Spirulina Pacifica -
a product made from Cyanotech algae.

Photo by Dennis Oda, Star-Bulletin

Kona green

In 1989, Cyanotech Corp. had a $900,000 deficit and
was on the verge of collapse. Today, it's enjoying
record profits and making plans for expansion.

By June Watanabe
Star Bulletin

KEAHOLE POINT, Big Island - It costs $50,000 to carve just one pond in the 200-year-old lava flow.

What eventually springs from it is green, gunky and as odoriferous as an unwashed old dog, but to Gerald Cysewski, the muck is finally proving to be almost as good as black gold.

The algae wasn't always this green for 13-year-old Cyanotech Corp., which was on the verge of collapse in 1989. Reports then depicted a company suffering from poor management, lack of focus and production problems. All that led to a nearly $900,000 deficit and a boot off the Nasdaq stock market when its total stockholders' equity dropped below $300,000.

The ponds are carved out of a 200-year-old lava flow.
Photo by Terry Luke, Star-Bulletin

But today, the biotech firm is back on the Nasdaq and is as hot as the lava that simmers beneath the Big Island's surface. "Sizzling," one stock analyst said. Sales of its natural beta-carotene rich microalgal product, Spirulina Pacifica, continue to rise and there are plans to look also to the sea for a natural food-coloring agent and a toxin to kill mosquitoes. Stockholders' equity today is $17.9 million, said Cysewski, company president and chief executive officer.

Cyanotech on Tuesday reported a record profit of $2.5 million, or 17 cents a share for the year ended March 31. That compares with a $769,000 profit - 5 cents a share - for the previous year. Revenues jumped to $8.1 million, a 95 percent increase, from a year ago.

The company's stock on Friday closed at $8.50 a share, up 12 cents from Thursday.

Profits, plus nearly $11 million realized from a recently completed secondary stock offering, are to be pumped back into the company, Cysewski said in an interview last week. Where the company six years ago regrouped to concentrate on Spirulina, a naturally occurring microscopic plant, it today is looking both to expand production of the health food supplement and diversify into other microalgal products.

Increasing competition, scientific studies debunking the benefits of beta-carotene supplements, the fickle marketplace, uncertain weather conditions, even changes in earnings estimates by analysts all make for a risky business.

But for now, "I don't see their earnings growing less than 50 percent over the next two to four years," said Colin Watanabe, Honolulu branch manager for National Securities Corp. But a word to potential investors: "It's not income stock any time in the near future; it's growth stock," he said.

Watanabe can't say enough good things about a company that he's been "supportive of" since 1988. "We've watched them grow up," he said, and predicts the small 55-employee company is on the verge of making it to the big time.

Gerald Cysewski of Cyanotech Corp. shows an experiment using green algae that will turn blood-red when oxygen is added. The process is part of the testing for astaxanthin, a pigment the company is developing that will give pen-raised fish and shrimp a pink color. Photo by Terry Luke, Star-Bulletin

"They're pretty close to netting markets that could really expand their revenues and earnings," Watanabe said. "And as their revenue expands, it's not like building an automobile factory ... their ramp-up time is very short and their overhead is quite low so their profit margins are substantial."

Cyanotech prices dropped from $12 a share in December to around $8 in January following reports that beta-carotene supplements had no positive health effect, but retail sales were not affected, both Cysewski and Watanabe said. Studies were based on synthetics, while Spirulina Pacifica is a natural product, a distinction apparently recognized by the health-food enthusiasts who buy it, they said.

Because of this, Cysewski believes the company can even capture part of the $50-million-a-year synthetic beta-carotene market.

Still, the nutritional supplement continues to take a battering. Results of two studies released just Wednesday also found that beta carotene does not prevent cancer or slow heart disease.

But the company already is looking to other microalgal products to fuel its growth. Cyanotech's product development has begun attracting investor attention outside the state, Watanabe said, especially among developing countries.

Cysewski himself is projecting that astaxanthin, a red pigment Cyanotech is developing to give salmon, shrimp and other fish raised in commercial pens a favored pink tint, will eventually surpass Spirulina in sales.

Cyanotech's facility near Kailua-Kona includes 50 ponds at the Natural Energy Laboratory of Hawaii. Photo courtesy of Cyanotech Corp.

A pilot test is under way, with limited production expected by the end of the year. "We hope by March 1997 to have sales of around $1 million," Cysewski said.

On top of that, Cyanotech has an exclusive license from the University of Memphis to manufacture and sell a genetically engineered "mosquitocide," a bacterial toxin aimed at killing only mosquito larvae and black flies. It is about 18 months away from full production, pending approval from the Environmental Protection Agency. Target markets are Asian and Pacific rim countries, Cysewski said, where mosquitoes are much more of a health problem than they are here.

These are heady times for Cysewski, 46, a former chemical engineering researcher and native of Seattle, who figured out how to take nutrient-rich microalgae out of the water and turn it efficiently into a marketable nutritional and pharmaceutical product.

A meeting with entrepreneur Arthur Karuna-Karan, who had the financing, led to the formation of Cyanotech, named for the cyan (blue-green) algae, in 1983. Karuna-Karan served as chief executive until, blamed for the company's problems, he was forced out seven years later. Back then, the company's headquarters were in Woodinville, Wash.

Cysewski, the scientific director, eventually took over as president and CEO and corporate offices were moved to Keahole, reflecting the shift in emphasis from research to production, and its financial management was tightened. Private investor Eva Reichl, now a director, bought $1.8 million shares in 1993, helping to fuel the company at a crucial time.

Microalgal paste moves along a conveyor belt after it has been filtered from water. The supplement is then packaged as powder, flakes or tablets. Photo by Terry Luke, Star-Bulletin

Today, Cyanotech is in an expansion stage. "We feel this is the best place to grow microalgae," Cysewski said, noting the abundant sunshine, scanty rainfall and access to the deep ocean water, from where the algae flows.

Offices and laboratories are in plain, one-story wooden structures, at the state-developed Natural Energy Laboratory of Hawaii park, near Keahole Airport. But Cyanotech is staking its future in this bleak terrain of hardened lava. Since 1992, it has increased its production capacity 350 percent. It is spending $4 million to increase the number of ponds from 50 to 75 by August, while another $2.5 million is being devoted to developing astaxanthin.

And if Spirulina production increases by 50 percent, as hoped, that could add six more employees to the current staff of 55. The astaxanthin operation would be separate, requiring another 10 to 12 workers.

A lean, bearded man looking like the scientist he is, Cysewski delights in the fact that he can show up for work in shorts and tennies, ideal attire for lava rock farming. Farming in this case involves neat rows of culture ponds - each 600 feet by 50 feet - with huge paddlewheels continually churning the water to assure exposure of algae to sunlight.

Company specs

Cyanotech Corp. develops and markets microalgae products.

FOUNDED: 1983 by Gerald Cysewski, now the president and chief executive officer, and Arthur Karuna-Karan, who was forced to resign in 1989, through merger of White Mountain Inc. and Alex Technology Inc.
WHAT: A Nevada corporation, based at the National Energy Laboratory of Hawaii park, Keahole. Nutrex Inc. is its wholly owned subsidiary.
PRODUCTS: Spirulina Pacifica powder, flakes and tablets; Hawaiian Energizer sports drinks and tablets; phycobiliproteins - fluorescent pigments sold to medical and biotech research companies. Developing natural astaxanthin pigment, genetically engineered mosquitocide and natural food colorings.
EARNINGS: A record profit of $2.5 million, or 17 cents a share, reported for the year ended March 31.
DIRECTORS: Among the directors are John Ushijima, University of Hawaii regent and former state senator and Paul Yuen, dean of the UH College of Engineering and former acting UH president.

The ponds are filled with cold sea water - drawn from 2,000 feet down - mixed with fresh water, with baking soda and carbon dioxide thrown in to spur the growth of Spirulina. A 600-pound "crop" is harvested from each pond every six days, when 70 percent of the water is pumped through underground pipes into the production building. There, an automated processing system first screens, then washes (three times) and vacuum filters the water, with the microalgae emerging in thick, dark green blobs. The smell of seaweed permeates the air. A patented process dries the algae in three seconds.

The Spirulina is packaged as powder, flakes or tablets, with the bulk of sales going to Asian companies for packaging under their own labels. Although Cyanotech has machines that can spit out 2,000 to 4,000 tablets a minute, the tablets are bottled in Los Angeles, where it's cheaper to ship to Asia than from Hawaii, Cysewski said.

The goal is to increase Cyanotech's own labels, which now run only about 8 percent of production, he said.

Part of the production process is to "recover and recycle everything," he said, including the water. Cyanotech leases as a holding tank a four-acre pond, one of four built for $1 million each by a well-publicized former NELH tenant, Ocean Farms of Hawaii.

Ocean Farms' attempt to raise salmon floundered, then it completely went under in 1991. Today, Cyanotech leases the pond for $2,000 a month. The other three stand empty and gaping, testament to the risks involved in such ventures. Even today, only 10 percent of the NELH is occupied, Cysewski said.

But for Cyanotech, the largest tenant in the 21-year-old park, new ground is still to be broken.

The Related Story:

Big Island Development Park

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