See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in thousands, except share data)
Note 1 Description of Business and Summary of Accounting Policies
(a) Description of Business
Cyanotech Corporation (Company) develops and commercializes natural products from microalgae. The Company is currently producing microalgae products for the nutritional supplement, aquaculture feed/pigments and immunological diagnostics markets.
(b) Principles of Consolidation
The Company consolidates enterprises in which it has a controlling financial interest. The accompanying consolidated financial statements include the accounts of Cyanotech Corporation and its wholly owned subsidiary, Nutrex Hawaii, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
(c) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt securities purchased with original or remaining maturities of three months or less to be cash equivalents.
(d) Inventories
Inventories are stated at the lower of cost (which approximates first-in, first-out) or market. Market is determined by net realizable value.
(e) Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives for equipment and furniture and fixtures, the shorter of the lease terms or estimated useful lives for leasehold improvements as follows:
Equipment 3 to 10 years
Leasehold improvements 10 to 25 years
Furniture and fixtures 7 years
(f) Revenue Recognition
The Company recognizes revenues when goods are shipped and when significant risks and benefits of ownership are transferred. Amounts received in advance under sales and distribution agreements for the right to sell and distribute the Company’s products are recognized as revenues on a straight-line basis over the term of such agreements.
(g) Earnings Per Share
Following is a reconciliation of the numerators and denominators of the Basic and Diluted net loss per Common Share computations for the periods presented (in thousands except share data):
Years ended March 31, 2001 2000 1999
- -------------------------------------------------------- --------------- --------------- ---------------
Basic and Diluted Loss Per Share
Net loss $ (1,067) $ (4,485) $ (2,557)
Undeclared Preferred Stock dividends -- (237) (238)
--------------- --------------- ---------------
Net loss attributable to Common stockholders $ (1,067) $ (4,722) $ (2,795)
=============== =============== ===============
Weighted average Common Shares outstanding 15,997,000 13,775,000 13,602,000
=============== =============== ===============
Net loss per Common Share $ (0.07) $ (0.34) $ (0.21)
=============== =============== ===============
13For the year ended March 31, 2001 warrants and options to purchase Common Stock shares of the Company and convertible debentures were outstanding, but were not included in the 2001 computation of Diluted net loss per common share because the inclusion of these securities would have had an antidilutive effect on the net loss per common share. For the years ended March 31, 2000 and 1999, warrants and options to purchase Common Stock shares of the Company and convertible preferred stock were outstanding, but were not included in the 2000 or1999 computation of Diluted net loss per common share because the inclusion of these securities would have had an antidilutive effect on the net loss per common share. As of March 31, 2001, warrants and options to acquire 994,030 shares of the Company’s common stock and debentures convertible into 833,333 shares of the Company’s common stock were outstanding. As of March 31, 2000, warrants and options to acquire 842,796 shares of the Company’s common stock and preferred stock convertible into 2,355,155 shares of the Company’s common stock were outstanding. As of March 31, 1999, warrants and options to acquire 600,375 shares of the Company’s common stock and preferred stock convertible into 2,975,155 shares of the Company’s common stock were outstanding.
(h) Research and Development
Research and development costs are expensed as incurred.
(i) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
(j) Stock Option Plan
The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations, in accounting for its fixed plan stock options issued to employees and nonemployee directors. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company applies the fair value-based method of accounting prescribed by Statement of Financial Accounting Standards (SFAS) No. 123,Accounting for Stock-Based Compensation, in accounting for its fixed plan stock options issued to outside third parties other than nonemployee directors. As such, expenses representing the fair value of stock-based awards on the date of grant are recognized over the vesting period.
(k) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
(l) Segment Information
As the Company's operations are solely related to microalgae-based products, management considers its operations to be one industry segment.
(m) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
14 (n) New Accounting Pronouncements
In March 2000, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No 44, "Accounting for Certain Transactions involving Stock Compensation, and Interpretation of APB Opinion No. 25." FASB Interpretation No. 44 clarifies the application of APB Opinion No. 25 for certain issues involving employee stock compensation and was generally effective July 1, 2000. The Company adopted the provisions of FASB Interpretation No. 44 effective July 1, 2000. Adoption of FASB Interpretation No. 44 did not have a material effect on the Company's financial condition, results of operations or liquidity.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." The SAB summarizes certain of the SEC staff's views in applying U.S. generally accepted accounting principles (GAAP) to revenue recognition in financial statements. In June 2000, the SEC issued SAB No. 101B, which delayed the implementation date of SAB No. 101 until no later than the fourth quarter of fiscal years beginning after December 15, 1999. The Company adopted the provisions of SAB No. 101 effective during the quarter ended December 31, 2000. Adoption of SAB No. 101 did not have a material effect on the Company's financial condition, results of operations or liquidity.
Note 2 Inventories
Inventories consists of the following as of March 31, 2001 and 2000
2001 2000
--------------- ---------------
Raw materials $ 82 $ 72
Work in process 174 278
Finished goods 1,607 1,060
Supplies 141 199
--------------- ---------------
$ 2,004 $ 1,609
=============== ===============
Note 3 Equipment and Leasehold Improvements, Net
Equipment and leasehold improvements consists of the following as of March 31, 2001 and 2000:
2001 2000
---------- ----------
Equipment $ 9,164 $ 8,961
Leasehold improvements 13,926 13,642
Furniture and fixtures 83 83
---------- ----------
23,173 22,686
Less accumulated depreciation and amortization (8,705) (7,383)
Construction in-progress 393 443
---------- ----------
Equipment and leasehold improvements, net $ 14,861 $ 15,746
========== ==========
In June 1999, the Company reached a preliminary agreement with Norsk Hydro to produce and market NatuRose natural astaxanthin product in a joint venture that would be owned 51% by Norsk Hydro and 49% by Cyanotech. The intention of the joint venture was to build and operate aNatuRose production facility in Kailua-Kona, Hawaii. While this arrangement was being finalized, the Company continued to independently develop its natural astaxanthin production technology and subsequently made significant improvements. The Company decided not to finalize the joint venture relationship.
As a result of the Company’s decision to end the negotiations, the projected future cash flows that were expected from the Norsk Hydro joint venture were reduced to zero. In accordance with the provisions of SFAS No. 121, an impairment loss is to be recognized whenever the projected future cash flows from an asset are less than the carrying value of that asset. The Company recorded a non-cash asset impairment charge of $2,796 during the year ended March 31, 2000 on the construction-in-progress balance related to this project. The impaired asset consisted primarily of the accumulated cost of the grading work done on the 93-acre facility and construction contract termination costs incurred.
15In February 1998, the Company suspended work on an adjacent 93-acre parcel which was intended for expansion of its natural astaxanthin production facility. In September 1999, the Company reached an agreement with the contractor on this project for indefinite suspension or termination of the contract. At the time of this agreement, the contractor calculated the remaining balance due for work completed under the contract to be $338. On April 28, 2000, the Company reached an agreement with the contractor for a modification of the terms of the aforementioned suspension agreement. In consideration for this modification, the Company paid the contractor $170. In the event the Company chooses to proceed with the project at a future date, the contractor reserves the right to negotiate for escalation and remobilization cost increases. If the Company cannot come to an agreement with the contractor for completion of the project, it may proceed with an alternate contractor after paying the remaining $168 plus interest.
Note 4 Accrued Expenses
Components of accrued expenses as of March 31, 2001 and 2000 are as follows:
2001 2000
--------------- ---------------
Accrued wages, commissions and royalties $ 141 $ 155
Accrued interest 82 1
Contractor settlement -- 170
Other accrued expenses 26 95
---------------- ---------------
$ 249 $ 421
================ ===============
Note 5 Line of Credit and Long-Term Debt
Loan and Security Agreement
In July 1998, the Company entered into a Loan and Security Agreement (Agreement) with a lender which provided for up to $3 million in credit facilities, secured by all the assets of the Company. In July 1999, the lender notified the Company of a default under the Agreement. In October, 1999, the lender informed the Company of its intent to terminate this Agreement, effective December 31, 1999, later extending the date to April 28, 2000. At March 31, 2000, the aggregate outstanding balance on this Agreement amounted to $1,493, representing outstanding working capital loans on a revolving basis of $993, and an equipment term loan of $500. In April 2000, this loan was paid in full with proceeds from the Company’s new term loan agreement as described below.
Term Loan Agreement
On April 21, 2000, the Company executed a Term Loan Agreement (Term Loan) with a new lender which provided for $3.5 million in aggregate credit facilities, secured by substantially all the assets of the Company. The Term Loan has a maturity date of May 1, 2010 and is payable in 120 equal monthly principal and interest payments of approximately $48, commencing June 1, 2000 ($45 at March 31, 2001). The interest rate under this Term Loan, in the absence of a default under the agreement, is the prime rate, as defined, in effect as of the close of business on the first day of each calendar quarter, plus 1% (at March 31, 2001 and April 21, 2000, the prime rate was 9.5%). Interest is calculated on the unpaid balance of principal based on a normal amortization schedule commencing May 1, 2000.
A warrant to purchase 20,000 shares of the Company’s common stock was issued in conjunction with this Term Loan agreement. The warrant expires in April 2011 and has an exercise price of $2.55 per share. The warrant may only be exercised after the Company has repaid the Term Loan in full.
On April 26, 2000, approximately $1,593 of the $3.5 million proceeds from this Term Loan, was used to repay the balance outstanding, including interest and related fees, under the Agreement. For the fiscal year ended March 31, 2000, the Company classified $186 of the outstanding balance on the previous Agreement of $1,493 as a current liability in the consolidated balance sheet at March 31, 2000. This amount represented the current portion of the Term Loan Agreement due by March 31, 2001.
16Convertible Debentures
On May 2, 2000, the Company completed a private placement of $1,250 principal amount 6% convertible subordinated debentures due April 30, 2002. This transaction provided net proceeds to the Company of approximately $1.1 million. Interest on these debentures is payable quarterly, in arrears, on April 1, July 1, October 1, and January 2 in each year commencing on July 1, 2000, at a rate of 6% per annum. The debentures are convertible into shares of common stock of the Company at a conversion price equal to $1.50 per share, the market price of the Company’s common stock at the date of issuance. Warrants to purchase 83,334 shares of the Company’s common stock were issued to the placement agent of the debentures, exercisable for five years from the issue date, at $1.80 per share.
Long-Term Debt
Long-term debt consists of the following as of March 31, 2001 and 2000:
2001 2000
------------ ------------
Note payable at the prime rate plus 5.5% per
annum, adjusted monthly; principal payments of
$20, due monthly, plus interest; balance due
April 30, 2000, repaid with proceeds from long-
term borrowings from a new lender in April 2000
as described above. $ -- $ 500
Revolving line of credit at the prime rate plus
5.5% per annum, adjusted monthly; balance due
April 30, 2000, repaid with proceeds from long-term
borrowings from a new lender in April 2000 as
described above. -- 993
Term loan at the prime rate in effect as of the close
of business on the first day of each calendar
quarter, plus 1% per annum, adjusted quarterly;
monthly principal and interest payments of $45 with
balance due May 1, 2010. 3,328 --
Convertible subordinated debentures. Interest at 6%
per annum; payable in interest-only quarterly payments
with balance due April 30, 2002. 1,250 --
------------ ------------
Total long-term debt 4,578 1,493
Less current maturities of long-term debt (242) (186)
------------ ------------
Long-term debt, excluding current maturities $ 4,336 $ 1,307
============ ============
At March 31, 2001, the aggregate maturities of long-term debt are as follows:
Year ending March 31:
2002 $ 242
2003 1,517
2004 292
2005 320
2006 350
Thereafter 1,857
--------------------
$ 4,578
====================
Note 6 Leases
The Company leases facilities, equipment and land under operating leases expiring between 2003 and 2025.
Future minimum lease payments under non-cancelable operating leases at March 31, 2001 are as follows:
Year ending March 31:
- ---------------------------------------------------------- --------------------
2002 $ 250
2003 250
2004 224
2005 223
2006 223
Thereafter, through 2025 2,889
- ---------------------------------------------------------- --------------------
Total minimum lease payments $ 4,059
====================
17Total rent expense under operating leases amounted to $329, $330, and $350 for the years ended March 31, 2001, 2000 and 1999, respectively.
The land leases provide for contingent rentals in excess of minimum rental commitments based on a percentage of the Company’s sales. Contingent rentals for the years ended March 31, 2001, 2000 and 1999 were not material.
The State of Hawaii has agreed to allow the Company to lease an additional 93-acre parcel on a year to year basis, until such time that the Company determines the need for a longer lease term. The current lease agreement is effective through December 31, 2001.
Note 7 Series C Preferred Stock
During the first three quarters of fiscal 2001, all outstanding shares of Series C preferred stock totaling 471,031 shares were converted into 2,355,155 shares of common stock. As a result of this conversion, cumulative dividends in arrears on these converted shares, totaling approximately $2.1 million at the time of conversion, were no longer payable.
Series C preferred stock was convertible into common stock at the rate of one share of preferred stock for five shares of common stock through February 23, 2002, after which date the conversion feature was no longer applicable. Series C preferred stock had voting rights equal to the number of shares of common stock into which it was convertible and had a preference in liquidation over all other series of preferred stock of $5 per share plus any unpaid accumulated dividends. Holders of Series C preferred stock were entitled to 8% cumulative annual dividends at the rate of $.40 per share.
Note 8 Stock Options and Warrants
Stock Options
The Company’s 1995 Stock Option Plan (the “1995 Plan”), reserves a total of 800,000 shares of common stock for issuance under the Plan. The 1995 Plan provides for the issuance of both incentive and non-qualified stock options. Options are to be granted at, or above, the fair market value of the Company’s common stock at the date of grant and generally become exercisable over a five-year period.
The Company also has a Non-employee Director Stock Option and Stock Grant Plan, which was approved by stockholders in 1994 (the “1994 Plan”). Under the 1994 Plan, and upon election to the Board of Directors, non-employee directors are granted a ten-year option to purchase 3,000 shares of the Company’s common stock at its fair market value on the date of grant. In addition, on the date of each Annual Meeting of Stockholders in each year that the 1994 Plan is in effect, each non-employee director continuing in office will be automatically granted, without payment, 2,000 shares of common stock that is non-transferable for six months following the date of grant. Grants of 6,000, 6,000 and 4,000 shares of common stock were made under the 1994 Plan in August 2000, August 1999 and September 1998, respectively. Expense recognized as a result of these stock grants amounted to $10 for the year ended March 31, 2001 and $6 for each of the years ended March 31, 2000 and 1999.
At March 31, 2001, there were 84,379 additional shares available for grant under the 1995 Plan and 41,000 additional shares available under the 1994 Plan. The per share weighted-average fair value of stock options granted during 2001, 2000 and 1999 was $1.35, $0.78 and $2.53, respectively, on the date of grant using a Black Scholes option-pricing model with the following weighted-average assumptions: 2001 - expected dividend yield of 0%, risk-free interest rate of 6.0%, expected volatility of 106%, and an expected life of 4.2 years, 2000 - expected dividend yield of 0%, risk-free interest rate of 5.5%, expected volatility of 96%, and an expected life of 4.2 years; 1999 expected dividend yield of 0%, risk-free interest rate of 5.6%, expected volatility of 98%, and an expected life of 5.7 years.
The Company applies the provisions of APB Opinion No. 25 in accounting for employee stock-based compensation and, accordingly, no compensation cost has been recognized for its employee stock options in the accompanying financial statements. Had the Company determined compensation cost based on the estimated fair value at the grant date for its employee stock options under SFAS No. 123, the Company’s net loss attributable to Common stockholders and net loss per common share would have been as reflected in the pro forma amounts which follow:
18
2001 2000 1999
--------------- --------------- ---------------
Net loss attributable to Common stockholders As reported $ (1,067) $ (4,722) $ (2,795)
Pro forma $ (1,383) $ (5,103) $ (3,282)
Net loss per common share - Basic and Diluted As reported $ (0.07) $ (0.34) $ (0.21)
Pro forma $ (0.09) $ (0.37) $ (0.24)
Pro forma net loss attributable to Common stockholders and net loss per common share information reflect only options granted since 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss attributable to Common stockholders and net loss per common share amounts presented above because compensation cost is reflected over the options’ vesting period of 5 years, and compensation cost for options granted prior to April 1, 1995 is not considered.
Stock option activity during the periods indicated is as follows:
Weighted-
Number of average
shares exercise price
--------------- ----------------
Balance at March 31, 1998 406,725 $ 5.48
Granted 213,600 3.22
Expired (20,000) 6.63
Forfeited (24,950) 4.81
--------------- ----------------
Balance at March 31, 1999 575,375 4.63
Granted 301,596 1.03
Exercised (21,650) 0.94
Expired (42,025) 0.94
Forfeited (95,500) 2.86
--------------- ----------------
Balance at March 31, 2000 717,796 3.68
Granted 233,800 1.69
Exercised (6,250) 0.97
Expired (87,200) 5.13
Forfeited (92,450) 2.64
--------------- ----------------
Balance at March 31, 2001 765,696 $ 3.05
=============== ================
The following table summarizes information about stock options outstanding at March 31, 2001:
Options Outstanding Options Exercisable
Range of Number Weighted-avg Weighted-avg Number Weighted-avg
exercise outstanding at remaining exercise exercisable exercise
prices 03/31/01 contractual life price at 03/31/01 price
- --------------- -------------- ---------------- ------------- ----------- ------------
$.97 to $1.69 442,396 3.8 years $ 1.36 63,996 $ 1.08
$3.13 to $3.69 139,500 3.0 years $ 3.23 74,000 $ 3.25
$6.13 to $7.63 183,800 0.8 years $ 7.00 162,675 $ 7.09
- --------------- -------------- ---------------- ------------- ----------- ------------
$.97 to $7.63 765,696 3.0 years $ 3.05 300,671 $ 4.86
=============== ============== ================ ============= =========== ============
Warrants
At March 31, 2001 and 2000, the Company has warrants outstanding to acquire 228,334 shares and 125,000 shares, respectively of the Company’s common stock. A warrant to acquire 75,000 shares of common stock was granted in December 1999 in consideration for services provided by a third party. The warrant is exercisable at $.63 per share, and expires in December, 2004. A warrant to acquire 50,000 shares of common stock was granted on January 19, 2000 in connection with the purchase of 50,000 shares of the Company’s common stock by an existing stockholder. The warrant is exercisable at $1.00 per share, and expires in January, 2005. A warrant to acquire 20,000 shares of common stock was granted in April 2000 in conjunction with completion of a term loan agreement. The warrant is exercisable at $2.55 per share, and expires in April 2011. A warrant to acquire 83,334 shares of common stock was granted in May 2000 in conjunction with completion of a private placement of convertible debentures. The warrant is exercisable at $1.80 per share, and expires in May 2005.
19Note 9 Major Customers and Export Sales
Sales to major customers for the years ended March 31, 2001, 2000 and 1999 are summarized as follows (percent of product sales):
2001 2000 1999
------------- -------------- --------------
Customer A 19% 23% 11%
============= ============== ==============
Net product sales by geographic area for the years ended March 31, 2001, 2000 and 1999 are summarized as follows:
2001 2000 1999
-------------- -------------- --------------
United States $ 3,676 46% $ 3,992 54% $ 4,075 60%
Canada/South America 509 6% 371 5% 426 6%
The Netherlands 1,542 19% 1,715 23% 717 11%
Europe, excluding the Netherlands 640 8% 613 8% 498 7%
China 119 2% 73 1% 50 1%
Asia/Pacific, excluding China 1,557 19% 634 9% 972 15%
-------------- -------------- --------------
$ 8,043 100% $ 7,398 100% $ 6,738 100%
============== ============== ==============
Foreign product sales transactions are consummated in U.S. dollars.
Note 10 Income Taxes
The income tax benefit for the years ended March 31, 2001, 2000 and 1999 represent current state tax refunds.
A reconciliation of the amount of income taxes computed at the federal statutory rate of 34% to the amount reflected in the Company’s consolidated statements of operations for the years ended March 31, 2001, 2000 and 1999 follows:
2001 2000 1999
---------- ---------- ----------
Amount at the federal statutory income tax rate $ (366) $ (1,532) $ (968)
State income taxes, net of federal income tax effect (5) (13) (191)
Increase in the valuation allowance for deferred tax assets 374 1,855 889
Other (11) (330) (19)
---------- ---------- ----------
$ (8) $ (20) $ (289)
========== ========== ==========
The significant components of deferred income taxes for the years ended March 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999
---------- ---------- ----------
Deferred tax benefit, exclusive of the change
in beginning-of-the-year valuation allowance balance $ (374) $ (1,855) $ (889)
Increase in beginning-of-the-year balance of the
valuation allowance for deferred tax assets 374 1,855 889
---------- ---------- ----------
$ -- $ -- $ --
========== ========== ==========
20The tax effects of temporary differences related to various assets, liabilities and carryforwards that give rise to deferred tax assets and deferred tax liabilities as of March 31, 2001 and 2000 are as follows:
2001 2000
-------------- --------------
Deferred tax assets:
Net operating loss carryforwards $ 3,250 $ 3,114
Leasehold improvement, impairment loss
for financial reporting purposes 1,062 1,062
Tax credit carryforwards 209 238
Other 478 174
-------------- --------------
Gross deferred tax assets 4,999 4,588
Less valuation allowance (3,522) (3,148)
-------------- --------------
Net deferred tax assets 1,477 1,440
Deferred tax liability - equipment and
leasehold improvements, principally due
to differences in depreciation and amortization (1,477) (1,440)
-------------- -------------- (1,477) (1,440)
$ -- $ --
============== ==============
The valuation allowance for deferred tax assets as of April 1, 2000, 1999 and 1998 was $3,148, $1,293 and $404 respectively. The valuation allowance increased by $374, $1,855 and $889 during the years ended March 31, 2001, 2000 and 1999 respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for future taxable income over the periods in which the net deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at March 31, 2001. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.
At March 31, 2001, the Company has net operating tax loss carryforwards and tax credit carryforwards available to offset future federal income taxes as follows:
Research and
Net operating experimentation
Expires March 31, losses tax credits
- ------------------------------------------------ ------------- ---------------
2002 $ -- $ 22
2003 -- 15
2004 -- 52
2005 -- 5
2006 400 --
2011 -- 23
2012 44 9
2013 1,601 --
2019 3,632 --
2020 2,051 --
2021 1,070 --
------------- ---------------
$ 8,798 $ 126
============= ===============
In addition, at March 31, 2001, the Company has alternative minimum tax credit carryforwards of approximately $83 which are available to reduce future federal regular income taxes over an indefinite period.
At March 31, 2001, the Company has tax net operating loss carryforwards of $4,311, which expire in March 31, 2019 through 2021, available to offset future Hawaii state taxable income.
21Note 11 Fair Value of Financial Instruments
SFAS Statement No. 107, "Disclosures about Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of March 31, 2001 and 2000.
Cash and Cash Equivalents
The carrying amounts approximate fair value because of the short-term nature of these instruments.
Long-Term Debt
The carrying amounts approximate fair value because the interest rates on the long-term debt reprice monthly or quarterly at market rates or approximates current market rates for similar debt instruments of comparable maturities.
Note 12 Profit Sharing Plan
The Company sponsors a 401(k) profit sharing plan for all associates not covered under a separate management incentive plan. Under the 401(k) profit sharing plan, 5% of pre-tax profits may be allocated based on gross wages to non-management associates on a quarterly basis. Fifty percent of each associate’s profit sharing bonus is distributed in cash on an after-tax basis, with the remainder deposited in each associate’s 401(k) account on a pre-tax basis with a six year vesting schedule, based on years of service with the Company. All associates may make voluntary pre-tax contributions to their 401(k) accounts. Compensation expense relative to this plan was nil for each of the three years ended March 31, 2001, 2000 and 1999.
Note 13 Commitments and Contingencies
On July 13, 1998, the Company filed a complaint (Case No. CV98-00600) in United States District Court for the District of Hawaii (Court) against Aquasearch, seeking declaratory judgment of patent noninfringement, patent invalidity, and non-misappropriation of trade secrets relating to closed culture production of astaxanthin. Aquasearch answered the complaint and filed counter claims alleging patent infringement, trade secret misappropriation, unfair competition and breach of contract.
In December 1999, the Court granted Aquasearch’s related motion that Cyanotech infringes its patent. The Court also granted Aquasearch’s partial summary judgment motion finding that Cyanotech misappropriated Aquasearch trade secrets and committed a breach of contract.
In the fourth quarter of fiscal 2001, Cyanotech and Aquasearch settled this litigation without admission of liability by either party. Terms of the agreement are confidential. Under this agreement, Cyanotech agreed to an injunction that prevents it from using any tube system for microalgal production that infringes Aquasearch’s U.S. Patent No. 5,541,056. Aquasearch agreed that Cyanotech’s current proprietary process for producing microalgae, known as thePhytoDome CCS system, does not infringe its aforementioned patent. Both parties agreed to dismiss, with prejudice, all claims that the parties asserted in the litigation. The Court entered an Order to that effect and that Aquasearch’s aforementioned patent is valid and enforceable. Cyanotech further agreed to pay Aquasearch an undisclosed settlement, including royalties, for a limited time, on future sales ofBioAstin. Amounts due at March 31, 2001 under this settlement have been fully accrued by the Company. Cyanotech management does not expect that future royalty payments will have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.
22INDEPENDENT AUDITORS’ REPORT
The Board of Directors
Cyanotech Corporation
We have audited the accompanying consolidated balance sheets of Cyanotech Corporation and subsidiaries as of March 31, 2001 and 2000, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended March 31, 2001. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cyanotech Corporation and subsidiaries as of March 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
KPMG LLP
Honolulu, Hawaii
April 27, 2001
Selected Quarterly Financial Data
First Second Third Fourth Total
($ in thousands, except share data) Quarter Quarter Quarter Quarter Year
- ----------------------------------- --------- --------- --------- --------- ---------
2001
Net sales $ 2,166 $ 2,360 $ 1,762 $ 1,755 $ 8,043
Gross profit 704 794 467 380 2,345
Net loss (22) (40) (322) (683) (1,067)
Net loss per common share
Basic and Diluted (a) (0.00) (0.00) (0.02) (0.04) (0.07)
2000
Net sales $ 1,599 $ 1,496 $ 2,037 $ 2,266 $ 7,398
Gross profit 267 126 512 598 1,503
Net loss (b) (527) (609) (3,188) (161) (4,485)
Net loss per common share
Basic and Diluted (a) (b) (0.04) (0.05) (0.24) (0.02) (0.34)
(a) due to rounding, quarterly per share amounts may not equal total year.
(b) Net loss and net loss per common share for the third quarter and for the total fiscal year 2000 reflect the effect of an asset impairment charge of $2,796. For further detail, see the sections "Operating Expenses-Impairment of Long-Lived Assets" and "Liquidity and Capital Resources" in Management's Discussion and Analysis of Financial Condition and Results of Operations from the Company's fiscal 2001 Annual Report.
23OFFICERS
Gerald R. Cysewski, Ph.D.
President, Chief Executive Officer
and Chairman of the Board
Ronald P. Scott
Executive Vice President -
Finance and Administration
Treasurer and Secretary
Glenn D. Jensen
Vice President - Operations
Kelly J. Moorhead
Vice President - Sales and Marketing
R. Shane Rohan
Vice President - Production
BOARD OF DIRECTORS
Gerald R. Cysewski, Ph.D.
Eric H. Reichl 1,2
David I. Rosenthal 1
Ronald P. Scott
John T. Waldron 2
Paul C. Yuen, Ph.D. 1,2
1 Member of the Audit Committee
2 Member of the Compensation and Stock Option Committee
CORPORATE INFORMATION
Corporate Headquarters
Cyanotech Corporation
73-4460 Queen Kaahumanu Hwy.
Suite 102
Keahole Point
Kailua-Kona, HI 96740
Tel (808) 326-1353
Fax (808) 329-3597
WHOLLY-OWNED SUBSIDIARIES
Nutrex Hawaii, Inc.
TRANSFER AGENT AND REGISTRAR
Computershare Investor Services
12039 West Alameda Parkway, Suite Z-2
Lakewood, CO 80228
(303) 986-5400
www.computershare.com
INDEPENDENT ACCOUNTANTS
KPMG LLP
1001 Bishop Street
Pauahi Tower, Suite 2100
Honolulu, HI 96813-3421
LEGAL COUNSEL
Goodsill Anderson Quinn & Stifel
P.O. Box 3196
Honolulu, HI 96801-3196
FORM 10-K
A copy of Cyanotech's annual report to the Securities and Exchange Commission on Form 10-K is available without charge upon written request to:
Secretary
Cyanotech Corporation
73-4460 Queen Kaahumanu Hwy.
Suite 102
Kailua-Kona, HI 96740
NOTICE OF ANNUAL MEETING
The 2001 annual meeting of stockholders will be
held on Thursday, August 23, 2001, at 2:00 p.m. at
King Kamehameha's Kona Beach Hotel
75-5660 Palani Road
Kailua Kona, HI 96740
ADDITIONAL INFORMATION:
As a service to our stockholders and prospective investors, copies of Cyanotech news releases and financial statements issued in the last 12 months are available 24 hours a day, seven days a week on the Internet's World Wide Web at http://www.cyanotech.com
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Cyanotech’s Common Stock is traded on the NASDAQ National Market under the symbol “CYAN.” The following table sets forth the high and low selling prices as reported by the NASDAQ Stock Market for the periods indicated.
Three Months Ended High Low
------------- -------------
2001
March 31, 2001 $ 1.38 $ 0.72
December 31, 2000 $ 1.75 $ 0.63
September 30, 2000 $ 2.06 $ 1.47
June 30, 2000 $ 2.63 $ 1.13
2000
March 31, 2000 $ 4.88 $ 1.00
December 31, 1999 $ 2.25 $ 0.50
September 30, 1999 $ 1.44 $ 0.72
June 30, 1999 $ 1.59 $ 0.59
Cyanotech has never declared or paid cash dividends on its Common Stock. We currently intend to retain all of our earnings for use in the business and do not anticipate paying any cash dividends on Common Stock in the foreseeable future.
The approximate number of record holders of outstanding Common Stock as of June 26, 2001 was 1,362.
FORWARD-LOOKING INFORMATION
Certain statements herein set forth management's intentions, plans, beliefs, expectations or predictions of the future based on current facts and analyses. Actual results may differ materially due to a variety of factors including reduced product demand, price competition, government action, and weather conditions. Additional information on factors that may affect the Company and cause actual results to differ from current expectations can be found in Cyanotech's filings with the SEC.
24