**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

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| x | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---|--------------------------------------------------------------------------------------------------------|

 

**For thequarterly period ended September 30, 2007**

 

**OR**

 
| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|---------------------------------------------------------------------------------------------------------|

 

**For thetransition period to**

 

**CommissionFile Number 0-14602**

 

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**CYANOTECH CORPORATION**

(Exact name of registrant asspecified in its charter)

 
| **NEVADA**                         |   | **91-1206026**         |
|------------------------------------|--------|------------------------|
| (State or other jurisdiction       |   | (IRS Employer          |
| of incorporation or  organization) |   | Identification Number) |

 

**73-4460Queen Kaahumanu Hwy. #102, Kailua-Kona, HI 96740**(Address of principalexecutive offices)

 

**(808) 326-1353**(Registrant’stelephone number)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.    Yes o    No **x**

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Large acceleratedfiler  o                    Acceleratedfiler  o                    Non-acceleratedfiler  **x**

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o    No **x**

 

The number of sharesoutstanding of the Registrant’s Common Stock, $.02 par value, as of November 7,2007 was 5,242,270.

 

 

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CYANOTECH CORPORATION

FORM 10-Q

 

INDEX

 
|       | PART I.  FINANCIAL  INFORMATION                                                                                                                           |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       | Discussion of Forward-Looking Statements                                                                                                                                 |
| Item 1.    | Financial Statements                                                                                                                                                     |
|       | Consolidated Condensed Balance Sheets as of September 30,  2007 (unaudited) and March 31, 2007                                                                 |
|       | Consolidated Condensed Statements of Operations and  Comprehensive Income (Loss) (unaudited) For the three and six month periods  ended September 30, 2007 and 2006 |
|       | Consolidated Condensed Statements of Cash Flows  (unaudited) For the six month periods ended September 30, 2007 and 2006                                            |
|       | Notes to Consolidated Condensed Financial Statements  (unaudited)                                                                                                        |
| Item  2.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                              |
| Item  3.   | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                              |
| Item  4.   | Controls  and Procedures                                                                                                                                                 |
|       | PART II.  OTHER  INFORMATION                                                                                                                              |
| Item 1.    | Legal Proceedings                                                                                                                                                        |
| Item 1A.   | Risk Factors                                                                                                                                                             |
| Item 2.    | Unregistered Sales of  Equity Securities and Use of Proceeds                                                                                                             |
| Item 3.    | Defaults upon Senior  Securities                                                                                                                                         |
| Item 4.    | Submission of Matters to  a Vote of Security Holders                                                                                                                     |
| Item 5.    | Other Information                                                                                                                                                        |
| Item 6.    | Exhibits                                                                                                                                                                 |
| SIGNATURES |

 

2

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**Discussionof Forward-Looking Statements:**

 

***Important Noticeto Investors:***Statementsmade in this report that relate to future plans, events, liquidity, financialresults or performance including statements relating to cash flows andliquidity, as well as estimated unrecognized compensation expense, projectedcapital expenditures, and future contractual obligations, are forward-lookingstatements as defined under the Private Securities Litigation Reform Act of1995.  These statements are based upon current information andexpectations.  Actual results may differ materially from those anticipatedas a result of certain risks and uncertainties, including delays, difficulties,changed strategies, or unanticipated factors affecting the implementation ofthe Company’s gross margin, as well as the general risks and uncertaintiesapplicable to the Company and its business.  For details concerning theseand other risks and uncertainties, see Part I, Item IA, “Risk Factors” ofour most recent Form 10-K as well as the Company’s other reportssubsequently filed with the Securities and Exchange Commission from time totime.  Investors are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date hereof.  TheCompany undertakes no obligation to update forward-looking statements toreflect events or circumstances after the date hereof or to reflect theoccurrence of unanticipated events. Investors should also be aware that whilethe Company from time to time does communicate with securities analysts, it isagainst the Company’s policy to disclose to them any material non-publicinformation or other confidential commercial information.  Furthermore,the Company has a policy against distributing or confirming financial forecastsor projections issued by analysts and any reports issued by such analysts arenot the responsibility of the Company.  Investors should not assume that theCompany agrees with any report issued by any analyst or with any statements,projections, forecasts or opinions contained in any such report.

 

3

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CYANOTECHCORPORATIONCONSOLIDATED CONDENSED BALANCE SHEETS(Dollars in thousands except per share amounts)

 
| ** **                                                                                                                                                 | ** ** | **September  30,  2007** | ** ** | **March 31,  2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                                                                                                                 | ** ** | **(Unaudited)**          | ** ** | ** **               | ** ** |
| ASSETS                                                                                                                                                     |       |                     |       |                     |       |
| Current assets:                                                                                                                                            |       |                     |       |                     |       |
| Cash and cash equivalents                                                                                                                                  |       | $                        | 758        |                     | $          | 1,444 |   |
| Accounts receivable, net of allowance for doubtful  accounts of $23                                                                                        |       | 1,413                    |       | 1,587                    |       |
| Inventories                                                                                                                                                |       | 1,994                    |       | 1,593                    |       |
| Prepaid expenses and other                                                                                                                                 |       | 275                      |       | 141                      |       |
| Total current assets                                                                                                                                       |       | 4,440                    |       | 4,765                    |       |
|                                                                                                                                                       |       |                     |       |                     |       |
| Equipment and leasehold improvements, net                                                                                                                  |       | 4,480                    |       | 4,701                    |       |
| Other assets                                                                                                                                               |       | 420                      |       | 440                      |       |
| Total assets                                                                                                                                               |       | $                        | 9,340      |                     | $          | 9,906 |   |
|                                                                                                                                                       |       |                     |       |                     |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                  |       |                     |       |                     |       |
| Current liabilities:                                                                                                                                       |       |                     |       |                     |       |
| Current maturities of long-term debt                                                                                                                       |       | $                        | 405        |                     | $          | 398 |   |
| Accounts payable                                                                                                                                           |       | 1,027                    |       | 616                      |       |
| Accrued expenses                                                                                                                                           |       | 336                      |       | 390                      |       |
| Total current liabilities                                                                                                                                  |       | 1,768                    |       | 1,404                    |       |
|                                                                                                                                                       |       |                     |       |                     |       |
| Long-term debt, excluding current maturities                                                                                                               |       | 792                      |       | 992                      |       |
| Total liabilities                                                                                                                                          |       | 2,560                    |       | 2,396                    |       |
|                                                                                                                                                       |       |                     |       |                     |       |
| Stockholders’ equity: (see Note 6)                                                                                                                    |       |                     |       |                     |       |
| Common stock of $0.02 par value, shares authorized  7,500,000; 5,233,520 shares issued and outstanding at September 30, 2007  and March 31, 2007 |       | 105                      |       | 105                      |       |
| Additional paid-in capital                                                                                                                                 |       | 27,333                   |       | 27,333                   |       |
| Accumulated other comprehensive loss – foreign  currency translation adjustments                                                                      |       | (12                      | )          | (8                       | )          |
| Accumulated deficit                                                                                                                                        |       | (20,646                  | )          | (19,920                  | )          |
| Total stockholders’ equity                                                                                                                            |       | 6,780                    |       | 7,510                    |       |
|                                                                                                                                                       |       |                     |       |                     |       |
| Total liabilities and stockholders’ equity                                                                                                            |       | $                        | 9,340      |                     | $          | 9,906 |   |

 

See accompanying Notes toConsolidated Condensed Financial Statements.

 

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CYANOTECH CORPORATION

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(In thousands, except pershare amounts)

(Unaudited)

 
| ** **                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                         | ** ** | **2007**                                             | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                               |       |                                                 |       |                                               |       |   |   |   |   |
| NET SALES                                          |       | $                                                    | 2,604      |                                               | $          | 2,475 |   | $ | 5,187 |   | $ | 4,919 |   |
| COST OF  PRODUCT SALES                             |       | 1,836                                                |       | 2,071                                              |       | 3,673 |   | 4,044 |   |
| Gross profit                                       |       | 768                                                  |       | 404                                                |       | 1,514 |   | 875 |   |
|                                               |       |                                                 |       |                                               |       |   |   |   |   |
| OPERATING  EXPENSES:                               |       |                                                 |       |                                               |       |   |   |   |   |
| Research and  development                          |       | 36                                                   |       | 50                                                 |       | 83 |   | 80 |   |
| Sales and  marketing                               |       | 337                                                  |       | 325                                                |       | 705 |   | 615 |   |
| General and  administrative                        |       | 709                                                  |       | 571                                                |       | 1,381 |   | 1,033 |   |
| Total  operating expenses                          |       | 1,082                                                |       | 946                                                |       | 2,169 |   | 1,728 |   |
|                                               |       |                                                 |       |                                               |       |   |   |   |   |
| Loss from  operations                              |       | (314                                                 | )          | (542                                               | )          | (655 | ) | (853 | ) |
|                                               |       |                                                 |       |                                               |       |   |   |   |   |
| OTHER INCOME  (EXPENSE):                           |       |                                                 |       |                                               |       |   |   |   |   |
| Interest  income                                   |       | 6                                                    |       | 17                                                 |       | 17 |   | 26 |   |
| Interest  expense                                  |       | (38                                                  | )          | (47                                                | )          | (79 | ) | (94 | ) |
| Other income  (expense), net                       |       | 2                                                    |       | (4                                                 | )          | 1 |   | (4 | ) |
|                                               |       |                                                 |       |                                               |       |   |   |   |   |
| Total other  expense, net                          |       | (30                                                  | )          | (34                                                | )          | (61 | ) | (72 | ) |
|                                               |       |                                                 |       |                                               |       |   |   |   |   |
| Loss before  income taxes                          |       | (344                                                 | )          | (576                                               | )          | (716 | ) | (925 | ) |
|                                               |       |                                                 |       |                                               |       |   |   |   |   |
| INCOME TAX  (BENEFIT) EXPENSE                      |       | —                                               |       | (4                                                 | )          | 10 |   | (6 | ) |
|                                               |       |                                                 |       |                                               |       |   |   |   |   |
| NET LOSS                                           |       | $                                                    | (344       | )                                                  | $          | (572 | ) | $ | (726 | ) | $ | (919 | ) |
|                                               |       |                                                 |       |                                               |       |   |   |   |   |
| NET LOSS PER  SHARE (see Note 6)                   |       |                                                 |       |                                               |       |   |   |   |   |
| Basic                                              |       | $                                                    | (0.07      | )                                                  | $          | (0.11 | ) | $ | (0.14 | ) | $ | (0.18 | ) |
| Diluted                                            |       | $                                                    | (0.07      | )                                                  | $          | (0.11 | ) | $ | (0.14 | ) | $ | (0.18 | ) |
|                                               |       |                                                 |       |                                               |       |   |   |   |   |
| SHARES USED  IN CALCULATION OF NET LOSS PER SHARE: |       |                                                 |       |                                               |       |   |   |   |   |
| Basic                                              |       | 5,234                                                |       | 5,234                                              |       | 5,234 |   | 5,233 |   |
| Diluted                                            |       | 5,234                                                |       | 5,234                                              |       | 5,234 |   | 5,233 |   |
|                                               |       |                                                 |       |                                               |       |   |   |   |   |
| COMPREHENSIVE  LOSS:                               |       |                                                 |       |                                               |       |   |   |   |   |
| Net loss                                           |       | $                                                    | (344       | )                                                  | $          | (572 | ) | $ | (726 | ) | $ | (919 | ) |
| Other  comprehensive income (loss)                 |       | 1                                                    |       | (2                                                 | )          | (4 | ) | — |   |
|                                               |       | $                                                    | (343       | )                                                  | $          | (574 | ) | $ | (730 | ) | $ | (919 | ) |

 

See accompanying Notes toConsolidated Condensed Financial Statements.

 

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CYANOTECH CORPORATION

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 
| ** **                                                                   | ** ** | **Six Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
|                                                                         |       |                                               |       |   |   |
| CASH FLOWS  FROM OPERATING ACTIVITIES:                                       |       |                                               |       |   |   |
| Net loss                                                                     |       | $                                                  | (726       | ) | $ | (919 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities: |       |                                               |       |   |   |
| Depreciation                                                                 |       | 269                                                |       | 650 |   |
| Provision  for allowance for doubtful accounts                               |       | —                                             |       | 4 |   |
| Amortization  of debt issue costs and other assets                           |       | 18                                                 |       | 17 |   |
|                                                                         |       |                                               |       |   |   |
| Net  (increase) decrease in:                                                 |       |                                               |       |   |   |
| Accounts  receivable                                                         |       | 174                                                |       | 459 |   |
| Refundable  income taxes                                                     |       | 10                                                 |       | (7 | ) |
| Inventories                                                                  |       | (401                                               | )          | (121 | ) |
| Prepaid  expenses and other assets                                           |       | (146                                               | )          | (48 | ) |
| Net increase  (decrease) in:)                                                |       |                                               |       |   |   |
| Accounts  payable                                                            |       | 411                                                |       | (44 | ) |
| Accrued  expenses                                                            |       | (54                                                | )          | (41 | ) |
| Net cash used  in operating activities                                       |       | (445                                               | )          | (50 | ) |
|                                                                         |       |                                               |       |   |   |
| CASH FLOWS  FROM INVESTING ACTIVITIES:                                       |       |                                               |       |   |   |
| Investment  in equipment and leasehold improvements                          |       | (48                                                | )          | (167 | ) |
|                                                                         |       |                                               |       |   |   |
| CASH FLOWS  FROM FINANCING ACTIVITIES:                                       |       |                                               |       |   |   |
| Proceeds  from exercise of stock options and warrants                        |       | —                                             |       | 3 |   |
| Principal  payments on long-term debt                                        |       | (193                                               | )          | (177 | ) |
| Net cash  used in financing activities                                       |       | (193                                               | )          | (174 | ) |
|                                                                         |       |                                               |       |   |   |
| Net decrease  in cash and cash equivalents                                   |       | (686                                               | )          | (391 | ) |
|                                                                         |       |                                               |       |   |   |
| Cash and  cash equivalents at beginning of period                            |       | 1,444                                              |       | 1,835 |   |
|                                                                         |       |                                               |       |   |   |
| Cash and  cash equivalents at end of period                                  |       | $                                                  | 758        |   | $ | 1,444 |   |
|                                                                         |       |                                               |       |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                           |       |                                               |       |   |   |
| Cash paid  during the period for:                                            |       |                                               |       |   |   |
| Interest                                                                     |       | $                                                  | 68         |   | $ | 80 |   |
| Income taxes                                                                 |       | $                                                  | 2          |   | $ | 1 |   |

 

See accompanying Notes toConsolidated Condensed Financial Statements.

 

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CYANOTECH CORPORATION

NOTESTO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

As of September 30,2007

(Unaudited)

 

**1.  BASIS OF PRESENTATION**

 

The accompanyingconsolidated condensed financial statements have been prepared in accordancewith accounting principles generally accepted in the United States of Americafor interim financial information and with the instructions to Form 10-Qand Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by GAAP for complete financialstatements.  *These consolidatedfinancial statements and notes should be read in conjunction with the Company’sconsolidated financial statements contained in the Company’s report on Form 10-Kfor the year ended March 31, 2007 filed on August 16, 2007.*

 

The accompanyingconsolidated financial statements include the accounts of Cyanotech Corporationand its wholly owned subsidiaries, Nutrex Hawaii, Inc. (“Nutrex Hawaii” or“Nutrex”) and Cyanotech Japan YK (“Cyanotech Japan” or “CJYK”). All significantintercompany balances and transactions have been eliminated inconsolidation.  On August 31, 2007, the Company discontinued allbusiness activity of its wholly owned Japanese subsidiary “CJYK.”  Allaquaculture feed business in Japan was absorbed through the Company’s domesticoperations.  “CJYK” will remain a registered Japanese corporation until November 30,2007, at which time it will be dissolved.  All “CJYK” assets andliabilities were absorbed into the Company as of September 1, 2007, and nosignificant “CJYK” assets or liabilities existed except for cash ofapproximately $50,000.  “CJYK” was under no contractual obligations at August 31,2007.  The Company made this decision due to declining sales ofapproximately 40% in each of the prior two fiscal years in addition todeclining gross profit margins of 13% and 4% for fiscal 2007, and the six monthperiod ended September 30, 2007, respectively.  “CJYK” sales forfiscal year 2007 and the six months ended September 30, 2007, were$482,000 and $45,000, respectively.  We do not expect the dissolution ofthis subsidiary to have a significant impact on our consolidated financialstatements.

 

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ materially from those estimates and assumptions.

 

**2.  INCOME TAXES**

 

The Company is subject totaxation in the United States, Japan, and two state jurisdictions.  Thepreparation of these tax returns requires the Company to interpret theapplicable tax laws and regulations in effect in such jurisdictions, whichcould affect the amount of tax paid by the Company. The Company, inconsultation with its tax advisors, files its tax returns on interpretationsthat are believed to be reasonable under the circumstances. The tax returns,however, are subject to routine reviews by the various taxing authorities inthe jurisdictions in which the Company files its returns.  As part ofthese reviews, a taxing authority may disagree with respect to the taxpositions taken by the Company (“uncertain tax positions”) and thereforerequire the Company to pay additional taxes. As required under applicableaccounting rules, the Company evaluates the requirement for additional taxaccruals, but for the three and six months ended September 30, 2007, noaccrual was recorded based on this evaluation of potential additional taxliability, including interest and penalties, which the Company could incur as aresult of the ultimate resolution of its uncertain tax positions.  TheCompany reviews and updates the accrual for uncertain tax positions as moredefinitive information becomes available from taxing authorities, completion oftax audits, expiration of statute of limitations, or upon occurrence of otherevents.

 

In June 2006 the FASBissued FASB Interpretation No. 48 (“FIN No. 48”) “Accounting forUncertainty in Income Taxes, an interpretation of FASB Statement No. 109.”This interpretation prescribes a “more-likely-than-not” recognition thresholdand measurement attribute (the largest amount of benefit

 

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that is greater than 50% likely of being realizedupon ultimate settlement with tax authorities) for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. This interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure and transition. FIN No. 48 is effective for fiscal yearsbeginning after December 15, 2006. The Company adopted FIN No. 48 on April 1,2007.

 

As a result of the implementationof FIN 48, the Company did not recognize a liability for unrecognized taxbenefits, and, accordingly, was not required to record any cumulative effectadjustment to beginning of year retained earnings.  As of both the date ofadoption and September 30, 2007, there was no significant liability forincome tax associated with unrecognized tax benefits.

 

The Company recognizesinterest accrued related to unrecognized tax benefits as well as any relatedpenalties in interest income or expense in its condensed consolidatedstatements of operations, which is consistent with the recognition of theseitems in prior reporting periods.  As of the date of adoption and duringthe three and six months ended September 30, 2007, the Company was notrequired to have an accrual for the payment of interest and penalties relatedto uncertain tax positions. With few exceptions, the Company is no longer subject to U.S. federal,state and local, or non-U.S. income tax examination by tax authorities for taxyears before 2001.

 

**3.**  **SHARE-BASEDCOMPENSATION**

 

The Company has adopted theprovisions of Statement of Financial Accounting Standard No. 123(R) (“SFASNo. 123R”) “Share-Based Payment” for its share-based compensationplans.  SFAS No. 123R requires an entity to measure the cost ofemployee services received in exchange for an award.  If an award vests orbecomes exercisable based on the achievement of a condition other than service,performance or market condition, the award is liability-classified.  Liability-classified awards are remeasured to fair value at each balance sheetdate until the award is settled. The Company currently has noliability-classified awards.  Equity-classified awards, including grantsof employee stock options, are measured at the grant-date fair value of theaward and are not subsequently remeasured.  The cost of equity-classifiedawards is recognized in the income statement over the period during which anemployee is required to provide the service in exchange for the award. Allof the Company’s stock options are performance based awards and because theCompany’s future employee incentive stock options are “plain vanilla,” asdefined by the SEC in Staff Accounting Bulletin No. 107, they arereflected only in Equity and Compensation Expense accounts.

 

***Stock Options***

 

As of September 30,2007, the Company had the following two shareholder approved stock plans underwhich shares were available for equity-based awards: the 2005 Stock Option Plan(the “2005 Plan”) wherein 200,000 shares of common stock are reserved forissuance, and the plan terminates on August 21, 2015, and the IndependentDirector Stock Option and Stock Grant Plan (the “2004 Plan”) wherein 75,000shares of common stock are reserved for issuance.  Under the 2005 Plan,eligible employees and certain independent consultants may be granted optionsto purchase shares of the Company’s Stock. The shares issuable under the 2005Plan will either be shares of the Company’s authorized but previously unissuedcommon stock or shares reacquired by the Company, including shares purchased onthe open market.  As of September 30, 2007, 195,000 options remainedavailable for grant under the 2005 Plan.  Concurrent with the 2005 Planapproval on August 22, 2005, the 1995 Stock Option Plan was terminatedexcept for the outstanding options issued thereunder.  Under the 2004Plan, upon election to the Board of Directors, a newly elected non-employeedirector is granted a ten-year option to purchase 1,000 shares of the Company’scommon stock at a fair market value on the date of grant.  All suchoptions are granted at fair market value on the date of grant.  Optionsgranted vest and become exercisable six months from the date of grant.  Inaddition, on the date of each Annual Meeting of Stockholders, each non-employeedirector continuing in office is automatically granted, without payment, 875shares of common stock, non-transferable for six months following the date ofgrant.  As of September 30, 2007, 70,250 options remained availablefor grant under the 2004 Plan.  Concurrent with the 2004 Plan approval on August 16,2004, the 1994 Non-Employee Director Stock Option and Stock Grant Plan wasterminated except for the outstanding options issued thereunder.

 

8

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The following table presentsshares authorized, available for future grant and outstanding under each of theCompany’s plans: 

 
| ** ** | ** ** | **As of September 30, 2007** | ** ** |
|------------|------------|--------------------------------------------------|------------|
| ** ** | ** ** | **Authorized**                                   | ** ** | **Available** | ** ** | **Outstanding** | ** ** |
| ** ** | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2005 Plan  |       | 200,000                                          |       | 195,000 |   | 5,000 |   |
| 2004 Plan  |       | 75,000                                           |       | 70,250 |   | 1,000 |   |
| 1995 Plan  |       | —                                           |       | — |   | 57,572 |   |
| 1994 Plan  |       | —                                           |       | — |   | 3,750 |   |
| Total      |       | 275,000                                          |       | 265,250 |   | 67,322 |   |

 

All stock option grants madeunder the 2005 Plan and the 2004 Directors Plan are made at exercise prices noless than the Company’s closing stock price on the date of grant. Options underthe 2005 Plan are granted, and are vested and exercisable as determined by theBoard of Directors or the Stock Option and Compensation Committee of the Boardin accordance with the provisions of the 2005 Stock Option Plan. Discussion relative to option granting, vesting, exercising, and otherconditions are set forth in a Stock Option Agreement evidencing each grant. Nooption can have a life in excess of ten (10) years.  The Companyrecords compensation expense for employee stock options based on the estimatedfair value of the options on the date of grant using the Black-Scholesoption-pricing model. The model will use various assumptions, including arisk-free interest rate, the expected term of the options, the expected stockprice volatility over the expected term of the options, and the expecteddividend yield. Compensation expense for employee stock options will berecognized ratably over the vesting term.   There were no stock optionsgranted during the three and six months ended September 30, 2007, orduring the three and six months ended September 30, 2006, thus the averagefair value assumptions used in the valuation of stock option grants are notdisclosed until the time of such grants.

 

As of September 30,2007, total unrecognized stock-based compensation expense related to unvestedstock options was $1,935 which is expected to be expensed over aweighted-average period of 1.9 years.

 

A summary of option activityunder Cyanotech Corporation’s Stock Plans for the three months ended September 30,2007 is presented below:

 
| ** **                         | ** ** | **Number of  Shares** | ** ** | **Weighted   Average  Exercise  Price** | ** ** | **Weighted   Average   Remaining  Contractual   Term in   Years** | ** ** | **Average   Intrinsic  Value** | ** ** |
|------------------------------------|------------|----------------------------|------------|----------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| Balance at June 30, 2007      |       | 84,172                     |       | $                                            | 3.86       |                                                                                       | 1.52       |                                | $          | 324,904 |   |
| Granted                            |       | —                     |       | —                                       |       | —                                                                                     |       | —                              |       |
| Exercised                          |       | —                     |       | —                                       |       | —                                                                                     |       | —                              |       |
| Expired                            |       | (15,950                    | )          | 2.40                                         |       | —                                                                                     |       | (38,280                             | )          |
| Forfeited                          |       | (900                       | )          | 2.00                                         |       | —                                                                                     |       | (1,800                              | )          |
| Balance at September 30, 2007 |       | 67,322                     |       | $                                            | 4.23       |                                                                                       | 1.60       |                                | $          | 284,824 |   |

 

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The following tablesummarizes the weighted average characteristics of outstanding stock options asof September 30, 2007:

 
| ** **                | ** ** | **Outstanding Options** | ** ** | **Exercisable Options** | ** ** |
|---------------------------|------------|------------------------------|------------|------------------------------|------------|
| **Range of**         | ** ** | **Number**                   | ** ** | **Remaining**                | ** ** | **Weighted** | ** ** | **Number of** | ** ** | **Weighted** | ** ** |
| **Exercise Prices**  | ** ** | **of Shares**           | ** ** | **Life (Years)**        | ** ** | **Average Price** | ** ** | **Shares** | ** ** | **Average Price** | ** ** |
| $ 1.84 - $ 2.60 |       | 34,094                       |       | 1.43                         |       | $ | 2.09 |   | 34,094 |   | $ | 2.09 |   |
| $ 4.20 - $ 6.50 |       | 26,978                       |       | 2.07                         |       | 4.51 |   | 26,538 |   | 4.51 |   |
| $14.75 - $14.75           |       | 6,250                        |       | 0.54                         |       | 14.75 |   | 6,250 |   | 14.75 |   |
| Total stock options       |       | 67,322                       |       | 1.60                    |       | 4.23 |   | 66,882 |   | 4.23 |   |
|                           |            |                              |            |                              |            |  |  |  |  |  |  |  |  |

 

A summary of option activity under CyanotechCorporation’s Stock Plans for the six months ended September 30, 2007 ispresented below:

 
| **Option Activity**               | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|------------|------------|------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at March 31, 2007     |       | 84,172     |       | $                                              | 3.86       |                                                        | 1.77       |                            | $          | 324,904 |   |
| Granted                                |       | —     |       | —                                         |       | —                                                      |       | —                          |       |
| Exercised                              |       | —     |       | $                                              | —     |                                                        | —     |                            | —     |   |
| Forfeited or expired                   |       | (16,850    | )          | $                                              | 2.38       |                                                        | —     |                            | (40,080    | ) |
| Outstanding at September 30, 2007 |       | 67,322     |       | $                                              | 4.23       |                                                        | 1.6 years  |                            | $          | 284,824 |   |
| Exercisable at September 30, 2007 |       | 66,882     |       | $                                              | 4.23       |                                                        | 1.6 years  |                            | $          | 282,911 |   |

 

A summary of Cyanotech Corporation’s non-vestedoptions for the six months ended September 30, 2007 is presented below:

 
| **Nonvested Options**           | ** ** | **Shares** | ** ** | **Weighted Average   Grant-Date  Fair Value** | ** ** |
|--------------------------------------|------------|------------|------------|--------------------------------------------------------------|------------|
| Nonvested at March 31, 2007     |       | 699        |       | $                                                            | 4.40       |   |
| Granted                              |       | —     |       | —                                                       |       |
| Vested                               |       | 259        |       | 4.40                                                         |       |
| Forfeited or expired                 |       | —     |       |                                                         | —     |   |
| Nonvested at September 30, 2007 |       | 440        |       | $                                                            | 4.40       |   |

 

***Warrants***

 

The Company had issuedwarrants which allow the warrant holders rights to acquire an equivalent numberof shares of common stock at a stated exercise price. Warrants outstandingduring the periods indicated were as follows:

 
| **Warrants issued in connection with:** | ** ** | **Term Loan**  | ** ** |
|-------------------------------------------------------------|------------|---------------------|------------|
| **Grant date:**                                        | ** ** | **April 2000** | ** ** |
| **Expiration date:**                                   | ** ** | **April 2011** | ** ** |
| **Exercise price:**                                    | ** ** | **$10.20**          | ** ** |

 
| Balance at March 31, 2007     |   | 5,000  |   |
|------------------------------------|--------|--------|--------|
| Exercises                          |   | — |   |
| Expired                            |   | — |   |
| Balance at September 30, 2007 |   | 5,000  |   |

 

10

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See Form 10-K, Note 5to the Consolidated Financial Statements for the year ended March 31, 2007for further discussion relative to warrants issued in connection with the TermLoan agreement.

 

** 4.**  **INVENTORIES**

 

Inventories are stated atthe lower of cost or market.  Cost is determined using the first-in,first-out (FIFO) method.  Market is defined as sales price less cost todispose and a normal profit margin. Inventories consist of the following:

 
| ** **      | ** ** | **September  30, 2007** | ** ** | **March 31, 2007** | ** ** |
|-----------------|------------|------------------------------|------------|------------------------------|------------|
| ** **      | ** ** | **(in thousands)**      | ** ** |
| Raw materials   |       | $                            | 214        |                         | $          | 246 |   |
| Work in process |       | 198                          |       | 281                          |       |
| Finished goods  |       | 1,455                        |       | 929                          |       |
| Supplies        |       | 127                          |       | 137                          |       |
|            |       | $                            | 1,994      |                         | $          | 1,593 |   |

 

The Company adopted SFAS No. 151effective April 1, 2006. In accordance with SFAS No. 151, fixedproduction related costs of approximately $34,000, and $59,000 were notinventoried for the quarter ended September 30, 2007 and September 30,2006 respectively, and $57,000 and 95,000 for the six months ended September 30,2007 and September 30, 2006 respectively, due to production below normalcapacity.

 

**5.  EQUIPMENT, LEASEHOLDIMPROVEMENTS AND LONG-LIVED ASSETS**

 

Equipment and leaseholdimprovements are stated at cost. Depreciation and amortization are providedusing the straight-line method over the estimated useful lives for equipmentand furniture and fixtures, or the shorter of the land lease term or estimateduseful lives for leasehold improvements as follows:

 
| Equipment              |   | 3 to 10 years  |
|------------------------|--------|----------------|
| Furniture and fixtures |   | 7 years        |
| Leasehold improvements |   | 10 to 20 years |

 

Equipment and leaseholdimprovements consist of the following:

 
| ** **                                             | ** ** | **September 30, 2007** | ** ** | **March 31, 2007** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                                             | ** ** | **(in thousands)**               | ** ** |
| Equipment                                              |       | $                                | 6,313      |                         | $          | 6,257 |   |
| Leasehold improvements                                 |       | 7,346                            |       | 7,335                        |       |
| Furniture and fixtures                                 |       | 88                               |       | 87                           |       |
|                                                   |       | 13,747                           |       | 13,679                       |       |
| Less accumulated depreciation &  amortization |       | (9,379                           | )          | (9,110                       | )          |
| Construction in-progress                               |       | 112                              |       | 132                          |       |
| Equipment and leasehold improvements, net              |       | $                                | 4,480      |                         | $          | 4,701 |   |

 

At March 31, 2007, theabove equipment, leasehold improvements, accumulated depreciation andconstruction in-progress amounts were reduced by a net $4.5 million impairmentcharge resulting from management’s analysis under SFAS No. 144, asdiscussed in Note 3 to the Consolidated Financial Statements of Form 10-Kfor the year ended March 31, 2007.

 

The Company reviewslong-lived assets for impairment whenever events or changes in circumstancesindicate that the carrying value of such assets may not be recoverable. Uponsuch an occurrence, recoverability of these assets is determined by comparingthe forecasted undiscounted net cash flows to which the assets relate, to thecarrying amount. If the asset is determined to be unable to recover itscarrying value, then the carrying value of the long-lived assets are comparedto the asset’s fair value. The Company has determined fair value based uponpresent values of expected future cash flows.  The

 

11

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Company’s SFAS No. 144 analysis for the three andsix months ended September 30, 2007, resulted in no asset impairmentcharge.

 

**6.**  **EARNINGSPER SHARE**

 

Basic earnings per share iscomputed on the basis of the weighted average number of common sharesoutstanding.  Diluted earnings per share is computed on the basis of theweighted average number of common shares outstanding plus the potentiallydilutive effect of outstanding stock options and warrants using the “treasurystock” method and convertible securities using the “if-converted” method.

 

Reconciliations between the numerator and thedenominator of the basic and diluted earnings per share computations for thethree months ended September 30, 2007 and 2006 are as follows (inthousands, except per share amounts):

 
| ** **                                                              | ** ** | **Three Months Ended September 30, 2007** | ** ** | **Three Months Ended September 30, 2006** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **Net Loss**                                                  | ** ** | **Shares**                                                         | ** ** | **Per Share** | ** ** | **Net Loss** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                                              | ** ** | **(Numerator)**                                                    | ** ** | **(Denominator)**                                                  | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic net loss per share                                                |       | $                                                                  | (344       | )                                                                  | 5,234      |   | $ | (0.07 | ) | $ | (572 | ) | 5,234 |   | $ | (0.11 | ) |
| Effect of dilutive securities — Common stock  options and warrants |       | —                                                             |       | —                                                             |       | — |   | — |   | — |   | — |   |
| Diluted net loss per share                                              |       | $                                                                  | (344       | )                                                                  | 5,234      |   | $ | (0.07 | ) | $ | (572 | ) | 5,234 |   | $ | (0.11 | ) |

 

Reconciliations between the numerator and thedenominator of the basic and diluted earnings per share computations for thesix months ended September 30, 2007 and 2006 are as follows (in thousands,except per share amounts):

 
| ** **                                                              | ** ** | **Six Months Ended September 30, 2007** | ** ** | **Six Months Ended September 30, 2006** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **Net Loss**                                                | ** ** | **Shares**                                                       | ** ** | **Per Share** | ** ** | **Net Loss** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                                              | ** ** | **(Numerator)**                                                  | ** ** | **(Denominator)**                                                | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic net loss per share                                                |       | $                                                                | (726       | )                                                                | 5,234      |   | $ | (0.14 | ) | $ | (919 | ) | 5,233 |   | $ | (0.18 | ) |
| Effect of dilutive securities — Common  stock options and warrants |       | —                                                           |       | —                                                           |       | — |   | — |   | — |   | — |   |
| Diluted net loss per share                                              |       | $                                                                | (726       | )                                                                | 5,234      |   | $ | (0.14 | ) | $ | (919 | ) | 5,233 |   | $ | (0.18 | ) |

 

Basic and diluted earningsper share are the same in periods of a net loss, thus there is no effect ofdilutive securities when a net loss is recorded.  There were approximately67,000 and 94,000 securities excluded from the calculation of diluted loss pershare because their effect was anti-dilutive for the three months ended September 30,2007 and 2006, respectively.  They were anti-dilutive due to the exerciseprice being greater than the Company’s weighted-average stock price for theperiod.

 

The following securities were excluded from thecalculation of diluted earnings per share because their effect was antidilutive(in thousands):

 
| ** **                 | ** ** | **Three Months Ended   September 30,** | ** ** | **Six Months Ended   September 30,** | ** ** |
|----------------------------|------------|------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                 | ** ** | **2007**                                                   | ** ** | **2006**                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| Stock options and warrants |       | 67                                                         |       | 94                                                       |       | 67 |   | 99 |   |

 

12

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**7.  NEW ACCOUNTINGPRONOUNCEMENTS**

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).This new standard provides guidance for using fair value to measure assets andliabilities and information about the extent to which companies measure assetsand liabilities at fair value, the information used to measure fair value, andthe effect of fair value measurements on earnings.  This framework isintended to provide increased consistency in how fair value determinations aremade under various existing accounting standards which permit, or in some casesrequire, estimates of fair market value. SFAS No. 157 also expandsfinancial statement disclosure requirements about a company’s use of fair valuemeasurements, including the effect of such measures on earnings.  The provisionsof SFAS No. 157 are effective for financial statements issued for fiscalyears beginning after November 15, 2007.  While the Company iscurrently evaluating the provisions of SFAS No. 157, the adoption is notexpected to have a material impact on our consolidated financial position orresults of operations.

 

In May 2007, the FASBissued FASB Staff Position (“FSP”) FIN 48-1 Definition of Settlement in FASBInterpretation No. 48 (FSP FIN 48-1). FSP FIN 48-1 provides guidanceon how to determine whether a tax position is effectively settled for thepurpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 iseffective retroactively to January 1, 2007. The implementation of thisstandard did not have a material impact on our consolidated financial positionor results of operations.

 

13

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**Item2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

*This report on Form 10-Qcontains forward-looking statements regarding the future performance ofCyanotech and future events that involve risks and uncertainties that couldcause actual results to differ materially from the statements contained herein.This document, and the other documents that the Company files from time to timewith the Securities and Exchange Commission, such as its reports on Form 10-K,Form 10-K/A, Form 10-Q, Form 8-K, and its proxy materials,contain additional important factors that could cause actual results to differfrom the Company’s current expectations and the forward-looking statementscontained herein.*

 

## **Overview**

## ** **

A comparison of selected consolidated statements ofoperations data as reported herein follows for the periods indicated (dollarsin thousands):

 
| ** **                   | ** ** | **Three Months Ended  September 30, 2007** | ** ** | **Three Months Ended  September 30, 2006** | ** ** | **Change** | ** ** |
|------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------|------------|
| Net sales:                   |       |                                                           |       |                                                           |       |       |       |
| Spirulina products           |       | $                                                              | 1,407      |                                                           | $          | 1,436      |       | (2 | )% |
| Natural astaxanthin products |       | 1,176                                                          |       | 1,000                                                          |       | 18         | %          |
| Other products               |       | 21                                                             |       | 39                                                             |       | (46        | )%         |
| Total sales, all products    |       | $                                                              | 2,604      |                                                           | $          | 2,475      |       | 5 | % |
|                         |       |                                                           |       |                                                           |       |       |       |
| Gross profit                 |       | $                                                              | 768        |                                                           | $          | 404        |       | 90 | % |
| Loss from operations         |       | $                                                              | (314       | )                                                              | $          | (542       | )          | 42 | % |
| Net loss                     |       | $                                                              | (344       | )                                                              | $          | (572       | )          | 40 | % |

 
| ** **                   | ** ** | **Six Months Ended  September 30, 2007** | ** ** | **Six Months Ended  September 30, 2006** | ** ** | **Change** | ** ** |
|------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------|------------|
| Net sales:                   |       |                                                         |       |                                                         |       |       |       |
| Spirulina products           |       | $                                                            | 2,938      |                                                         | $          | 2,962      |       | (1 | )% |
| Natural astaxanthin products |       | 2,173                                                        |       | 1,890                                                        |       | 15         | %          |
| Other products               |       | 76                                                           |       | 67                                                           |       | 13         | %          |
| Total sales, all products    |       | $                                                            | 5,187      |                                                         | $          | 4,919      |       | 5 | % |
|                         |       |                                                         |       |                                                         |       |       |       |
| Gross profit                 |       | $                                                            | 1,514      |                                                         | $          | 875        |       | 73 | % |
| Loss from operations         |       | $                                                            | (655       | )                                                            | $          | (853       | )          | 23 | % |
| Net loss                     |       | $                                                            | (726       | )                                                            | $          | (919       | )          | 21 | % |

 

Sales for the second quarterof fiscal 2008 ended September 30, 2007 increased from the comparableprior year period by $129,000 or 5% due primarily to increases in the number ofunits sold of *BioAstin* products.

 

Spirulina sales remainedrelatively flat, decreasing by 2% from the prior year period.  Unit sales decreased 8% and average sellingprice increased 5% compared to comparable prior year period.

 

The natural astaxanthintotal product line overall experienced an 18% increase to $1,176,000 in thesecond quarter of fiscal 2008 from $1,000,000 in the second quarter of fiscal2007.  Natural astaxanthin

 

14

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product sales, not including *NatuRose*,increased by 57% compared to the comparable prior period.  *NatuRose*product sales decreased by 35% from the comparable prior year period.

 

Our previous statementspredicting that a shortfall in the Japan aquaculture market would persist haveproven correct, and we expect *NatuRose* fishfeed astaxanthin product sales will not recover.  Accordingly, as discussed in Note 1 of “Notesto Consolidated Condensed Financial Statements” the Company has discontinuedall business activity of its wholly owned Japanese subsidiary “CJYK”. Thediscontinuance of “CJYK” is not expected to have a significant current orfuture financial impact. In addition, the Company is increasing focus onbuilding market share in the human nutrition market with a major focus ondifferentiating *BioAstin* from lower qualityofferings from competitors.

 

Our gross profit margin as apercentage of sales increased to 29% for the three months ended September, 30,2007 from 16% for the same period a year ago.  Sales for the secondquarter of fiscal year 2008 increased 5% from the comparable prior year period,and cost of sales declined 11% for the same respective period.  Significant factors for the cost of sales decrease were a 64% reduction indepreciation expense and a production increase of 38% for astaxanthinpowder.  For the three months ended September 30,2007, variable production costs decreased 4% primarily in chemical, water, andrepair and maintenance costs.  Approximately $34,000 and $59,000 of fixedproduction overhead costs were not inventoriable during the three months ended September 30,2007 and September 30, 2006 respectively, due to both spirulina andastaxanthin production levels being below normal capacity.   Fixed costs were adjusted accordingly perSFAS No. 151.  Approximately$126,000 and $127,000 of production costs were not inventoriable because suchcosts would have exceeded the market value for such inventory during the threemonths ended September 30, 2007 and 2006, respectively.   Gross profit margin percentages in fiscalyear 2008 are expected to increase in comparison to the fiscal year 2007results.

 

The net loss for the secondquarter of fiscal 2008 decreased $228,000 compared to the comparable quarter offiscal 2007. The decrease in net loss is primarily due to increased sales of$129,000 and decreased cost of goods sold of $235,000, partially offset byincreased general and administrative expenses of $138,000.

 

*Second Quarter of Fiscal 2008Compared to Second Quarter of Fiscal 2007*

 

Net sales for the secondquarter of fiscal 2008 increased to $2,604,000 from the $2,475,000 reported forthe comparable period a year ago.  Company sales of spirulina products forthe second quarter of fiscal 2008 were $1,407,000, compared to $1,436,000 inthe second quarter of fiscal 2007.  As a percentage of sales, spirulinawas 54% of total sales in the second quarter of fiscal 2008, compared to 58%for the comparable period a year ago.

 

Natural astaxanthin productsales for the second quarter of fiscal 2008 were $1,176,000 compared to$1,000,000 in the second quarter of fiscal 2007.  As a percentage ofsales, natural astaxanthin product sales including *NatuRose*,our animal feed astaxanthin product, were 45% of total sales in the secondquarter of fiscal 2008, compared to 40% for the comparable period a year ago.

 

*NatuRose* sales decreased as a result of thepreviously discussed lack of demand in the Japanese aquaculture market andresulting decreased emphasis on sales of this product line. The Company feelsthat the Japan aquaculture market adapted to using less natural astaxanthin,and less *NatuRose*, in favor of using less costlysynthetic substitutes.  With sales price constraints in the animalnutrition market coupled with rising production costs for labor, nutrients,utilities and transportation, profit margins are limited to the point thatmaintaining profitable business in the animal nutrition market has becomedifficult.  Accordingly, as discussed in Note 1 of “Notes to ConsolidatedCondensed Financial Statements” the Company has discontinued all businessactivity of its wholly owned Japanese subsidiary “CJYK”.  All aquaculture feed business in Japan hasbeen absorbed into the Company’s domestic operations. The discontinuance of “CJYK”is not expected to have a significant current or future financial impact.

 

Other products sales were$21,000 during the second quarter of fiscal 2008 and $39,000 during the secondquarter of fiscal 2007, and represented 1% and 2% of sales in the respectiveperiods.

 

15

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International sales were 44%of total sales for the second quarter of fiscal 2008, compared to 41% a yearago.  Historically, our major customers (sales exceeding 10% of totalsales) have been two distributors, one based in Europe and one in the UnitedStates.   For the three months ended September 30, 2007, ourEuropean distributor accounted for 12% of total sales as compared to 10% oftotal sales for the comparable period of fiscal 2007.   Sales to theUnited States distributor were less than 10% of total sales in each of thesecond quarters of fiscal years 2008 and 2007.

 

Gross profit, derived fromnet sales less the cost of product sales, primarily includes the cost ofmaterials, manufacturing overhead costs, direct labor costs anddepreciation.  Gross profit for the three months ended September 30,2007 was $768,000 with a gross profit margin percentage of 29%, increased fromgross profit of $404,000 and a gross profit margin of 16% reported for thecomparable prior year quarter.  Sales for the second quarter of fiscalyear 2008 increased 5% from the comparable prior year quarter and cost of salesdecreased 11% for the same comparable quarter.   Water usagedecreased due to cooler weather and repair and maintenance costs decreased dueto the timing of repair and maintenance expenses.  However, we expect gradual direct cost priceincreases in all areas consistent with the local and nationaleconomy.  Pursuant to SFAS No. 151, approximately $34,000 and$59,000 of fixed production overhead cost was not inventoriable during thethree months ended September 30, 2007 and September 30, 2006, due toproduction levels below normal capacity.  In addition, approximately$126,000 and $127,000 of production costs were not inventoriable because suchcosts would have exceeded the market value for such inventory during the threemonths ended September 30, 2007 and 2006, respectively.

 

Operating expenses for thethree months ended September 30, 2007 were 42% of sales or $1,082,000,compared to 38% of sales or $946,000 for the three months ended September 30,2006.  The $136,000 increase in operating expenses during the three monthsended September 30, 2007, compared with the three months ended September 30,2006, and the 4% increase as a percentage of sales, were primarily the resultof general and administrative expense increasing by $138,000 or 24%.  The increase in general and administrativeexpenses as a percentage of sales resulted primarily from increased employeerelated expenses due to recruitment of additional accounting personnel.  Also, contractual services and legal expensesincreased due to the late filings of Form 10-K for the year ended March 31,2007 and Form 10-Q for the quarter ended June 30, 2007.

 

The Company periodically reviewsthe recoverability of the carrying value of long-lived assets using themethodology prescribed in Statement of Financial Accounting Standards (SFAS) No. 144. At March 31, 2007, this analysis resulted in a non-cash, asset impairmentcharge of $4.5 million.  The determination of this impairment charge wasthe primary cause of the delayed filing of the fiscal 2007 Form 10-K. A portion of the accounting and auditing fees associated with the impairmentcharge analysis were included in general and administrative expense in thesecond quarter of fiscal 2008. Other increases in general andadministrative expenses have been described above. The Company expects thattotal operating expenses will increase in the remaining quarters of this fiscalyear. Work has been completed on the Company’s delayed Form 10-K filed on August 16,2007, and the delayed Form 10-Q for the quarter ended June 30, 2007, filedSeptember 21, 2007, the Company is required to comply with theSarbanes-Oxley Act by March 31, 2008 and expects to incur additional relatedcosts, as discussed in the following paragraphs.

 

 In addition to the foregoing, sales andmarketing expenses increased 4% in the second quarter of fiscal 2008 over priorcomparable period amounts.  Whether sales and marketing expenses continueto increase over fiscal year 2007 levels will be based on customer demand andmarket opportunities that may arise. Research and development expensedecreased by 28% in the second quarter of fiscal 2008 over the prior periodcomparable amounts due to reduced expenditures on contractual services.  Research and development expenses may beginto increase as new opportunities arise, but the Company will continue to seekadditional leverage from customer supported research where and as practicable.The Company expects overall operating expense spending will remain consistentwith or increase from fiscal 2007 levels after excluding the previouslymentioned non-cash impairment write-down and SFAS No. 144 related costs.See our comments in the following paragraph below related to potentialSarbanes-Oxley Act compliance and costs.

 

By March 31, 2008, theCompany is required to be in full compliance with the Sarbanes-Oxley Act and Rules issuedthereunder by the Securities and Exchange Commission, including Section 404Compliance Standards established by the Public Companies Accounting OversightBoard. The cost of

 

16

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attaining and maintaining such compliance couldmaterially decrease reported net income or increase reported net losses infuture periods.  Although the Company had previously taken steps towardwhat is generally referred to as Sarbanes-Oxley Act compliance, the process ofpreparing and filing the Company’s Form 10-K/A for the period ended March31, 2006 filed February 14, 2007 and subsequent delayed filings of theCompany’s Form 10-K and Forms 10-Q for fiscal year 2007, coupled with thelack of resources discussed in Item 9A of Form 10-K for the year ended March 31,2007, resulted in the recognition of a material weakness.  These events adversely impacted the Company’sefforts toward implementing full Sarbanes-Oxley compliance. Such compliancemust be achieved by March 31, 2008. This could require significantexpenditures and effort over the remaining time to achieve compliance. The costs of compliance with international standards (ISO), U.S. food and drugmanufacturing practice (GMP), the Sarbanes-Oxley Act, and other regulatorycompliance areas may also continue to increase.

 

The end result of theforegoing was a net loss of $344,000, or ($0.07) per diluted share, for thethree months ended September 30, 2007, as compared****to a net loss of $572,000, or ($0.11) perdiluted share, for the comparable prior year quarter.

 

*Six Months Ended September 30,2007 Compared to Six Months Ended September 30, 2006*

 

Net sales for the six monthsended September 30, 2007 were $5,187,000, an increase of 5% from sales of$4,919,000 reported for the comparable period a year ago.  The increase insales over the prior year’s six-month period was largely the result ofincreased sales of *BioAstin* andbulk *BioAstin* gelcaps, offset in part bydecreased sales in *NatuRose*products.  International sales represented 43% of net sales for the sixmonths ended September 30, 2007 compared to 47% for the same period a yearago.  For the six months ended September 30,2007 and September 30, 2006, our European distributor accounted for 12%and 10% of total sales respectively, with sales to our United Statesdistributor accounting for less than 10% of total sales.

 

For the six months ended September 30,2007, cost of sales decreased 9% from the comparable prior yearperiod.   For the six months ended September 30, 2007, variableproduction costs decreased 1%.   Non-inventoriable period coststotaled approximately $43,000 for the six months ended September 30,2007.   In addition, pursuant to SFAS No. 151, approximately$57,000 of fixed production overhead costs were not inventoriable during thesix months ended September 30, 2007 because production levels were belownormal capacity.  In addition, production costs associated with theCompany’s inventory totaling approximately $156,000 and $245,000 incurredduring the six months ended September 30, 2007 and 2006, respectively,were not inventoriable because such costs would have exceeded the market valuefor such inventory.  As a result of the increase in sales coupled with thedecrease in cost of sales, gross profit margins as a percentage of salesincreased to 29% for the six months ended September 30, 2007 as comparedto 18% for the comparable prior year period.

 

Operating expenses for thesix months ended September 30, 2007 were $2,169,000, an increase of$441,000 or 26% from the comparable prior year period.   The increasein such expense reflects increased general and administrative expenses,increased sales and marketing expenses, and decreased research and developmentexpense.  Increased general and administrative expense during the currentsix-month period was primarily due to increased accounting and auditing fees aswell as consulting services related to late filings of Form 10-K for theyear ended March 31, 2007 and Form 10-Q for the period ended June 30,2007, as previously discussed.  Increased expenses for sales and marketingwere related to increased advertising campaigns.  Decreased research and development expensefor the current six-month period reflects the Company’s efforts to containexpenses where possible.  While it is our goal to contain discretionaryoperating spending in our research and development, sales and marketing, andgeneral and administrative activities, it may become necessary for the Companyto selectively increase spending in some or all of these areas to remaincompetitive and to comply with regulatory requirements.

 

Net other expense, whichincludes interest on the Company’s debt, for the six months ended September 30,2007 was comparable to the same period of the prior fiscal year.

 

For the six months ended September 30,2007, an income tax expense of $10,000 was recorded compared to an income taxbenefit recorded of $6,000 for the same period of the prior year.  TheCompany

 

17

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does not expect any additional United States incometaxes for the current fiscal year as a result of available net operating losscarry-forwards.

 

The Company recorded a netloss of $726,000 or ($0.14) per diluted share for the six month period ended September 30,2007.  For the same period a year ago the Company reported net loss of $919,000or ($0.18) per diluted share.

 

### ***Variability of Results***

### ** **

The Company has experiencedsignificant quarterly fluctuations in operating results and anticipates thatthese fluctuations may continue in future periods.   As described inprevious paragraphs, operating results have fluctuated as a result of changesin sales levels to our customers, competition (both pricing, new products andother market trends) and production difficulties, including increasedproduction costs and variable production results.  The Company hasalso, during its history, experienced production difficulties as a result ofinclement weather, changes in the mix between sales of bulk and packagedconsumer products and start up costs associated with new product introductions,new facilities and expansion into new markets.    In addition,future operating results may fluctuate as a result of factors beyond theCompany’s control such as foreign exchange fluctuations, changes in governmentregulations, and economic changes in the regions it operates in and sellsto.  A portion of our operating expenses are relatively fixed and thetiming of increases in expense levels is based in large part on forecasts offuture sales.   Therefore, if net sales are below expectations in anygiven period, the adverse impact on results of operations may be magnified byour inability to meaningfully adjust spending in certain areas, or theinability to adjust spending quickly enough, as in personnel and administrativecosts, to compensate for a sales shortfall. We may also choose to reduce pricesor increase spending in response to market conditions, and these decisions mayhave a material adverse effect on financial condition and results ofoperations.

 

**Financial Condition**

 

Cash and cash equivalentsdecreased $686,000 or 48% to $758,000 at September 30, 2007, from$1.4 million at March 31, 2007.  This decrease in cash resulted fromcash used in operating activities of $445,000, as well as cash used ininvesting activities of $48,000, and cash used in financing activities of$193,000.  Cash used in operating activities for the six months ended September 30,2007 reflects increases in inventory of $401,000, prepaid and other assets of $146,000,offset partially by a decrease in accounts receivable of $174,000 and anincrease in accounts payable of $411,000. Such net negative impact on cash results from the foregoing itemscombined with a net loss of $726,000 before non-cash adjustments fordepreciation and amortization of $287,000.  Cash flows used in investing activitiesreflect capital expenditures during the first six months of fiscal 2008. Cashflows used in financing activities are attributable to debt payments duringthat period.

 

As of September 30,2007, the Company’s net accounts receivable decreased $174,000 to $1,413,000from $1,587,000 as of March 31, 2007.  The decrease in accountsreceivable is primarily the result of the timing of collection on the customer’saccounts.  The Company believes that its accounts receivable arecollectible net of the allowance for doubtful accounts of $23,000 at September 30,2007.

 

The Company’s net inventoryincreased $401,000 or 25% to $1,994,000 as of September 30, 2007 comparedto $1,593,000 as of March 31, 2007.  The increase in inventory duringthe first six months of fiscal 2008 is primarily due to producing moreoleoresin, a product derived from astaxanthin, in the first six months offiscal 2008 than in the comparable period of fiscal 2007. This is consistentwith the Company’s transition emphasizing human astaxanthin products.

 

**Liquidity and Capital Resources**

 

The Company has recentlyexperienced a number of factors that have negatively impacted its balance sheetand liquidity, including the following:

 

•     The Company has experienced significant recurring net losses. At March 31,2007, the Company had an accumulated deficit of $19,920,000 compared to anaccumulated deficit of $12,495,000 at March 31, 2006.  Thisaccumulated deficit increased by $726,000 for the six

 

18

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months ended September 30, 2007.  As discussed earlier, andas required under Statement of Financial Accounting Standards (SFAS) No. 144,“Accounting for the Impairment and Disposal of Long-Lived Assets,” as of March 31,2007 the Company recorded a non-cash impairment charge reducing, by $4.5million, the values of certain production equipment and leasehold improvementassets.  *This non-cash charge did notimpact liquidity.*

 

•     The Company’s business has not generated positive cash from operatingactivities in five of the eight quarters during fiscal years ended March 31,2007 and 2006, nor during the quarter and year to date covered by this report.

 

•     Material weaknesses in its internal controls, as previously reported, havecaused the Company to experience delays in completing its consolidatedfinancial statements and filing periodic reports with the U.S. Securitiesand Exchange Commission (the “SEC”) on a timely basis. Accordingly, the Companycontinues to devote substantial additional internal resources, and experiencehigher than expected fees for audit services.  As a result of the hiringof key financial personnel early in the second quarter of fiscal 2008, theCompany does not anticipate delayed filings in future periods.

 

***Sources of Liquidity***

 

For the six months ended September 30,2007, cash decreased $686,000 to $758,000 from $1,444,000 at March 31,2007.  Working capital for the same six month period decreased by$689,000 to $2,672,000 from $3,361,000 at March 31, 2007, primarily as aresult of decreases in cash and increases to accounts payable and inventory inthe current six month period.

 

The decrease in cashresulted primarily from cash used from operating activities, capitalexpenditures, and payments on the Company’s long-term debt.   Cashused in operating activities for the six month period ended September 30,2007 was $445,000 compared to cash used in operations of $50,000 for thecomparable prior period. Capital expenditures totaled $48,000 for the sixmonths ended September 30, 2007 compared to $167,000 for the comparableprior year period.   Cash used in financing activities includedrepayments of the Company’s long-term debt of $193,000 and $177,000 for the sixmonths ended September 30, 2007 and 2006, respectively.

 

The Company’s contractualobligations and commitments (consisting of a term loan and operating leases)are disclosed below and in the Company’s 2007 Annual Report on Form 10-Kin the following sections: Item 7 Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Liquidity and CapitalResources, and Item 8 Financial Statements and Supplementary Data – Notes 5 and6 of Notes to Consolidated Financial Statements.  There were nosignificant changes in contractual obligations and commitments from March 31,2007 to September 30, 2007.  The Company is not aware of any othersignificant cash or contractual obligations as of the filing date of this Form 10-Q.

 

***Significant Cashand Contractual Obligations***

 

The following table presentsthe Company’s debt and lease obligations at September 30, 2007:

 
| **(in thousands)**       | ** ** | **Less Than  1 Year** | ** ** | **1-3   Years** | ** ** | **4-5  Years** | ** ** | **After 5  Years** | ** ** | **Total** | ** ** |
|-------------------------------|------------|---------------------------------|------------|----------------------|------------|----------------|------------|-------------------------|------------|-----------|------------|
| Term Loan                     |       | $                               | 405        |                 | $          | 792            |       | $                       | —     |      | $          | — |   | $ | 1,197 |   |
| Interest Expense on Term Loan |       | 95                              |       | 66                   |       | —         |       | —                  |       | 161       |       |
| Operating Leases              |       | 186                             |       | 327                  |       | 296            |       | 1,953                   |       | 2,762     |       |
| Total                         |       | $                               | 686        |                 | $          | 1,185          |       | $                       | 296        |      | $          | 1,953 |   | $ | 4,120 |   |

 

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***Sufficiency ofLiquidity***

 

Based upon our currentoperating plan, analysis of our consolidated financial position and projectedfuture results of operations, we believe that our operating cash flows, cashbalances, and working capital, together with a moderate amount of additionalborrowing, will be sufficient to finance current operating requirements, debtservice, and planned capital expenditures, for the next 12 months. With totalworking capital of $2.7 million, and a current ratio of 2.5 as of September 30,2007, management expects liquidity in fiscal 2008 to be generated fromoperating cash flows, working capital, and moderate borrowing during fiscal2008 or 2009 to offset the $709,000, as disclosed in the Company’s Form 10-Kfor the year ended March 31, 2007, expended to restate the Company’sresults, file Form 10-K/A, and take other actions relating to restatingthe year ended March 31, 2006. Since the Company has repaid well over halfof its $3.5 million senior debt since fiscal year 2002, the Company isreasonably confident that it will be able to secure additional funds and is nownegotiating with the current lender for additional funding. The Company cannotprovide assurance that such funding will be attained.

 

***Capital Resources***

 

The Company does notcurrently have any material commitments for capital expenditures.  TheCompany expects fiscal 2008 capital expenditures to be under $250,000 whichapproximates those of fiscal 2007.  This includes capital expenditures insupport of the Company’s normal operations, and expenditures that we may incurin conjunction with initiatives to improve gross margins and reduce expenses.

 

**Critical Accounting Policies andEstimates**

 

There have been no materialchanges to our critical accounting policies and estimates from the informationprovided in Item 7, “Management’s Discussion and Analysis of Financial Conditionand Results of Operations”, included in our Form 10-K for the fiscal yearended March 31, 2007.

 

In June 2006, the FASBissued FASB Interpretation No. 48 (“FIN No. 48”), “Accounting forUncertainty in Income Taxes, an interpretation of FASB Statement No. 109”. The Company adopted FIN No. 48 on April 1, 2007.  Theadoption of this interpretation did not have a material impact on itsconsolidated financial statements.

 

## **Outlook**

## ** **

*Thisoutlook section contains a number of forward-looking statements, all ofwhich are based on current expectations.  Actual results may differmaterially.*

 

Cyanotech Corporation’sstrategic direction is to position itself as a world-leader in the productionand marketing of high-value natural products from microalgae.  We arevertically aligned; producing raw materials in the form of microalgae processedat our 90-acre facility in Hawaii, and integrating those raw materials intofinished products.  In fiscal 2008, we will continue to focus on thebusiness-to-business wholesale market for the products and compounds that weproduce, but will put greater emphasis on our Nutrex Hawaii consumer productswith introduction of new product lines.  Our current product offeringsinclude Naturally Cultivated Spirulina Pacifica® in powder, flake and tabletform, *NatuRose*® natural astaxanthin powder forthe animal nutrition market, *BioAstin*®natural astaxanthin antioxidant in lipid extract, softgel caplet andmicro-encapsulated beadlet form for the human nutrition and cosmetic industriesand Phycobiliproteins for use in medical diagnostics.  Information aboutour Company and our products can be viewed at www.cyanotech.com,www.nutrex-hawaii.com or www.phycobiliprotein.com.  Consumer products canalso be purchased online at www.nutrex-hawaii.com.

 

We are currentlyexperiencing an upward trend in sales with unit sales increasing during thesecond quarter of fiscal 2008 as compared to the second quarter of fiscal2007.  The most significant impact was due to an increase in the humanastaxanthin bulk product line. The Company expects spirulina sales to remainessentially level since the product has reached a mature life cyclestage.  However, significant variability between periods and even acrossseveral periods can be expected based on historical results.

 

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As discussed in Note 1 of “Notesto Consolidated Condensed Financial Statements” the Company has discontinuedall business activity of its wholly owned Japanese subsidiary “CJYK”.  TheCompany made this decision due to declining sales of approximately 40% in eachof the prior two fiscal years in addition to declining gross profit margins of13% and 4% for fiscal 2007, and the six months ended September 30, 2007,respectively.  “CJYK” sales for fiscal year 2007 and the six months ended September 30,2007, were $482,000 and $45,000, respectively.  We do not expect thediscontinuance of this subsidiary to have a significant impact on ourconsolidated financial statements.

 

Overall costs are increasingin part because of non-U.S. product registration costs and increasing labor,chemical, utility and transportation costs.  We feel that these conditionswill likely remain, which places significant pressure on being able to deliverprofitable natural astaxanthin products in the animal nutrition market.  Consequently,we are shifting our natural astaxanthin production into higher value productssuch as *BioAstin* for human consumption untilsuch time as reasonably profitable animal nutrition markets are identified.

 

With particular focus on *BioAstin*, the Company’s human natural astaxanthin productline, the Company is exploring options to expand consumer brand awareness,knowledge of its product line, and brands related to its product lines.  To accomplish these objectives, the Company,among other initiatives, has hired a knowledgeable sales employee, based in thecontinental U.S., to increase the Company’s outreach to both the U.S. andEuropean markets.  We will be introducing new product lines, to be sold primarilythrough our Nutrex Hawaii subsidiary, during fiscal year 2008.

 

Gross profit marginpercentages in fiscal year 2008 are expected to increase in comparison tofiscal year 2007 results.  We identified and corrected imbalances inastaxanthin production in the fourth quarter of fiscal 2007.  Theseimbalances negatively impacted fiscal year 2007 gross margins and we expectthis imbalance correction to result in increased gross margins as a percentageof sales during fiscal 2008.  With competition increasing and higherproduction costs, pressure is placed on achieving a reasonable profit margin.

 

With the adoption of SFAS No. 151,the Company recognizes costs associated with abnormal amounts of idle facilityexpense, freight, handling costs and wasted materials (such as spoilage) ascurrent-period charges in cost of sales.   When production costsexceed historical averages, the Company evaluates whether such costs arecurrent-period charges or are inventoriable.   In addition, the allocationof fixed production overheads (such as depreciation and general insurance) toinventories is determined based on normal production capacity.   Whenthe Company’s production volumes are below normal capacity limits, certainfixed production overhead costs cannot be inventoried and are recordedimmediately in cost of sales.   Currently, the Company’s naturalastaxanthin production is approaching levels experienced prior to fiscal year2007.  Producing the highest quality microalgae is a complex biologicalprocess which requires balancing numerous factors including microalgal strainvariation, temperature, acidity, nutrient and other environmentalconsiderations, some of which are not within the Company’s control.

 

To manage its cash resourceseffectively, the Company will continue to balance production in light of salesdemand, minimizing the cost associated with build-ups in inventory.  TheCompany has experienced other significant cash outflows and may need to utilizeother cash resources to meet working capital needs if prolonged net losses areincurred in future periods.  A prolonged downturn in sales could impairthe Company’s ability to generate sufficient cash for operations and minimizethe Company’s ability to attract additional capital investment which couldbecome necessary in order to expand into new markets or increase productofferings.

 

The Company expectsoperating expense spending to remain consistent with or moderately increasefrom fiscal 2007 levels after the exclusion of the previously mentionednon-cash impairment write-down and SFAS No. 144 related costs. However, by March 31, 2008, the Company is required to be in fullcompliance with the Sarbanes-Oxley Act and Rules issued thereunder by theSecurities and Exchange Commission, including Section 404 ComplianceStandards established by the Public Companies Accounting Oversight Board. Thecost of attaining and maintaining such compliance could materially decreasereported net income or increase reported net losses in future periods.

 

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The Company’s future resultsof operations and the other forward-looking statements contained in thisOutlook, in particular the statements regarding revenues, gross margin andcapital spending involve a number of risks and uncertainties.  In additionto the factors discussed above, any of the following could cause actual resultsto differ materially:  business conditions and growth in the naturalproducts industry and in the general economy; changes in customer orderpatterns; changes in demand for natural products in general; changes in weatherconditions; competitive factors, such as increased production capacity fromcompeting spirulina and astaxanthin producers and the resulting impact, if any,on world market prices for these products; government actions; shortage ofmanufacturing capacity; and other factors beyond our control.  Riskfactors are discussed in detail in Item 1A in our Form 10-K report for theyear ended March 31, 2007.

 

Cyanotech believes that ithas the products, facilities, personnel, competitive, and financial resourcesfor improved results, but future revenues, costs, gross margins and profits areall influenced by a number of factors, as discussed above, all of which areinherently difficult to forecast.

 

**Item 3.    Quantitative and Qualitative Disclosuresabout Market Risk**

 

We have never entered intoany transactions using derivative financial instruments or derivative commodityinstruments and believe that our exposure to market risk associated with other financialinstruments is not material.

 

We have a term loanagreement that adjusts quarterly based on the prime rate.  As such, we areexposed to the interest rate risk whereby a 1% increase in the prime rate wouldlead to an increase of approximately $12,000 in interest expense for the yearending March 31, 2008 (based on September 30, 2007 amountsoutstanding).

 

**Item4.  Controls and Procedures**

 

(a) **DisclosureControls and Procedures**

 

ThisForm 10-Q should be read in conjunction with Item 9A “Controls andProcedures” of the Company’s Form 10-K for the fiscal year ended March 31,2007 filed August 16, 2007.  Therewere no material changes in Controls and Procedures during the currentquarter.  As of September 30, 2007,the Company believes its systems and procedures are sufficient to reasonablyensure accurate financial data, but it has concluded that due to a lack ofadequately trained internal accounting resources, there exists more than aremote likelihood that a material misstatement to the interim financialstatements could occur and not be detected by procedures and controls overfinancial reporting on a timely basis. This material weakness in internal control over financial reporting hasled to an inability to produce timely filings over the past year. The Company’snew Controller-Inventory and Cost Accounting began employment on July 9, 2007.However, the duties and tasks associated with that position have not yet beenfully integrated into the Company’s accounting and internal controls. Untilthis integration and related tasks are fully accomplished the Company believesthat a material weakness exists.

 

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**PART II.   OTHER INFORMATION**

 
| **Item 1.** | **Legal Proceedings** |
|------------------|-----------------------|

 

None.

 
| **Item 1A.** | **Risk Factors** |
|-------------------|------------------|

 

**Certain Factors Affecting CyanotechCorporation**

 

The Company has included in Part I,Item 1A of its Annual Report on Form 10-K for the year ended March 31,2007, a description of certain risks and uncertainties that could affect theCompany’s business, future performance or financial condition (the “RiskFactors”). There are no material changes from the disclosure provided in the Form 10-Kfor the year ended March 31, 2007 with respect to the Risk Factors.Investors should consider the Risk Factors prior to making an investmentdecision with respect to the Company.

 
| **Item 2.** | **Unregistered Sales of Equity  Securities and Use of Proceeds** |
|------------------|------------------------------------------------------------------|

 

None.

 
| **Item 3.** | **Defaults upon Senior Securities** |
|------------------|-------------------------------------|

 

None.

 
| **Item 4.** | **Submission of Matters to a Vote  of Security Holders** |
|------------------|----------------------------------------------------------|

 

Submission of Matters to a Vote of SecurityHolders —

 

OnSeptember 24, 2007, the following matters were submitted and voted bystockholders entitled to vote at the Company’s Annual Meeting of Stockholders:

 

Thevotes shown below are adjusted for the Company’s previously reported one forfour reverse stock split.

 

a)              The following directors were elected to serveuntil the next Annual Meeting or until their successors are elected.

 
| ** **         | ** ** | **For Votes** | ** ** | **Withheld Votes** | ** ** |
|--------------------|------------|--------------------|------------|-------------------------|------------|
| Gerald R. Cysewski |       | 4,095,456          |       | 188,188                 |       |
| Michael A. Davis   |       | 4,090,509          |       | 193,135                 |       |
| Gregg W. Robertson |       | 4,093,634          |       | 190,010                 |       |
| David I. Rosenthal |       | 4,096,296          |       | 187,348                 |       |
| John T. Waldron    |       | 4,102,599          |       | 181,045                 |       |
| Paul C. Yuen       |       | 4,095,972          |       | 187,672                 |       |

 

b)             Ratification of the selection of KPMG LLP asthe Company’s Independent Registered Public Accounting Firm for the fiscal yearending March 31, 2008.  The vote on the ratification was 4,035,624for, 230,874 against, and 17,146 abstaining.

 

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| **Item 5.** | **Other Information** |
|------------------|-----------------------|

 

None. 

 
| **Item 6.** | **Exhibits** |
|------------------|--------------|

 

The following exhibits arefurnished with this report:

 

31.1   Certification by the Chief Executive Officerpursuant to Rule 13a-14(a)/15d-14(a) of the Exchange Act

 

31.2   Certification by the Chief Financial Officer pursuantto Rule 13a-14(a)/15d-14(a) of the Exchange Act

 

32.1   Certification by the Chief Executive Officerpursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002

 

32.2   Certification by the Chief Financial Officerpursuant to 18 U. S. C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

 

In accordance with the requirements of theSecurities Exchange Act of 1934, the registrant caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

 
|                  | CYANOTECH CORPORATION (Registrant) |
|-----------------------|------------------------------------|
|                  |                               |
| November 7, 2007 |                               |   | By: |  /s/Gerald R. Cysewski |   |
| (Date)                |                               |   | Gerald R. Cysewski |
|                  |                               |   | Chairman of the Board, |
|                  |                               |   | President and Chief Executive Officer |
|                  |                               |   |   |
|                  |                               |   |   |
| November 7, 2007 |                               |   | By: |  /s/William R. Maris |   |
| (Date)                |                               |   | William R. Maris |
|                  |                               |   | Vice President – Finance &  Administration, |
|                  |                               |   | Chief Financial Officer |
|                  |                               |   | (Principal Financial and Accounting |
|                  |                               |   | Officer) |
|                       |                                    |  |  |  |  |  |  |

 

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