Cyanotech(US:CYAN)2024-06-26 20:02Part I Business Cyanotech is a global leader in microalgae-derived natural products, primarily BioAstin® Astaxanthin and Hawaiian Spirulina, cultivated at its unique Hawaiian facility - The company is a world leader in producing high-value natural products from microalgae, operating from a 96-acre facility in Kona, Hawaii, which offers unique environmental advantages for cultivation1517 - The company's two major product lines are BioAstin® Hawaiian Astaxanthin® (a powerful antioxidant) and Hawaiian Spirulina Pacifica® (a nutrient-rich superfood)19 Net Sales by Product Line (in thousands) | Product Line | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Natural astaxanthin products (BioAstin®) | $15,104 | $14,209 | $17,378 | | Spirulina products (Hawaiian Spirulina Pacifica®) | $7,351 | $8,355 | $17,990 | | Contract extraction and R&D services | $616 | $614 | $600 | | Total | $23,071 | $23,178 | $35,968 | - For fiscal year 2024, two major customers accounted for 34% and 17% of total net sales, indicating significant customer concentration44 - The company's patents for production methods and BioAstin® usage have expired, now relying on trade secrets, know-how, and its unique location for competitive advantage4647 Risk Factors The company faces significant operational, market, and financial risks, including facility vulnerability, intense competition, and going concern doubts - The company's operations are concentrated at a single facility in Hawaii, making it vulnerable to natural disasters, weather patterns, and resource shortages like water and power606265 - The company faces significant financial risk, with recurring losses, negative cash flow, and an accumulated deficit of approximately $22.9 million as of March 31, 2024, raising substantial doubt about its ability to continue as a going concern104105 - The company has defaulted on debt covenants related to its debt service coverage ratio and current ratio as of March 31, 2024, and is seeking a waiver from its lender, with failure to obtain a waiver potentially leading to default and bankruptcy102103 - Significant customer concentration risk exists, with the top ten customers generating 69% of net sales in fiscal 2024, where the loss of a major customer could materially reduce revenues75 - Two largest shareholders collectively own approximately 32.7% of the common stock, which could allow them to exert substantial influence over the company's business and policies84 Cybersecurity The company maintains a cybersecurity risk management program with Board oversight, reporting no material incidents to date - The company has a cybersecurity risk management program that includes risk assessments, an incident response plan, and employee training, with oversight from the Board of Directors109111 - As of the end of fiscal year 2024, the company has not identified any cybersecurity risks or incidents that have materially affected its business, operations, or financial condition110 Properties The company's primary 96-acre facility and headquarters are in Kailua-Kona, Hawaii, under long-term leases expiring in 2035 and 2037 - The main operations are on a 96-acre property in Kailua-Kona, Hawaii, leased from the State of Hawaii with leases expiring in 2035 and 2037112 Legal Proceedings As of March 31, 2024, the company reported no significant outstanding legal proceedings - As of March 31, 2024, the company had no significant outstanding legal proceedings113 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on OTCQB under 'CYAN', with no history of cash dividends due to lender restrictions - The company's common stock is traded on the OTCQB Venture Market under the symbol "CYAN"114 - The company has never paid cash dividends and is prohibited from doing so by an existing loan agreement115 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses declining sales, operating losses, and liquidity challenges, including debt covenant violations and going concern doubts, despite cost-saving efforts Results of Operations FY2024 saw a slight sales decrease to $23.1 million, with worsening operating and net losses, and a decline in gross profit margin to 25.8% Consolidated Performance Summary ($ in thousands) | Metric | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Net sales | $23,071 | $23,178 | $35,968 | | Gross profit | $5,945 | $7,259 | $13,566 | | Gross profit % | 25.8% | 31.3% | 37.7% | | Operating (loss) income | $(4,592) | $(2,920) | $2,574 | | Net (loss) income | $(5,267) | $(3,440) | $2,154 | - In FY2024, net sales decreased 0.5% to $23.1 million, with a $1.0 million (12.0%) decrease in spirulina sales largely offset by a $0.9 million (6.3%) increase in astaxanthin sales130 - Gross profit margin decreased by 5.5 percentage points in FY2024 to 25.8%, caused by higher per-kilogram costs from lower production volumes and inventory write-downs133 - Bulk sales saw a significant decline of 44.5% in FY2024, with spirulina bulk sales dropping 55.6% and astaxanthin bulk sales down 24.8%, while total packaged sales grew 13.8%131132 Liquidity and Going Concern Recurring losses, negative cash flows, and debt covenant violations raise substantial doubt about the company's ability to continue as a going concern - Recurring operating losses, negative cash flows, and debt covenant violations have raised substantial doubt about the company's ability to continue as a going concern139190 - As of March 31, 2024, the company was not in compliance with the debt service coverage ratio and current ratio covenants required by its lender, First Foundation Bank, and is seeking a waiver142193 - The company is utilizing a $2.0 million revolving line of credit from a related party, with $1.25 million outstanding as of March 31, 2024, which expires in April 2025141192 - In December 2023, the company raised net proceeds of $388,000 for working capital through a private placement of 400,000 shares of common stock at $1.00 per share143194 Cash Flows FY2024 operating cash outflow improved to $0.5 million, with overall cash decreasing by $0.3 million due to investing and financing activities Summary of Cash Flows ($ in thousands) | Activity | 2024 | 2023 | 2022 | | :--- | :--- | :--- | :--- | | Operating activities | $(455) | $(2,100) | $2,379 | | Investing activities | $(381) | $(1,068) | $(1,270) | | Financing activities | $569 | $1,553 | $(2,287) | | Net decrease in cash | $(267) | $(1,615) | $(1,178) | Financial Statements and Supplementary Data This section presents audited financial statements, including balance sheets and income statements, with the auditor's report highlighting going concern doubts - The independent auditor's report includes a "Going Concern" paragraph, citing operating losses, negative cash flows, and non-compliance with debt covenants as conditions that raise substantial doubt about the company's ability to continue as a going concern172 Consolidated Balance Sheet Data (in thousands) | Account | March 31, 2024 | March 31, 2023 | | :--- | :--- | :--- | | Total Current Assets | $10,591 | $13,496 | | Total Assets | $25,112 | $29,728 | | Total Current Liabilities | $8,554 | $8,103 | | Total Liabilities | $13,298 | $13,381 | | Total Stockholders' Equity | $11,814 | $16,347 | Consolidated Statements of Operations Data (in thousands) | Account | FY 2024 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | | Net sales | $23,071 | $23,178 | $35,968 | | Gross profit | $5,945 | $7,259 | $13,566 | | (Loss) income from operations | $(4,592) | $(2,920) | $2,574 | | Net (loss) income | $(5,267) | $(3,440) | $2,154 | | Basic and Diluted EPS | $(0.81) | $(0.55) | $0.35 | - In FY2024, the company expensed $206,000 in abnormal production costs and $467,000 in other non-inventoriable fixed costs to cost of sales, primarily due to regenerating fallowed spirulina ponds and lower overall production volumes230232 - The company has a loan and a revolving line of credit with a related party (Skywords Family Foundation, Inc., controlled by the Chairman), with outstanding balances of $1.0 million on the term loan and $1.25 million on the revolver as of March 31, 2024244245290 - A full valuation allowance of $4.4 million has been recorded against deferred tax assets as of March 31, 2024, due to cumulative losses in recent years, indicating it is more likely than not that these assets will not be realized279280 Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2024 - Management concluded that the company's disclosure controls and procedures, as well as its internal control over financial reporting, were effective as of March 31, 2024293294 Other Information The Chairman of the Board initiated a Rule 10b5-1 trading plan on March 6, 2024, to purchase 315,000 shares - The Chairman of the Board, Michael Davis, entered into a Rule 10b5-1 trading plan on March 6, 2024, to purchase 315,000 shares of company stock298 Part III Directors, Executive Officers, Compensation, Security Ownership, and Accountant Fees Information on directors, executive compensation, security ownership, and accountant fees is incorporated by reference from the 2024 Proxy Statement - Information regarding directors, executive officers, compensation, security ownership, and accountant fees is incorporated by reference from the company's definitive 2024 Proxy Statement301303304305306 Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including material contracts and certifications - This section contains the list of all financial statements, schedules, and exhibits filed with the Form 10-K, including material contracts and certifications307309 Signatures This section contains the formal signatures of the registrant's authorized officers and directors, certifying the report