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Cyanotech Reports Net Loss of $294,000 in Third-Quarter Fiscal 2006

Wednesday, February 8, 2006

Hawaii microalgae company, Cyanotech Corporation today announced financial results for the third quarter and nine months of fiscal 2006, ended December 31, 2005.

Sales for the third quarter of fiscal 2006 were $2,333,000, down 27% and 7%, respectively, from sales of $3,180,000 for the same period of the prior fiscal year and $2,517,000 for the prior sequential quarter. Gross profit for the third quarter was $621,000, with gross profit margin of 27%, compared to a gross profit of $1,163,000 and gross profit margin of 37% reported for the same quarter of the prior year. The net loss for the third quarter was $294,000, or ($0.01) per diluted share, compared to net income of $326,000, or $0.02 per diluted share for the same quarter of the prior year and net loss of $321,000, or ($0.02) per diluted share for the second quarter of fiscal 2006.

Cash and cash equivalents, including short-term investments, at the end of the third quarter were $2,951,000 compared to the March 31, 2005 balance of $3,005,000. Working capital was $5,196,000 compared to $5,102,000 at March 31, 2005.

"Lower revenue for the third quarter resulted from reduced order levels of spirulina products and continued reduced demand for NatuRose(R) in Japan aquaculture," said Gerald R. Cysewski, Ph.D., Cyanotech's Chairman, President and CEO. "Offsetting this somewhat, sales of BioAstin(R) Natural Astaxanthin and private label sales of finished consumer products showed increased demand from existing as well as new customers.

"Cyanotech holds a leading share of the high-quality segment of the spirulina market, which is now maturing into overall growth of 5% to 7% per year. The schedule for purchasing spirulina among our customers has always been variable, but we would expect, as has been typical, that orders should increase as customer inventories are consumed.

"NatuRose presents a more challenging prospect and we now know as a result of a fact-finding trip to Japan in November that the previously significant market for Sea Bream or Tai aquaculture feed may remain lower for some time. This is due to reduced sales and pricing of Sea Bream, causing growers to use less natural astaxanthin in the feed. As a result, we are diversifying our NatuRose sales efforts through several initiatives. These include feeding trials underway for Spanish Mackerel, another popular fish in Japan; concentration on the ornamental or tropical fish market worldwide where brilliant, natural color is important; and investigation of niche markets in the large salmon aquaculture arena where feed manufacturers and growers are seeking positive differentiation through all-natural products and may adopt NatuRose rather than synthetic astaxanthin. We are also looking into the feed market for companion animals, particularly dogs, where the health benefits of natural astaxanthin may warrant inclusion in premium products.

"Our principal marketing and sales focus on BioAstin Natural Astaxanthin as an ingredient in health formulations continues to produce results with the number of wholesale customers and level of BioAstin sales up again in the third quarter. The bulk of our promotional budget continues to be dedicated to this effort."

For the first nine months of fiscal 2006, Cyanotech reported sales of $7,879,000, a decrease from sales of $8,885,000 reported for the first nine months of the prior fiscal year. Gross profit for the first nine months of fiscal 2006 was $2,227,000 with gross profit margin of 28%, compared to gross profit of $3,104,000 and gross profit margin of 35% for the comparable period of the prior fiscal year. Decreased gross profit for both the third quarter and the first nine months of 2006 was primarily attributable to decreased sales coupled with increased natural astaxanthin and other per unit production costs. This result was due in part from a decision to reduce production in response to lower order levels. In addition, some material and freight costs have increased, and the company has absorbed its fixed costs across reduced production and sales volumes. For the first nine months of fiscal 2006 the Company reported a net loss of $462,000, or ($0.02) per diluted share compared to net income of $560,000, or $0.03 per diluted share reported for the comparable period of the prior fiscal year.

In November 2005, Dr. Cysewski visited customers, prospective customers, government and trade association officials on a business development trip to China, Hong Kong and Japan. Distribution agreements signed with a Chinese-American joint venture are expected to generate orders for BioAstin and NatuRose in 2006. Currently, the products are being registered with the Chinese government for sale in China.

The clinical studies of BioAstin underway during the latter half of last year have now been completed and final review and analysis are underway. The results are anticipated within 30 days.

At the end of the third quarter, most of the Company's 69 microalgae ponds were in production with 12 ponds growing astaxanthin and the balance producing spirulina as needed. Additional ponds are available for astaxanthin production with minimal conversion time and necessary processing equipment is at hand to accommodate the conversion of several additional ponds from spirulina to astaxanthin.

Cyanotech's sales and marketing program will be enhanced during the fourth quarter of fiscal 2006 and beyond with a commitment to a broad-based public relations campaign for the company's leading product for human nutrition and health, BioAstin Natural Astaxanthin. The program will target consumer media, including magazines, newspaper, radio and TV to promote consumer awareness of BioAstin and drive consumers to purchase the product from Cyanotech's customers. These include Now Foods, Health Plus, Twin Laboratories, Jarrow Formulas, Pure Encapsulations, HVL/Douglass Labs, Derma E and Garden of Life, among others.

"This campaign represents a major initiative by Cyanotech to support our customers in marketing BioAstin," Dr. Cysewski said. "The timing is good because consumer awareness of natural astaxanthin for such health benefits as fighting inflammation is increasing steadily."

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