CYANOTECH : Transcript of August 11 earnings call for Q1 FY 18

Cyanotech Corporation (NASDAQ:CYAN)
Q1 2018 Earnings Broadcast

August 11, 2017; 5:00pm ET
Executives:
Gerry Cysewski - Chief Executive Officer
Jolé Deal - Chief Financial Officer

Gerry Cysewski
Aloha from Kona, Hawaii. Thank you all for joining us today. We're pleased to finally be reporting Cyanotech's first quarter fiscal year 2018 earnings results. I am Gerry Cysewski, Founder and Chief Executive Officer. Joining me here in Kona are Jolé Deal, our CFO, as well as several members of our management team.

I'd like to start with our corporate mission statement, which is 'Fulfilling the promise of whole health through Hawaiian microalgae.' With that, I'd like Jolé to make a Safe Harbor statement and review our financial results for the first quarter.

Jolé Deal
Thank you, Gerry. Let me start by saving our discussion today may include forward-looking statements which are current as of today's date. We do not undertake any obligation to update forward-looking statements either as a result of new information, future events or otherwise. Our actual results may differ materially from what is described in these forward-looking statements. Some of the factors that may cause results to differ are listed in our publicly filed documents. For additional information, we encourage you to review our 10-q and 10-K filings with the Securities and Exchange Commission.

With that, I'll begin discussing our operating results for the first quarter. Total revenues increased 20% compared to the first quarter of fiscal 2017. Our revenues from our Nutrex packaged products increased 42%, due to a 51% increase in astaxanthin sales and a 22% increase in spirulina sales. This is the result of our focus on strategic channels like Amazon and Costco.

Our revenues from bulk products decreased 34% due to a 47% decrease in astaxanthin and a 31% decrease in spirulina. The spirulina decrease is the result of inventory shortages that follow low production in the last quarter of fiscal 2017. The decrease in bulk astaxanthin, while a large percentage change, is fairly small from a dollar perspective.

Our gross margin increased 240 basis points from 38.5% to 40.9%. This was driven a favorable mix toward higher margin customers and products, along with lower astaxanthin costs from prior quarters' production.

Our operating expenses decreased 13% driven mostly by lower legal expenses.

Net income was $501,000 for the quarter versus a loss of $691,000 for the same quarter last year. Our effective tax rate for the quarter was 2.1% compared to a benefit of 6.8% for the same quarter last year, and the tax rate is low because we are using our net operating loss carryforward and offsetting the valuation allowance on our deferred tax asset. As of the end of our last fiscal year, our federal NOL carryforward was $11.8 million

Diluted earnings per share were $0.09 in the current year compared to a loss of $0.12 per share in the prior year. With that, I'll turn it back to you, Gerry.

Gerry Cysewski

Thank you very much, Jolé. I'd like to start with a statement about the Company.

Cyanotech is a science based microalgae company that strives to produce the highest quality products in an environmentally friendly way. I am the founder of this company, and I am very proud of the consistent quality standards we have established and maintained for our customers, and our industry.

The fundamental nature of what we do is analogous to farming and the agricultural industry. There are many factors, including inconsistent climatic conditions, which create challenges to our success. Over the years, we have not always been profitable or financially successful. We're constantly evolving and working to improve all aspects of our business, and are pleased that our most recent quarterly performance reflects positively on these efforts.

Now to the first question, which is 'What are the most significant of the 'many changes' during the last fiscal year that were noted in the release?'

The changes made during FY17 for which we are seeing positive results include:
1. Stabilizing astaxanthin production which lowered production cost.
2. Personnel changes which resulted in cost savings
3. Stable commercial operation of our supercritical CO2 extraction plant which reduces costs over external extraction
4. Increased sales to Costco
5. A shift to higher-margin retail marketing strategy with in Amazon.

The second question is 'As you pivot more to retail, should we expect less seasonality between Q1 and Q2 this year, in comparison to previous 35% seasonal top-line jump typically seen from Q1 to Q2 in previous years?'

I would very much like to see a 35% sales increase in Q2. However, we do not provide future guidance.

The next question is 'How many Costco stores were you in as of the end of Q1? Last count you had 254 COSTCO store penetration in Q2 of last year?'

We are currently in 5 of 8 Costco regions representing 258 warehouses or 53% of all warehouses nationwide. With Costco's concurrence, we slowed our nationwide expansion to increase sales in the regions we already occupied. With sales to Costco up 100% compared to a year ago our efforts are certainly working.

The next question is 'Are there plans to get into additional retail chains on a go forward basis?'

Yes, we are planning to move into additional retail chains. However, I should point out that we are presently in a number of retail chains including Whole Foods, iHerb, Sprouts, Fresh Thyme, Vitamin Shoppe, and GNC. In Hawaii we are also in Target, Longs, and Walmart.

Finally, the question 'CYAN just reported a quarter with a below statutory tax rate. In the 10-k I found little mention of tax loss carryforwards. I know Hawaii likely gives them a tax break, but what is the size of the tax loss carryforward since at some point they would be a full taxpayer?'

This tax issue was discussed in our form 10Q for Q1 FY18 which was filed at the close of market yesterday. To summarize, the tax rate is low because we are using our NOL and offsetting the valuation allowance on our related deferred tax asset. As of the end of our last fiscal year, our federal NOL carryforward was $11.8 million and our NOL carryforward for Hawaii was $6.3 million

Contact:
Bruce Russell: [email protected]
(310) 346-6131