Cyanotech Corporation (Nasdaq Capital Market: CYAN), a world leader in microalgae-based, high-value nutrition and health products, today announced financial results for the fourth quarter and fiscal Year 2015, ended March 31, 2015.

Fiscal Year 2015

For fiscal 2015 compared to fiscal 2014, net sales were $33,809,000 compared to $28,178,000, an increase of 20%. Gross profit was $14,466,000, with gross profit margin of 43%, compared to gross profit of $11,189,000 and gross profit margin of 40%. Operating income for the year was $322,000 compared to an operating loss of $210,000 for fiscal 2014. The Company recognized a net loss for the year of $24,000 or $0.00 per diluted share, compared to a net loss of $420,000 or ($0.08) per diluted share.

Commenting on the fiscal 2015 results (changes shown vs. fiscal 2014), Brent Bailey, Cyanotech President and CEO, noted:

“Significant progress was made on many fronts in fiscal 2015. Although financial performance was better than fiscal 2014, it was negatively impacted by legal costs in the first three quarters from now-resolved litigation as well as continued Astaxanthin production challenges. We still have much work to do to realize our potential.

“Focusing first on progress:

  • Net sales in our Nutrex packaged consumer products grew +44% versus prior year. Fiscal 2015 net sales growth of our Nutrex business, by channel, was:
    • Nutrex Mainland: +56%
    • Nutrex Hawaii: +37%
    • Nutrex Direct (online): +34%
    • Nutrex International: NC
  • Net sales per capita in Hawaii, which we consider an indicator of our potential on the mainland, reached $2.60 in fiscal 2015 up from $1.92 in fiscal 2014.
  • For fiscal 2015, retail market share of Astaxanthin under our BioAstin brand in the US natural products channel was 57% (+4 pts.). Nutrex Spirulina market share was 49% (+1 pt.) in fiscal 2015.
  • In February 2015, our Costco test was expanded from 15 warehouses in San Diego to the remainder of the San Diego Region, which includes an additional 37 warehouses in Arizona, Colorado, Nevada, Utah and New Mexico, plus an additional 8 warehouses in Los Angeles. Including Hawaii, BioAstin Astaxanthin is now available in approximately 15% of Costco’s domestic warehouses. Results to date continue to exceed expectations.
  • All issues related to litigation with Valensa were resolved in December 2014.
  • Our new extraction equipment arrived in Kona ten months behind schedule but is now online. With this addition to our production process, we believe we are the only vertically integrated supplier of natural Astaxanthin in the world, owning the entire process from growth of the algae on our farm in Kona, Hawaii all the way to the consumer with our market-leading BioAstin brand. The addition of our own extraction facility is expected to significantly reduce cost and shorten lead times in processing. The extraction equipment is part of a new building that also includes separate biomass handling and oil blending rooms, a drive-in freezer storage area and a warehouse complex.
  • Supplemented existing experience and expertise with additions in key areas:
    • Gerry Watts joined Cyanotech in August 2014 as Chief Operations Officer and brings more than 30 years’ food and agribusiness experience including senior operations positions with Calavo Growers, Maui Land & Pineapple and SunOpta Foods. In a relatively short time, his leadership has energized the Operations team and he has developed an Astaxanthin capacity expansion plan that when implemented is expected to increase the quantity and quality of our product as well as the consistency and predictability of our production output.
    • Dr. Charles O’Kelly, a Ph.D. and expert in algal mass culture with 35 years’ experience, joined Cyanotech in April 2015 to expand our in-house research capabilities. Dr. O’Kelly, together with our founder and Chief Science Officer, Dr. Gerry Cysewski, will be focusing primarily on algae strain management and improvement to increase quantity and reduce variability in our production output.

“Two factors prevented us from realizing the full financial benefits of the continuing shift of our revenue from bulk sales to Nutrex retail in fiscal 2015:

  • Legal costs of $2,828,000 in fiscal 2015 that pertained to the legal proceedings which had been ongoing since 2012, but which were completely settled in the third quarter. Excluding these legal costs, pretax earnings for the year were $3,057,000 compared to $1,437,000 in fiscal 2014 and net income was $1,617,000 compared to $567,000 in fiscal 2014.
  • Astaxanthin production in fiscal 2015 versus fiscal 2014 was down 4% for the full year and 10% in the second half largely due to inconsistent weather caused by an increase in activity of the Kilauea volcano to a 50-year high as well as an El Nino weather pattern. Although we cannot change the weather, we recently started the first $2.5 million phase of a capacity expansion project that will not only increase the number of ponds and supporting infrastructure, but will also add processes designed to protect the algae from environmental factors during the growth cycle.”

Fourth Quarter 2015

For the fourth quarter of fiscal 2015 compared to the fourth quarter of fiscal 2014, net sales were $8,549,000 compared to $7,019,000, an increase of 22%. Gross profit was $2,674,000, with gross profit margin of 31%, compared to gross profit of $2,466,000 and gross profit margin of 35%. Operating loss for the quarter was ($53,000) compared to an Operating loss of ($797,000) for the same quarter last year. Net loss was ($171,000) or ($0.03) per diluted share, compared to a net loss of ($520,000) or ($0.09) per diluted share.

Regarding the fourth quarter fiscal 2015 results (changes shown versus fourth quarter fiscal 2014), Brent Bailey stated:

“In the fourth quarter, our Nutrex packaged consumer products net sales growth, by channel, was:

  • Nutrex Mainland: +35%
  • Nutrex Hawaii: +26%
  • Nutrex Direct (online): -10%
  • Nutrex International: -54%

“The decline in our Nutrex Direct business reflects our strategic decision to focus on building partnerships with key customers who are better suited to capitalize on the online opportunity due to their scale and breadth of product offerings. The Nutrex International decline is primarily due to order timing, not a trend change. BioAstin natural products channel market share of Astaxanthin was 57% (NC). Nutrex Spirulina market share was 49% (+1 pt.).

“The incremental profit generated by the strong +22% revenue growth in the fourth quarter was partially offset by:

  • A disappointing 18% reduction in Astaxanthin production, due to the irregular Kona weather conditions described previously. Successful completion of the work we have started on capacity expansion and internal research capability mentioned above should result in improved quantity, quality, consistency and predictability of production in the future by reducing the effects of weather.
  • Planned costs associated with the key personnel and infrastructure investments that are driving the excellent topline growth we continue to see in our consumer business.”

DELAYED FILING OF FORM 10-K — In the course of finalizing our financial statements for fiscal 2015, we discovered that our revenue recognition process resulted in an error in the reporting period of certain sales previously recognized and, as a result, had to delay the filing of our Annual Report on Form 10-K in order to correct the error. The applicable adjustment to net income for the fiscal years ended March 31, 2013 and 2014 was approximately ($45,000) and ($225,000), respectively. After evaluation of our revenue recognition process, we identified a material weakness in our internal control over financial reporting. We believe this material weakness did not have a material effect on our previously reported financial results. Refer to Item 9A in our Form 10-K.

Pursuant to the guidance of SEC Staff Accounting Bulletin (“SAB”) No. 99, Materiality, the Company concluded that the errors were not material to any of its prior period financial statements. However, in accordance with SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements, the prior period financial statements were revised. Prior period amounts stated in this Form 10-K have been revised to facilitate comparability between current and prior year periods.

About Cyanotech — Cyanotech Corporation, a world leader in microalgae technology, produces BioAstin® Natural Astaxanthin and Hawaiian Spirulina Pacifica®—all natural, functional nutrients that leverage our experience and reputation for quality, building nutritional brands which promote health and well-being. Cyanotech's Spirulina products offer complete nutrition, and augment energy and immune response. They are FDA-reviewed and accepted as Generally Recognized as Safe (GRAS) for use in food products. BioAstin's superior antioxidant activity and ability to support and maintain a natural anti-inflammatory response enhance skin, muscle and joint health. All Cyanotech products are produced from microalgae grown at our 90-acre facility in Kona, Hawaii using patented and proprietary technology. Cyanotech sells its products direct to consumers at retail locations in the United States and online at www.nutrex-hawaii.com and also distributes to nutritional supplement, nutraceutical and cosmeceutical manufacturers and marketers worldwide and is GMP-certified by the Natural Products Association™. Visit www.cyanotech.com for more information.

“Safe Harbor” Statement under the U.S. Private Securities Litigation Reform Act of 1995 Besides statements of present fact and historical fact, this press release may contain forward-looking statements. Forward-looking statements relate to the future and are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by forward-looking statements. We caution against relying on forward-looking statements. Important factors that could change actual, future results include: changes in sales levels to our largest customers, weather patterns in Hawaii, production problems, risks associated with new products, foreign exchange fluctuations, and availability of financing, as well as national and global political, economic, business, competitive, market and regulatory conditions. Other factors are more fully detailed in the Company’s annual Form 10-K filings with the Securities and Exchange Commission.

(Financial Tables Follow: The following tables do not contain footnotes or other information contained in the Company’s Form 10-K for the period ended March 31, 2015, which can be found on the Cyanotech website (www.cyanotech.com) under Investors>Investor Filings upon filing. As such the following Financial Tables are provided only as a guide and other factors are more fully detailed in the Company’s annual Form 10-K filings with the Securities and Exchange Commission.)

     
CYANOTECH CORPORATION AND SUBSIDIARY
 
CONSOLIDATED BALANCE SHEETS
 

March 31,

 
2015 2014
(in thousands, except
share data)
ASSETS
Current assets:
Cash and cash equivalents $ 2,226 $ 4,312
Accounts receivable, net of allowance for doubtful accounts of $6 in 2015 and $6 in 2014 3,258 2,376
Inventories, net 5,678 5,341
Deferred tax assets 315 216
Prepaid expenses and other current assets   317   339
Total current assets 11,794 12,584
Equipment and leasehold improvements, net 14,754 11,826
Restricted cash 486 1,368
Deferred tax assets 3,035 3,297
Other assets   846   902
Total assets $ 30,915 $ 29,977
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt $ 234 $ 204
Customer deposits 31 30
Accounts payable 2,926 3,147
Accrued expenses   1,124   774
Total current liabilities 4,315 4,155
Long-term debt, less current maturities 5,109 5,263
Deferred rent   8   8
Total liabilities   9,432   9,426
Commitments and contingencies
Stockholders’ equity:
Common stock of $0.02 par value, authorized 50,000,000 shares; issued and outstanding 5,564,799 shares at March 31, 2015 and 5,488,038 shares at March 31, 2014 111 110
Additional paid-in capital 30,846 29,891
Accumulated deficit   (9,474 )   (9,450 )
Total stockholders’ equity   21,483   20,551
Total liabilities and stockholders’ equity $ 30,915 $ 29,977
 
       
CYANOTECH CORPORATION AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 

Year ended March 31,

 
2015 2014 2013
(in thousands, except per share data)
 
Net sales $ 33,809 $ 28,178 $ 27,459
Cost of sales   19,343   16,989   16,575
Gross profit   14,466   11,189   10,884
Operating expenses:
General and administrative 7,864 6,415 4,680
Sales and marketing 5,667 4,469 3,675
Research and development 517 469 258
Loss on disposal of equipment and leasehold improvements   96   46   46
Total operating expense   14,144   11,399   8,659
Income from operations   322   (210 )   2,225
Other income (expense):
Loss on extinguishment of debt — — (51 )
Interest expense, net (93 ) (118 ) (60 )
           
Total other expense, net   (93 )   (118 )   (111 )
Income before income tax (expense) benefit 229 (328 ) 2,114
Income tax (expense) benefit   (253 )   (92 )   2,050
Net income (loss) $ (24 ) $ (420 ) $ 4,164
Net income (loss) per share:
Basic $ (0.00 ) $ (0.08 ) $ 0.76
Diluted $ (0.00 ) $ (0.08 ) $ 0.74
Shares used in calculation of net income (loss) per share:
Basic   5,517   5,478   5,455
Diluted   5,517   5,478   5,655