CYANOTECH CORP - Quarter Report: 2020 December (Form 10-Q)

 

Table of Contents

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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.

 

 

 

 

		December 31, 2020				March 31, 2020
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

 

		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

 

		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

		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

 

		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			$	—

 

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:

 

  

 

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:

 

 

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:

 

 

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:

 

  

 

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:

 

 

 

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:

 

 

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

 

 

 

8.	ACCRUED EXPENSES

 

Accrued expenses consist of the following as of:

 

 

 

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:

 

 

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: 

 

 

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:

 

 

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:

 

 

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:

 

 

 

 

 

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.