<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
/X/ Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarter Ended January 31, 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 Changed 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 January 31, 1998 was 47,819,881 shares.
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AQUASEARCH, INC.
FORM 10-QSB FOR THE
QUARTER ENDED JANUARY 31, 1998
CONTENTS
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
ITEM 1: FINANCIAL STATEMENTS
BALANCE SHEETS 3
STATEMENTS OF LOSS AND ACCUMULATED DEFICIT 4
STATEMENTS OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6
ITEM 2: MANAGEMENT'S PLAN OF OPERATION
OVERVIEW 7
MANAGEMENT'S PLAN OF OPERATION FOR FISCAL 1998 9
RESULTS OF OPERATIONS -- COMPARISON OF QUARTERS AND
YEARS ENDED JANUARY 31, 1997 AND 1998 11
LIQUIDITY AND CAPITAL RESOURCES 11
PART II - OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS 12
ITEM 2: CHANGES IN SECURITIES 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 12
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 5: OTHER INFORMATION 12
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K 12
</TABLE>
2
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Aquasearch, Inc.
(A Development Stage Enterprise)
Balance Sheets
<TABLE>
<CAPTION>
October 31, January 31,
1997 1998
(Audited) (Unaudited)
--------------------------------
<S> <C> <C>
Assets
Current assets:
Cash $ 47,006 $ 23,222
Accounts receivable 1,219 4,931
Prepaid expenses 24,439 13,757
Refundable deposits 4,570 5,370
--------------------------------
Total current assets 77,234 47,280
--------------------------------
Notes receivable 30,516 30,516
Plant and equipment:
Plant 738,889 739,023
Equipment 173,052 180,940
Less accumulated depreciation (104,894) (125,609)
--------------------------------
Net plant and equipment 807,047 794,354
--------------------------------
Total assets $ 914,797 $ 872,150
--------------------------------
--------------------------------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 446,344 $ 446,065
Notes payable 575,000 975,000
--------------------------------
Total current liabilities 1,021,344 1,421,065
--------------------------------
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 January 31, 1998) 5,904 5,904
Additional paid-in capital 4,699,470 4,699,470
Deficit accumulated during the development stage (4,811,921) (5,254,289)
--------------------------------
Total stockholders' equity (deficit) (106,547) (548,915)
--------------------------------
Total liabilities and stockholders' equity (deficit) $ 914,797 $ 872,150
--------------------------------
--------------------------------
</TABLE>
3
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Aquasearch, Inc.
(A Development Stage Enterprise)
Statements of Loss and Accumulated Deficit
<TABLE>
<CAPTION>
For the Period For the Three For the Three
From inception Months Ended Months Ended
To January 31, January 31, January 31,
1998 1997 1998
(Unaudited) (Unaudited) (Unaudited)
------------------------------------------------------
<S> <C> <C> <C>
Sales $ 11,077 $ 570 $ -
Cost of sales 23,464 - -
------------------------------------------------------
Gross profit (loss) (12,387) 570 -
Research and development costs 2,112,549 207,949 226,013
General and administrative expenses 2,902,128 243,427 197,523
------------------------------------------------------
Loss from operations (5,027,064) (450,806) (422,536)
Other Income (Expense)
Interest (24,014) 3,178 (18,832)
Other (6,702) (194) -
Investment in joint venture (147,096) - -
------------------------------------------------------
Total other income (expense) (177,812) 2,984 (18,832)
------------------------------------------------------
Loss before income taxes and
extraordinary item (5,204,876) (447,822) (442,368)
Extraordinary item - loss on write down
of assets to liquidation basis (14,502) - -
------------------------------------------------------
Loss before income taxes (5,219,378) (447,822) (442,368)
Federal and State income taxes - - -
------------------------------------------------------
Net loss (5,219,378) (447,822) (442,368)
Accumulated Deficit
Balance, beginning of period (34,268) (2,948,718) (4,811,921)
------------------------------------------------------
Balance, end of period $ (5,253,646) $ (3,396,540) $ (5,254,289)
------------------------------------------------------
------------------------------------------------------
Loss per share $ (0.23) $ (0.01) $ (0.01)
------------------------------------------------------
------------------------------------------------------
Weighted average shares outstanding 22,936,599 42,376,389 47,819,881
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</TABLE>
4
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Aquasearch, Inc.
(A Development Stage Enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Period For the Three For the Three
From inception Months Ended Months Ended
To January 31, January 31, January, 31
1998 1997 1998
(Unaudited) (Unaudited) (Unaudited)
------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $ (5,220,021) $ (447,822) $ (442,368)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization 3,527 - -
Depreciation 131,316 14,173 20,715
Expenses paid with common stock 755,319 - -
Loss on write down of assets to
liquidation basis 5,392 - -
Changes in:
Other current assets (18,926) (108,444) 9,882
Receivables (4,931) 803 (3,712)
Accounts payable 362,352 (48,055) (279)
Deposits held - (346,535) -
------------------------------------------------------
Cash used in operating activities (3,985,972) (935,880) (415,762)
Cash Flows from Investing Activities
Purchase of fixed assets (829,547) (18,107) (8,022)
------------------------------------------------------
Cash used in investing activities (829,547) (18,107) (329,099)
Cash Flows from Financing Activities
Cash (held in) released from escrow - 335,980 -
Increase in notes receivable (30,516) - -
Issuance of common stock 4,136,322 935,979 -
Increase (decrease) in notes payable 1,004,800 (135,000) 400,000
Offering costs (271,919) (74,005) -
------------------------------------------------------
Cash provided by financing activities 4,838,687 1,062,954 400,000
------------------------------------------------------
Net increase (decrease) in cash (23,784) (108,967) (23,784)
Cash, beginning of the period 54 187,166 47,006
------------------------------------------------------
Cash, end of the period $ 23,222 $ 296,133 $ 23,222
------------------------------------------------------
------------------------------------------------------
</TABLE>
5
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Aquasearch, Inc.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
January 31, 1998
(Unaudited)
1. COMMON STOCK AND STOCK PURCHASE WARRANTS
As of January 31, 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 January 31, 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, October 31, 1997 47,819,881 $ 5,904 $ 4,699,470 $ (4,811,921) $ (106,547)
Loss for the three months
ended January 31, 1998 -- -- -- (442,368) (442,368)
------------------------------------------------------------------------
Balance, January 31, 1998 47,819,881 $ 5,904 $ 4,699,470 $ (5,254,289) $ (548,915)
------------------------------------------------------------------------
------------------------------------------------------------------------
</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
January 31, 1998 does not reflect the issuance of the C. Brewer Common Stock
or the C. Brewer Warrant. The Company does not plan to finalize its agreement
with C. Brewer until such time as Aquasearch clearly has the ability to
further expand its production facilities beyond its current one-acre site,
which is contingent on obtaining further capital.
2. ISSUANCE OF SHORT-TERM NOTES
During the quarter ended January 31, 1998, the Company issued $400,000
of Short-Term Notes bearing interest at 10% per annum. The noteholder 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 the 10% of the face value of the note divided by
the closing bid price at the time the note was funded. The note is due April
1, 1998. The noteholder is an officer/director of the Company.
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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 JANUARY 31, 1997. 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
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
7
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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 is anticipated to begin in early 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.
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.
FEBRUARY 1, 1997 THROUGH JANUARY 31, 1998. The Company has experienced
certain significant developments over the past twelve months.
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").
8
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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, was $1,105,421.
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, 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.
In September 1997, Aquasearch executed a Letter of Intent with Inflazyme
Pharmaceuticals, Limited 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.
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 intends to enlarge the size of its
proprietary AGM technology by a factor of at least two during 1998.
Furthermore, the process control system is slated for 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 is poised to significantly
increase its production capacity. Construction permits have already been
issued that, when implemented, would augment production capacity by at
least five-fold. Furthermore, the Company is planning 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 on the availability of financing.
- - PHARMACEUTICAL DRUG DEVELOPMENT: The Company believes that the
consummation of its contract with Inflazyme will pay for a large fraction
of the Company's pharmaceutical research and development costs. The
Company believes that between seven and ten new personnel will need to be
hired to perform under the Inflazyme project. The Company intends to keep
its current
9
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personnel entirely focused on astaxanthin-related science and
technology. New personnel hired for the Inflazyme work will be dedicated
entirely to that project and will function as a separate team, which costs
will be borne by Inflazyme. The Company believes that additional
laboratory facilities may also be required for Inflazyme's contract
research and development. The Company expects, based on its Letter of
Intent and the current form of the draft contract between the parties,
that costs for such dedicated facilities will be borne by Inflazyme.
Aquasearch intends, during 1998, to pursue additional drug development
agreements with other biotechnology and pharmaceutical companies.
- - 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 development 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 first quarter of fiscal 1998. During the quarter, the Company
achieved:
- Increases of more than five-fold in yield (weight of
astaxanthin per unit of production capacity) over any
performance the Company has yet achieved;
- Sustained operation, for the entire quarter, of the largest
photobioreactor the Company has ever operated, and which
the Company believes to be the largest photobioreactor in
existence; and
- Production that exceeded its first quarter target.
The Company has set a yield target for the second quarter which, if
achieved, will make it possible to substantially reduce its previous
estimate of capital requirements. Attainment of the next yield target
will make it possible for the Company to achieve its 1998 production
commitment to Cultor after expanding its facility to two acres (rather
than to four acres, as previously estimated). The Company believes that
further improvements in yield are likely to be derived from additional
research and automation, which have been solely responsible for the
Company's yield 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 January 31, 1998, the Company had an accumulated deficit of
approximately $5.3 million. The Company's losses to date have resulted
primarily from costs incurred in research and development and from general and
administrative
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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 toward becoming 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.
RESULTS OF OPERATIONS - COMPARISON OF QUARTERS ENDED JANUARY 31, 1997 AND 1998
Revenues for the quarter ended January 31, 1998 were $ -0- compared
with revenues of $570 for the quarter ended January 31, 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's 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 improve
production. The Company has implemented and will continue to implement these
recommendations as resources allow.
Consistent with the Company's efforts to implement improvements in its
production system, research and development costs increased by $18,064, or
approximately 9%, during the quarter ended January 31, 1998 compared with
the quarter ended January 31, 1997.
General and administrative expenses decreased by $45,904, or
approximately 19% during the quarter ended January 31, 1998 compared with the
quarter ended January 31, 1997. The decrease in general and administrative
expenses was primarily due to a decrease in legal costs relating to patent
filings.
The Company incurred a net loss of $442,368 or $0.01 per share, for the
quarter ended January 31, 1998 compared with a net loss of $447,822, or
$0.01 per share, for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Cash decreased by $23,784 in the quarter ended January 31, 1998 from the
prior period, resulting in a cash balance of $23,222 at January 31, 1998.
Purchases of fixed assets of $8,022 were made during the quarter, primarily
for equipment, bringing the Company's net plant and equipment assets to
$794,354 and total assets to $872,150.
11
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The Company currently estimates that it will require between $1.5
million and $2.0 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 $0.6 to $1.1 million per annum (depending
upon global market price), which would substantially offset operating capital
requirements. As a result of recent increases in yield, 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 facility to a two-acre
facility, and repayment of $0.4 million short-term debt.
Taking into account all factors over the next twelve months, the Company
anticipates a need for a total of approximately $3.3 to 3.9 million in
financing. Management expects this amount to repay short-term debt, and to
complete the construction of an expanded production facility that produces
significant revenues. 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 two-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 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
12
<PAGE>
(a) EXHIBITS -- None
(b) REPORTS ON FORM 8-K -- None
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: March 13, 1998 By: /s/ Mark E. Huntley
--------------------------------------
Mark E. Huntley, Ph.D.
President and Chief Executive Officer
13
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