CYANOTECH CORP - Quarter Report: 2005 December (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended December 31, 2005
Commission File Number 0-14602
CYANOTECH CORPORATION
(Exact name of registrant as specified in its charter)
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NEVADA |
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91-1206026 |
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(State or other jurisdiction |
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(IRS Employer |
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of incorporation or organization) |
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Identification Number) |
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73-4460 Queen Kaahumanu Hwy. #102, Kailua-Kona, HI 96740 |
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(Address of principal executive offices) |
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(808) 326-1353 |
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(Registrant’s telephone number) |
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Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer ý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes o No ý
Number of common shares outstanding as of February 8, 2006:
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Title of Class |
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Shares Outstanding |
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Common stock - $0.005 par value |
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20,913,765 |
CYANOTECH CORPORATION
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
CYANOTECH CORPORATION
(Dollars in thousands)
(Unaudited)
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December 31, |
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March 31, |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
1,951 |
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$ |
2,005 |
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Short-term investments |
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1,000 |
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1,000 |
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Accounts receivable, net |
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1,445 |
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2,069 |
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Refundable income taxes |
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27 |
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97 |
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Inventories (see Note 3) |
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2,011 |
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1,565 |
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Prepaid expenses |
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131 |
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85 |
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Total current assets |
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6,565 |
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6,821 |
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Equipment and leasehold improvements, net (see Note 4) |
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10,358 |
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11,174 |
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Other assets |
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538 |
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547 |
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Total assets |
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$ |
17,461 |
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$ |
18,542 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Current maturities of long-term debt |
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$ |
354 |
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$ |
355 |
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Accounts payable |
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448 |
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977 |
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Accrued expenses |
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567 |
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387 |
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Total current liabilities |
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1,369 |
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1,719 |
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Long-term debt, excluding current maturities |
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1,485 |
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1,743 |
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Total liabilities |
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2,854 |
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3,462 |
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Stockholders’ equity: |
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Common Stock of $0.005 par value; shares authorized 30,000,000; 20,913,765 shares issued and outstanding at December 31, 2005, and 20,896,265 at March 31, 2005 |
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104 |
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104 |
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Additional paid-in capital |
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27,312 |
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27,298 |
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Accumulated other comprehensive income - foreign currency translation adjustments |
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2 |
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27 |
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Accumulated deficit |
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(12,811 |
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(12,349 |
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Total stockholders’ equity |
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14,607 |
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15,080 |
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Total liabilities and stockholders’ equity |
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$ |
17,461 |
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$ |
18,542 |
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See accompanying Notes to Consolidated Financial Statements.
3
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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2005 |
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2004 |
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2005 |
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2004 |
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NET SALES |
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$ |
2,333 |
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$ |
3,180 |
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7,879 |
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$ |
8,885 |
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COST OF PRODUCT SALES |
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1,712 |
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2,017 |
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5,652 |
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5,781 |
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Gross profit |
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621 |
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1,163 |
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2,227 |
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3,104 |
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OPERATING EXPENSES: |
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Research and development |
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45 |
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38 |
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144 |
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165 |
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Sales and marketing |
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351 |
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301 |
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988 |
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892 |
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General and administrative |
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461 |
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506 |
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1,421 |
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1,395 |
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Total operating expenses |
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857 |
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845 |
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2,553 |
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2,452 |
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Income (loss) from operations |
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(236 |
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318 |
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(326 |
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652 |
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OTHER INCOME (EXPENSE): |
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Interest income |
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13 |
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8 |
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36 |
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25 |
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Interest expense |
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(46 |
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(43 |
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(136 |
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(122 |
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Other income (expense), net |
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(2 |
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37 |
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(10 |
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26 |
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Total other income (expense), net |
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(35 |
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2 |
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(110 |
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(71 |
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Income (loss) before income taxes |
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(271 |
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320 |
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(436 |
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581 |
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INCOME TAX EXPENSE (BENEFIT) |
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23 |
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(6 |
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26 |
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21 |
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NET INCOME (LOSS) |
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$ |
(294 |
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$ |
326 |
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$ |
(462 |
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$ |
560 |
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NET INCOME (LOSS) PER SHARE |
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Basic |
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$ |
(0.01 |
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$ |
0.02 |
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$ |
(0.02 |
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$ |
0.03 |
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Diluted |
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$ |
(0.01 |
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$ |
0.02 |
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$ |
(0.02 |
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$ |
0.03 |
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SHARES USED IN CALCULATION OF NET INCOME (LOSS) PER SHARE: |
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Basic |
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20,906 |
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20,771 |
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20,900 |
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20,753 |
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Diluted |
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20,906 |
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20,988 |
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20,900 |
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20,981 |
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COMPREHENSIVE INCOME (LOSS): |
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Net income (loss) |
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$ |
(294 |
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$ |
326 |
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$ |
(462 |
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$ |
560 |
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Other comprehensive income (loss) |
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(17 |
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20 |
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(25 |
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10 |
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$ |
(311 |
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$ |
346 |
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$ |
(487 |
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$ |
570 |
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See accompanying Notes to Consolidated Financial Statements.
4
CYANOTECH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
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Nine Months Ended |
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2005 |
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2004 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) |
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$ |
(462 |
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$ |
560 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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1,024 |
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995 |
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Issuance of stock in exchange for services |
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14 |
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15 |
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Issuance of stock options in exchange for services |
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— |
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7 |
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Amortization of debt issue costs and other assets |
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23 |
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23 |
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Allowance for doubtful accounts |
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(5 |
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30 |
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Net (increase) decrease in: |
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Accounts receivable |
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629 |
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(233 |
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Refundable income taxes |
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70 |
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(3 |
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Inventories |
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(446 |
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(377 |
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Prepaid expenses and other assets |
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(90 |
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(46 |
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Net increase (decrease) in: |
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Accounts payable |
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(529 |
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(256 |
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Accrued expenses |
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180 |
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53 |
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Net cash provided by operating activities |
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408 |
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768 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Investment in equipment and leasehold improvements |
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(203 |
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(544 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from exercise of stock options |
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— |
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28 |
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Proceeds from exercise of warrants |
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— |
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54 |
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Principal payments on long-term debt |
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(259 |
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(255 |
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Net cash provided by (used in) financing activities |
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(259 |
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(173 |
) |
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Net increase (decrease) in cash and cash equivalents |
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(54 |
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51 |
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Cash and cash equivalents at beginning of period |
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2,005 |
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2,531 |
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Cash and cash equivalents at end of period |
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$ |
1,951 |
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$ |
2,582 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Cash paid during the period for: |
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Interest |
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$ |
101 |
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$ |
98 |
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Income taxes |
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$ |
4 |
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$ |
188 |
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See accompanying Notes to Consolidated Financial Statements.
5
CYANOTECH CORPORATION
FORM 10-Q
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2005
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying
unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q
and Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. These consolidated financial statements and
notes should be read in conjunction with the Company’s consolidated financial
statements contained in the Company’s previously filed report on Form
10-K for the year ended March 31, 2005.
The Company consolidates enterprises in which it has a controlling financial interest. The accompanying consolidated financial statements include the accounts of Cyanotech Corporation and its wholly-owned subsidiaries, Nutrex Hawaii, Inc. and Cyanotech Japan YK. All significant intercompany balances and transactions have been eliminated in consolidation. While the financial information furnished for the three and nine month periods ended December 31, 2005 is unaudited, the statements in this report reflect all material items which, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods covered and of the financial condition of the Company at the dates of the consolidated balance sheets. The operating results for the interim period presented are not necessarily indicative of the results that may be expected for the year ending March 31, 2006.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of any contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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 significantly from those estimates.
2. STOCK-BASED COMPENSATION
As allowed by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, the Company has elected to continue to apply the intrinsic value-based method of accounting for employee based stock options and adopted only the disclosure requirements of SFAS No.123. The following table illustrates the effect on net income and net income per common share if the Company had applied the fair-value method under SFAS No. 123 to its employee stock option plans:
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Three Months Ended |
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Nine Months Ended |
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2005 |
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2004 |
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2005 |
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2004 |
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Net income (loss), as reported |
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$ |
(294 |
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$ |
326 |
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$ |
(462 |
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$ |
560 |
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Deduct stock-based employee compensation |
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Expense determined under fair-value method for all awards |
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(5 |
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(25 |
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(44 |
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(67 |
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Pro-forma net income (loss) |
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$ |
(299 |
) |
$ |
301 |
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$ |
(506 |
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$ |
493 |
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Basic net income (loss) per common share: |
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As reported |
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$ |
(0.01 |
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$ |
0.02 |
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$ |
(0.02 |
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$ |
0.03 |
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Pro-forma |
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$ |
(0.01 |
) |
$ |
0.01 |
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$ |
(0.02 |
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$ |
0.02 |
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Diluted net income (loss) per common share: |
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As reported |
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$ |
(0.01 |
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$ |
0.02 |
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$ |
(0.02 |
) |
$ |
0.03 |
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Pro-forma |
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$ |
(0.01 |
) |
$ |
0.01 |
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$ |
(0.02 |
) |
$ |
0.02 |
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6
3. INVENTORIES
Inventories are stated at the lower of cost (which approximates first-in, first-out) or market and consist of the following (dollars in thousands):
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December 31, 2005 |
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March 31, 2005 |
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Raw materials |
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$ |
218 |
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$ |
246 |
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Work in process |
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296 |
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243 |
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Finished goods |
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1,377 |
|
957 |
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Supplies |
|
120 |
|
119 |
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$ |
2,011 |
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$ |
1,565 |
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4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives for equipment and furniture and fixtures, or the shorter of the land lease term or estimated useful lives for leasehold improvements as follows:
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Equipment |
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3 to 10 years |
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Furniture and fixtures |
|
7 years |
|
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Leasehold improvements |
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10 to 20 years |
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Equipment and leasehold improvements consist of the following (dollars in thousands):
|
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|
December 31, 2005 |
|
March 31, 2005 |
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Equipment |
|
$ |
10,440 |
|
10,241 |
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Leasehold improvements |
|
14,613 |
|
14,603 |
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Furniture and fixtures |
|
86 |
|
86 |
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|
25,139 |
|
24,930 |
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Less accumulated depreciation and amortization |
|
(15,025 |
) |
(14,006 |
) |
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Construction in-progress |
|
244 |
|
250 |
|
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|
Equipment and leasehold improvements, net |
|
$ |
10,358 |
|
$ |
11,174 |
|
5. 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 and warrants using the “treasury stock” method and convertible securities using the “if-converted” method.
Reconciliations between the numerator and the denominator of the basic and diluted earnings per share computations for the three months ended December 31, 2005 and 2004 are as follows (in thousands, except per share amounts):
7
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|
Three Months Ended December 31, 2005 |
|
Three Months Ended December 31, 2004 |
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Net Income, |
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Net Income, |
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|
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(Loss) |
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Shares |
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Per Share |
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(Loss) |
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Shares |
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Per Share |
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(Numerator) |
|
(Denominator) |
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Amount |
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(Numerator) |
|
(Denominator) |
|
Amount |
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Basic earnings (loss) per share |
|
$ |
(294 |
) |
20,906 |
|
$ |
(0.01 |
) |
$ |
326 |
|
20,771 |
|
$ |
0.02 |
|
|
Effect of dilutive securities – Common stock options and warrants |
|
— |
|
— |
|
|
|
— |
|
217 |
|
|
|
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Dilutive earnings per share |
|
$ |
(294 |
) |
20,906 |
|
$ |
(0.01 |
) |
$ |
326 |
|
20,988 |
|
$ |
0.02 |
|
Reconciliations between the numerator and the denominator of the basic and diluted earnings per share computations for the nine months ended December 31, 2005 and 2004 are as follows (in thousands, except per share amounts):
|
|
|
Nine Months Ended December 31, 2005 |
|
Nine Months Ended December 31, 2004 |
|
||||||||||||
|
|
|
Net Income, |
|
|
|
|
|
Net Income, |
|
|
|
|
|
||||
|
|
|
(Loss) |
|
Shares |
|
Per Share |
|
(Loss) |
|
Shares |
|
Per Share |
|
||||
|
|
|
(Numerator) |
|
(Denominator) |
|
Amount |
|
(Numerator) |
|
(Denominator) |
|
Amount |
|
||||
|
Basic earnings (loss) per share |
|
$ |
(462 |
) |
20,900 |
|
$ |
(0.02 |
) |
$ |
560 |
|
20,753 |
|
$ |
0.03 |
|
|
Effect of dilutive securities – Common stock options and warrants |
|
— |
|
— |
|
|
|
— |
|
228 |
|
|
|
||||
|
Dilutive earnings per share |
|
$ |
(462 |
) |
20,900 |
|
$ |
(0.02 |
) |
$ |
560 |
|
20,981 |
|
$ |
0.03 |
|
The following securities were excluded from the calculation of diluted earnings per share because their effect was antidilutive (in thousands):
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||
|
|
|
2005 |
|
2004 |
|
2005 |
|
2004 |
|
|
Stock options and warrants |
|
512 |
|
172 |
|
512 |
|
172 |
|
Since dilutive securities reduce loss per share amounts, they are disregarded when net losses are reported. In this context, the disregarded securities are described as being “anti-dilutive”.
6. NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (Revised 2004) “Share-Based Payment” which is a revision of FASB Statement No. 123 “Accounting for Stock-Based Compensation.” SFAS No. 123 (Revised 2004) (Statement No. 123R) requires an entity to measure the cost of employee services received in exchange for an award. If an award vests or becomes exercisable based on the achievement of a condition other than service, performance or market condition, the award is liability-classified. Liability-classified awards are remeasured to fair value at each balance sheet date until the award is settled. Equity –classified awards, including grants of employee stock options, are measured at the grant-date fair value of the award and are not subsequently remeasured. The cost of equity-classified awards is recognized in the income statement over the period during which an employee is required to provide the service in exchange for the award. Currently the Company accounts for its employee and non-employee director stock options under the intrinsic value provision of APB Opinion No. 25. The Company is required to adopt the provisions for SFAS No. 123 (Revised 2004) as of the beginning of the first annual reporting period that begins after June 15, 2005, although earlier adoption is permitted. SFAS No. 123 (Revised 2004) offers several alternatives for implementation. At this time, management has not made a decision as to the alternative it may select.
8
In November 2004, the FASB issued SFAS No. 151 “Inventory Costs – an amendment of Accounting Research Bulletin No. 43, Chapter 4”. SFAS No. 151 requires that abnormal amounts of freight, handling costs and wasted material (spoilage) be recognized as current-period charges and fixed production overhead costs be allocated to inventory based on the normal capacity of production facilities. Normal 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.” Companies will no longer be permitted to capitalize inventory costs on the balance sheet when the production defect rate varies significantly from the expected defect rate. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 24, 2004. The Company has yet to determine the impact, if any, of SFAS No. 151 on its consolidated financial statements.
In December 2004, the FASB issued SFAS No. 153, “Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29, ‘Accounting for Nonmonetary Transactions.’” SFAS No. 153 is based on the principle that exchange of nonmonetary assets should be measured based on the fair market value of the assets exchanged. SFAS No. 153 eliminates the exception of nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges in fiscal periods beginning after June 15, 2005. Adoption of the provisions of SFAS No. 153 is not expected to have a material impact on the Company’s financial condition, results of operations, or liquidity.
In March 2005, the FASB issued FASB Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations — an interpretation of FASB Statement No. 143.” FIN 47 clarifies that the term “conditional asset retirement obligation” as used in FASB Statement No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company adopted the provisions of FIN 47 effective April 2005. Adoption of the provisions of FIN 47 had no material impact on the Company’s financial condition, results of operations or liquidity.
On March 29, 2005, the Securities and Exchange Commission (SEC) staff issued Staff Accounting Bulletin No. 107, “Share-Based Payment” (SAB No. 107), which expressed the SEC staff’s views on Statement No. 123R, but did not modify any of Statement No. 123R’s provisions. The Company is evaluating the views expressed by the SEC in SAB No. 107 in conjunction with its assessment of Statement No. 123R’s impact to the Company.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 requires retrospective application for voluntary changes in accounting principle unless it is impracticable to do so. In addition, indirect effects of a change in accounting principle should be recognized in the period of the accounting change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.
9
CYANOTECH CORPORATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This report on Form 10-Q contains forward-looking statements regarding the future performance of Cyanotech and future events that involve risks and uncertainties that could cause actual results to differ materially from the statements contained herein. This document, and the other documents that the Company files from time to time with the Securities and Exchange Commission, such as its reports on Form 10-K, Form 10-Q, Form 8-K, and its proxy materials, contain additional important factors that could cause actual results to differ from the Company’s current expectations and the forward-looking statements contained herein.
Overview
A comparison of selected consolidated statements of operations data as reported herein and in the Company’s previously filed reports on Form 10-Q for the quarterly period ended September 30, 2005 and on Form 10-K for the year ended March 31, 2005 follows for the periods indicated (dollars in thousands):
|
|
|
(A) |
|
(B) |
|
(C) |
|
|||
|
|
|
Current Year |
|
Prior Year Comparable |
|
Prior Consecutive |
|
|||
|
Net sales: |
|
|
|
|
|
|
|
|||
|
Spirulina products |
|
$ |
1,289 |
|
$ |
1,810 |
|
$ |
1,377 |
|
|
Natural astaxanthin products |
|
1,011 |
|
1,324 |
|
1,084 |
|
|||
|
Other products |
|
33 |
|
46 |
|
56 |
|
|||
|
Total sales, all products |
|
$ |
2,333 |
|
$ |
3,180 |
|
$ |
2,517 |
|
|
|
|
|
|
|
|
|
|
|||
|
Gross profit |
|
$ |
621 |
|
$ |
1,163 |
|
$ |
581 |
|
|
Income (loss) from operations |
|
$ |
(236 |
) |
$ |
318 |
|
$ |
(298 |
) |
|
Net income (loss) |
|
$ |
(294 |
) |
$ |
326 |
|
$ |
(321 |
) |
|
|
|
Year to Year |
|
Sequential Quarter |
|
|
Net sales: |
|
|
|
|
|
|
Spirulina products |
|
(29 |
)% |
(6 |
)% |
|
Natural astaxanthin products |
|
(24 |
)% |
(7 |
)% |
|
Other products |
|
(28 |
)% |
(41 |
)% |
|
Total sales, all products |
|
(27 |
)% |
(7 |
)% |
Decreased sales for the current year third quarter compared to the prior year comparable quarter are attributable primarily to lower order levels of Spirulina products and reduced demand for NatuRose® from the Japan aquaculture market. Decreased sales compared to the prior consecutive quarter are primarily attributable to continuing reduced demand for NatuRose® from the Japan aquaculture market with slight reductions in some Spirulina product sales offset in part by increased sales of BioAstin® and private label products.
10
Gross profit of $621,000 for the third quarter of fiscal 2006 was 47% or $542,000 less than reported for the prior year comparable quarter, and 7% or $40,000 more in comparison to the prior consecutive quarter. Comparing the third quarter of the current fiscal year to the prior year comparable quarter, decreased gross profit was primarily attributable to decreased sales coupled with increased natural astaxanthin per unit production cost increases which resulted from a decision to reduce natural astaxanthin production in response to lower order levels. The per unit cost increase reflects continuing fixed overhead costs of our operations. In addition, certain raw material, utility, and freight costs increased, also increasing the total per unit cost. Comparing the third quarter of the current fiscal year to the prior consecutive quarter, the increase in gross profit of $40,000, from $581,000 to $621,000, was due to the foregoing, and in addition, gross profit is also impacted because the company’s various products naturally have different costs. As the mix as well as the volume of product sales varies between comparable periods the cost of sales varies and the resulting gross margin also varies.
Comparing the third quarter of the current fiscal year to the prior year comparable quarter, sales and marketing expenses have increased 17% or $50,000. Likewise, comparing the third quarter of the current fiscal year to the prior consecutive quarter, sales and marketing expenses have increased $47,000 or 16%. Both of these increases are consistent with our plan to increase marketing activity with the objective of increasing product sales.
Comparing the third quarter of the current fiscal year to the prior year comparable quarter, general and administrative expenses have decreased 9% or $45,000. Likewise, comparing the third quarter of the current fiscal year to the prior consecutive quarter, general and administrative expenses have decreased $61,000 or 12%. Both of these decreases are consistent with the company’s on-going cost containment efforts. Comparing the third quarter of the current fiscal year to the prior year comparable quarter, and comparing the third quarter of the current fiscal year to the prior consecutive quarter, total operating expense of $857,000 for the current quarter is nearly level with the amounts reported for the comparable periods just noted, the reason being that sales and marketing expense increases were basically offset by general and administrative expense decreases.
Total other expense increased in comparison to both the third quarter of the previous fiscal year and compared to the second quarter of the current fiscal year. The increase was primarily due to period to period foreign currency translation adjustments.
The company’s net loss of $294,000 for the third quarter of fiscal 2006 reflected a decrease of $620,000 in comparison to the prior year comparable quarter income of $326,000, but the third quarter current fiscal year net loss was $27,000 less than the net loss of $321,000 reported for the prior consecutive quarter. Because operating expenses, as discussed above, and other income/expense and tax provisions remained somewhat level, the net loss for the quarter, when compared to both the prior year comparable quarter and the prior consecutive quarter, was primarily due to lower sales and the previously discussed decline in gross margin.
Results of Operations
Third Quarter of Fiscal 2006 Compared to Third Quarter of Fiscal 2005
Net sales for the three months ended December 31, 2005 were $2,333,000, a 27% decrease from $3,180,000 for the comparable period a year ago. Sales of spirulina products decreased 29% primarily due to lower
11
tablet sales volumes. Sales of natural astaxanthin products decreased by 24% due primarily to reduced demand for NatuRose from the Japan aquaculture market. Sales of private label products doubled, but this increase only slightly offset reduced spirulina and astaxanthin sales overall. International sales were 44% of total sales for the third quarter of fiscal 2006, compared to 51% a year ago. Historically, our major customers (sales exceeding 10% of total sales) have been two distributors, one based in Europe and one in the United States. For the three months ended December 31, 2005, our European distributor accounted for 7% of total sales as compared to 11% of total sales for the comparable prior year period. Sales to the major United States distributor accounted for 12% of total sales for the three months ended December 31, 2005 and 6% of total sales for the three months ended December 31, 2004. Increases and decreases in percentage sales to the two distributors reflect overall sales volumes and historic variability in the order patterns of these customers.
Gross profit represents net sales less the cost of product sales, which includes the cost of materials, manufacturing overhead costs, direct labor costs, depreciation and amortization. Gross profit for the three months ended December 31, 2005 was $621,000, with a gross profit margin of 27%. In contrast, gross profit for the comparable period of the prior fiscal year was $1,163,000 with a gross profit margin of 37%. As discussed in the preceding overview, comparing the third quarter of the current fiscal year to the prior year comparable quarter, decreased gross profit was primarily attributable to decreased sales coupled with increased natural astaxanthin per unit production cost increases which resulted from a decision to reduce natural astaxanthin production in response to lower order levels. In addition, in comparison to the third quarter of the previous fiscal year, for the three months ended December 31, 2005, certain raw material, utility, and freight costs increased, and the company absorbed production support costs, such as depreciation and utilities, across reduced production and sales volumes, resulting in higher per unit costs. In addition to the foregoing, gross profit is also impacted because the company’s various products naturally have different costs. As the mix as well as the volume of product sales varies between comparable periods, the cost of sales varies and the resulting gross margin also varies.
Operating expenses for the three months ended December 31, 2005 and 2004 were $857,000 and $845,000, respectively. As a percentage of net sales, operating expenses for the third quarter of fiscal 2006 were 37%, compared to 27% for the comparable prior year quarter, with the percentage change due primarily to lower net sales in the current year period. Increased sales and marketing expenses in the current period were offset by decreased general and administrative expenses. Sales and marketing expense increases were focused on emerging BioAstin markets and in response to declining sales.
Total other expense, net for the third quarter of fiscal 2006 was $35,000, compared with net other income of $2,000 for the same period a year ago. The change was primarily due to foreign currency translation losses from transactions with our Japanese subsidiary. Also, for the quarter ended December 31, 2005, a change in a previous estimate of a state tax accrual resulted in a $23,000 estimated tax expense for the quarter. This compares to a $6,000 tax benefit recorded for the comparable period of the prior fiscal year. The Company does not expect any United States income taxes for the current fiscal year as a result of available net operating loss carry forwards.
The result of the foregoing is a net loss of $294,000, or ($0.01) per diluted share, for the three months ended December 31, 2005, in contrast to net income of $326,000, or $0.02 per diluted share, for the comparable prior year quarter. The net loss stemmed primarily from overall lower net sales and reduced gross margin, as previously discussed.
12
Nine Months Ended December 31, 2005 Compared to Nine Months Ended December 31, 2004
Net sales for the nine months ended December 31, 2005 were $7,879,000, a decrease of 11% from sales of $8,885,000 reported for the comparable period a year ago. This decrease during the current year period is primarily attributable to lower sales of most natural astaxanthin and spirulina products. These reductions are somewhat offset by increased sales of phycobiliproteins, BioAstin, and private label products as compared to the comparable period of the prior fiscal year. International sales represented 52% of net sales for the nine months ended December 31, 2005 compared to 48% for the same period a year ago with reduced Japan and Asia sales offset by increased European, Canadian, and New Zealand sales. For the nine months ended December 31, 2005, our European distributor accounted for 10% of total sales as compared to 9% of total sales for the comparable prior year period. Sales to the major United States distributor were less than 10% of total sales for the nine months ended December 31, 2005 and 2004. Increases and decreases in percentage sales to the two distributors reflect overall sales volumes and historic variability in the order patterns of these customers.
Gross profit for the nine months ended December 31, 2005 was $2,227,000 with a gross profit margin of 28%, compared to gross profit of $3,104,000 and gross profit margin of 35% for the comparable period of the prior fiscal year. As discussed in the preceding overview, comparing the first nine months of the current fiscal year to the prior year comparable nine months, decreased gross profit was primarily attributable to decreased sales coupled with increased natural astaxanthin per unit production cost increases which resulted from a decision to reduce natural astaxanthin production in response to lower order levels. In addition, in comparison to the comparable nine months of the previous fiscal year, for the nine months ended December 31, 2005, certain raw material, utility, and freight costs increased, and the company absorbed production support costs, such as depreciation and utilities, across reduced production and sales volumes, resulting in higher per unit costs. In addition to the foregoing, gross profit is also impacted because the company’s various products naturally have different costs. As the mix as well as the volume of product sales varies between comparable periods the cost of sales varies and the resulting gross margin also varies.
Operating expenses for the nine months ended December 31, 2005 were $2,553,000, an increase of $101,000 or 4% versus the comparable prior year period. The expense increase reflects a combination of reduced general and administrative and research and development expenses year to date coupled with increased sales and marketing expenses. As noted earlier, sales and marketing expense were increased in an effort to generate additional sales.
Net other expense increased 55% or $39,000 over the prior year comparable period. Current year’s interest expense increased due to increases in the prime rate, the basis for term loan interest. Interest income on short-term investments increased slightly. The nine month comparable period ended December 31, 2004 included other income of $26,000 while the current nine month period reflects other expense of $10,000, the net $36,000 difference comprises the bulk of the $39,000 increase in net other expense which is primarily related to foreign currency translation expense stemming from transactions with our Japanese subsidiary.
For the nine months ended December 31, 2005, a tax provision of $26,000 has been recorded primarily reflecting a $23,000 change in a previous estimate of a state tax accrual compared to a tax provision of $21,000 recorded for the same period of the prior year. The Company does not expect any United States income taxes for the current fiscal year as a result of available net operating loss carry forwards.
The Company recorded a net loss of $462,000 or ($0.02) per diluted share for the nine month period ended December 31, 2005. For the same period a year ago the Company reported net income of $560,000 or earnings of $0.03 per diluted share. The $1,022,000 net income difference between the comparable periods is primarily due to sales decreasing 11% or $1,006,000 while total cost of goods sold decreased 2% or
13
$129,000. This resulted in a period to period gross margin decrease of $877,000 or 28%. As discussed earlier, increased per unit production costs stemming from decisions to reduce production levels coupled with certain material and support cost increases resulted in the gross margin decrease between the comparable periods. In addition to gross margin, total operating expense increased $101,000 or 4% when comparing the nine month period ended December 31, 2005 as compared to the nine months ended December 31, 2004. The operating expense increase was primarily due to increased sales and marketing expenses as previously discussed. The remainder of the comparative difference between the periods was due to increased other expenses, primarily related to foreign currency translation and tax provision expenses.
Variability of Results
The Company has experienced significant quarterly fluctuations in operating results and anticipates that these fluctuations may continue in future periods. Future operating results may fluctuate as a result of changes in sales levels to our largest customers, new product introductions, production difficulties, weather patterns, the mix between sales of bulk products and packaged consumer products, start-up costs associated with new facilities, expansion into new markets, sales promotions, competition, increased energy costs, foreign exchange fluctuations, the announcement or introduction of new products by competitors, changes in our customer mix, overall trends in the market for our products, government regulations and other factors beyond our control. While a significant portion of our expense levels are relatively fixed and the timing of increases in expense levels is based in large part on 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.
Liquidity and Capital Resources
Working capital for the nine months ended December 31, 2005 increased by $94,000 to $5,196,000 from $5,102,000 at March 31, 2005 primarily due to a reduction in trade accounts payable, offset by lower accounts receivable balances. At December 31, 2005 inventory increased to $2,011,000 an increase of $446,000 from $1,565,000 at the beginning of the fiscal year. The inventory increase was primarily due to accumulating specific inventory in order to satisfy existing bulk shipment commitments and ordinary timing differences between production levels and sales volumes.
Despite the net loss of $462,000 for the nine month period ended December 31, 2005 versus $560,000 net income for the same period a year ago, overall cash and equivalents remained nearly the same, decreasing $54,000 from $2,005,000 to $1,951,000. Cash was primarily generated by collection of receivables and mainly used for payment of trade payables.
Cash used in investing activities (for capital expenditures) was $341,000 less for the nine months ended December 31, 2005 versus the same period a year ago, reflecting reduced capital spending after the completion of the natural astaxanthin project in the prior fiscal year.
Cash used in financing activities totaled $259,000 for the nine months ended December 31, 2005 compared to cash used in financing activities of $173,000 for the comparable prior year period. For the current period and for the comparable prior year period, cash used in financing went to principal payments on debt, remaining effectively level period to period. In the prior comparable period cash was also generated from stock option and warrant exercise proceeds.
14
There have been no significant changes in contractual obligations and commitments from March 31, 2005 to December 31, 2005 other than those reported elsewhere in this Form 10-Q. The Company’s contractual obligations and commitments (consisting of a term loan and operating leases) are disclosed in the Company’s previously filed report on Form 10-K for the fiscal year ended March 31, 2005 in the following sections: Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources, and Item 8. Financial Statements and Supplementary Data – Notes 5 and 6 of Notes to Consolidated Financial Statements.
Critical Accounting Policies
Our unaudited financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management’s application of accounting policies. The Company has identified certain policies that require the application of significant judgment by management. Our most critical accounting policies are those related to inventory valuation, revenue recognition, equipment and leasehold improvements, income taxes and impairment of long-lived assets. These critical accounting policies are discussed in the Notes to Consolidated Financial Statements in the Company’s previously filed report on Form 10-K for the fiscal year ended March 31, 2005. This discussion and analysis should be read in conjunction with such notes and our consolidated financial statements and related notes included elsewhere in this report.
Outlook
This outlook section contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially. See first paragraph of this Item 2.
The goal of Cyanotech Corporation is based on its strategy to be a world-leader in the production and marketing of high-value natural products from microalgae. For fiscal 2006 we have refined this strategy with a heightened focus on the business-to-business wholesale market for the products and compounds that we extract from the microalgae processed at our 90 acre facility in Hawaii. Our current product offerings include “All Natural” Spirulina Pacifica® in powder, flake, and tablet form, NatuRose® natural astaxanthin powder for the animal nutrition market, BioAstin® natural astaxanthin antioxidant in lipid extract, softgel caplet and micro-encapsulated beadlet form for the human nutrition and cosmetic industries, and Phycobiliproteins for use in medical diagnostics. Information about our Company and our products can be viewed at www.cyanotech.com, www.nutrex-hawaii.com or www.phycobiliprotein.com. Consumer products can also be purchased online at www.nutrex-hawaii.com.
Our net sales for the third quarter of fiscal 2006 (the quarter ended December 31, 2005) of $2,333,000 were 7% or $184,000 less than the $2,517,000 reported for the prior sequential quarter ended September 30, 2005. Compared to the prior sequential quarter, increased sales of BioAstin and private label products partially offset decreases in other product sales. Third quarter fiscal 2006 net sales were $847,000 or 27% less than reported for the third quarter of the prior fiscal year. Compared to the third quarter ended December 31, 2004, sales of all but private label products were either comparable or down. In general, sales decreases were attributable to lower orders for spirulina and NatuRose® products offset partly by the aforementioned
15
increases in BioAstin and private label sales.
BioAstin is the company’s natural Astaxanthin product for the human nutraceutical market. We remain concerned about the recovery of our largest market for NatuRose (fish coloration in Japan aquaculture) and continue taking action to improve sales of this product through feeding trials aimed at enhancing this product’s appeal for use as animal nutrition. At the same time, the Company recognizes that the general market for spirulina is maturing.
With the foregoing in mind, we continue to believe that it is important to use Company resources for advertising and promotion aimed at generating higher sales of our BioAstin® products. In addition company resources will be used for research and development aimed at new or improved products, product uses, production methods, and product trials. We believe that our product mix may change with increases in sales of BioAstin® as more manufacturers expand their product offerings to incorporate this anti-inflammatory carotenoid. There can be no assurance as to whether or when advertising, changes in products or product mix, promotion, or research and development will bear results.
The Company will continue to restrain discretionary operating spending while deploying Company resources as discussed in the preceding paragraphs.
The Company’s future results of operations and the other forward-looking statements contained in this Outlook, in particular any statements regarding revenues, gross margin, expenses and spending involve a number of risks and uncertainties. In addition to the factors discussed above that could cause actual results to differ materially are the following: 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, competitive factors, such as competing spirulina and astaxanthin producers increasing their production capacity and the resulting impact, if any, on world market prices for these products, government actions, shortage of manufacturing capacity, and other factors beyond our control. Risk factors are discussed in detail in Exhibit 99.1, included in this report.
Cyanotech believes that it has the product offerings, facilities, personnel, and competitive and financial resources for improved results, but future revenues, costs, margins and profits are all influenced by a number of factors, as discussed above, all of which are inherently difficult to forecast.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We have not entered into any transactions using derivative financial instruments or derivative commodity instruments and believe that our exposure to market risk associated with other financial instruments is not material.
Item 4. Controls and Procedures
Under the supervision and with the participation of management, including the President and Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”) of the Company (the “Certifying Officers”), we have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report in accordance with Item 307 of Regulation S-K promulgated by the Securities and Exchange Commission. As defined under Rules 13a-15(e) or 15d-15(e) issued under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the term “disclosure controls and
16
procedures” refers to controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective. There were no changes in our internal controls over financial reporting during the quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
17
PART II. OTHER INFORMATION
None
Item 4. Submission of Matters to a Vote of Security Holders
On August 22, 2005, the following matters were submitted and voted by stockholders entitled to vote at the Company’s Annual Meeting of Stockholders:
a) The following directors were elected to serve until the next Annual Meeting or until their successors are elected:
|
|
|
For Votes |
|
Withheld Votes |
|
|
|
|
|
|
|
|
|
Gerald R. Cysewski |
|
15,030,894 |
|
88,383 |
|
|
Michael A. Davis |
|
14,988,998 |
|
130,279 |
|
|
Gregg W. Robertson |
|
14,976,594 |
|
142,683 |
|
|
David I. Rosenthal |
|
14,984,644 |
|
144,633 |
|
|
John T. Waldron |
|
14,994,694 |
|
124,583 |
|
|
Paul C. Yuen |
|
15,005,194 |
|
114,083 |
|
b) Approval of the 2005 Stock Option Plan (the “2005 Plan”), reserving a total of 800,000 authorized shares of common stock of the Company for issuance of options under the 2004 Plan. The vote was 4,043,292 for, 423,236 against, 40,851 abstaining and 10,611,898 broker not voted.
d) Ratification of the selection of KPMG LLP as the Company’s independent Registered Public Accounting Firm for the fiscal year ending March 31, 2006. The vote on the ratification was 15,062,416 for, 23,736 against and 32,955 abstaining.
Item 6. Exhibits and Reports on Form 8-K
a) The following exhibits are furnished with this report:
31.1 Certification by the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act
31.2 Certification by the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act
32.1 Certification by the Chief Executive Officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification by the Chief Financial Officer pursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Risk Factors
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b) Reports on Form 8-K
A report on Form 8-K dated October 19, 2005 included Item 8.01, Other Events, in conjunction with the Company’s press release dated October 19, 2005, announcing the resignation of Chief Financial Officer, Jeffery H. Sakamoto.
A report on Form 8-K dated October 28, 2005 included Item 5.04, Temporary Suspension of Trading Under Registrant’s Employee Benefit Plans, in conjunctions with issuance of a notice dated October 24, 2005, to all participants of such plan.
A report on Form 8-K dated October 28, 2005 included Item 8.01, Other Events, in conjunction with the Company’s press release dated October 24, 2005, announcing the date of its earnings release and investor conference call for the quarter ended September 30, 2005.
A report on Form 8-K dated November 4, 2005 included Item 2.02, Results of Operations and Financial Condition, in conjunction with the Company’s press release dated October 24, 2005, announcing the financial results for the Quarter ended September 30, 2005.
A report on Form 8-K dated November 21, 2005 included Item 5.04, Temporary Suspension of Trading Under Registrant’s Employee Benefit Plans, in conjunctions with issuance of a revised blackout period notice to all participants in the Company’s 401(k) Plan.
A report on Form 8-K dated December 6, 2005 included Item 3.01, Notice of Failure to Satisfy a Continued Listing Rule, in conjunction with issuance of a press release dated December 6, 2005, announcing notification from the Nasdaq Stock Market Listing Qualifications Department that for the previous 30 consecutive business days the Company’s common stock has closed below the minimum $1.00 per share requirement for continued inclusion under Marketplace Rule 4310(c)(4). (See additional discussion under Risk Factors.)
A report on Form 8-K dated December 19, 2005 included Item 5.02, Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers, in conjunction with a press release dated December 12, 2005 announcing the election of William R. Maris, age 56, as Chief Financial Officer and Vice President of Finance and Administration, effective January 1, 2006. The same Form 8-K also included Item 5.05 Amendments to the Registrant’s Code of Ethics, or Waiver of a Provision of the Code of Ethics, with Cyanotech Corporation Corporate Code of Conduct attached as an Exhibit, such that, on December 9, 2005 the Board of Directors of Cyanotech Corporation amended the Corporate Code of Conduct and Ethics, strengthening its commitment to honest and ethical behavior and the highest standards of business conduct, and further emphasizing corporate and individual accountability while encouraging individuals to come forward with information about possible misconduct and assuring them of protection from retaliation.
A report on Form 8-K dated February 9, 2006 included Item 2.02, Results of Operations and Financial Condition, in conjunction with the Company’s press release dated February 8, 2006, and transcript of the web-cast and Vcall announcing the financial results for the Quarter ended December 31, 2005.
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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.
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CYANOTECH CORPORATION (Registrant) |
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February 8, 2006 |
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By: |
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/s/ Gerald R. Cysewski |
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(Date) |
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Gerald R. Cysewski |
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Chairman of the Board, |
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President and Chief Executive Officer |
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By: |
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/s/ William R. Maris |
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William R. Maris |
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Vice President – Finance & Administration |
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(Principal Financial and Accounting Officer) |
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