CYAN 10-Q
Cyanotech Corp (CYAN)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For Quarterly Period Ended
Or
| | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period From to
Commission File Number
CYANOTECH CORPORATION
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
(Address of principal executive offices)
(
(Registrant’s telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | |
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| | Smaller reporting company | |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of February 4, 2022, the number of shares outstanding of the registrant’s common stock was
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report and other presentations made by Cyanotech Corporation (“CYAN”) and its subsidiary contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as “expects,” “anticipates,” “intends,” “plan,” “believes,” “predicts”, “estimates” or similar expressions. In addition, any statement concerning future financial performance, ongoing business strategies or prospects and possible future actions are also forward-looking statements. Forward-looking statements are based upon current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning CYAN and its subsidiary (collectively, the “Company”), the performance of the industry in which CYAN does business, and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance. You should not place undue reliance on forward-looking statements.
Forward-looking statements speak only as of the date of the Report, presentation or filing in which they are made. Except to the extent required by the Federal Securities Laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our forward-looking statements in this Report include, but are not limited to:
| ● |
Statements relating to our business strategy; |
| ● |
Statements relating to our business objectives; and |
| ● |
Expectations concerning future operations, profitability, liquidity and financial resources. |
These forward-looking statements are subject to risk, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control, including those factors described in Item 2 of Part I of this quarterly report and in Item 1A of Part I of the Company’s Annual Report on Form 10-K filed on June 22, 2021. Additionally, the following factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions and expectations expressed in our forward-looking statements:
| ● |
The added risks associated with or attributed to the current local, national and world economic conditions, including but not limited to, the volatility of crude oil prices, inflation and currency fluctuations; |
| ● |
Access to available and reasonable financing on a timely basis; |
| ● |
The Company’s inability to generate enough revenues to meet its obligations or repay maturing indebtedness; |
| ● |
Failure of capital projects to operate as expected or meet expected results; |
It is not possible to predict or identify all potential risks and uncertainties and the above referenced factors and list do not comprise a complete list of all potential risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in any forward-looking statement contained in this report. All forward-looking statements speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this report. Except as is required by law, the Company expressly disclaims any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report. Throughout this report, Cyanotech Corporation, together with its subsidiary, are referred to as “the Company.”
CYANOTECH CORPORATION
FORM 10-Q
| Item 1. |
4 |
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| Condensed Consolidated Balance Sheets as of December 31, 2021 and March 31, 2021 (unaudited) |
4 |
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| 5 |
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| 6 |
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| 7 |
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| Notes to Condensed Consolidated Financial Statements (unaudited) |
8 |
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| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
20 |
| Item 4. |
25 |
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| Item 1. |
26 |
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| Item 1A |
26 |
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| Item 2. |
26 |
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| Item 3. |
26 |
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| Item 5. |
26 |
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| Item 6. |
27 |
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| 28 |
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CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
| December 31, | March 31, | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $ as of December 31, 2021 and $ as of March 31, 2021 | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Equipment and leasehold improvements, net | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Customer deposits | ||||||||
| Operating lease obligations, current portion | ||||||||
| Line of credit | ||||||||
| Current maturities of long-term debt | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, less current maturities | ||||||||
| Long-term operating lease obligations | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock of $ par value, authorized shares; shares issued and outstanding | ||||||||
| Common stock of $ par value, authorized shares; issued and outstanding shares at December 31, 2021 and shares at March 31, 2021 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Income (loss) from operations | ( | ) | ||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on extinguishment of debt | ||||||||||||||||
| Income before income taxes | ||||||||||||||||
| Income tax expense (benefit) | ( | ) | ||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Net income per share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Shares used in calculation of net income per share: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
Three months ended December 31, 2021 and 2020
| Common | Common Amount | Additional | Accumulated | Total | ||||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||||
| Balances at September 30, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Issuances of common stock for Director Stock Grants | ||||||||||||||||||||
| Share-based compensation expense | — | |||||||||||||||||||
| Net income | — | |||||||||||||||||||
| Balances at December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balances at September 30, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Share-based compensation expense | — | |||||||||||||||||||
| Net income | — | |||||||||||||||||||
| Balances at December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
Nine months ended December 31, 2021 and 2020
| Common | Common Amount | Additional | Accumulated | Total | ||||||||||||||||
| (in thousands, except per share data) | ||||||||||||||||||||
| Balances at March 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Issuances of common stock for Director Stock Grants | ||||||||||||||||||||
| Issuance of vested shares of restricted stock | ( | ) | ( | ) | ||||||||||||||||
| Shares withheld for tax payments | ( | ) | ||||||||||||||||||
| Share-based compensation expense | — | |||||||||||||||||||
| Net income | — | |||||||||||||||||||
| Balances at December 31, 2021 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Balances at March 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Issuances of common stock for Director Stock Grants | ||||||||||||||||||||
| Issuance of common stock in connection with severance of former executive | ||||||||||||||||||||
| Shares withheld from former executive for tax payments | ( | ) | ||||||||||||||||||
| Issuance of vested shares of restricted stock | ( | ) | ( | ) | ||||||||||||||||
| Shares withheld for tax payments | ( | ) | ||||||||||||||||||
| Share-based compensation expense | — | |||||||||||||||||||
| Net income | — | |||||||||||||||||||
| Balances at December 31, 2020 | $ | $ | $ | ( | ) | $ | ||||||||||||||
See accompanying notes to condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| Nine Months Ended | ||||||||
| 2021 | 2020 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net income | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Gain from extinguishment of debt – PPP loan | ( | ) | ||||||
| Amortization of debt issue costs and other assets | ||||||||
| Amortization of operating leases right-of-use assets | ||||||||
| Share-based compensation expense | ||||||||
| Provision for doubtful accounts | ||||||||
| Net (increase) decrease in assets: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other assets | ||||||||
| Net increase (decrease) in liabilities: | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued expenses | ( | ) | ||||||
| Customer deposits | ( | ) | ( | ) | ||||
| Operating lease obligations | ( | ) | ( | ) | ||||
| Deferred rent and other liabilities | ( | ) | ( | ) | ||||
| Net cash provided by operating activities | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Investment in equipment and leasehold improvements | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments on short-term contract obligation | ( | ) | ||||||
| Net payments on line of credit | ( | ) | ( | ) | ||||
| Net payments on debt – related party | ( | ) | ||||||
| Proceeds from long-term debt – PPP loan | ||||||||
| Principal payments on long-term debt | ( | ) | ( | ) | ||||
| Payments on finance leases | ( | ) | ||||||
| Taxes paid related to net share settlement of restricted stock units | ( | ) | ( | ) | ||||
| Net cash (used in) provided by financing activities | ( | ) | ||||||
| Net (decrease) increase in cash | ( | ) | ||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021
(Unaudited)
| 1. | ORGANIZATION AND BASIS OF PRESENTATION |
Cyanotech Corporation (the “Company”), located in Kailua-Kona, Hawaii, was incorporated in the state of Nevada on March 3, 1983 and is listed on the NASDAQ Capital Market under the symbol “CYAN”. The Company is engaged in the production of natural products derived from microalgae for the nutritional supplements market.
The Company is an agricultural company that produces high value natural products derived from microalgae grown in complex and intricate open-pond agricultural systems on the Kona coast of Hawaii. The Company's products include Hawaiian Spirulina Pacifica, a superfood with numerous benefits, including boosting the immune system and overall cellular health; and Hawaiian BioAstin, a powerful antioxidant shown to support and maintain the body's natural inflammatory response.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information pursuant to the instructions to Form 10-Q and Regulation S-X of the Securities and Exchange Commission (“SEC”). These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Stockholders’ Equity and Condensed Consolidated Statements of Cash Flows for the periods presented in accordance with GAAP.
Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full fiscal year. The Condensed Consolidated Balance Sheet as of March 31, 2021 was derived from the audited consolidated financial statements. These condensed consolidated financial statements and notes should be read in conjunction with the Company’s audited consolidated financial statements for the year ended March 31, 2021, contained in the Company’s annual report on Form 10-K as filed with the SEC on June 22, 2021.
Liquidity and Capital Resources
As of December 31, 2021, the Company had cash of $
As of December 31, 2021, the Company had $
In response to the coronavirus (“COVID-19”) pandemic and the uncertainty surrounding the pandemic, in May 2020, the Company obtained a Paycheck Protection Program (“PPP”) loan in the amount of $
Funds generated by operating activities and available cash are expected to continue to be the Company’s most significant sources of liquidity for working capital requirements, debt service and funding of maintenance levels of capital expenditures.
Based upon the Company’s operating plan and related cash flow and financial projections, cash flows expected to be generated by operating activities and available financing are expected to be sufficient to fund its operations through at least December 31, 2022, and the Company’s debt service coverage ratio and current ratio covenants are expected to be in compliance with the annual Term Loans and Credit Agreement covenant requirements as of March 31, 2022, the next measurement date. However, no assurances can be provided that the Company will achieve its operating plan and cash flow projections for the next fiscal years or its projected consolidated financial position as of March 31, 2022. Such estimates are subject to change based on future results and such change could cause future results to vary significantly from expected results.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
Consolidation
The accompanying condensed consolidated financial statements include the accounts of Cyanotech Corporation and its wholly owned subsidiary, Nutrex Hawaii, Inc. (“Nutrex Hawaii” or “Nutrex”, collectively the “Company”). All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of any contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods reported. Management reviews these estimates and assumptions periodically and reflects the effect of revisions in the period that they are determined to be necessary. Actual results could differ from those estimates and assumptions.
Cash
Cash consists of cash on hand and cash in bank deposits.
Concentration Risk
A significant portion of revenue and accounts receivable are derived from a few major customers. For the three months ended December 31, 2021, customers individually accounted for
Revenue Recognition
The Company records revenue based on the five-step model which includes: (1) identifying the contract with the customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations; and (5) recognizing revenue when the performance obligations are satisfied. Substantially all of the Company’s revenue is generated by fulfilling orders for the purchase of our microalgal nutritional supplements to retailers, wholesalers, or direct to consumers via online channels, with each order considered to be a distinct performance obligation. These orders may be formal purchase orders, verbal phone orders, e-mail orders or orders received online. Shipping and handling activities for which the Company is responsible under the terms and conditions of the order are not accounted for as performance obligations but as fulfillment costs. These activities are required to fulfill the Company’s promise to transfer the goods and are expensed when revenue is recognized.
Revenue is measured as the net amount of consideration expected to be received in exchange for fulfilling a performance obligation. The Company has elected to exclude sales, use and similar taxes from the measurement of the transaction price. The amount of consideration expected to be received and revenue recognized includes estimates of variable consideration, which includes costs for trade promotion programs, coupons, returns and early payment discounts. Such estimates are calculated using historical averages adjusted for any expected changes due to current business conditions and experience. The Company reviews and updates these estimates at the end of each reporting period and the impact of any adjustments are recognized in the period the adjustments are identified. In assessing whether collection of consideration from a customer is probable, the Company considers the customer's ability and intent to pay that amount of consideration when it is due. Payment of invoices is due as specified in the underlying customer agreement, typically 30 days from the invoice date, which occurs on the date of transfer of control of the products to the customer. Revenue is recognized at the point in time that control of the ordered products is transferred to the customer. Generally, this occurs when the product is delivered, or in some cases, picked up from one of the Company’s distribution centers by the customer. Revenue from extraction services is recognized when control is transferred upon completion of the extraction process.
Customer contract liabilities consist of customer deposits received in advance of fulfilling an order and are shown separately on the consolidated balance sheets. During the three months ended December 31, 2021 and 2020, the Company recognized $
Disaggregation of Revenue
The following table represents revenue disaggregated by major product line and extraction services for the:
| ($ in thousands) | Three Months Ended December 31, 2021 | Three Months Ended December 31, 2020 | ||||||
| Packaged sales | ||||||||
| Astaxanthin packaged | $ | $ | ||||||
| Spirulina packaged | ||||||||
| Total packaged sales | ||||||||
| Bulk sales | ||||||||
| Astaxanthin bulk | ||||||||
| Spirulina bulk | ||||||||
| Total bulk sales | ||||||||
| Contract extraction revenue | ||||||||
| Total net sales | $ | $ | ||||||
| ($ in thousands) | Nine Months Ended December 31, 2021 | Nine Months Ended December 31, 2020 | ||||||
| Packaged sales | ||||||||
| Astaxanthin packaged | $ | $ | ||||||
| Spirulina packaged | ||||||||
| Total packaged sales | ||||||||
| Bulk sales | ||||||||
| Astaxanthin bulk | ||||||||
| Spirulina bulk | ||||||||
| Total bulk sales | ||||||||
| Contract extraction revenue | ||||||||
| Total net sales | $ | $ | ||||||
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes, removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company adopted ASU 2019-12 as of April 1, 2021 with no impact on its consolidated financial statements and related disclosures.
In November 2018, the FASB issued ASU 2018-18 – Collaborative Arrangements (“ASU 2018-18”), which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue when the collaborative arrangement participant is a customer in the context of a unit of account and precludes recognizing as revenue consideration received from a collaborative arrangement participant if the participant is not a customer. This ASU requires retrospective adoption to the date the Company adopted ASC 606, April 1, 2018, by recognizing a cumulative-effect adjustment to the opening balance of retained earnings of the earliest annual period presented. The Company adopted ASU 2018-18 as of April 1, 2020 with no impact on its financial statements.
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU No. 2018-15”), which aligns the capitalization requirements for implementation costs incurred in a hosting arrangement that is a service contract with the existing capitalization requirements for implementation costs incurred to develop or obtain internal-use software (Subtopic 350-40). The Company adopted ASU No. 2018-15 as of April 1, 2020 with no impact on its financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement - Disclosure Framework (Topic 820)” (“ASU No. 2018-13”). The updated guidance improves the disclosure requirements on fair value measurements. The Company adopted this standard as of April 1, 2020, with no impact to its disclosures.
| 3. | INVENTORIES |
Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out method. Inventories consist of the following as of:
| December 31, 2021 | March 31, 2021 | |||||||
| (in thousands) | ||||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Supplies | ||||||||
| Inventories | $ | $ | ||||||
The Company recognizes abnormal production costs, including fixed cost variances from normal production capacity, fixed production overhead costs, idle facilities, freight handling costs and spoilage, as an expense in the period incurred, without adjusting overhead absorption rates. Normal production capacity is defined as the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The Company had
Beginning in fiscal 2021, cultivation of astaxanthin was completed in the first six months of the fiscal year during the most productive months of the year due to the best growing conditions, compared to year-round production in the prior fiscal years. The same approach is being followed in fiscal year 2022. The Company calculates total production costs for the year based on normal capacity of production expected to be achieved in a year under normal circumstances. These costs are then allocated into inventory based on the period of production, not including abnormal production costs. Allocating fixed and overhead costs requires management’s judgement to determine when production is outside of the normal range of expected variation in production.
Other non-inventoriable fixed costs of $
| 4. | EQUIPMENT AND LEASEHOLD IMPROVEMENTS |
Equipment and leasehold improvements consist of the following as of:
| December 31, 2021 | March 31, 2021 | |||||||
| (in thousands) | ||||||||
| Equipment | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Furniture and fixtures | ||||||||
| Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Construction-in-progress | ||||||||
| Equipment and leasehold improvements, net | $ | $ | ||||||
Management has determined
| 5. | SHORT-TERM CONTRACT OBLIGATION |
On November 30, 2018, the Company completed the purchase of a -acre production and research facility from Cellana LLC (“Cellana”) under a purchase agreement that was signed August 31, 2018. In accordance with the terms of the third amendment to the asset purchase agreement, the Company acquired the asset for $
The short-term obligation was comprised of two separate loans in the principal amount of $180,000 and $215,000. The first loan of $
The second loan had a principal amount of $
| 6. | LINE OF CREDIT AND LONG-TERM DEBT |
Total debt consists of the following as of:
| December 31, 2021 | March 31, 2021 | |||||||
| (in thousands) | ||||||||
| Line of credit | $ | $ | ||||||
| Long-term debt | ||||||||
| Debt - related party | ||||||||
| Less current maturities | ( | ) | ( | ) | ||||
| Long-term debt, excluding current maturities | ||||||||
| Less unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Total long-term debt, net of current maturities and unamortized debt issuance costs | $ | $ | ||||||
Line of Credit and Term Loans
On August 30, 2016, the Credit Agreement, which the Company entered into with the Bank on June 3, 2016, became effective after the Company and the Bank received the necessary approvals from the State of Hawaii to secure the lien on the Company’s leasehold property in Kona, Hawaii. The Credit Agreement allows the Company to borrow up to $
At December 31, 2021, there was
The Credit Agreement grants the Bank the following security interests in the Company’s property: (a) a lien on the Company’s leasehold interest in its Kona facility; (b) an assignment of the Company’s interest in leases and rents on its Kona facility; and (c) a security interest in all fixtures, furnishings and equipment related to or used by the Company at the Kona facility. Each security interest is further subject to the terms of the Credit Agreement.
In 2015, the Company executed a loan agreement with a lender providing for $
The provisions of the 2015 Loan require the payment of principal and interest until its maturity on September 1, 2022, the obligation fully amortizes over seven (
In 2012, the Company executed a loan agreement with a lender providing for $
The provisions of the 2012 Loan required the payment of interest only for the first
The 2015 Loan includes a one-time origination and guaranty fee totaling $
Loan Covenants
The Company’s Credit Agreement, 2015 Loan and 2012 Loan are subject to annual debt service and other financial covenants, including covenants which require the Company to meet key financial ratios and customary affirmative and negative covenants. As of March 31, 2021, the Company was in compliance with all required annual financial covenants. The next remeasurement date will be March 31, 2022.
Long-term Debt – PPP
In May 2020, the Company obtained a PPP loan in the amount of $
Debt – Related Party
In April 2019, the Company obtained a loan in the amount of $
Equipment Finance Agreement
In October 2017, the Company entered into an Equipment Finance Agreement (the “Equipment Agreement”) with a lender, which provides up to $
Future principal payments under the loans and finance lease obligations at December 31, 2021 are as follows:
| Payments Due | (in thousands) | |||
| Remainder of 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total principal payments | $ | |||
| 7. | OPERATING LEASES |
The Company leases facilities, equipment and land under non-cancelable operating leases expiring through 2037. One of its facility leases contains price escalations and a renewal option for five years. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Right-of-use assets and liabilities were recognized at April 1, 2019 based on the present value of lease payments over the lease term, using the Bank’s incremental borrowing rate based on the information available at recognition, and the Company has elected to exclude non-lease components. In the second quarter of fiscal 2021, the Company commenced a solar lease for one of its buildings which was added to the right-of-use assets and liabilities. At December 31, 2021, the weighted average remaining lease terms was
Supplemental balance sheet information related to leases consist of the following as of:
| Operating leases | Balance Sheet Classification | December 31, 2021 | March 31, 2021 | ||||||
| (in thousands) | |||||||||
| Right-of-use assets | Operating lease right-of-use assets | $ | $ | ||||||
| Accumulated lease amortization | Operating lease right-of-use assets | ( | ) | ( | ) | ||||
| Total right-of-use assets | $ | $ | |||||||
| Current lease liabilities | Operating lease obligations | $ | $ | ||||||
| Non-current lease liabilities | Long-term operating lease obligations | ||||||||
| Total lease liabilities | $ | $ | |||||||
Maturities of lease liabilities at December 31, 2021 are as follows:
| Payments | (in thousands) | |||
| Remainder of 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total undiscounted lease payments | ||||
| Less: present value discount | ( | ) | ||
| Total lease liability balance | $ | |||
| 8. | ACCRUED EXPENSES |
Accrued expenses consist of the following as of:
| December 31, 2021 | March 31, 2021 | |||||||
| (in thousands) | ||||||||
| Wages, commissions, bonus and profit sharing | $ | $ | ||||||
| Vacation | ||||||||
| Rent, interest and legal | ||||||||
| Other accrued expenses | ||||||||
| Total accrued expenses | $ | $ | ||||||
| 9. | COMMITMENTS AND CONTINGENCIES |
From time to time, the Company may be involved in litigation and investigations relating to claims and matters arising out of its operations in the normal course of business. There were no significant legal matters outstanding at December 31, 2021.
| 10. | SHARE-BASED COMPENSATION |
The Company has share-based compensation plans, which are more fully described in Note 10, Share-Based Compensation, to the Consolidated Financial Statements included in the Company’s annual report on Form 10-K for the fiscal year ended March 31, 2021 as filed with the SEC on June 22, 2021.
As of December 31, 2021, the Company had
At the 2021 Annual Meeting of Stockholders, the stockholders of the Company approved an amendment to the 2014 Directors Plan to increase the number of shares of common stock available for issuance under the plan by
The following table presents shares authorized, available for future grant and outstanding under each of the Company’s plans:
| As of December 31, 2021 | ||||||||||||
| Authorized | Available | Outstanding | ||||||||||
| 2016 Plan | ||||||||||||
| 2014 Directors Plan | ||||||||||||
| 2005 Plan | ||||||||||||
| 2004 Directors Plan | ||||||||||||
| Total | ||||||||||||
Stock Options
All stock option grants made under the equity-based compensation plans were issued at exercise prices no less than the Company’s closing stock price on the date of grant. Options under the 2016 Plan, 2005 Plan and 2014 Directors Plan were determined by the Board of Directors or the Compensation Committee of the Board of Directors in accordance with the provisions of the respective plans. The terms of each option grant include vesting, exercise, and other conditions set forth in a Stock Option Agreement evidencing each grant. No option can have a life in excess of (10) years. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The model requires various assumptions, including a risk-free interest rate, the expected term of the options, the expected stock price volatility over the expected term of the options, and the expected dividend yield. Compensation expense for employee stock options is recognized ratably over the vesting term. Compensation expense recognized for options issued under all Plans was $
A summary of option activity under the Company’s stock plans for the nine months ended December 31, 2021 is presented below:
| Option Activity | Shares | Weighted Price | Weighted Average years) | Aggregate | ||||||||||||
| Outstanding at March 31, 2021 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Forfeited | ( | ) | $ | |||||||||||||
| Expired | ( | ) | $ | |||||||||||||
| Outstanding at December 31, 2021 | $ | $ | ||||||||||||||
| Exercisable at December 31, 2021 | $ | $ | ||||||||||||||
The aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise price optionees would have received if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price of $
A summary of the Company’s non-vested options for the nine months ended December 31, 2021 is presented below:
| Nonvested Options | Shares | Weighted | ||||||
| Nonvested at March 31, 2021 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Nonvested at December 31, 2021 | $ | |||||||
The weighted average grant-date fair value of stock options granted during the nine months ended December 31, 2021 was $
Restricted Stock
Grants of fully vested restricted stock issued to Non-Employee Directors during the nine months ended December 31, 2021 and 2020 were
Restricted Stock Units (“RSUs”)
RSUs are service-based awards granted to eligible employees under the 2016 Plan. Compensation expense recognized for RSUs issued under the 2016 Plan was $
The following table summarizes information related to awarded RSUs for the nine months ended December 31, 2021:
| Nonvested Restricted Stock Units | Shares | Weighted | ||||||
| Nonvested restricted stock units at March 31, 2021 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Nonvested restricted stock units at December 31, 2021 | $ | |||||||
As of December 31, 2021, total unrecognized stock-based compensation expense related to unvested restricted stock units was $
| 11. | INCOME TAXES |
On December 22, 2017 H.R. 1, originally known as the Tax Cuts and Jobs Act, (the “Tax Act”) was enacted. Among the significant changes to the U.S. Internal Revenue Code, the Tax Act lowers the U.S. federal corporate income tax rate (“Federal Tax Rate”) from
The Company utilizes its estimated annual effective tax rate to determine its provision or benefit for income taxes for interim periods. The income tax provision or benefit is computed by multiplying the estimated annual effective tax rate by the year-to-date pre-tax book income (loss). The Company recorded an income tax expense of $
The Company is subject to taxation in the United States and seven state jurisdictions. The preparation of tax returns requires management to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. Management, in consultation with its tax advisors, files its tax returns based on interpretations that are believed to be reasonable under the circumstances. The income tax returns, however, are subject to routine reviews by the various taxing authorities. As part of these reviews, a taxing authority may disagree with respect to the tax positions taken by management (“uncertain tax positions”) and therefore may require the Company to pay additional taxes. Management evaluates the requirement for additional tax accruals, including interest and penalties, which the Company could incur as a result of the ultimate resolution of its uncertain tax positions. Management reviews and updates the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, completion of tax audits, expiration of statute of limitations, or upon occurrence of other events.
As of December 31, 2021 and 2020, there was
With few exceptions, the Company is no longer subject to U.S. federal, state, local, and non-U.S. income tax examination by tax authorities for tax years before 2017.
In response to the COVID-19 pandemic, the CARES Act was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Act. Corporate taxpayers may carryback net operating losses originating during 2018 through 2020 for up to five years, which was not previously allowed under the Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize net operating loss carryforwards to offset taxable income in 2018, 2019 and 2020. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the Tax Act.
In addition, the CARES Act increases the limitation applied to the deductibility of business interest from 30% of adjusted taxable income to 50% of adjusted taxable income for the 2019 and 2020 tax years, raises the corporate charitable deduction limit to 25% of taxable income, and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus depreciation. The enactment of the CARES Act did not result in any material adjustments to the Company’s income tax provision for the three and nine months ended December 31, 2021 or 2020.
On December 27, 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was enacted. The CAA includes the COVID related Tax Relief Act of 2020 (“COVID TRA”). Section 276 of the COVID TRA includes provisions that overturn IRS Notice 2020-32 and Rev. Rul. 2020-27, allowing full deductibility of expenses incurred to receive full forgiveness of its PPP loan. The Company received full forgiveness of its PPP loan during the third quarter of fiscal 2021. For income tax purposes, the forgiveness has been excluded from income and the applicable expenses incurred during the prior fiscal year have been deducted.
| 12. | EARNINGS PER SHARE |
Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the potentially dilutive effect of outstanding stock options using the treasury stock method.
Reconciliations between the numerator and the denominator of the basic and diluted income per share computations for the three and nine months ended December 31, 2021 and 2020 are as follows:
| Three Months Ended December 31, 2021 | ||||||||||||
| Net Income | Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
| (in thousands) | ||||||||||||
| Basic income per share | $ | $ | ||||||||||
| Effective dilutive securities – common stock options and restricted stock units | — | — | ||||||||||
| Diluted income per share | $ | $ | ||||||||||
| Three Months Ended December 31, 2020 | ||||||||||||
| Net Income | Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
| (in thousands) | ||||||||||||
| Basic income per share | $ | $ | ||||||||||
| Effective dilutive securities – common stock options and restricted stock units | — | — | ||||||||||
| Diluted income per share | $ | $ | ||||||||||
| Nine Months Ended December 31, 2021 | ||||||||||||
| Net Income | Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
| (in thousands) | ||||||||||||
| Basic income per share | $ | $ | ||||||||||
| Effective dilutive securities – common stock options and restricted stock units | — | — | ||||||||||
| Diluted income per share | $ | $ | ||||||||||
| Nine Months Ended December 31, 2020 | ||||||||||||
| Net Income | Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
| (in thousands) | ||||||||||||
| Basic income per share | $ | $ | ||||||||||
| Effective dilutive securities – common stock options and restricted stock units | — | — | ||||||||||
| Diluted income per share | $ | $ | ||||||||||
Restricted stock units become dilutive within the period granted and remain dilutive until the units vest and are issued as common stock.
| 13. | RELATED PARTY TRANSACTIONS |
In April 2019, the Company obtained an unsecured subordinated loan from Skywords Family Foundation, Inc. (“Skywords”) in the principal amount of $
On April 12, 2021, the Company entered into an Amended and Restated Promissory Note (the “Skywords Amended Note”) with Skywords. The Company and Skywords agreed to amend, restate, replace and otherwise modify without novation, the Skywords Note in order to covert $
On April 12, 2021, in connection with the grant of a security interest in the Collateral, the Company also entered into an Intercreditor and Subordination Agreement with the Bank and Skywords. The Company is indebted to the Bank pursuant to two Term Loans and a Credit Agreement, each of which granted the Bank a security interest in substantially all of the Company’s personal property assets. The Bank’s security interest in the Company’s personal property assets ranks senior to Skywords’ security interest in the Collateral, and the Intercreditor and Subordination Agreement generally governs the relationship between the Bank and Skywords as secured lenders to the Company and includes customary terms.
At December 31, 2021 and March 31, 2021, the Skywords Note principal balance was $
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview:
We are a world leader in the production of high value natural products derived from microalgae. Incorporated in 1983, we are guided by the principle of providing beneficial, quality microalgal products for health and human nutrition in a sustainable, reliable and environmentally sensitive operation. We are Good Manufacturing Practices (“GMP”) certified by the Merieux NutriSciences, reinforcing our commitment to quality in our products, quality in our relationships (with our customers, suppliers, employees and the communities we live in), and quality of the environment in which we work. Our products include:
| ● |
BioAstin® Hawaiian Astaxanthin® - a powerful dietary antioxidant shown to support and maintain the body’s natural inflammatory response, to enhance skin, and to support eye, joint and immune health. It has expanding applications as a human dietary supplement and dietary ingredient; and |
| ● |
Hawaiian Spirulina Pacifica® - a nutrient-rich dietary supplement used for extra energy, a strengthened immune system, cardiovascular benefits and as a source of antioxidant carotenoids |
Microalgae are a diverse group of microscopic plants that have a wide range of physiological and biochemical characteristics and contain, among other things, high levels of natural protein, amino acids, vitamins, pigments and enzymes. Microalgae have the following properties that make commercial production attractive: (1) microalgae grow much faster than land grown plants, often up to 100 times faster; (2) microalgae have uniform cell structures with no bark, stems, branches or leaves, permitting easier extraction of products and higher utilization of the microalgae cells; and (3) the cellular uniformity of microalgae makes it practical to control the growing environment in order to optimize a particular cell characteristic. Efficient and effective cultivation of microalgae requires consistent light, warm temperatures, low rainfall and proper chemical balance in a very nutrient-rich environment, free of environmental contaminants and unwanted organisms. This is a challenge that has motivated us to design, develop and implement proprietary production and harvesting technologies, systems and processes in order to commercially produce human dietary supplement products derived from microalgae.
Our production of these products at the 96-acre facility on the Kona Coast of the island of Hawaii provides several benefits. We selected the Keahole Point location in order to take advantage of relatively consistent warm temperatures, sunshine and low levels of rainfall needed for optimal cultivation of microalgae. This location also offers us access to cold deep ocean water, drawn from an offshore depth of 2,000 feet, which we use in our Ocean-Chill Drying system to eliminate the oxidative damage caused by standard drying techniques and as a source of trace nutrients for microalgal cultures. The area is also designated a Biosecure Zone, with tight control of organisms allowed into the area and free of genetically modified organisms (“GMO”). We believe that our technology, systems, processes and favorable growing location generally permit year-round harvest of our microalgal products in a cost-effective manner.
Results of Operations
The following tables present selected consolidated financial data for each of the periods indicated ($ in thousands):
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| December 31, |
December 31, |
|||||||||||||||
| 2021 |
2020 |
2021 |
2020 |
|||||||||||||
| Net sales |
$ | 9,459 | $ | 6,985 | $ | 27,842 | $ | 22,907 | ||||||||
| Net sales increase |
35.4 | % |
21.5 | % |
||||||||||||
| Gross profit |
$ | 3,238 | $ | 2,071 | $ | 10,672 | $ | 8,347 | ||||||||
| Gross profit as % of net sales |
34.2 | % |
29.6 | % |
38.3 | % |
36.4 | % |
||||||||
| Operating expenses |
$ | 2,730 | $ | 2,512 | $ | 8,462 | $ | 8,238 | ||||||||
| Operating expenses as % of net sales |
28.9 | % |
36.0 | % |
30.4 | % |
36.0 | % |
||||||||
| Operating income (loss) |
$ | 508 | $ | (441 | ) |
$ | 2,210 | $ | 109 | |||||||
| Operating income (loss) as % of net sales |
5.4 | % |
(6.3 | )% |
7.9 | % |
0.5 | % |
||||||||
| Income tax expense (benefit) |
$ | 6 | $ | (2 | ) |
$ | 21 | $ | 3 | |||||||
| Net income |
$ | 386 | $ | 827 | $ | 1,877 | $ | 1,121 | ||||||||
Comparison of the Three Months Ended December 31, 2021 and 2020
| Net Sales (in thousands) |
||||||||||||||||
| Three Months Ended |
||||||||||||||||
| December 31, |
$ | % |
||||||||||||||
| 2021 |
2020 |
Change |
Change |
|||||||||||||
| Packaged sales |
||||||||||||||||
| Astaxanthin |
$ | 3,563 | $ | 3,388 | $ | 175 | 5.2 | % |
||||||||
| Spirulina |
1,612 | 1,659 | (47 | ) |
(2.8 | )% |
||||||||||
| Total Packaged sales |
$ | 5,175 | $ | 5,047 | $ | 128 | 2.5 | % |
||||||||
| Bulk sales |
||||||||||||||||
| Astaxanthin |
$ | 1,128 | $ | 291 | $ | 837 | 287.6 | % |
||||||||
| Spirulina |
2,990 | 1,413 | 1,577 | 111.6 | % |
|||||||||||
| Total Bulk sales |
$ | 4,118 | $ | 1,704 | $ | 2,414 | 141.7 | % |
||||||||
| Contract extraction revenue |
$ | 166 | $ | 234 | $ | (68 | ) |
(29.1 | )% |
|||||||
| Total sales |
||||||||||||||||
| Astaxanthin |
$ | 4,691 | $ | 3,679 | $ | 1,012 | 27.5 | % |
||||||||
| Spirulina |
4,602 | 3,072 | 1,530 | 49.8 | % |
|||||||||||
| Contract extraction revenue |
166 | 234 | (68 | ) |
(29.1 | )% |
||||||||||
| Total sales |
$ | 9,459 | $ | 6,985 | $ | 2,474 | 35.4 | % |
||||||||
Net Sales The net sales increase of 35.4% for the current quarter compared to the same period last year was primarily driven by an increase in spirulina and astaxanthin bulk sales, offset by a decrease in spirulina packaged sales and contract extraction sales. The increase in both spirulina and astaxanthin bulk sales in the current quarter was primarily due to increased sales to a few of our major customers due to their high demand combined with higher production volumes of spirulina.
Gross Profit Gross profit as a percent of net sales increased by 4.6 percentage points compared to the same period last year, which was the result of lower costs of both spirulina and astaxanthin due to higher production volumes.
Operating Expenses Operating expenses increased by $0.2 million, or 8.7%, for the current year third quarter compared to the prior year same quarter, primarily due to bonus and profit sharing and Board of Directors annual stock grants in the current year third quarter, offset by lower advertising fees in the current year third quarter.
Income Taxes We recorded a state income tax expense of $6,000 for the third quarter of this fiscal year compared to an income tax benefit of $2,000 for the same period last year. We continue to carry a full valuation allowance on our net deferred tax assets.
Comparison of the Nine Months Ended December 31, 2021 and 2020
| Net Sales (in thousands) |
||||||||||||||||
| Nine Months Ended |
||||||||||||||||
| December 31, |
$ | % |
||||||||||||||
| 2021 |
2020 |
Change |
Change |
|||||||||||||
| Packaged sales |
||||||||||||||||
| Astaxanthin |
$ | 11,618 | $ | 10,767 | $ | 851 | 7.9 | % |
||||||||
| Spirulina |
6,150 | 5,626 | 524 | 9.3 | % |
|||||||||||
| Total Packaged sales |
$ | 17,768 | $ | 16,393 | $ | 1,375 | 8.4 | % |
||||||||
| Bulk sales |
||||||||||||||||
| Astaxanthin |
$ | 2,041 | $ | 1,173 | $ | 868 | 74.0 | % |
||||||||
| Spirulina |
7,558 | 4,628 | 2,930 | 63.3 | % |
|||||||||||
| Total Bulk sales |
$ | 9,599 | $ | 5,801 | $ | 3,798 | 65.5 | % |
||||||||
| Contract extraction revenue |
$ | 475 | $ | 713 | $ | (238 | ) |
(33.4 | )% |
|||||||
| Total sales |
||||||||||||||||
| Astaxanthin |
$ | 13,659 | $ | 11,940 | $ | 1,719 | 14.4 | % |
||||||||
| Spirulina |
13,708 | 10,254 | 3,454 | 33.7 | % |
|||||||||||
| Contract extraction revenue |
475 | 713 | (238 | ) |
(33.4 | )% |
||||||||||
| Total sales |
$ | 27,842 | $ | 22,907 | $ | 4,935 | 21.5 | % |
||||||||
Net Sales The net sales increase of 21.5% for the first nine months of fiscal 2022 compared to the same period last year was primarily driven by an increase in spirulina and astaxanthin bulk sales and packaged sales for both products, offset by a decrease in contract extraction sales. The increase in astaxanthin and spirulina packaged sales in the period was primarily due to an increase in sales to one of our major customers driven by consumer demand as COVID-19 restrictions have been relaxed, and as we transition from selling direct to a large customer to utilizing an integrated third-party logistics and marketing provider with a data science driven platform. The increase in bulk astaxanthin sales is primarily due to strong demand for a few significant customers. The increase in bulk sales of spirulina is due to high demand, with key customers in particular, combined with higher production volumes of spirulina.
Gross Profit Gross profit as a percent of net sales increased by 1.9 percentage points compared to the same period last year, which was the result of lower costs of both spirulina and astaxanthin due to higher production volumes.
Operating Expenses Operating expenses increased by $0.2 million, or 2.7%, for the first nine months of fiscal 2022 compared to the prior year same quarter, primarily due to bonus and profit sharing in the current year, offset by lower advertising expenses.
Income Taxes We recorded a state income tax expense of $21,000 for the third quarter of this fiscal year compared to an income tax expense of $3,000 for the same period last year. We continue to carry a full valuation allowance on our net deferred tax assets.
Liquidity and Capital Resources
As of December 31, 2021, we had cash of $2.3 million and working capital of $11.2 million compared to $3.8 million and $9.3 million, respectively, at March 31, 2021. We have a Credit Agreement with the Bank that allows us to borrow up to $2.0 million on a revolving basis. At December 31, 2021, we had no outstanding borrowings and at March 31, 2021, we had outstanding borrowings of $1.0 million, on the line of credit. The line of credit is subject to renewal on August 30, 2022, and we intend to renew or replace it with another line of credit on or before the expiration date.
As of December 31, 2021, we had $4.1 million in Term Loans payable to the Bank that require the payment of principal and interest monthly through August 2032. Pursuant to the Term Loans and the Credit Agreement, we are subject to annual financial covenants, customary affirmative and negative covenants and certain subjective acceleration clauses. As of March 31, 2021, we were in compliance with all required annual financial covenants under the Term Loans and the Credit Agreement.
In response to the COVID-19 pandemic and the uncertainty surrounding the pandemic, in May 2020, we obtained a PPP loan in the amount of $1.4 million under the CARES Act. The proceeds were used for certain payroll costs in accordance with the PPP and the PPP Flexibility Act. In December 2020, we received notice of forgiveness of the PPP loan in whole, including all accrued interest to date (see Note 6 in the notes to condensed consolidated financial statements). In April 2019, we obtained a loan in the amount of $1.5 million from a related party. The proceeds were used to pay down accounts payable and for general operating capital purposes. On April 12, 2021, we amended this loan (see Notes 6 and 13 in the notes to condensed consolidated financial statements).
Funds generated by operating activities and available cash are expected to continue to be our most significant sources of liquidity for working capital requirements, debt service and funding of maintenance levels of capital expenditures.
Based upon our operating plan and related cash flow and financial projections, cash flows expected to be generated by operating activities and available financing are expected to be sufficient to fund our operations through at least December 31, 2022, and our debt service coverage ratio and current ratio covenants are expected to be in compliance with the annual Term Loans and Credit Agreement covenant requirements as of March 31, 2022, the next measurement date. However, no assurances can be provided that we will achieve our operating plan and cash flow projections for the next fiscal years or our projected consolidated financial position as of March 31, 2022. Such estimates are subject to change based on future results and such change could cause future results to vary significantly from expected results.
Cash Flows The following table summarizes our cash flows for the periods indicated ($ in thousands):
| Nine Months Ended December 31, |
||||||||
| 2021 |
2020 |
|||||||
| Total cash provided by (used in): |
||||||||
| Operating activities |
$ | 1,344 | $ | 1,141 | ||||
| Investing activities |
(745 | ) |
(295 | ) |
||||
| Financing activities |
(2,068 | ) |
990 | |||||
| (Decrease) increase in cash |
$ | (1,469 | ) |
$ | 1,836 | |||
Cash used in operating activities for the nine months ended December 31, 2021 was the result of an increase of $2.2 million in accounts receivable balances, offset by $1.9 million net income and non-cash charges of $1.9 million.
Cash used in investing activities for the nine months ended December 31, 2021 primarily includes costs for acquiring equipment and leasehold improvements at our Kona facility.
Cash used in financing activities for the nine months ended December 31, 2021 consists primarily of principal payments of our related party loan of $0.5 million, payments on the line of credit of $1.0 million and debt service payments of $0.5 million.
Sources and Uses of Capital
As of December 31, 2021, our working capital was $11.2 million, an increase of $1.9 million compared to March 31, 2021. There was an increase in accounts receivable balances, primarily due to timing of shipments and increased sales, and an increase in inventories in the first half of fiscal 2022, as we continued cultivation of astaxanthin and higher inventories at our third-party processors. Cultivation improvements that we have made, allow us to produce all of the required demand for astaxanthin during the most favorable growing season. These increases were offset by the payments of $0.5 million on the related party loan, $1.0 million on the line of credit and $0.5 million of debt service.
Our results of operations and financial condition can be affected by numerous factors, many of which are beyond our control and could cause future results of operations to fluctuate materially as it has in the past. Future operating results may fluctuate as a result of changes in sales volumes to our largest customers, weather patterns, increased competition, increased materials, nutrient and energy costs, government regulations and other factors beyond our control.
A significant portion of our expense levels are relatively fixed, so the timing of increases in expenses is based in large part on 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 financial condition and results of operations.
Based upon our current operating plan, analysis of our consolidated financial position and projected future results of operations, we believe that our operating cash flows, cash balances and working capital will be sufficient to finance current operating requirements, debt service requirements, and routine planned capital expenditures, for the next twelve (12) months.
Outlook
This outlook section contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially.
Our strategic direction has been to position as a world leader in the production and marketing of high-value natural products from microalgae. We are vertically aligned, producing raw materials in the form of microalgae processed at our 96-acre facility in Hawaii, and integrating those raw materials into finished products. In fiscal 2022, our primary focus is stabilizing our production volume, rationalizing market channel participation, and leveraging our centers of core competence. We will continue to place emphasis on our Nutrex Hawaiian consumer products while exploring further opportunities for bulk sales orders for Spirulina and Astaxanthin, both domestically and internationally. Extraction services to third party customers utilizing our 1,000 bar super critical CO2 extractor process are expected to generate additional income throughout the year. We will leverage our experience and reputation for quality, nutritional products which promote health and well-being. The foundation of our nutritional products is naturally cultivated Hawaiian Spirulina Pacifica® in powder and tablet form; and BioAstin® Hawaiian Astaxanthin® antioxidant in extract and softgel form. Information about our Company and our products can be viewed at www.cyanotech.com and www.nutrex-hawaii.com. Consumer products can also be purchased online at www.nutrex-hawaii.com.
Gross profit margin percentages going forward can be impacted by lower production volumes along with pressure on input costs as well as greater competition in the market place. This could cause margins to decline in future periods. We will continue to focus on higher margin consumer products that promote health and well-being and strive for continuous improvements in processes and production methods to stabilize costs and production levels for the future. However, significant sales variability between periods may occur based on historical results.
Producing the highest quality microalgae is a complex biological process which requires balancing numerous factors including microalgal strain variation, temperature, acidity, nutrient and other environmental considerations, some of which are not within our control. An imbalance or unexpected event can occur resulting in production levels below normal capacity. The allocation of fixed production overheads (such as depreciation, rent and general insurance) to inventories is determined based on normal production capacity. When our production volumes are below normal capacity limits, certain fixed production overhead costs cannot be inventoried and are recorded immediately in cost of sales. In addition, when production costs exceed historical averages, we evaluate whether such costs are one-time-period charges or an ongoing component of inventory cost.
To manage our cash resources effectively, we will balance production with sales demand, minimizing the cost associated with inventory levels when appropriate and manage our expenses judiciously. We could experience unplanned cash outflows and may need to utilize other cash resources to meet working capital needs. A prolonged downturn in sales could impair our ability to generate sufficient cash for operations and hamper our ability to attract additional capital investment which could become necessary to maintain optimal production levels and efficiencies.
Our future results of operations and the other forward-looking statements contained in this Outlook, in particular the statements regarding revenues, gross margin and capital spending, involve a number of risks and uncertainties. In addition to the factors discussed above, any of the following could cause actual results to differ materially: business conditions and growth in the natural products industry and in the general economy; changes in customer order patterns; changes in demand for natural products in general; changes in weather conditions; changes in health and growing conditions of our astaxanthin and spirulina products; competitive factors, such as increased production capacity from competing spirulina and astaxanthin producers and the resulting impact, if any, on world market prices for these products; government actions and increased regulations both domestic and foreign; shortage of manufacturing capacity; and other factors beyond our control. Risk factors are discussed in detail in Part II, Item 1A of this quarterly report and in Part I, Item 1A of our Form 10-K report for the year ended March 31, 2021.
We believe that our technology, systems, processes and favorable growing location generally permit year-round harvest of our microalgal products in a cost-effective manner. However, previously experienced imbalances in the highly complex biological production systems, together with volatile energy costs and rapidly changing world markets, suggest a need for continuing caution with respect to variables beyond our reasonable control. Therefore, we cannot, and do not attempt to, provide any definitive assurance with regard to our technology, systems, processes, location, or cost-effectiveness.
Off-Balance Sheet Arrangements
As of December 31, 2021, we had no off-balance sheet arrangements or obligations.
Impact of Inflation
Inflationary factors such as increases in the costs of materials and labor directly affect our operations. Most of our leases provide for cost-of-living adjustments and require us to pay for insurance and maintenance expenses, all of which are subject to inflation. Additionally, our future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that we will be able to pass on increased costs to our customers.
Depreciation expense is based on the historical cost of fixed assets and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2021 filed with the SEC on June 22, 2021. In the nine months ended December 31, 2021, there were no changes to the application of critical accounting policies previously disclosed in our most recent Annual Report on Form 10-K.
| Controls and Procedures |
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer (“CEO”) and chief financial officer (“CFO”), we have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act as of the end of the period covered by this Report. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control - Integrated Framework” (2013 Framework). Based on our assessment, using those criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2021.
Changes to Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the nine months ended December 31, 2021 that has materially affected, or was reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, do not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errors and all fraud. A control system no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
The inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, or by collusion of two or more people. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
This Form 10-Q should be read in conjunction with Item 9A “Controls and Procedures” of the Company’s Form 10-K for the fiscal year ended March 31, 2021, filed June 22, 2021.
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| Legal Proceedings |
From time to time, the Company may be involved in litigation and investigations relating to claims and matters arising out of its operations in the normal course of business. There were no significant legal matters outstanding at December 31, 2021.
| Risk Factors |
For a discussion of the risk factors relating to our business, please refer to Part I, Item 1A of our Form 10-K for the year ended March 31, 2021, which is incorporated by reference herein.
| Unregistered Sales of Equity Securities and Use of Proceeds |
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| None. |
| Defaults upon Senior Securities |
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| None. |
| Other Information |
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| None. |
| Exhibits |
| 31.1* |
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| 31.2* |
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| 32* |
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| 99.1* |
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| 101 |
The following financial statements from Cyanotech Corporation’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements. |
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| 104 |
Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101) |
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| *Included herewith. Other exhibits were filed as shown above. |
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CYANOTECH CORPORATION |
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| (Registrant) |
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| February 10, 2022 |
By: |
/s/ Gerald R. Cysewski, PH.D. |
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| (Date) |
Gerald R. Cysewski, PH.D. |
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| Chief Executive Officer; Vice Chairman of the Board |
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| February 10, 2022 |
By: |
/s/ Felicia Ladin |
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| (Date) |
Felicia Ladin |
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| Chief Financial Officer, Vice President — Finance & Administration, and Treasurer |
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| (Principal Financial Officer) |
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EXHIBIT INDEX
| Exhibit Number |
Description |
|
| 31.1* |
Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 10, 2022. |
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| 31.2* |
Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 10, 2022. |
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| 32* |
Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of February 10, 2022. |
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| 99.1* |
Press Release dated February 10, 2022. |
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| 101 |
The following financial statements from Cyanotech Corporation’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements |
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| 104 |
Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101) |
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| *Included herewith. Other exhibits were filed as shown above. |