CYANOTECH CORP

Previous wording

Net Sales The net sales decrease of 5.2% for the current quarter compared to the same period last year was driven by a decrease in astaxanthin and spirulina bulk sales, as well as contract extraction services. During the current year quarter, we saw overall lower demand in bulk sales, as well as some impacts of timing of customer orders for astaxanthin bulk, offset by increased sales primarily due the timing of shipments and increased demand for one of our key customers.

Current wording

Net Sales The net sales increase of 14.6% for the current quarter compared to the same period last year was driven by an increase in astaxanthin bulk and astaxanthin packaged sales, offset by a decrease in spirulina sales. During the current year quarter, we saw higher demand in astaxanthin packaged sales and higher bulk sales related to both timing of customer orders and increased demand, offset slightly by decreased spirulina sales due to the timing of shipments.

Previous wording

Gross Profit Gross profit as a percent of net sales for the third quarter of fiscal 2024 decreased by 0.4 percentage points compared to the same period last year, which was the result of higher costs related to lower production volumes.

Current wording

Gross Profit Gross profit as a percent of net sales for the first quarter of fiscal 2025 decreased by 4.8 percentage points compared to the same period last year, which was the result of higher costs related to lower production volumes.

Previous wording

Operating Expenses Operating expenses of $2.5 million for the third quarter of fiscal 2024 compared to the prior year same quarter, increased $0.3 million. Sales and marketing expenses increased primarily due to higher online selling fees, offset by lower general and administrative costs.

Current wording

Operating Expenses Operating expenses of $2.5 million for the first quarter of fiscal 2025 compared to the prior year same quarter, decreased $0.2 million. Sales and marketing expenses decreased primarily due to lower online selling fees and research and development costs related to lower headcount.

Previous wording

Income Taxes We did not record income tax expense for the third quarter of fiscal 2024 compared to $8,000 income tax expense for the same period last year. We continue to carry a full valuation allowance on our net deferred tax assets.

Current wording

Income Taxes We did not record income tax expense for the first quarter of fiscal 2025 or 2024. We continue to carry a full valuation allowance on our net deferred tax assets.

Previous wording

The accompanying condensed consolidated financial statements as of and for the three and nine months ended December 31, 2023 and 2022, and as of March 31, 2023, have been prepared assuming we will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We sustained operating losses and negative cash flows from operations for these same periods. Further, as discussed below, we were not in compliance with a debt covenant requirement at March 31, 2023 and the Bank instituted a freeze on additional advances from the Credit Agreement. These conditions raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expense that may be necessary if we were unable to continue as a going concern.

Current wording

The accompanying condensed consolidated financial statements, as of and for the three months ended June 30, 2024 and 2023, and as of March 31, 2024, have been prepared assuming we will continue as a going concern. The going concern assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We sustained operating losses and cumulative negative cash flows from operations for these same periods. Further, as discussed below, we were not in compliance with two debt covenant requirements at March 31, 2024 and one debt covenant requirement at March 31, 2023. In June 2023, the Bank instituted a freeze on additional advances from the Line of Credit. These conditions raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expense that may be necessary if we were unable to continue as a going concern.

Previous wording

As of December 31, 2023, we had cash of $0.7 million and working capital of $3.7 million compared to $1.0 million and $5.4 million, respectively, at March 31, 2023. We had a Credit Agreement with the Bank that provided for borrowings up to $2.0 million on a revolving basis, however, as part of the covenant waiver at March 31, 2023, the borrowings under this line of credit were frozen at $1.8 million. On October 13, 2023, the Bank converted this line of credit to a term loan in the amount of $1.48 million with a maturity date of August 30, 2024. As of December 31, 2023, we had $1.36 million outstanding on this loan and as of March 31, 2023, we had outstanding borrowings of $1.54 million on the line of credit. (See Note 5 in the notes to our condensed consolidated financial statements).

Current wording

As of June 30, 2024, we had cash of $0.7 million and working capital of $207 thousand compared to $0.7 million and $2.0 million, respectively, at March 31, 2024. We had a Credit Agreement with the Bank that provided for borrowings up to $2.0 million on a revolving basis, however, as part of the covenant waiver at March 31, 2023, the borrowings under this Line of Credit were frozen. On October 13, 2023, the Bank converted this Line of Credit to the 2023 Loan in the amount of $1.48 million with a maturity date of August 30, 2024. As of June 30, 2024 and March 31, 2024, we had $1.12 million and $1.24 million, respectively, outstanding on the 2023 Loan. (See Note 5 in the notes to our condensed consolidated financial statements).

Previous wording

We also have a loan facility with a related party that allows us to borrow up to $2.0 million on the Revolver. At December 31, 2023 and March 31, 2023, we had $1.25 million and $0.5, respectively, outstanding borrowings on the Revolver, which were included in line of credit – related party on the Condensed Consolidated Balance Sheets. The Revolver expires on April 12, 2025 (see Notes 5 and 13 in the notes to our condensed consolidated financial statements).

Current wording

We also have a loan facility with a related party that allows us to borrow up to $2.0 million on the Revolver. At both June 30, 2024 and March 31, 2024, we had $1.25 million outstanding borrowings on the Revolver, which was included in line of credit – related party on the Condensed Consolidated Balance Sheets. The Revolver expires on April 12, 2025 (see Notes 5 and 12 in the notes to our condensed consolidated financial statements).

Previous wording

As of December 31, 2023, we had $3.3 million in Term Loans payable to the Bank that require the payment of principal and interest monthly through August 2032. Pursuant to the Term Loans and the Credit Agreement, we are subject to annual financial covenants, customary affirmative and negative covenants and certain subjective acceleration clauses. As of March 31, 2023, our debt service coverage ratio fell short of the Bank’s annual requirement. On June 22, 2023, the Bank provided us with a letter waiving the covenant violation as of March 31, 2023, but noting that the Bank reserved its right to declare a default in the future if any covenants remain out of compliance at applicable measurement dates.

Current wording

As of June 30, 2024, we had $3.2 million in the 2012 Loan payable to the Bank that require the payment of principal and interest monthly through August 2032. Pursuant to the 2012 Loan and the 2023 Loan, we are subject to annual financial covenants, customary affirmative and negative covenants and certain subjective acceleration clauses. As of March 31, 2024, our debt service coverage ratio and current ratio fell short of the Bank’s annual requirement. We are currently seeking a letter from the Bank waiving the covenant violations as of March 31, 2024, but noting there can be no assurance that the Bank will provide such a waiver and may declare a default if any covenants remain out of compliance at applicable measurement dates.

Previous wording

In April 2019, we obtained a loan in the amount of $1.5 million from a related party. The proceeds were used to pay down accounts payable and for general operating capital purposes. On April 12, 2021, December 14, 2022 and August 14, 2023, we amended this loan (see Notes 5 and 13 in the notes to condensed consolidated financial statements). As of both December 31, 2023 and March 31, 2023, we had $1.0 million outstanding on the related party note. The loan matures on April 12, 2025.

Current wording

In April 2019, we obtained a loan in the amount of $1.5 million from a related party. The proceeds were used to pay down accounts payable and for general operating capital purposes. On April 12, 2021, December 14, 2022 and August 14, 2023, we amended this loan (see Notes 5 and 12 in the notes to condensed consolidated financial statements). As of both June 30, 2024 and March 31, 2024, we had $1.0 million outstanding on the related party note. The loan matures on April 12, 2025.

Previous wording

We continue to experience a loss from operations as the impacts from the macroeconomic environment led to lower sales across our portfolio on a year-to-date basis. Industry data shows that consumers intake of dietary supplements is not slowing down but may be trading down to private label brands to save on costs. The market for bulk material is increasingly price sensitive with many companies sourcing lower priced international ingredients. Since the second quarter of fiscal year 2023, we drew a net of $1.36 million on our line of credit and $1.25 million on the Revolver. To address the resulting cash flow challenges, we continue to monitor cost savings initiatives implemented in fiscal year 2023, including stopping or slowing production of inventory in alignment with current customer demand, maintaining a reduced headcount and compensation, primarily through attrition and furloughs, respectively, and eliminating certain discretionary selling, general and administrative expenses. We have also made changes in the sales and marketing team starting with the Chief Commercial Officer and strengthening the sales team, updating our marketing materials to emphasize our competitive strengths and raising capital by completing a private placement in the third fiscal quarter of 2024.

Current wording

We continue to experience a loss from operations as the impacts from the macroeconomic environment led to lower sales across our portfolio, therefore, we continue to rely on our funding sourced to provide liquidity. To address the resulting cash flow challenges, we continue to monitor cost savings initiatives implemented in fiscal year 2023, including stopping or slowing production of inventory in alignment with current customer demand, maintaining a reduced headcount and compensation, primarily through attrition and furloughs, respectively, and eliminating certain discretionary selling, general and administrative expenses. We have also made changes in the sales and marketing team starting with the Chief Commercial Officer and strengthening the sales team, re-positioning the brand(s) and optimizing our marketing efforts to emphasize our competitive strengths. In addition, we raised capital by completing a private placement in the third fiscal quarter of 2024.

Previous wording

Funds generated by operating activities and available cash are our most significant sources of liquidity for working capital requirements, debt service and funding of maintenance levels of capital expenditures. We have developed our operating plan to produce the cash flows necessary to meet all financing requirements. Although we have a history of either being in compliance with debt covenants or obtaining the necessary waivers, execution of our operating plan is dependent on many factors, some of which are not within the control of the Company. However, no assurances can be provided that we will achieve our operating plan and cash flow projections for this fiscal year or our projected consolidated financial position as of December 31, 2024. Such estimates are subject to change based on future results and such change could cause future results to vary significantly from expected results.

Current wording

Funds generated by operating activities and available cash are our most significant sources of liquidity for working capital requirements, debt service and funding of maintenance levels of capital expenditures. We have developed our operating plan to produce a significant portion of our cash flows necessary to meet all financing requirements, with the remaining need for capital raising. Although we have a history of either being in compliance with debt covenants or obtaining the necessary waivers, execution of our operating plan is dependent on many factors, some of which are not within the control of the Company. However, no assurances can be provided that we will achieve our operating plan and cash flow projections for this fiscal year or our projected consolidated financial position as of June 30, 2025. Such estimates are subject to change based on future results and such change could cause future results to vary significantly from expected results.

Previous wording

Cash used in operating activities for the nine months ended December 31, 2023 was the result of a net loss of $3.2 million, offset by non-cash items of $1.8 million and an increase in accounts receivable due to timing of sales, offset by a decrease in inventories.

Current wording

Cash provided by operating activities for the three months ended June 30, 2024 was the result of lower inventories and higher accounts payable as we continue to closely manage inventory and have increased the purchase of materials to support an increase in production to meet customer needs, offset by a net loss of $1.2 million less non-cash items of $0.6 million.

Previous wording

Cash used in investing activities for the nine months ended December 31, 2023 primarily includes costs for capital improvements at our Kona facility.

Current wording

Cash used in investing activities for the three months ended June 30, 2024 primarily includes costs for capital improvements at our Kona facility.

Previous wording

As of December 31, 2023, our working capital was $3.7 million, a decrease of $1.6 million compared to March 31, 2023. There was a decrease in inventories in the first nine months of fiscal year 2024 as we manage our production in line with sales demand, offset by the start-up of astaxanthin cultivation in April, as well as draws on our related party line of credit.

Current wording

As of June 30, 2024, our working capital was $207 thousand, a decrease of $1.8 million compared to March 31, 2024. There was a decrease in inventories in the first quarter of fiscal year 2025 as we continue to manage our production in line with sales demand and material supplies are being managed on a just-in-time basis, as well as the reclassification of $1.0 million of related party loan due in April 2025 to current maturities of long-term debt.

Previous wording

Our strategic direction has been to position as a world leader in the production and marketing of high-value natural products from microalgae. We are vertically aligned, producing raw materials in the form of microalgae processed at our 96-acre facility in Hawaii, and integrating those raw materials into finished products. Our primary focus is stabilizing our production volume, rationalizing market channel participation, and leveraging our centers of core competence. We will continue to place emphasis on our Nutrex Hawaiian consumer products while exploring further opportunities for bulk sales orders for Spirulina and Astaxanthin, both domestically and internationally. Extraction services to third party customers utilizing our 1,000 bar super critical CO2 extractor process are expected to generate additional income throughout the year. We will leverage our experience and reputation for quality, nutritional products which promote health and well-being. The foundation of our nutritional products is naturally cultivatedHawaiian Spirulina Pacifica® in powder and tablet form; andBioAstin®* Hawaiian Astaxanthin*® antioxidant in extract and softgel form. Information about our Company and our products can be viewed at www.cyanotech.com and www.nutrex-hawaii.com. Consumer products can also be purchased online at www.nutrex-hawaii.com.

Current wording

Our strategic direction has been to position as a world leader in the production and marketing of high-value natural products from microalgae. We are vertically aligned, producing raw materials in the form of microalgae processed at our 96-acre facility in Hawaii, and integrating those raw materials into finished products. Our primary focus is stabilizing our production volume, rationalizing market channel participation, and leveraging our centers of core competence. We will continue to place emphasis on our Nutrex Hawaiian consumer products while exploring further opportunities for bulk sales orders for Spirulina and Astaxanthin, both domestically and internationally. Extraction services to third party customers utilizing our 1,000 bar, supercritical carbon dioxide extractor process are expected to generate additional income throughout the year. We will leverage our experience and reputation for quality, nutritional products which promote health and well-being. The foundation of our nutritional products is naturally cultivatedHawaiian Spirulina Pacifica® in powder and tablet form; andBioAstin®* Hawaiian Astaxanthin*® antioxidant in extract and softgel form. Information about our Company and our products can be viewed at www.cyanotech.com and www.nutrex-hawaii.com. Consumer products can also be purchased online at www.nutrex-hawaii.com.

Previous wording

Inflationary factors such as increases in the costs of materials, utilities and labor affected our operations in fiscal year 2023. In the first nine months of fiscal year 2024, we have seen stabilization in our underlying costs. We are also experiencing overall lower demand as consumers are feeling the impacts of higher inflation and are closely managing their discretionary spend. The exact impact on our results is difficult to isolate and quantify given the macroeconomic environment. Most of our leases provide for cost-of-living adjustments and require us to pay for insurance and maintenance expenses, all of which are subject to inflation. Additionally, our future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that we will be able to pass on increased costs to our customers.

Current wording

Inflationary factors such as increases in the costs of materials, utilities and labor affected our operations. We have seen stabilization in our underlying costs, however, we are also experiencing overall lower demand as consumers are feeling the impacts of higher inflation and are closely managing their discretionary spend. The exact impact on our results is difficult to isolate and quantify given the macroeconomic environment. Most of our leases provide for cost-of-living adjustments and require us to pay for insurance and maintenance expenses, all of which are subject to inflation. Additionally, our future lease cost for new facilities may include potentially escalating costs of real estate and construction. There is no assurance that we will be able to pass on increased costs to our customers.

Previous wording

Our critical accounting policies and estimates are disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2023, filed with the SEC on June 27, 2023. In the nine months ended December 31, 2023, there were no changes to the application of critical accounting policies previously disclosed in our most recent Annual Report on Form 10-K.

Current wording

Our critical accounting policies and estimates are disclosed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2024, filed with the SEC on June 26, 2024. In the three months ended June 30, 2024, there were no changes to the application of critical accounting policies previously disclosed in our most recent Annual Report on Form 10-K.