Cyanotech Corporation

Aloha from Kona, Hawaii. Thank you all for joining us today. We are pleased to report Cyanotech's third quarter fiscal year 2020 earnings results. I am Jerry Sosuski, Chief Executive Officer for Cyanotech and Nutrex. At this stage, I would like to introduce our Chief Financial Officer, Brian Orlop, who will make a safe harbor statement and review our financial results for the third quarter. We will respond to questions after Brian shares the quarter three results.

Thank you, Jerry. Let me start by saying our discussion today may include forward-looking statements. 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 your publicly filed documents. For additional information, we encourage you to review our 10Q and 10K filings with the Security and Exchange Commission.

Thank you, Brian. Before Brian discusses the details of the quarter, I would like to point out that our third quarter achieved sales of $7.5 million, a decrease of $2.5 million, or 25% from quarter three of fiscal 2019. While the results are below last year's unusual level, on a nine-month basis, our sales volume and profit margins appear to be normalizing. We continue to focus on our primary core areas of production stabilization, efficiencies in market spending, and cost control across all departments.

Thanks, Jerry. Now let's go through the results for the third quarter. As mentioned, total sales revenue decreased from the prior quarter last year by $2.5 million or 25% to $7.5 million. The overall operating income for the quarter was $367,000, a decrease of $128,000 from the same period last year. On a year-to-date basis, our operating income is $825,000 versus last year, which recorded a $1.7 million operating loss. The net sales decrease of 25% was primarily attributable to inventory build last year with our main customers and the non-recurring replenishment orders related to the re-inoculation of the Spirulina ponds. Additionally, we had increases in orders at the end of the quarter that will roll over into the fourth quarter. These decreases were partially offset by an increase in spirulina bulk sales as well as contract extraction sales. The year-to-date net sales decrease of $858,000 or 3.6% compared to last year was driven by a 9.9% and 11% decrease in astaxanthin and spirulina package sales respectively. The decreases were partially offset by a 56% increase in spirulina bulk sales as well as contract extraction sales. Gross profit as a percentage of net sales decreased 2.7% compared to the same period last year. And clement and cooler weather impacted production which affected our gross margins. Operating expenses decreased 1.1 million for the current quarter as compared to the same period last year. Overall cost in three key areas were down to cost-cutting initiatives with a $662,000 decrease in sales and marketing and a $447,000 collectively in general and administrative and research and development expenses. Interest expense increased $30,000 and $114,000 this quarter and year-to-date, respectively, as compared to last year's same time periods due to the additional interest expenses associated with the line of credit and the loan from the Skywards Family Foundation. Net income was $171,000 for the quarter versus a gain of $288,000 for the same quarter last year. Diluted earnings were $0.03 per share in the current quarter compared to $0.05 per share in the prior year. Net income on a year-to-date basis was $266,000 versus a loss last year of $2.1 million, a positive swing of $2.4 million. Now back to Jerry.

Thank you, Brian. We have received a number of questions from investors and shareholders, which we'll now address. The first question is, liabilities have increased by $1 million and liabilities from the lease arrangement by $3 million versus March 31st. Can you please give a bit more background on how these proceeds from the lendings were used and when these liabilities will be paid back? Brian, could you handle this one?

Sure, Jerry. Okay. The loan infusion was entirely used to address our accounts payable. On the balance sheet assets listing, under operating lease rights of use, the increase of $3.9 million is newly recognized in our books beginning April 1, 2019, in compliance with the accounting standards codification ASC 842 requirements, where leases are now capitalized on a balance sheet. This is wholly offset in the liability section of short-term and long-term obligations. With continued attention to our strategic goals, we look to further generate internal cash and reduce our payables and debt obligations accordingly.

Thank you, Brian. The next question is, could you explain what is driving the 25% sales revenue drop of $2.54 million in the quarter? Has the company lost a major customer? I'll take this, Brian. The high revenue for the third quarter last year was driven by a large inventory buildup by our two largest customers. This led to low revenue in the fourth quarter of last year as these customers purchased very little in Q4 of FY19. An inventory buildup by these customers did not happen the third quarter of this fiscal year, leading to the 25% lower revenue. But I should point out, we expect sustaining sales from these customers through our fourth quarter this year, as it occurred in the third quarter. We did not lose any major customers, just a shift in buying patterns. We then had three more questions really concerning future revenue guidance and net income guidance, and I'm sorry, but I cannot answer these questions as it is the company's policy not to provide any future guidance. Thank you. I'd now like to provide some concluding remarks. We are pleased with the progress of our most recent quarter performance, which reflected positively on our collective organizational efforts during the earlier half of the fiscal year. Through three quarters, it appears sales and profits are normalizing. With continued attention and commitment to our strategic goals in the months ahead, we look to further generate internal cash, reduce our payables, and increase profitability. We thank you for joining the call today, and we thank you for your continued support. Aloha and Mahalo.