CYANOTECH CORP

Previous wording

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative of our financial condition, results of operations, liquidity and certain other factors that may affect our future results from the perspective of management.

Current wording

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our consolidated financial statements with a narrative of our financial condition, results of operations, liquidity and certain other factors that may affect our future results from the perspective of management.

Previous wording

We are an agricultural company and a world leader in the production of natural products derived from microalgae grown in complex and intricate agricultural systems on the Kona coast of Hawaii. We have a core competency in cultivating and processing microalgae into high-value, high-quality natural products for the human dietary supplement market. We are unique in that our microalgae are grown in open ponds which, similar to natural land and plant-based horticulture, require favorable weather conditions. In our case these conditions include consistent light, warm temperatures and low rainfall to achieve optimum production. Equally important is a nutrient-rich environment, which requires the proper control and balance of necessary nutrients to support growth and yields. Greater variability in these environmental factors more commonly occur in our winter growing season.

Current wording

We are an agricultural company and a world leader in the production of natural products derived from microalgae grown in complex and intricate agricultural systems on the Kona coast of Hawaii. We have core competency in cultivating and processing microalgae into high-value, high-quality natural products for the human dietary supplement market. We are unique in that our microalgae are grown in open ponds which, similar to natural land and plant-based horticulture, require favorable weather conditions. In our case these conditions include consistent light, warm temperatures and low rainfall to achieve optimum production. Equally important is a nutrient-rich environment, which requires the proper control and balance of necessary nutrients to support growth and yields. Greater variability in these environmental factors more commonly occur in our winter growing season.

Previous wording

We will continue to focus on growing the market for our high quality, higher margin consumer products by emphasizing the higher nutritional content of ourHawaiian Spirulina Pacifica® and the multiple health benefits of ourBioAstin®Hawaiian Astaxanthin®. We generated 18%, 27% and 32% of our revenues outside of the United States during the years ended March 31, 2024, 2023 and 2022, respectively. Competing in a global marketplace, we are influenced by the general economic conditions of the countries in which our customers operate, including adherence to our customers’ local governmental regulations and requirements. Since substantially all sales are made in U.S. currency, we have no material foreign exchange exposure.

Current wording

We will continue to focus on growing the market for our high quality, higher margin consumer products by emphasizing the higher nutritional content of ourHawaiian Spirulina Pacifica® and the multiple health benefits of ourBioAstin®Hawaiian Astaxanthin®. We generated 21% and 18% of our revenues outside of the United States during the years ended March 31, 2025 and 2024, respectively. Competing in a global marketplace, we are influenced by the general economic conditions of the countries in which our customers operate, including adherence to our customers’ local governmental regulations and requirements. Since substantially all sales are made in U.S. currency, we have no material foreign exchange exposure.

Previous wording

Complex biological processes in the cultivation and processing of our microalgae are influenced by factors beyond our control—the weather, for example. As a result, we cannot assure that adequate production levels will be consistent period over period. To the extent that our production levels are not sufficient to absorb these costs on a period basis, we recognize abnormal and non-inventoriable production costs, including fixed cost variances from normal production capacity, as an expense in the period incurred. Abnormal amounts of freight, handling costs and wasted material (spoilage) are recognized as current-period charges and fixed production overhead costs are allocated to inventory based on the normal capacity of production facilities. Normal 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. To offset increased production costs, we seek ways to increase production efficiencies in volume yield, potency, and quality consistent with our commitment to produce high-value, high-quality products.

Current wording

Complex biological processes in the cultivation and processing of our microalgae are influenced by factors beyond our control—the weather, for example. As a result, we cannot be sure that adequate production levels will be consistent period over period. To the extent that our production levels are not sufficient to absorb these costs on a period basis, we recognize abnormal and non-inventoriable production costs, including fixed cost variances from normal production capacity, as an expense in the period incurred. Abnormal amounts of freight, handling costs and wasted material (spoilage) are recognized as current-period charges and fixed production overhead costs are allocated to inventory based on the normal capacity of production facilities. Normal 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. To offset increased production costs, we seek ways to increase production efficiencies in volume yield, potency, and quality consistent with our commitment to produce high-value, high-quality products.

Previous wording

We utilize several third-party contractors for encapsulation of our gelcaps, molding of our gummies and for the packaging of our finished products. Although these services are available from a limited number of sources, we believe that we have the ability to use other parties if any of the current contractors become unavailable.

Current wording

We utilize several third-party contractors for the encapsulation of our gelcaps, molding of our gummies and for the packaging of our finished products. Although these services are available from a limited number of sources, we believe that we have the ability to use other parties if any of the current contractors become unavailable.

Previous wording

The following tables present selected consolidated financial data for each of the past three fiscal years ($ in thousands):

Current wording

The following tables present selected consolidated financial data for each of the past two fiscal years ($ in thousands):

Previous wording

Gross Profit Gross profit as a percent of net sales decreased by 6.4 percentage points compared to fiscal 2022, which was the result of higher cost per kilogram of astaxanthin and spirulina due to the impact of inflation on our underlying costs and lower spirulina production volumes.

Current wording

Gross Profit Gross profit as a percent of net sales increased by 2.6 percentage points compared to fiscal year 2024, which was the result of higher production volumes, which resulted in lower production costs for the current fiscal year.

Previous wording

Operating Expenses Operating expenses increased $0.4 million, or 3.5% compared to fiscal year 2023. Selling and marketing expenses increased primarily due to higher online selling fees, offset by lower general and administrative and research and development costs related to lower headcount.

Current wording

Operating Expenses Operating expenses decreased $1.2 million, or 10.9% compared to fiscal year 2024. Selling and marketing expenses decreased primarily due to lower online selling fees, advertising and commissions, as well as lower research and development costs related to lower headcount.

Previous wording

Income Taxes We recorded an income tax expense of $7,000 in fiscal 2024 for state taxes, compared to income tax expense of $18,000 in fiscal 2023.

Current wording

Income Taxes We recorded an income tax expense of $8,000 in fiscal year 2025 for state taxes, compared to income tax expense of $7,000 in fiscal 2024.

Previous wording

The accompanying consolidated financial statements, as of and for the fiscal year ended March 31, 2024 and 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 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 Revolving Credit Agreement. These conditions raise substantial doubt about our 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 we were unable to continue as a going concern.

Current wording

The accompanying consolidated financial statements, as of and for the fiscal years ended March 31, 2025 and 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 negative cash flows from operations for these same periods. Furthermore, as discussed below, we were not in compliance with two debt covenant requirements as of March 31, 2024 and 2025. In June 2023, the Bank instituted a freeze on additional advances from the Revolving Credit Agreement (the “Line of Credit”). These conditions raise substantial doubt about our 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 we were unable to continue as a going concern.

Previous wording

As of March 31, 2024, we had cash of $0.7 million and working capital of $2.0 million compared to $1.0 million and $5.4 million, respectively, at March 31, 2023. We had the 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 a term loan in the amount of $1.48 million with a maturity date of August 30, 2024. As of March 31, 2024, we had $1.24 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 consolidated financial statements).

Current wording

As of March 31, 2025, we had cash of $0.3 million and working capital of $0.3 million compared to $0.7 million and $2.0 million, respectively, as of March 31, 2024. We had the 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 as of March 31, 2023, the borrowings under the Line of Credit were frozen. On October 13, 2023, the Bank converted the Line of Credit to a term loan in the amount of $1.48 million with an original maturity date of August 30, 2024 (the “2023 Loan”). As of March 31, 2025 and 2024, we had $0.8 million and $1.2 million, respectively, outstanding on the 2023 Loan (see Note 5 in the notes to 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 a revolving basis (the “Revolver”). At March 31, 2024 and 2023, we had $1.25 million and $0.5 million, 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 Note 5 and 15 in the notes to 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 a revolving basis (the “Revolver”). As of March 31, 2025 and 2024, we had $3.0 million and $1.25 million, respectively, of 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, 2026 (see Note 5 and 15 in the notes to consolidated financial statements).

Previous wording

As of March 31, 2024, we had $3.2 million 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, 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. 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.

Current wording

As of March 31, 2025, we had $3.0 million of debt (the "2012 Loan") payable to the Bank that requires the payment of principal and interest monthly through August 2032. Pursuant to the 2012 Loan and 2023 Loan, we are subject to annual financial covenants, customary affirmative and negative covenants and certain subjective acceleration clauses. As of March 31, 2025, our debt service coverage ratio and current ratio fell short of the Bank’s annual requirement. On June 4, 2025, the Bank provided us with a letter waiving the covenant violations as of March 31, 2025, 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. 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.

Previous wording

We continue to experience a loss from operations as the impacts from the macroeconomic environment led to lower sales across our portfolio for the fiscal year ended March 31, 2024. 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. Beginning in the second quarter of fiscal year 2023 through the end of fiscal year ended 2024, we drew on our funding sources 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 some 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 quarter of fiscal 2024.

Current wording

We continue to experience a loss from operations and continue to rely on our funding source to provide liquidity. To address the resulting continued cash flow challenges, we continue to monitor cost savings initiatives implemented in fiscal year 2023. This includes: stopping or slowing production of inventory in alignment with current customer demand throughout the year, maintaining a reduced headcount and compensation, primarily through attrition and furloughs, respectively, and eliminating certain discretionary selling, general and administrative and research and development expenses. We have made some additional changes in the sales and marketing team by hiring a Head of Sales to strengthen our eCommerce footprint, optimize our marketing efforts and improve our retail strategy.

Previous wording

Inflationary factors such as increases in the costs of materials, utilities and labor directly affect our operations. 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 costs 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 directly affect our operations. We are also experiencing overall lower demand in packaged sales as consumers are feeling the impacts of higher inflation and are closely managing their discretionary expenses. 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 costs 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

Cash Flows The following table summarizes our cash flows from operating, investing and financing activities for each of the past three fiscal years ($ in thousands):

Current wording

Cash Flows The following table summarizes our cash flows from operating, investing and financing activities for each of the past two fiscal years:

Previous wording

Cash used in operating activities in fiscal 2023 was the result of a net loss of $3.4 million, an increase of $1.2 million in inventories and a decrease of $1.7 million in accounts payables and other accruals, offset by non-cash charges of $2.1 million and a decrease of $2.2 million in accounts receivables.

Current wording

Cash used in operating activities in fiscal 2025 was primarily the result of a net loss of $3.2 million and an increase of $0.5 million in inventories, offset partially by non-cash charges of $2.2 million.

Previous wording

Cash used in operating activities in fiscal 2024 was the result of a net loss of $5.3 million and an increase of $0.8 million in accounts receivable, offset by non-cash charges of $2.4 million and a decrease of $3.4 million in inventories.

Current wording

Cash used in operating activities in fiscal 2024 was primarily the result of a net loss of $5.3 million and an increase of $0.8 million in accounts receivable, offset partially by non-cash charges of $2.4 million and a decrease of $3.4 million in inventories.

Previous wording

Cash provided by financing activities in fiscal 2023 consisted primarily of draws on the line of credit of $1.5 million and on the related party line of credit of $0.5 million, offset by debt service payments of $0.5 million.

Current wording

Cash provided by financing activities in fiscal 2025 consisted primarily of additional draws on the related party line of credit of $1.8 million, partially offset by the paydown of $0.5 million on the 2023 Loan and $0.3 million of debt service payments.

Previous wording

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, 2024 and 2023, we recognized $26,000 and $94,000, respectively, of revenue from deposits that were included in contract liabilities as of March 31, 2023 and 2022, respectively. Our contracts have a duration of one year or less and therefore, we have elected the practical expedient of not disclosing revenues allocated to partially unsatisfied performance obligations.

Current wording

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, 2025 and 2024, we recognized $45,000 and $26,000, respectively, of revenue from deposits that were included in contract liabilities as of March 31, 2024 and 2023, respectively. Our contracts have a duration of one year or less and therefore, we have elected the practical expedient of not disclosing revenues allocated to partially unsatisfied performance obligations.

Previous wording

Beginning in fiscal 2021 through fiscal year 2023, cultivation of astaxanthin was completed in the first six months of the fiscal year during the most productive months of the year due to the best growing conditions, compared to year-round cultivation in the prior fiscal years. In fiscal year 2024, cultivation of astaxanthin reverted back to year-round in order to manage staffing constraints. We calculate 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.

Current wording

Beginning in fiscal 2021 through fiscal year 2023, cultivation of astaxanthin was completed in the first six months of the fiscal year during the most productive months of the year due to the best growing conditions, compared to year-round cultivation in the prior fiscal years. In fiscal year 2024, cultivation of astaxanthin reverted back to year-round in order to manage staffing constraints, however, in fiscal year 2025, cultivation of astaxanthin was completed in the most productive nine months of the year. We calculate 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.

Previous wording

Equipment and leasehold improvements - Equipment and leasehold improvements are reported at cost less accumulated depreciation and amortization. Self-constructed leasehold improvements include design, construction and supervision costs. These costs are recorded in construction in progress and are transferred to equipment and leasehold improvements when construction is completed, and the facilities are placed in service. Long-lived assets, such as property and equipment and purchased intangibles subject to amortization are reviewed 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. We did not recognize any impairment of long-lived assets as of March 31, 2024. We recognized $5,000 impairment of long-lived assets as of March 31, 2023, which are included in other income (expense) on the consolidated statements of operations.

Current wording

Equipment and leasehold improvements - Equipment and leasehold improvements are reported at cost less accumulated depreciation and amortization. Self-constructed leasehold improvements include design, construction and supervision costs. These costs are recorded in construction in progress and are transferred to equipment and leasehold improvements when construction is completed, and the facilities are placed in service. Long-lived assets, such as property and equipment and purchased intangibles subject to amortization are reviewed 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. We recognized $5,000 impairment of long-lived assets as of March 31, 2025, but did not recognize any impairment of long-lived assets as of March 31, 2024.

Previous wording

Stock-Based Compensation - We provide compensation benefits in the form of stock options, restricted stock units and restricted stock grants to employees and non-employee directors. Our stock-based compensation expense is based on the fair value of awards, adjusted for estimated forfeitures, and amortized on a straight-line basis over the requisite service period for stock options and restricted stock units (“RSUs”). The fair value of stock options is estimated as of the date of grant using the Black-Scholes option-pricing model. This model requires input assumptions for our expected dividend yield, expected stock price volatility, risk-free interest rate and the expected option term. Restricted stock and RSUs are valued at the fair value of our common stock as of the date of the grant. See Note 9 in the notes to our consolidated financial statements.

Current wording

Stock-Based Compensation - We provide compensation benefits in the form of stock options, restricted stock units (“RSUs”) and restricted stock grants to employees and non-employee directors. Our stock-based compensation expense is based on the fair value of awards, adjusted for estimated forfeitures, and amortized on a straight-line basis over the requisite service period for stock options and RSUs. The fair value of stock options is estimated as of the date of grant using the Black-Scholes option pricing model. This model requires input assumptions for our expected dividend yield, expected stock price volatility, risk-free interest rate and the expected option term. Restricted stock and RSUs are valued at the fair value of our common stock as of the date of the grant. See Note 9 in the notes to our consolidated financial statements.