Company Quick10K Filing
Cyanotech
Price3.12 EPS-0
Shares6 P/E-17
MCap19 P/FCF-23
Net Debt6 EBIT-1
TEV25 TEV/EBIT-37
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-12-31 Filed 2021-02-11
10-Q 2020-09-30 Filed 2020-11-12
10-Q 2020-06-30 Filed 2020-08-11
10-K 2020-03-31 Filed 2020-06-23
10-Q 2019-12-31 Filed 2020-02-11
10-Q 2019-09-30 Filed 2019-11-12
10-Q 2019-06-30 Filed 2019-08-13
10-K 2019-03-31 Filed 2019-07-01
10-Q 2018-12-31 Filed 2019-02-13
10-Q 2018-09-30 Filed 2018-11-13
10-Q 2018-06-30 Filed 2018-08-13
10-K 2018-03-31 Filed 2018-06-15
10-Q 2017-12-31 Filed 2018-02-06
10-Q 2017-09-30 Filed 2017-11-06
10-Q 2017-06-30 Filed 2017-08-10
10-K 2017-03-31 Filed 2017-06-22
10-Q 2016-12-31 Filed 2017-02-07
10-Q 2016-09-30 Filed 2016-11-10
10-Q 2016-06-30 Filed 2016-08-15
10-K 2016-03-31 Filed 2016-06-23
10-Q 2015-12-31 Filed 2016-02-11
10-Q 2015-09-30 Filed 2015-11-12
10-Q 2015-06-30 Filed 2015-08-07
10-K 2015-03-31 Filed 2015-07-15
10-Q 2014-12-31 Filed 2015-02-12
10-Q 2014-09-30 Filed 2014-11-12
10-Q 2014-06-30 Filed 2014-08-14
10-K 2014-03-31 Filed 2014-06-27
10-Q 2013-12-31 Filed 2014-02-06
10-Q 2013-09-30 Filed 2013-11-07
10-Q 2013-06-30 Filed 2013-08-12
10-K 2013-03-31 Filed 2013-06-24
10-Q 2012-12-31 Filed 2013-02-07
10-Q 2012-09-30 Filed 2012-11-09
10-Q 2012-06-30 Filed 2012-08-10
10-K 2012-03-31 Filed 2012-06-21
10-Q 2011-12-31 Filed 2012-02-09
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-11
10-K 2011-03-31 Filed 2011-06-23
10-Q 2010-12-31 Filed 2011-02-11
10-Q 2010-09-30 Filed 2010-11-10
10-Q 2010-06-30 Filed 2010-08-12
10-K 2010-03-31 Filed 2010-06-24
10-Q 2009-12-31 Filed 2010-02-11
8-K 2020-09-25
8-K 2020-08-27
8-K 2020-05-05
8-K 2019-08-22
8-K 2019-06-03
8-K 2019-04-26
8-K 2019-04-12
8-K 2019-01-03
8-K 2018-11-30
8-K 2018-11-06
8-K 2018-08-31
8-K 2018-08-27
8-K 2018-04-13
8-K 2018-01-24

CYAN 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex_223547.htm
EX-31.2 ex_223548.htm
EX-32 ex_223549.htm
EX-99.1 ex_223550.htm

Cyanotech Earnings 2020-12-31

Balance SheetIncome StatementCash Flow
0.10.10.10.00.00.02012201420172020
Assets, Equity
0.10.10.0-0.0-0.1-0.12012201420172020
Rev, G Profit, Net Income
0.10.10.0-0.0-0.1-0.12012201420172020
Ops, Inv, Fin

10-Q 1 cyan20201231_10q.htm FORM 10-Q cyan20201231_10q.htm
 
 

Table of Contents



 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For Quarterly Period Ended December 31, 2020

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 0-14602

 

CYANOTECH CORPORATION

(Exact name of registrant as specified in its charter)

NEVADA

91-1206026

(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification Number)

 

73-4460 Queen Kaahumanu Hwy. #102, Kailua-Kona, HI 96740

(Address of principal executive offices)

 (808) 326-1353

(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

Common Stock, $0.02 par value per share

CYAN

NASDAQ

 

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. Yes ☒  No ☐

 

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).  Yes ☒  No ☐ 

 

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 ☐

Non-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 ☐  No ☒

 

As of February 5, 2021, the number of shares outstanding of the registrant’s common stock was 6,097,073.

 

 

 

 

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 23, 2020. 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

INDEX

 

PART I.  FINANCIAL INFORMATION

  

  

  

Item 1.

Financial Statements

4

  

Condensed Consolidated Balance Sheets as of December 31, 2020 and March 31, 2020 (unaudited)

4

  

Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2020 and 2019 (unaudited)

5

 

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended December 31, 2020 and 2019 (unaudited)

6

  

Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2020 and 2019 (unaudited)

7

  

Notes to Condensed Consolidated Financial Statements (unaudited)

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 4.

Controls and Procedures

26

  

  

  

PART II.  OTHER INFORMATION

  

  

  

Item 1.

Legal Proceedings

27

Item 1A

Risk Factors

27

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

27

Item 3.

Defaults upon Senior Securities

27

Item 5.

Other Information

27

Item 6.

Exhibits

28

 

 

 

SIGNATURES

29

 

 

 

PART I.  FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

 

CYANOTECH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

 

   

December 31,
20
20

   

March 31,
20
20

 

ASSETS

               

Current assets:

               

Cash

  $ 3,322     $ 2,417  

Accounts receivable, net of allowance for doubtful accounts of $31 at December 31, 2020 and $13 at March 31, 2020

    1,682       2,154  

Inventories, net

    9,589       9,653  

Prepaid expenses and other current assets

    430       504  

Total current assets

    15,023       14,728  
                 

Equipment and leasehold improvements, net

    12,363       13,042  

Operating lease right-of-use assets, net

    3,598       3,834  

Other assets

    129       183  

Total assets

  $ 31,113     $ 31,787  
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

               

Current liabilities:

               

Accounts payable

  $ 1,550     $ 2,137  

Accrued expenses

    701       849  

Customer deposits

    116       327  

Operating lease obligations, current portion

    338       319  

Short-term contract obligation

          38  

Line of credit

    1,750       2,000  

Current maturities of long-term debt

    2,204       689  

Total current liabilities

    6,659       6,359  
                 

Long-term debt, less current maturities

    3,998       6,009  

Long-term operating lease obligations

    3,265       3,519  

Other long-term liabilities

    34       54  

Total liabilities

    13,956       15,941  
                 

Commitments and contingencies

               
                 

Stockholders’ equity:

               

Preferred stock of $0.01 par value, authorized 10,000,000 shares; no shares issued and outstanding

           

Common stock of $0.02 par value, authorized 50,000,000 shares; issued and outstanding 6,097,073 shares at December 31, 2020 and 6,011,885 shares at March 31, 2020

    122       120  

Additional paid-in capital

    33,182       32,994  

Accumulated deficit

    (16,147

)

    (17,268

)

Total stockholders’ equity

    17,157       15,846  

Total liabilities and stockholders’ equity

  $ 31,113     $ 31,787  

 

See accompanying notes to condensed consolidated financial statements

 

 

 

CYANOTECH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

   

Three Months Ended
December 31,

   

Nine Months Ended
December 31,

 
   

2020

   

2019

   

2020

   

2019

 
                                 

Net sales

  $ 6,985     $ 7,504     $ 22,907     $ 23,265  

Cost of sales

    4,914       4,627       14,560       13,650  

Gross profit

    2,071       2,877       8,347       9,615  
                                 

Operating expenses:

                               

General and administrative

    1,001       958       3,801       4,146  

Sales and marketing

    1,300       1,406       3,918       4,157  

Research and development

    211       146       519       487  

Total operating expenses

    2,512       2,510       8,238       8,790  
                                 

(Loss) income from operations

    (441

)

    367       109       825  
                                 

Interest expense, net

    (123

)

    (164

)

    (374

)

    (530

)

Gain on extinguishment of debt

    1,389             1,389        
                                 

Income before income taxes

    825       203       1,124       295  
                                 

Income tax (benefit) expense

    (2

)

    32       3       29  
                                 

Net income

  $ 827     $ 171     $ 1,121     $ 266  
                                 

Net income per share:

                               

Basic

  $ 0.14     $ 0.03     $ 0.18     $ 0.04  

Diluted

  $ 0.13     $ 0.03     $ 0.18     $ 0.04  
                                 

Shares used in calculation of net income per share:

                               

Basic

    6,097       5,957       6,060       5,946  

Diluted

    6,222       5,962       6,169       5,949  

 

See accompanying notes to condensed consolidated financial statements

 

 

 

CYANOTECH CORPORATION

 CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 (Unaudited)

 

Three months ended December 31, 2020 and 2019

 

   

Common
Stock
Shares

   

Common
Stock

Amount

   

Additional
Paid-in
Capital

   

Accumulated
Deficit

   

Total
Stockholders’
Equity

 
   

(in thousands, except per share data)

 

Balances at September 30, 2020

    6,097,073     $ 122     $ 33,164     $ (16,974

)

  $ 16,312  

Share-based compensation expense

                18             18  

Net income

                      827       827  

Balances at December 31, 2020

    6,097,073     $ 122     $ 33,182     $ (16,147

)

  $ 17,157  
                                         

Balances at September 30, 2019

    5,913,421     $ 118     $ 32,786     $ (17,560

)

  $ 15,344  

Issuance of common stock in connection with severance of former executive

    12,296                          

Share-based compensation expense

                31             31  

Net income

                      171       171  

Balances at December 31, 2019

    5,925,717     $ 118     $ 32,817     $ (17,389

)

  $ 15,546  

 

Nine months ended December 31, 2020 and 2019

 

   

Common
Stock
Shares

   

Common
Stock

Amount

   

Additional
Paid-in
Capital

   

Accumulated
Deficit

   

Total
Stockholders’
Equity

 
   

(in thousands, except per share data)

 

Balances at March 31, 2020

    6,011,885     $ 120     $ 32,994     $ (17,268

)

  $ 15,846  

Issuances of common stock for Director Stock Grants

    66,385       1       157             158  

Issuance of common stock in connection with severance of former executive

    11,400                          

Shares withheld from former executive for tax payments

    (3,635

)

                       

Issuance of vested shares of restricted stock

    17,469       1       (7

)

          (6 )

Shares withheld for tax payments

    (6,431

)

                       

Share-based compensation expense

                38             38  

Net income

                      1,121       1,121  

Balances at December 31, 2020

    6,097,073     $ 122     $ 33,182     $ (16,147

)

  $ 17,157  
                                         

Balances at March 31, 2019

    5,879,710     $ 117     $ 32,447     $ (17,655

)

  $ 14,909  

Issuance of common stock for exercise of stock options for cash

    2,112             4             4  

Issuance of common stock in connection with severance of former executive

    29,078             320             320  

Issuance of vested shares of restricted stock

    22,502       1       (26

)

          (25

)

Shares withheld for tax payments

    (7,685

)

                       

Share-based compensation expense

                72             72  

Net income

                      266       266  

Balances at December 31, 2019

    5,925,717     $ 118     $ 32,817     $ (17,389

)

  $ 15,546  

 

 See accompanying notes to condensed consolidated financial statements

 

 

 

CYANOTECH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

   

Nine Months Ended
December 31,

 
   

2020

   

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net income

  $ 1,121     $ 266  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Depreciation and amortization

    1,340       1,458  

Gain from extinguishment of debt – PPP loan

    (1,389

)

     

Amortization of debt issue costs and other assets

    73       51  

Amortization of operating leases right-of-use assets

    236       219  

Share-based compensation expense

    196       392  

Provision for doubtful accounts

    31        

Net (increase) decrease in assets:

               

Accounts receivable

    441       401  

Inventories

    64       68  

Prepaid expenses and other assets

    78       93  

Net increase (decrease) in liabilities:

               

Accounts payable

    (665

)

    (2,222

)

Accrued expenses

    (140

)

    (91

)

Customer deposits

    (211

)

    (217

)

Operating lease obligations

    (236

)

    (214

)

Deferred rent and other liabilities

    (20

)

     

Net cash provided by operating activities

    919       204  

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Investment in equipment and leasehold improvements

    (583

)

    (180

)

Net cash used in investing activities

    (583

)

    (180

)

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Payments on short-term contract obligation

    (38

)

    (247

)

Principal payments on the line of credit

    (250

)

     

Proceeds from long-term debt – related party

          1,500  

Proceeds from long-term debt – PPP loan

    1,381        

Principal payments on long-term debt

    (498

)

    (443

)

Payments on finance leases

    (20

)

    (44

)

Taxes paid related to net share settlement of restricted stock units

    (6

)

    (25

)

Proceeds from exercise of stock options

          4  

Net cash provided by financing activities

    569       745  

Net increase in cash

    905       769  

Cash at beginning of period

    2,417       840  

Cash at end of period

  $ 3,322     $ 1,609  
                 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

               

Cash paid during the period for:

               

Interest

  $ 344     $ 499  

Income taxes

  $ 14     $  

 

See accompanying notes to condensed consolidated financial statements 

 

 

CYANOTECH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020

(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, 2020 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, 2020, contained in the Company’s annual report on Form 10-K as filed with the SEC on June 23, 2020. 

 

Liquidity and Capital Resources

 

As of December 31, 2020, the Company had cash of $3,322,000 and working capital of $8,364,000 compared to $2,417,000 and $8,369,000, respectively, at March 31, 2020. The Company has a Revolving Credit Agreement (“Credit Agreement”) with First Foundation Bank (“Bank”) that allows the Company to borrow up to $2,000,000 on a revolving basis. At December 31, 2020 and March 31, 2020, the Company had outstanding borrowings of $1,750,000 and $2,000,000, respectively, on the line of credit.  The line of credit is subject to renewal on August 30, 2021 and the Company intends to renew or replace it with another line of credit on or before the expiration date.

 

As of December 31, 2020, the Company had $4,777,000 in long-term debt (“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, the Company is subject to annual financial covenants, customary affirmative and negative covenants and certain subjective acceleration clauses. As of March 31, 2019, the Company’s debt service coverage ratio of -0.66:1 fell short of the Bank's annual requirement of 1.25:1. Additionally, on March 31, 2019, the Company’s current ratio of 1.49:1 fell short of the Bank’s annual requirement of 1.50:1.  On June 17, 2019, the Bank provided the Company with a letter waiving the covenant violations as of March 31, 2019, but noting that the Bank reserved its rights to declare a default in the future if any covenants remain out of compliance at applicable measurement dates. As of March 31, 2020, the Company was in compliance with all required annual financial covenants under the Term Loans and the Credit Agreement.

 

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 $1,381,000, under the Coronavirus Aid, Relief, and Economics Security Act (“CARES Act”). The proceeds were used for certain payroll costs in accordance with the PPP and the PPP Flexibility Act of 2020 (“PPP Flexibility Act”). On December 10, 2020, the Company received notice of forgiveness of the PPP loan in whole, including all accrued interest to date. (see Note 6). In April 2019, the Company obtained an unsecured subordinated loan in the amount of $1,500,000 from a related party (see Notes 6 and 13). The proceeds were used to pay down accounts payable and for general operating capital purposes.

 

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. In fiscal year 2020, the Company began a strategic cost savings initiative that included the elimination of positions through attrition and the elimination of open positions to create a leaner organization, and the Company is continuing the cost savings initiative in fiscal year 2021.

 

 

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, 2021, and its 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, 2021, 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, 2021. 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 primarily 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, 2020 and 2019, two customers individually accounted for 18% and 19%, and 35% and 17%, respectively, of the Company’s net sales. For the nine months ended December 31, 2020 and 2019, two customers individually accounted for 17% each and 36% and 17%, respectively, of the Company’s net sales. Two customers accounted for 76% and 80%, respectively, of the Company’s accounts receivable balance at December 31, 2020 and March 31, 2020, respectively.

 

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, 2020 and 2019, the Company recognized $0 and $33,000, respectively, of revenue from deposits that were included in contract liabilities as of March 31, 2020 and 2019, respectively. During the nine months ended December 31, 2020 and 2019, the Company recognized $251,000 and $550,000, respectively, of revenue from deposits that were included in contract liabilities as of March 31, 2020 and 2019, respectively. The Company’s contracts have a duration of one year or less and therefore, the Company has elected the practical expedient of not disclosing revenues allocated to partially unsatisfied performance obligations.

 

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,
20
20

   

Three Months

Ended

December 31,
201
9

 

Packaged sales

               

Astaxanthin packaged

  $ 3,388     $ 4,513  

Spirulina packaged

    1,659       1,878  

Total packaged sales

    5,047       6,391  
                 

Bulk sales

               

Astaxanthin bulk

    291       377  

Spirulina bulk

    1,413       613  

Total bulk sales

    1,704       990  
                 

Contract extraction revenue

    234       123  

Total net sales

  $ 6,985     $ 7,504  

  

($ in thousands)

 

Nine Months

Ended

December 31,
2020

   

Nine Months

Ended

December 31,
2019

 

Packaged sales

               

Astaxanthin packaged

  $ 10,767     $ 13,870  

Spirulina packaged

    5,626       5,523  

Total packaged sales

    16,393       19,393  
                 

Bulk sales

               

Astaxanthin bulk

    1,173       879  

Spirulina bulk

    4,628       2,590  

Total bulk sales

    5,801       3,469  
                 

Contract extraction revenue

    713       403  

Total net sales

  $ 22,907     $ 23,265  

 

Recently Adopted Accounting Pronouncements

 

Effective April 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842): Accounting for Leases and issued subsequent amendments to the initial guidance and implementation guidance including ASU No. 2018-01, 2018-10, 2018-11, 2018-20 and 2019-01 (collectively including ASU No. 2016-02, “ASC 842”). ASC 842 requires that lessees recognize right-of-use assets and lease liabilities that are measured at the present value of the future lease payments at lease commencement date. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee will largely remain unchanged and shall continue to depend on its classification as a finance or operating lease. The Company elected the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and did not restate prior periods. Under the new guidance, the majority of the Company’s leases continue to be classified as operating. Based on the Company’s lease portfolio, the impact of adopting ASC 842 increased both total assets and total liabilities, however, it did not have a significant impact on the Company’s consolidated statements of operations or cash flows. Finance leases continue to be classified with long-term debt on the Consolidated Balance Sheets and are described in Note 6. See Note 8 for operating leases.

 

 

In June 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-07, “Compensation - Stock Compensation (Topic 718)” (“ASU No. 2018-07”): Improvements to Nonemployee Share-Based Payment Accounting. ASU No. 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees, and as a result, the accounting for share-based payments to non-employees will be substantially aligned. ASU No. 2018-07 is effective for the Company in the first quarter of fiscal year 2020.  The Company adopted ASU No. 2018-07 as of April 1, 2019 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. 

 

Recently Issued 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 is currently evaluating the impact this standard may have on its consolidated financial statements and related 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,

2020

   

March 31,

2020

 
   

(in thousands)

 

Raw materials

  $ 690     $ 397  

Work in process

    3,792       4,172  

Finished goods

    4,894       4,945  

Supplies

    213       139  

Inventories, net

  $ 9,589     $ 9,653  

 

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.

 

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 year. 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 $79,000 and $158,000 were expensed to cost of sales for the three months ended December 31, 2020 and 2019, respectively. Non-inventoriable fixed costs of $124,000 and $258,000 were expensed to cost of sales for the nine months ended December 31, 2020 and 2019, respectively.

 

 

4.

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

 

Equipment and leasehold improvements consist of the following as of:

 

   

December 31,

2020

   

March 31,

2020

 
   

(in thousands)

 

Equipment

  $ 19,104     $ 18,841  

Leasehold improvements

    14,755       14,736  

Furniture and fixtures

    373       369  
      34,232       33,946  

Less accumulated depreciation and amortization

    (22,519

)

    (21,179

)

Construction-in-progress

    650       275  

Equipment and leasehold improvements, net

  $ 12,363     $ 13,042  

 

Management has determined no asset impairment existed as of December 31, 2020 and March 31, 2020, respectively. Depreciation and amortization expense were approximately $423,000 and $487,000 for the three months ended December 31, 2020 and 2019, respectively. Depreciation and amortization expense were approximately $1,340,000 and $1,458,000 for the nine months ended December 31, 2020 and 2019, respectively.

 

 

5.

SHORT-TERM CONTRACT OBLIGATION

 

On November 30, 2018, the Company completed the purchase of a six-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 $495,000 with a cash down payment of $100,000 leaving a short-term obligation of $395,000 on the asset purchase.

 

The short-term obligation was comprised of two separate loans in the principal amount of $180,000 and $215,000. The first loan of $180,000 bore an interest rate of 6.25% and was payable in four monthly installments of principal and interest. The loan commenced on December 1, 2018 and matured on July 15, 2019. There were no principal amounts outstanding at December 31, 2020 or March 31, 2020.

 

The second loan had a principal amount of $215,000 and was a non-interest bearing loan that was payable in twelve monthly installments. The loan commenced on December 1, 2018 and matured on October 15, 2019. This contract contained a hold back of $38,000 pending resolution of certain closing items by the seller, which have been resolved. The principal amounts outstanding at December 31, 2020 and March 31, 2020 were $0 and $38,000, respectively.

 

 

6.

LINE OF CREDIT AND LONG-TERM DEBT

 

Total debt consists of the following as of:

 

   

December 31,

2020

   

March 31,

2020

 
   

(in thousands)

 

Line of credit

  $ 1,750     $ 2,000  

Long-term debt

    4,849       5,367  

Debt - related party

    1,500       1,500  

Long-term debt – PPP loan

           

Less current maturities

    (3,954

)

    (2,689

)

Long-term debt, excluding current maturities

    4,145       6,178  

Less unamortized debt issuance costs

    (147

)

    (169

)

Total long-term debt, net of current maturities and unamortized debt issuance costs

  $ 3,998     $ 6,009  

  

 

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 $2,000,000 on a revolving basis. Borrowings under the Credit Agreement bear interest at the Wall Street Journal prime rate (3.25% and 4.75% at December 31, 2020 and March 31, 2020, respectively) plus 2%, floating. At no time shall the annual interest rate be less than 5.25%.

 

At December 31, 2020 and March 31, 2020, the outstanding balance under the Credit Agreement was $1,750,000 and $2,000,000, respectively, and was included in current liabilities on the Condensed Consolidated Balance Sheets. The line of credit, which is subject to annual renewal, was renewed on August 30, 2020 and will be subject to renewal upon expiration on August 30, 2021.

 

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 $2,500,000 in aggregate credit facilities (the “2015 Loan”) secured by substantially all the Company’s assets, pursuant to a Term Loan Agreement dated July 30, 2015 (the “2015 Loan Agreement”). The 2015 Loan is evidenced by a promissory note in the amount of $2,500,000, the repayment of which is partially guaranteed under the provisions of the United States Department of Agriculture (“USDA”) Rural Development Guarantee program. The proceeds of the 2015 Loan were used to pay off a $500,000 short term note payable that matured on September 18, 2015, and to acquire new processing equipment and leasehold improvements at the Company’s Kona, Hawaii facility.

 

 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 (7) years. Interest on the 2015 Loan accrues on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate (3.25% and 4.75% at December 31, 2020 and March 31, 2020, respectively) plus 2.0% and is adjustable on the first day of each calendar quarter and fixed for that quarter. At no time shall the annual interest rate be less than 6.0%. The 2015 Loan has a prepayment penalty of 5.0% for any prepayment made prior to the first anniversary of the date of the 2015 Loan Agreement, which penalty is reduced by 1.0% each year thereafter until the fifth anniversary of such date, after which there is no prepayment penalty. The balance under the 2015 Loan was $735,000 and $1,027,000 at December 31, 2020 and March 31, 2020, respectively, and was included in long-term debt in the debt table above.

 

In 2012, the Company executed a loan agreement with a lender providing for $5,500,000 in aggregate credit facilities (the “2012 Loan”) secured by substantially all the Company’s assets, including a mortgage on the Company's interest in its lease at the National Energy Laboratory of Hawaii Authority, pursuant to a Term Loan Agreement dated August 14, 2012 (the “2012 Loan Agreement”). The 2012 Loan is evidenced by promissory notes in the amounts of $2,250,000 and $3,250,000, the repayment of which is partially guaranteed under the provisions of a USDA Rural Development Guarantee. The proceeds of the 2012 Loan were used to acquire processing equipment and leasehold improvements at its Kona, Hawaii facility.

 

The provisions of the 2012 Loan required the payment of interest only for the first 12 months of the term; thereafter, and until its maturity on August 14, 2032, the obligation fully amortizes over nineteen (19) years. Interest on the 2012 Loan accrues on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate (3.25% and 4.75% at December 31, 2020 and March 31, 2020, respectively) plus 1.0% and is adjustable on the first day of each calendar quarter and fixed for that quarter. At no time shall the annual interest rate be less than 5.5%. The balance under the 2012 Loan was $4,042,000 and $4,222,000 at December 31, 2020 and March 31, 2020, respectively, and was included in long-term debt in the debt table above.

  

The 2015 Loan includes a one-time origination and guaranty fee totaling $113,900 and an annual renewal fee payable in the amount of 0.5% of the USDA guaranteed portion of the outstanding principal balance as of December 31 of each year, beginning December 31, 2015. The USDA has guaranteed 80% of all amounts owing under the 2015 Loan. The 2012 Loan included a one-time origination and guaranty fees totaling $214,500 and an annual renewal fee payable in the amount of 0.25% of the USDA guaranteed portion of the outstanding principal balance as of December 31 of each year, beginning December 31, 2012. The USDA has guaranteed 80% of all amounts owing under the 2012 Loan. The balance in unamortized debt issuance costs was $147,000 and $169,000 at December 31, 2020 and March 31, 2020, respectively.

 

 

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, 2020, the Company was in compliance with all required annual financial covenants. The next remeasurement date will be March 31, 2021.

 

Long-term Debt – PPP

 

In May 2020, the Company obtained a PPP loan in the amount of $1,381,000, which matures on May 5, 2022. The note bears interest at a rate of 1% per annum, payable monthly commencing on November 5, 2020, following an initial six-month deferral period as specified under the PPP.  In October 2020, the initial deferment period for the commencement of interest payments was amended by the PPP Flexibility Act, to end at the earliest in April 2021 and at the latest in August 2021. The Company has used the proceeds of the PPP loan for certain payroll costs in accordance with the PPP. Under the terms of the PPP and the PPP Flexibility Act, up to the entire amount of principal and accrued interest may be forgiven to the extent the proceeds are used for qualifying expenses as determined by the guidance of the U.S. Small Business Administration under these programs. On December 10, 2020, the Company received notice of forgiveness of the PPP loan in whole, including all accrued interest to date. For the three and nine months ended December 31, 2020, $1,389,000 was included in gain on extinguishment of debt on the Condensed Consolidated Statements of Operations. The forgiveness included principal of $1,381,000 and accrued interest of $8,000.

 

Debt – Related Party

 

In April 2019, the Company obtained an unsecured subordinated loan in the amount of $1,500,000, which bears interest at the Wall Street Journal prime rate, plus 1%, or 4.25% and 5.5% at December 31, 2020 and March 30, 2020, respectively, and is payable quarterly.  The principal amount and any accrued and unpaid interest are due in April 2021 (see Note 13).  The balance under this loan was $1,500,000 at December 31, 2020 and March 31, 2020 and was included in current maturities of long-term debt and long-term debt, respectively, in the debt table above.

 

Equipment Finance Agreement

 

In October 2017, the Company entered into an Equipment Finance Agreement (the “Equipment Agreement”) with a lender, which provides up to $175,000 of financing for equipment. The interest rate on this loan is 4.75%. The provisions of the Equipment Agreement require the payment of principal and interest until its maturity on October 31, 2022. The balance under this loan was $68,000 and $94,000 at December 31, 2020 and March 31, 2020, respectively, and was included in long-term debt in the debt table above.

 

 Finance Lease Obligations

 

In February 2016, the Company executed a finance lease agreement with Bank of the West providing for $51,000 in equipment, secured by the equipment financed. The finance lease matures in March 2021 and is payable in 60 equal monthly payments. The interest rate under this finance lease is 4.18%. The balance under this lease was $4,000 and $11,000 at December 31, 2020 and March 31, 2020, respectively, and was included in current maturities of long-term debt in the debt table above.

 

In July 2015, the Company executed a finance lease agreement with Huntington Technology Finance providing for $174,000 in equipment, secured by the equipment financed. The finance lease matured in July 2020 and was payable in 60 equal monthly payments. The interest rate under this lease is 6.57%. The balance under this lease was $0 and $13,000 at December 31, 2020 and March 31, 2020, respectively, and was included in current maturities of long-term debt in the debt table above.

 

Future principal payments under the loans and finance lease obligations at December 31, 2020 are as follows:

 

Payments Due

 

(in thousands)

 

Remainder of 2021

  $ 176  

2022

    2,213  

2023

    477  

2024

    289  

2025

    306  

Thereafter

    2,888  

Total principal payments

  $ 6,349  

 

 

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. At December 31, 2020, the weighted average remaining lease terms is 13.6 years, the weighted average discount rate is 7.5% and for both the nine months ended December 31, 2020 and 2019, the operating lease costs are $445,000.

 

 

Supplemental balance sheet information related to leases consist of the following as of:

 

Operating leases

 

Balance Sheet Classification

 

December 31,

2020

   

March 31,

2020

 
       

(in thousands)

 

Right-of-use assets

 

Operating lease right-of-use assets

  $ 4,128     $ 4,128  

Accumulated lease amortization

 

Operating lease right-of-use assets

    (530 )     (294 )
                     

Total right-of-use assets

  $ 3,598     $ 3,834  
                     

Current lease liabilities

 

Operating lease obligations

  $ 338     $ 319  

Non-current lease liabilities

 

Long-term operating lease obligations

    3,265       3,519  
                     

Total lease liabilities

  $ 3,603     $ 3,838  

 

Maturities of lease liabilities at December 31, 2020 are as follows:

 

Payments

 

(in thousands)

 

Remainder of 2021

  $ 148  

2022

    593  

2023

    371  

2024

    371  

2025

    348  

Thereafter

    3,883  

Total undiscounted lease payments

    5,714  

Less: present value discount

    (2,111

)

Total lease liability balance

  $ 3,603  

 

 

8.

ACCRUED EXPENSES

 

Accrued expenses consist of the following as of:

 

   

December 31,

2020

   

March 31,

2020

 
   

(in thousands)

 

Wages, commissions, bonus and profit sharing

  $ 90     $ 295  

Vacation

    383       301  

Rent, interest and legal

    97       76  

Other accrued expenses

    131       177  

Total accrued expenses

  $ 701     $ 849  

 

 

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, 2020.

 

 

 

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, 2020 as filed with the SEC on June 23, 2020.

 

As of December 31, 2020, the Company had two equity-based compensation plans: the 2016 Equity Incentive Plan (the “2016 Plan”) and the 2014 Independent Director Stock Option and Restricted Stock Grant Plan (the “2014 Directors Plan”). The Company has also issued stock options, which remain outstanding as of December 31, 2020, under two equity-based compensation plans which have expired according to their terms: the 2005 Stock Option Plan (the “2005 Plan”) and the 2004 Independent Director Stock Option and Stock Grant Plan (the “2004 Directors Plan”). These plans allowed the Company to award stock options and shares of restricted common stock to eligible employees, certain outside consultants and independent directors. No additional awards will be issued under the 2005 Plan or the 2004 Directors Plan. 

 

The following table presents shares authorized, available for future grant and outstanding under each of the Company’s plans:

 

   

As of December 31, 2020

 
   

Authorized

   

Available

   

Outstanding

 
                         

2016 Plan

    1,300,000       1,078,358       163,688  

2014 Directors Plan

    350,000       43,133       12,000  

2005 Plan

                235,300  

2004 Directors Plan

                12,000  

Total

    1,650,000       1,121,491       422,988  

 

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 ten (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 $10,000 and $5,000 for the three months ended December 31, 2020 and 2019, respectively. Compensation expense recognized for options issued under all Plans was $19,000 and $123,000 for the nine months ended December 31, 2020 and 2019, respectively. In the first nine months of fiscal year 2020, compensation expense included $109,000 related to a settlement agreement with a former executive.

 

A summary of option activity under the Company’s stock plans for the six months ended December 31, 2020 is presented below: 

 

Option Activity

 

Shares

   

Weighted
Average
Exercise

Price

   

Weighted

Average
Remaining
Contractual
Term (in

years)

   

Aggregate
Intrinsic
Value

 

Outstanding at March 31, 2020

    318,300     $ 4.08       3.0     $  

Granted

    130,000     $ 2.35                  

Exercised

        $                  

Forfeited

    (54,000

)

  $ 3.16                  

Outstanding at December 31, 2020

    394,300     $ 2.21       4.0     $ 94,600  

Exercisable at December 31, 2020

    269,300     $ 2.69       1.4     $ 7,850  

 

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 $3.04 and $2.06 at December 31, 2020 and March 31, 2020, respectively.

 

 

A summary of the Company’s non-vested options for the nine months ended December 31, 2020 is presented below:

 

Nonvested Options

 

Shares

   

Weighted
Average
Grant-Date
Fair Value

 

Nonvested at March 31, 2020

    37,500     $ 1.52  

Granted

    130,000       1.20  

Vested

    (5,000

)

    1.27  

Forfeited

    (37,500

)

    1.52  

Nonvested at December 31, 2020

    125,000     $ 1.19  

 

The weighted average grant-date fair value of stock options granted during the nine months ended December 31, 2020 was $6,000. As of December 31, 2020, total unrecognized stock-based compensation expense related to all unvested stock options was $132,000, which is expected to be expensed over a weighted average period of 3.3 years.

 

Restricted Stock

 

Grants of fully vested restricted stock issued during the first nine months of fiscal year 2021 to Non-Employee Directors was 66,385 shares. Compensation expense recognized for these grants issued under the 2014 Directors Plan was $158,000.

 

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 $8,000 and $26,000 for the three months ended December 31, 2020 and 2019, respectively. Compensation expense recognized for RSUs issued under the 2016 Plan was $20,000 and $64,000 for the nine months ended December 31, 2020 and 2019, respectively. In the first nine months of fiscal year 2020, compensation expense included $6,000 related to a settlement agreement with a former executive.

 

The following table summarizes information related to awarded RSUs for the nine months ended December 31, 2020:

 

Nonvested Restricted Stock Units

 

Shares

   

Weighted
Average
Grant Price

 

Nonvested restricted stock units at March 31, 2020

    12,766     $ 3.98  

Granted

    28,647       2.15  

Vested

    (9,135

)

    3.97  

Forfeited

    (3,590

)

    2.23  

Nonvested restricted stock units at December 31, 2020

    28,688     $ 2.38  

 

As of December 31, 2020, total unrecognized stock-based compensation expense related to unvested restricted stock units was $51,000, which is expected to be expensed over a weighted average period of 2.2 years.

 

Common Stock 

 

In the first nine months of fiscal year 2020, the Company recorded $205,000 in compensation expense related to a settlement agreement with a former executive.

 

 

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 34% to 21% effective January 1, 2018. The 21% Federal Tax Rate applies to fiscal years ending March 31, 2019 and each year thereafter.

 

 

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 benefit of $2,000 and income tax expense of $32,000 for the three months ended December 31, 2020 and 2019, respectively. The Company recorded an income tax expense of $3,000 and $29,000 for the nine months ended December 31, 2020 and 2019, respectively. The Company’s effective tax rate was 0.2% and 15.8% for the three months ended December 31, 2020 and 2019, respectively. The Company’s effective tax rate was 0.3% and 9.8% for the nine months ended December 31, 2020 and 2019, respectively. The effective tax rates for all periods differ from the statutory rate of 21% as a result of state taxes (net of federal benefit) and the net change in valuation allowance against the net deferred tax asset the Company believes is not more likely than not to be realized.  The Company continues to carry a full valuation allowance on its net deferred tax assets.

 

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.

 

At December 31, 2020 and 2019, there was no liability for income tax associated with unrecognized tax benefits. The Company recognizes accrued interest related to unrecognized tax benefits as well as any related penalties in interest income or expense in its Consolidated Condensed Statements of Operations, which is consistent with the recognition of these items in prior reporting periods.

  

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 2016.

 

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, 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 during the third quarter of fiscal 2021. For income tax purposes, the forgiveness of the loan and accrued interest has been excluded from income and the applicable expenses incurred during the 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, 2020 and 2019 are as follows:

 

   

Three Months Ended December 31, 2020

 
   

Net Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
   

(in thousands)

         

Basic income per share

  $ 827       6,097     $ 0.14  

Effective dilutive securities – common stock options and restricted stock units

          125        

Diluted income per share

  $ 827       6,222     $ 0.13  

 

   

Three Months Ended December 31, 2019

 
   

Net Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
   

(in thousands)

         

Basic income per share

  $ 171       5,957     $ 0.03  

Effective dilutive securities – restricted stock units

          5        

Diluted income per share

  $ 171       5,962     $ 0.03  

 

   

Nine Months Ended December 31, 2020

 
   

Net Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
   

(in thousands)

         

Basic income per share

  $ 1,121       6,060     $ 0.18  

Effective dilutive securities – common stock options and restricted stock units

          109        

Diluted income per share

  $ 1,121       6,169     $ 0.18  

 

   

Nine Months Ended December 31, 2019

 
   

Net Income

   

Shares

   

Per Share

 
   

(Numerator)

   

(Denominator)

   

Amount

 
   

(in thousands)

         

Basic income per share

  $ 266       5,946     $ 0.04  

Effective dilutive securities – common stock options  and restricted stock units

          3        

Diluted income per share

  $ 266       5,949     $ 0.04  

 

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 

 

During the nine months ended December 31, 2019, the Company obtained an unsecured subordinated loan from Skywords Family Foundation, Inc. (“Skywords”) in the principal amount of $1,500,000 pursuant to a Promissory Note (“the Skywords Note”) executed by the Company in favor of Skywords. Skywords is controlled by the Company’s Chairman of the Board of Directors and largest stockholder. The Skywords Note bears interest at a rate of 1% plus the prime rate (as published by the Wall Street Journal), which will be recalculated and payable on a quarterly basis. The principal amount and any accrued and unpaid interest will be due and payable on April 12, 2021, unless accelerated in an event of default. The Company may prepay the Skywords Note at any time without penalty. The proceeds of the Skywords Note were used to pay down accounts payable and for general operating capital purposes. At both December 31, 2020 and March 31, 2020, the Skywords Note principal balance was $1,500,000. The loan balance at December 31, 2020 was included in current maturities of long-term debt and at March 31, 2020 was included in long-term debt on the Condensed Consolidated Balance Sheets.

 

 

 

Item 2.

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 and joint health. It has expanding applications as a human nutraceutical and functional food 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 nutritional 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,

 
   

2020

   

2019

   

2020

   

2019

 

Net sales

  $ 6,985     $ 7,504     $ 22,907     $ 23,265  

Net sales decrease

    (6.9

)%

            (1.5

)%

       

Gross profit

  $ 2,071     $ 2,877     $ 8,347     $ 9,615  

Gross profit as % of net sales

    29.6

%

    38.3

%

    36.4

%

    41.3

%

Operating expenses

  $ 2,512     $ 2,510     $ 8,238     $ 8,790  

Operating expenses as % of net sales

    36.0

%

    33.4

%

    36.0

%

    37.8

%

Operating (loss) income

  $ (441

)

  $ 367     $ 109     $ 825  

Operating (loss) income as % of net sales

    (6.3

)%

    4.9

%

    0.5

%

    3.5

%

Income tax (benefit) expense

  $ (2

)

  $ 32     $ 3     $ 29  

Net income

  $ 827     $ 171     $ 1,121     $ 266  

 

 

Comparison of the Three Months Ended December 31, 2020 and 2019

 

Net Sales (in thousands)

 

   

Three Months Ended

                 
   

December 31,

    $    

%

 
   

2020

   

2019

   

Change

   

Change

 

Packaged sales

                               

Astaxanthin

  $ 3,388     $ 4,513     $ (1,125

)

    (24.9

)%

Spirulina

    1,659       1,878       (219

)

    (11.7

)%

Total Packaged sales

  $ 5,047     $ 6,391     $ (1,344

)

    (21.0

)%

                                 

Bulk sales

                               

Astaxanthin

  $ 291     $ 377     $ (86

)

    (22.8

)%

Spirulina

    1,413       613       800       130.5

%

Total Bulk sales

  $ 1,704     $ 990     $ 714       72.1

%

                                 

Contract extraction revenue

  $ 234     $ 123     $ 111       90.2

%

                                 

Total sales

                               

Astaxanthin

  $ 3,679     $ 4,890     $ (1,211

)

    (24.8

)%

Spirulina

    3,072       2,491       581       23.3

%

Contract extraction revenue

    234       123       111       90.2

%

Total sales

  $ 6,985     $ 7,504     $ (519

)

    (6.9

)%

 

Net Sales The net sales decrease of 6.9% for the current quarter compared to the same period last year was primarily driven by a decrease in astaxanthin and spirulina packaged sales, offset by a 130.5% increase in spirulina bulk sales and contract extraction sales. The decrease in astaxanthin packaged sales in the current quarter was due to a combination of the timing of product received by one of our major customers and reductions in certain of their retail locations.  The decrease in spirulina packaged sales was primarily due to a change in customers' ordering patterns.  The increase in spirulina bulk sales in the current year quarter was due to strong demand from our existing customers.

 

Gross Profit Gross profit as a percent of net sales decreased by 8.7 percentage points compared to the same period last year, which was primarily the result of sales product mix, with bulk sales at lower gross profit margins. The decline was also related to the sales impact of higher cost astaxanthin inventory from the prior year and current year higher spirulina costs per kilo driven by lower production in the current quarter.

 

Operating Expenses Although operating expenses remained relatively constant at $2.5 million for the third quarter comparison, there were higher research and development expenses, primarily due to increased labor costs, offset by lower marketing spending in the current year quarter as promotional activities have been impacted by COVID-19 restrictions.

 

 Income Taxes We recorded an income tax benefit of $2,000 for the third quarter of this fiscal year with an effective tax rate of 0.2% compared to an income tax expense of $32,000 for the same period last year with an effective tax rate of 15.8%. The decrease in effective tax rate is primarily due to the permanent income tax exclusion of the PPP loan forgiveness.  We continue to carry a full valuation allowance on our net deferred tax assets.

 

 

Comparison of the Nine Months Ended December 31, 2020 and 2019

 

Net Sales (in thousands)

 

   

Nine Months Ended

                 
   

December 31,

    $    

%

 
   

2020

   

2019

   

Change

   

Change

 

Packaged sales

                               

Astaxanthin

  $ 10,767     $ 13,870     $ (3,103

)

    (22.4

)%

Spirulina

    5,626       5,523       103       1.9

%

Total Packaged sales

  $ 16,393     $ 19,393     $ (3,000

)

    (15.5

)%

                                 

Bulk sales

                               

Astaxanthin

  $ 1,173     $ 879     $ 294       33.4

%

Spirulina

    4,628       2,590       2,038       78.7

%

Total Bulk sales

  $ 5,801     $ 3,469     $ 2,332       67.2

%

                                 

Contract extraction revenue

  $ 713     $ 403     $ 310       76.9

%

                                 

Total sales

                               

Astaxanthin

  $ 11,940     $ 14,749     $ (2,809

)

    (19.0

)%

Spirulina

    10,254       8,113       2,141       26.4

%

Contract extraction revenue

    713       403       310       76.9

%

Total sales

  $ 22,907     $ 23,265     $ (358

)

    (1.5

)%

 

Net Sales The net sales decrease of 1.5% for the first nine months of fiscal 2021 compared to the same period last year was primarily driven by a decrease in packaged sales of astaxanthin of 22.4%, offset by a 26.4% increase in spirulina for both packaged and bulk sales, a 33.4% increase in bulk astaxanthin sales and an increase in contract extraction sales of $0.3 million. The decrease in astaxanthin packaged sales was primarily due to lower demand for one of our major customers related to decreased promotional spending, the timing of product received and reductions in certain of their retail locations, as well as lower consumer demand related to restrictions surrounding the COVID-19 pandemic in fiscal 2021, such as store restrictions, limitations of store demonstrations and loss of tourism in Hawaii. The increases in bulk spirulina and contract services were primarily due to strong demand from existing customers.

  

Gross Profit Gross profit as a percent of net sales decreased by 4.9 percentage points compared to the same period last year, which was primarily the result of sales product mix, with bulk sales at lower gross profit margins and the sales impact of higher cost inventory in the third quarter.

 

Operating Expenses Operating expenses decreased by $0.6 million for the first nine months of fiscal 2021 compared to the same period last year, primarily due to lower general and administrative expenses of $0.3 million and sales and marketing costs of $0.2 million. The decrease in general and administrative expenses was primarily due to lower legal and audit expenses of $0.2 million and the prior year period’s inclusion of expenses related to the severance of a former executive of $0.5 million, offset by increases in corporate insurance of $0.2 million and the Board of Directors’ annual stock grants of $0.2 million, which were granted in the second quarter, whereas the Board of Directors’ annual stock grants in the prior year were granted in the fourth quarter. Sales and marketing expenses were lower as a result of COVID-19 restrictions on promotional activities.

 

 Income Taxes We recorded an income tax expense of $3,000 for the first nine months of the fiscal year with an effective tax rate of 0.3% compared to an income tax expense of $29,000 for the same period last year with an effective tax rate of 9.8%.  The decrease in effective tax rate is primarily due to the permanent income tax exclusion of the PPP loan forgiveness. We continue to carry a full valuation allowance on our net deferred tax assets.

 

Liquidity and Capital Resources

 

As of December 31, 2020, we had cash of $3.3 million and working capital of $8.4 million compared to $2.4 million and $8.4 million, respectively, at March 31, 2020.  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, 2020 and March 31, 2020, we had outstanding borrowings of $1.8 million and $2.0 million, respectively, on the line of credit. The line of credit is subject to renewal on August 30, 2021 and we intend to renew or replace it with another line of credit on or before the expiration date.

 

 

As of December 31, 2020, we had $4.8 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, 2019, our debt service coverage ratio of -0.66:1 fell short of the Bank's annual requirement of 1.25:1. Additionally, on March 31, 2019, our current ratio of 1.49:1 fell short of the Bank’s annual requirement of 1.50:1.  On June 17, 2019, the Bank provided us with a letter waiving the covenant violations as of March 31, 2019, but noting that the Bank reserved its rights to declare a default in the future if any covenants remain out of compliance at applicable measurement dates. As of March 31, 2020, 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. On December 10, 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 an unsecured subordinated loan in the amount of $1.5 million from a related party (see Notes 6 and 13 in the notes to condensed consolidated financial statements).  The proceeds were used to pay down accounts payable and for general operating capital purposes.

 

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. In fiscal year 2020, we began a strategic cost savings initiative that included the elimination of positions through attrition and the elimination of open positions to create a leaner organization, and we are continuing the cost savings initiative in fiscal year 2021. 

 

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, 2021, 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, 2021, 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, 2021. 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,

 
   

2020

   

2019

 

Total cash provided by (used in):

               

Operating activities

  $ 919     $ (579

)

Investing activities

    (583

)

    (86

)

Financing activities

    569       919  
                 

Increase in cash

  $ 905     $ 254  

 

Cash provided by operating activities for the nine months ended December 31, 2020 was the result of $1.1 million net income, non-cash charges of $0.5 million and lower accounts receivable balances, offset by a decrease in accounts payable and accrued expenses.

 

Cash used in investing activities for the nine months ended December 31, 2020 primarily includes costs for acquiring equipment and leasehold improvements at our Kona facility.

 

Cash provided by financing activities for the nine months ended December 31, 2020 consists primarily of a $1.4 million increase for the new PPP loan obtained during the first quarter, offset by payments of short-term contract obligations, the line of credit and long-term debt.

 

Sources and Uses of Capital

 

At December 31, 2020, our working capital was $8.4 million, the same as at March 31, 2020. There were increases in cash related to the PPP loan, offset by the reclassification of the related party loan from long-term debt to short-term debt, and by payments of debt, including the line of credit. There was an increase in astaxanthin inventories in the first half of the year, offset by a decrease in the third quarter of fiscal year 2021 as we stopped cultivation of astaxanthin in early October 2020. Cultivation improvements that we have made allow us to produce all of the required demand for astaxanthin during the most favorable growing season.

  

 

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 2021, our primary focus is stabilizing our production volume, rationalizing market channel participation, executing on our strategic cost cutting programs, 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, 2020.

  

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, 2020, 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, 2020 filed with the SEC on June 23, 2020. In the nine months ended December 31, 2020, there were no changes to the application of critical accounting policies previously disclosed in our most recent Annual Report on Form 10-K.

 

Item 4.

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, 2020. 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, 2020. 

 

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, 2020 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, 2020, filed June 23, 2020.

 

 

PART II.     OTHER INFORMATION

 

Item 1.

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.

 

On October 2, 2019, a shareholder of the Company, Meridian OHC Partners, LP (“Meridian”), filed a complaint in the United States District Court, District of Hawaii, against the Board of Directors seeking to proceed derivatively on behalf of the Company. The Company is named as a nominal defendant. The complaint alleges, among other things, that the directors have breached their fiduciary duties, in overseeing the Company. Meridian seeks declaratory and injunctive relief and an award of damages to the Company. The case is Meridian v. Davis et al. (Cyanotech), No. 19-cv-0536 (D. Hawaii). The Company and the defendants filed motions to dismiss, and the court granted those motions and dismissed the complaint with prejudice on July 15, 2020.

 

Item 1A.

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, 2020, which is incorporated by reference herein.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.

Defaults upon Senior Securities

 

None.

 

Item 5.

Other Information

 

None.

 

 

Item 6.

Exhibits

 

 

31.1*

Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 11, 2021.

 

 

 

 

31.2*

Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 11, 2021.

 

 

 

 

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 11, 2021.

 

  

  

 

99.1*

Press Release dated February 11, 2021.

 

 

 

 

101

The following financial statements from Cyanotech Corporation’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2020, formatted in 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.

   

 

   

*Included herewith. Other exhibits were filed as shown above.

 

 

SIGNATURES

 

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

  

  

(Registrant)

  

  

  

  

  

  

February 11, 2021

  

By:

/s/ Gerald R. Cysewski, PH.D.

(Date)

  

  

Gerald R. Cysewski, PH.D.

  

  

  

Chief Executive Officer; Vice Chairman of the Board

  

  

  

  

  

  

  

  

February 11, 2021

  

By:

/s/ Felicia Ladin

(Date)

  

  

Felicia Ladin

  

  

  

Chief Financial Officer, Vice President — Finance &

Administration, and Treasurer

  

  

  

(Principal Financial Officer)

 

 

 

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 11, 2021.

  

  

  

31.2*

  

Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 11, 2021.

  

  

  

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 11, 2021.

  

  

  

99.1*

  

Press Release dated February 11, 2021.

  

  

  

101

  

The following financial statements from Cyanotech Corporation’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2020, formatted in 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

     
   

*Included herewith. Other exhibits were filed as shown above.

 

30