SEC Form 10-Q filed by Cyanotech Corporation
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For Quarterly Period Ended
Or
| | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period From to
Commission File Number
CYANOTECH CORPORATION
(Exact name of registrant as specified in its charter)
| | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
(Address of principal executive offices)
(
(Registrant’s telephone number)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | |
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
| Large accelerated filer ☐ | Accelerated filer ☐ |
| | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of February 2, 2024, the number of shares outstanding of the registrant’s common stock was
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Report and other presentations made by Cyanotech Corporation (“CYAN”) and its subsidiary contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as “expects,” “anticipates,” “intends,” “plan,” “believes,” “predicts”, “estimates” or similar expressions. In addition, any statement concerning future financial performance, ongoing business strategies or prospects and possible future actions are also forward-looking statements. Forward-looking statements are based upon current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning CYAN and its subsidiary (collectively, the “Company”), the performance of the industry in which CYAN does business, and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance. You should not place undue reliance on forward-looking statements.
Forward-looking statements speak only as of the date of the Report, presentation or filing in which they are made. Except to the extent required by the Federal Securities Laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our forward-looking statements in this Report include, but are not limited to:
| ● |
Statements relating to our business strategy; |
| ● |
Statements relating to our business objectives; and |
| ● |
Expectations concerning future operations, profitability, liquidity and financial resources. |
These forward-looking statements are subject to risk, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control, including those factors described in Item 2 of Part I of this quarterly report and in Item 1A of Part I of the Company’s Annual Report on Form 10-K filed on June 27, 2023. Additionally, the following factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions and expectations expressed in our forward-looking statements:
| ● |
The added risks associated with or attributed to the current local, national and world economic conditions, including but not limited to, the volatility of crude oil prices, inflation and currency fluctuations; |
| ● |
Access to available and reasonable financing on a timely basis; |
| ● |
The Company’s inability to generate enough revenues to meet its obligations or repay maturing indebtedness; and |
| ● |
Failure of capital projects to operate as expected or meet expected results. |
It is not possible to predict or identify all potential risks and uncertainties and the above referenced factors and list do not comprise a complete list of all potential risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in any forward-looking statement contained in this report. All forward-looking statements speak only as of the date of this report and are expressly qualified in their entirety by the cautionary statements included in or incorporated by reference into this report. Except as is required by law, the Company expressly disclaims any obligation to publicly release any revisions to forward-looking statements to reflect events after the date of this report. Throughout this report, Cyanotech Corporation, together with its subsidiary, are referred to as “the Company.”
CYANOTECH CORPORATION
FORM 10-Q
| Item 1. |
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| Condensed Consolidated Balance Sheets as of December 31, 2023 and March 31, 2023 (unaudited) |
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| Notes to Condensed Consolidated Financial Statements (unaudited) |
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| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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| Item 4. |
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| Item 1. |
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| Item 1A |
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| Item 2. |
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| Item 3. |
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| Item 5. |
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| Item 6. |
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Item 1. Financial Statements
CYANOTECH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
| December 31, | March 31, | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowance for credit losses of $ as of December 31, 2023 and $ as of March 31, 2023 | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Equipment and leasehold improvements, net | ||||||||
| Operating lease right-of-use assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Customer deposits | ||||||||
| Operating lease obligations, current portion | ||||||||
| Short term debt - bank | ||||||||
| Line of credit – bank | ||||||||
| Line of credit – related party | ||||||||
| Current maturities of long-term debt | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, less current maturities | ||||||||
| Long-term operating lease obligations | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock of $ par value, authorized shares; shares issued and outstanding | ||||||||
| Common stock of $ par value, authorized shares; issued and outstanding shares at December 31, 2023 and shares at March 31, 2023 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying notes to condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
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| Net sales |
$ | $ | $ | $ | ||||||||||||
| Cost of sales |
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| Gross profit |
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| Operating expenses: |
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| General and administrative |
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| Sales and marketing |
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| Research and development |
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| Total operating expenses |
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| Loss from operations |
( |
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( |
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( |
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( |
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| Interest expense, net |
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( |
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( |
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( |
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| Loss before income taxes |
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( |
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( |
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| Income tax expense |
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| Net loss |
$ | ( |
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$ | ( |
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$ | ( |
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$ | ( |
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| Net loss per share: |
||||||||||||||||
| Basic |
$ | ( |
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$ | ( |
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$ | ( |
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$ | ( |
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| Diluted |
$ | ( |
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$ | ( |
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$ | ( |
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$ | ( |
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| Shares used in calculation of net loss per share: |
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| Basic |
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| Diluted |
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See accompanying notes to condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
Three months ended December 31, 2023 and 2022
| Common |
Common Amount |
Additional |
Accumulated |
Total |
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| (in thousands, except per share data) |
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| Balances at September 30, 2023 |
$ | $ | $ | ( |
) |
$ | ||||||||||||||
| Proceeds from the sale of common stock, net of expenses |
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| Issuances of common stock to Directors in lieu of cash for current year board fees |
||||||||||||||||||||
| Share-based compensation expense |
— | |||||||||||||||||||
| Net loss |
— | ( |
) |
( |
) |
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| Balances at December 31, 2023 |
$ | $ | $ | ( |
) |
$ | ||||||||||||||
| Balances at September 30, 2022 |
$ | $ | $ | ( |
) |
$ | ||||||||||||||
| Share-based compensation expense |
— | |||||||||||||||||||
| Net loss |
— | ( |
) |
( |
) |
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| Balances at December 31, 2022 |
$ | $ | $ | ( |
) |
$ | ||||||||||||||
Nine months ended December 31, 2023 and 2022
| Common |
Common Amount |
Additional |
Accumulated |
Total |
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| (in thousands, except per share data) |
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| Balances at March 31, 2023 |
$ | $ | $ | ( |
) |
$ | ||||||||||||||
| Proceeds from the sale of common stock, net of expenses |
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| Issuances of common stock to Directors Stock Grants |
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| Issuances of common stock to Directors in lieu of cash for current year board fees |
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| Issuances of common stock to Directors in lieu of cash for prior year board fees |
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| Issuances of vested shares of restricted stock |
( |
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( |
) |
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| Shares withheld for tax payments |
( |
) |
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| Share-based compensation expense |
— | |||||||||||||||||||
| Net loss |
— | ( |
) |
( |
) |
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| Balances at December 31, 2023 |
$ | $ | $ | ( |
) |
$ | ||||||||||||||
| Balances at March 31, 2022 |
$ | $ | $ | ( |
) |
$ | ||||||||||||||
| Issuances of common stock to Directors Stock Grants |
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| Issuances of vested shares of restricted stock |
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( |
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| Shares withheld for tax payments |
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) |
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| Share-based compensation expense |
— | |||||||||||||||||||
| Net loss |
— | ( |
) |
( |
) |
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| Balances at December 31, 2022 |
$ | $ | $ | ( |
) |
$ | ||||||||||||||
See accompanying notes to condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
| Nine Months Ended |
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| 2023 |
2022 |
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| CASH FLOWS FROM OPERATING ACTIVITIES: |
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| Net loss |
$ | ( |
) |
$ | ( |
) |
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| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
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| Depreciation and amortization |
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| Amortization of debt issue costs and other assets |
( |
) | ||||||
| Amortization of operating leases right-of-use assets |
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| Share-based compensation expense |
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| Provision for doubtful accounts |
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| Net (increase) decrease in assets: |
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| Accounts receivable |
( |
) |
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| Inventories |
( |
) |
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| Prepaid expenses and other assets |
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| Net increase (decrease) in liabilities: |
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| Accounts payable |
( |
) |
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| Accrued expenses |
( |
) |
( |
) |
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| Customer deposits |
( |
) |
( |
) |
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| Operating lease obligations |
( |
) |
( |
) |
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| Other liabilities |
( |
) |
( |
) |
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| Net cash used in operating activities |
( |
) |
( |
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| CASH FLOWS FROM INVESTING ACTIVITIES: |
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| Investment in equipment and leasehold improvements |
( |
) |
( |
) |
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| Net cash used in investing activities |
( |
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( |
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| CASH FLOWS FROM FINANCING ACTIVITIES: |
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| Net (payments) draws on short term debt and line of credit – bank |
( |
) |
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| Net draws on line of credit – related party |
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| Principal payments on long-term debt – bank |
( |
) |
( |
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| Proceeds from the issuance of common stock, net of expenses |
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| Taxes paid related to net share settlement of restricted stock units |
( |
) |
( |
) |
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| Net cash provided by financing activities |
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| Net decrease in cash |
( |
) |
( |
) |
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| Cash at beginning of period |
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| Cash at end of period |
$ | $ | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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| Cash paid during the period for: |
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| Interest |
$ | $ | ||||||
| Income taxes |
$ | $ | ||||||
See accompanying notes to condensed consolidated financial statements
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2023
(Unaudited)
| 1. | ORGANIZATION AND BASIS OF PRESENTATION |
Cyanotech Corporation (the “Company”), located in Kailua-Kona, Hawaii, was incorporated in the state of Nevada on March 3, 1983, and is listed on the NASDAQ Capital Market under the symbol “CYAN”. The Company is engaged in the production of natural products derived from microalgae for the nutritional supplements market.
The Company is an agricultural company that produces high value natural products derived from microalgae grown in complex and intricate open-pond agricultural systems on the Kona coast of Hawaii. The Company's products include Hawaiian Spirulina Pacifica®, a superfood with numerous benefits, including boosting the immune system and overall cellular health; and BioAstin® Hawaiian Astaxanthin®, 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, 2023 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, 2023, contained in the Company’s annual report on Form 10-K as filed with the SEC on June 27, 2023.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements as of and for the three and nine months ended December 31, 2023 and 2022, and as of March 31, 2023, have been prepared assuming the Company will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company sustained operating losses and negative cash flows from operations for these same periods. Further, as discussed below, the Company was not in compliance with a debt covenant requirement at March 31, 2023 and First Foundation Bank (the “Bank”) instituted a freeze on additional advances from the Revolving Credit Agreement (“Credit Agreement”). These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expense that may be necessary if the Company was unable to continue as a going concern.
As of December 31, 2023, the Company had cash of $
The Company also has a loan facility with a related party that allows the Company to borrow up to $
As of December 31, 2023, the Company had $
On December 15, 2023, the Company completed a private placement (the “Private Placement”) for
In April 2019, the Company obtained a loan in the amount of $
The Company continues to experience a loss from operations as the impacts from the macroeconomic environment led to lower sales across the Company's portfolio on a year-to-date basis. Industry data shows that consumers intake of dietary supplements is not slowing down but may be trading down to private label brands to save on costs. The market for bulk material is increasingly price sensitive with many companies sourcing lower priced international ingredients. Since the second quarter of fiscal year 2023, the Company drew a net of $
Funds generated by operating activities and available cash are the Company’s most significant sources of liquidity for working capital requirements, debt service and funding of maintenance levels of capital expenditures. The Company has developed its operating plan to produce the cash flows necessary to meet all financing requirements. Although the Company has a history of either being in compliance with debt covenants, or obtaining the necessary waivers, execution of its operating plan is dependent on many factors, some of which are not within the control of the Company. However, no assurances can be provided that the Company will achieve its operating plan and cash flow projections for this fiscal year or its projected consolidated financial position as of December 31, 2024. 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 revenues and accounts receivables are derived from a few major customers. For the three months ended December 31, 2023, customers individually accounted for
Accounts Receivable
Accounts receivable balances are recorded at the invoiced amount and do not accrue interest. Credit is extended based on evaluation of the customer’s financial condition. Collateral is not required. The allowance for credit losses reflects management’s best estimate of expected credit losses inherent in the accounts receivable balance. Management determines the allowances based on historical experience, specifically identified nonpaying customers and other currently available evidence, including the likelihood of each customer not being able to pay, due to the Company’s small customer and recurring customer base. Management reviews its customer account balances monthly with a focus on significant individual past due balances over 90 days. All other balances are reviewed on a pooled basis. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers or otherwise.
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 its microalgal dietary 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, 2023 and 2022, the Company recognized $
Disaggregation of Revenue
The following table represents revenue disaggregated by major product line and extraction services for the:
| ($ in thousands) | Three Months December 31, 2023 | Three Months December 31, 2022 | ||||||
| Packaged sales | ||||||||
| Astaxanthin packaged | $ | $ | ||||||
| Spirulina packaged | ||||||||
| Total packaged sales | ||||||||
| Bulk sales | ||||||||
| Astaxanthin bulk | ||||||||
| Spirulina bulk | ||||||||
| Total bulk sales | ||||||||
| Contract extraction and R&D services revenue | ||||||||
| Total net sales | $ | $ | ||||||
| ($ in thousands) | Nine Months December 31, 2023 | Nine Months December 31, 2022 | ||||||
| Packaged sales | ||||||||
| Astaxanthin packaged | $ | $ | ||||||
| Spirulina packaged | ||||||||
| Total packaged sales | ||||||||
| Bulk sales | ||||||||
| Astaxanthin bulk | ||||||||
| Spirulina bulk | ||||||||
| Total bulk sales | ||||||||
| Contract extraction and R&D services revenue | ||||||||
| Total net sales | $ | $ | ||||||
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” (“Topic 326”), which was subsequently amended in November 2018 through ASU 2018-19, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses” (“CECL”). CECL requires entities to estimate lifetime expected credit losses for trade and other receivables, net investment in leases, financing receivables, debt securities and other instruments, which will result in earlier recognition of credit losses. The guidance is effective for interim and annual periods beginning after December 15, 2022. The Company adopted this standard as of April 1, 2023, however, due to the relatively short-term nature of its accounts receivable and history of limited bad debt expense, the impact of this guidance was not significant to the Company’s consolidated financial statements and related disclosure. The Company will continue to evaluate the impact of CECL going forward.
In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosure” (“ASU 2023-09”), which enhances the transparency and decision usefulness of income tax disclosures. Adjustments to the annual disclosure of income taxes include: a tabulate rate reconciliation comprised of eight specific categories; income taxes paid, disaggregated between significant federal, state, and foreign jurisdictions; eliminating requirements to disclose the nature and estimate of reasonably possible changes to unrecognized tax benefits in the next 12 months or that an estimated range cannot be made; and adds a requirement to disclose income (or loss) from continuing operations before income tax expense (or benefit) and income tax expense (or benefit) from continuing operations disaggregated between domestic and foreign. ASU 2023-09 is effective for public business entities for fiscal years beginning on or after December 15, 2024, with early adoption permitted. The amendments in ASU 2023-09 should be applied on a prospective basis. Retrospective application is permitted.
| 3. | INVENTORIES |
Inventories are stated at the lower of cost or net realizable value. Cost is determined by the first-in, first-out method. Inventories consist of the following as of:
| December 31, 2023 | March 31, 2023 | |||||||
| (in thousands) | ||||||||
| Raw materials | $ | $ | ||||||
| Work in process | ||||||||
| Finished goods | ||||||||
| Supplies | ||||||||
| Inventories | $ | $ | ||||||
The Company recognizes abnormal production costs, including fixed cost variances from normal production capacity, fixed production overhead costs, idle facilities, freight handling costs and spoilage, as an expense in the period incurred, without adjusting overhead absorption rates. Normal production capacity is defined as the production expected to be achieved over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance. The Company had abnormal production cost recovery of $
Beginning in fiscal year 2021 through fiscal year 2023, cultivation of astaxanthin was completed in the first six months of the fiscal year during the most productive months of the year due to the best growing conditions, compared to year-round production in the prior fiscal years. In fiscal year 2024, cultivation of astaxanthin reverted back to year-round in order to manage staffing constraints. The Company calculates total production costs for the year based on normal capacity of production expected to be achieved in a year under normal circumstances. These costs are then allocated into inventory based on the period of production, not including abnormal production costs. Allocating fixed and overhead costs requires management’s judgement to determine when production is outside of the normal range of expected variation in production.
Other non-inventoriable fixed costs of $
| 4. | EQUIPMENT AND LEASEHOLD IMPROVEMENTS |
Equipment and leasehold improvements consist of the following as of:
| December 31, 2023 | March 31, 2023 | |||||||
| (in thousands) | ||||||||
| Equipment | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Furniture and fixtures | ||||||||
| Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Construction-in-progress | ||||||||
| Equipment and leasehold improvements, net | $ | $ | ||||||
Management has determined that
| 5. | LINE OF CREDIT AND LONG-TERM DEBT |
Total debt consists of the following as of:
| December 31, 2023 | March 31, 2023 | |||||||
| (in thousands) | ||||||||
| Line of credit - bank | $ | $ | ||||||
| Short-term debt - bank | ||||||||
| Line of credit – related party | ||||||||
| Long-term debt | ||||||||
| Long-term debt - related party | ||||||||
| Unamortized debt issuance costs | ( | ) | ( | ) | ||||
| Less current maturities | ( | ) | ( | ) | ||||
| Total long-term debt, net of current maturities | $ | $ | ||||||
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 allowed the Company to borrow up to $
On October 13, 2023, the Bank converted this line of credit to a term loan (“2023 Loan”) in the amount of $
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 2012, the Company executed a loan agreement with a lender providing for $
The provisions of the 2012 Loan required the payment of interest only for the first
The 2012 Loan included a one-time origination and guaranty fees totaling $
Loan Covenants, Violation and Waiver
The Company’s Credit Agreement and the 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, 2023, the Company was not in compliance with the required debt service coverage ratio, however, was in compliance with the two other covenants. Due to this violation, the Bank would be contractually entitled to require immediate repayment of the outstanding term loans and the outstanding line of credit balance. However, on June 22, 2023, the Bank issued the Company a letter waiving the covenant violation as of March 31, 2023, and implemented an immediate freeze on any and all further advances of the Credit Agreement through the maturity date, with an outstanding balance in the amount of $
Line of Credit and Debt – Related Party
In April 2019, the Company obtained a loan in the amount of $
At both December 31, 2023 and March 31, 2023, the balance under this loan was $
Future principal payments under the loans at December 31, 2023 are as follows:
| Fiscal year payments due | (in thousands) | |||
| Remainder of 2024 | $ | |||
| 2026 | ||||
| Total principal payments | $ | |||
| 6. | 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. The Company also leases
Supplemental balance sheet information related to leases consist of the following as of:
| Operating leases | Balance Sheet Classification | December 31, 2023 | March 31, 2023 | ||||||
| (in thousands) | |||||||||
| Right-of-use assets | Operating lease right-of-use assets | $ | $ | ||||||
| Accumulated lease amortization | Operating lease right-of-use assets | ( | ) | ( | ) | ||||
| Total right-of-use assets | $ | $ | |||||||
| Current lease liabilities | Operating lease obligations | $ | $ | ||||||
| Non-current lease liabilities | Long-term operating lease obligations | ||||||||
| Total lease liabilities | $ | $ | |||||||
Maturities of lease liabilities at December 31, 2023 are as follows:
| Payments | (in thousands) | |||
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total undiscounted lease payments | ||||
| Less: present value discount | ( | ) | ||
| Total lease liability balance | $ | |||
| 7. | ACCRUED EXPENSES |
Accrued expenses consist of the following as of:
| December 31, 2023 | March 31, 2023 | |||||||
| (in thousands) | ||||||||
| Bonus and profit sharing | $ | $ | ||||||
| Wages | ||||||||
| Vacation | ||||||||
| Interest and legal | ||||||||
| Other accrued expenses | ||||||||
| Total accrued expenses | $ | $ | ||||||
| 8. | 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, 2023.
| 9. | SHARE-BASED COMPENSATION |
The Company has share-based compensation plans, which are more fully described in Note 9, 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, 2023 as filed with the SEC on June 27, 2023.
As of December 31, 2023, the Company had equity-based compensation plans: the 2016 Equity Incentive Plan (the “2016 Plan”) and the 2014 Independent Director Stock Option and Restricted Stock Grant Plan and Amendment (the “2014 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.
The following table presents shares authorized, available for future grant and outstanding under each of the Company’s plans:
| As of December 31, 2023 | ||||||||||||
| Authorized | Available | Outstanding | ||||||||||
| 2016 Plan | ||||||||||||
| 2014 Directors Plan | ||||||||||||
| Total | ||||||||||||
Stock Options
All stock option grants made under the equity-based compensation plans were issued at exercise prices no less than the Company’s closing stock price on the date of grant. Options under the 2016 Plan and 2014 Directors Plan were determined by the Board of Directors or the Compensation Committee of the Board of Directors in accordance with the provisions of the respective plans. The terms of each option grant include vesting, exercise, and other conditions set forth in a Stock Option Agreement evidencing each grant. No option can have a life in excess of (10) years. The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The model requires various assumptions, including a risk-free interest rate, the expected term of the options, the expected stock price volatility over the expected term of the options, and the expected dividend yield. Compensation expense for employee stock options is recognized ratably over the vesting term. Compensation expense recognized for options issued under all Plans was $
A summary of option activity under the Company’s stock plans for the nine months ended December 31, 2023 is presented below:
| Option Activity | Shares | Weighted Price | Weighted Average | Aggregate | ||||||||||||
| Outstanding at March 31, 2023 | $ | $ | — | |||||||||||||
| Granted | $ | |||||||||||||||
| Expired | ( | ) | $ | |||||||||||||
| Outstanding at December 31, 2023 | $ | $ | ||||||||||||||
| Exercisable at December 31, 2023 | $ | $ | — | |||||||||||||
The aggregate intrinsic value in the table above is before applicable income taxes and represents the excess amount over the exercise price optionees would have received if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price of $
A summary of the Company’s non-vested options for the nine months ended December 31, 2023 is presented below:
| Nonvested Options | Shares | Weighted | ||||||
| Nonvested at March 31, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Nonvested at December 31, 2023 | $ | |||||||
The weighted average grant-date fair value of stock options granted during the nine months ended December 31, 2023 was $
Restricted Stock
Grants of fully vested restricted stock issued to Non-Employee Directors during the nine months ended December 31, 2023 and 2022 were
To reduce the Company’s ongoing cash expenses, the Nominating and Corporate Governance Committee of the Board of Directors adopted a resolution allowing each director to elect to receive his or her quarterly director fees in the form of restricted stock in lieu of cash. Two Board members elected to receive shares of restricted stock in lieu of cash for the third fiscal quarter of 2023 and one Board member elected to receive shares of restricted stock in lieu of cash for the second fiscal quarter of 2024. On April 3, 2023,
Restricted Stock Units (“RSUs”)
RSUs are service-based awards granted to eligible employees under the 2016 Plan. Compensation expense recognized for RSUs issued under the 2016 Plan was $
The following table summarizes information related to awarded RSUs:
| Nonvested Restricted Stock Units | Shares | Weighted | ||||||
| Nonvested restricted stock units at March 31, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Forfeited | ( | ) | ||||||
| Nonvested restricted stock units at December 31, 2023 | $ | |||||||
As of December 31, 2023, total unrecognized stock-based compensation expense related to unvested restricted stock units was $
| 10. | STOCKHOLDERS’ EQUITY |
On December 15, 2023, the Company completed the Private Placement of an aggregate of
The Shares are restricted securities under applicable federal securities laws and are subject to certain piggyback registration rights as provided for in the Subscription Agreement.
| 11. | INCOME TAXES |
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 $
The Company is subject to taxation in the United States and eight state jurisdictions. The preparation of tax returns requires management to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. Management, in consultation with its tax advisors, files its tax returns based on interpretations that are believed to be reasonable under the circumstances. The income tax returns, however, are subject to routine reviews by the various taxing authorities. As part of these reviews, a taxing authority may disagree with respect to the tax positions taken by management (“uncertain tax positions”) and therefore may require the Company to pay additional taxes. Management evaluates the requirement for additional tax accruals, including interest and penalties, which the Company could incur as a result of the ultimate resolution of its uncertain tax positions. Management reviews and updates the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, completion of tax audits, expiration of statute of limitations, or upon occurrence of other events.
As of December 31, 2023 and 2022, there was
With few exceptions, the Company is no longer subject to U.S. federal, state, local, and non-U.S. income tax examination by tax authorities for tax years before 2019.
| 12. | EARNINGS PER SHARE |
Basic earnings (loss) per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings (loss) 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 (loss) income per share computations for the three and nine months ended December 31, 2023 and 2022 are as follows:
| Three Months Ended December 31, 2023 | ||||||||||||
| Net Loss | Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
| (in thousands) | ||||||||||||
| Basic and diluted loss per share | $ | ( | ) | $ | ( | ) | ||||||
| Three Months Ended December 31, 2022 | ||||||||||||
| Net Loss | Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
| (in thousands) | ||||||||||||
| Basic and diluted loss per share | $ | ( | ) | $ | ( | ) | ||||||
| Nine Months Ended December 31, 2023 | ||||||||||||
| Net Loss | Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
| (in thousands) | ||||||||||||
| Basic and diluted loss per share | $ | ( | ) | $ | ( | ) | ||||||
| Nine Months Ended December 31, 2022 | ||||||||||||
| Net Loss | Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Amount | ||||||||||
| (in thousands) | ||||||||||||
| Basic and diluted loss per share | $ | ( | ) | $ | ( | ) | ||||||
Basic and diluted per share amounts are the same in periods of a net loss because common share equivalents are anti-dilutive when a net loss is recorded. Diluted earnings per share does not include the impact of common stock options and restricted stock units totaling
| 13. | RELATED PARTY TRANSACTIONS |
In April 2019, the Company obtained an unsecured subordinated loan from Skywords Family Foundation, Inc. (“Skywords”) in the principal amount of $
On April 12, 2021, the Company entered into an Amended and Restated Promissory Note (the “Skywords Amended Note”) with Skywords. The Company and Skywords agreed to amend, restate, replace and otherwise modify without novation, the Skywords Note in order to convert $
On April 12, 2021, in connection with the grant of a security interest in the Collateral, the Company also entered into an Intercreditor and Subordination Agreement with the Bank and Skywords. The Company is indebted to the Bank pursuant to two Term Loans and a Credit Agreement, each of which granted the Bank a security interest in substantially all of the Company’s personal property assets. The Bank’s security interest in the Company’s personal property assets ranks senior to Skywords’ security interest in the Collateral, and the Intercreditor and Subordination Agreement generally governs the relationship between the Bank and Skywords as secured lenders to the Company and includes customary terms.
On December 14, 2022, the Company entered into a First Amendment (the “First Amendment”) to the Skywords Amended Note. The First Amendment extends the maturity date to April 12, 2025 and increases the revolving amount that the Company may borrow from time to time under the Skywords Amended Note from $
On August 14, 2023, the Company entered into a Second Amendment (the “Second Amendment”) to the Skywords Amended Note. The Second Amendment increases the revolving amount that the Company may borrow from time to time under the Skywords Amended Note from to $
At both December 31, 2023 and March 31, 2023, the Skywords Note principal balance was $
See Note 10 regarding the Private Placement with the Company’s Chairman of the Board.
| 14. | SUBSEQUENT EVENTS |
The Company had no subsequent events.
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Overview:
We are an agricultural company and a world leader in the production of natural products derived from microalgae grown in complex and intricate agricultural systems on the Kona coast of Hawaii. Incorporated in 1983, we are guided by the principle of providing beneficial, quality microalgal products for health and human nutrition in a sustainable, reliable and environmentally sensitive operation. We are Good Manufacturing Practices (“GMP”) certified by the Merieux NutriSciences, reinforcing our commitment to quality in our products, quality in our relationships (with our customers, suppliers, employees and the communities we live in), and quality of the environment in which we work. Our products include:
| ● |
BioAstin® Hawaiian Astaxanthin® - a powerful dietary antioxidant shown to support and maintain the body’s natural inflammatory response, to enhance skin, and to support eye, joint and immune health*. It has expanding applications as a human dietary supplement and dietary ingredient; and |
| ● |
Hawaiian Spirulina Pacifica® - a nutrient-rich dietary supplement used for extra energy, a strengthened immune system, cardiovascular benefits and as a source of antioxidant carotenoids* |
*These statements have not been evaluated by the Food and Drug Administration. This product is not intended to diagnose, treat, cure or prevent any disease.
Microalgae are a diverse group of microscopic plants that have a wide range of physiological and biochemical characteristics and contain, among other things, high levels of natural protein, amino acids, vitamins, pigments and enzymes. Microalgae have the following properties that make commercial production attractive: (1) microalgae grow much faster than land grown plants, often up to 100 times faster; (2) microalgae have uniform cell structures with no bark, stems, branches or leaves, permitting easier extraction of products and higher utilization of the microalgae cells; and (3) the cellular uniformity of microalgae makes it practical to control the growing environment in order to optimize a particular cell characteristic. Efficient and effective cultivation of microalgae requires consistent light, warm temperatures, low rainfall and proper chemical balance in a very nutrient-rich environment, free of environmental contaminants and unwanted organisms. This is a challenge that has motivated us to design, develop and implement proprietary production and harvesting technologies, systems and processes in order to commercially produce human dietary supplement products derived from microalgae.
Our production of these products at the 96-acre facility on the Kona Coast of the island of Hawaii provides several benefits. We selected the Keahole Point location in order to take advantage of relatively consistent warm temperatures, sunshine and low levels of rainfall needed for optimal cultivation of microalgae. This location also offers us access to cold deep ocean water, drawn from an offshore depth of 2,000 feet, which we use in our Ocean-Chill Drying system to eliminate the oxidative damage caused by standard drying techniques and as a source of trace nutrients for microalgal cultures. The area is also designated a Biosecure Zone, with tight control of organisms allowed into the area and free of genetically modified organisms (“GMO”). We believe that our technology, systems, processes and favorable growing location generally permit year-round harvest of our microalgal products in a cost-effective manner.
Results of Operations
The following tables present selected consolidated financial data for each of the periods indicated ($ in thousands):
| Three Months Ended |
Nine Months Ended |
|||||||||||||||
| December 31, |
December 31, |
|||||||||||||||
| 2023 |
2022 |
2023 |
2022 |
|||||||||||||
| Net sales |
$ | 5,582 | $ | 5,891 | $ | 17,101 | $ | 17,786 | ||||||||
| Net sales decrease |
(5.2 | )% |
(3.9 | )% |
||||||||||||
| Gross profit |
$ | 1,649 | $ | 1,764 | $ | 5,270 | $ | 5,872 | ||||||||
| Gross profit as % of net sales |
29.5 | % |
29.9 | % |
30.8 | % |
33.0 | % |
||||||||
| Operating expenses |
$ | 2,497 | $ | 2,168 | $ | 7,959 | $ | 7,538 | ||||||||
| Operating expenses as % of net sales |
44.7 | % |
36.8 | % |
46.5 | % |
42.4 | % |
||||||||
| Operating loss |
$ | (848 | ) |
$ | (404 | ) |
$ | (2,689 | ) |
$ | (1,666 | ) |
||||
| Operating loss as % of net sales |
(15.2 | )% |
(6.8 | )% |
(15.7 | )% |
(9.4 | )% |
||||||||
| Income tax expense |
$ | — | $ | 8 | $ | 2 | $ | 11 | ||||||||
| Net loss |
$ | (1,020 | ) | $ | (598 | ) | $ | (3,186 | ) |
$ | (2,010 | ) |
||||
Comparison of the Three Months Ended December 31, 2023 and 2022
| Net Sales (in thousands) |
||||||||||||||||
| Three Months Ended |
||||||||||||||||
| December 31, |
$ |
% |
||||||||||||||
| 2023 |
2022 |
Change |
Change |
|||||||||||||
| Packaged sales |
||||||||||||||||
| Astaxanthin |
$ | 3,691 | $ | 3,113 | $ | 578 | 18.6 | % |
||||||||
| Spirulina |
1,277 | 1,147 | 130 | 11.3 | % |
|||||||||||
| Total Packaged sales |
$ | 4,968 | $ | 4,260 | $ | 708 | 16.6 | % |
||||||||
| Bulk sales |
||||||||||||||||
| Astaxanthin |
$ | 261 | $ | 378 | $ | (117 | ) |
(31.0 | )% |
|||||||
| Spirulina |
312 | 967 | (655 | ) |
(67.7 | )% |
||||||||||
| Total Bulk sales |
$ | 573 | $ | 1,345 | $ | (772 | ) |
(57.4 | )% |
|||||||
| Contract extraction and R&D services revenue |
$ | 41 | $ | 286 | $ | (245 | ) |
(85.7 | )% |
|||||||
| Total sales |
||||||||||||||||
| Astaxanthin |
$ | 3,952 | $ | 3,491 | $ | 461 | 13.2 | % |
||||||||
| Spirulina |
1,589 | 2,114 | (525 | ) |
(24.8 | )% |
||||||||||
| Contract extraction and R&D services revenue |
41 | 286 | (245 | ) |
(85.7 | )% |
||||||||||
| Total sales |
$ | 5,582 | $ | 5,891 | $ | (309 | ) |
(5.2 | )% |
|||||||
Net Sales The net sales decrease of 5.2% for the current quarter compared to the same period last year was driven by a decrease in astaxanthin and spirulina bulk sales, as well as contract extraction services. During the current year quarter, we saw overall lower demand in bulk sales, as well as some impacts of timing of customer orders for astaxanthin bulk, offset by increased sales primarily due the timing of shipments and increased demand for one of our key customers.
Gross Profit Gross profit as a percent of net sales for the third quarter of fiscal 2024 decreased by 0.4 percentage points compared to the same period last year, which was the result of higher costs related to lower production volumes.
Operating Expenses Operating expenses of $2.5 million for the third quarter of fiscal 2024 compared to the prior year same quarter, increased $0.3 million. Sales and marketing expenses increased primarily due to higher online selling fees, offset by lower general and administrative costs.
Income Taxes We did not record income tax expense for the third quarter of fiscal 2024 compared to $8,000 income tax expense for the same period last year. We continue to carry a full valuation allowance on our net deferred tax assets.
Comparison of the Nine Months Ended December 31, 2023 and 2022
| Net Sales (in thousands) |
||||||||||||||||
| Nine Months Ended |
||||||||||||||||
| December 31, |
$ |
% |
||||||||||||||
| 2023 |
2022 |
Change |
Change |
|||||||||||||
| Packaged sales |
||||||||||||||||
| Astaxanthin |
$ | 10,195 | $ | 9,492 | $ | 703 | 7.4 | % |
||||||||
| Spirulina |
4,447 | 3,719 | 728 | 19.6 | % |
|||||||||||
| Total Packaged sales |
$ | 14,642 | $ | 13,211 | $ | 1,431 | 10.8 | % |
||||||||
| Bulk sales |
||||||||||||||||
| Astaxanthin |
$ | 1,168 | $ | 1,204 | $ | (36 | ) |
(3.0 | )% |
|||||||
| Spirulina |
1,033 | 2,844 | (1,811 | ) |
(63.7 | )% |
||||||||||
| Total Bulk sales |
$ | 2,201 | $ | 4,048 | $ | (1,847 | ) |
(45.6 | )% |
|||||||
| Contract extraction and R&D services revenue |
$ | 258 | $ | 527 | $ | (269 | ) |
(51.0 | )% |
|||||||
| Total sales |
||||||||||||||||
| Astaxanthin |
$ | 11,363 | $ | 10,696 | $ | 667 | 6.2 | % |
||||||||
| Spirulina |
5,480 | 6,563 | (1,083 | ) |
(16.5 | )% |
||||||||||
| Contract extraction and R&D services revenue |
258 | 527 | (269 | ) |
(51.0 | )% |
||||||||||
| Total sales |
$ | 17,101 | $ | 17,786 | $ | (685 | ) |
(3.9 | )% |
|||||||
Net Sales The net sales decrease of 3.9% for the first nine months of fiscal year 2024 compared to the same period last year was driven by a decrease in spirulina bulk sales, primarily due to the market for bulk material being increasingly price sensitive with many companies sourcing lower priced international ingredients. This was partially offset by increases in astaxanthin and spirulina packaged sales, primarily due to the timing of shipments and higher demand at one of our key customers.
Gross Profit Gross profit as a percent of net sales for the first nine months of fiscal 2024 decreased by 2.2 percentage points compared to the same period last year, which was the result of higher costs related to lower production volumes.
Operating Expenses Operating expenses of $8.0 million for the first nine months of fiscal 2024 compared to the prior year same period, increased primarily due to higher online selling fees, offset by lower general and administrative and research and development costs.
Income Taxes We recorded an income tax expense of $2,000 for the first nine months of fiscal 2024 compared to an income tax expense of $11,000 for the same period last year. We continue to carry a full valuation allowance on our net deferred tax assets.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements as of and for the three and nine months ended December 31, 2023 and 2022, and as of March 31, 2023, have been prepared assuming we will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We sustained operating losses and negative cash flows from operations for these same periods. Further, as discussed below, we were not in compliance with a debt covenant requirement at March 31, 2023 and the Bank instituted a freeze on additional advances from the Credit Agreement. These conditions raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expense that may be necessary if we were unable to continue as a going concern.
As of December 31, 2023, we had cash of $0.7 million and working capital of $3.7 million compared to $1.0 million and $5.4 million, respectively, at March 31, 2023. We had a Credit Agreement with the Bank that provided for borrowings up to $2.0 million on a revolving basis, however, as part of the covenant waiver at March 31, 2023, the borrowings under this line of credit were frozen at $1.8 million. On October 13, 2023, the Bank converted this line of credit to a term loan in the amount of $1.48 million with a maturity date of August 30, 2024. As of December 31, 2023, we had $1.36 million outstanding on this loan and as of March 31, 2023, we had outstanding borrowings of $1.54 million on the line of credit. (See Note 5 in the notes to our condensed consolidated financial statements).
We also have a loan facility with a related party that allows us to borrow up to $2.0 million on the Revolver. At December 31, 2023 and March 31, 2023, we had $1.25 million and $0.5, respectively, outstanding borrowings on the Revolver, which were included in line of credit – related party on the Condensed Consolidated Balance Sheets. The Revolver expires on April 12, 2025 (see Notes 5 and 13 in the notes to our condensed consolidated financial statements).
As of December 31, 2023, we had $3.3 million in Term Loans payable to the Bank that require the payment of principal and interest monthly through August 2032. Pursuant to the Term Loans and the Credit Agreement, we are subject to annual financial covenants, customary affirmative and negative covenants and certain subjective acceleration clauses. As of March 31, 2023, our debt service coverage ratio fell short of the Bank’s annual requirement. On June 22, 2023, the Bank provided us with a letter waiving the covenant violation as of March 31, 2023, but noting that the Bank reserved its right to declare a default in the future if any covenants remain out of compliance at applicable measurement dates.
On December 15, 2023, we completed a Private Placement of an aggregate of 400,000 shares of our common stock at a price of $1.00 per share, and incurred legal costs related to the Private Placement of $8,000. The net proceeds of $392,000 were used for general working capital. (See Note 10 in the notes to condensed consolidated financial statements).
In April 2019, we obtained a loan in the amount of $1.5 million from a related party. The proceeds were used to pay down accounts payable and for general operating capital purposes. On April 12, 2021, December 14, 2022 and August 14, 2023, we amended this loan (see Notes 5 and 13 in the notes to condensed consolidated financial statements). As of both December 31, 2023 and March 31, 2023, we had $1.0 million outstanding on the related party note. The loan matures on April 12, 2025.
We continue to experience a loss from operations as the impacts from the macroeconomic environment led to lower sales across our portfolio on a year-to-date basis. Industry data shows that consumers intake of dietary supplements is not slowing down but may be trading down to private label brands to save on costs. The market for bulk material is increasingly price sensitive with many companies sourcing lower priced international ingredients. Since the second quarter of fiscal year 2023, we drew a net of $1.36 million on our line of credit and $1.25 million on the Revolver. To address the resulting cash flow challenges, we continue to monitor cost savings initiatives implemented in fiscal year 2023, including stopping or slowing production of inventory in alignment with current customer demand, maintaining a reduced headcount and compensation, primarily through attrition and furloughs, respectively, and eliminating certain discretionary selling, general and administrative expenses. We have also made changes in the sales and marketing team starting with the Chief Commercial Officer and strengthening the sales team, updating our marketing materials to emphasize our competitive strengths and raising capital by completing a private placement in the third fiscal quarter of 2024.
Funds generated by operating activities and available cash are our most significant sources of liquidity for working capital requirements, debt service and funding of maintenance levels of capital expenditures. We have developed our operating plan to produce the cash flows necessary to meet all financing requirements. Although we have a history of either being in compliance with debt covenants or obtaining the necessary waivers, execution of our operating plan is dependent on many factors, some of which are not within the control of the Company. However, no assurances can be provided that we will achieve our operating plan and cash flow projections for this fiscal year or our projected consolidated financial position as of December 31, 2024. Such estimates are subject to change based on future results and such change could cause future results to vary significantly from expected results.
Cash Flows The following table summarizes our cash flows for the periods indicated ($ in thousands):
| Nine Months Ended December 31, |
||||||||
| 2023 |
2022 |
|||||||
| Total cash provided by (used in): |
||||||||
| Operating activities |
$ | (762 | ) |
$ | (2,683 | ) |
||
| Investing activities |
(323 | ) |
(1,018 | ) |
||||
| Financing activities |
772 | 1,625 | ||||||
| Decrease in cash |
$ | (313 | ) |
$ | (2,076 | ) |
||
Cash used in operating activities for the nine months ended December 31, 2023 was the result of a net loss of $3.2 million, offset by non-cash items of $1.8 million and an increase in accounts receivable due to timing of sales, offset by a decrease in inventories.
Cash used in investing activities for the nine months ended December 31, 2023 primarily includes costs for capital improvements at our Kona facility.
Cash provided by financing activities for the nine months ended December 31, 2023 consists primarily of the proceeds from the Private Placement of $392,000 and draws on the related party line of credit of $750,000 offset by debt service payments of $179,000 and the paydown of the Bank line of credit of $180,000.
Sources and Uses of Capital
As of December 31, 2023, our working capital was $3.7 million, a decrease of $1.6 million compared to March 31, 2023. There was a decrease in inventories in the first nine months of fiscal year 2024 as we manage our production in line with sales demand, offset by the start-up of astaxanthin cultivation in April, as well as draws on our related party line of credit.
Our results of operations and financial condition can be affected by numerous factors, many of which are beyond our control and could cause future results of operations to fluctuate materially as it has in the past. Future operating results may fluctuate as a result of changes in sales volumes to our largest customers, weather patterns, increased competition, increased materials, nutrient and energy costs, government regulations and other factors beyond our control.
A significant portion of our expense levels are relatively fixed, so the timing of increases in expenses is based in large part on forecasts of future sales. If net sales are below expectations in any given period, the adverse impact on results of operations may be magnified by our inability to adjust spending quickly enough to compensate for the sales shortfall. We may also choose to reduce prices or increase spending in response to market conditions, which may have a material adverse effect on financial condition and results of operations.
Outlook
This outlook section contains a number of forward-looking statements, all of which are based on current expectations. Actual results may differ materially.
Our strategic direction has been to position as a world leader in the production and marketing of high-value natural products from microalgae. We are vertically aligned, producing raw materials in the form of microalgae processed at our 96-acre facility in Hawaii, and integrating those raw materials into finished products. Our primary focus is stabilizing our production volume, rationalizing market channel participation, and leveraging our centers of core competence. We will continue to place emphasis on our Nutrex Hawaiian consumer products while exploring further opportunities for bulk sales orders for Spirulina and Astaxanthin, both domestically and internationally. Extraction services to third party customers utilizing our 1,000 bar super critical CO2 extractor process are expected to generate additional income throughout the year. We will leverage our experience and reputation for quality, nutritional products which promote health and well-being. The foundation of our nutritional products is naturally cultivated Hawaiian Spirulina Pacifica® in powder and tablet form; and BioAstin® Hawaiian Astaxanthin® antioxidant in extract and softgel form. Information about our Company and our products can be viewed at www.cyanotech.com and www.nutrex-hawaii.com. Consumer products can also be purchased online at www.nutrex-hawaii.com.
Gross profit margin percentages going forward can be impacted by lower production volumes along with pressure on input costs as well as greater competition in the market place. This could cause margins to decline in future periods. We will continue to focus on higher margin consumer products that promote health and well-being and strive for continuous improvements in processes and production methods to stabilize costs and production levels for the future. However, significant sales variability between periods may occur based on historical results.
Producing the highest quality microalgae is a complex biological process which requires balancing numerous factors including microalgal strain variation, temperature, acidity, nutrient and other environmental considerations, some of which are not within our control. An imbalance or unexpected event can occur resulting in production levels below normal capacity. The allocation of fixed production overheads (such as depreciation, rent and general insurance) to inventories is determined based on normal production capacity. When our production volumes are below normal capacity limits, certain fixed production overhead costs cannot be inventoried and are recorded immediately in cost of sales. In addition, when production costs exceed historical averages, we evaluate whether such costs are one-time-period charges or an ongoing component of inventory cost.
To manage our cash resources effectively, we will balance production with sales demand, minimizing the cost associated with inventory levels when appropriate and manage our expenses judiciously. We could experience unplanned cash outflows and may need to utilize other cash resources to meet working capital needs. A prolonged downturn in sales could impair our ability to generate sufficient cash for operations and hamper our ability to attract additional capital investment which could become necessary to maintain optimal production levels and efficiencies.
Our future results of operations and the other forward-looking statements contained in this Outlook, in particular the statements regarding revenues, gross margin and capital spending, involve a number of risks and uncertainties. In addition to the factors discussed above, any of the following could cause actual results to differ materially: business conditions and growth in the natural products industry and in the general economy; changes in customer order patterns; changes in demand for natural products in general; changes in weather conditions; changes in health and growing conditions of our astaxanthin and spirulina products; competitive factors, such as increased production capacity from competing spirulina and astaxanthin producers and the resulting impact, if any, on world market prices for these products; government actions and increased regulations both domestic and foreign; shortage of manufacturing capacity; and other factors beyond our control. Risk factors are discussed in detail in Part II, Item 1A of this quarterly report and in Part I, Item 1A of our Form 10-K report for the year ended March 31, 2023.
We believe that our technology, systems, processes and favorable growing location generally permit year-round harvest of our microalgal products in a cost-effective manner. However, previously experienced imbalances in the highly complex biological production systems, together with volatile energy costs and rapidly changing world markets, suggest a need for continuing caution with respect to variables beyond our reasonable control. Therefore, we cannot, and do not attempt to, provide any definitive assurance with regard to our technology, systems, processes, location, or cost-effectiveness.
Off-Balance Sheet Arrangements
As of December 31, 2023, we had no off-balance sheet arrangements or obligations.
Impact of Inflation
Inflationary factors such as increases in the costs of materials, utilities and labor affected our operations in fiscal year 2023. In the first nine months of fiscal year 2024, we have seen stabilization in our underlying costs. We are also experiencing overall lower demand as consumers are feeling the impacts of higher inflation and are closely managing their discretionary spend. The exact impact on our results is difficult to isolate and quantify given the macroeconomic environment. Most of our leases provide for cost-of-living adjustments and require us to pay for insurance and maintenance expenses, all of which are subject to inflation. Additionally, our future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that we will be able to pass on increased costs to our customers.
Depreciation expense is based on the historical cost of fixed assets and is therefore potentially less than it would be if it were based on current replacement cost. While property and equipment acquired in prior years will ultimately have to be replaced at higher prices, it is expected that replacement will be a gradual process over many years.
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, filed with the SEC on June 27, 2023. In the nine months ended December 31, 2023, there were no changes to the application of critical accounting policies previously disclosed in our most recent Annual Report on Form 10-K.
| Controls and Procedures |
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our chief executive officer (“CEO”) and chief financial officer (“CFO”), we have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15(d)-15(e) of the Exchange Act as of the end of the period covered by this Report. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information we are required to disclose in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2023. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control - Integrated Framework” (2013 Framework). Based on our assessment, using those criteria, management concluded that our internal control over financial reporting was effective as of December 31, 2023.
Changes to Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the nine months ended December 31, 2023, that has materially affected, or was reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including our CEO and CFO, do not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all errors and all fraud. A control system no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
The inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by the individual acts of some persons, or by collusion of two or more people. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
This Form 10-Q should be read in conjunction with Item 9A “Controls and Procedures” of the Company’s Form 10-K for the fiscal year ended March 31, 2023, filed June 27, 2023.
| OTHER INFORMATION |
| Legal Proceedings |
From time to time, the Company may be involved in litigation and investigations relating to claims and matters arising out of its operations in the normal course of business. There were no significant legal matters outstanding at December 31, 2023.
| Risk Factors |
For a discussion of the risk factors relating to our business, please refer to Part I, Item 1A of our Form 10-K for the year ended March 31, 2023, which is incorporated by reference herein.
| Unregistered Sales of Equity Securities and Use of Proceeds |
None.
| Defaults upon Senior Securities |
None.
| Other Information |
As disclosed previously, on August 10, 2023, the Company received a notification letter from the Listing Qualifications Department (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq") notifying the Company that, for the last 30 consecutive business days, the bid price for the Company's common stock had closed below the minimum $1.00 per share requirement for continued listing on the Nasdaq under Nasdaq Listing Rule 5550(a)(2) (“Bid Price Rule”). The notification letter provided that, in accordance with the Nasdaq Listing Rule 5810(c)(3)(A), the Company had an initial period of 180 days from the date of the notification letter, or until February 6, 2024 (the “Compliance Date”), to regain compliance with the Bid Price Rule.
On February 7, 2024, the Company was notified by the Staff of the Company's failure to demonstrate compliance by the Compliance Date and the Company expects to receive a Staff Delist Determination from Nasdaq notifying the Company that its common stock will be delisted from Nasdaq for failing to comply with the Bid Price Rule. The Company does expect to appeal the Staff Delist Determination within the prescribed time period. The delisting is expected to be effective February 20, 2024, and a Form 25-NSE will be filed with the Securities and Exchange Commission to remove the Company's common stock from listing on the Nasdaq Stock Market.
The Company expects that its common stock will be eligible to be traded over-the-counter. However, no assurance can be given that trading of the Company's common stock will be commenced or maintained on an over-the-counter market or any other quotation medium.
| Exhibits |
| 10.1 |
||
| 31.1* |
||
| 31.2* |
||
| 32* |
||
| 99.1* |
||
| 101 |
The following financial statements from Cyanotech Corporation’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2023, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements. |
|
| 104 |
Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101) |
|
| *Included herewith. Other exhibits were filed as shown above. |
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CYANOTECH CORPORATION |
|||
| (Registrant) |
|||
| February 8, 2024 |
By: |
/s/ Matthew K. Custer |
|
| (Date) |
Matthew K. Custer |
||
| President and Chief Executive Officer |
|||
| February 8, 2024 |
By: |
/s/ Felicia Ladin |
|
| (Date) |
Felicia Ladin |
||
| Chief Financial Officer, Vice President — Finance & |
|||
| (Principal Financial Officer) |
|||
EXHIBIT INDEX
| Exhibit Number |
Description |
|
| 10.1 |
Subscription Agreement, dated December 15, 2023, by and between The Michael Arlen Davis Revocable Trust and Cyanotech Corporation (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed December 19, 2023) |
|
| 31.1* |
Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 8, 2024 |
|
| 31.2* |
Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 8, 2024 |
|
| 32* |
Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of February 8, 2024 |
|
| 99.1* |
Press Release dated February 8, 2024 |
|
| 101 |
The following financial statements from Cyanotech Corporation’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2023, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements |
|
| 104 |
Cover Page Interactive Data File (Formatted as Inline XBRL and contained in Exhibit 101) |
|
| *Included herewith. Other exhibits were filed as shown above. |