Cyanotech(CYAN) - 2019 Q3 - Quarterly Report

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This section outlines the nature of forward-looking statements within the report, their inherent risks, and factors that could cause actual financial performance to differ - The report contains forward-looking statements that are predictive in nature, depend upon or refer to future events or conditions, and typically include words such as "expects," "anticipates," "intends," "plan," "believes," "predicts," or "estimates"[5] - These forward-looking statements are based on current expectations and projections, subject to risks, uncertainties, and assumptions concerning the Company, industry performance, and economic factors, and are not guarantees of future performance[5] - Key forward-looking statements relate to the Company's business strategy, business objectives, and expectations concerning future operations, profitability, liquidity, and financial resources[6] - Factors that could cause financial performance to differ significantly include local, national, and world economic conditions (e.g., crude oil prices, inflation, currency fluctuations), access to financing, inability to generate sufficient revenues, and failure of capital projects[7] PART I. FINANCIAL INFORMATION Item 1. Financial Statements Presents Cyanotech Corporation's unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and detailed notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | ASSETS | December 31, 2018 (in thousands) | March 31, 2018 (in thousands) | | :----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | :------------------------------- | :---------------------------- | | Current assets: | | | | Cash | $1,573 | $1,329 | | Accounts receivable, net | 1,883 | 2,664 | | Inventories, net | 10,112 | 9,034 | | Prepaid expenses and other current assets | 641 | 590 | | Total current assets | 14,209 | 13,617 | | Equipment and leasehold improvements, net | 15,183 | 15,734 | | Restricted cash | — | 65 | | Other assets | 291 | 291 | | Total assets | $29,683 | $29,707 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Current liabilities: | | | | Accounts payable | $4,055 | $3,527 | | Accrued expenses | 1,073 | 892 | | Short-term contract obligation | 332 | — | | Line of credit | 1,750 | 500 | | Current maturities of long-term debt | 663 | 655 | | Customer deposits | 172 | 133 | | Total current liabilities | 8,045 | 5,707 | | Long-term debt, less current maturities | 5,328 | 5,790 | | Other long-term liabilities | 57 | 103 | | Total liabilities | 13,430 | 11,600 | | Stockholders' equity: | | | | Common stock | 117 | 115 | | Additional paid-in capital | 32,318 | 32,051 | | Accumulated deficit | (16,182) | (14,059) | | Total stockholders' equity | 16,253 | 18,107 | | Total liabilities and stockholders' equity | $29,683 | $29,707 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands) | | Three Months Ended December 31, 2018 (in thousands) | Three Months Ended December 31, 2017 (in thousands) | Nine Months Ended December 31, 2018 (in thousands) | Nine Months Ended December 31, 2017 (in thousands) | | :----------------------------------------------------- | :-------------------------------------------------- | :-------------------------------------------------- | :------------------------------------------------- | :------------------------------------------------- | | NET SALES | $10,044 | $9,150 | $24,143 | $26,014 | | COST OF SALES | 5,928 | 4,910 | 15,906 | 14,551 | | Gross profit | 4,116 | 4,240 | 8,237 | 11,463 | | OPERATING EXPENSES: | | | | | | General and administrative | 1,337 | 1,368 | 4,190 | 4,132 | | Sales and marketing | 2,068 | 1,620 | 5,088 | 4,549 | | Research and development | 216 | 142 | 635 | 433 | | Total operating expenses | 3,621 | 3,130 | 9,913 | 9,114 | | Income (loss) from operations | 495 | 1,110 | (1,676) | 2,349 | | Interest expense, net | (134) | (130) | (414) | (371) | | Income (loss) before income taxes | 361 | 980 | (2,090) | 1,978 | | INCOME TAX EXPENSE (BENEFIT) | 73 | (127) | 33 | (105) | | NET INCOME (LOSS) | $288 | $1,107 | $(2,123) | $2,083 | | NET INCOME (LOSS) PER SHARE: | | | | | | Basic | $0.05 | $0.19 | $(0.37) | $0.36 | | Diluted | $0.05 | $0.19 | $(0.37) | $0.36 | | SHARES USED IN CALCULATION OF NET INCOME (LOSS) PER SHARE: | | | | | | Basic | 5,836 | 5,749 | 5,809 | 5,714 | | Diluted | 5,862 | 5,831 | 5,809 | 5,774 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | | Nine Months Ended December 31, 2018 (in thousands) | Nine Months Ended December 31, 2017 (in thousands) | | :----------------------------------------------------------------------------------------------------------------------- | :------------------------------------------------- | :------------------------------------------------- | | CASH FLOWS FROM OPERATING ACTIVITIES: | | | | Net (loss) income | $(2,123) | $2,083 | | Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | | | | Depreciation and amortization | 1,421 | 1,403 | | Share-based compensation expense | 282 | 369 | | Amortization of debt issue costs and other assets | 57 | 52 | | Net (increase) decrease in assets: | | | | Accounts receivable | 781 | (791) | | Inventories | (1,078) | (1,730) | | Prepaid expenses and other assets | (84) | (86) | | Net increase (decrease) in liabilities: | | | | Accounts payable | 528 | (76) | | Accrued expenses | 181 | 332 | | Customer deposits | 39 | (80) | | Other long-term liabilities | (46) | (8) | | Net cash (used in) provided by operating activities | $(42) | $1,468 | | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | Investment in equipment and leasehold improvements | (375) | (667) | | Investment in Cellana asset purchase | (100) | — | | Investment in restricted cash | — | (65) | | Net cash used in investing activities | $(475) | $(732) | | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | Net draws (payments) on line of credit | 1,250 | (111) | | Payments on short term contract obligation | (63) | — | | Payments on capitalized leases | (49) | (67) | | Principal payments on long-term debt | (429) | (394) | | Proceeds from long-term debt, net of costs | — | 166 | | Withholding on restricted stock unit vesting | (32) | — | | Proceeds from stock options exercised | 19 | 26 | | Net cash provided by (used in) financing activities | $696 | $(380) | | Net increase in cash | $179 | $356 | | Cash and restricted cash at beginning of period | 1,394 | 1,407 | | Cash at end of period | $1,573 | $1,763 | | SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | Cash paid during the period for: Interest | $358 | $313 | | Income taxes | $17 | $— | | Purchase of Cellana assets | $495,000 | $— | | Less: Issuance of short-term obligation | 395,000 | — | | Cash paid to acquire Cellana assets | $100,000 | $— | Notes to Condensed Consolidated Financial Statements 1. ORGANIZATION AND BASIS OF PRESENTATION Details Cyanotech Corporation's incorporation, product offerings, and the basis for preparing its unaudited condensed consolidated financial statements - Cyanotech Corporation (CYAN), incorporated in Nevada on March 3, 1983, produces natural products derived from microalgae for the nutritional supplements market[25] - The Company's products include Hawaiian Spirulina Pacifica and Hawaiian BioAstin (astaxanthin), grown in complex open-pond agricultural systems on the Kona coast of Hawaii[26] - The accompanying unaudited condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information[27] 2. SIGNIFICANT ACCOUNTING POLICIES Outlines the Company's key accounting principles, including consolidation, estimates, revenue recognition, and the impact of recently adopted and issued accounting pronouncements - The consolidated financial statements include Cyanotech Corporation and its wholly-owned subsidiary, Nutrex Hawaii, Inc., with all intercompany balances eliminated[29] - Management makes estimates and assumptions in preparing financial statements, which are reviewed periodically, and actual results could differ[30] - At December 31, 2018, two customers comprised 67% of the Company's accounts receivable and 66% of total net sales for the three months ended December 31, 2018[33] - Revenue is recognized based on a five-step model, primarily from fulfilling orders for microalgal nutritional supplements, with control transfer typically occurring upon delivery or pickup[34][35] Disaggregation of Revenue (in thousands) | Product Line | Three Months Ended Dec 31, 2018 | Three Months Ended Dec 31, 2017 | Nine Months Ended Dec 31, 2018 | Nine Months Ended Dec 31, 2017 | | :------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Packaged products | | | | | | Astaxanthin | $6,012 | $5,746 | $15,388 | $15,649 | | Spirulina | $3,212 | $2,268 | $6,208 | $6,560 | | Total Packaged | $9,224 | $8,014 | $21,596 | $22,209 | | Bulk products | | | | | | Astaxanthin | $287 | $317 | $884 | $748 | | Spirulina | $533 | $819 | $1,663 | $3,057 | | Total Bulk | $820 | $1,136 | $2,547 | $3,805 | | Total | $10,044 | $9,150 | $24,143 | $26,014 | - The Company adopted ASU 2017-09 (Stock Compensation), ASU 2016-18 (Restricted Cash), ASU 2016-15 (Cash Flow Classification), and ASU 2014-09 (Revenue from Contracts with Customers) as of April 1, 2018, with ASU 2016-18 applied retrospectively and ASU 2014-09 having no material effect on historical financials[41][42][43][45] - The Company is currently evaluating the impact of recently issued accounting pronouncements, including ASU 2018-18 (Collaborative Arrangements), ASU 2018-15 (Cloud Computing Implementation Costs), ASU 2018-13 (Fair Value Measurement), and ASU 2018-07 (Nonemployee Share-Based Payment Accounting)[46][49][50][51] - ASU 2016-02 (Leases), effective for fiscal year beginning April 1, 2019, is expected to have a material impact on the consolidated balance sheets due to the recognition of lease assets and liabilities, but not on results of operations or cash flows[52] 3. INVENTORIES Describes the Company's inventory valuation method and reports abnormal production costs incurred during the period - Inventories are stated at the lower of cost or net realizable value, determined by the first-in, first-out method[54] Inventories, Net (in thousands) | Category | December 31, 2018 | March 31, 2018 | | :---------------- | :---------------- | :------------- | | Raw materials | $460 | $410 | | Work in process | 4,649 | 2,602 | | Finished goods | 4,828 | 5,878 | | Supplies | 175 | 144 | | Inventories, net| $10,112 | $9,034 | - Abnormal production costs related to spirulina production of $250,000 were charged to cost of sales for the nine months ended December 31, 2018[54] 4. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Presents the breakdown of equipment and leasehold improvements, net of accumulated depreciation and amortization, and confirms no asset impairment Equipment and Leasehold Improvements, Net (in thousands) | Category | December 31, 2018 | March 31, 2018 | | :------------------------------------- | :---------------- | :------------- | | Equipment | $18,312 | $17,935 | | Leasehold improvements | 14,288 | 14,248 | | Furniture and fixtures | 348 | 348 | | Total | 32,948 | 32,531 | | Less accumulated depreciation and amortization | (18,767) | (17,346) | | Construction-in-progress | 1,002 | 549 | | Equipment and leasehold improvements, net | $15,183 | $15,734 | - Management determined that no asset impairment existed as of December 31, 2018, and March 31, 2018[55] 5. SHORT TERM CONTRACT OBLIGATION Details the Company's purchase of a production and research facility from Cellana LLC, including the cash down payment and the structure of the short-term obligation - On November 30, 2018, the Company purchased a six-acre production and research facility from Cellana LLC for $495,000, with a $100,000 cash down payment and a $395,000 short-term obligation[56] - The short-term obligation includes a $180,000 loan at 6.25% interest, with $137,000 outstanding at December 31, 2018, and a $215,000 non-interest bearing loan, with $195,000 outstanding at December 31, 2018[57][58] 6. LINE OF CREDIT Describes the Company's revolving credit agreement, outstanding borrowings, available credit, and changes to the current ratio covenant - The Company has a revolving credit agreement allowing borrowings up to $2,000,000, bearing interest at the Wall Street Journal prime rate (5.50% at December 31, 2018) plus 2%[59] - As of December 31, 2018, $1,750,000 was borrowed, with $250,000 available on the line of credit[59] - The line of credit was renewed on August 30, 2018, and the current ratio covenant was changed from 2.10:1 to 1.50:1[59] 7. ACCRUED EXPENSES Presents a breakdown of the Company's accrued expenses as of December 31, 2018, and March 31, 2018 Accrued Expenses (in thousands) | Category | December 31, 2018 | March 31, 2018 | | :------------------------------------- | :---------------- | :------------- | | Wages, commissions, bonus and profit sharing | $799 | $707 | | Other accrued expenses | 274 | 185 | | Total accrued expenses | $1,073 | $892 | 8. LONG-TERM DEBT Details the Company's long-term debt obligations, including term loans, equipment finance agreements, and capital leases, along with their balances and interest rates Long-Term Debt, Net (in thousands) | Category | December 31, 2018 | March 31, 2018 | | :------------------------------------------------------------------------ | :---------------- | :------------- | | Long-term debt | $6,101 | $6,530 | | Capital lease obligations | 98 | 148 | | Less current maturities | (663) | (655) | | Long-term debt, excluding current maturities | 5,536 | 6,023 | | Less unamortized debt issuance costs | (208) | (233) | | Total long-term debt, net of current maturities and unamortized debt issuance costs | $5,328 | $5,790 | - The Company has a $5,500,000 term loan (August 2012 Loan Agreement) with a balance of $4,492,000 at December 31, 2018, secured by assets and partially guaranteed by USDA, bearing interest at WSJ prime + 1.0%[63][64] - A $2,500,000 term loan (2015 Loan Agreement) had a balance of $1,475,000 at December 31, 2018, secured by assets and partially guaranteed by USDA, with interest at WSJ prime + 2.0% (minimum 6.00%)[66][67][70] - An Equipment Finance Agreement (2017) for up to $175,000 had a balance of $134,000 at December 31, 2018, at 4.75% interest[71] - Three capital leases for equipment totaled $98,000 at December 31, 2018, with interest rates ranging from 4.18% to 12.90%[72] 9. CONTINGENCIES States the Company's belief that no current legal proceedings or claims would materially affect its financial position, results of operations, or cash flows - The Company believes it is not currently a party to any legal proceedings or claims that would have a material effect on its consolidated financial position, results of operations, or cash flows[73] 10. SHARE-BASED COMPENSATION Outlines the Company's equity-based compensation plans, including authorized, available, and outstanding shares, and reports compensation expenses for stock options and restricted stock units - The Company has two active equity-based compensation plans (2016 Equity Incentive Plan, 2014 Independent Director Stock Option and Restricted Stock Grant Plan) and two expired plans with outstanding options[75] Shares Authorized, Available, and Outstanding (as of December 31, 2018) | Plan | Authorized | Available | Outstanding | | :--------------------- | :--------- | :-------- | :---------- | | 2016 Plan | 1,300,000 | 1,113,022 | 170,975 | | 2014 Directors Plan | 350,000 | 184,400 | 12,000 | | 2005 Plan | — | — | 434,400 | | 2004 Directors Plan | — | — | 12,000 | | Total | 1,650,000| 1,297,422| 629,375 | - Compensation expense for employee stock options was $18,000 for the three months and $54,000 for the nine months ended December 31, 2018[80] - Total unrecognized stock-based compensation expense related to unvested stock options was $127,000, expected to be expensed over a weighted average period of 1.6 years[82] - Compensation expense for Restricted Stock Units (RSUs) was $20,000 for the three months and $58,000 for the nine months ended December 31, 2018[86] - Total unrecognized stock-based compensation expense related to unvested RSUs was $140,000, expected to be expensed over a weighted average period of 1.8 years[89] 11. INCOME TAXES Discusses the impact of the reduced U.S. federal corporate income tax rate and explains the Company's effective tax rate for the periods presented - The U.S. federal corporate income tax rate was lowered from 34% to 21% effective January 1, 2018, impacting the Company's fiscal year ending March 31, 2019[90] Income Tax Expense (Benefit) and Effective Tax Rate (in thousands) | Period | Income Tax Expense (Benefit) | Effective Tax Rate | | :------------------------------------ | :--------------------------- | :----------------- | | Three months ended Dec 31, 2018 | $73 | 20.2% | | Three months ended Dec 31, 2017 | $(127) | (13.0)% | | Nine months ended Dec 31, 2018 | $33 | (1.6)% | | Nine months ended Dec 31, 2017 | $(105) | (5.3)% | - The effective tax rate for the three and nine months ended December 31, 2018, differs from the statutory rate due to state taxes and a valuation allowance against net deferred tax assets[91] 12. EARNINGS (LOSS) PER SHARE Presents the basic and diluted earnings (loss) per share calculations for the three and nine months ended December 31, 2018 and 2017 Basic and Diluted EPS (Three Months Ended December 31) | Period | Net Income (Loss) (in thousands) | Shares (in thousands) | Per Share Amount | | :------------------------------------ | :------------------------------- | :-------------------- | :--------------- | | Dec 31, 2018 | | | | | Basic income per share | $288 | 5,836 | $0.05 | | Diluted income per share | $288 | 5,862 | $0.05 | | Dec 31, 2017 | | | | | Basic income per share | $1,107 | 5,749 | $0.19 | | Diluted income per share | $1,107 | 5,831 | $0.19 | Basic and Diluted EPS (Nine Months Ended December 31) | Period | Net Income (Loss) (in thousands) | Shares (in thousands) | Per Share Amount | | :------------------------------------ | :------------------------------- | :-------------------- | :--------------- | | Dec 31, 2018 | | | | | Basic and diluted loss per share | $(2,123) | 5,809 | $(0.37) | | Dec 31, 2017 | | | | | Basic income per share | $2,083 | 5,714 | $0.36 | | Diluted income per share | $2,083 | 5,774 | $0.36 | - Potentially dilutive securities were excluded from diluted EPS calculation for the nine months ended December 31, 2018, due to a net loss, which would have made their effect anti-dilutive[97] 13. RELATED PARTY TRANSACTIONS AND BALANCES Reports a consulting agreement with a vendor employing an independent director, resulting in general and administrative expense and payments - During the nine months ended December 31, 2018, the Company entered into a consulting agreement with a vendor employing one of its independent directors, resulting in $120,000 in general and administrative expense and payments[98] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Provides an overview of Cyanotech Corporation's business, financial performance analysis, liquidity, capital resources, and future outlook Overview Introduces Cyanotech Corporation as a GMP-certified world leader in microalgae-derived natural products, highlighting its Hawaiian facility's optimal growing conditions and biosecure production environment - Cyanotech Corporation is a GMP-certified world leader in producing high-value natural products from microalgae, including Hawaiian BioAstin natural astaxanthin and Hawaiian Spirulina Pacifica, for the nutritional supplements market[100] - The Company's 96-acre facility on the Kona Coast of Hawaii provides optimal growing conditions (consistent warm temperatures, sunshine, low rainfall) and access to cold deep ocean water for its Ocean-Chill Drying system, enabling cost-effective, year-round harvest[101] - The production area is designated a Biosecure Zone, with tight control of organisms and free of genetically modified organisms (GMO's)[101] Results of Operations Analyzes the Company's financial performance, including net sales, gross profit, and operating expenses, for the three and nine months ended December 31, 2018, compared to the prior year Selected Consolidated Financial Data (in thousands) | Metric | Three Months Ended Dec 31, 2018 | Three Months Ended Dec 31, 2017 | Nine Months Ended Dec 31, 2018 | Nine Months Ended Dec 31, 2017 | | :-------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net sales | $10,044 | $9,150 | $24,143 | $26,014 | | Net sales increase (decrease) | 9.8% | | (7.2)% | | | Gross profit | $4,116 | $4,240 | $8,237 | $11,463 | | Gross profit as % of net sales | 41.0% | 46.3% | 34.1% | 44.1% | | Operating expenses | $3,621 | $3,130 | $9,913 | $9,114 | | Operating expenses as % of net sales | 36.0% | 34.2% | 41.1% | 35.0% | | Operating income (loss) | $495 | $1,110 | $(1,676) | $2,349 | | Operating income (loss) as % of net sales | 4.9% | 12.1% | (6.9)% | 9.0% | | Income tax expense (benefit) | $73 | $(127) | $33 | $(105) | | Net income (loss) | $288 | $1,107 | $(2,123) | $2,083 | Comparison of the Three Months Ended December 31, 2018 and 2017 Compares the Company's financial performance for the three months ended December 31, 2018, against the same period in 2017, highlighting changes in net sales, gross profit, and operating expenses Net Sales (in thousands) - Three Months Ended December 31 | Product Line | Dec 31, 2018 | Dec 31, 2017 | $ Change | % Change | | :------------------ | :----------- | :----------- | :------- | :------- | | Packaged sales | | | | | | Astaxanthin | $6,012 | $5,746 | $266 | 4.6% | | Spirulina | $3,212 | $2,268 | $944 | 41.6% | | Total Packaged sales| $9,224 | $8,014 | $1,210 | 15.0% | | Bulk sales | | | | | | Astaxanthin | $287 | $317 | $(30) | (9.5)% | | Spirulina | $533 | $819 | $(286) | (34.9)% | | Total Bulk sales | $820 | $1,136 | $(316) | (27.8)% | | Total sales | | | | | | Astaxanthin | $6,299 | $6,063 | $236 | 3.9% | | Spirulina | $3,745 | $3,087 | $658 | 21.3% | | Total sales | $10,044 | $9,150 | $894 | 9.8% | - Net sales increased by 9.8% due to a 21.3% increase in spirulina sales, driven by a 16% improvement in spirulina production, with packaged spirulina sales up 41.6% and bulk spirulina sales down 34.9% due to inventory shortages[103] - Gross profit margin decreased by 5.3 percentage points due to increased astaxanthin cost resulting from an 18% reduction in astaxanthin production[104] - Operating expenses increased by $0.5 million, primarily due to a $0.5 million increase in advertising and promotion costs[105] Comparison of the Nine Months Ended December 31, 2018 and 2017 Compares the Company's financial performance for the nine months ended December 31, 2018, against the same period in 2017, detailing changes in net sales, gross profit, and operating expenses Net Sales (in thousands) - Nine Months Ended December 31 | Product Line | Dec 31, 2018 | Dec 31, 2017 | $ Change | % Change | | :------------------ | :----------- | :----------- | :--------- | :------- | | Packaged sales | | | | | | Astaxanthin | $15,388 | $15,649 | $(261) | (1.7)% | | Spirulina | $6,208 | $6,560 | $(352) | (5.4)% | | Total Packaged sales| $21,596 | $22,209 | $(613) | (2.8)% | | Bulk sales | | | | | | Astaxanthin | $884 | $748 | $136 | 18.2% | | Spirulina | $1,663 | $3,057 | $(1,394) | (45.6)% | | Total Bulk sales | $2,547 | $3,805 | $(1,258) | (33.1)% | | Total sales | | | | | | Astaxanthin | $16,272 | $16,397 | $(125) | (0.8)% | | Spirulina | $7,871 | $9,617 | $(1,746) | (18.2)% | | Total sales | $24,143 | $26,014 | $(1,871)| (7.2)%| - Net sales decreased by 7.2% due to an 18.2% decrease in spirulina sales, primarily caused by a complete re-inoculation in the first quarter of fiscal 2019 and resulting lower supply[108] - Gross profit margin decreased by 10.0 percentage points, mainly due to the spirulina re-inoculation and lower production levels, which led to a $1.4 million increase in cost of goods[109] - Operating expenses increased by $0.8 million, largely driven by a $0.9 million increase in advertising and promotion costs[110] Liquidity and Capital Resources Discusses the Company's cash position, working capital, revolving line of credit, and cash flow activities, affirming sufficient resources for future operations - As of December 31, 2018, cash was $1.6 million and working capital was $6.2 million, compared to $1.3 million and $7.9 million, respectively, at March 31, 2018[112] - The Company has a $2.0 million revolving line of credit, with $1.75 million borrowed and $0.25 million available at December 31, 2018; the current ratio requirement was reduced to 1.50:1[112] - Cash used in operating activities for the nine months ended December 31, 2018, was $42,000, primarily due to a net loss, offset by non-cash charges and a decrease in working capital[116] - Cash provided by financing activities was $696,000, mainly from a $1.3 million increase in the line of credit, offset by debt payments[118] - The Company expects operating cash flows and available financing to be sufficient to fund operations for at least the next twelve months[115][122] Outlook Outlines the Company's strategic direction to be a world leader in microalgae products, focusing on consumer brands, production consistency, and acknowledging potential impacts on gross profit margins and future risks - The Company's strategic direction is to position itself as a world leader in producing and marketing high-value natural products from microalgae, focusing on building consumer brands and increasing astaxanthin and spirulina production volume and consistency[125] - The recent re-inoculation of spirulina ponds was a necessary step for sustaining long-term production levels, and the Company will continue to promote the nutritional superiority of Hawaiian grown microalgae[126] - Gross profit margins are expected to be impacted by production volumes, input costs, and increased competition, potentially leading to declines, with a continued focus on higher-margin consumer products[127] - Future results are subject to various risks, including business conditions, customer order patterns, weather, product health, competitive factors, government regulations, and energy costs[130][131] Off-Balance Sheet Arrangements States that the Company had no off-balance sheet arrangements or obligations as of December 31, 2018 - As of December 31, 2018, the Company had no off-balance sheet arrangements or obligations[132] Impact of Inflation Discusses how inflationary factors directly affect the Company's operations and the uncertainty of passing on increased costs to customers - Inflationary factors, such as increases in the costs of materials and labor, directly affect the Company's operations[134] - There is no assurance that the Company will be able to pass on increased costs to its customers[134] Critical Accounting Policies and Estimates Highlights changes to critical accounting policies due to the adoption of the new revenue recognition standard - Changes to critical accounting policies in the nine months ended December 31, 2018, relate to the adoption of ASU 2014-09 (Revenue from Contracts with Customers) on April 1, 2018[136] Revenue Recognition Explains the Company's five-step model for revenue recognition, primarily from microalgal nutritional supplements, and the estimation of variable consideration - The Company records revenue based on a five-step model, primarily from fulfilling orders for microalgal nutritional supplements, with revenue recognized when control of products is transferred to the customer[137][139] - Revenue measurement includes estimates of variable consideration for trade promotion programs, coupons, returns, and early payment discounts, calculated using historical averages adjusted for current business conditions[138] Item 3. Quantitative and Qualitative Disclosures about Market Risk Reports no material changes to the Company's market risk during the nine months ended December 31, 2018, and refers to the prior annual report for additional information - There have been no material changes to the Company's market risk during the nine months ended December 31, 2018[140] - For additional information on market risk, refer to the Company's Annual Report on Form 10-K for the year ended March 31, 2018[140] Item 4. Controls and Procedures Evaluates the Company's disclosure controls and internal control over financial reporting, concluding effectiveness with noted changes Disclosure Controls and Procedures States that management, including the CEO and CFO, evaluated and concluded on the effectiveness of disclosure controls and procedures as of December 31, 2018 - Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of December 31, 2018[141] - Based on the evaluation, the CEO and CFO concluded that disclosure controls and procedures are effective to provide reasonable assurance that required information is recorded, processed, summarized, and reported timely[141][142] Management's Report on Internal Control over Financial Reporting Affirms management's responsibility for internal control over financial reporting and concludes on its effectiveness as of December 31, 2018, based on the COSO 2013 Framework - Management is responsible for establishing and maintaining adequate internal control over financial reporting[144] - Management evaluated the effectiveness of internal control over financial reporting as of December 31, 2018, using the COSO 2013 Framework, and concluded it was effective[144] Changes to Internal Control Over Financial Reporting Reports additions and modifications to internal controls due to the adoption of the new revenue recognition standard, with no other material changes during the period - The Company made additions and/or modifications to policies, procedures, and controls affecting internal control over financial reporting due to the adoption of the new revenue recognition accounting standard on April 1, 2018[145] - No other changes materially affected internal control over financial reporting during the quarterly period ended December 31, 2018[146] Limitations on the Effectiveness of Controls Acknowledges that disclosure controls and internal controls provide only reasonable assurance and cannot prevent all errors or fraud due to inherent limitations - Management acknowledges that disclosure controls and internal controls over financial reporting provide only reasonable, not absolute, assurance and cannot prevent all errors or fraud due to inherent limitations[147][148] PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company may face ordinary course litigation but had no significant legal matters outstanding - The Company may become party to lawsuits and claims arising in the ordinary course of business relating to employment, intellectual property, and other matters[153] - There were no significant legal matters outstanding at December 31, 2018[153] Item 1A. Risk Factors Refers to the Company's Annual Report on Form 10-K for a detailed discussion of risk factors - For a discussion of the risk factors relating to the Company's business, refer to Part I, Item 1A of its Form 10-K for the year ended March 31, 2018[154] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Reports no unregistered sales of equity securities or use of proceeds - None[155] Item 3. Defaults upon Senior Securities Reports no defaults upon senior securities - None[156] Item 5. Other Information Reports no other information - None[157] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including CEO/CFO certifications and XBRL financial statements - Exhibits include Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002, signed as of February 13, 2019[158][163] - A Press Release dated February 13, 2019, is furnished as Exhibit 99.1[158][163] - The Condensed Consolidated Balance Sheets, Statements of Operations, Statements of Cash Flows, and Notes to Condensed Consolidated Financial Statements are furnished in XBRL (eXtensible Business Reporting Language) format[158][163] SIGNATURES Contains official signatures of Cyanotech Corporation's CEO and CFO, certifying the report filing - The report was signed on behalf of Cyanotech Corporation by Mawae R. Morton (Chief Executive Officer; Director) and Brian B. Orlopp (Vice President — Finance & Administration and CFO) on February 13, 2019[161]