<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark one)
/X/ Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarter Ended April 30, 1998
or
/ / Transition Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 33-23460-LA
AQUASEARCH, INC.
(Exact name of Registrant as specified in its charter)
Colorado 33-0034535
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
73-4460 QUEEN KA'AHUMANU HIGHWAY, SUITE 110
KAILUA-KONA, HAWAII 96740
(Address of principal executive offices)
(808) 326-9301
Registrant's telephone number, including area code
Not Applicable
Former Name, Former Address and Former Fiscal
Year, if Changes Since Last Report
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ----
The number of shares outstanding of Registrant's Common Stock, $0.0001 par
value at April 30, 1998 was 47,819,881 shares.
<PAGE>
AQUASEARCH, INC.
FORM 10-QSB FOR THE
QUARTER ENDED APRIL 30, 1998
CONTENTS
PART I - FINANCIAL INFORMATION
Page
ITEM 1: FINANCIAL STATEMENTS
BALANCE SHEETS. . . . . . . . . . . . . . . . . . . . . . . . . 3
STATEMENTS OF LOSS AND ACCUMULATED DEFICIT . . . . . . . . .4, 5
STATEMENTS OF CASH FLOWS. . . . . . . . . . . . . . . . . . . . 6
NOTES TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . 7
ITEM 2: MANAGEMENT'S PLAN OF OPERATION
OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
MANAGEMENT'S PLAN OF OPERATION FOR FISCAL 1998. . . . . . . . .11
RESULTS OF OPERATIONS -- COMPARISON OF QUARTERS AND
YEARS ENDED APRIL 30, 1997 AND 1998 . . . . . . . . . . . . .14
LIQUIDITY AND CAPITAL RESOURCES . . . . . . . . . . . . . . . .14
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . .15
ITEM 2: CHANGES IN SECURITIES. . . . . . . . . . . . . . . . . . .15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. . . . . . . . . . . . . .15
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . .15
ITEM 5: OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . .15
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . .15
2
<PAGE>
Aquasearch, Inc.
(A Development Stage Enterprise)
Balance Sheets
<TABLE>
<CAPTION>
October 31, April 30,
1997 1998
(Audited) (Unaudited)
------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 47,006 $ 6,128
Accounts receivable 1,219 --
Prepaid expenses 24,439 4,503
Refundable deposits 4,570 6,225
------------------------------------------
Total current assets 77,234 16,856
------------------------------------------
Notes receivable 30,516 30,516
Plant and equipment:
Plant 738,889 741,160
Equipment 173,052 240,416
Less accumulated depreciation (104,894) (145,961)
-------------------------------------------
Net plant and equipment 807,047 835,615
------------------------------------------
Total assets $ 914,797 $ 882,987
------------------------------------------
------------------------------------------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 446,344 $ 541,772
Notes payable 575,000 1,445,000
------------------------------------------
Total current liabilities 1,021,344 1,986,772
------------------------------------------
Stockholders' Equity (Deficit)
Preferred stock (5,000,000 shares authorized) -- --
Common stock ($0.0001 par value, 100,000,000
shares authorized, 47,819,881, shares
outstanding at October 31, 1997, and
April 30, 1998) 5,904 5,904
Additional paid-in capital 4,699,470 4,699,470
Deficit accumulated during the development stage (4,811,921) (5,809,159)
------------------------------------------
Total stockholders' equity (deficit) (106,547) (1,103,785)
------------------------------------------
Total liabilities and stockholders' equity (deficit) $ 914,797 $ 882,987
------------------------------------------
------------------------------------------
</TABLE>
3
<PAGE>
Aquasearch, Inc.
(A Development Stage Enterprise)
Statements of Loss and Accumulated Deficit
<TABLE>
<CAPTION>
For the Period For the Three For the Six
From inception Months Ended Months Ended
To April 30, April 30, April 30,
1998 1998 1998
(Unaudited) (Unaudited) (Unaudited)
-------------------------------------------------------
<S> <C> <C> <C>
Sales $ 11,077 $ - $ -
Cost of sales 23,464 - -
-------------------------------------------------------
Gross profit (loss) (12,387) - -
Research and development costs 2,432,226 319,677 545,690
General and administrative expenses 3,121,132 218,361 415,884
-------------------------------------------------------
Loss from operations (5,565,745) (538,038) (961,574)
Other Income (Expense)
Interest (40,522) (16,508) (35,340)
Other (7,026) (324) (324)
Investment in joint venture (147,096) - -
-------------------------------------------------------
Total other income (expense) (194,644) (16,382) (35,664)
-------------------------------------------------------
Loss before income taxes and
extraordinary item (5,760,389) (554,870) (997,238)
Extraordinary item - loss on write down
of assets to liquidation basis (14,502) - -
-------------------------------------------------------
Loss before income taxes (5,774,891) (554,870) (997,238)
Federal and State income taxes - - -
-------------------------------------------------------
Net loss (5,774,891) (554,870) (997,238)
Accumulated Deficit
Balance, beginning of period (34,268) (5,254,289) (4,811,921)
-------------------------------------------------------
Balance, end of period $ (5,809,159) $(5,809,159) $(5,809,159)
-------------------------------------------------------
-------------------------------------------------------
Loss per share $ (0.25) $ (0.01) $ (0.02)
-------------------------------------------------------
-------------------------------------------------------
Weighted average shares outstanding 22,936,599 47,819,881 47,819,881
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
4
<PAGE>
Aquasearch, Inc.
(A Development Stage Enterprise)
Statements of Loss and Accumulated Deficit
<TABLE>
<CAPTION>
For the Period For the Three For the Six
From inception Months Ended Months Ended
To April 30, April 30, April 30,
1998 1997 1997
(Unaudited) (Unaudited) (Unaudited)
-------------------------------------------------------
<S> <C> <C> <C>
Sales $ 11,077 $ 361 $ 931
Cost of sales 23,464 - -
-------------------------------------------------------
Gross profit (loss) (12,387) - 931
Research and development costs 2,432,226 190,877 398,826
General and administrative expenses 3,121,132 104,220 347,647
-------------------------------------------------------
Loss from operations (5,565,745) (294,736) (745,542)
Other Income (Expense)
Interest (40,522) 1,047 4,225
Other (7,026) - (194)
Investment in joint venture (147,096) - -
-------------------------------------------------------
Total other income (expense) (194,644) 1,047 4,031
-------------------------------------------------------
Loss before income taxes and
extraordinary item (5,760,389) (293,689) (741,511)
Extraordinary item - loss on write down
of assets to liquidation basis (14,502) - -
-------------------------------------------------------
Loss before income taxes (5,774,891) (293,689) (741,511)
Federal and State income taxes - - -
-------------------------------------------------------
Net loss (5,774,891) (293,689) (741,511)
Accumulated Deficit
Balance, beginning of period (34,268) (3,396,540) (2,948,718)
-------------------------------------------------------
-------------------------------------------------------
Balance, end of period $ (5,809,159) $(3,690,229) $(3,690,229)
-------------------------------------------------------
-------------------------------------------------------
Loss per share $ (0.25) $ (0.01) $ (0.02)
-------------------------------------------------------
-------------------------------------------------------
Weighted average shares outstanding 22,936,599 44,388,873 43,382,631
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
5
<PAGE>
Aquasearch, Inc.
(A Development Stage Enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Period For the Six For the Six
From inception Months Ended Months Ended
To April 30, April 30, April 30,
1998 1997 1998
(Unaudited) (Unaudited) (Unaudited)
--------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $ (5,887,891) $ (741,511) $ (997,238)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization 3,527 - -
Depreciation 151,668 28,886 41,067
Expenses paid with common stock 755,319 - -
Loss on write down of assets to
liquidation basis 5,392 - -
Changes in:
Other current assets (10,527) (89,785) 18,281
Receivables 547 1,219
Accounts payable 458,059 (7,911) 95,428
Deposits held - (390,980) -
--------------------------------------------------------
Cash used in operating activities (4,411,453) (1,170,754) (841,243)
Cash Flows from Investing Activities
Purchase of fixed assets (891,160) (46,564) (69,635)
--------------------------------------------------------
Cash used in investing activities (891,160) (46,564) (69,635)
Cash Flows from Financing Activities
Cash (held in) released from escrow - 360,980 -
Increase in notes receivable (30,516) - -
Issuance of common stock 4,136,322 1,170,981 -
Increase (decrease) in notes payable 1,474,800 (135,000) 870,000
Offering costs (271,919) (156,213) -
---------------------------------------------------------
Cash provided by financing activities 5,308,687 1,240,748 870,000
---------------------------------------------------------
Net increase (decrease) in cash 6,074 23,430 (40,878)
Cash, beginning of the period 54 187,166 47,006
---------------------------------------------------------
Cash, end of the period $ 6,128 $ 210,596 $ 6,128
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
6
<PAGE>
Aquasearch, Inc.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
April 30, 1998
(Unaudited)
1. COMMON STOCK AND STOCK PURCHASE WARRANTS
As of April 30, 1998, there were a total of 5,373,218 Common Stock
Purchase Warrants (the "Warrants") issued and outstanding, of which
5,347,244. Warrants had an exercise price of $1.00 per share and 25,974
Warrants had an exercise price of $0.21 per share. No Warrants were
exercised during the three months ended April 30, 1998. 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 for 20 trading days out of
30 consecutive trading days ending on the third day prior to the date of the
notice of redemption. Additionally, there are warrants to be issued under
the Convertible Notes Payable and the Short-Term Notes.
An analysis of the changes in stockholders' equity is as follows:
<TABLE>
<CAPTION>
Shares of Additional Total
Common Common Paid-In Accumulated Stockholders'
Description Stock Stock Capital Deficit Equity (Deficit)
<S> <C> <C> <C> <C> <C>
Balance, January 31, 1998 47,819,881 $5,904 $4,699,470 $(5,254,289) $(548,915)
--------------------------------------------------------------------------
Loss for the three months
ended April 30, 1998 -- -- -- (554,870) (554,870)
--------------------------------------------------------------------------
Balance, April 30, 1998 47,819,881 $5,904 $4,699,470 $(5,809,159) $(1,103,785)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
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 the issuance to C. Brewer of between 2,570,000 and 2,850,000 shares of
Common Stock of the Company (the "C. Brewer Common Stock") at a purchase
price of $0.35 per share. In addition, C. Brewer acquired a three-year
warrant (the "C. Brewer Warrant") to purchase up to 500,000 shares of Common
Stock at a purchase price of $1.25 per share. The stockholders' equity at
April 30, 1998 does not reflect the issuance of the C. Brewer Common Stock or
the C. Brewer Warrant. The Company does not yet wish to finalize its
agreement with C. Brewer. Aquasearch had intended to complete the C. Brewer
transaction in order to have sufficient property on which to expand its
production capability to 40 kg astaxanthin per month. However, improvements
in productivity of astaxanthin have rendered the Brewer land acquisition
unnecessary at present.
2. ISSUANCE OF SHORT-TERM NOTES
During the quarter ended April 30, 1998, the Company issued $470,000 of
Short-Term Notes and one-year convertible notes
7
<PAGE>
bearing interest at 10% per annum. The note holders will also receive
warrants to purchase shares of the Company's Common Stock at an exercise
price of $0.50 per share. The number of shares underlying the warrant is
computed based on 10% of the face value of the short-term note divided by the
closing bid price at the time the note was funded, and 100 shares of common
stock for each $1,000 aggregate principal amount of the convertible notes.
As of April 30, 1998, none of the warrants were issued.
3. MANAGEMENT'S REPRESENTATIONS OF INTERIM FINANCIAL INFORMATION
These financial statements reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results of
operations for the interim period presented. These adjustments are of a
normal and recurring nature.
ITEM 2. 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
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, 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" IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE
FISCAL YEAR ENDED OCTOBER 31, 1997 (THE "1997 FORM 10-KSB"). 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 QUARTERLY
REPORT ON FORM 10-QSB. 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
"FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS" IN THE 1997 FORM 10-KSB
FOR A MORE DETAILED DESCRIPTION OF THESE SIGNIFICANT RISKS AND UNCERTAINTIES.
OVERVIEW
INCEPTION THROUGH APRIL 30, 1998. Aquasearch, Inc. ("Aquasearch" or the
"Company") 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 Ltd.
("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 a Supply Agreement with Svenska Foder AB (the "Svenska Foder
Supply Agreement"), 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
8
<PAGE>
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 HOST Business Park at Keahole Point,
Kailua-Kona, Hawaii.
On May 14, 1996, the Company entered into a three-year Distribution and
Development Agreement with Cultor (the "Cultor Distribution and Development
Agreement"), which was approved by the shareholders of the Company 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 were initially 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); however, Cultor
and the Company agreed to: (i) extend the term of the Agreement one year,
(ii) eliminate the September 24, 1997 production target and (iii) provide
that the September 24, 1998 and 1999 production targets will be 40 kilograms
and 120 kilograms per month, respectively. In order to meet the revised
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 under the caption "Part I, Description of
Business-Corporate Partner Relationships-Cultor" of the 1997 Form 10-KSB.
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 the 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) a Stock Subscription
Agreement with Cultor pursuant to which Cultor agreed to purchase 400,000
shares of the Company's Common Stock at a purchase price of $0.50 per share
(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's consultants completed the initial phase
of the design work for the Company's planned intermediate expansion from a
one-acre facility to a four-acre facility. Construction of expanded
production facilities began in the second quarter of 1998 and is expected to
take approximately four to six months. The construction of these expanded
facilities is dependent upon the timely performance of a variety of
contractors and sub-contractors, the availability of supplies and 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 October 22, 1996, Cultor acquired 400,000 shares of the Company's
Common Stock pursuant to the terms of the Cultor Stock Subscription Agreement.
9
<PAGE>
In December 1996, Cultor sold its majority stake in Svenska Foder and
acquired all of Svenska Foder's rights under the Svenska Foder Supply
Agreement.
In February 1997, the Company completed a private placement of a total
of 5,044,570 Units, consisting of one share of Common Stock and one Common
Stock Purchase Warrant (the "Warrants"). The purchase price of the Units
ranged from $0.21 per Unit to $0.43 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 upon 30 days'
notice anytime that the closing bid price per share of the 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.
The net proceeds from this offering, net of placement agent fees and
commissions, were $1,105,421.
MAY 1, 1997 THROUGH APRIL 30, 1998. The Company has experienced certain
significant developments over the past twelve months.
On June 25, 1997, the Company was awarded a European Patent number
0494887 for the "Process and Apparatus for the Production of Photosynthetic
Microbes" which claims certain processes that operate in the Company's
proprietary, closed-system photobioreactor system, the Aquasearch Growth
Module ("AGM"), and the means for automated process control. The patent was
awarded by the European Patent Office, and applies in all member nations of
the European Union.
Aquasearch placed great emphasis in the past six months on optimizing
the AGM and its performance. The Company believes that the most important
advances that can be made concern the size of the AGM and the sustainability
of its performance. Any increase in size has the effect of reducing capital
costs of the system by a comparable amount because the greatest costs relate
to automated sensors and computer-controlled devices. Thus, a double-size
AGM costs approximately the same amount as a unit half the size, and reduces
the amount of labor by half. Furthermore, most experts agree that
photobioreactor technology cannot be commercially viable until the unit size
exceeds about 1,000 gallons.
During the past six months, the Company has increased the size of its
largest AGM from 1,000 gallons to 4,000 gallons. To date, the larger AGM has
not only been less costly, but also has required less labor, has operated for
longer periods, and has demonstrated significantly greater productivity than
previous smaller versions of the AGM. The Company has conducted intensive
engineering studies on an even larger model AGM of more than 7,000 gallons
that has now been designed, and is slated for construction in summer of 1998.
Management anticipates replacing all production capacity with the new, very
large AGMs in 1998, contingent upon available capital. The Company believes
that the use of these very large AGMs will increase total production capacity
by a factor of more than five with no increase in labor costs.
Aquasearch began replacing its computer control system with a
state-of-the-art industrial process control in 1997. Improvements that are
still underway have already reduced labor and hardware costs, and have
provided significantly better quality control. The Company believes that its
process control system is already greatly advanced compared to the standard
in biology-based manufacturing. Aquasearch continues to develop certain
proprietary software that it believes will couple strongly with its AGM
hardware to confer a significant advantage over competitive technologies.
The Company introduced in late 1997 certain changes resulting from its
research. These changes yielded a sustained improvement of AGM productivity
by a factor of five by comparison to performance over the preceding year.
10
<PAGE>
In July 1997, Aquasearch agreed to become a charter member of the Marine
Bioprocess Engineering Center (MarBEC) initiative launched by the University
of Hawaii at Manoa. Ten universities, including the University of Hawaii,
are now competing nationwide for a total of five Engineering Research Centers
to be awarded by the U.S. National Science Foundation. MarBEC, if funded in
mid-1998 at approximately $30 million for a 10-year period, will focus
entirely on the development of new enzymes and pigments from microalgae.
Charter industry members (including Aquasearch, Merck, Monsanto, Hoechst and
Eastman Chemical) will have equal preferential rights to new products from
microalgae developed by MarBEC. Aquasearch believes that it is the only
charter member of MarBEC that has developed photobioreactor technology, which
is likely to be required for the commercial exploitation of any new product
from microalgae.
In September 1997, Aquasearch executed a Letter of Intent with Inflazyme
Pharmaceuticals, Limited ("Inflazyme") to enter into a ten-year drug
development and manufacturing agreement. Under the terms of the agreement,
Aquasearch would produce large-scale research quantities of several thousand
different microalgae in its AGM photobioreactors. Inflazyme intends to
investigate each species for therapeutic activity in the areas of
inflammation, cancer, blood and cardiovascular diseases. Aquasearch would
receive cost-plus reimbursement of all its research costs (including
dedicated physical facilities), potential milestone payments associated with
steps in the U.S. Food and Drug Administration drug approval process, and
royalties on future net product sales.
The Company believes that its agreements with C. Brewer, University of
Hawaii, and Inflazyme represent important strategic alliances that form the
basis of long-term business opportunities. In Aquasearch's view, C. Brewer
would provide the real property required for expansion of production
capacity; MarBEC would provide a strongly leveraged product development
effort at the level of $3 million per year; and agreements similar to that
with Inflazyme could directly pay for the bulk of Aquasearch's research and
development costs in pharmaceutical drug development.
The Company has added three new members to its Scientific Advisory Board
in the past quarter, increasing its expertise in genetics and microbiology.
Aquasearch has an active Scientific Advisory Board consisting of eleven
Ph.D.s with expertise in the fields of aquaculture, marine biology, fluid
dynamics, and the chemistry, photobiology, physiology, genetics and mass
culture of microalgae.
MANAGEMENT'S PLAN OF OPERATION FOR FISCAL 1998
During fiscal 1998, Aquasearch intends to focus its efforts on
strengthening its intellectual property position, optimizing the performance
of its proprietary AGM technology, expanding its production capacity to meet
the targets under the Cultor Distribution and Development Agreement,
initiating a business in pharmaceutical drug development, and improving
productivity through employee incentives.
- - INTELLECTUAL PROPERTY: The Company is maintaining several international
patent applications under the aegis of the Patent Cooperation Treaty, and
contemplates new filings that will enhance its formal claims to
intellectual property. At the same time, Aquasearch continues to develop
certain trade secrets that management believes would consolidate its
competitive stance.
- - TECHNOLOGY IMPROVEMENT: Aquasearch enlarged the size of its proprietary
AGM technology by a factor of more than two during the second quarter of
1998, and intends to create further enlargements in the next 6 months.
Furthermore, the process control system is scheduled
11
<PAGE>
for continuing hardware and software improvements. The Company believes
that, as in 1997, this effort will continue to reduce capital costs,
reduce labor costs, and improve productivity.
- - EXPANSION OF PRODUCTION CAPACITY: Aquasearch began construction during
the past quarter to significantly increase its production capacity.
Construction is expected to be complete by September 1998, and is
expected to increase its production capacity by at least five-fold.
Furthermore, the Company has the opportunity to increase its production
capacity by the construction of a separate ten-acre facility dedicated to
astaxanthin production for Cultor. All increases in production capacity
are contingent upon the availability of financing.
- - PHARMACEUTICAL DRUG DEVELOPMENT: Aquasearch intends, during 1998, to
pursue drug development agreements with biotechnology and pharmaceutical
companies, in addition to its pending agreement with Inflazyme
Pharmaceuticals. The Company believes that the consummation of such
agreements will pay for a large fraction of the Company's pharmaceutical
research and development costs. The Company believes that additional
personnel will need to be hired to perform such projects, but the Company
intends to keep its current personnel entirely focused on
astaxanthin-related science and technology. New personnel hired for drug
development work will be dedicated entirely to those projects and will
function as a separate team, which costs will be borne by strategic
partners. The Company believes that additional laboratory facilities may
also be required for drug development activities. The Company intends
that costs for such dedicated facilities will be borne by strategic
partners.
- - IMPROVEMENTS IN PRODUCTIVITY THROUGH EMPLOYEE INCENTIVES: At the outset
of fiscal year 1998 Aquasearch implemented an incentive compensation
program to award significant cash bonus incentives to all employees
provided that the Company meets certain quarterly production targets.
Targets are planned that management believes would significantly advance
the Company's research and production efforts. Under the incentive
program, cash bonuses would represent as much as a 25% increase in salary
on a quarterly basis. The Company also intends to award stock options to
all employees as a further incentive to increase productivity.
Aquasearch believes that employee incentives will significantly enhance
productivity.
Significant improvements in productivity were realized by the Company in
the second quarter of fiscal 1998. During the quarter, the Company
achieved:
- Increase of three-fold in productivity (weight of astaxanthin
per unit of production capacity) over the previous quarter,
during which a five-fold increase was attained;
- Sustained operation, for 6 months, of the largest
photobioreactor the Company has ever operated, and which the
Company believes to be the largest photobioreactor in
existence; and
- Increase of 25% in production capacity, through installation
of large AGM photobioreactors in existing space.
The Company has set a yield target for the third quarter which, if
achieved, will make it possible to further reduce its previous estimate of
capital requirements. Attainment of the next yield
12
<PAGE>
target will make it possible for the Company to achieve its 1998
production commitment to Cultor after expanding its facility to three
acres (rather than to four acres, as previously estimated). The Company
believes that further improvements in productivity are likely to be
derived from additional research and automation, which have been solely
responsible for the Company's productivity improvements to date.
The Company expects to continue producing relatively small amounts of
astaxanthin (less than 6 kg dry weight per month) until September 1998,
when its first monthly shipment of 40 kg (dry weight) is due under
contract. The Company is currently satisfying Cultor's requirements for
product testing, regulatory approvals and related developmental
activities. The Company will focus in the forthcoming quarter on
continuing to improve yields and increasing the cost-effectiveness of
its production.
The Company believes that strategic relationships and
collaborations will continue to be an important part of its business
strategy. There can be no assurances 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.
Since inception, the Company's primary operating activities have
consisted of basic research and development and production process
development. From inception through April 30, 1998, the Company had an
accumulated deficit of approximately $5.8 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 at
least 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.
The Company has a limited operating history and any assessment of the
Company's prospects must include the technology risks, market risks, expenses
and other difficulties frequently encountered by development stage companies,
and particularly companies attempting to enter competitive industries with
significant technology risks and barriers to entry. Although the Company has
attempted to address these risks by, among other things, hiring and retaining
highly qualified persons and forging strategic alliances with companies that
complement the Company's technical strengths, there can be no assurance that
the Company will overcome these risks in a timely manner, if at all.
The Company is in the process of transitioning to a full-scale
commercial producer of microalgal 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.
13
<PAGE>
RESULTS OF OPERATIONS - COMPARISON OF QUARTERS ENDED APRIL 30, 1997 AND 1998
Revenues for the quarter ended April 30, 1998 were $ -0- compared with
revenues of $361 for the quarter ended April 30, 1997. The Company has
continued to supply Cultor with sufficient astaxanthin product to conduct
additional tests, trials and other analyses involved in product development
under the Cultor Distribution and Development Agreement. The Company has also
supplied test product to several other potential strategic partners that are
investigating uses of astaxanthin other than in animal feeds.
The Company's staff, in conjunction with consultants and representatives
from Cultor, have designed certain improvements in hardware and procedures that
are intended to improve production. The Company is implementing and will
continue to implement these improvements as resources allow.
Consistent with the Company's efforts to implement improvements in its
production system, research and development costs increased by $128,800, or
approximately 67%, during the quarter ended April 30, 1998, compared with the
quarter ended April 30, 1997. The increase includes additional compensation,
maintenance cost on pond equipment, and cost of automation improvements.
General and administrative expenses increased by $114,141, or
approximately 110%, during the quarter ended April 30, 1998, compared with the
quarter ended April 30, 1997. The increase in general and administrative
expenses was primarily due to increases in legal, insurance and consulting
expenses.
The Company incurred a net loss of $554,870, or $0.01 per share, for the
quarter ended April 30, 1998, compared with a net loss of $293,689, or $0.01
per share, for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased by $17,904 in the quarter ended April 30, 1998, from the
prior period, resulting in a cash balance of $6,128 at April 30, 1998.
Purchases of fixed assets of $61,613 were made during the quarter, primarily
for equipment, bringing the Company's net plant and equipment assets to
$835,615 and total assets to $882,987.
The Company currently estimates that it will require between $1.9
million and $2.5 million in operating capital over the next twelve months
before any planned capital expenditures. Beginning with the shipment of
increased amounts of astaxanthin to Cultor in September 1998, the Company
expects to generate revenues of $0.7 to $1.1 million per annum (depending
upon the global market price of astaxanthin), which would substantially
offset operating capital requirements. As a result of continuing increases
in productivity, the Company has reduced its estimate of further capital
requirements to a total of $2.4 million (a decrease of $1.3 million from
previous estimates). This $2.4 million in financing is required during the
next twelve months to automate, optimize and expand the Company's existing
research and development/production facility from a one-acre
14
<PAGE>
facility to a three-acre facility, and repayment of $0.7 million short-term
debt.
Taking into account all factors over the next nine months, the Company
anticipates a need for a total of approximately $3.0 to 3.6 million in
financing. Management expects this amount to repay short-term debt, and to
complete the construction of an expanded production facility. In 1999 the
Company will seek additional financing to complete construction and begin
operation of a separate production facility dedicated solely to the
production of natural astaxanthin derived from microalgae and to fund
research and development of new microalgal products. If the Company is not
able to raise sufficient capital to automate, optimize and expand its
one-acre facility to a three-acre facility or to construct the separate
facility, the Company's ability to meet its production targets under the
Cultor Distribution and Development Agreement would be adversely affected as
would its ability to fund the research and development of new microalgal
products.
The Company believes that its existing capital resources, funds to be
raised through public and/or private offerings of equity and/or debt
securities, and bank financing will be sufficient for continued operations
through fiscal 1998. Aquasearch is presently pursuing additional sources of
capital in order to maintain and expand its operations. These capital sources
include government contracts and grants, product sales, license agreements, and
equity or debt financing. There can be no assurance 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. The Company's inability
to raise sufficient capital could cause it to significantly curtail operations,
which would have a material adverse effect on the Company's business, financial
condition, results of operations and relationships with its corporate partners.
See "Factors That May Affect Future Operating Results--Substantial Near-Term
Capital Needs; Uncertainty of Additional Funding; Dilution" and "--Substantial
Long-Term Capital Needs; Uncertainty of Additional Funding; Dilution" in the
1997 Form 10-KSB.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS -- None
ITEM 2. CHANGES IN SECURITIES -- None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- None
ITEM 5. OTHER INFORMATION -- None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS -- None
(b) REPORTS ON FORM 8-K -- None
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-QSB to be signed
on its behalf by the undersigned thereunto duly authorized.
AQUASEARCH, INC.
Dated: June 14, 1998 By: /s/ Mark E. Huntley
-----------------------
Mark E. Huntley, Ph.D.
President and Chief Executive Officer
16
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