Cyanotech was one of the pioneers of cultivating microalgae as a source of dietary ingredients. The company grows algae in open ponds at its facility on the Kona Coast of Hawaii’s Big Island. Like some other open pond advocates, Cyanotech touts the cost benefits of the approach as well as the attributes of the pristine environment in which its ponds are located.
But being exposed to the environment has its drawbacks. Advocates of closed systems claim that contamination is too big a threat in an open setting, though Cyanotech has been in business for years so it can be presumed the company has learned how to deal with that challenge. But controlling the weather is something no company can lay claim to.
“The net sales decline of 5.8% in fiscal 2016 was driven primarily by a reduction of bulk astaxanthin sales due to lower production from weather-related (El Niño) conditions in the first half of the fiscal year,” said interim president and CEO Gerry Cysewski, PhD.
Strategy pivot
Cyanotech has been pivoting toward a vertical integration model and reportedly no longer sells much in the way of bulk ingredients. It has been ramping up sales of its Nutrex Hawaii band within the state, and has been gaining increased penetration on the mainland. But that strategy comes with some short-term hurt, Cysewski said.
“Our astaxanthin sales decreased 10.2% over the prior year, driven by a 67.1% decrease in bulk sales, offset by a 4.4% increase in packaged sales,” he said.
“Both spirulina and astaxanthin are sold in consumer packaged goods distributed primarily in the US and in bulk form for use worldwide. The change in composition of our sales in fiscal 2016 reflects our ongoing strategy to focus on growing the market for higher margin branded consumer products by emphasizing the higher nutritional content of our Hawaiian spirulina and the benefits of our natural astaxanthin over synthetics,” Cysewski said.
“During the fourth quarter of fiscal 2016, BioAstin (Cyanotech’s consumer astaxanthin brand) expanded into an additional 53 Costco warehouses in their San Francisco Bay Area region bringing our total Costco distribution to 163 warehouses,” he said. Cysewski said the brand continues to enjoy a dominant market position accounting for 59% of astaxanthin products sold.
Cyanotech has come under fire recently from an investment firm that owns almost 13% of the company’s stock. In a couple of Schedule 13D forms filed recently with the Securities and Exchange commission the firm Meridian OHC Partners and its principal Scott Shuda made the case that Cyanotech needs to move more quickly to ramp up its astaxanthin production capacity to capitalize on its current dominant position at the consumer level. Shuda had told NutraIngredients-USA that the company is in his view oddly complacent. The market has show little reaction to the announcement of Cyanotech’s losses, with the stock trading today at about $5.17, in line with the range for this calendar year. It is off significantly year over year, however; the 52-week high for the stock was exactly a year ago: $8.83 on July 13, 2015, and the stock was trading above $10 a share in June of last year.
Earnings details
For fiscal year 2016 compared to fiscal year 2015, net sales were $31,840,000 compared to $33,809,000, a decrease of 5.8%. Gross profit was $11,866,000, with gross profit margin of 37.3%, compared to gross profit of $14,466,000 and gross profit margin of 42.8%. Operating loss was ($785,000) compared to operating income of $322,000. Net loss was ($4,395,000) or ($0.79) per diluted share, compared to net loss of ($24,000) or ($0.00) per diluted share. The net loss for the current year included a valuation allowance on our deferred tax asset of $3,564,000 compared to $0 in the prior year.