CYANOTECH CORP

Previous 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.

Current wording

Net Sales The net sales decrease of 8.3% for the current quarter compared to the same period last year was driven by a decrease in both astaxanthin and spirulina packaged sales, offset by an increase in spirulina bulk sales and contract extraction revenue. During the current year quarter, we saw lower demand in packaged sales due to timing of shipments, offset by higher demand in spirulina bulk related to both timing of customer orders and increased demand.

Previous 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.

Current wording

Gross Profit Gross profit as a percent of net sales for the second quarter of fiscal 2025 decreased by 7.5 percentage points compared to the same period last year, which was the result of higher bulk sales with lower gross margins, and higher inventory costs due to lower production volumes.

Previous 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.

Current wording

Operating Expenses Operating expenses of $2.5 million for the second 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 advertising costs.

Previous 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.

Current wording

Income Taxes We did not record income tax expense for the second quarter of fiscal 2025 and recorded an income tax expense of $2,000 for the second quarter of fiscal 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 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.

Current wording

The accompanying condensed consolidated financial statements, as of and for the three and six months ended September 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 most of 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 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).

Current wording

As of September 30, 2024, we had cash of $0.8 million and working capital of $0.6 million compared to $0.7 million and $2.0 million, respectively, at March 31, 2024. We had a Line of Credit 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 an original maturity date of August 30, 2024. As of September 30, 2024 and March 31, 2024, we had $1.0 million and $1.24 million, respectively, outstanding on the 2023 Loan, with a maturity date, which was extended to March 31, 2025. (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 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).

Current wording

We also have a loan facility with a related party that allows us to borrow up to $4.0 million on the Revolver. At September 30, 2024 and March 31, 2024, we had $2.0 million and $1.25 million, respectively, 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, 2026 (see Notes 5 and 12 in the notes to our condensed consolidated financial statements).

Previous 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.

Current wording

As of September 30, 2024, we had $3.1 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. On September 12, 2024, the Bank provided us with a letter waiving the covenant violations as of March 31, 2024, but noting that the Bank reserves its right to declare a default in the future if any covenants remain out of compliance at applicable measurement dates.

Previous 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.

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 source 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

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.

Current wording

Cash used in operating activities for the six months ended September 30, 2024 was the result of a net loss of $2.4 million less non-cash items of $1.1 million, offset by 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.

Previous wording

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

Current wording

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

Previous wording

Cash used in financing activities for the three months ended June 30, 2024 consists of $63,000 of debt service payments and the paydown of $120,000 on the 2023 Loan.

Current wording

Cash provided by financing activities for the six months ended September 30, 2024 consists of additional draws on the related party line of credit of $750,000, offset by the paydown of $240,000 on the 2023 Loan and $127,000 of debt service payments.

Previous 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.

Current wording

As of September 30, 2024, our working capital was $550 thousand, a decrease of $1.5 million compared to March 31, 2024. The decrease was primarily due to a decrease in accounts receivable due to sales demand, timing and receipt of cash payments and inventories in the first half 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. We also had additional draw on the related party line of credit.

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, 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.

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 six months ended September 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.