the Board of Directors authorized and approved the
issuance of 400,000 shares of Common Stock to Dr. Huntley for past
services. The closing bid price of the Company's Common Stock on May 2,
1994 was at $0.08 per share.
The total annual salary and bonus for any other executive officer did not
exceed $100,000 for the fiscal year ended October 31, 1996.
STOCK OPTION GRANTS
There were no individual grants of stock options made to any executive
officers or directors during the fiscal year ended October 31, 1996. The
following table sets forth information concerning individual grants of stock
options made to all employees of the Company during the fiscal year ended
October 31, 1996:
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<PAGE>
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE
UNDERLYING TO EMPLOYEES IN OR BASE EXPIRATION
NAME AND POSITION OPTIONS FISCAL YEAR PRICE ($/SH) DATE
- -------------------------- ---------- --------------- ------------ -----------
<S> <C> <C> <C> <C>
John J. Emerick, Vice 100,000(1) 55.6% $0.61/share 8/l/2002
President of Operations
Alexander B. Leonard, Ph.D., 50,000(2) 27.8% $0.61/share 8/l/2002
Vice President of Manufacturing
Georgia Malan 30,000(3) 16.6% $0.61/share 8/1/2002
</TABLE>
(1) On August 1, 1995, the Company granted a stock option to Mr. Emerick
to purchase 100,000 shares that would vest on July 25, 1996 at an
exercise price equal to the closing bid price of the Common Stock on
July 25, 1996. The closing bid price of the Common Stock on July 25,
1996 was $0.61 per share.
(2) On August 1, 1995, the Company granted a stock option to Dr. Leonard
to purchase 50,000 shares that would vest on July 25, 1996 at an
exercise price equal to the closing bid price of the Common Stock on
July 25, 1996. The closing bid price of the Common Stock on July 25,
1996 was $0.61 per share.
(3) On August 1, 1995, the Company granted a stock option to Ms. Malan to
purchase 30,000 shares that would vest on July 25, 1996 at an exercise
price equal to the closing bid price of the Common Stock on July 25,
1996. The closing bid price of the Common Stock on July 25, 1996 was
$0.61 per share.
STOCK OPTIONS EXERCISED DURING FISCAL YEAR
No stock options or stock appreciation rights were exercised by any
executive officers or directors of the Company during the fiscal year ending
October 31, 1996.
OPTION VALUES
The following table sets forth information with respect to the value of
unexercised options held by executive officers as of October 31, 1996:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END FISCAL YEAR END(1)
------------------------------ -------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mark E. Huntley, Ph.D. . . . . . 1,665,250 -0- $528,717 -0-
</TABLE>
- --------------
(1) Value of unexercised options is based on the closing bid price of the
Company's Common Stock on the Nasdaq Electronic Bulletin Board on
October 31, 1996 ($0.38) minus the exercise price.
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<PAGE>
LTIP AWARDS DURING FISCAL YEAR
No long term incentive plan awards were made to any executive officers or
directors of the Company during the fiscal year ending October 31, 1996.
COMPENSATION OF DIRECTORS
As of October 31, 1996, no director had received any compensation for any
service provided to the Company as a director.
EMPLOYMENT CONTRACTS
There are currently no employment contracts or change-in-control
arrangements between the Company and any director or executive officer.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Mark E. Huntley, Ph.D. is the only person who owns of record or is known
to the Company to own beneficially more than five percent (5%) of the shares of
Common Stock of the Company as of October 31, 1996. The following table sets
forth information regarding the security ownership of the Company's directors
and officers.
<TABLE>
<CAPTION>
TITLE NAME AND ADDRESS NATURE OF PERCENT
OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP NO. OF SHARES OF CLASS(2)
- ------------ -------------------------------- -------------------- -------------- -----------
<S> <C> <C> <C> <C>
Common Mark E. Huntley, Ph.D. Direct 5,683,186(1) 13.92%
73-4460 Queen Ka'ahumanu Highway
Suite 110
Kailua-Kona, Hawaii 96740
</TABLE>
(1) Includes stock options to purchase an aggregate of 1,665,250 shares of
Common Stock at an exercise price of $0.0625 per share with a term of
seven years, payable by a promissory note payable over 3 years with
interest at 5% per annum.
(2) The percent of class is calculated on the basis of the amount of
outstanding securities as of October 31, 1996.
SECURITY OWNERSHIP OF MANAGEMENT
Certain information with respect to the holdings of Common Stock of the
directors and executive officers of the Company as of October 31, 1996 is set
forth in the table below.
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<PAGE>
<TABLE>
<CAPTION>
TITLE NAME AND ADDRESS NATURE OF NO. OF PERCENT
OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP SHARES(1) OF CLASS
- ---------- ------------------------------------ -------------------- -------------- ----------
<S> <C> <C> <C> <C>
Common Mark E. Huntley, Ph.D. Direct 5,683,186(2) 13.92%
73-4460 Queen Ka'ahumanu
Highway, Suite 110, Kailua-Kona,
Hawaii 96740
Common Pearn P. Niiler, Ph.D. Direct 1,918,402(3) 4.70%
73-4460 Queen Ka'ahumanu
Highway, Suite 110, Kailua-Kona,
Hawaii 96740
Common Michael C.B Smith Direct 1,961,050(4) 4.80%
73-4460 Queen Ka'ahumanu
Highway, Suite 110, Kailua-Kona,
Hawaii 96740
All Executive Officers and Direct 9,562,638(5) 23.42%
directors as a group
(3 in number)
</TABLE>
(1) Applicable percentage ownership is based on 40,829,331 shares of Common
Stock outstanding as of October 31, 1996 together with applicable options
for such stockholder. Beneficial ownership is determined in accordance
with the rules of the Commission, and includes voting and investment power
with respect to the shares. Shares of Common Stock subject to options
currently exercisable or within 60 days after October 31, 1996 are deemed
outstanding for purposes of computing the percentage ownership of the
persons holding such options, but are not deemed outstanding for computing
the percentage of any other stockholder.
(2) Includes 1,655,250 shares subject to options that are exercisable within
60 days after October 31, 1996.
(3) Includes 1,291,050 shares subject to options that are exercisable within
60 days after October 31, 1996.
(4) Includes 1,741,050 shares subject to options that are exercisable within
60 days after October 31, 1996.
(5) Includes a total of 4,847,350 shares subject to options that are
exercisable within 60 days after October 31, 1996.
CHANGES IN CONTROL
The Company is not aware of any arrangements which may result in a change
in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the last two years, the Company has not been a party to any
transaction or series of similar transactions exceeding $60,000 in which any
of the following persons had a direct or indirect material interest: (1) any
director or executive officer of the Company; (2) any nominee for election as
a director; (3) any person who owns of record or is known to the Company to
own beneficially more than 5 % of
-52-
<PAGE>
the shares of common stock of the Company; or (4) any member of the immediate
family of any of the foregoing persons.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBITS
3.1 Articles of Incorporation of the Registrant. (Previously filed as an
exhibit to the Registrant's Annual Report on Form 10-KSB for the year
ended October 31, 1995).
3.2 Articles of Amendment to Articles of Incorporation, filed October 4,
1996. (Filed herewith).
3.3 Bylaws. (Previously filed as an exhibit to the Registrant's Annual
Report on Form 10-KSB for the fiscal year ended October 31, 1995).
4.1 Form of 1996 Bridge Note (Filed herewith).
4.2 Form of Private Placement Warrant (Filed herewith).
10.1 Distribution and Development Agreement, dated May 14, 1996, between
the Company and Cultor. (Previously filed as an exhibit to the
Registrant's Current Report on Form 8-K dated May 14, 1996.)
10.2 Stock Subscription Agreement, dated May 14, 1996, between the Company
and Cultor. (Previously filed as an exhibit to the Registrant's
Current Report on Form 8-K dated May 14, 1996.)
10.3 Amended Keahole Point Facilities Use Agreement dated August 22, 1996,
by and between The Natural Energy Laboratory of Hawaii Authority and
the Company. (Filed herewith).
27 Financial Data Schedule. (Filed herewith).
REPORTS ON FORM 8-K
On September 12, 1996, the Company filed a Current Report on Form 8-K
including the text of Cultor Distribution and Development Agreement
and the Cultor Stock Subscription Agreement.
-53-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on April 21, 1997, on its behalf by the
undersigned, thereunto duly authorized.
AQUASEARCH, INC.
By /s/ Mark E. Huntley
-------------------------------
Mark E. Huntley
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the date indicated.
Signature Date
/s/ Mark E. Huntley April 21, 1997
- ---------------------------
Mark E. Huntley
Director, President, CEO & Chairman
of the Board of Directors
/s/ Pearn P. Niiler April 21, 1997
- --------------------------
Pearn P. Niiler
Director
/s/ Michael C.B. Smith April 21, 1997
- --------------------------
Michael C.B. Smith
Director
-54-
<PAGE>
Aquasearch, Inc.
(A Development Stage Enterprise)
Financial Statements
Years ended October 31, 1996, 1995 and 1994
CONTENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . F-2
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . F-3
Financial Statements
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Statements of Loss and Accumulated Deficit . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Statements of Stockholders' Equity (Deficit) . . . . . . . . . . . . . . . . F-7
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . .F-13
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
Aquasearch, Inc.
We have audited the accompanying balance sheet of Aquasearch, Inc. (a
development stage enterprise) as of October 31, 1996, and the related
statements of loss and accumulated deficit, cash flows, and stockholders'
equity (deficit) for the year then ended and for the period from inception to
October 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements as of
October 31, 1995 and 1994, and for the period from inception to October 31,
1995, were audited by other auditors whose report dated December 2, 1995 except
for Note 5 dated January 26, 1996, and Note 8 dated April 6, 1997, expressed an
unqualified opinion on those statements. The financial statements for the
period from inception to October 31, 1995 include no revenues and a net loss of
$1,616,518. Our opinion on the statements of loss and accumulated deficit,
cash flows, and stockholders' equity (deficit) for the period from inception to
October 31, 1996, insofar as it relates to amounts for prior periods through
October 31, 1995, is based solely on the report of the other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Aquasearch, Inc. (a development stage
enterprise) as of October 31, 1996, and the results of its operations and its
cash flows for the year then ended and the period from inception to October 31,
1996, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations and working capital deficit at October 31, 1996 raise
substantial doubt about its ability to continue as a going concern. The
October 31, 1996 financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
SIGNATURE
March 11, 1997
Honolulu, Hawaii
F-2
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Aquasearch, Inc.
San Diego, California
We have audited the accompanying balance sheets of Aquasearch, Inc. (a
development stage enterprise) (a Colorado corporation) as of October 31,
1995, 1994 and 1993, and the related statements of loss and accumulated
deficit, cash flows, and stockholders' equity for the years then ended and
for the period from inception to October 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aquasearch, Inc. (a
development stage enterprise) as of October 31, 1995, 1994 and 1993, and the
results of its operations, cash flows, and changes in stockholders' equity
for the years then ended and for the period from inception to October 31,
1995, in conformity with generally accepted accounting principles.
Englewood, Colorado
December 2, 1995 except
Note 5 dated January 26, 1996
and Note 8 dated April 6, 1997 /s/ Johnson, Holscher & Co.
PROFESSIONAL CORPORATION
F-3
<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31
1995
(AS RESTATED)
1994 (NOTE 8) 1996
--------- -------------- ----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,213 $ 27,208 $ 187,166
Cash in escrow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000 -- 460,980
Accounts receivable - employees/affiliates. . . . . . . . . . . . . . . -- -- 1,933
Stock subscriptions receivable. . . . . . . . . . . . . . . . . . . . . -- 35,000 --
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 9,177 5,534
Refundable deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 1,207 2,535 3,145
---------- ---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,420 73,920 658,758
---------- ---------- ----------
Plant and equipment - at cost: . . . . . . . . . . . . . . . . . . . . . .
Plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 408,219 676,709
Other equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 7,740 68,349
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . -- (320) (35,876)
---------- ---------- ----------
Net plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . -- 415,639 709,182
---------- ---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87,420 $ 489,559 $1,367,940
---------- ---------- ----------
---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,866 $ 233,181 $ 466,165
Deposits held . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000 -- 460,980
Notes payable (NOTE 2). . . . . . . . . . . . . . . . . . . . . . . . . -- -- 150,000
---------- ---------- ----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 106,866 233,181 1,077,145
---------- ---------- ----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock ($0.0001 par value, 100,000,000 shares authorized,
40,829,331 shares outstanding). . . . . . . . . . . . . . . . . . . . . 3,467 4,379 5,204
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 1,141,060 1,902,785 3,234,309
Deficit accumulated during the development stage . . . . . . . . . . . . . (1,163,973) (1,650,786) (2,948,718)
---------- ---------- ----------
Total stockholders' equity (deficit) . . . . . . . . . . . . . . . . . . . (19,446) 256,378 290,795
---------- ---------- ----------
Total liabilities and stockholders' equity (deficit) . . . . . . . . . . . $ 87,420 $ 489,559 $1,367,940
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF LOSS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31
FROM INCEPTION 1995
TO OCTOBER 31, (AS RESTATED)
1996 1994 (NOTE 8) 1996
------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
OPERATIONS
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,000 $ -- $ -- $ 10,000
Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,226 -- -- 21,226
Research and development costs . . . . . . . . . . . . . . . . . . . . 1,092,766 27,063 89,264 648,601
------------ ------------ ------------ ------------
Gross profit (loss). . . . . . . . . . . . . . . . . . . . . . . . . . (1,103,992) (27,063) (89,264) (659,827)
General and administrative expenses. . . . . . . . . . . . . . . . . . 1,633,197 115,131 393,171 640,702
------------ ------------ ------------ ------------
Earnings (loss) from operations. . . . . . . . . . . . . . . . . . . . (2,737,189) (142,194) (482,435) (1,300,529)
OTHER INCOME (EXPENSE)
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,647) -- (1,762) 2,597
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,016) (800) (2,616) --
Investment in joint venture. . . . . . . . . . . . . . . . . . . . . . (147,096) (97,096) -- --
------------ ------------ ------------ ------------
Total other income and (expense) . . . . . . . . . . . . . . . . . . . (162,759) (97,896) (4,378) 2,597
------------ ------------ ------------ ------------
Earnings (loss) before income taxes and extraordinary item . . . . . . (2,899,948) (240,090) (486,813) (1,297,932)
Extraordinary item - loss on write down of assets
to liquidation basis. . . . . . . . . . . . . . . . . . . . . . . . (14,502) -- -- --
------------ ------------ ------------ ------------
Earnings (loss) before income taxes. . . . . . . . . . . . . . . . . . (2,914,450) (240,090) (486,813) (1,297,932)
Federal and State income taxes . . . . . . . . . . . . . . . . . . . . -- -- -- --
------------ ------------ ------------ ------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . (2,914,450) (240,090) (486,813) (1,297,932)
ACCUMULATED DEFICIT
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . (34,268) (923,883) (1,163,973) (1,650,786)
------------ ------------ ------------ ------------
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . $(2,948,718) $(1,163,973) $(1,650,786) $(2,948,718)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.14) $ (0.01) $ (0.02) $ (0.03)
------------ ------------- ------------- -----------
------------ ------------- ------------- -----------
Weighted average shares outstanding. . . . . . . . . . . . . . . . . . 20,380,495 22,782,063 25,541,021 37,679,955
------------ ------------- ------------- -----------
------------ ------------- ------------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED OCTOBER 31
FROM INCEPTION 1995
TO OCTOBER 31, (AS RESTATED)
1996 1994 (NOTE 8) 1996
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(2,914,450) $(240,090) $(486,813) $(1,297,932)
Adjustments to reconcile net loss to net cash used
in operating activities:
Amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,527 -- -- --
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,583 -- 320 35,556
Expenses paid with common stock . . . . . . . . . . . . . . . . . . 444,165 82,000 210,998 62,800
Loss on write down of assets to liquidation basis . . . . . . . . . 5,392 -- -- --
Changes in:
Other current assets . . . . . . . . . . . . . . . . . . . . . . (8,478) (1,207) (10,505) 3,033
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . (1,933) -- (35,000) 33,067
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 382,452 6,425 110,536 232,968
Deposits held. . . . . . . . . . . . . . . . . . . . . . . . . . 460,980 85,000 (85,000) 460,980
------------ ---------- ---------- ------------
Cash used in operating activities. . . . . . . . . . . . . . . . . . . (1,586,762) (67,872) (295,464) (469,528)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets . . . . . . . . . . . . . . . . . . . . . . . (654,642) -- (315,180) (329,099)
------------ ---------- ---------- ------------
Cash used in investing activities. . . . . . . . . . . . . . . . . . . (654,642) -- (315,180) (329,099)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash (held in) released from escrow. . . . . . . . . . . . . . . . . . (460,980) (85,000) 85,000 (460,980)
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . 2,816,193 7,500 571,580 1,326,600
Increase in notes payable. . . . . . . . . . . . . . . . . . . . . . . 179,800 -- -- 150,000
Offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . (106,497) -- (19,941) (57,035)
------------ ---------- ---------- ------------
Cash provided by financing activities. . . . . . . . . . . . . . . . . 2,428,516 (77,500) 636,639 958,585
------------ ---------- ---------- ------------
Net increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . 187,112 (145,372) 25,995 159,958
Cash, beginning of the period. . . . . . . . . . . . . . . . . . . . . 54 146,585 1,213 27,208
------------ ---------- ---------- ------------
Cash, end of the period. . . . . . . . . . . . . . . . . . . . . . . . $ 187,166 $ 1,213 $ 27,208 $ 187,166
------------ ---------- ---------- ------------
------------ ---------- ---------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FROM INCEPTION TO OCTOBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
----------- --------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, October 31, 1988. . . . . . . . 20,000,000 $2,000 $ 72,730 $(101,984) $(27,254)
Issuance of stock for cash
($0.05 per share)
January 12, 1989. . . . . . . . . . . 4,000,000 400 165,291 -- 165,691
Treasury shares acquired at
no cost, January 1989 . . . . . . . . (1,207,972) -- -- -- --
Exercise of A warrants for cash
($0.12 per share)
March 3, 1989 . . . . . . . . . . . . 55,000 5 6,595 -- 6,600
Exercise of A warrants for
cash ($0.12 per share)
April 21, 1989. . . . . . . . . . . . 95,000 10 11,390 -- 11,400
Exercise of A warrants for
cash ($0.12 per share)
June 5, 1989. . . . . . . . . . . . . 20,000 2 2,398 -- 2,400
Treasury shares acquired at
no cost, June 1989. . . . . . . . . . (601,912) -- -- -- --
Exercise of A warrants for
cash ($0.12 per share)
September 1989. . . . . . . . . . . . 177,500 19 21,281 -- 21,300
Exercise of A warrants for
cash ($0.12 per share)
August 28, 1989 . . . . . . . . . . . 145,000 14 17,386 -- 17,400
Exercise of A warrants for
cash ($0.12 per share)
October 30, 1989. . . . . . . . . . . 63,500 6 7,614 -- 7,620
Treasury shares acquired at
no cost, October 1989 . . . . . . . . (9,388,954) -- -- -- --
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
----------- --------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Rent provided at no charge . . . . . . . -- $ -- $ 1,000 $ -- $ 1,000
Loss for the year ended
October 31, 1989. . . . . . . . . . . -- -- -- (183,333) (183,333)
---------- ------- ---------- ----------- ----------
Balance, October 31, 1989. . . . . . . . 13,357,162 2,456 305,685 (285,317) 22,824
Exercise of A warrants for
cash ($0.12 per share)
December 1989 . . . . . . . . . . . . 390,000 39 41,440 -- 41,479
Exercise of A warrants for
cash ($0.12 per share)
January 1990. . . . . . . . . . . . . 224,000 23 26,857 -- 26,880
Exercise of A warrants for
cash ($0.12 per share)
February 9, 1990. . . . . . . . . . . 80,000 8 9,592 -- 9,600
Exercise of A warrants for
cash ($0.12 per share)
April 25, 1990. . . . . . . . . . . . 30,000 3 3,597 -- 3,600
Exercise of A warrants for
cash ($0.12 per share)
May 14, 1990. . . . . . . . . . . . . 30,000 3 3,597 -- 3,600
Issuance of stock for services
($0.05 per share) May 31, 1990. . . . 300,000 30 12,778 -- 12,808
Exercise of A warrants for cash
($0.12 per share) June 28, 1990 . . . 15,000 1 1,789 -- 1,790
Issuance of restricted stock for
cash ($0.07 per share)
August 8, 1990. . . . . . . . . . . . 140,000 14 9,786 -- 9,800
Exercise of A warrants for
cash ($0.12 per share)
August 1990 . . . . . . . . . . . . . 110,000 11 13,169 -- 13,180
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
----------- --------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Services provided at no
charge, August 27, 1990 . . . . . . . -- -- (263) -- (263)
Exercise of A warrants for
cash ($0.12 per share)
September 5, 1990 . . . . . . . . . . 160,000 $ 16 $ 19,114 $ -- $ 19,130
Exercise of A warrants for
cash ($0.12 per share)
October 1990. . . . . . . . . . . . . 1,753,000 175 209,385 -- 209,560
Rent provided at no charge . . . . . . . -- -- 1,000 -- 1,000
Loss for the year ended
October 31, 1990. . . . . . . . . . . -- -- -- (163,839) (163,839)
---------- ------- ---------- ----------- ----------
Balance, October 31, 1990. . . . . . . . 16,589,162 2,779 657,526 (449,156) 211,149
Issue stock in consideration for
loans ($0.04 per share)
September 1991. . . . . . . . . . . . 290,000 29 11,571 -- 11,600
Sale of restricted stock for
cash ($0.04 per share)
October 1991. . . . . . . . . . . . . 125,000 13 4,988 -- 5,000
Rent provided without charge . . . . . . -- -- 1,000 -- 1,000
Loss for the year. . . . . . . . . . . . -- -- -- (251,401) (251,401)
---------- ------- ---------- ----------- ----------
Balance, October 31, 1991. . . . . . . . 17,004,162 2,821 675,085 (700,557) (22,652)
Restricted stock for past
services ($0.04 per share)
November 1991 . . . . . . . . . . . . 34,000 3 1,357 -- 1,360
Restricted stock for
services ($0.01 per share)
February 1992 . . . . . . . . . . . . 247,500 25 2,900 -- 2,925
Restricted stock for
services ($0.04 per share)
February 1992 . . . . . . . . . . . . 12,000 1 479 -- 480
</TABLE>
SEE ACCOMPANYING NOTES.
F-9
<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
----------- --------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Restricted stock for
cash ($0.15 per share)
February 1992 . . . . . . . . . . . . 20,000 2 2,998 -- 3,000
Restricted stock for
services ($0.04 per share)
May 1992. . . . . . . . . . . . . . . 10,000 $ 1 $ 398 $ -- $ 399
Restricted stock for services
($0.0001 per share)
August 1992 . . . . . . . . . . . . . 150,000 15 -- -- 15
Rent provided without charge
during the year . . . . . . . . . . . -- -- 1,000 -- 1,000
Loss during the year . . . . . . . . . . -- -- -- (81,128) (81,128)
---------- ------- ---------- ----------- ----------
Balance, October 31, 1992. . . . . . . . 17,477,662 2,868 684,217 (781,685) (94,601)
Sale of stock ($0.08 per
share) February 1993. . . . . . . . . 975,000 98 73,367 -- (21,136)
Sale of stock ($0.08 per
share) April 1993 . . . . . . . . . . 2,200,000 220 170,704 -- 149,788
Stock issued for services
($0.08 per share)
May 1993. . . . . . . . . . . . . . . 673,751 68 53,833 -- 203,689
Conversion of notes and
advances for stock ($0.08
per share) May 1993 . . . . . . . . . 861,900 87 69,315 -- 273,091
Rent provided at no charge . . . . . . . -- -- 250 -- 273,341
Loss for the period. . . . . . . . . . . -- -- -- (142,197) 131,144
---------- ------- ---------- ----------- ----------
Balance, October 31, 1993. . . . . . . . 22,188,313 3,341 1,051,686 (923,883) 131,144
</TABLE>
SEE ACCOMPANYING NOTES.
F-10
<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
----------- --------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Stock issued ($0.03 per
share) January 1994 . . . . . . . . . 250,000 $ 25 $ 7,475 $ -- $ 7,500
Stock issued for services
($0.08 per share)
May 1994. . . . . . . . . . . . . . . 775,000 76 61,924 -- 62,000
Stock issued for services
($0.08 per share)
June 1994 . . . . . . . . . . . . . . 250,000 25 19,975 -- 20,000
Loss for the year ended
October 31, 1994. . . . . . . . . . . -- -- -- (240,090) (240,090)
---------- ------- --------- ----------- ----------
Balance, October 31, 1994. . . . . . . . 23,463,313 3,467 1,141,060 (1,163,973) (19,446)
Stock issued for cash
($0.10 per share)
March 1995. . . . . . . . . . . . . . 1,710,000 171 166,408 -- 166,579
Stock issued for services
($0.10 per share)
June 1995 . . . . . . . . . . . . . . 50,000 5 4,995 -- 5,000
Stock subscribed for cash
($0.0625 per share)
July 1995 . . . . . . . . . . . . . . 3,200,000 320 199,680 -- 200,000
Reissue stock previously
canceled at no cost
August 1995 . . . . . . . . . . . . . 1,320,000 132 (132) -- --
Stock issued for cash
($0.08 per share),
September 1995. . . . . . . . . . . . 2,712,500 271 184,795 -- 185,066
Stock issued for services
(valued at $0.0625 per
share) October 1995 . . . . . . . . . 127,875 13 7,979 -- 7,992
</TABLE>
SEE ACCOMPANYING NOTES.
F-11
<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------- ADDITIONAL TOTAL
NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY (DEFICIT)
----------- --------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Loss for the year ended October 31, 1995 -- $ -- $ -- $ (288,813) $ (288,813)
---------- ------- ---------- ------------ -----------
Balance, October 31, 1995, as
previously reported . . . . . . . . . 32,583,688 4,379 1,704,785 (1,452,786) 256,378
Correction of reissuance of
stock previously canceled,
October 1995 (NOTE 8) . . . . . . . . -- -- 198,000 (198,000) --
---------- ------- ---------- ------------ -----------
Balance, October 31, 1995, as
restated. . . . . . . . . . . . . . . 32,583,688 4,379 1,902,785 (1,650,786) 256,378
Stock issued for services
($0.125 per share)
November 1995 . . . . . . . . . . . . 264,000 26 32,974 -- 33,000
Stock issued for services
($0.125 per share)
December 1995 . . . . . . . . . . . . 40,000 4 4,996 -- 5,000
Stock issued for cash
($0.15 per share)
January 1996. . . . . . . . . . . . . 4,000,000 400 570,534 -- 570,934
Stock issued for cash
($0.125 per share)
January 1996. . . . . . . . . . . . . 2,492,800 249 296,266 -- 296,515
Stock issued for services
($0.62 per share)
February 1996 . . . . . . . . . . . . 40,000 4 24,796 -- 24,800
Stock issued for cash
($0.50 per share)
October 1996. . . . . . . . . . . . . 400,000 40 199,960 -- 200,000
Stock issued for cash
($0.21 to $0.23 per share)
October 1996. . . . . . . . . . . . . 1,008,843 102 201,998 -- 202,100
Loss for the year ended
October 31, 1996. . . . . . . . . . . -- -- -- (1,297,932) (1,297,932)
---------- ------- ---------- ------------ -----------
Balance, October 31, 1996. . . . . . . . 40,829,331 $ 5,204 $3,234,309 $(2,948,718) $ 290,795
---------- ------- ---------- ------------ -----------
---------- ------- ---------- ------------ -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-12
<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
October 31, 1996, 1995 and 1994
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Aquasearch, Inc. (Aquasearch) was founded in February 1988 as a Colorado
corporation which designs and markets aquaculture technology. The Company
has been engaged, since its inception, in the development of proprietary
photobioreactor technology for commercial cultivation of microalgae. The
Company's principal operations are located in Kailua-Kona, Hawaii.
Substantially all of Aquasearch's efforts to date have been focused on the
development of the Aquasearch Growth Module and the initial production of
natural astaxanthin, a naturally occurring red pigment derived from a
freshwater microalgae. The two primary markets for natural astaxanthin are
currently aquaculture and poultry feed.
In July 1995, the Company entered into a three-year supply agreement with
Svenska Foder AB, a subsidiary of Cultor, Ltd., a European producer of animal
feed. The contract requires Aquasearch to deliver five kilograms of natural
astaxanthin per month. During the year ended October 31, 1996, the Company
made its first shipment of product to Svenska Foder AB under the supply
agreement resulting in revenues of $10,000. Because no significant sales
have occurred and because the Company has devoted most of its efforts to
research and development, the Company is considered to be in the development
stage.
BASIS OF PRESENTATION
The Company's financial statements have been presented on the basis that it
is able to continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business.
The Company has incurred operating losses since inception totaling
approximately $3 million. At October 31, 1996 the Company had a working
capital deficit of approximately $420,000. During December 1996 and January
1997, the Company sold additional shares of stock through a private
placement which were sufficient to fund its immediate operating financial
needs.
In May 1996, the Company entered into a three-year Distribution and
Development Agreement with Cultor, Ltd. (the Cultor Agreement) pursuant to
which the Company will act as the exclusive worldwide supplier and Cultor,
Ltd. will act as the exclusive worldwide distributor of Aquasearch's natural
astaxanthin in the field of animal feed and animal nutrition. The terms of
the Cultor Agreement require that from September 1997 the Company is to
provide Cultor, Ltd. with 40 kilograms of natural astaxanthin per month
increasing to 120 kilograms per month beginning in September 1998. The
Cultor Agreement provides that Aquasearch and Cultor, Ltd. share equally in
the gross margin of the product shipped.
F-13
<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Cultor Agreement also provides that Cultor, Ltd. and Aquasearch may, at
Cultor, Ltd.'s option, mutually develop a new joint venture company for the
sole purpose of producing and selling natural astaxanthin in the field of
animal feed and animal nutrition. Pursuant to this arrangement, Aquasearch
would contribute a ten-acre natural astaxanthin production facility to be
constructed in 1997 in return for its 50% stake in the new company and
Cultor, Ltd. would contribute cash equal to the appraised value of the
facility for its 50% stake.
In connection with the execution of the Cultor Agreement, Cultor, Ltd.
purchased 400,000 shares of the Company's common stock at a purchase price of
$0.50 per share.
The Company currently has begun planning for the expansion of its present
one-acre research and development facility to a four-acre production facility
that will allow it to meet its September 1997 40 kilogram per month target
production requirement under the Cultor Agreement. To complete the expansion,
the Company estimates that it must obtain between $5 and $10 million of
additional capital. In order to meet the September 1998 120 kilogram per
month target, the Company anticipates that it must construct a ten-acre
production facility.
The Company currently projects that it will require between $1.2 and $1.5
million in operating capital in 1997, before any planned capital expenditures
related to the construction of its new production facility. The Company is
presently pursuing additional sources of capital in order to maintain and
expand its operations in fiscal 1997. These capital sources include
government contracts and grants, product sales, license agreements and equity
and debt financing.
The Company's continued existence is dependent upon its ability to obtain
working capital and long-term financing to meet its obligations on a timely
basis and to fund expansion of its production facilities and continued
research and development of new microalgae products. The Company is
presently unable to reasonably determine the likelihood of obtaining such
financing. In addition, the failure of the Company to gain additional
customers for its natural astaxanthin product in other applications and
customers for its other potential products, the loss of Cultor, Ltd. or any
potential corporate partner as a customer, or a significant reduction in the
level of sales to Cultor, Ltd. or any potential corporate partner could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The accompanying financial statements do not include any adjustments,
including those related to the classification of recorded asset amounts or
classification of liabilities, that might result from the outcome of the
aforementioned uncertainties.
F-14
<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three months
or less to be cash equivalents.
PLANT AND EQUIPMENT
Plant and equipment is stated at cost. Depreciation is provided on the
straight-line method over ten years for plant and five years for equipment.
STOCK ISSUED FOR SERVICES
Stock issued for services is based on management's estimate of the fair value
of the Company's restricted stock at the date of issue.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes as required by Statement of Financial Accounting Standards No. 109
(SFAS 109), ACCOUNTING FOR INCOME TAXES. SFAS 109 requires the recognition
of deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the
tax basis of certain assets and liabilities.
Since its inception, the Company has incurred net operating losses.
Accordingly, no provision has been made for income taxes.
LOSS PER SHARE
Loss per share was based on the average common shares outstanding during the
period. Average common share equivalents have not been included in the
computation of loss per share as their effect would be anti-dilutive.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash,
cash in escrow, accounts payable, deposits held and notes payable are deemed
to approximate fair value due to their short-term nature.
F-15
<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior years' balances have been reclassified to be comparable to the
current year presentation.
2. COMMON STOCK WARRANTS
On January 12, 1989, the Company sold to the public 4,000,000 shares of its
$0.0001 par value common stock. The shares were sold as part of a unit for
$0.05 per unit. Each unit consisted of one share of common stock and one
common stock purchase warrant ("A" warrant). The "A" warrant entitled the
holder thereof to purchase one additional share of common stock and one
common stock purchase warrant ("B" warrant) for $0.12 per share. The "B"
warrant entitles the holder to purchase one additional share of common stock
for $ 1.00. The warrants may be redeemed by the Company at $0.0001 per
warrant. The offering netted $165,691 to the Company on the date of closing.
During the years ended October 31, 1989 and 1990, 3,348,000 "A" warrants were
exercised at $0.12 per share which netted the Company $393,523 (after issue
costs). All remaining "A" warrants have been canceled. The 3,348,000 "B"
warrants expired on September 15, 1996.
During the year ended October 31, 1996, the Company sold to the public
1,008,843 shares of its $0.0001 par value common stock. The shares were sold
under a 12,000,000 unit private placement offering, each unit consisting of
one share of common stock and one common stock purchase warrant. The
warrants have a term of three years and are exercisable at $1.00 per share.
The warrants may be redeemed by the Company at $0.01 per warrant upon 30
days' notice anytime that the closing price per share of the Company's common
stock exceeds $1.50 per share for 20 trading days out of 30 consecutive
trading days ending on the third day prior to the date of the notice of
redemption. Pursuant to the private placement offering, the placement agent
received 60,531 warrants as of October 31, 1996.
F-16
<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. COMMON STOCK WARRANTS (CONTINUED)
In August and September 1996 the Company obtained approximately $150,000 of
short-term bridge financing from four individual investors pursuant to a note
and warrant purchase agreement dated August 1, 1996. The notes bear
interest at 6.25% and matured on September 30, 1996. No interest payments
were made on the notes as of October 31, 1996. As of January 31, 1997,
$135,000 of the notes payable was paid.
In conjunction with the execution of the notes the investors received a total
of 25,974 warrants entitling the holder to purchase one share of common stock
at an exercise price of $0.21 per share. The warrants expire on December 31,
1999.
No warrants were exercised during the year ended October 31, 1996. At
October 31, 1996, the Company had reserved a sufficient number of shares of
its common stock for issuance pursuant to the exercise of the warrants.
3. COMMON STOCK OPTIONS
In August 1995, the Company granted stock options, exercisable immediately,
to seven individuals to purchase a total of 5,732,462 shares of the Company's
common stock at an exercise price of $0.0625 per share. In addition, the
Company also granted stock options to three individuals which became
exercisable in July 1996 to purchase a total of 180,000 shares of the
Company's common stock at an exercise price of $0.61 per share.
In July 1996, the Company granted stock options to an individual to purchase
a total of 400,000 shares of the Company's common stock at an exercise price
of $0.56 per share. The options were immediately exercisable with respect to
200,000 shares. The remaining options become exercisable in January 1997 for
100,000 shares and July 1997 for 100,00 shares.
No common stock options have been exercised as of October 31, 1996.
4. RELATED PARTY TRANSACTIONS
During the year ended October 31, 1991, the Company borrowed $29,000 from
stockholders. The four separate notes were unsecured, carried an interest of
12% and were due in August 1992. As an inducement for the loans, the Company
issued a total of 290,000 shares of restricted stock to the lenders. For
purposes of the financial statements, this stock was valued at $0.04 per
share based on recent sales of restricted stock. Loan issue costs of $5,322
were charged to interest expense in 1991 and unamortized
F-17
<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
loan issue costs of $6,693 were written off. During the year ended October
31, 1993, these loans were converted to 430,650 shares of common stock.
During the year ended October 31, 1995, the Company reissued 1,320,000 shares
of common stock to its president and chief executive officer. These were
shares which had been previously returned to the Company.
The Company has also issued restricted stock for services to various officers
as follows:
Number of
Shares Value
--------- ----------
YEAR
1996 40,000 $ 5,000
1995 177,875 12,992
1994 1,025,000 82,000
1993 650,938 52,075
1992 300,000 30
5. INCOME TAXES
Since its formation the Company has incurred net operating losses. As of
October 31, 1996, the Company had a net operating loss carryforward available
to offset future taxable income for federal and state income tax purposes of
approximately $2.5 million. The net operating loss carryforward for tax
reporting purposes expires in the years from 1999 to 2011. The Company also
has a research credit carryover approximating $40,000 which expires between
the years 2003 and 2011.
No deferred tax benefit or liability has been recorded for temporary
differences between book and tax reporting due to the uncertainty of any
eventual recovery or payment.
6. INVESTMENT IN OCEANCOLOR
In March 1993, the Company invested $50,000 in a joint venture (OceanColor,
Inc.) with Cyanotech Corporation. The Company and Cyanotech each owned 50%
of OceanColor. During the year ended October 31, 1994, the Company invested
an additional $97,100 in this joint venture. In November 1994, the joint
venture was dissolved with the licensing rights to its proprietary technology
reverting entirely to the Company. At the time of dissolution, there was
approximately $7,500 of equipment in the joint venture which was distributed
to the Company.
F-18
<PAGE>
AQUASEARCH, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
During the year ended October 31, 1995, the Company constructed its plant
facility at a cost of $408,219. At October 31, 1995, there remained in
accounts payable approximately $100,800 of this cost. Accordingly, the
amount which remained in accounts payable was removed from cash paid for the
purchase of fixed assets in the statement of cash flows for the year ended
October 31, 1995.
8. CORRECTION OF ACCOUNTING FOR REISSUANCE OF STOCK PREVIOUSLY CANCELED
During the year ended October 31, 1995, the Company reisssued 1,320,000
shares of restricted stock to its president and chief executive officer.
These were shares which had been previously returned to the Company by the
president and chief executive officer at no cost to the Company. The
reissuance was recorded at par value in the financial statements for the year
ended October 31, 1995 with no effect on net loss for that year. The Company
has subsequently valued the reissued stock at $0.15 per share based on the
quoted market price of the restricted stock at the date of reissuance. As a
result, the Company's financial statements for the year ended October 31,
1995 have been restated as follows:
AS ORIGINALLY
REPORTED AS RESTATED
------------- -----------
Balance sheet:
Additional paid-in capital $1,704,785 $1,902,785
Deficit accumulated during the development stage (1,452,786) (1,650,786)
Statement of loss and accumulated deficit:
General and administrative expenses 195,171 393,171
Net income (loss) (288,813) (486,813)
Loss per share (0.01) (0.02)
Statement of cash flows:
Expenses paid with common stock 12,998 210,998
9. SUBSEQUENT EVENT
In November 1996, the Company announced that it would acquire between 80 and
90 acres of property on the Big Island of Hawaii valued at between $900,000
and $1,000,000 from C. Brewer and Company, Limited in exchange for C. Brewer
and Company, Limited's acquisition of approximately 6% of the outstanding
common stock of the Company. In connection with this transaction, C. Brewer
also acquired a warrant to purchase up to 500,000 shares of the Company's
common stock at an exercise price of $1.25 per share.
F-19
<PAGE>
EXHIBIT 3.2
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
AQUASEARCH, INC
Pursuant to the provisions of the Colorado Business Corporation Act, the
undersigned corporation adopts the following Articles of Amendment to its
Articles of Incorporation:
FIRST: The name of the corporation is Aquasearch, Inc.
SECOND: The following amendment was adopted by the Board of Directors
and Shareholders of the corporation effective September 24, 1996 in the
manner prescribed by the Colorado Business Corporation Act:
RESOLVED: That the Fourth Article of the Articles of Incorporation of the
corporation be, and it hereby is, changed to read as follows:
(a) This Corporation is authorized to issue two classes of stock,
designated "Common Stock" and "Preferred Stock." The total number of shares
of Common Stock which this corporation shall have authority to issue is
100,000,000 shares. The total number of shares of Preferred Stock which this
corporation shall have authority to issue is 5,000,000 shares. Each share of
Common Stock and Preferred Stock shall have a par value of $0.0001 per share.
The corporation's board of directors is hereby authorized, subject to
limitations prescribed by law and the provisions of this Fourth Article to
provide for the issuance of the shares of Preferred Stock in one or more
series, and by filing Articles of Amendment to the Articles of Incorporation
pursuant to the Colorado Business Corporation Act, to establish from time to
time the number of shares included in each such series, and to fix the
designations, preferences, limitations, and relative rights of the series of
shares.
The authority of the corporation's board of directors with respect to each
series shall include, but not be limited to, determination of the following:
<PAGE>
A. The number of shares constituting that series and the distinctive
designation of that series;
B. The dividend rate on the shares of that series, whether dividends
shall be cumulative and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on
shares of that series;
C. Whether that series shall have the voting rights in addition to the
voting rights provided by law, and, if so, the terms of such voting
rights;
D. Whether that series shall have conversion privileges, and, if so, the
terms and conditions of such privileges, including provision for
adjustment of the conversion rate in such events as the corporation's
board of directors shall determine;
E. Whether or not the shares of that series shall be redeemable, and, if
so, the terms and conditions of such privileges, including the date or
dates upon or after which they shall be redeemable, and the amount per
share payable on case of redemption, which amount may vary under different
conditions and at different redemption rates;
F. Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series and, if so, the terms in the amount of
such sinking funds;
G. The rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding up of the corporation, and
the relative rights of priority, if any, of payment or shares of that
series; and
H. Any other relative rights, preferences and limitations of that
series.
(b) Each shareholder of record shall have one vote for each share of
Common Stock standing in his or her name on the books of the corporation and
entitled to vote thereon. Cumulative voting shall not be permitted in the
election of directors or otherwise.
(c) At all meetings of shareholders, one-third of the shares entitled to
vote at such meeting, represented in person or by proxy, shall constitute a
quorum.
(d) The shareholders, by vote or concurrence of a majority of the
outstanding shares of the corporation, or any class or series thereof,
entitled to vote on the subject matter, may take any action which, except for
this Article, would require a two-thirds vote under the Colorado Business
Corporation Act, as amended.
(e) No shareholder of the corporation shall have any preemptive or other
right to subscribe for any additional unissued or treasury shares of stock or
for other securities of any class, or for rights, warrants or options to
purchase stock, or for scrip, or for securities of any kind convertible into
stock or carrying stock purchase warrants or privileges.
<PAGE>
(f) The Board of Directors may from time to time distribute to the
shareholders in partial liquidation, out of stated capital or capital surplus
of the corporation, a portion of its assets, in cash or property, subject to
the limitations contained in the statutes of Colorado and these Articles of
Incorporation.
THIRD: The number of shares voting for the amendment was sufficient for
approval.
FOURTH: The manner, if not set forth in the amendments, in which any
exchange, reclassification or cancellation of issued shares provided for in
the amendments shall be effected, are as follows: Not applicable.
FIFTH: The manner in which the amendments effect a change in the
amount of stated capital as changed by amendments are as follows: No change.
AQUASEARCH, INC.
By /s/ Steven L. Berson
-----------------------------
Steven L. Berson, Secretary
<PAGE>
EXHIBIT 4.1
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS
OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON
TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS
PERMITTED UNDER THE ACT AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO
REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY
BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE
PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF
COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT
ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY
APPLICABLE STATE SECURITIES LAWS.
AQUASEARCH, INC.
PROMISSORY NOTE
$___________ Kailua-Kona, Hawaii
August 1, 1996
FOR VALUE RECEIVED, AQUASEARCH, INC., a Colorado corporation (the
"Company") hereby absolutely and unconditionally promises to pay to
____________________________ (the "Lender"), or order, the principal amount of
__________________________________ ($_________), together with simple interest
at the rate of six and one-quarter percent (6.25%) per annum (calculated on the
basis of twelve 30-day months). Accrued interest shall be due and payable in
cash only at the time the principal amount of this Note becomes due and owing.
This Note is one of a series of Notes issued pursuant to the Note and
Warrant Purchase Agreement dated as of August 1, 1996 (as amended and in effect
from time to time, the "Purchase Agreement") by and among the Company, the
Lender, and certain other lenders named in Exhibit A thereto (the Lender and
the certain other lenders are referred to herein as the "Lenders"). All
rights under this Note rank equally with all rights under all other Notes,
and no holder of this Note shall have rights senior to the rights of the
holders of all or any other Notes.
1. REPAYMENTS AND PREPAYMENTS.
(a) This Note shall be due and payable on September 30, 1996;
PROVIDED, HOWEVER, that if the $200,000 due to the Company upon receipt of
shareholder approval of that certain Distribution and Development Agreement
and Stock Subscription Agreement, each dated as of May 14, 1996, between the
Company and Cultor, Ltd. (the "Cultor Payment") is paid to the Company before
September 30, 1996, then one half of the principal amount of this Note
(including interest) shall become due and
<PAGE>
payable to the holder of this Note within five business days after receipt by
the Company of the $200,000 Cultor Payment; and, PROVIDED, FURTHER, that any
outstanding principal amount of this Note shall become immediately due and
payable (including interest) upon the closing (the "First Closing") of any
sale of equity securities of the Company before September 30, 1996. Any
payment of this Note shall be made only at the same time as the Company pays
all other Notes issued pursuant to the Purchase Agreement, with such payments
to be made pro-rata in proportion to the then outstanding principal amounts
of such Notes. In the event that the Company fails to pay any portion of the
principal or interest on this Note when due upon the receipt of the Cultor
Payment or upon the First Closing, then the Lender shall thereafter have the
option to receive all or any portion of the interest due on this Note in the
form of Common Stock valued at the lower of $0.56 per share or the lowest
price at which units are sold in the Company's proposed private placement of
units consisting of one share of Common Stock and one Warrant to Purchase One
Share of Common Stock. Interest shall continue to accrue on this Note until
such time as all principal and interest due is paid in full.
(b) The Company may prepay this Note at any time, either in whole
or in part, without premium or penalty and without the prior consent of the
Lender. Any prepayment of this Note shall be made only at the same time as
the Company prepays all other Notes issued pursuant to the Purchase
Agreement, with such prepayments to be made pro-rata in proportion to the
then outstanding principal amounts of such Notes.
2. EVENTS OF DEFAULT; ACCELERATION.
(a) The principal amount of this Note is subject to prepayment in
whole or in part upon the occurrence and during the continuance of any of the
following events (each, an "Event of Default"): (i) failure to pay any
amount owing by the Company hereunder when due and payable, or (ii) the
initiation of any bankruptcy, insolvency, moratorium, receivership or
reorganization by or against the Company, or a general assignment of assets
by the Company for the benefit of creditors. Upon the occurrence of any
Event of Default, the entire unpaid principal balance of this Note shall be
immediately due and payable.
(b) No remedy herein conferred upon the Lender is intended to be
exclusive of any other remedy and each and every remedy shall be cumulative
and in addition to every other remedy hereunder, and under the Purchase
Agreement, now or hereafter existing at law or in equity or otherwise.
3. NOTICES.
(a) All notices, reports and other communications required or
permitted hereunder shall be in writing and may be delivered in person, by
telecopy with written confirmation, via overnight delivery service or U.S.
mail, in which event it may be mailed by first-class, certified or
registered, postage fully prepaid, addressed (i) if to a Lender, at such
Lender's address set forth in the Schedule of Investors attached as Exhibit A
to the Purchase Agreement (or such other address as such Lender shall have
furnished the Company in writing) and (ii) if to the Company, at the address
set forth at the
-2-
<PAGE>
beginning of the Purchase Agreement (or such other address as the Company
shall have furnished the Lenders in writing), attention of Mark E. Huntley,
Ph.D., President and Chief Executive Officer.
(b) Each such notice, report or other communication shall for all
purposes under this Note be treated as effective or having been given when
delivered if delivered personally or, if sent by mail, at the earlier of its
receipt or 72 hours after the same has been deposited in a regularly
maintained receptacle for the deposit of the United States mail, addressed
and mailed as aforesaid, or, if sent by telecopier with written confirmation,
at the earlier of (i) 24 hours after confirmation of transmission by the
sending telecopier machine or (ii) delivery of written confirmation.
4. MISCELLANEOUS.
(a) With the written consent of the record holders of more than
66 2/3% of the principal amount of the Notes then outstanding, the obligations
of the Company and the rights of the holders under the Notes may be waived
(either generally or in a particular instance, either retroactively or
prospectively and either for a specified period of time or indefinitely), and
with the same consent the Company, when authorized by resolution of its Board
of Directors, may enter into a supplementary agreement for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Note; PROVIDED, HOWEVER, that no such waiver or
supplemental agreement shall reduce the above percentage of principal amount,
the holders of which are required to consent to any waiver or supplemental
agreement, without the consent of the record or beneficial holders of all of
the Notes, nor increase the obligations of any holder of a Note without such
holder's written consent. Upon the effectuation of each such waiver,
consent, agreement, amendment or modification, the Company shall promptly
give written notice thereof to the record holders of the Notes who have not
previously consented thereto in writing. Neither this Note nor any
provisions hereof may be changed, waived, discharged or terminated orally,
but only by a signed statement in writing.
(b) No failure or delay by the Lender to exercise any right
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege preclude any other right, power or
privilege. The provisions of this Note are severable and if any one
provision hereof shall be held invalid or unenforceable in whole or in part
in any jurisdiction, such invalidity or unenforceability shall affect only
such provision in such jurisdiction. This Note expresses the entire
understanding of the parties with respect to the transactions contemplated
hereby. The Company and every endorser and guarantor of this Note regardless
of the time, order or place of signing hereby waives presentment, demand,
protest and notice of every kind, and assents to any extension or
postponement of the time for payment or any other indulgence, to any
substitution, exchange or release of collateral, and to the addition or
release of any other party or person primarily or secondarily liable.
(c) If Lender retains an attorney for collection of this Note, or
if any suit or proceeding is brought for the recovery of all, or any part of,
or for protection of the indebtedness respected by this Note, then the
Company agrees to pay on demand all costs and expenses of the suit or
proceeding, or any appeal thereof, incurred by the Lender, including without
limitation, reasonable attorneys' fees.
-3-
<PAGE>
(d) This Note shall for all purposes be governed by, and construed
in accordance with the laws of the State of California (without reference to
conflict of laws).
(e) This Note shall be binding upon the Company's successors and
assigns, and shall inure to the benefit of the Lender's successors and
assigns.
IN WITNESS WHEREOF, the Company has caused this Note to be executed by
its duly authorized officer to take effect as of the date first hereinabove
written.
AQUASEARCH, INC.
By:
-------------------------------------
Mark E. Huntley, Ph.D.
President and Chief Executive Officer
<PAGE>
EXHIBIT 4.2
THE SECURITIES REPRESENTED BY THIS CERTIFICATE AND THE SHARES OF COMMON STOCK
AND OTHER SECURITIES, IF ANY, ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS
REGISTERED UNDER SUCH ACT AND ALL APPLICABLE STATE SECURITIES LAWS OR UNLESS,
IN THE OPINION OF COUNSEL SATISFACTORY TO THE COMPANY, AN EXEMPTION FROM SUCH
REGISTRATIONS IS AVAILABLE AT THE TIME OF SUCH SALE OR TRANSFER.
WARRANTS TO
PURCHASE COMMON STOCK
OF
AQUASEARCH, INC.
WARRANT CERTIFICATE NO. [___]
VOID AFTER DECEMBER 31, 1999
This certifies that, for value received, [___________________] ("Buyer")
or registered assigns (the "Holder") is the owner of [______] warrants (the
"Warrants") of Aquasearch, Inc., a Colorado corporation (the "Company").
Each Warrant shall entitle the registered holder thereof to purchase one
share of the Company's Common Stock, $0.0001 par value (the "Common Stock"),
at an exercise price per share of Common Stock equal to $1.00 per share (the
"Exercise Price"), at any time during the period commencing on the date of this
Warrant and expiring at 5:00 p.m. Honolulu, Hawaii time, on December 31, 1999
(the "Exercise Period"), all upon the terms and subject to the conditions set
forth herein. After expiration of the Exercise Period, the Holder shall have no
right to purchase any Common Stock hereunder. In the event that the aforesaid
expiration date of the Warrants falls on a day that is not a business day, then
the Warrants shall expire at 5:00 p.m. Honolulu, Hawaii time on the next
succeeding business day. For purposes hereof, the term "business day" shall
mean any day other than a Saturday, Sunday or a day on which banking
institutions in Honolulu, Hawaii are authorized or obligated by law to be
closed.
The Warrants are being issued pursuant to a securities purchase agreement
between the Company and Buyer relating to the sale by the Company and the
purchase by Buyer of an aggregate of [_____] units (the "Units"), each
consisting of one share of Common Stock (the "Unit Common Stock") and one
Warrant to purchase one share of Common Stock (the "Warrant Common Stock").
The Warrant is one of a series of Warrants issued to multiple purchasers
under substantially identical securities purchase agreements with the Company
(hereinafter, together with the securities purchase agreement entered into
between the Company and Buyer, the "Purchase Agreements").
The Holder, by its or his acceptance hereof, agrees with the Company that
the Warrants have been issued and all rights hereunder shall be held subject
to all of the conditions, limitations and provisions set forth herein.
<PAGE>
1. EXERCISE OF WARRANTS. The rights represented by the Warrants may be
exercised in whole on one occasion at any time within the Exercise Period (a
"Warrant Exercise Date") by (i) the surrender of the Warrants (with the
purchase form at the end hereof properly executed) at the principal executive
office of the Company or at the office of Wilson, Sonsini, Goodrich & Rosati,
650 Page Mill Rd., Palo Alto, California 94304 (telephone (415) 493-9300;
facsimile (415) 493-6811), attention Steven L. Berson (the "Warrant Agent")
(or such other office or agency of the Company as it may designate by notice in
writing to the Holder at the address of the Holder appearing on the books of the
Warrant Agent), along with a Notice of Exercise in the form of EXHIBIT II
hereto; and (ii) payment to the Company of the Exercise Price for the number
of shares of Common Stock specified in the above-mentioned purchase form,
together with applicable stock transfer taxes, if any. Payment of the Exercise
Price shall be made in cash or by certified or bank check payable to the
Company. The Warrants shall be deemed to have been exercised, immediately
prior to the close of business on the date the Warrants are surrendered and
payment is made in accordance with the foregoing provisions of this Paragraph
1, and the person or persons in whose name or names the certificates for the
Warrant Common Stock shall be issuable upon such exercise shall become the
Holder or Holders of record of such Warrant Common Stock at that time and
date. The certificate evidencing the Warrant Common Stock so purchased
shall be delivered to the Holder within a reasonable time, after the rights
represented by the Warrants shall have been so exercised.
2. RESTRICTIONS ON TRANSFER. The Holder, by its or his acceptance
hereof, hereby represents and warrants to, and agrees with, the Company as
follows: (i) the Holder has been informed that neither the Warrants, nor the
shares of Warrant Common Stock or other securities purchasable pursuant to
the Warrants, have been registered for sale under any federal or state
securities laws and that the Warrants are being offered and issued to the
Holder and, upon the exercise of the Warrants by the Holder, the Warrant
Common Stock purchasable pursuant to the Warrants will be sold to the Holder,
pursuant to an exemption from registration under the Securities Act of 1933,
as amended (the "Securities Act"); (ii) the Holder is acquiring the Warrants and
will acquire the Warrant Common Stock purchasable upon exercise of the Warrants
for the Holder's own account and not with a view to distribution thereof; (iii)
neither the Warrants nor such Warrant Common Stock may be sold, transferred,
assigned, hypothecated or otherwise disposed of, in whole or in part, unless
registered under the Securities Act and applicable state securities laws or
unless, in the opinion of counsel satisfactory to the Company, an exemption
from such registrations is available; and (iv) prior to the exercise of the
Warrants the Holder shall provide to the Company in writing such information
as the Company may reasonably request to establish that the exercise of the
Warrants by the Holder is exempt from registration under such securities laws.
Subject to the preceding paragraph, any assignment of Warrants shall be
effected by the Holder by (i) completing and executing the Assignment Form
attached as EXHIBIT III hereto and (ii) surrendering the Warrants represented
hereby with such duly completed and executed transfer form for cancellation,
accompanied by funds sufficient to pay any transfer tax, at the office or
agency of the Company referred to in Paragraph 1; whereupon the Company shall
issue, in the name or names specified by the Holder a new Warrant or Warrants
of like tenor and representing in the aggregate rights to purchase the same
number of shares of Warrant Common Stock as are then purchasable hereunder.
3. PAYMENT OF TAXES. The Company will pay any documentary stamp taxes
attributable to the initial issuance of Common Stock issuable upon the
exercise of Warrants; PROVIDED, HOWEVER, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer
involved in the issuance or delivery of any certificates of shares of Warrant
Common Stock in a name
<PAGE>
other than that of the registered Holder of Warrants in respect of which such
shares are issued, and in such case the Company shall not be required to
issue or deliver any certificate for shares of Warrant Common Stock or any
Warrant until the person requesting the same has paid to the Company the
amount of such tax or has established to the Company's satisfaction that such
tax has been paid.
4. RESERVATION OF COMMON STOCK. There have been reserved, and the
Company shall at all times keep reserved, out of its authorized but unissued
shares of Common Stock, the full number of shares of Common Stock sufficient to
provide for the exercise of the rights of purchase represented by the Warrants,
and the transfer agent for the shares of Warrant Common Stock and every
subsequent transfer agent for any shares of Warrant Common Stock issuable upon
the exercise of any of the aforesaid rights of purchase are irrevocably
authorized and directed at all times to reserve such number of authorized
shares of Common Stock as shall be required for such purpose. The Company
agrees that all shares of Warrant Common Stock issued upon exercise of the
Warrants shall be, at the time of delivery of the certificates for such
shares against payment of the Exercise Price therefor, validly issued and
outstanding, fully paid and nonassessable.
5. NO RIGHTS OF SHAREHOLDER. Prior to the exercise of any Warrants
represented hereby, the Holder, as such, shall not be entitled to any rights
of a shareholder of the Company, including, without limitation, the right to
vote or to receive dividends or other distributions, and shall not be
entitled to receive any notice of any proceedings of the Company, except as
otherwise provided herein.
6. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SHARES. The number and
kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price shall be subject to adjustment from time to time as set forth
in EXHIBIT I hereto upon the occurrence of certain events described therein.
The provisions of EXHIBIT I are incorporated by reference herein with the
same effect as if set forth in full herein.
7. NOTICES OF RECORD DATE. In the event of any taking by the Company
of a record of its shareholders for the purpose of determining shareholders
who are entitled to receive payment of any dividend or other distribution,
any right to subscribe for, purchase or otherwise acquire any share of any
class or any other securities or property, or to receive any other right, or
for the purpose of determining shareholders who are entitled to vote in
connection with any proposed merger or consolidation of the Company with or
into any other corporation (excluding any proposed merger or consolidation in
which the shareholders of the Company immediately before such merger or
consolidation will own more than 50% of the outstanding voting stock of the
surviving entity), or any proposed sale, lease or conveyance of all or
substantially all of the assets of the Company (other than the contribution
of certain assets of the Company to a possible joint venture to be formed
between the Company and Cultor Ltd. ("Cultor") pursuant to the terms of that
certain Distribution and Development Agreement dated as of May 14, 1996
including the exhibits thereto (collectively, the "Cultor Transaction")), or any
proposed liquidation, dissolution or winding up of the Company, then, in
connection with each such event, the Company shall mail to the Holder of this
Warrant at least twenty days prior written notice of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right(s)
or vote of the shareholders. Each such written notice shall specify the amount
and character of any such dividend, distribution or right(s), and shall set
forth, in reasonable detail, the matter requiring any such vote of the
shareholders.
8. FRACTIONAL SHARES. The Warrants may only be exercised to purchase
full shares of Warrant Common Stock and the Company shall not be required to
issue fractions of shares of Warrant Common Stock on the exercise of
Warrants. However, if a Holder of Warrants exercises all Warrants then owned
of record by him and such exercise would result in the issuance of a
fractional share, the
<PAGE>
Company will pay to such Holder, in lieu of the issuance of any fractional
share otherwise issuable, an amount of cash based on the Market Price of the
Common Stock on the last trading day prior to the exercise date. "Market
Price" means, on any date, the average of the last reported sale price, or,
in case no such reporting takes place on such day, the average of the last
reported sale prices for the last three trading days, in either case as
officially reported by the principal securities exchange on which the Common
Stock is then listed or admitted to trading or as reported in the Nasdaq
Stock Market, or, if the Common Stock is not listed or admitted to trading on
any national securities exchange or quoted on the Nasdaq Stock Market, the
closing bid quotation as furnished by the National Association of Securities
Dealers, Inc. through NASDAQ or a similar organization if NASDAQ is no longer
reporting such information, or if the Common Stock is traded on the NASD
Electronic Bulletin Board, the closing bid price as furnished by NASDAQ, or
if the Common Stock is not quoted on NASDAQ or the NASD Electronic Bulletin
Board, as determined in good faith by resolution of the Board of Directors of
the Company, based on the best information available to it for the day
immediately preceding such issuance or sale, the day of such issuance or sale
and the day immediately after such issuance or sale. If the Common Stock is
listed or admitted to trading on a national securities exchange and also
quoted on the Nasdaq Stock Market, the Market Price shall be determined as
hereinabove provided by reference to the prices reported in the Nasdaq Stock
Market; provided that if the Common Stock is listed or admitted to trading on
the New York Stock Exchange, the Market Price shall be determined as
hereinabove provided by reference to the prices reported by such exchange.
9. REGISTRATION RIGHTS. The rights of the Holder of this Warrant and the
obligations of the Company with respect to registration under the Securities Act
and the applicable rules and regulations thereunder shall be as set forth in
that certain Registration Rights Agreement dated as of October 1, 1996 between
the Company and the Buyer (the "Registration Rights Agreement"), the provisions
of which are incorporated by reference herein with the same effect as if set
forth in full herein. The Warrant Common Stock shall be deemed "Registrable
Securities" as those terms are defined in the Registration Rights Agreement and
the Holder of this Warrant shall be deemed a "Holder," subject to all of the
rights and obligations thereunder.
10. MERGERS. The Company agrees to provide the Holder of this Warrant
with at least 20 days' prior written notice of the terms and conditions of
any proposed transaction, in which the Company would (i) sell, lease,
exchange, convey or otherwise dispose of all or substantially all of its
property or business (other than the Cultor Transaction), or (ii) merge into
or consolidate with any other corporation (other than a wholly-owned
subsidiary of the Company), or effect any transaction (including a merger or
other reorganization) or series of related transactions, in which more than
fifty percent (50%) of the voting power of the Company is disposed of. The
Company will cooperate with the Holder in arranging the sale of this Warrant
in connection with any such transaction.
11. MODIFICATION; WAIVER AND SEVERABILITY. This Warrant and any
provision hereof may be changed, altered, modified, amended, supplemented,
discharged or terminated only with the written consent of the holders of a
majority of the Warrants then outstanding issued pursuant to the Purchase
Agreements. In the event that any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid,
illegal or unenforceable, the validity, legality and enforceability of any
such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby, and the parties
agree to cooperate with each other to
<PAGE>
insure that each receives the economic benefits intended by any such
provision that is so held to be invalid, illegal or unenforceable.
12. NOTICES. Any notice, request or other document required or
permitted to be given or delivered to the Holder hereof or the Company shall
be delivered or sent to each such Holder at its address as shown on the books
of the Warrant Agent or to the Company at 73-4460 Queen Ka'ahumanu Highway,
Suite 110, Kailua-Kona, Hawaii, 96740 (or at such other address as may be
designated in writing from time to time) and shall be deemed received by the
Holder or the Company upon the earlier of actual receipt or, if sent by
certified mail (postage fully pre-paid), five days after deposit in the
U.S. mail.
13. BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon
any corporation succeeding the Company by merger, consolidation or
acquisition of all or substantially all of the Company's assets. All of the
obligations of the Company relating to the Warrant Common Stock shall survive
the exercise and termination of this Warrant. All of the covenants and
agreements of the Company shall inure to the benefit of the successors and
assigns of the Holder hereof. The Company will, at the time of the exercise
of this Warrant, in whole or in part, upon request of the Holder hereof but
at the Company's expense, acknowledge in writing its continuing obligation to
the Holder hereof in respect of any rights (including, without limitation,
any right to registration of the Warrant Common Stock in accordance with the
Registration Rights Agreement) to which the Holder hereof shall continue to
be entitled after such exercise in accordance with this Warrant; PROVIDED,
HOWEVER, that the failure of the Holder hereof to make any such request shall
not affect the continuing obligation of the Company to the Holder hereof in
respect of such rights.
14. LOST WARRANTS OR STOCK CERTIFICATES. The Company covenants to the
Holder hereof that upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction, or mutilation of this Warrant or any
stock certificate issued upon exercise thereof and, in the case of any such
loss, theft or destruction, upon receipt of an indemnity reasonably
satisfactory to the Company, or in the case of any such mutilation upon
surrender and cancellation of such Warrant or stock certificate, the Company
shall make and deliver a new Warrant or stock certificate, of like tenor, in
lieu of the lost, stolen, destroyed or mutilated Warrant or stock certificate.
15. NO IMPAIRMENT. The Company will not, by amendment of its charter or
through any reorganization, recapitalization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the Company, but will
at all times in good faith assist in the carrying out of all the provisions
of this Warrant and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Holder of this Warrant
against impairment.
16. DESCRIPTIVE HEADINGS. The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
17. RECOVERY OF LITIGATION COSTS. If any legal action or other
proceeding is brought for the enforcement of this Warrant, or because of an
alleged dispute, breach, default, or misrepresentation in connection with any
of the provisions of this Warrant, the successful or prevailing party or
parties shall be entitled to recover reasonable attorneys' fees and other
costs incurred in that action or proceeding, in addition to any other relief
to which it or they may be entitled.
<PAGE>
18. GOVERNING LAW. The Warrants shall be governed by and in accordance
with the laws of the State of Hawaii without regard to the conflicts of law
principles thereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its duly authorized officer to take effect as of
[_________________________________________].
AQUASEARCH, INC.
By:
----------------------------
Mark E. Huntley, Ph.D.
President and Chief Executive Officer
<PAGE>
EXHIBIT I
ADJUSTMENT PROVISIONS
1. CAPITALIZED TERMS. Capitalized terms used in this Exhibit I that are
not otherwise defined herein shall have the respective meanings assigned to
them in the Warrant, dated as of [________________________________________] to
which this Exhibit I is attached, if therein defined.
2. RECLASSIFICATION OR MERGER. In case of any reclassification, change
or conversion of securities of the class issuable upon exercise of this
Warrant (other than a change in par value, or from par value to no par value,
or from no par value to par value, or as a result of a subdivision or
combination), or in case of any merger of the Company with or into another
corporation or entity (other than a merger with another corporation in which
the Company is a continuing corporation and which does not result in any
reclassification or change of outstanding securities issuable upon exercise
of this Warrant), or in case of any sale of all or substantially all of the
assets of the Company, the Company, or such successor or purchasing
corporation or entity, as the case may be, shall execute a new Warrant (in
form and substance satisfactory to the Holder of this Warrant) providing that
the Holder of this Warrant shall have the right to exercise such new Warrant
and upon such exercise to receive, in lieu of each share of Warrant Common
Stock theretofore issuable upon exercise of this Warrant, the kind and amount
of shares of stock, other securities, money and property receivable upon such
reclassification, change or merger by a holder of one share of Common Stock.
Such new Warrant shall provide for adjustments that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Exhibit I. The provisions of this Section 2 shall similarly apply to successive
reclassifications, changes, mergers and transfers.
3. SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time
while this Warrant remains outstanding and unexpired shall subdivide or combine
its Common Stock, the Exercise Price and the number of Shares issuable upon
exercise hereof shall be proportionately adjusted.
4. STOCK DIVIDENDS. If the Company at any time while this Warrant is
outstanding and unexpired shall pay a dividend payable in shares of Common
Stock, then the Exercise Price shall be adjusted, from and after the date of
determination of shareholders entitled to receive such dividend or
distribution, to that price determined by multiplying the Exercise Price in
effect immediately prior to such date of determination by a fraction (a) the
numerator of which shall be the total number of shares of Common Stock
outstanding immediately prior to such dividend or distribution, and (b) the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such dividend or distribution and the number of
shares of Warrant Common Stock subject to this Warrant shall be
proportionately adjusted.
5. OTHER DISTRIBUTIONS. In the event the Company shall declare a
dividend or distribution payable in cash, securities of other persons,
evidences of indebtedness issued by the Company or other persons, assets or
options or rights not referred to in Sections 2, 3 or 4 of this Exhibit I, then,
in each such case, provision shall be made by the Company such that the holder
of this Warrant shall receive upon exercise of this Warrant a proportionate
share of any such dividend or distribution as though it were the
<PAGE>
Holder of the shares of Warrant Common Stock as of the record date fixed for
the determination of the shareholders of the Company entitled to receive such
dividend or distribution.
6. NOTICE OF ADJUSTMENTS. Whenever the Exercise Price shall be
adjusted pursuant to the provisions hereof, the Company shall within thirty
days of such adjustment deliver a certificate signed by its Chief Financial
Officer to the registered Holder(s) hereof setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated, and the Exercise Price after
giving effect to such adjustment.
<PAGE>
EXHIBIT II
NOTICE OF EXERCISE
To: Aquasearch, Inc.
73-4460 Queen Ka'ahumanu Highway
Suite 110
Kailua-Kona, Hawaii 96740
1. The undersigned hereby elects to purchase __________ shares of Common
Stock of the Company pursuant to the terms of the attached Warrant, and tenders
herewith payment of the purchase price of such shares in full; or
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name or names as are specified
below:
Name: ________________________________________
Address: ________________________________________
________________________________________
3. The undersigned represents that the aforesaid shares are being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares.
_______________
(DATE)
____________________________________
(SIGNATURE)
<PAGE>
EXHIBIT III
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute
this form and supply the required information.
Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the undersigned hereby, sells, assigns and transfers
unto:
____________________________________________________________________
whose address is ___________________________________________________
(Please Print)
and whose Social Security or other Taxpayer Identification
Number is: ________________________________________________________,
the foregoing Warrant and all rights thereunder, hereby constituting and
appointing ______________________________________ to transfer said Warrant on
the books of the Company, with full power of substitution in the premises.
Dated: ______________, 19__.
Holder's Signature: ________________________
Holder's Name: _____________________________
(Please Print)
Holder's Address: __________________________
(Please Print)
____________________________________________
Signature Guaranteed: ____________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as
it appears on the face of the Warrant, without alteration or enlargement or
any change whatever, and must be guaranteed by a bank or trust company or by
a member of the National Association of Securities Dealers, Inc. Officers of
corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
<PAGE>
EXHIBIT 10.3
NATURAL ENERGY LABORATORY OF HAWAII AUTHORITY
FACILITIES RENTAL AGREEMENT
KEAHOLE POINT FACILITY
THIS AGREEMENT, made this 22nd day of August, 1996 by and between the
NATURAL ENERGY LABORATORY OF HAWAII AUTHORITY, a body corporate and a public
instrumentality of the State of Hawaii organized pursuant to Hawaii Revised
Statutes, Chapter 227D, hereinafter "NELHA", whose business and post office
address is 73-4460 Queen Kaahumanu Highway, #101, Kailua-Kona, Hawaii 96740,
and AQUASEARCH, INC., whose business and post office address is 73-4460 Queen
Kaahumanu Highway, #110, Kailua-Kona, Hawaii 96740, hereinafter referred to
as the "TENANT", WITNESS THAT:
WHEREAS, the TENANT desires to utilize certain facilities of NELHA
located at the Keahole Point, Kailua-Kona, Island of Hawaii for research,
development, and production of commercially viable microalgae; as generally
described in Exhibit 'C' attached hereto.
WHEREAS, NELHA recognizes TENANT's benefits to the public and NELHA;
NOW, THEREFORE, the parties mutually agree as follows:
1. DESCRIPTION OF PROPERTY. NELHA shall provide the property and
services as outlined in Exhibit 'A' and Exhibit 'B' attached hereto.
Alterations in project scope and/or facilities, utilities, resources, and
services requirements as outlined herein shall be requested in writing and
approved in advance by the executive director.
2. OPTION. TENANT shall have an option to lease an additional 3.12
acres of land as outlined in Exhibit 'B' attached hereto, at a fixed fee in
the amount of $1,248.00. TENANT agrees to pay the option fee once a year.
3. TERM. The term of this Agreement shall be from April 1, 1996 to
March 31, 1997.
The monthly rental shall be reopened and redetermined at the expiration
of the 1st year; provided that the rental provisions may be opened and
amended by NELHA upon granting of any new use or upon the request to consent
to sublease or assign rights under this rental agreement.
4. RENTAL FEES. In consideration of the property and services provided
by NELHA, TENANT agrees to pay to NELHA a fixed fee in the amount of $552.00
per month, payable in advance,
<PAGE>
without notice or demand, in twelve equal installments on the first day of
each and every month or a percentage of gross sales as indicated below (the
"Percentage Rent") whichever is greater, subject to the following:
(a) The "Percentage Rent" to be paid by TENANT (if such percentage
rent is greater than the Minimum Annual Rental provided above) shall be two
percent (2%) of gross sales. For purposes of this agreement "gross sales"
shall be defined as all receipts, income and revenues derived from,
relating to, or connected with the operations, and received by TENANT under
this agreement provided however the following shall be excluded from the
computation of gross sales; (i) shipping to a foreign destination from the
State of Hawaii; (ii) import tariffs; (iii) brokerage commission for
foreign sales; and (iv) the State of Hawaii general excise tax. Within
ninety (90) days of the end of each calendar year during the rental term,
TENANT shall also pay the Percentage Rent due thereby (to extent that the
same excess the amount of the Minimum Annual Rental.)
(b) In recognition of the substantial capital investment by TENANT in
permanent improvements made to the Premises during the early years of the
tenancy and the substantial financial risks undertaken by TENANT together
with the other direct and indirect benefits which will accrue to the State
of Hawaii by reason of the presence of the TENANT at the Premises, for the
term of this Facilities Rental Agreement, TENANT shall be entitled to an
offset against percentage rent payable to NELHA in the amount equivalent to
a total of thirty-five percent (35%) of capital expenditures. This offset
against percentage rent shall be fixed beginning April 1, 1996 and ending
March 31, 2001.
However, capital expenditure must have occurred to claim the offset.
For purposes of this offset provision, "capital expenditures" shall mean
all costs incurred by TENANT in making site improvements, including:
grading, contouring, road construction, paving, fill materials,
landscaping, utility installation, sea water and deep well pipelines and
pumps installation, building of office structures, permanent fishponds, and
metal fences.
Capital expenditures shall be established by receipts and certified
audit conducted in accordance with generally accounting standards,
available to NELHA upon written request.
(c) A penalty fee of 1% per month (12% per annum) will be charged on
any unpaid balances which are thirty (30) days past due. Payments may be
made at the laboratory or mailed to the NELHA office in Kailua-Kona.
Checks should be made payable to: NELHA/State of Hawaii.
5. SEAWATER, BRACKISH WATER, AND GROUNDWATER. NELHA will make its best
efforts to maintain seawater flow at the times and rates required by TENANT,
but because of the unpredictable conditions relating to the seawater
delivery, NELHA does not guarantee a continuous delivery of seawater. NELHA
shall not be responsible for inability to provide seawater to TENANT for
reasons beyond NELHA's control such as power failure, weather, riots,
strikes, lockouts or other reasons of nature which are beyond the control of
NELHA.
-2-
<PAGE>
TENANT acknowledges that NELHA cannot warrant, guarantee, or represent
that the quality of its seawater, brackish water, and groundwater is never
subject to contamination for reasons outside the control of NELHA. TENANT
further acknowledges that it assumes all risk of loss for injury or property
damage which may result from contamination of seawater, brackish water, and
groundwater which are not the fault of NELHA, the County of Hawaii or the
State of Hawaii, and which are not caused by the gross or willful misconduct
or neglect of any of their agents or employees.
6. UTILITIES. NELHA will use its best efforts to accommodate TENANT's
requirements for utilities at the site. NELHA shall not be responsible for
inability to provide utilities to TENANT for reasons beyond NELHA's control
such as power failure, weather, riots, strikes, lockouts or other reasons of
nature which are beyond the control of NELHA. In the event that the
electrical power furnished to TENANT must be interrupted or diminished by
NELHA on a scheduled basis, NELHA will provide TENANT with adequate notice
thereof.
TENANT recognizes that freshwater is in limited supply in the North
Kona-Kohala area and shall be conserved whenever possible. Provisions of
freshwater will be on a non-guaranteed basis and is subject to the provisions
of the County Board of Water Supply.
TENANT may install its own telephone equipment using existing utility
conduits.
7. INSTALLATION COSTS. TENANT agrees to pay any costs incurred by
NELHA that result from the installation of TENANT's seawater systems and
utility systems. These costs will be billed to the TENANT in monthly
invoices described in paragraph 3 of this Agreement, and are payable on the
same date as the payments described in said invoices.
8. EQUIPMENT AND APPARATUS. Any equipment and apparatus provided and
operated by the TENANT shall be solely the responsibility of the TENANT and
not NELHA. All equipment and apparatus to be connected to the seawater
systems and the electrical systems at the facility shall be inspected by the
NELHA or its designated representative prior to any connection. The test
equipment and apparatus shall be made in accordance with applicable
standards, regulations, codes and sound engineering practice. NELHA or its
designated representative may request inspection and certification by outside
experts and/or professional engineers.
9. CONSTRUCTION WITHIN NELHA. The TENANT will not make or cause to be
made any additions, alterations, or improvements, or install or cause to be
installed any buildings, structures, electrical, or plumbing fixtures, except
upon the prior review and consent of NELHA. All buildings, structures, and
landscaping shall express the island character and be of high quality, but
natural in appearance emphasizing the outdoor environment. The TENANT will
provide sufficient landscaping to make the project site visually attractive
to local residents and island visitors. All allowed structures shall comply
with applicable County of Building codes and construction permits.
10. SEAWATER SYSTEMS AND UTILITY CONNECTIONS. It shall be the
responsibility of the TENANT to make the necessary connections to the
existing NELHA seawater, freshwater, electrical, process air, and utility
systems. All connections and service lines shall be made in accordance with
the applicable
-3-
<PAGE>
rules, regulations, laws and codes. TENANTS will discuss with and obtain the
concurrence of the NELHA or its designated representative as to the method
proposed for each connection and line, and the days and time that any
proposed connection might cause disruption to NELHA's operations, utilities,
or services. NELHA shall inspect all connections before any connections shall
be made.
11. OPERATIONS. TENANT will conduct its activities at NELHA in
accordance with all applicable Federal, State, and County statutes,
ordinances and regulations in additions to NELHA's rules and regulations.
NELHA will provide the TENANT with a copy of its Facilities Use Manual (FUM)
which outlines the day to day operating rules, regulations, and expected
conduct at NELHA. All discharges from the TENANT's project shall be included
in and comply with existing permits at the site and the TENANT will obtain
and be responsible for all required importation permits (copy to NELHA).
Project sites shall be kept visually attractive to local resident and to
island visitors.
12. SEAWATER DISCHARGES. It is the intent of NELHA to minimize adverse
environmental effects in the return of water to the ocean. TENANT shall
submit discharge water quality and quantity characteristics to NELHA for
review and approval. Return ocean water discharged into any disposal system
shall meet the basic water quality criteria applicable to waters as described
in the state department of health rules relating to water quality standards.
TENANT shall be responsible for pretreating its return ocean water discharge
to meet these standards.
NELHA may require the TENANT to monitor, record and report the quality of
the TENANT's return ocean water discharge and/or NELHA may enter TENANT's
premises at any time for the purpose of taking samples of the TENANT's return
ocean water discharge for independent water quality analysis. In the event
that monitoring by the TENANT or NELHA indicates the discharge of substances
or water quantities at levels which exceed the predetermined water quality
standards, NELHA shall have the authority to order the TENANT to cease
operations until the discharge problem has been corrected to the satisfaction
of NELHA. TENANT shall be liable for any property damage or environmental
damage that may result form such action.
13. INDEPENDENT CONTRACTOR. TENANT shall be considered an independent
contractor. All persons hired or used by TENANT shall be considered TENANT's
agents and employees and TENANT shall be responsible for all services
performed by its agents and employees. Further, TENANT intentionally,
voluntarily, and knowingly assumes the sole and entire liability for any of
its agent and employees, and to third persons for all loss, cost, damage, or
injury caused, either directly or indirectly, by TENANT's agents and
employees in the course of their employment.
14. INDEMNITY. TENANT will indemnify, defend and hold NELHA, the County
of Hawaii and the State of Hawaii harmless from and against any claim or
demand for loss, liability or damage, including claims for property damage,
personal injury or death, arising out of any accident which occurs in the
TENANT's facilities or on NELHA premises, including sidewalks and roadways
adjacent thereto or occasioned by any act or nuisance made or suffered in
TENANT's facilities or on NELHA's premises, or by any fire thereon, or
growing out of or caused by any failure on the part of the TENANT to maintain
the facilities in a safe condition, which arises from or is related in anyway
to TENANT's research, operations, or by any act or omission of the TENANT,
from and against all actions, suits, damages and
-4-
<PAGE>
claims by whomsoever brought or made by reason of the non-observance or
non-performance of any of the terms, covenants and conditions herein or the
rules, regulations, ordinances and laws of the federal, state, municipal or
county governments.
15. COSTS OF LITIGATION. In case NELHA shall, without any fault on its
part, be made a party to any litigation commenced by or against TENANT, TENANT
shall and will pay all costs and expenses incurred by or imposed on NELHA;
furthermore, the TENANT shall and will pay all costs and expenses which may be
incurred by or paid by NELHA in enforcing the covenants and agreements of this
Agreement, in recovering possession of the facilities or in the collection of
delinquent fees and any all other charges.
16. LIABILITY INSURANCE. The TENANT warrants that it will keep in force
a policy or policies of comprehensive general liability insurance against all
claims for personal injury, death, and property damage caused by its use,
occupancy, operations, or other activity on NELHA's, premises or caused by
the acts, omissions, or neglects or TENANT, its officers, employees, agents,
or contractors, and that said policy or policies shall cover the entire NELHA
premises, including all facilities, improvements, grounds, roadways or
sidewalks on or adjacent to the premises, and all events of seawater,
brackish water, and groundwater contamination caused by TENANT.
TENANT shall procure, at its own cost and expense, and maintain during
the entire period of this Agreement, a policy or policies of comprehensive
general public liability and property damage insurance from a company
licensed to do business in the State of Hawaii in an amount acceptable to
NELHA, but not less than the following minimum amounts:
(a) Comprehensive General Bodily Injury Liability - $100,000 each
occurrence, and $300,000 aggregate.
(b) Comprehensive General Bodily Injury Liability - $100,000 each
occurrence, and $500,000 aggregate.
The State of Hawaii, the County of Hawaii and NELHA, shall be named as
additional insured parties on the aforesaid policy. TENANT shall furnish
NELHA with a certificate showing such policy to be initially in force, and
shall furnish a like certificate upon each renewal of such policy, each such
certificate to contain or be accompanied by an assurance of the insurer to
notify NELHA of any intention to cancel any such policy prior to actual
cancellation. The procuring of this policy shall not release or relieve the
TENANT of its responsibilities under this Agreement set forth herein, or
limit the amount of its liability under this Agreement. Notice to cancel
shall be sent to NELHA sixty (60) days prior to the event of cancellation.
The TENANT also warrants that it is either self-insured or carries
commercial insurance to cover its own business losses which may occur not as
a result of its own negligence. TENANT expressly warrants that its officers,
agents, and employees who use or operate on the NELHA premises are covered by
TENANT'S comprehensive general liability insurance for bodily injury and
property damage which may occur as a result of their employment with TENANT
or their presence on NELHA premises.
-5-
<PAGE>
NELHA, the County of Hawaii, and the State of Hawaii shall be named as
additional insured parties with respect to said policy and premises for all
liabilities which may run to TENANT's officers, agents, employees, or
contractors.
17. BREACH AND TERMINATION. This Agreement may be terminated by NELHA
if the TENANT fails to comply with any of the terms of this Agreement, laws,
or regulations, or if a Sublease has been executed by the parties, or if the
TENANT wholly ceases all activities for a period three (3) months without the
written consent of NELHA for reasons other than force majeure. NELHA shall
give the TENANT written notice of the claimed default. TENANT shall have
sixty (60) days to correct such default. Failure to comply with the
foregoing shall be deemed sufficient cause for termination. Defaults arising
because of failure to pay rents and/or royalties when due must be cured
within thirty (30) days of a written notice of default; otherwise this
Agreement may be terminated.
Upon the termination of this Agreement by NELHA, NELHA shall have the
option to:
(a) Require the TENANT to remove TENANT's equipment and restore
NELHA's premises to a similar condition prior to any development, to the
extent reasonably possible and, upon failure by the TENANT to do so, NELHA
may recover the cost thereof, in addition to imposing any penalties as
provided by law or its regulations.
(b) NELHA shall have the immediate right of re-entry and may remove
all persons and property from the premises and such property may be removed
and stored in a public warehouse or elsewhere at the cost of, and for the
account of the TENANT, all without service of notice or resort to legal
process and without being guilty of trespass, or becoming liable for any
loss or damage which may be occasioned thereby.
18. ACCEPTANCE OF FEES NOT A WAIVER. The acceptance of any fees under
this Agreement by NELHA shall not be deemed a waiver of any breach by the
TENANT of any term, covenant or condition of this Agreement, not of NELHA's
right to declare and enforce a forfeiture for any such breach, and the
failure of the NELHA to insist upon strict performance of any such term,
covenant, or condition, or to exercise any option herein conferred, in any
one or more instances shall not be construed as a waiver or relinquishment of
any such term, covenant, condition or option.
19. EXTENSION OF TIME. Notwithstanding any provision contained herein to
the contrary, wherever applicable, NELHA may for good cause shown, allow
additional time beyond the time or times specified herein to the TENANT, in
which to comply, observe and perform any of the terms, condition and covenants
contained herein.
20. NON-WARRANTY. NELHA does not warrant the conditions of its
facilities, as the same is being utilized by TENANT "as is".
21. NOTICES. NELHA may give any notice or deliver any document
hereunder to TENANT by mailing the same by registered mail addressed to
TENANT's address above or by delivering the same in person to any officer of
TENANT. TENANT may give any notice or deliver any document hereunder
-6-
<PAGE>
to NELHA by mailing the same by registered mail addressed to NELHA's address
above or by delivering the same to NELHA in person. For the purpose of this
paragraph, either party may change its address by written notice to the
other. In case of any notice or document delivered by certified mail, the
same shall be deemed delivered when deposited in any United States post
office, properly addressed as herein provided, with postage fully prepaid.
22. MODIFICATION OF AGREEMENT. Any modification, alteration or change
in this Agreement, shall be made only by written agreements executed by the
parties thereto.
This Agreement shall be governed by the laws of the State of Hawaii.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
NATURAL ENERGY LABORATORY OF
HAWAII AUTHORITY
By /s/ D. Manas
-----------------------------
Its Executive Officer
Date August 26, 1996
AQUASEARCH, INC.
By /s/ John J. Emerick, Jr.
-----------------------------
Its Vice President Operations
Date August 22, 1996
-7-
<PAGE>
Exhibit 'A'
FACILITIES USE FEES
<PAGE>
Aquasearch, Inc. EXHIBIT 'A'
July 26, 1996 FACILITIES USE FEE
Keahole Point Facility
<TABLE>
<CAPTION>
Rate Space Estimate
A. FIXED FEES ($/sq. ft.) (acres) (month) (year)
<S> <C> <C>
<C> <C>
1. Space
a. Office space $2.00
------------------ ------------- -------------
b. Laboratory space $3.00
------------------ ------------- -------------
c. Concrete test pad $1.00
------------------ ------------- -------------
d. Research compound $0.10
------------------ ------------- -------------
e. Farm compound $0.05
------------------ ------------- -------------
2. Out-Compound ($/acre)
a. Improved $400.00 1.38* $552.00 $6,624.00
------------------ ------------- -------------
b. Unimproved $100.00
------------------ ------------- -------------
one time $1,146.00
3. Other option** various** 3.12** yearly fee
------------------ ------------- -------------
TOTAL(A) 4.5 $552.00 $7,770.00
------------------ ------------- -------------
B. VARIABLE CHARGES Rate Amt./Mo.
1. Seawater: $/Kgal
------------------ ------------- -------------
a. Warm (10 psi) $0.0628 LESS THAN min.use
------------------ ------------- -------------
b. Cold (10 psi) $0.0742 LESS THAN min.use
------------------ ------------- -------------
2. Electricity HELCO rate
------------------ ------------- -------------
3. Freshwater (K=1000 gal) BWS rate
------------------ ------------- -------------
4. Personnel Services see list
------------------ ------------- -------------
5. Water Quality Analysis see list
------------------ ------------- -------------
6. Photocopying $.08/copy
------------------ ------------- -------------
7. Facsimile: incoming $.90/page
------------------ ------------- -------------
outgoing $3.00
first page
------------------ ------------- -------------
$2.00
thereafter
------------------ ------------- -------------
8. Vehicles/Equipment see list
------------------ ------------- -------------
9. Other:
------------ ------------- ------------------ ------------- -------------
Subtotal (B) $0.00 $0.00
------------- -------------
Overhead $0.00 $0.00
------------- -------------
TOTAL (B) $0.00 $0.00
------------- -------------
C. ADJUSTMENTS -------------
D. GRAND TOTALS $552.00 $7,770.00
------------- -------------
</TABLE>
[* EXHIBIT 'B': PARCELS A, B, C, AND D]
[**EXHIBIT 'B': PARCEL E = 2.81 ACS. @ $400/AC = $1,124.00
PARCEL H = 0.22 ACS. @ $100/AC = $22.00
PARCEL I = 0.09 ACS. = NO CHARGE]
<PAGE>
Exhibit 'B'
SITE PLAN
[MAP OF SITE]
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1996
<PERIOD-END> OCT-31-1996
<CASH> 187,166
<SECURITIES> 0
<RECEIVABLES> 1,933
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 658,758
<PP&E> 745,058
<DEPRECIATION> 35,876
<TOTAL-ASSETS> 1,367,940
<CURRENT-LIABILITIES> 1,077,145
<BONDS> 0
0
0
<COMMON> 5,204
<OTHER-SE> 285,591
<TOTAL-LIABILITY-AND-EQUITY> 1,367,940
<SALES> 10,000
<TOTAL-REVENUES> 10,000
<CGS> 21,226
<TOTAL-COSTS> 1,289,303
<OTHER-EXPENSES> (2,597)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,297,932)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,297,932)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,297,932)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
