Cyanotech Corporation
1999 Annual Report
Selected Financial Data
Years ended March 31,
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(in thousands, except per share data 1999 1998 1997 1996 1995
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RESULTS OF OPERATIONS
Net sales $ 6,738 $ 7,627 $11,399 $ 8,081 $4,150
Gross profit 973 3,137 6,809 4,563 1,875
Income (loss) from operations (2,642) (300) 3,751 2,571 718
Net income (loss) (2,557) (300) 4,159 2,509 769
Net income (loss) per common share
Basic $ (0.21) $ (0.05) $ 0.31 $ 0.22 $ 0.05
Diluted $ (0.21) $ (0.05) $ 0.25 $ 0.17 $ 0.05
Average shares outstanding
Basic 13,602 12,909 12,583 9,583 8,895
Diluted 13,602 12,909 16,598 14,502 8,895
SELECTED BALANCE SHEET DATA
Cash and investment securities $ 323 $ 1,397 $ 6,729 $ 9,409 $ 496
Total assets 23,621 25,667 26,015 19,716 6,212
Long-term debt and
capital lease obligations,
excluding current maturities 13 129 559 838
184
Stockholders' equity $ 20,707 $ 23,174 $23,335 $17,316 $5,104
CYANOTECH
Cyanotech Corporation produces high-value natural products from microalgae.
Products include NatuRose(TM) natural astaxanthin used in the worldwide
aqua-culture and animal feed industry, which Cyanotech has agreed to manufacture
and market in a joint venture with Norsk Hydro ASA (www.hydro.com). Other
products are Spirulina Pacifica(TM), a nutrient-rich dietary supplement,
phycobiliproteins, which are fluorescent pigments used in the immunological
diagnostics market, and to be launched in fiscal 2000, natural astaxanthin for
use as a human nutritional supplement. Under development are microalgae-based
products for the biopesticide markets; and a patented aldolase catalytic
antibody under license from The Scripps Research Institute. Cyanotech is the
only microalgae company in the world to have an ISO 9002 Registered Quality
System. Additional information is available at www.cyanotech.com.
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Cyanotech is the world leader in
the production of natural products
from microalgae. Our leadership
position has been strengthened as a
result of the agreement reached
with Norsk Hydro ASA, a multi-
billion dollar enterprise based in
Oslo, Norway, to produce and
market NatuRose(R) natural
astaxanthin worldwide for
animal pigmentation.
We produce the world's highest
quality Spirulina products and
are preparing to launch a natural
astaxanthin product for use as a
powerful human antioxidant.
Cyanotech is focusing on
enhancing quality and production
efficiency and forming strategic
relationships that enhance our sales
and distribution capabilities.
1
CHARTS
CYANOTECH PRODUCT PIPELINE
ENTERING THE YEAR 2000
Spirulina Pacifica(TM)
1985
Health & Natural Foods
Phycobiliproteins
1988
Immunological Diagnostics
Naturose(R)
Natural Astaxanthin
1997/1999e
Aquaculture/human-nutrition
Aldolase Catalytic Antibody
2000e
Industrial Enzymes
Mosquitocide
2000e
Biopesticides
PRODUCT
year introduced
MARKETS
TO OUR STOCKHOLDERS
Our agreement with Norsk Hydro ASA in June 1999 to jointly produce and market
NatuRose(R) natural astaxanthin overshadows the unsatisfactory results of the
Company for fiscal 1999 and portends a brighter future for Cyanotech. We have
worked steadily for two years to bring NatuRose to the market potential we
believe, and tests show, that it deserves. These same two years were also deeply
disappointing for Cyanotech after several years of profitable growth. Most of
the problems resulted from reduced sales of Spirulina Pacifica(TM), while the
solution - hearty sales of the far more promising NatuRose - did not materialize
even though more than three dozen trials around the world showed the product to
be effective. We are now focusing on what we do best as a Company -- develop,
commercialize and produce unique, high-value products from microalgae - and
enlist the support of others through corporate partnering alliances to drive
marketing and sales for key products.
NATUROSE AGREEMENT
We reached an agreement to produce and market NatuRose for animal
pigmentation with Norsk Hydro ASA (NYSE: NHY), a multi-billion dollar enterprise
based in Oslo, Norway. NatuRose natural astaxanthin is a red pigment used in the
aquaculture industry to impart color to the flesh of pen-raised fish and shrimp,
and for pigmentation in other animals, such as poultry. Worldwide annual sales
of astaxanthin are estimated at more than $150 million. Norsk Hydro will fund
the optimization of Cyanotech's production technology for astaxanthin. Upon
successful completion of the optimization program, the two companies intend to
enter into a joint venture to be owned 51% by Norsk Hydro and 49% by Cyanotech
to build and operate a NatuRose production facility in Kailua-Kona, Hawaii.
NORSK HYDRO
Norsk Hydro (www.hydro.com) is an excellent partner and should help us
achieve the significant worldwide potential of NatuRose for aquaculture and
animal feed. An industrial enterprise based on the use of natural resources,
Norsk Hydro is a Fortune 500 company, with 1998 revenue of 97.5 billion
Norwegian Krone (approximately US$12.7 billion).
HUMAN ASTAXANTHIN
The Norsk Hydro agreement does not affect Cyanotech's position with regard
to the human astaxanthin product we announced in fiscal 1999, and for which we
retain full product and marketing rights worldwide.
During the fourth quarter of fiscal 1999, we announced this new natural
astaxanthin product, a powerful antioxidant, for use as a human dietary
supplement. A growing body of scientific literature indicates that astaxanthin
in
2
capsule form surpasses many of the antioxidant benefits of vitamin C, vitamin E,
beta-carotene and other carotenoids with up to 550 times the antioxidant
activity of vitamin E and 10 times the antioxidant activity of beta-carotene. We
expect to receive Food and Drug Administration (FDA) approval to sell the
product as a human dietary supplement by late summer. In anticipation of FDA
approval, we are negotiating with several domestic and foreign companies for its
sale and distribution.
NEW PRODUCT DEVELOPMENT
In the research and development area, we continue to develop our unique,
bio-engineered mosquitocide product and the aldolase catalytic antibody.
Transformation of the microalgae, Synechococcus, to express the Bti mosquitocide
toxin has proven more difficult than originally anticipated and we now expect
preliminary data on toxin expression levels later this year. On the aldolase
catalytic antibody project, the Company continues to work with researchers from
The Scripps Research Institute on expression of the catalytic antibody gene.
GOING FORWARD
With NatuRose finally moving ahead in a joint venture with what appears to
be significant potential, we are shifting our focus to the promising new
products now under development and others under consideration. As a result of
the Company's reduced performance for the fourth quarter and fiscal year, we
downsized Cyanotech's operations to keep them in line with current revenue
levels, reducing annual production and operating expenses by approximately $1.0
million. We did not reduce our production capabilities nor disrupt corporate
development plans. We also implemented an asset management program with an
aggressive inventory reduction plan, scaling back Spirulina production to bring
inventory in line with current sales volume. Our continuing challenge is to
maintain our focus on those products with the best potential of success for the
benefit of our stockholders. We commend the fine work of our associates and
thank our Board of Directors and stockholders for their support during this
challenging period.
Gerald R. Cysewski, Ph.D.
Chairman, President and Chief Executive Officer
June 30, 1999
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company's consolidated financial statements have been prepared on a going
concern basis, which assumes continuity of operations and realization of assets
and liquidation of liabilities in the ordinary course of business. During the
years ended March 31, 1999 and 1998, the Company incurred losses of $2,557,000
and $300,000, respectively. During these two fiscal years, the Company has
experienced declining sales which can be attributed to increased competition for
sales of Spirulina products in all of its major markets. The most significant
decline in sales revenue resulted from the loss of our largest customer, a Hong
Kong-based network marketing company, in fiscal 1998. The major effect of the
decrease in sales has been a significant decrease in liquidity. Due to the
significant decrease in sales and the decline in working capital the Company has
taken action to reduce expenditures and obtain additional sources of external
financing while concurrently continuing to diversify its product offerings and
explore opportunities for expanding the markets for its products. Management
believes that this plan may increase revenues and return the Company to
profitability. Furthermore, as described in detail in Liquidity and Capital
Resources, the Company is in technical default on certain debt. The Company's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to comply with
the terms of its financing agreement, to obtain additional financing or
refinancing as may be required, to attain profitability, or a combination
thereof. There can be no assurance that these efforts will be successful or that
the Company will return to generating profit on either a quarterly or annual
basis.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data as a percentage of net sales for the periods indicated.
Years Ended March 31, 1999 1998 1997
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Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 85.6 58.9 40.3
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Gross Profit 14.4 41.1 59.7
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OPERATING EXPENSES:
Research and development 13.3 8.8 5.1
General and administrative 26.5 17.3 12.6
Sales and marketing 13.8 18.9 9.1
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Total operating expenses 53.6 45.0 26.8
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Income (loss) from operations (39.2) (3.9) 32.9
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OTHER INCOME (EXPENSE):
Interest income 0.2 2.6 3.9
Interest expense (2.6) (0.4) (0.4)
Other income (expense), net (0.6) 0.1 0.1
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Total other income (expense) (3.0) 2.3 3.6
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Income (loss) before income taxes (42.2) (1.6) 36.5
Income taxes 4.3 (2.3) --
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Net income (loss) (37.9)% (3.9)% 36.5%
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FISCAL 1999 COMPARED TO FISCAL 1998
Net Sales
Net sales for the year ended March 31, 1999 were $6,738,000, a decrease of
11.7% from net sales of $7,627,000 for the year ended March 31, 1998. The
decrease in net sales during the year ended March 31, 1999 is primarily due
to reduced shipment volume of bulk Spirulina products (2% less), lower
average selling prices (11% lower) for bulk Spirulina products, and
decreased sales of packaged consumer products.
Gross Profit
Gross profit represents net sales less the cost of goods sold, which
includes the cost of materials, manufacturing overhead costs, direct labor
expenses and depreciation and amortization. Gross profit decreased to 14.4%
of net sales for the year ended March 31, 1999, from 41.1% of net sales for
the year ended March 31, 1998. This decrease in gross profit from the prior
year is primarily attributable to an increase in depreciation expense of
$391,000, costs associated with producing NatuRose at limited production
levels which were below optimal manufacturing efficiency, lower per unit
selling prices of bulk Spirulina, estimated product potency losses in
NatuRose finished goods inventory and increased Spirulina production costs
incurred in re-starting previously idled Spirulina culture ponds.
Operating Expenses
Operating expenses for the year ended March 31, 1999, increased to
$3,615,000, an increase of 5.2% from the $3,437,000, of operating expenses
reported for the year ended March 31, 1998, primarily due to increased gen-
4
eral and administrative, and research and development expenses, offset in
part by reduced sales and marketing expenses.
Research and Development. Expenditures for research and development
increased 32.2 % to $895,000, for the year ended March 31, 1999, from
$677,000, for the year ended March 31, 1998. The increase from the prior
year is primarily the result of research and ongoing development work done
on the mosquitocide project, the Aldolase Catalytic Antibody 38C2 project,
additional costs related to new product development and higher costs
related to developing our BioDome CCS closed culture technology.
General and Administrative. General and administrative expenses
increased 35.7% to $1,788,000, for the year ended March 31, 1999, from
$1,318,000, for the year ended March 31, 1998. The increase from the prior
year is primarily due to increased legal fees related to the ongoing patent
litigation with Aquasearch, Inc. ("Aquasearch") and increased depreciation
expense.
Sales and Marketing. Sales and marketing expenses decreased 35.4% to
$932,000, for the year ended March 31, 1999, from $1,442,000, for the year
ended March 31, 1998. The decrease from the prior year is primarily due to
reduced personnel, advertising and consulting service expenditures dictated
by lower sales.
Other Income (Expense)
Other expense was $204,000 for the year ended March 31, 1999, compared to
other income of $175,000 for the year ended March 31, 1998, a difference of
$379,000. This resulted from a decrease in interest income due to a
decrease in investment securities and an increase in interest expense due
to an increase in outstanding, interest-bearing debt.
Income Taxes
The income tax benefit of $289,000, for the year ended March 31, 1999,
represents the estimated tax refund of Hawaii State income taxes from the
carryback of net operating losses generated in fiscal 1999.
Net Income (Loss)
The Company recorded a net loss of $2,557,000 for the year ended March 31,
1999, compared to a net loss of $300,000 for the year ended March 31, 1998.
This increase in net loss was primarily attributable to reduced sales of
bulk Spirulina powder and tablets, costs associated with producing NatuRose
at limited production levels which were below optimal manufacturing
efficiency, higher operating expenses, increased interest expense due to
higher debt, and decreased interest income.
FISCAL 1998 COMPARED TO FISCAL 1997
Net Sales
Net sales for the year ended March 31, 1998 were $7,627,000, a decrease of
33.1% from net sales of $11,399,000 for the year ended March 31, 1997. The
decrease in net sales during the year ended March 31, 1998 was primarily
due to lower sales of Spirulina packaged consumer products to our largest
customer, a Hong Kong-based network marketing company which purchased our
packaged consumer products for sale under a private label through their
marketing organization, primarily in mainland China. This customer
experienced a delay in its annual recertification process by the Chinese
government and was restricted by local governmental authorities from
hosting any large scale distributor meetings from March 1997 through
September 1997. These regulatory factors adversely impacted our customer's
ability to sell and, consequently, this customer's need for our packaged
consumer products was severely reduced. For the year ended March 31, 1998,
this customer accounted for less than 5% of Cyanotech's net sales, down
from approximately 34% and 29% of net sales in the years ended March 31,
1997 and 1996, respectively. Effective October 1, 1998, the Chinese
government imposed a ban on all network market organizations. Also
contributing to the decline were lower shipments (11% lower) and lower
average selling prices (2% lower) for bulk Spirulina powder.
Gross Profit
Gross profit decreased to 41.1% of net sales for the year ended March 31,
1998, from 59.7% of net sales for the year ended March 31, 1997. This
decrease in gross profit from the prior year is primarily attributable to a
shift in the product mix to greater sales of lower priced bulk Spirulina
products (78% of net sales in fiscal 1998, up from 58% of net sales in
fiscal 1997), Spirulina production inefficiencies due to decreased
production beginning December 1997 through February 1998 which resulted in
additional charges to Cost of Sales of approximately $264,000 during that
period, and lower average selling prices for bulk Spirulina.
Operating Expenses
Operating expenses for the year ended March 31, 1998 increased by $379,000,
an increase of 12.4% over the prior year, primarily because of increased
expenditures for sales and marketing.
Research and Development. Expenditures for research and development
increased 15.3 % to $677,000, for the year ended March 31, 1998, from
$587,000, for the year ended March 31, 1997. The increase from the prior
year
5
is primarily the result of research and ongoing development work done on
the mosquitocide project, and on optimizing production of the natural
astaxanthin product.
General and Administrative. General and administrative expenses
decreased 8.3% to $1,318,000, for the year ended March 31, 1998, from
$1,437,000, for the year ended March 31, 1997. The decrease from the prior
year is primarily due to reduced associate incentive bonuses which are
indexed to the Company's profitability, partially offset by an increase in
personnel costs.
Sales and Marketing. Sales and marketing expenses increased 39.5% to
$1,442,000, for the year ended March 31, 1998, from $1,034,000, for the
year ended March 31, 1997. The increase from the prior year is primarily
due to higher personnel costs, and increased domestic and international
marketing efforts associated with the introduction of the NatuRose product.
Other Income (Expense)
Other income decreased by 57.1% to $175,000, for the year ended March 31,
1998, from $408,000, for the year ended March 31, 1997. The decrease from
the prior year is primarily related to decreased earnings on lower balances
of cash and investment securities.
Income Taxes
The provision for income taxes was $175,000, for the year ended March 31,
1998. This is due to an increase in the allowance for deferred tax assets,
offset in part by current income tax benefits.
Net Income (Loss)
For the year ended March 31, 1998 and for the first time since 1991, the
Company recorded a net loss. The fiscal 1998 net loss of $300,000, compares
with net income of $4,159,000, for the year ended March 31, 1997. The net
loss is primarily the result of lower sales of Spirulina bulk and packaged
consumer products due to a reduction in orders from a single customer in
China that had previously accounted for a large percentage of sales in
packaged consumer Spirulina Pacifica products, lower average selling prices
for bulk Spirulina products, Spirulina production inefficiencies due to
decreased production during December 1997 through February 1998 which
resulted in additional charge to Cost of Sales of approximately $264,000
during the third and fourth quarters of 1998, and start-up costs associated
with commercialization of NatuRose, our natural astaxanthin product.
In February 1998, the Company reduced its workforce by approximately
25% in order to better align resources with sales levels. The workforce
reduction was part of the Company's plans to enhance its competitive
position through improvements of operational productivity and cost
reduction - specifically more efficient utilization of assets and
employees. Production operations, sales, and administrative functions were
restructured and downsized by this action.
Variability of Results
Cyanotech Corporation was formed in 1983 and did not become profitable on
an annual basis until fiscal 1992 (the twelve month period ended December
31, 1992). From fiscal 1992 through fiscal 1997, the Company had total net
sales of $29,401,000 and total net income of $7,931,000. In fiscal 1998 and
1999, the Company had net sales of $7,627,000, and $6,738,000, and a net
loss of $300,000, and $2,557,000, respectively. As of March 31, 1999, our
accumulated deficit was $3,318,000. There can be no assurance that we will
return to generating profits on either a quarterly or an annual basis. We
have experienced significant quarterly fluctuations in operating results
and anticipate that these fluctuations may continue in future periods.
Future operating results may fluctuate as a result of changes in sales
levels to our largest customers, new product introductions, production
difficulties, weather patterns, the mix between sales of bulk products and
packaged consumer products, start-up costs associated with new facilities,
expansion into new markets, sales promotions, competition, increased energy
costs, the announcement or introduction of new products by our competitors,
changes in our customer mix, overall trends in the market for our products,
government regulations and other factors beyond our control. While a
significant portion of our expense levels are relatively fixed, and the
timing of increases in expense levels is based in large part on our
forecasts of future sales, if net sales are below expectations in any given
period, the adverse impact on results of operations may be magnified by our
inability to adjust spending quickly enough to compensate for the sales
shortfall. We may also choose to reduce prices or increase spending in
response to market conditions, which may have a material adverse effect on
our results of operations. The Company's continuation as a going concern is
dependent upon its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to comply with the terms of its financing
agreement, to obtain additional financing or refinancing as may be
required, to attain profitability, of a combination thereof. There can be
no assurance that these efforts will be successful of that the Company will
return to generating profit on either a quarterly or annual basis.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999. The Company currently holds no derivative instruments, nor is it
6
currently participating in hedging activities. Management does not expect
adoption of SFAS No. 133 will have a material effect on the Company's
financial condition, results of operations or liquidity.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," which requires that certain costs,
including certain payroll and payroll-related costs, be capitalized and
amortized over the estimated useful life of the software. The provisions of
SOP 98-1 are effective for fiscal years beginning after December 15, 1998.
The Company adopted the provisions of SOP 98-1 effective April 1, 1999.
Adoption of SOP 98-1 did not have a material effect on the Company's
financial condition, results of operations or liquidity.
In April 1998, the AICPA Accounting Standards Executive Committee
issued SOP 98-5, "Reporting on the Costs of Start-up Activities." SOP 98-5
requires that costs of start-up activities, including organization costs,
be expensed as incurred. The provisions of SOP 98-5 are effective for
fiscal years beginning after December 15, 1998 and earlier application is
encouraged. The Company adopted the provisions of SOP 98-5 effective April
1, 1999. Adoption of SOP 98-5 did not have a material effect on the
Company's financial condition, results of operations or liquidity.
LIQUIDITY AND CAPITAL RESOURCES
Our working capital for the year ended March 31, 1999 decreased by
$1,679,000 to $917,000. Our cash and cash equivalents decreased
substantially by $1,074,000 to $323,000, primarily because of cash flows
used in operations and capital expenditures of $874,000 and $588,000,
respectively, offset in part by cash provided by financing activities of
$388,000.
The primary uses of cash flows in operating activities for the year
ended March 31, 1999, was the net loss of $2,557,000, offset by
depreciation and amortization of $1,405,000. This compares to cash flows
provided by operating activities of $988,000 in 1998.
Cash flows used for capital expenditures for the year ended March 31,
1999 decreased $5,293,000 to $588,000. Cash flows provided by financing
activities were $388,000 for the year ended March 31, 1999 compared to cash
flows used in financing activities of $439,000 for the year ended March 31,
1998. The primary sources of cash flows in financing activities for the
year ended March 31, 1999 were borrowings under a short-term revolving line
of credit of $994,000 and proceeds from the issuance of long-term debt of
$750,000, offset in part by repayment of a $975,000 short-term note
payable, payments on capital lease obligations and long-term debt of
$278,000, and debt issue costs of $103,000.
On July 28, 1998, we entered into a Loan and Security Agreement
(Agreement) with a lender which provides for up to $3 million in aggregate
credit facilities, secured by all the assets of the Company. The major
components of the Agreement include working capital loans on a revolving
basis, subject to the availability of eligible accounts receivable and
inventory (as defined), a sub-limit term loan of up to $750,000 (amortized
in equal payments of $12,500 over sixty months), secured by eligible
machinery and equipment, and a sub-limit term loan of up to $2 million
(amortized over sixty months and subject to the Company achieving and
maintaining specific levels of financial performance) for the acquisition
of new machinery and equipment. The Agreement has a maturity date of July
31, 2001 with an optional provision for automatic and continuous renewal
for successive, additional terms of one year each. The interest rate on all
borrowings under the Agreement is prime plus 2.5%, adjusted monthly, (at
March 31, 1999, the prime rate was 7.75%) until the Company achieves
certain financial performance levels, at which time the interest rate will
decrease to prime plus 1.25%. Interest is calculated on a base amount of $1
million or the outstanding loan balance, whichever is greater. The fee for
renewing the Agreement beyond the maturity date of July 31, 2001 is set at
.5% of the aggregate outstanding balance at the end of the initial term of
the Agreement. Proceeds from borrowings under the Agreement were used to
repay a short-term note payable and fund working capital requirements.
The Agreement contains certain restrictive covenants, which include,
among other things, the maintenance of minimum consolidated net worth, as
defined, and a subjective acceleration clause contingent upon the
occurrence of an event with a material adverse effect on the Company as
defined. Having been previously notified of the "going concern" explanatory
paragraph in the independent auditors' report on the March 31, 1999
consolidated financial statements, on July 13, 1999, the lender declared
the Company to be in technical default on the Agreement due to the
uncertainty of the Company's ability to continue as a going concern being
considered a material adverse effect. In the notice of default, the lender
exercised its rights under the Agreement, and effective July 13, 1999, has
increased the applicable interest rate on all borrowings under the
Agreement from prime plus 2.5% to prime plus 5.5% Although it has not
declared its intent to do so, the lender reserved its rights to other
remedies, among other things, to cease further lending transactions and
demand immediate repayment of outstanding borrowings under the Agreement.
Consequently the Company has classified the aggregate outstanding balance
on this Agreement of $1,644,000, representing outstanding working capital
loans on a revolving basis of $994,000 and an equipment term loan of
$650,000, as a current liability in the consolidated balance sheet at March
31, 1999.
At March 31, 1999, the remaining availability under the Agreement was
calculated by the lender to be $282,000. The remaining availability amount
excludes the component of the facility for the acquisition of new machinery
and equipment as such component is contingent on the Company's achievement
of a Debt Service Coverage ratio of at least 1.25:1 for the prior two full
consecutive quarters on a combined basis. This component, if available, may
increase the availability by an additional $1,074,000 up to the limit of $3
million for the entire Agreement.
As of March 31, 1999, the Company had a commitment for a construction
project on a 93 acre parcel which
7
was suspended in February 1998. In June 1999 the Company reached an
agreement with the project contractor to resume work on the suspended
construction project on or before June 1, 2000. The remaining balance on
the construction contract is approximately $1.9 million. In consideration
for the extension of the termination and completion dates of the contract,
the Company will pay an additional $20,000 at the startup of work and a
surcharge of 1.5% on work not completed by September 30, 1999, and a
surcharge of 4% on work not completed by September 30, 2000. If work does
not resume on or before June 1, 2000, then the contract will be considered
to have been terminated by Cyanotech. Assertion by the contractor of its
termination rights could have a material adverse effect on the Company's
financial condition, results of operations and/or liquidity. As of March
31, 1999, the credit facilities available to Cyanotech, as described above,
unless supplemented by funds from other sources, would not be sufficient to
finance this construction work. Total costs incurred as of March 31, 1999
with respect to this expansion project approximate $2,643,000. Failure to
comply with the commitments on this project would have a material adverse
effect on the Company's financial condition, results of operations, and/or
liquidity.
The consolidated financial statements at March 31, 1999 have been
prepared on a going concern basis, which assumes continuity of operations
and realization of assets and liquidation of liabilities in the ordinary
course of business. During the years ended March 31, 1999 and 1998, the
Company incurred losses of $2,557,000 and $300,000, respectively. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
comply with the terms of its financing agreement, to obtain additional
financing or refinancing as may be required, to attain profitability, or a
combination thereof.
During the fourth quarter of fiscal 1999, and again in April 1999, we
downsized our operations to bring them in line with current sales levels,
with anticipated savings in production and operating expenses of
approximately $1 million annually. We have not, however, reduced our
production capabilities or disrupted corporate development plans. We are
implementing an asset management program with an aggressive inventory
reduction plan, scaling back Spirulina production to approximately 50% of
capacity in order to bring Spirulina inventory in line with current sales
volume. If Spirulina sales volume continues at the current rate, we expect
to resume producing at or near full capacity later in fiscal year 2000. As
of March 1999, we had also reduced NatuRose production to about 15% of full
capacity until our NatuRose inventory levels are reduced. Based on our
current sales forecast, we expect to resume full production of NatuRose by
mid-1999.
In June 1999, the Company reached an agreement with Norsk Hydro ASA
("Norsk Hydro") to produce and market NatuRose natural astaxanthin. Under
the agreement, Norsk Hydro will participate in the optimization of the
Cyanotech production technology for astaxanthin. Upon successful completion
of the optimization program, the two companies intend to enter into a joint
venture that will be owned 51% by Norsk Hydro and 49% by Cyanotech. The
intention of the joint venture is to build and operate a NatuRose facility
in Kailua-Kona, Hawaii. Norsk Hydro will have worldwide exclusive rights to
distribute the NatuRose product into the aquaculture and animal
pigmentation and nutrition markets; Cyanotech will retain worldwide
exclusive rights to distribute the NatuRose product into the human
nutrition markets. The Company's assessment of the impairment of certain
long-lived assets as of March 31, 1999 is predicated on the consummation
and commercial success of this joint venture. Failure to consummate the
joint venture arrangement and/or failure by the joint venture to achieve
expected commercial results may result in the impairment of such long-lived
assets. The Company is seeking other possible sources of external
financing, but unless it is successful there may be liquidity shortfalls in
future periods. There can be no assurance that the Company will be
successful in obtaining additional financing or will have sufficient cash
resources to support its continued operations.
Year 2000 Compliance
We have completed a comprehensive review of our computer systems to
identify the systems that could be affected by the "Year 2000" issue and
have developed an implementation plan, to be completed before the end of
calendar 1999, to resolve the issue. We believe that, with modifications to
existing software and converting to new software, the Year 2000 issue will
not pose significant operational problems for our computer systems as so
modified and converted. The costs of such modifications and conversions are
not expected to exceed $10,000. However, if such modifications and
conversions are not completed in a timely manner, the Year 2000 problem may
have a material adverse impact on our operations.
The primary risks to the Company are those of business continuity
related to reliance on third parties. We are continuing the review and
evaluation of our reliance on other third parties (e.g. utilities
providers, distribution channels, major suppliers and vendors) to determine
and minimize the extent to which our operations may be dependent on such
third parties to remedy the Year 2000 issues in their systems. In addition,
contingency backup plans will be reviewed for each mission critical system,
with the emphasis on operational and production continuity. The Company's
business, operating results and financial condition could be materially
adversely affected, at least for a time, by the failure of its systems or
those of other parties to operate properly beyond 1999.
Quantitative and Qualitative Disclosures About Market Risk
We have not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believe that our
exposure to market risk associated with other financial instruments is not
material.
8
CONSOLIDATED BALANCE SHEETS
March 31,
-------------------------------------------------------------------------------------------------------------------
(in thousands, except share data) 1999 1998
===================================================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 323 $ 1,397
Accounts receivable, net of allowance for doubtful receivables of $12 in 1999
and $10 in 1998 1,012 1,127
Refundable income taxes 273 119
Inventories 2,105 2,229
Prepaid expenses 105 88
-------------------------------------------------------------------------------------------------------------------
Total current assets 3,818 4,960
Equipment and leasehold improvements, net 19,623 20,544
Other assets 180 163
-------------------------------------------------------------------------------------------------------------------
Total assets $ 23,621 $ 25,667
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 700 $ 50
Short-term revolving line of credit 994 --
Note payable -- 975
Current maturities of capital lease obligation 67 129
Accounts payable 746 938
Accrued expenses and other 394 272
-------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,901 2,364
Long-term debt, excluding current maturities 13 62
Obligation under capital lease, excluding current maturities -- 67
-------------------------------------------------------------------------------------------------------------------
Total liabilities 2,914 2,493
-------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Cumulative preferred stock, Series C, of $.001 par value (aggregate involuntary
liquidation preference $2,975 ($5 per share), plus unpaid cumulative dividends)
Authorized 5,000,000 shares; issued and outstanding 595,031 in 1999 and 1998. 1 1
Common stock of $.005 par value, authorized 25,000,000 shares at March 31, 1999
and 1998; issued and outstanding 13,603,572 shares at March 31, 1999 and
13,599,572 shares at March 31, 1998 68 68
Additional paid-in capital 23,956 23,866
Accumulated deficit (3,318) (761)
-------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 20,707 23,174
-------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Total liabilities and stockholders' equity $ 23,621 $ 25,667
===================================================================================================================
See accompanying notes to consolidated financial statements.
9
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended March 31,
-------------------------------------------------------------------------------------------------------------------------
(in thousands, except per-share data) 1999 1998 1997
=========================================================================================================================
Net sales $ 6,738 $ 7,627 $ 11,399
Cost of sales 5,765 4,490 4,590
-------------------------------------------------------------------------------------------------------------------------
Gross profit 973 3,137 6,809
-------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Research and development 895 677 587
General and administrative 1,788 1,318 1,437
Sales and marketing 932 1,442 1,034
-------------------------------------------------------------------------------------------------------------------------
Total operating expenses 3,615 3,437 3,058
-------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (2,642) (300) 3,751
-------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 13 202 443
Interest expense, net of interest costs capitalized of nil in 1999, $114 in 1998
and $23 in 1997 (174) (35) (47)
Other income (expense), net (43) 8 12
-------------------------------------------------------------------------------------------------------------------------
Total other income (expense) (204) 175 408
-------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (2,846) (125) 4,159
Income taxes 289 (175) --
-------------------------------------------------------------------------------------------------------------------------
Net income (loss) (2,557) (300) 4,159
Undeclared Preferred Stock dividends (238) (289) (294)
-------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to Common stockholders $ (2,795) $ (589) $ 3,865
=========================================================================================================================
Net income (loss) per common share
Basic $ (0.21) $ (0.05) $ 0.31
=========================================================================================================================
Diluted $ (0.21) $ (0.05) $ 0.25
=========================================================================================================================
Weighted average number of common shares outstanding
Basic 13,602 12,909 12,583
=========================================================================================================================
Diluted 13,602 12,909 16,598
=========================================================================================================================
See accompanying notes to consolidated financial statements.
10
Consolidated Statements of Stockholders' Equity
Years ended March 31, 1999, 1998 and 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Preferred stock Common stock Total
------------------------------------------- Additional Stock-
Par Par paid-in Accumulated holders'
(in thousands, except share data) Shares value Shares value capital deficit equity
===================================================================================================================================
Balances at March 31, 1996 734,977 $ 1 11,755,650 $ 59 $ 21,876 $ (4,620) $ 17,316
Exercise of common stock warrants for cash -- -- 668,120 3 298 -- 301
Exercise of stock options for cash -- -- 57,912 -- 49 -- 49
Issuance of common stock options
for other assets -- -- -- -- 80 -- 80
Issuance of common stock to nonemployee
directors for services -- -- 6,000 -- 37 -- 37
Common stock issued for cash,
net of costs of $51 -- -- 225,000 1 1,392 -- 1,393
Net income -- -- -- -- -- 4,159 4,159
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1997 734,977 1 12,712,682 63 23,732 (461) 23,335
Exercise of common stock warrants for cash -- -- 107,880 1 43 -- 44
Exercise of stock options for cash -- -- 84,750 1 102 -- 103
Common stock purchased and canceled -- -- (13,470) -- (55) -- (55)
Issuance of common stock to nonemployee
directors for services -- -- 8,000 -- 47 -- 47
Exchange of Series C preferred stock
for common stock (139,946) -- 699,730 3 (3) -- --
Net loss -- -- -- -- -- (300) (300)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at March 31, 1998 595,031 1 13,599,572 68 23,866 (761) 23,174
Issuance of stock options to consultant
for services, at fair value -- -- -- -- 84 -- 84
Issuance of common stock to nonemployee
directors for services -- -- 4,000 -- 6 -- 6
Net loss -- -- -- -- -- (2,557) (2,557)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT MARCH 31, 1999 595,031 $ 1 13,603,572 $ 68 $ 23,956 $ (3,318) $ 20,707
===================================================================================================================================
See accompanying notes to consolidated financial statements.
11
Consolidated Statements of Cash Flows
Years ended March 31,
-----------------------------------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997
=======================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,557) $ (300) $ 4,159
Adjustments to reconcile net income (loss) to net cash provided by,
(used in) operating activities:
Deferred income taxes -- 373 (373)
Depreciation and amortization 1,405 978 691
Loss on disposal of assets 104 -- --
Decrease (increase) in accounts receivable, net 115 1,664 (1,503)
Increase in refundable income taxes (154) (119) --
Decrease (increase) in inventories 124 (1,091) (644)
Decrease (increase) in prepaid expenses and other assets 4 67 (62)
Increase (decrease) in accounts payable (192) (570) 656
Increase (decrease) in accrued expenses and other 122 (61) (101)
Other 155 47 37
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (874) 988 2,860
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in equipment and leasehold improvements (588) (5,881) (7,008)
Purchases of investment securities -- -- (10,827)
Proceeds from sales and maturities of investment securities -- 3,954 6,873
-----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (588) (1,927) (10,962)
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and exercise of stock options
and warrants, net of issuance costs -- 92 1,743
Proceeds from issuance of long-term debt 750 -- --
Principal payments on long-term debt (149) (401) (150)
Debt issue costs (103) -- --
Borrowings on short-term revolving line of credit, net 994 -- --
Principal payments on note payable (975) -- --
Principal payments on capital lease obligations (129) (130) (125)
-----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 388 (439) 1,468
-----------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,074) (1,378) (6,634)
Cash and cash equivalents at beginning of year 1,397 2,775 9,409
-----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 323 $ 1,397 $ 2,775
=======================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest, net of amounts capitalized $ 160 $ 35 $ 36
=======================================================================================================================
Cash paid during the year for income taxes $ -- $ 56 $ 355
=======================================================================================================================
Non-cash investing and financing activities:
Issuance of note payable for construction in progress $ -- $ 975 $ --
=======================================================================================================================
Issuance of common stock and options for services and other assets $ 90 $ 47 $ 117
=======================================================================================================================
See accompanying notes to consolidated financial statements.
12
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 and is also
developing microalgae-based pro the biopesticide, chiral chemistry and
food coloring markets.
Substantially all of the Company's net sales have been
attributable to its Spirulina Pacifica(TM) products. Sales of
Spirulina Pacifica products accounted for approximately 91% of the
Company's net sales for the year ended March 31, 1999, 95% for the
year ended March 31, 1998 and 98% for the year ended March 31, 1997.
(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
subsidiaries, Nutrex, Inc. and Cyanotech International FSC, Inc. All
significant intercompany balances and transactions have been
eliminated in consolidation.
Cyanotech International FSC, Inc., was formed on April 1, 1997 as
a foreign sales corporation under the Internal Revenue Code.
(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
Owned equipment and leasehold improvements are stated at cost.
Equipment under capital lease is stated at the lower of the present
value of minimum lease payments or fair value of the equipment at the
inception of the lease. Depreciation and amortization are provided
using the straight-line method over the estimated useful lives for
equipment and furniture and fixtures, the shorter of the lease terms
or estimated useful lives for leasehold improvements and the lease
terms or estimated useful lives for equipment under capital lease as
follows:
Equipment 3 to 10 years
Leasehold improvements 10 to 27 years
Furniture and fixtures 7 years
Equipment under capital lease 10 years
Amortization of equipment under capital lease is included in
depreciation and amortization expense in the accompanying consolidated
financial statements.
13
(f) Earnings Per Share
Following is a reconciliation of the numerators and denominators of
the Basic and Diluted net income (loss) per Common Share computations
for the periods presented (in thousands except share data):
Years ended March 31, 1999 1998 1997
=========================================================================================================================
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss) $ (2,557) $ (300) $ 4,159
Requirement for Preferred Stock dividends (238) (289) (294)
-------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to Common stockholders $ (2,795) $ (589) $ 3,865
=========================================================================================================================
Weighted average Common Shares outstanding 13,602,000 12,909,000 12,583,000
=========================================================================================================================
Net income (loss) per Common Share $ (0.21) $ (0.05) $ 0.31
=========================================================================================================================
DILUTED EARNINGS (LOSS) PER SHARE
Net income (loss) available to Common stockholders $ (2,795) $ (589) $ 3,865
Requirement for Preferred Stock dividends -- -- 294
-------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to Common stockholders, as adjusted $ (2,795) $ (589) $ 4,159
=========================================================================================================================
Weighted average Common Shares outstanding 13,602,000 12,909,000 12,583,000
Effect of dilutive securities
Stock options and warrants -- -- 340,000
Convertible preferred stock -- -- 3,675,000
-------------------------------------------------------------------------------------------------------------------------
Weighted average Common Shares outstanding, as adjusted 13,602,000 12,909,000 16,598,000
=========================================================================================================================
Net income (loss) per Common share $ (0.21) $ (0.05) $ 0.25
=========================================================================================================================
For the years ended March 31, 1999 and 1998, warrants and options to
purchase Common Stock shares of the Company and convertible preferred
stock were outstanding, but were not included in the 1999 or 1998
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, 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. As of March 31, 1998, warrants and options to
acquire 431,725 shares of the Company's common stock and preferred
stock convertible into 2,975,155 shares of the Company's common stock
were outstanding.
(g) Research and Development
Research and development costs are expensed as incurred. Research and
development costs amounted to $895, $677, and $587 in 1999, 1998 and
1997 respectively.
(h) 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 charge in tax rates is
recognized in income in the period that includes the enactment date.
(i) 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.
14
(j) 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 costs to sell.
(k) Segment Information
As the Company's operations are solely related to microalgae-based
products, management considers its operations to be one industry
segment.
(l) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the 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.
(m) New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130,
Reporting Comprehensive Income, which establishes standards for the
reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. SFAS No.
130 requires reclassification of financial statements for earlier
periods provided for comparative purposes. The Company adopted the
provisions of SF No. 130 effective April 1, 1998. Adoption of SFAS No.
130 did not have a material effect on the Company's reported financial
information.
In June 1997, the FASB also issued SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information, which
establishes standards for public business enterprises to report
information about operating segments in annual financial statements
and requires that those enterprises report selected information about
operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997. SFAS No. 131 requires restatement of
comparative information presented for earlier periods. The Company
adopted the provisions of SFAS No. 131 effective April 1, 1998.
Adoption of SFAS No. 131 did not have a material effect on the
Company's reported financial information.
In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments and for
hedging activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS
No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company currently holds no derivative
instruments, nor is it currently participating in hedging activities.
Management does not expect adoption of SFAS No. 133 will have a
material effect on the Company's financial condition, results of
operations or liquidity.
In March, 1998, the American Institute of Certified Public
Accountants ("AICPA") Accounting Standards Executive Committee issued
Statement of Position ("SOP") 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use, which
requires that certain costs, including certain payroll and
payroll-related costs, be capitalized and amortized over the estimated
useful life of the software. The provisions of SOP 98-1 are effective
for fiscal years beginning after December 15, 1998. The Company
adopted the provisions of SOP 98-1 effective April 1, 1999. Adoption
of SOP 98-1 did not have a material effect on the Company's financial
condition, results of operations or liquidity.
In April 1998, the AICPA Accounting Standards Executive Committee
issued SOP 98-5, Reporting on the Costs of Start-up Activities. SOP
98-5 requires that costs of start-up activities, including
organization costs, be expensed as incurred. The provisions of SOP
98-5 are effective for fiscal years beginning after December 15, 1998
and earlier application is encouraged. The Company adopted the
provisions of SOP 98-5 effective April 1, 1999. Adoption of SOP 98-5
did not have a material effect on the Company's financial condition,
results of operations or liquidity.
(n) Reclassifications
Certain reclassifications have been made to the March 31, 1998
consolidated financial statements to confirm to the classifications
used in the March 31, 1999 consolidated financial statements. Such
reclassifications had no effect on previously reported results of
operations.
15
NOTE 2 INVENTORIES
Inventories consists of the following as of March 31, 1999 and 1998:
1999 1998
=====================================================================
Raw materials $ 63 $ 103
Work in process 287 362
Finished goods 1,555 1,524
Supplies 200 240
---------------------------------------------------------------------
$ 2,105 $ 2,229
=====================================================================
NOTE 3 EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Equipment and leasehold improvements consists of the following as of
March 31, 1999 and 1998:
1999 1998
=========================================================================================
Equipment $ 8,421 $ 7,791
Leasehold improvements 13,779 13,285
Furniture and fixtures 83 94
Equipment under capital lease 388 569
-----------------------------------------------------------------------------------------
22,671 21,739
Less accumulated depreciation and amortization (6,107) (4,707)
Construction in-progress 3,059 3,512
-----------------------------------------------------------------------------------------
Equipment and leasehold improvements, net $ 19,623 $ 20,544
=========================================================================================
Construction in-progress includes a construction project on a 93 acre
parcel which was suspended in February 1998. In June 1999, the Company
reached an agreement with the project contractor to resume work on the
suspended construction project on or before June 1, 2000. The
remaining balance on the construction contract is approximately $1.9
million. In consideration for the extension of the termination and
completion dates of the contract, the Company will pay an additional
$20 at the startup of work and a surcharge of 1.5% on work not
completed by September 30, 1999, and a surcharge of 4% on work not
completed by September 30, 2000. If work does not resume on, or
before, June 1, 2000, then the contract will be considered to have
been terminated by Cyanotech. Assertion by the contractor of its
termination rights could have a material adverse effect on the
Company's financial condition, results of operations and/or liquidity.
As of March 31, 1999, the credit facilities available to Cyanotech,
unless supplemented by funds from other sources, would not be
sufficient to finance this construction work. Total costs incurred as
of March 31, 1999 with respect to this expansion project approximate
$2,643. Failure to comply with the commitments on this project would
have a material adverse effect on the Company's financial condition,
results of operations, and/or liquidity.
NOTE 4 LINE OF CREDIT, LONG-TERM DEBT AND NOTE PAYABLE
Line of Credit
On July 28, 1998, the Company entered into a Loan and Security
Agreement (Agreement) with a lender which provides for up to $3
million in aggregate credit facilities, secured by all the assets of
the Company. The major components of the Agreement include working
capital loans on a revolving basis subject to the availability of
eligible accounts receivable and inventory (as defined), a sub-limit
term loan of up to $750 (amortized in equal payments of $12.5 over
sixty months), secured by eligible machinery and equipment, and a
sub-limit term loan of up to $2 million (amortized over sixty months
and subject to the Company achieving and maintaining specific levels
of financial performance) for the acquisition of new machinery and
equipment. The Agreement has a maturity date of July 31, 2001 with an
optional provision for automatic and continuous renewal for
successive, additional terms of one year each. The interest rate on
all borrowings under the Agreement is prime plus 2.5%, adjusted
monthly, (at March 31, 1999, the prime rate was 7.75%) until the
Company achieves certain financial performance levels, at which time
the interest rate will decrease to prime plus 1.25%. Interest is
calculated on a
16
base amount of $1 million or the outstanding loan balance, whichever
is greater. The fee for renewing the Agreement beyond the maturity
date of July 31, 2001 is set at .5% of the aggregate outstanding
balance at the end of the initial term of the Agreement. Proceeds from
borrowings under the Agreement were used to repay a short-term note
payable and fund working capital requirements.
The Agreement contains certain restrictive covenants, which
include, among other things, the maintenance of minimum consolidated
net worth, as defined, and a subjective acceleration clause contingent
upon the occurrence of an event with a material adverse effect on the
Company as defined. Having been previously notified of the "going
concern" explanatory paragraph in the independent auditors' report on
the March 31, 1999 consolidated financial statements, on July 13,
1999, the lender declared the Company to be in technical default on
the Agreement due to the uncertainty of the Company's ability to
continue as a going concern being considered a material adverse
effect. In the notice of default, the lender exercised its rights
under the Agreement, and effective July 13, 1999, has increased the
applicable interest rate on all borrowings under the Agreement from
prime plus 2.5% to prime plus 5.5% Although it has not declared its
intent to do so, the lender reserved its rights to other remedies,
among other things, to cease further lending transactions and demand
immediate repayment of outstanding borrowings under the Agreement.
Consequently the Company has classified the aggregate outstanding
balance on this Agreement of $1,644,000, representing outstanding
working capital loans on a revolving basis of $994,000 and an
equipment term loan of $650,000, as a current liability in the
consolidated balance sheet at March 31, 1999.
At March 31, 1999, the remaining availability under the Agreement
was calculated by the lender to be $282,000. The remaining
availability amount excludes the component of the facility for the
acquisition of new machinery and equipment as such component is
contingent on the Company's achievement of a Debt Service Coverage
ratio of at least 1.25:1 for the prior two full consecutive quarters
on a combined basis. This component, if available, may increase the
availability by an additional $1,074,000 up to the limit of $3 million
for the entire Agreement.
Long-Term Debt
Long-term debt consists of the following as of March 31, 1999 and
1998:
1999 1998
=========================================================================================================================
Note payable at the London Interbank Offered Rate (LIBOR) plus 2%, adjusted quarterly;
principal payments of $12.5, due quarterly, plus interest, through April 1, 2000 $ 63 $ 112
Note payable at the prime rate plus 2.5% per annum, adjusted monthly;
principal payments of $12.5, due monthly, plus interest; balance due July 31, 2001,
classified as current as described above 650 --
-------------------------------------------------------------------------------------------------------------------------
Total long-term debt 713 112
Less current maturities of long-term debt (700) (50)
-------------------------------------------------------------------------------------------------------------------------
Long-term debt, excluding current maturities $ 13 $ 62
=========================================================================================================================
In 1995, the Company executed a $250 note, payable in principal
installments of $12.5 each quarter through April 1, 2000, plus
interest, with principal and interest payments satisfied by delivering
to the lender an equivalent market value amount of salable product or
cash (at the lender' option). The note payable bears interest at LIBOR
plus 2%, adjusted quarterly, and is secured by certain production
equipment. For the quarter ended March 31, 1999, interest on this note
was calculated at 7.1%.
The aggregate maturities of long-term debt for each of the two
years subsequent to March 31, 1999 are $700 and $13 for the years
ending March 31, 2000 and 2001, respectively.
Note Payable
In March 1998, the Company reached an agreement with its general
contractor to convert certain trade accounts payable to a note
payable. Under the terms of the agreement, $975 of trade accounts
payable to the contractor for work completed on an expansion project
was converted to a note payable due December 31, 1998. Terms of the
note called for a principal and interest payment of $150 on April 1,
1998, monthly principal and interest payments of $100 beginning June
1, 1998, with the balance due on December 31, 1998. The note payable
bore interest at prime plus 2%, beginning January 1, 1998, and was
secured by all of the assets of the Company. This note was satisfied,
in its entirety, in August 1998 with proceeds from borrowings under
the line of credit.
NOTE 5 LEASES
The Company leases certain equipment under a capital lease expiring in
2000, and leases facilities, equipment and land under operating leases
expiring between 2003 and 2025. At March 31, 1999, the net book value
of equipment under the capital lease amounted to $215.
17
Future minimum lease payments under non-cancelable operating
leases, and the present value of future minimum capital lease payments
as of March 31, 1999 are as follows:
Year ending March 31: Capital lease Operating leases
=====================================================================================================
2000 $ 68 $ 250
2001 -- 250
2002 -- 250
2003 -- 250
2004 -- 224
Thereafter, through 2025 -- 3,481
-----------------------------------------------------------------------------------------------------
Total minimum lease payments 68 $ 4,705
===========
Less amount representing interest (at 9%) (1)
---------------------------------------------------------------------------------
Present value of net minimum capital lease payments 67
Less current maturities of capital lease obligation 67
---------------------------------------------------------------------------------
Obligation under capital lease, excluding current maturities $ --
=================================================================================
Total rent expense under operating leases amounted to $350, $211, and
$138 for the years ended March 31, 1999, 1998, and 1997, 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, 1999, 1998 and
1997 were not significant.
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, 1999. In
January 1999, the Company negotiated a deferral of lease rent with the
State of Hawaii on the 93 acre parcel. The term of the deferral is for
one year effective January 1999. Under the deferral agreement,
one-half of the monthly fixed fee, or $5 per month, may be deferred
until December 31, 1999. Interest on all deferred rent is being
charged to the Company at an annual rate of 5%. The deferred portion
of rent for this parcel and interest related to this agreement are
being expensed each period for financial statement purposes.
NOTE 6 SERIES C PREFERRED STOCK
Series C preferred stock is convertible into common stock at the rate
of one share of preferred stock for five shares of common stock
through February 23, 2000, after which date the conversion feature is
no longer applicable. Series C preferred stock has voting rights equal
to the number of shares of common stock into which it is convertible
and has a preference in liquidation over all other series of preferred
stock of $5 per share plus any accumulated but unpaid dividends.
Holders of Series C preferred stock are entitled to 8% cumulative
annual dividends at the rate of $.40 per share; cumulative dividends
in arrears as of March 31, 1999 amount to $ 2,326 ($3.91 share). Upon
conversion of Series C preferred stock, cumulative dividends in
arrears on converted shares are no longer payable. The amount of
cumulative dividends foregone due to conversion during the year ended
March 31, 1999 was nil ($457 in 1998 and nil in 1997). The consent of
Series C preferred stockholders is required to modify their present
rights or sell all or substantially all of the Company's assets.
NOTE 7 STOCK OPTIONS AND WARRANTs
Stock Options
In August 1995, the stockholders of the Company approved the Company's
1995 Stock Option Plan (the "1995 Plan"), reserving a total of 400,000
shares of common stock for issuance under the Plan. In September 1997,
the stockholders approved an amendment to the 1995 Plan which
increased the number of shares reserved for issuance under the Plan
from 400,000 to 800,000. 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-
18
employee directors are granted a ten-year option to purchase 3,000
shares of 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
4,000, 8,000 and 6,000 shares of common stock were made under the 1994
Plan in September 1998 and 1997 and 1996, respectively. Expense
recognized as a result of these stock grants amounted to $6, $47, and
$37 for the years ended March 31, 1999, 1998 and 1997, respectively.
At March 31, 1999, there were 302,600 additional shares available
for grant under the 1995 Plan and 53,000 additional shares available
under the 1994 Plan. The per share weighted-average fair value of
stock options granted during 1999, 1998 and 1997 was $2.53, $4.72, and
$6.02, respectively, on the date of grant using a Black Scholes
option-pricing model with the following weighted-average assumptions:
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;
1998 -- expected dividend yield of 0%, risk-free interest rate of
6.6%, expected volatility of 99%, and an expected life of 4.5 years;
1997 -- expected dividend yield of 0%, risk-free interest rate of
6.6%, expected volatility of 130%, and an expected life of 4.1 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
income (loss) available to common stockholders and net income (loss)
per Common share would have been as reflected in the pro forma amounts
below:
1999 1998 1997
===============================================================================================================
Net income (loss) available
to Common stockholders As reported $ (2,795) $ (589) $ 3,865
Pro forma $ (3,282) $ (1,041) $ 3,444
Net income (loss) per Common share As reported Basic $ (0.21) $ (0.05) $ 0.31
Diluted $ (0.21) $ (0.05) $ 0.25
Pro forma Basic $ (0.24) $ (0.08) $ 0.27
Diluted $ (0.24) $ (0.08) $ 0.23
Pro forma net income (loss) available to Common stockholders and net
income (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 income (loss) available to common
stockholders and net income (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, 1996 419,700 $ 2.24
Granted 166,000 7.30
Exercised (57,912) .85
Forfeited (107,400) 1.31
---------------------------------------------------------------------
Balance at March 31, 1997 420,388 4.42
Granted 125,000 6.31
Exercised (84,750) 1.21
Forfeited (53,913) 5.87
---------------------------------------------------------------------
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
=====================================================================
19
The following table summarizes information about stock options
outstanding at March 31, 1999:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------------------------------
Range of Number outstanding Weighted-avg. remaining Weighted-avg. Number exercisable Weighted-avg.
exercise prices at 3/31/99 contractual life exercise price at 3/31/99 exercise price
==========================================================================================================================
$.94 to $1.63 76,175 1.1 years $ 1.01 70,175 $ 0.96
$3.13 to $3.75 197,300 4.8 years $ 3.28 -- $ --
$5.13 to $7.63 301,900 2.3 years $ 6.42 151,000 $ 6.24
--------------------------------------------------------------------------------------------------------------------------
$.94 to $7.63 575,375 3.0 years $ 4.63 221,175 $ 4.56
==========================================================================================================================
Warrants
At March 31, 1999, the Company has warrants outstanding to acquire
25,000 shares of the Company's common stock. The warrants were granted
in consideration for services provided by a third party, exercisable
at $1.00 per share, and expire in September, 1999. Warrants to acquire
107,880, and 668,120 shares of common stock were exercised at average
prices of $.41 and $.45 in 1998 and 1997, respectively.
NOTE 8 MAJOR CUSTOMERS AND EXPORT SALES
Sales to major customers for the years ended March 31, 1999, 1998 and
1997 are summarized as follows (percent of product sales):
1999 1998 1997
==================================================================
Customer A *% *% 34%
Customer B 11% *% *%
-------------------------------------------------------------=----
11% *% 34%
==================================================================
*Less than 10% of product sales.
Net product sales by geographic area for the years ended March 31,
1999, 1998 and 1997 are summarized as follows:
1999 1998 1997
=======================================================================================================================
United States $4,075 60% $4,297 56% $ 4,303 38%
Canada/South America 426 6% 404 5% 851 8%
The Netherlands 717 11% 496 7% 499 4%
Europe, excluding the Netherlands 498 7% 788 10% 793 7%
China 50 1% 358 5% 3,905 34%
Asia/Pacific, excluding China 972 15% 1,284 17% 1,048 9%
-----------------------------------------------------------------------------------------------------------------------
$6,738 100% $7,627 100% $11,399 100%
=======================================================================================================================
Foreign product sales transactions are consummated in U.S. dollars.
20
NOTE 9 INCOME TAXES
The components of income tax expense (benefit) are as follows for the
years ended March 31, 1999, 1998 and 1997:
1999 1998 1997
=====================================================================
Current
Federal $ -- $ (13) $ 138
State (289) (185) 235
---------------------------------------------------------------------
(289) (198) 373
---------------------------------------------------------------------
Deferred
Federal -- 314 (352)
State -- 59 (21)
---------------------------------------------------------------------
-- 373 (373)
---------------------------------------------------------------------
$(289) $ 175 $ --
=====================================================================
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,
1999, 1998 and 1997 follows:
1999 1998 1997
==========================================================================================================================
Amount at the federal statutory income tax rate $(968) $ (43) $ 1,414
State income taxes, net of federal income tax effect (191) (83) 141
Benefit of operating loss carryforwards -- -- (1,328)
Change in the beginning-of-the-year balance of the valuation allowance
for deferred tax assets 889 270 (213)
Other (19) 31 (14)
--------------------------------------------------------------------------------------------------------------------------
$(289) $ 175 $ --
==========================================================================================================================
The significant components of deferred income tax expense (benefit)
for the years ended March 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997
==========================================================================================================================
Deferred tax expense (benefit), exclusive of the change in beginning-of-the-year
valuation allowance balance $ (889) $ 103 $ (160)
Increase (decrease) in beginning-of-the-year balance of the valuation allowance
for deferred tax assets 889 270 (213)
--------------------------------------------------------------------------------------------------------------------------
$ -- $ 373 $ (373)
==========================================================================================================================
The 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, 1999 and 1998 are as
follows:
1999 1998
==========================================================================================================================
Deferred tax assets:
Net operating loss carryforwards $ 2,020 $ 441
Tax credit carryforwards 252 255
Other 200 156
--------------------------------------------------------------------------------------------------------------------------
Gross deferred tax assets 2,472 852
Less valuation allowance (1,293) (404)
--------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 1,179 448
Deferred tax liability -- equipment and leasehold improvements, principally due to
differences in depreciation and amortization (1,179) (448)
--------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ -- $ --
==========================================================================================================================
21
The valuation allowance for deferred tax assets as of April 1, 1998,
1997 and 1996 was $404, $134, and $1,675, respectively. The valuation
allowance increased by $889 and $270 during the years ended March 31,
1999 and 1998, respectively, and decreased by $1,541 during the year
ended March 31, 1997. 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,
1999. 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, 1999, the Company has tax net operating tax loss
carryforwards and tax credit carryforwards available to offset future
federal income taxes as follows:
Research and
Net operating Investment experimentation
Expires March 31, losses tax credits tax credits
===============================================================================================
2000 $ -- $ -- $ 14
2001 -- 14 15
2002 -- -- 22
2003 -- -- 15
2004 -- -- 52
2005 -- -- 5
2006 400 -- --
2011 -- -- 23
2012 44 -- 9
2013 1,601 -- --
2019 3,558 -- --
-----------------------------------------------------------------------------------------------
$ 5,603 $ 14 $ 155
===============================================================================================
In addition, at March 31, 1999, 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, 1999, the Company has tax net operating loss
carryforwards of $1,098, which expire March 31, 2019, available to
offset future Hawaii state taxable income.
Investment tax credits will be recorded as a reduction of the
provision for federal income taxes in the year realized.
NOTE 10 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, 1999
and 1998:
Cash and Cash Equivalents
The carrying amounts approximate fair value because of the short-term
nature of these instruments.
Short-Term Revolving Line of Credit
The carrying value of the short-term revolving line of credit
approximates fair value because the instruments reprice monthly at
market rates.
Note Payable
The carrying value of the note payable approximates fair value because
the instruments reprice quarterly at market rates.
Long-Term Debt
The carrying amounts approximate fair value because the instruments
reprice monthly or quarterly at market rates.
22
NOTE 11 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 are 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 the years ended
March 31, 1999 and 1998, and $219 for the year ended March 31, 1997.
NOTE 12 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, Inc. ("Aquasearch"), seeking declaratory judgement
of patent noninfringement, patent invalidity, and non-misappropriation
of trade secrets relating to closed culture production of astaxanthin.
The complaint was filed in response to assertions by Aquasearch
regarding its alleged intellectual property rights. Aquasearch has
answered the complaint and filed counter claims alleging patent
infringement, trade secret misappropriation, unfair competition and
breach of contract. The Court has granted Cyanotech's motion to amend
its complaint against Aquasearch to add claims of misappropriation of
trade secrets regarding open pond technology, unfair competition and
breach of contract. The Company is pursuing this litigation
vigorously. In the opinion of management, the ultimate disposition of
this matter will not have a material adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
As of March 31, 1999, the Company had a commitment for a
suspended construction project on a 93 acre parcel (see Note 3).
NOTE 13 FINANCIAL CONDITION AND LIQUIDITY AND SUBSEQUENT EVENTS
The consolidated financial statements at March 31, 1999 have been
prepared on a going concern basis, which assumes continuity of
operations and realization of assets and liquidation of liabilities in
the ordinary course of business. During the years ended March 31, 1999
and 1998, the Company incurred losses of $2,557 and $300,
respectively. During these two fiscal years, the Company has
experienced declining sales which management believes can be
attributed to increased competition for sales of Spirulina products in
all of its major markets. The major effect of the decrease in sales
has been a significant decrease in liquidity. Due to the significant
decrease in sales and the decline in working capital, the Company has
taken action to reduce expenditures and obtain additional sources of
external financing while concurrently continuing to diversify its
product offerings and explore opportunities for expanding the markets
for its products. Management believes that this plan may increase
revenues and return the Company to profitability. As discussed in Note
4 the Company is in technical default on certain debt. The Company's
continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely
basis, to comply with the terms of its financing agreement, to obtain
additional financing or refinancing as may be required, to attain
profitability, or a combination thereof. The Company is seeking other
possible sources of external financing, but unless it is successful
there may be liquidity shortfalls in future periods. There can be no
assurance that the Company will be successful in obtaining additional
financing or will have sufficient cash resources to support its
continued operations. The accompanying consolidated financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
In June, 1999, the Company reached an agreement with Norsk Hydro
ASA ("Norsk Hydro") to produce and market NatuRose natural
astaxanthin. Under the agreement, Norsk Hydro will participate in the
optimization of the Cyanotech production technology for astaxanthin.
Upon successful completion of the optimization program, the two
companies intend to enter into a joint venture that will be owned 51%
by Norsk Hydro and 49% by Cyanotech. The intention of the joint
venture is to build and operate a NatuRose facility in Kailua-Kona,
Hawaii. Norsk Hydro will have worldwide exclusive rights to distribute
the NatuRose product into the aquaculture and animal pigmentation and
nutrition markets; Cyanotech will retain worldwide exclusive rights to
distribute the NatuRose product into the human nutrition markets. The
Company's assessment of the impairment of certain long-lived assets as
of March 31, 1999 is predicated on the consummation and commercial
success of this joint venture. Failure to consummate the joint venture
arrangement and/or failure by the joint venture to achieve expected
commercial results may result in the impairment of such long-lived
assets.
23
INDEPENDENT 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, 1999 and 1998,
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, 1999. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our 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, 1999 and
1998, and the results of their operations and their cash flows for
each of the years in the three-year period ended March 31, 1999 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in note 13 to the consolidated financial statements, the
Company has suffered recurring losses from operations and has limited
sources of additional liquidity that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard
to these matters are also described in note 13. The consolidated
financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
KPMG LLP
Honolulu, Hawaii
May 14, 1999, except as to the second paragraph of note 3,
the second paragraph of note 4 and the second paragraph
of note 13, which are as of July 13, 1999
Selected Quarterly Financial Data
First Second Third Fourth Total
($ in thousands, except share data) Quarter Quarter Quarter Quarter Year
=========================================================================================================================
1999
Net sales $ 1,763 $ 1,525 $ 1,675 $ 1,775 $ 6,738
Gross profit 179 401 122 271 973
Net loss (631) (442) (719) (765) (2,557)
Net loss per common share
Basic (0.05) (0.04) (0.06) (0.06) (0.21)
Diluted (0.05) (0.04) (0.06) (0.06) (0.21)
1998
Net sales $ 1,774 $ 2,053 $ 1,564 $ 2,236 $ 7,627
Gross profit 872 885 542 838 3,137
Net income (loss) 125 (54) (286) (85) (300)
Net income (loss) per common share
Basic 0.00 (0.01) (0.03) (0.01) (0.05)
Diluted 0.00 (0.01) (0.03) (0.01) (0.05)
24
OFFICERS
Gerald R. Cysewski, Ph.D
President, Chief Executive Officer
and Chairman of the Board
Glenn D. Jensen
Vice President - Operations
Larry L. Line
Vice President -
Sales and Marketing
President, Nutrex, Inc.
Kelly J. Moorhead
Vice President -
Product Development
Ronald P. Scott
Executive Vice President -
Finance & Administration
Treasurer and Secretary
BOARD OF DIRECTORS
Gerald R. Cysewski, Ph.D
Eric H. Reichl 1,2
Ronald P. Scott
John T. Waldron 1,2
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, Inc.
Cyanotech International FSC, Inc.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C.
Shareholder Relations
85 Challenger Road
Ridgefield Park, NJ 07660
(800) 522-6645
Independent Accountants
KPMG LLP
Honolulu, HI 96812-4150
Legal Counsel
Goodsill Anderson Quinn & Stifel
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 1999 annual meeting of stockholders will be held on Thursday, August 26,
1999, at 2:00 p.m. at
King Kamehameha's Kona Beach Hotel
75-5660 Palani Road
Kailua-Kona, Hawaii 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
===============================================================
1999
March 31, 1999 $ 1.25 $ 0.88
December 31, 1998 $ 1.75 $ 0.91
September 30, 1998 $ 3.69 $ 1.50
June 30, 1998 $ 4.44 $ 3.13
1998
March 31, 1998 $ 4.06 $ 2.50
December 31, 1997 $ 5.75 $ 2.44
September 30, 1997 $ 6.38 $ 4.25
June 30, 1997 $ 7.13 $ 4.75
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 Series C Preferred Stock or Common
Stock in the foreseeable future.
The approximate number of record holders of outstanding Common Stock as of
June 28, 1999 was 1,410.
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.