Cyanotech Corporation’s (CYAN) CEO Gerry Cysewski on Q1 2018 Results – Earnings Call Transcript

Cyanotech Corporation (NASDAQ:CYAN)

Q1 2018 Earnings Conference Call

August 11, 2017 5:00 PM ET

Executives

Gerry Cysewski – Founder and Chief Executive Officer

Jole Deal – Chief Financial Officer

Analysts

Gerry Cysewski

Hello all from Kona, Hawaii. Thank you all for joining us today. We are 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 Jole Deal, our Chief Financial Officer; as well as several members of our management team. What I would like to do is start off with our corporate mission statement, which is fulfilling the promise of whole health through Hawaiian microalgae.

With that I would like Jole Deal to make a Safe Harbor Statement and review our financial results for the first quarter.

Jole Deal

All right, thank you, Gerry. Let me be start by start by saying, our discussion today may include forward-looking statements, which occurring 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 package products increased 42%, due to a 51% increase in astaxanthin sales and a 22% increase in spirulina sales. This is a 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 sales and a 31% decrease in spirulina sales. The spirulina decrease is the result of inventory shortages that follow low production in the last quarter of fiscal 2017 and a decrease in bulk astaxanthin while it’s a large percentage change is barely small from a dollar perspective.

Our gross margin increased 240 basis points compared to Q1 of fiscal 2017 from 38.5% to 40.9% and this was driven by a favorable mix towards higher margin customers and products along with lower astaxanthin costs from prior quarter’s production. Our operating expenses decreased 13% driven largely 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 12.1% compared to a benefit of 6.8% for the same quarter last year and the tax rates were low because we’re using our net operating loss carry forward and offsetting the valuation allowance and on our deferred tax asset.

As of the end of our last fiscal year, our federal NOL carry forward was $11.8 million. Diluted earnings per share were $0.09 in the current quarter compared to a loss of $0.12 per share in the same quarter last year.

And with that I will turn it back to Gerry.

Gerry Cysewski

Thank you very much, Jole. I’d first 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’m founder of this company and I’m 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 forming an 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 are constantly evolving and working to improve all aspects of our business and we are pleased that our most recent quarterly performance reflects positively on those efforts.

Question-and-Answer Session

Q – Unidentified Analyst

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 press release?

Gerry Cysewski

he changes made during FY 2017 of which we are seeing positive results include stabilizing astaxanthin production, which lowered production costs, personnel changes, which resulted in cost savings, our stable commercial operation of our supercritical CO2 extraction plant, which has reduced costs over external extraction, increased sales at Costco, and finally a shift to higher margin retail marketing strategy within Amazon.

Unidentified Analyst

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

Gerry Cysewski

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

Unidentified Analyst

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.

Gerry Cysewski

We are currently in five of eight Cosco 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’re already occupied. With sales the Cosco up 100% compared to year ago, our efforts are certainly working.

Unidentified Analyst

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

Gerry Cysewski

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, Meyers, Sprouts, Fresh Thyme, Vitamin Shoppe and GNC. In Hawaii, we’re also in Targetand Wal-Mart.

Unidentified Analyst

Finally, the question, Cyanotech just reported a quarter with a below statutory tax rate. In the 10-K I found little mention of the tax loss carry forward. I know Hawaii likely gives them a tax break, but what is the size of the tax loss carry forward since at some point they would be a full tax payer.

Gerry Cysewski

This tax issue was discussed in our Form 10-Q for Q1 FY 2018, which was filed after close of market yesterday. To summarize, the tax rate is low because we are using our net operating loss, or NOL, and offsetting the evaluation allowance of our related deferred tax asset. As of the end of our last fiscal year, our federal NOL carry forward was $11.8 million and our NOL carry forward for Hawaii was $6.3 million.

Gerry Cysewski

That ends the questions that we received before the cut-off date and I want to thank everyone for attending this conference call. And again, thank you very much and have a wonderful weekend everyone. Goodbye.

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