NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 dietary 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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements include the accounts of Cyanotech Corporation and its wholly owned subsidiary, Nutrex Hawaii, Inc. (“Nutrex Hawaii” or “Nutrex”). Intercompany balances and transactions have been eliminated in consolidation.
Liquidity and Going Concern
The accompanying consolidated financial statements, as of and for the fiscal year ended 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 the fiscal year ended March 31, 2023. Further, as discussed below, the Company was 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 the Company's ability to continue as a going concern. The 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 March 31, 2023, the Company had cash of $974,000 and working capital of $5,393,000 compared to $2,589,000 and $11,443,000, respectively, at March 31, 2022. The Company has a Revolving Credit Agreement (the “Credit Agreement”) with First Foundation Bank (“the Bank”) that provided for borrowings up to $2,000,000 on a revolving basis. At March 31, 2023 and 2022, the Company had outstanding borrowings of $1,540,000 and $0, respectively, on the line of credit. The line of credit is subject to renewal on August 30, 2023, and the Company intends to renew or replace it with another line of credit on or before the expiration date.
The Company also has a loan facility with a related party that allows the Company to borrow up to $1,000,000 on a revolving basis (the “Revolver”). At March 31, 2023 and March 31, 2022, the Company had $500,000 and $0, respectively, outstanding borrowings on the Revolver, which were included in line of credit – related party on the Consolidated Balance Sheets. The Revolver expires on April 12, 2025 (see Notes 5 and 15).
As of March 31, 2023, the Company had $3,461,000 of 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, 2023, the Company’s debt service coverage ratio fell short of the Bank’s annual requirement. On June 22, 2023, the Bank provided the Company 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. In addition, the Bank's letter 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 $1,770,000 as of June 21, 2023. As of March 31, 2022, the Company met all required annual financial and debt covenants.
In April 2019, the Company obtained a loan in the amount of $1,500,000 from a related party. The proceeds were used to pay down accounts payable and for general operating capital purposes. On April 12, 2021 and December 14, 2022, the Company amended this loan (see Notes 5 and 15). As of both March 31, 2023 and 2022, the Company had $1,000,000 outstanding on the related party note. The loan matures on April 12, 2025.
The Company experienced a loss from operations resulting in net cash outflows from operating activities of $2,100,000 for the fiscal year ended March 31, 2023, primarily due to the macroeconomic environment which led to lower sales across all of the Company’s products. During the fiscal year, the Company drew $1,540,000 on its line of credit and $500,000 on the Revolver. To address the resulting cash flow challenges during fiscal year 2023, the Company implemented some cost savings initiatives, including stopping or slowing production of inventory in alignment with current customer demand, reducing headcount and compensation, primarily through attrition and furloughs, respectively, and eliminating certain discretionary selling, general and administrative expenses.
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. The Company has developed its operating plan to produce the cash flows necessary to meet all financial requirements through at least June 30, 2024. 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 the next fiscal years or its projected consolidated financial position as of March 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 |
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("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.
Financial Instruments and Fair Value
The Company applies a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:
| Level 1 — | Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access. |
| Level 2 — | Inputs to the valuation methodology include: |
| ● | Quoted prices for similar assets or liabilities in active markets; |
| ● | Quoted prices for identical or similar assets or liabilities in inactive markets; |
| ● | Inputs other than quoted prices that are observable for the asset or liability; and |
| ● | Inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
If the asset or liability has a specified contractual term, the Level 2 input must be observable for substantially the full term of the asset or liability.
| Level 3 — | Inputs to the valuation methodology are unobservable and significant to the fair value. |
Cash, Accounts Receivable, Accounts Payable, Accrued Expenses and Customer Deposits - Due to the short-term nature of these instruments, management believes that the carrying amounts approximate fair value.
Line of Credit, Revolver and Long-Term Debt - The carrying amount of our lines of credit, Revolver and long-term debt approximates fair value as interest rates applied to the underlying debt are adjusted quarterly to market interest rates, which approximate current interest rates for similar debt instruments of comparable maturities.
Cash
Cash primarily consists of cash on hand and cash in bank deposits.
Concentration Risk
The Company maintains its cash accounts in banks located in Hawaii, which are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per bank. The Company had cash balances at March 31, 2023 and 2022 that exceeded the balance insured by the FDIC by $422,000 and $2,089,000, respectively. A significant portion of revenues and accounts receivables are derived from a few major customers. For the year ended March 31, 2023, two customers individually accounted for 34% and 6% of the Company’s total net sales and for the year ended March 31, 2022, two customers individually accounted for 22% and 19% of the Company’s total net sales. Two customers accounted for 46% and 63% of the Company’s accounts receivable balance as of March 31, 2023 and 2022, respectively.
Accounts Receivable
Accounts receivable 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 doubtful accounts reflects management’s best estimate of probable credit losses inherent in the accounts receivable balance. Management determines the allowance based on historical experience, specifically identified nonpaying accounts and other currently available evidence. Management reviews its allowance for doubtful accounts 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.
Inventories
Inventories are stated at the lower of cost or net realizable value. Inventories are determined using the first-in, first-out (“FIFO”) method. Net realizable value is defined as estimated sales price less cost to dispose. Inventory costs include materials, labor, overhead and third-party costs. Management reviews and writes down inventory for known or expected inventory obsolescence based on product age and quality which may affect salability.
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.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives for equipment and furniture and fixtures, and the shorter of the land lease term (see Notes 4 and 7) or estimated useful lives for leasehold improvements as follows (in years):
Equipment | 3 | to | 10 |
Furniture and fixtures | 3 | to | 7 |
Leasehold improvements | 10 | to | 25 |
Capital project costs are accumulated in construction-in-progress until completed, at which time the costs are transferred to the relevant asset and commence depreciation. Repairs and Maintenance costs are expensed in the period incurred. Repairs and maintenance that significantly increase the useful life or value of the asset are capitalized and depreciated over the remaining life of the asset. The Company capitalizes interest cost incurred on funds used to construct property and equipment. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life.
Impairment of Long-Lived Assets
Management reviews long-lived assets, such as equipment, leasehold improvements and purchased intangibles subject to amortization for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized to the extent that the carrying amount exceeds the asset’s fair value. Assets to be disposed of and related liabilities would be separately presented in the consolidated balance sheet. Assets to be disposed of would be reported at the lower of the carrying value or fair value less costs to sell and would not be depreciated.
Accounting for Asset Retirement Obligations
Management evaluates quarterly the potential liability for asset retirement obligations under the Company’s lease for its principal facility and corporate headquarters. No liability has been recognized as of March 31, 2023 and 2022 (see Note 7).
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 years ended March 31, 2023 and 2022, the Company recognized $94,000 and $55,000, respectively, of revenue from deposits that were included in contract liabilities as of March 31, 2022 and 2021, 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.
Research and Development
Research and development costs are expensed as incurred and consist primarily of labor, benefits and outside research.
Advertising
Advertising costs are expensed as incurred. Total advertising expense for the years ended March 31, 2023, 2022 and 2021 was $1,513,000, $1,458,000, and $2,116,000, respectively.
Income Taxes
Income taxes are accounted for under the asset and liability method. The asset and liability method require the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using income tax rates applicable to the period in which the tax difference is expected to reverse.
Judgment is required in determining any valuation allowance recorded against deferred tax assets, specifically net operating loss carryforwards, tax credit carryforwards and deductible temporary differences that may reduce taxable income in future periods. In assessing the need for a valuation allowance, the Company considers all available evidence including past operating results, estimates of future taxable income and tax planning opportunities. In the event the Company changes its determination as to the amount of deferred tax assets that can be realized, it will adjust its valuation allowance with a corresponding impact to income tax expense in the period in which such determination is made.
In evaluating a tax position for recognition, management evaluates whether it is more-likely-than-not that a position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more-likely-than-not recognition threshold, the tax position is measured and recognized in the Company’s financial statements as the largest amount of tax benefit that, in management’s judgment, is greater than 50% likely of being realized upon settlement. At March 31, 2023 and 2022, there were no liabilities 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 expense in its consolidated statements of operations. During the years ended March 31, 2023 and 2022, there were no accrual for the payment of interest and penalties related to uncertain tax positions.
Share-Based Compensation
The Company accounts for share-based payment arrangements using fair value. The Company currently has no liability-classified awards. Equity-classified awards, including grants of restricted stock, restricted stock units and employee stock options, are measured at the grant-date fair value of the award and are not subsequently remeasured unless an award is modified. The cost of equity-classified awards is recognized in the statement of operations over the period during which an employee is required to provide the service in exchange for the award, or the vesting period. All of the Company’s restricted stock, restricted stock units and stock options are service-based awards, and considered equity-classified awards; as such, they are reflected in Equity and Stock Compensation Expense accounts. All stock-based compensation has been classified as general and administrative expense in the consolidated statement of operations.
The Company utilizes the Black-Scholes option pricing model to determine the fair value of each option award. Expected volatilities are based on the historical volatility of the Company’s common stock over a period consistent with that of the expected term of the options. The expected term of the options is estimated based on factors such as vesting periods, contractual expiration dates and historical exercise behavior. The risk-free rates for periods within the contractual life of the options are based on the yields of U.S. Treasury instruments with terms comparable to the estimated option terms. The forfeiture rate of the options is based on historical forfeitures of similar grants.
Per Share Amounts
Basic earnings (loss) per common share is calculated by dividing net income (loss) for the year by the weighted average number of common shares outstanding during the year. Diluted earnings per common share is calculated by dividing net income for the year by the sum of the weighted average number of common shares outstanding during the year plus the number of potentially dilutive common shares (“dilutive securities”) that were outstanding during the year. Dilutive securities include restricted stock units and stock options granted pursuant to the Company’s stock option plans. Dilutive securities related to the Company’s stock option plans are included in the calculation of diluted earnings per common share using the treasury stock method. Potentially dilutive securities are excluded from the computation of earnings per share in periods in which a net loss is reported, as their effect would be antidilutive. A reconciliation of the numerators and denominators of the basic and diluted income (loss) per common share calculations for the years ended March 31, 2023, 2022 and 2021 is presented in Note 11.
Recent Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes” (“ASU 2019-12”), which, as part of its Simplification Initiative to reduce the cost and complexity in accounting for income taxes, removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also amends other aspects of the guidance to help simplify and promote consistent application of GAAP. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company adopted this standard as of April 1, 2021, with no impact on its consolidated financial statements and related disclosures.
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 is currently evaluating the impact the adoption of this standard will have on its financial statements.
Inventories consist of the following as of March 31, 2023 and 2022:
| | 2023 | | | 2022 | |
| | (in thousands) | |
Raw materials | | $ | 1,887 | | | $ | 1,490 | |
Work in process | | | 2,049 | | | | 2,868 | |
Finished goods | | | 6,502 | | | | 4,595 | |
Supplies | | | 269 | | | | 513 | |
Inventories | | $ | 10,707 | | | $ | 9,466 | |
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 expensed abnormal production costs of $90,000, $0 and $110,000 to cost of sales for the fiscal years ended March 31, 2023, 2022 and 2021, respectively.
Beginning in fiscal 2021, cultivation of astaxanthin was completed in the first six months of the fiscal year during the most productive months of the year due to the best growing conditions, compared to year-round cultivation in the prior fiscal years. The same approach was followed in fiscal year 2022 and 2023. 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 $269,000, $136,000 and $179,000 were expensed to cost of sales for the fiscal years ended March 31, 2023, 2022 and 2021, respectively.
4. | EQUIPMENT AND LEASEHOLD IMPROVEMENTS |
Equipment and leasehold improvements consist of the following as of March 31, 2023 and 2022:
| | 2023 | | | 2022 | |
| | (in thousands) | |
Equipment | | $ | 21,649 | | | $ | 20,231 | |
Leasehold improvements | | | 15,038 | | | | 14,751 | |
Furniture and fixtures | | | 407 | | | | 394 | |
| | | 37,094 | | | | 35,376 | |
Less accumulated depreciation and amortization | | | (25,947 | ) | | | (24,339 | ) |
Construction in-progress | | | 219 | | | | 848 | |
Equipment and leasehold improvements, net | | $ | 11,366 | | | $ | 11,885 | |
Management has determined that $5,000, $21,000 and $64,000 of asset impairment existed as of March 31, 2023, 2022 and 2021, and the impairment losses were included in other income (expense) on the consolidated statements of operations.
Depreciation and amortization expense were approximately $1,655,000, $1,599,000 and $1,748,000 for the years ended March 31, 2023, 2022 and 2021, respectively.
5. | LINE OF CREDIT AND LONG-TERM DEBT |
Total debt consists of the following at March 31, 2023 and 2022 as follows:
| | 2023 | | | 2022 | |
| | (in thousands) | |
Line of credit | | $ | 1,540 | | | $ | — | |
Line of credit – related party | | | 500 | | | | — | |
Long-term debt | | | 3,369 | | | | 3,938 | |
Long-term debt – related party | | | 1,000 | | | | 1,000 | |
Less current maturities | | | (5,409 | ) | | | (490 | ) |
Long-term debt, excluding current maturities | | | 1,000 | | | | 4,448 | |
Less unamortized debt issuance costs | | | — | | | | (112 | ) |
Total long-term debt, net of current maturities and unamortized debt issuance costs | | $ | 1,000 | | | $ | 4,336 | |
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 (8.0% at March 31, 2023 and 3.25% at March 31, 2022) plus 2%, floating, provided that at no time shall the annual interest rate be less than 4.25%.
At March 31, 2023 and 2022, the outstanding balances under the Credit Agreement was $1,540,000 and $0, respectively, and at March 31, 2023 was included in current liabilities on the Consolidated Balance Sheets. The line of credit, which is subject to annual renewal, was renewed on August 30, 2022 and will be subject to renewal upon expiration on August 30, 2023.
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 a United States Department of Agriculture (“USDA”) Rural Development Guarantee program.
The provisions of the 2015 Loan required the payment of principal and interest until its maturity on September 1, 2022. Interest on the 2015 Loan accrued on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate (7.5% at March 31, 2023 and 3.25% at March 31, 2022) plus 2.0% and was adjustable on the first day of each calendar quarter and fixed for that quarter, provided that at no time shall the annual interest rate be less than 6.0%. The 2015 Loan was paid off in September 2022 and the balance under this loan was $218,000 at March 31, 2022, which was included in the current maturities of 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 (7.5% at March 31, 2023 and 3.25% at March 31, 2022) plus 1.0% and is adjustable on the first day of each calendar quarter and fixed for that quarter, provided that at no time shall the annual interest rate be less than 5.5%. The balance under the 2012 Loan was $3,461,000 and $3,720,000 at March 31, 2023 and 2022, respectively, and was included in current maturities of long-term debt and long-term debt, respectively, in the debt table above. See Loan Covenants, Violations and Waiver below.
The 2015 Loan included 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 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 guaranteed 80% of all amounts owing under the 2012 Loan. The balance in unamortized debt issuance costs was $92,000 and $112,000 at March 31, 2023 and 2022, respectively, and at March 31, 2023 was included in current maturities of long-term debt in the debt table above. See Loan Covenants, Violations and Waiver below.
Loan Covenants, Violations and Waiver
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, 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 loan amount of $3,461,000 and the outstanding line of credit balance of $1,540,000. 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 $1,770,000 as of June 21, 2023. As of March 31, 2022, the Company was in compliance with all required covenants.
Although the Term Loans mature in August 2032, it is probable that a debt covenant violation occurs within the next twelve months. Therefore, the Term Loans and related unamortized debt issuance costs are classified as current on the Balance Sheet as of March 31, 2023.
Long-term Debt – PPP
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"), with an original maturity date of May 2022. In December 2020, the Company received notice of forgiveness of the PPP loan in whole, including all accrued unpaid interest. In fiscal year 2021, the Company recorded the forgiveness of $1,381,000 of principal and $8,000 of accrued interest for a total of $1,389,000, which was included in gain on extinguishment of debt on the Consolidated Statements of Operations. The Company has used the proceeds of the PPP loan for certain payroll costs in accordance with the PPP.
Line of Credit and Debt – Related Party
In April 2019, the Company obtained a loan in the amount of $1,500,000 and the interest was payable quarterly. The loan was originally due in April 2021. In April 2021, the Company amended the loan, which extended the expiration to April 2024, converted $500,000 into the Revolver, adjusted the interest rate to reflect a floor of 5%, and granted a security interest in substantially all of the Company’s personal property assets, subject to limited exceptions. Concurrently, with the amendment and conversion of the original loan, the Company repaid in cash the principal amount of $500,000 plus accrued interest to date of $1,900 (see Note 15). In December 2022, the Company amended the loan to extend the expiration to April 2025 and increase the Revolver to $1,000,000. At March 31, 2023 and 2022, the balance under this loan was $1,000,000, which was included in long-term debt in the debt table above. At March 31, 2023 and 2022, the balance under the Revolver was $500,000 and $0, respectively, which was included in line of credit – related party in the debt table above. Interest accrues on the outstanding principal balance and the Revolver at an annual variable rate equal to the published Wall Street Journal prime rate (7.5% and 3.25% at March 31, 2023 and 2022, respectively) plus 1.0% and is adjustable on the first day of each calendar quarter and fixed for that quarter, provided that at no time shall the annual interest rate be less than 5.0%.
Future principal payments, excluding unamortized debt issuance costs, under the loans at March 31, 2023 are as follows:
Fiscal year ending March 31 | | (in thousands) | |
2024 | | $ | 3,461 | |
2026 | | | 1,000 | |
Total principal payments | | $ | 4,461 | |
Accrued expenses as of March 31, 2023 and 2022 consist of the following:
| | 2023 | | | 2022 | |
| | (in thousands) | |
Bonus and profit sharing | | $ | 143 | | | $ | 488 | |
Wages | | | 215 | | | | 211 | |
Vacation | | | 393 | | | | 392 | |
Rent, interest and legal | | | 30 | | | | 108 | |
Other accrued expenses | | | 320 | | | | 213 | |
Total accrued expenses | | $ | 1,101 | | | $ | 1,412 | |
The Company’s principal facility and its corporate headquarters are located at the Natural Energy Laboratory of Hawaii Authority (“NELHA”) at Keahole Point in Kailua-Kona, Hawaii. The Company leases two properties from the State of Hawaii under a 40-year commercial lease expiring in 2035 and a 19-year commercial lease expiring in 2037. Under the terms of the existing NELHA leases, the Company could be required to remove improvements at the end of the lease terms. Under generally accepted accounting principles in the United States, an entity should recognize the fair value of a liability for an asset retirement obligation in the period in which the retirement obligation is incurred, if a reasonable estimate of fair value can be made. If such an estimate cannot be made in the period the asset retirement obligation is incurred, the liability should be recognized when the fair value can be reasonably estimated. Based on communications with NELHA, management does not believe the projected cost for such removal to be material to the consolidated financial statements, or likely, given historical practices. However, conditions could change in the future. It is not possible to predict such changes or estimate any impact thereof.
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, which was renewed effective January 1, 2023. The NELHA land lease provides for contingent rentals in excess of minimum rental commitments based on a percentage of the Company’s sales. Contingent rental payments for the years ended March 31, 2023, 2022 and 2021 were $0, $73,000 and $50,000, respectively.
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 terms, 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 two 84-month solar leases for two of its buildings and a 48-month lease for equipment, which are included in the right-of-use assets and liabilities. At March 31, 2023, the weighted average remaining lease terms of all operating leases was 9.8 years, the weighted average discount rate was 7.3% and the operating lease costs were $719,000. At March 31, 2022, the weighted average remaining lease terms of all operating leases was 12.2 years, the weighted average discount rate was 7.2% and the operating lease costs were $603,000. For fiscal year ended March 31, 2023, noncash right-of-use assets obtained in exchange for operating lease obligations was $1,429,000, representing the lease renewal of one of the Company's facility leases.
Supplemental balance sheet information related to leases consist of the following as of:
Operating leases | | Balance Sheet Classification | | March 31, 2023 | | | March 31, 2022 | |
| | | | (in thousands) | |
Right-of-use assets | | Operating lease right-of-use assets | | $ | 6,149 | | | $ | 4,720 | |
Accumulated lease amortization | | Operating lease right-of-use assets | | | (1,373 | ) | | | (933 | ) |
| | | | | | | | | | |
Total right-of-use assets | | $ | 4,776 | | | $ | 3,787 | |
| | | | | | | | | | |
Current lease liabilities | | Operating lease obligations | | $ | 483 | | | $ | 393 | |
Non-current lease liabilities | | Long-term operating lease obligations | | | 4,275 | | | | 3,386 | |
| | | | | | | | | | |
Total lease liabilities | | $ | 4,758 | | | $ | 3,779 | |
Maturities of lease liabilities at March 31, 2023 are as follows:
Fiscal year ending March 31 | | (in thousands) | |
2024 | | $ | 810 | |
2025 | | | 820 | |
2026 | | | 797 | |
2027 | | | 798 | |
2028 | | | 683 | |
Thereafter | | | 2,760 | |
Total undiscounted lease payments | | | 6,668 | |
Less: present value discount | | | (1,910 | ) |
Total lease liabilities balance | | $ | 4,758 | |
Rent expense, including contingent rent, under operating leases were $506,000, $713,000 and $616,000 for the years ended March 31, 2023, 2022 and 2021, respectively. Property taxes paid to the states of Hawaii and California were $37,000, $30,000 and $28,000 for the years ended March 31, 2023, 2022 and 2021, respectively.
8. | OTHER 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 March 31, 2023.
As of March 31, 2023, 2022 and 2021, the Company had purchase obligations of $822,000, $1,105,000 and $1,005,000, respectively, including agreements to purchase goods or services that are enforceable, are legally binding and specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. The term of the minimum purchase agreement is for ten years, expiring in April 2026 and purchase obligations do not include agreements that are cancelable without penalty.
9. | SHARE-BASED COMPENSATION |
As of March 31, 2023, 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 and Amendment (the “2014 Directors Plan”). The Company has also issued stock options, which remain outstanding as of March 31, 2022, under an equity-based compensation plan which have expired according to its terms: the 2004 Independent Director Stock Option and Stock Grant Plan (the “2004 Directors Plan”). This plan 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 2004 Directors Plan.
On August 25, 2016, the Company’s shareholders approved the 2016 Plan, authorizing the Board of Directors to provide incentive to the Company’s officers, employees and certain independent consultants through equity-based compensation in the form of stock options, restricted stock, restricted stock units, stock appreciation rights and other stock-based awards (together, “Stock Awards”) and performance shares and performance units (together, “Performance Awards”). Awards under the 2016 Plan are limited to the authorized amount of 1,300,000 shares, up to 600,000 of which are available for issuance in connection with Performance Awards and Stock Awards. As of March 31, 2023, there were 881,437 shares available for grant under the 2016 Plan.
On August 28, 2014, the Company’s shareholders approved the 2014 Directors Plan authorizing the Board of Directors to provide incentive to the Company’s independent directors through equity-based compensation in the form of stock options and restricted stock. Awards under the 2014 Directors Plan are limited to the authorized amount of 350,000 shares. At the 2021 Annual Meeting of Shareholders, the stockholders of the Company approved an amendment to the 2014 Directors Plan to increase the number of shares of common stock available for issuance under the plan by 300,000 shares. As of March 31, 2023, there were 223,206 shares available for grant under the 2014 Directors Plan.
The following table presents shares authorized, available for future grant and outstanding under each of the Company’s plans:
| | As of March 31, 2023 | |
| | Authorized | | | Available | | | Outstanding | |
2016 Plan | | | 1,300,000 | | | | 881,437 | | | | 305,334 | |
2014 Directors Plan | | | 650,000 | | | | 223,206 | | | | 12,000 | |
2004 Directors Plan | | | — | | | | — | | | | 6,000 | |
Total | | | 1,950,000 | | | | 1,104,643 | | | | 323,334 | |
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, 2004 Directors 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 are 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 $90,000, $63,000 and $29,000 for the fiscal years ended March 31, 2023, 2022 and 2021, respectively.
A summary of option activity under the Company’s stock plans for the years ended March 31, 2023, 2022 and 2021 is presented below:
Option Activity | | Shares | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (in years) | | | Aggregate Intrinsic Value | |
Outstanding at March 31, 2020 | | | 318,300 | | | $ | 4.08 | | | | 3.0 | | | $ | — | |
Granted | | | 130,000 | | | | 2.35 | | | | | | | | | |
Exercised | | | (19,000 | ) | | | 3.59 | | | | | | | | | |
Forfeited | | | (55,000 | ) | | | 3.13 | | | | | | | | | |
Outstanding at March 31, 2021 | | | 374,300 | | | $ | 3.64 | | | | 3.9 | | | $ | 129,700 | |
Granted | | | 50,000 | | | | 2.96 | | | | | | | | | |
Forfeited | | | (5,000 | ) | | | 5.21 | | | | | | | | | |
Expired | | | (166,800 | ) | | | 3.84 | | | | | | | | | |
Outstanding at March 31, 2022 | | | 252,500 | | | $ | 3.34 | | | | 6.5 | | | $ | 159,650 | |
Granted | | | 50,000 | | | | 3.43 | | | | | | | | | |
Expired | | | (49,500 | ) | | | 5.80 | | | | | | | | | |
Outstanding at March 31, 2023 | | | 253,000 | | | $ | 2.88 | | | | 7.5 | | | $ | — | |
Exercisable at March 31, 2023 | | | 111,333 | | | $ | 2.90 | | | | 6.6 | | | $ | — | |
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 $0.88, $3.37 and $3.30 at March 31, 2023, 2022 and 2021, respectively. The total intrinsic value of stock options exercised during fiscal year 2021 was $6,000. No stock options were exercised during fiscal year 2023 or 2022.
A summary of the Company’s non-vested options for the year ended March 31, 2023 is presented below:
Nonvested Options | | Shares | | | Weighted Average Grant-Date Fair Value | |
Nonvested at March 31, 2022 | | | 141,667 | | | $ | 1.33 | |
Granted | | | 50,000 | | | | 1.94 | |
Expired | | | (50,000 | ) | | | 1.33 | |
Nonvested at March 31, 2023 | | | 141,667 | | | $ | 1.55 | |
The weighted average grant-date fair value of stock options granted during fiscal years 2023, 2022 and 2021 was $97,000, $80,000 and $155,000, respectively. The total grant-date fair value of stock options that vested during fiscal years 2023, 2022 and 2021 were $67,000, $40,000 and $6,000, respectively.
The following table summarizes the weighted average characteristics of outstanding stock options as of March 31, 2023:
| | | | | Outstanding Options | | | Exercisable Options | |
Range of Exercise Prices | | | Number of Shares | | | Remaining Life (Years) | | | Weighted Average Exercise Price | | | Number of Shares | | | Weighted Average Exercise Price | |
$ 2.11 | - | $ 2.34 | | | | 105,000 | | | | 7.2 | | | $ | 2.28 | | | | 55,000 | | | $ | 2.27 | |
$ 2.35 | - | $2.76 | | | | 30,000 | | | | 7.5 | | | $ | 2.54 | | | | 21,666 | | | $ | 2.53 | |
$ 2.77 | - | $3.20 | | | | 50,000 | | | | 8.1 | | | $ | 2.96 | | | | 16,667 | | | $ | 2.96 | |
$ 3.21 | - | $5.91 | | | | 68,000 | | | | 7.3 | | | $ | 3.89 | | | | 18,000 | | | $ | 5.18 | |
Total stock options | | 253,000 | | | | 7.5 | | | $ | 2.88 | | | | 111,333 | | | $ | 2.90 | |
The range of fair value assumptions related to options granted during the years ended March 31, 2023, 2022 and 2021 were as follows:
| | 2023 | | | 2022 | | | 2021 | |
Exercise Price | | $ | 1.94 | | | $ | 1.60 | | | $ | 1.20 | |
Volatility | | | 57.47 | % | | | 58.23 | % | | | 54.44 | % |
Risk Free Rate | | | 3.36 | % | | | 1.06 | % | | | 0.40 | % |
Vesting Period (in years) | | | 3.0 | | | | 3.0 | | | | 3.0 | |
Forfeiture Rate | | | 19 | % | | | 0 | % | | | 0 | % |
Expected Life (in years) | | | 6.0 | | | | 6.0 | | | | 6.2 | |
Dividend Rate | | | 0 | % | | | 0 | % | | | 0 | % |
Total unrecognized stock-based compensation expense related to all unvested stock options was $124,000 and $139,000, at March 31, 2023 and 2022, respectively, which is expected to be expensed over a weighted average period of 1.6 years and 2.1 years, respectively.
Restricted Stock
Grants of fully vested restricted stock issued to Non-Employee Directors during fiscal years 2023, 2022 and 2021 was 64,489, 55,438 and 66,385 shares, respectively. Compensation expense recognized for fully vested restricted stock grants issued under the 2014 Directors Plan was $158,000, $158,000 and $158,000 for the fiscal years ended March 31, 2023, 2022 and 2021, respectively.
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. On April 3, 2023, 17,672 shares of fully vested restricted stock were issued to the two Board members. For the fiscal year ended March 31, 2023, compensation expense was earned and recognized for these fully vested restricted stock grants in the amount of $15,500.
Restricted Stock Units (“RSUs”)
RSUs are service-based awards granted to eligible employees under our 2016 Plan. Compensation expense recognized for RSUs issued under the 2016 Plan was $62,000, $123,000 and $28,000 for the years ended March 31, 2023, 2022 and 2021, respectively.
The following table summarizes information related to awarded RSUs:
Nonvested Restricted Stock Units | | Shares | | | Weighted Average Grant Price | |
Nonvested restricted stock units at March 31, 2020 | | | 12,766 | | | $ | 3.98 | |
Granted | | | 28,647 | | | $ | 2.15 | |
Vested | | | (9,135 | ) | | $ | 3.97 | |
Forfeited | | | (4,090 | ) | | $ | 2.21 | |
Nonvested restricted stock units at March 31, 2021 | | | 28,188 | | | $ | 2.38 | |
Granted | | | 38,672 | | | $ | 2.91 | |
Vested | | | (46,963 | ) | | $ | 2.85 | |
Forfeited | | | (5,432 | ) | | $ | 2.51 | |
Nonvested restricted stock units at March 31, 2022 | | | 14,465 | | | $ | 2.22 | |
Granted | | | 66,423 | | | $ | 3.13 | |
Vested | | | (8,312 | ) | | $ | 2.35 | |
Forfeited | | | (2,242 | ) | | $ | 2.91 | |
Nonvested restricted stock units at March 31, 2023 | | | 70,334 | | | $ | 3.04 | |
Total unrecognized stock-based compensation expense related to unvested restricted stock units was $122,000 and $19,000 at March 31, 2023 and 2022, respectively, which is expected to be expensed over a weighted average period of 2.3 years and 1.2 years, respectively.
On April 6, 2023, 7,900 RSUs were awarded to all eligible employees of the Company. This award is valued at $0.94 per share, the closing market price of Cyanotech common stock on the grant date, and vests over a period of three years.
10. | COMMON AND PREFERRED STOCK |
The Company has authorized a total of sixty million shares of which fifty million shares are authorized common stock and ten million shares are authorized preferred stock. None of the preferred stock was issued or outstanding at March 31, 2023 and 2022. Under the terms of the Company’s Amended and Restated Articles of Incorporation, the Board of Directors is authorized to determine or alter the rights, preferences, privileges and restrictions of the Company’s authorized but unissued shares of preferred stock.
11. | EARNINGS (LOSS) PER SHARE |
Basic earnings (loss) per share is computed on the basis of the weighted average number of common shares outstanding. Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the potentially dilutive effect of outstanding stock options and unvested restricted stock units using the treasury stock method.
Reconciliations between the numerator and the denominator of the basic and diluted income (loss) per share computations for the years ended March 31, 2023, 2022 and 2021 are as follows:
| | Net Income (loss) (Numerator) | | | Shares (Denominator) | | | Per Share Amount | |
| | (in thousands, except per share amounts) | |
Year ended March 31, 2023: | | | | | | | | | | | | |
Basic and diluted loss per share | | $ | (3,440 | ) | | | 6,244 | | | $ | (0.55 | ) |
Year ended March 31, 2022: | | | | | | | | | | | | |
Basic income per share | | $ | 2,154 | | | | 6,157 | | | $ | 0.35 | |
Effective dilutive securities—Common stock options and restricted stock units | | | — | | | | 11 | | | | — | |
Diluted income per share | | $ | 2,154 | | | | 6,168 | | | $ | 0.35 | |
Year ended March 31, 2021: | | | | | | | | | | | | |
Basic income per share | | $ | 920 | | | | 6,070 | | | $ | 0.15 | |
Effective dilutive securities—Common stock options and restricted stock units | | | — | | | | 8 | | | | — | |
Diluted income per share | | $ | 920 | | | | 6,079 | | | $ | 0.15 | |
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 restricted stock units totaling 3,000 for the fiscal year ended March 31, 2023, as the effect of their inclusion would be anti-dilutive. Restricted stock units become dilutive within the period granted and remain dilutive until the units vest and are then included in the calculation of basic earnings per share.
12. | PROFIT SHARING AND 401(K) PLAN |
The Company sponsors a profit sharing plan for all employees not covered under a separate management incentive plan. Under the profit sharing plan, a percentage determined by the Board of Directors of pre-tax profits on a quarterly basis may be allocated to non-management employees at management’s discretion. The profit sharing bonus may be distributed all in cash on an after-tax basis or distributed half in cash (on an after-tax basis) and the remainder deposited in an employee’s 401(k) account on a pre-tax basis. Employees may also make voluntary pre-tax contributions to their 401(k) accounts. Compensation expense under this plan was approximately $0, $121,000 and $25,000 for the fiscal years ended March 31, 2023, 2022 and 2021, respectively. Additionally, the Company makes a retirement contribution to all employees individual 401(k) accounts equal to two percent of each employee’s base pay for each bi-weekly pay period on a pre-tax basis. Retirement expense under this plan was approximately $138,000, $135,000 and $141,000 for fiscal years ended March 31, 2023, 2022 and 2021, respectively.
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13. | PRODUCT LINE AND GEOGRAPHIC INFORMATION |
Disaggregation of Revenue
The following table represents revenue disaggregated by major product line and extraction services for the years ended March 31, 2023, 2022 and 2021 (in thousands):
| | 2023 | | | 2022 | | | 2021 | |
Packaged sales | | | | | | | | | | | | |
Astaxanthin packaged | | $ | 12,227 | | | $ | 14,931 | | | $ | 14,512 | |
Spirulina packaged | | | 4,814 | | | | 7,604 | | | | 7,616 | |
Total packaged sales | | | 17,041 | | | | 22,535 | | | | 22,128 | |
| | | | | | | | | | | | |
Bulk sales | | | | | | | | | | | | |
Astaxanthin bulk | | | 1,982 | | | | 2,447 | | | | 2,279 | |
Spirulina bulk | | | 3,541 | | | | 10,386 | | | | 7,119 | |
Total bulk sales | | | 5,523 | | | | 12,833 | | | | 9,398 | |
| | | | | | | | | | | | |
Contract extraction and R&D services revenue | | | 614 | | | | 600 | | | | 819 | |
Total net sales | | $ | 23,178 | | | $ | 35,968 | | | $ | 32,345 | |
Cost of sales for contract extraction and R&D services for the years ended March 31, 2023, 2022 and 2021 were $441,000, $439,000 and $337,000, respectively.
Net sales by geographic region for the years ended March 31, 2023, 2022 and 2021 are as follows:
| | 2023 | | | 2022 | | | 2021 | |
| | (dollars in thousands) | |
Net sales(1): | | | | | | | | | | | | | | | | | | | | | | | | |
United States | | $ | 17,031 | | | | 73 | % | | $ | 24,468 | | | | 68 | % | | $ | 21,474 | | | | 66 | % |
Asia / Pacific | | | 2,164 | | | | 9 | % | | | 7,102 | | | | 20 | % | | | 5,827 | | | | 18 | % |
Europe | | | 2,440 | | | | 11 | % | | | 3,183 | | | | 9 | % | | | 3,416 | | | | 11 | % |
Other | | | 1,543 | | | | 7 | % | | | 1,215 | | | | 3 | % | | | 1,628 | | | | 5 | % |
| | $ | 23,178 | | | | 100 | % | | $ | 35,968 | | | | 100 | % | | $ | 32,345 | | | | 100 | % |
(1) | Net sales are attributed to countries based on location of customer. |
On December 22, 2017, H.R. 1, originally known as the Tax Cuts and Jobs Act, (“the Tax Act”) was enacted. As part of the Tax Act, for tax years beginning on or after January 1, 2022, taxpayers are required to capitalize research and experimental expenditures that qualify as Section 174 costs and recover them over five years for domestic expenditures, and 15 years for expenditures attributed for foreign research.
The Inflation Reduction Act of 2022 (the “IRA”) was signed into law on August 16, 2022. Among other things, the IRA contained three key changes for corporations: a corporate minimum tax, a 1% excise tax on certain stock buybacks and certain clean energy incentives and initiatives. The enactment of the IRA did not result in any material impact to the Company’s income tax provision for fiscal year 2023.
On August 9, 2022, the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022 (the “CHIPS Act”) was signed into law, which provides certain financial incentives with the intention of increasing American semi-conductor research, development and production and promoting domestic scientific and technological advances. The enactment of the CHIPS Act did not result in any material impact to the Company’s income tax provision for fiscal year 2023.
Income tax (expense) benefit for the years ended March 31, 2023, 2022 and 2021 consisted of:
| | 2023 | | | 2022 | | | 2021 | |
| | (in thousands) | |
Current: | | | | | | | | | | | | |
Federal | | $ | — | | | $ | — | | | $ | — | |
State | | | (18 | ) | | | (28 | ) | | | (3 | ) |
Total current (expense) benefit | | | (18 | ) | | | (28 | ) | | | (3 | ) |
Deferred: | | | | | | | | | | | | |
Federal | | | — | | | | — | | | | — | |
State | | | — | | | | — | | | | — | |
Total deferred expense | | | — | | | | — | | | | — | |
Income tax expense | | $ | (18 | ) | | $ | (28 | ) | | $ | (3 | ) |
The following table reconciles the amount of income taxes computed at the federal tax rate of 21% for each of the years ended March 31, 2023, 2022 and 2021, to the amount reflected in the Company’s consolidated statements of operations for the years ended March 31, 2023, 2022 and 2021:
| | 2023 | | | 2022 | | | 2021 | |
| | (in thousands) | |
Tax provision at federal statutory income tax rate | | $ | 952 | | | $ | (591 | ) | | $ | (263 | ) |
Stock-based compensation | | | (23 | ) | | | (16 | ) | | | (11 | ) |
Decrease (increase) in valuation allowance | | | (518 | ) | | | 557 | | | | (17 | ) |
State and local income taxes, net of federal tax benefit | | | (12 | ) | | | (2 | ) | | | 1 | |
Expired losses | | | (380 | ) | | | — | | | | — | |
Deferred tax true-up | | | (24 | ) | | | 34 | | | | 27 | |
CARES Act, PPP Loan Forgiveness | | | — | | | | — | | | | 298 | |
Other, net | | | (13 | ) | | | (10 | ) | | | (38 | ) |
Income tax expense | | $ | (18 | ) | | $ | (28 | ) | | $ | (3 | ) |
The tax effects of temporary differences related to various assets, liabilities and carry forwards that give rise to deferred tax assets and deferred tax liabilities as of March 31, 2023 and 2022 are as follows:
| | 2023 | | | 2022 | |
| | (in thousands) |
Deferred tax assets: | | | | | | | | |
Net operating loss carry forwards | | $ | 3,570 | | | $ | 3,140 | |
Inventory | | | 50 | | | | 175 | |
Compensation accrual | | | 177 | | | | 251 | |
Tax credit carry forwards | | | 28 | | | | 28 | |
Interest limitation | | | 108 | | | | — | |
Operating lease right-of-use assets | | | 1,323 | | | | 1,025 | |
Section 174 Costs | | | 118 | | | | — | |
Other | | | 26 | | | | 27 | |
Gross deferred tax assets | | | 5,400 | | | | 4,646 | |
Less valuation allowance | | | (2,990 | ) | | | (2,473 | ) |
Net deferred tax assets | | | 2,410 | | | | 2,173 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Operating lease obligations | | | (1,328 | ) | | | (1,027 | ) |
Depreciation and amortization | | | (1,082 | ) | | | (1,146 | ) |
Net deferred tax liabilities | | | (2,410 | ) | | | (2,173 | ) |
Net deferred tax assets (liabilities) | | $ | — | | | $ | — | |
In assessing the valuation allowance for deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Ultimately, the realization of deferred tax assets will depend on the existence future taxable income during the periods. In making this assessment, management considers past operating results, the scheduled reversal of deferred tax liabilities, estimates of future taxable income and tax planning strategies.
As of March 31, 2023, 2022 and 2021, the Company has concluded that a valuation allowance was appropriate in light of the significant negative evidence, which was objective and verifiable, primarily the cumulative losses in recent years.
While the Company’s long-term financial outlook remains positive, the Company concluded that its ability to rely on its long-term outlook as to future taxable income was limited due to the relative weight of the negative evidence from its recent cumulative losses. The Company’s conclusion regarding the need for a valuation allowance against its deferred tax assets could change in the future based on improvements in operating performance, which may result in the full or partial reversal of the valuation allowance.
At March 31, 2023, the Company has net operating loss carry forwards and tax credit carry forwards available to offset future federal income tax as follows (in thousands):
Expires March 31, | | Net Operating Loss | | | State Net Operating Losses | | | Research and Experimentation Tax Credit | |
| | (in thousands) | |
2025 | | $ | — | | | $ | — | | | $ | 8 | |
2026 | | | 159 | | | | — | | | | 2 | |
2027 | | | 2,665 | | | | — | | | | — | |
Thereafter | | | 4,379 | | | | 11,150 | | | | 18 | |
Indefinite | | | 6,850 | | | | — | | | | — | |
| | $ | 14,053 | | | $ | 11,150 | | | $ | 28 | |
At March 31, 2023, the Company has federal net operating loss carry forwards of $14,053,000, of which $7,203,000 of the losses carried forward were generated prior to the 2018 tax year and have a 20 year carry forward and are available to offset 100% of taxable income. The remaining $6,850,000 of the losses were generated in tax years 2018 or later, which have an unlimited carry forward and are limited to 80% of taxable income. At March 31, 2023, the Company had state tax net operating loss carry forwards available to offset future California state taxable income of $2,946,000. These carry forwards expire March 31, 2030 through 2040. At March 31, 2023, the Company had state tax net operating loss carry forwards available to offset future Hawaii state taxable income of $7,914,000. These carry forwards expire March 31, 2030 through 2040. At March 31, 2023, the Company had $290,000 of net operating loss carry forwards between the remaining states filed in.
The following, in general, represents the open tax years and jurisdictions that the Company used in its evaluation of tax positions. The Company has unused net operating losses carried forward, which cause the statute to remain open up to the amount of unused loss with the statute not begin until the year in which they are used.
Open tax years ending March 31, | | Jurisdiction |
2020 | - | 2023 | | U.S. Federal |
2020 | - | 2023 | | State of Hawaii |
2019 | - | 2023 | | State of California |
15. | RELATED-PARTY TRANSACTIONS AND BALANCES |
In April 2019, 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 bore interest at a rate of 1% plus the prime rate (as published by the Wall Street Journal), which was 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. The proceeds of the Skywords Note were used to pay down accounts payable and for general operating capital purposes.
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 $500,000 of the outstanding principal amount into revolving loans that may be prepaid and reborrowed from time to time in principal amounts not to exceed $500,000, extend the maturity date by three years, adjust the interest rate to reflect a floor of 5% and secure Skywords’ interest by granting a security interest in substantially all of the Company’s personal property assets, subject to limited exceptions (the “Collateral”). On April 12, 2021, concurrently with the conversion, the Company repaid in cash to Skywords the principal amount of $500,000 plus accrued interest to date of $1,900. The Skywords Amended 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, provided that at no time shall the annual interest rate be less than 5%. The Company may prepay the Skywords Amended Note at any time without penalty.
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 “Amendment”) to the Skywords Amended Note. The 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 Note from $500,000 to $1,000,000. All other terms of the Skywords Note remain the same.
At both March 31, 2023 and 2022, the Skywords Note principal balance was $1,000,000, and was included in long-term debt on the Consolidated Balance Sheets. At March 31, 2023 and 2022, the balance on the Revolver was $500,000 and $0, respectively, and was included in line of credit – related party on the Consolidated Balance Sheets. At March 31, 2023 and 2022, the interest rates were 7.5% and 5.0%, respectively.
On May 2, 2023, the Company was notified by Nasdaq that the Company is not in compliance with Nasdaq’s Listing Rule 5550(a)(2), as the minimum bid price of the Company’s common stock had been below $1.00 per share for 30 consecutive business days. Under Nasdaq’s rules, the notification of noncompliance had no immediate effect on the listing or trading of the Company’s common stock on Nasdaq under the symbol “CYAN”. Under Nasdaq’s rules, the Company was given 180 days, or until October 30, 2023, to achieve compliance with the minimum bid price requirement. To regain compliance, the minimum bid price of the Company’s common stock must meet or exceed $1.00 per share for a minimum of ten consecutive business days prior to the expiration of the 180-day grace period. Failure to regain compliance during this period could result in delisting.
On June 15, 2023, the Company was notified by Nasdaq that the Company has regained compliance with the Nasdaq's Listing Rule 5500(a)(2) and is in compliance with all applicable listing standards.
The Company had no additional subsequent events, other than those mentioned above, in Note 6 regarding the Bank waiver letter dated June 22, 2023, and in Note 9 for Restricted Stock and RSUs issued in April 2023.
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