Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**x****  Quarterly Report Pursuant to Section 13 or15(d) of the Securities Exchange Act of 1934**

** **

**ForQuarterly Period Ended September 30, 2008**

 

**Or**

** **

**o****  Transition Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

** **

**Forthe Transition Period From                  to                 **

 

**CommissionFile Number 0-14602**

 

**CYANOTECH CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **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 principal executive offices)

 

**(808)326-1353**(Registrant’s telephone number)

 

**NotApplicable**

(Former name, former address and formerfiscal year, if changed since last report)

 

Indicateby check mark whether the registrant (1) filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act of 1934 during thepast 12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.        Yes  x   No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer o | Accelerated  filer o | Non-accelerated  filer o  (Do not check if a smaller  reporting company) | Smaller  reporting company x |
|--------------------------------|---------------------------|-------------------------------------------------------------------------------|-----------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).Yes  o   No  x

 

Numberof common shares outstanding as of September 30, 2008:

 
| **Title of  Class**            | ** ** | **Shares  Outstanding** |
|--------------------------------|------------|-------------------------|
| Common stock - $0.02 par value |       | 5,242,270               |

 

 

 

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CYANOTECHCORPORATION

FORM 10-Q

INDEX

 
|       | PART I.  FINANCIAL  INFORMATION                                                                                                        | 2      |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|       |                                                                                                                                                  |   |
| Item 1.    | Financial  Statements (unaudited)                                                                                                                     | 2      |
|       | Consolidated Condensed  Balance Sheets as of September 30, 2008 and March 31, 2008                                                          | 2      |
|       | Consolidated Condensed  Statements of Operations and Comprehensive Income (Loss) for the three and  six months ended September 30, 2008 and 2007 | 3      |
|       | Consolidated Condensed  Statements of Cash Flows for the six months ended September 30, 2008 and  2007                                           | 4      |
|       | Notes to Consolidated Condensed Financial Statements                                                                                                  | 5      |
| Item 2.    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                           | 13     |
| Item 3.    | Quantitative  and Qualitative Disclosures About Market Risk                                                                                           | 20     |
| Item 4.    | Controls and  Procedures                                                                                                                              | 20     |
|       | PART II.  OTHER  INFORMATION                                                                                                           | 21     |
| Item 1.    | Legal Proceedings                                                                                                                                     | 21     |
| Item 2.    | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                          | 21     |
| Item 3.    | Defaults upon  Senior Securities                                                                                                                      | 21     |
| Item 4.    | Submission of  Matters to a Vote of Security Holders                                                                                                  | 21     |
| Item 5.    | Other Information                                                                                                                                     | 21     |
| Item 6.    | Exhibits                                                                                                                                              | 21     |
| SIGNATURES |                                                                                                                                                  | 22     |

 

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Part 1. FINANCIAL INFORMATION

 

Item 1. Financial Statements (unaudited)

 

CYANOTECH CORPORATION

CONSOLIDATED CONDENSEDBALANCE SHEETS

(Dollars in thousands except per shareamounts)

(unaudited)

 
| ** **                                                                                                                                                 | ** ** | **September 30,  2008** | ** ** | **March 31,  2008** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| ASSETS                                                                                                                                                     |       |                         |       |                     |       |
| Current assets:                                                                                                                                            |       |                         |       |                     |       |
| Cash and cash equivalents                                                                                                                                  |       | $                            | 989        |                     | $          | 1,090 |   |
| Accounts receivable, net of allowance for  doubtful accounts of $15 at September 30, 2008 and $23 at March 31,  2008                             |       | 2,052                        |       | 1,934                    |       |
| Inventories                                                                                                                                                |       | 2,613                        |       | 1,601                    |       |
| Prepaid expenses and other                                                                                                                                 |       | 98                           |       | 263                      |       |
| Total current assets                                                                                                                                       |       | 5,752                        |       | 4,888                    |       |
|                                                                                                                                                       |       |                         |       |                     |       |
| Equipment and leasehold improvements, net                                                                                                                  |       | 4,204                        |       | 4,269                    |       |
| Other assets                                                                                                                                               |       | 499                          |       | 623                      |       |
| Total assets                                                                                                                                               |       | $                            | 10,455     |                     | $          | 9,780 |   |
|                                                                                                                                                       |       |                         |       |                     |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                  |       |                         |       |                     |       |
| Current liabilities:                                                                                                                                       |       |                         |       |                     |       |
| Current maturities of long-term debt                                                                                                                       |       | $                            | 588        |                     | $          | 567 |   |
| Customer deposits                                                                                                                                          |       | 124                          |       | 104                      |       |
| Accounts payable                                                                                                                                           |       | 1,211                        |       | 805                      |       |
| Accrued expenses                                                                                                                                           |       | 448                          |       | 320                      |       |
| Total current liabilities                                                                                                                                  |       | 2,371                        |       | 1,796                    |       |
|                                                                                                                                                       |       |                         |       |                     |       |
| Long-term debt, less current maturities                                                                                                                    |       | 1,205                        |       | 1,505                    |       |
| Other                                                                                                                                                      |       | —                       |       | 100                      |       |
| Total liabilities                                                                                                                                          |       | 3,576                        |       | 3,401                    |       |
|                                                                                                                                                       |       |                         |       |                     |       |
| Commitments and contingencies (Note 5)                                                                                                                     |       |                         |       |                     |       |
|                                                                                                                                                       |       |                         |       |                     |       |
| Stockholders’ equity:                                                                                                                                 |       |                         |       |                     |       |
| Common stock of $0.02 par value, shares  authorized 7,500,000; 5,242,270 shares issued and outstanding at  September 30, 2008 and March 31, 2008 |       | 105                          |       | 105                      |       |
| Additional paid-in capital                                                                                                                                 |       | 27,403                       |       | 27,337                   |       |
| Accumulated deficit                                                                                                                                        |       | (20,629                      | )          | (21,063                  | )          |
| Total stockholders’ equity                                                                                                                            |       | 6,879                        |       | 6,379                    |       |
|                                                                                                                                                       |       |                         |       |                     |       |
| Total liabilities and stockholders’ equity                                                                                                            |       | $                            | 10,455     |                     | $          | 9,780 |   |

 

See accompanying Notes to ConsolidatedCondensed Financial Statements.

 

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CYANOTECH CORPORATION

CONSOLIDATED CONDENSEDSTATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share amounts)

(Unaudited)

 
| ** **                                                  | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                             | ** ** | **2007**                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                        |       |                                                 |       |                                               |       |   |   |   |   |
| NET SALES                                                   |       | $                                                    | 3,274      |                                               | $          | 2,604 |   | $ | 6,975 |   | $ | 5,187 |   |
| COST OF PRODUCT SALES                                       |       | 1,896                                                |       | 1,836                                              |       | 4,293 |   | 3,673 |   |
| Gross profit                                                |       | 1,378                                                |       | 768                                                |       | 2,682 |   | 1,514 |   |
|                                                        |       |                                                 |       |                                               |       |   |   |   |   |
| OPERATING EXPENSES:                                         |       |                                                 |       |                                               |       |   |   |   |   |
| Research and development                                    |       | 54                                                   |       | 36                                                 |       | 90 |   | 83 |   |
| Sales and marketing                                         |       | 255                                                  |       | 337                                                |       | 522 |   | 705 |   |
| General and administrative                                  |       | 864                                                  |       | 709                                                |       | 1,573 |   | 1,381 |   |
| Total operating expenses                                    |       | 1,173                                                |       | 1,082                                              |       | 2,185 |   | 2,169 |   |
|                                                        |       |                                                 |       |                                               |       |   |   |   |   |
| Income (loss) from operations                               |       | 205                                                  |       | (314                                               | )          | 497 |   | (655 | ) |
|                                                        |       |                                                 |       |                                               |       |   |   |   |   |
| OTHER INCOME (EXPENSE):                                     |       |                                                 |       |                                               |       |   |   |   |   |
| Interest income                                             |       | 2                                                    |       | 6                                                  |       | 5 |   | 17 |   |
| Interest expense                                            |       | (44                                                  | )          | (38                                                | )          | (89 | ) | (79 | ) |
| Other income (expense), net                                 |       | —                                               |       | 2                                                  |       | 10 |   | 1 |   |
|                                                        |       |                                                 |       |                                               |       |   |   |   |   |
| Total other expense, net                                    |       | (42                                                  | )          | (30                                                | )          | (74 | ) | (61 | ) |
|                                                        |       |                                                 |       |                                               |       |   |   |   |   |
| Income (loss) before income tax (benefit)  expense          |       | 163                                                  |       | (344                                               | )          | 423 |   | (716 | ) |
|                                                        |       |                                                 |       |                                               |       |   |   |   |   |
| INCOME TAX (BENEFIT) EXPENSE                                |       | —                                               |       | —                                             |       | (11 | ) | 10 |   |
|                                                        |       |                                                 |       |                                               |       |   |   |   |   |
| NET INCOME (LOSS)                                           |       | $                                                    | 163        |                                               | $          | (344 | ) | $ | 434 |   | $ | (726 | ) |
|                                                        |       |                                                 |       |                                               |       |   |   |   |   |
| NET INCOME (LOSS) PER SHARE:                                |       |                                                 |       |                                               |       |   |   |   |   |
| Basic                                                       |       | $                                                    | .03        |                                               | $          | (0.07 | ) | $ | .08 |   | $ | (0.14 | ) |
| Diluted                                                     |       | $                                                    | .03        |                                               | $          | (0.07 | ) | $ | .08 |   | $ | (0.14 | ) |
|                                                        |       |                                                 |       |                                               |       |   |   |   |   |
| SHARES USED IN CALCULATION OF NET INCOME  (LOSS) PER SHARE: |       |                                                 |       |                                               |       |   |   |   |   |
| Basic                                                       |       | 5,242                                                |       | 5,234                                              |       | 5,242 |   | 5,234 |   |
| Diluted                                                     |       | 5,242                                                |       | 5,234                                              |       | 5,242 |   | 5,234 |   |
|                                                        |       |                                                 |       |                                               |       |   |   |   |   |
| COMPREHENSIVE INCOME (LOSS):                                |       |                                                 |       |                                               |       |   |   |   |   |
| Net income (loss)                                           |       | $                                                    | 163        |                                               | $          | (344 | ) | $ | 434 |   | $ | (726 | ) |
| Other comprehensive income (loss)                           |       | —                                               |       | 1                                                  |       | — |   | (4 | ) |
|                                                        |       | $                                                    | 163        |                                               | $          | (343 | ) | $ | 434 |   | $ | (730 | ) |

 

See accompanying Notes to ConsolidatedCondensed Financial Statements.

 

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CYANOTECH CORPORATION

CONSOLIDATED CONDENSEDSTATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 
| ** **                                                                                          | ** ** | **Six Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2008**                                           | ** ** | **2007** | ** ** |
|                                                                                                |       |                                               |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |       |                                               |       |   |   |
| Net income (loss)                                                                                   |       | $                                                  | 434        |   | $ | (726 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |       |                                               |       |   |   |
| Depreciation                                                                                        |       | 216                                                |       | 269 |   |
| Decrease in allowance for doubtful accounts                                                         |       | (8                                                 | )          | — |   |
| Amortization of debt issue costs and other  assets                                                  |       | 27                                                 |       | 18 |   |
| Stock option compensation expense                                                                   |       | 66                                                 |       | — |   |
| Net (increase) decrease in:                                                                         |       |                                               |       |   |   |
| Accounts receivable                                                                                 |       | (110                                               | )          | 174 |   |
| Refundable income taxes                                                                             |       | —                                             |       | 10 |   |
| Inventories                                                                                         |       | (1,012                                             | )          | (401 | ) |
| Prepaid expenses and other assets                                                                   |       | 262                                                |       | (146 | ) |
| Net increase (decrease) in:                                                                         |       |                                               |       |   |   |
| Customer deposits                                                                                   |       | (80                                                | )          | — |   |
| Accounts payable                                                                                    |       | 406                                                |       | 411 |   |
| Accrued expenses                                                                                    |       | 128                                                |       | (54 | ) |
| Net cash provided by (used in) operating  activities                                                |       | 329                                                |       | (445 | ) |
|                                                                                                |       |                                               |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |       |                                               |       |   |   |
| Investment in equipment and leasehold  improvements                                                 |       | (151                                               | )          | (48 | ) |
| Cash used in investing activities                                                                   |       | (151                                               | )          | (48 | ) |
|                                                                                                |       |                                               |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                               |       |                                               |       |   |   |
| Principal payments on long-term debt                                                                |       | (279                                               | )          | (193 | ) |
| Cash used in financing activities                                                                   |       | (279                                               | )          | (193 | ) |
|                                                                                                |       |                                               |       |   |   |
| Net decrease in cash and cash equivalents                                                           |       | (101                                               | )          | (686 | ) |
|                                                                                                |       |                                               |       |   |   |
| Cash and cash equivalents at beginning of  period                                                   |       | 1,090                                              |       | 1,444 |   |
|                                                                                                |       |                                               |       |   |   |
| Cash and cash equivalents at end of period                                                          |       | $                                                  | 989        |   | $ | 758 |   |
|                                                                                                |       |                                               |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW  INFORMATION:                                                  |       |                                               |       |   |   |
| Cash paid during the period for:                                                                    |       |                                               |       |   |   |
| Interest                                                                                            |       | $                                                  | 81         |   | $ | 68 |   |
| Income taxes                                                                                        |       | $                                                  | —     |   | $ | 2 |   |

 

See accompanying Notes to ConsolidatedCondensed Financial Statements.

 

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CYANOTECH CORPORATIONNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

As of September 30, 2008(Unaudited)

 

**1.****                                     ****BASIS OF PRESENTATION**

 

Theaccompanying consolidated condensed financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for 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 generally accepted accounting principles(“GAAP”) for complete financial statements.  These consolidated condensed financial statements and notes should beread in conjunction with the Company’s consolidated financial statementscontained in the Company’s annual report on Form 10-K for the year ended March 31,2008 filed on June 26, 2008.

 

Theaccompanying consolidated condensed financial statements include the accountsof Cyanotech Corporation and its wholly-owned subsidiaries, Nutrex Hawaii, Inc.(“Nutrex Hawaii” or “Nutrex”) and Cyanotech Japan YK (“Cyanotech Japan” or “CJYK”).All significant intercompany balances and transactions have been eliminated inconsolidation.  On August 31, 2007, the Company discontinued theactivity of its wholly owned Japanese subsidiary CJYK. All aquaculture feedbusiness in Japan was absorbed through the Company’s U.S. operations. CJYKremained a registered Japanese corporation until November 30, 2007, at whichtime it was dissolved.  All CJYK assets and liabilities were absorbed intothe Company as of September 1, 2007.  The Company made this decisiondue to declining sales of approximately 40% in each of the two fiscal years2007 and 2006. CJYK sales for the quarter ended September 30, 2007 wereapproximately $20,000. Dissolution of this subsidiary has not had a significantimpact on the consolidated financial statements.

 

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and the disclosures of contingent assets and liabilities at thebalance sheet date and the reported amounts of revenues and expenses during theperiod reported.  Management reviews these estimates and assumptionsperiodically and reflects the effect of revisions in the period that they aredetermined to be necessary.  Actual results could differ from thoseestimates and assumptions.

 

**2.**                                      **INVENTORIES**

 

Inventoriesare stated at the lower of cost (which approximates first-in, first-out) ormarket. Market is defined as sales price less cost to dispose and a normalprofit margin.  Inventories consist of the following

 
| ** **      | ** ** | **September 30, 2008** | ** ** | **March 31, 2008** | ** ** |
|-----------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **      | ** ** | **(in thousands)**          | ** ** |
| Raw materials   | ** ** | $                                | 369        |                         | $          | 321 |   |
| Work in process |       | 290                              |       | 214                          |       |
| Finished goods  |       | 1,778                            |       | 888                          |       |
| Supplies        |       | 176                              |       | 178                          |       |
|            |       | $                                | 2,613      |                         | $          | 1,601 |   |

 

Inaccordance with SFAS No. 151, fixed production related costs ofapproximately $0  and $34,000 were notinventoried for the quarter ended September 30, 2008 and 2007,respectively, and $20,000 and $57,000 for the six months ended September 30,2008 and 2007, respectively, due to below normal production capacity.

 

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**3.****                                     ****EQUIPMENT AND LEASEHOLDIMPROVEMENTS**

 

Equipmentand leasehold improvements are stated at cost. Depreciation and amortizationare provided using the straight-line method over the estimated useful lives forequipment and furniture and fixtures, or the shorter of the land lease term orestimated useful 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, 2008** | ** ** | **March 31, 2008** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **(in thousands)**          | ** ** |
| Equipment                                       |       | $                                | 6,396      |                         | $          | 6,335 |   |
| Leasehold improvements                          |       | 7,424                            |       | 7,348                        |       |
| Furniture and fixtures                          |       | 115                              |       | 94                           |       |
|                                            |       | 13,935                           |       | 13,777                       |       |
| Less accumulated depreciation and  amortization |       | (9,816                           | )          | (9,600                       | )          |
| Construction-in-progress                        |       | 85                               |       | 92                           |       |
| Equipment and leasehold improvements, net       |       | $                                | 4,204      |                         | $          | 4,269 |   |

 

Managementreviews long-lived assets for impairment whenever events or changes incircumstances indicate that the carrying value of such assets may not berecoverable. Upon such an occurrence, recoverability of these assets isdetermined by comparing the forecasted undiscounted net cash flows from therelated assets, to its carrying amount. If the carrying value exceeds therelated cash flows, then the carrying value of the long-lived assets arecompared to the asset’s fair value using discounted cash flow. Management hasdetermined no asset impairment occurred during the three or six months ended September 30,2008.

 

**4.**                                      **LONG-TERM DEBT**

 

Long-termdebt consists of the following:

 
| ** **                                    | ** ** | **September 30, 2008** | ** ** | **March 31, 2008** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **(in thousands)**          | ** ** |
| Term loans                                    |       | $                                | 1,793      |                         | $          | 2,072 |   |
| Less current maturities                       |       | (588                             | )          | (567                         | )          |
| Long-term debt, excluding current  maturities |       | $                                | 1,205      |                         | $          | 1,505 |   |

 

*Term LoanAgreements*

 

In February 2008, theCompany executed a Term Loan Agreement (“Term Loan A”) with a lender providingfor $1.1 million in aggregate credit facilities, secured by the Company’sassets. Term Loan A has a maturity date of March 1, 2015 and is payable in84 equal monthly principal and interest payments. The interest rate under TermLoan A, in the absence of a default under the agreement, is the prime rate ineffect as of the close of business on the first day of each calendar quarter,plus 1%. As of September 30, 2008 the prime rate was 5.00%. The Company isprohibited from declaring any common stock dividends without the lender’s priorwritten consent. Borrowings outstanding under Term Loan A were $1,016,523 and$1,078,400 at September 30, 2008 and March 31, 2008, respectively.

 

In April 2000, theCompany executed a Term Loan Agreement (“Term Loan B”) with a lender providingfor $3.5 million in aggregate credit facilities, secured by the Company’sassets. Term Loan B has a maturity date of May 1, 2010 and is payable in120 equal monthly principal and interest payments. The interest rate under TermLoan B, in the absence of a default under the agreement, is the prime rate, ineffect as of the close of business on the first day of each calendar quarter,plus 1%. As of September 30, 2008, the prime rate was 5.00%. The Companyis prohibited from declaring any common stock dividends without the lender’sprior written consent. A warrant to purchase 5,000 shares of the Company’scommon stock was issued in conjunction with Term Loan B. The warrant expires inApril 2011 and has an exercise price of $10.20 per share. The warrant mayonly be exercised after the Company has repaid Term Loan B in full. Borrowingsoutstanding under Term Loan B were $776,744 and $993,376 at September 30,2008 and March 31, 2008, respectively.

 

The Company isrequired to comply with certain covenants in connection with its loanagreements. At September 30, 2008, the Company was in compliance with thesecovenants.

 

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These Term Loans areadditionally secured by a $250,000 restricted cash deposit which is included inOther Assets in the accompanying consolidated condensed balance sheets at September 30,2008 and March 31, 2008.

 

Future principal paymentsunder the Term Loan Agreements are as follows:

 
| **Year Ending March 31** | ** ** | **(in  thousands)** | ** ** |
|-----------------------------------------|------------|---------------------|------------|
| 2009 (6 Months)                         |       | $                   | 290        |   |
| 2010                                    |       | 606                 |       |
| 2011                                    |       | 225                 |       |
| 2012                                    |       | 153                 |       |
| 2013                                    |       | 163                 |       |
| Thereafter through 2015                 |       | 356                 |       |
| Total principal payments                |       | $                   | 1,793      |   |

 

**5.****                                     ****LEASES**

 

The Company leasesfacilities, equipment and land under operating leases expiring between 2008 and2025.  The land lease provides forcontingent rental in excess of minimum rental commitments based on a percentageof the Company’s annual sales. Contingent rental for six months ended September 30,2008 and 2007 were $27,000 and $23,000, respectively.

 

Future minimum leasepayments under all non-cancelable operation leases are as follows:

 
| **Year ending March 31** | ** ** | **(in  thousands)** | ** ** |
|-----------------------------------------|------------|---------------------|------------|
| 2009 (6 Months)                         |       | $                   | 93         |   |
| 2010                                    |       | 168                 |       |
| 2011                                    |       | 161                 |       |
| 2012                                    |       | 151                 |       |
| 2013                                    |       | 148                 |       |
| Thereafter through 2025                 |       | 1,887               |       |
| Total minimum lease payments            |       | $                   | 2,608      |   |

 

**6.**                                      **SHARE-BASED COMPENSATION**

 

TheCompany has adopted the provisions of Statement of Financial AccountingStandard (“SFAS”) No. 123(R) (“SFAS No. 123R”), “Share-BasedPayment,” for its share-based compensation plans.  SFAS No. 123Rrequires an entity to measure the cost of employee services received inexchange for an award.  If an award vests or becomes exercisable based onthe achievement of a condition other than service such as for meeting certainperformance or market condition, the award is classified as a liability.  Liability-classifiedawards are remeasured to fair value at each balance sheet date until the awardis settled. The Company currently has no liability-classified awards. Equity-classified awards, including grants of employee stock options, aremeasured at the grant-date fair value of the award and are not subsequentlyremeasured unless an award is modified.  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 service-based awards, and because theCompany’s future employee incentive stock options are “plain vanilla,” asdefined by the U. S. Securities and Exchange Commission in Staff AccountingBulletin No. 107, they are reflected only in Equity and CompensationExpense accounts.

 

***Stock Options***

 

Asof September 30, 2008, the Company had the following two shareholderapproved stock plans under which shares were available for equity-based awards:The 2005 Stock Option Plan (the “2005 Plan”) wherein, pursuant to a vote of theCompany’s stockholders on September 9, 2008, 700,000 shares of commonstock are reserved for issuance until the Plan 

 

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terminates on August 21,2015, and; The Independent Director Stock Option and Stock Grant Plan (the “2004Directors Plan”) wherein 75,000 shares of common stock are reserved forissuance until the Plan terminates in 2014.  Under the 2005 Plan, eligibleemployees and certain independent consultants may be granted options topurchase shares of the Company’s common stock. The shares issuable under the2005 Plan will either be shares of the Company’s authorized but previouslyunissued common stock or shares reacquired by the Company, including sharespurchased on the open market.  As of September 30, 2008, 255,582options remain available for grant under the 2005 Plan pursuant to the increaseof 500,000 authorized Plan shares as approved by the stockholders of theCompany on September 9, 2008. Concurrent with the 2005 Plan approval, the 1995 Stock Option Plan wasterminated, except for the outstanding options issued thereunder.

 

Underthe 2004 Directors Plan, upon election to the Board of Directors, a newlyelected non-employee director is granted a ten-year option to purchase 1,000shares of the Company’s common stock at fair market value on the date of grant.Options granted vest and become exercisable six months from the date ofgrant.  In addition, on the date of each Annual Meeting of Stockholders,each non-employee director continuing in office is automatically granted 875shares of common stock, non-transferable for nine months following the date ofgrant.  As of September 30, 2008, 70,250 options remain available forgrant 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.

 

Thefollowing table presents shares authorized, available for future grant andoutstanding under each of the Company’s plans:

 
| ** ** | ** ** | **As of September 30, 2008** | ** ** |
|------------|------------|--------------------------------------------------|------------|
| ** ** | ** ** | **Authorized**                                   | ** ** | **Available** | ** ** | **Outstanding** | ** ** |
| 2005 Plan  |       | 700,000                                          |       | 255,582 |   | 444,418 |   |
| 2004 Plan  |       | 75,000                                           |       | 70,250 |   | 1,000 |   |
| 1995 Plan  |       | —                                           |       | — |   | 21,553 |   |
| 1994 Plan  |       | —                                           |       | — |   | 2,250 |   |
| Total      |       | 775,000                                          |       | 325,832 |   | 469,221 |   |

 

Allstock option grants made under the 2005 Plan and the 2004 Directors Plan wereat exercise prices no less than the Company’s closing stock price on the dateof grant. Options under the 2005 Plan and 2004 Plan were determined by theBoard of Directors or the Stock Option and Compensation Committee of the Boardin accordance with the provisions of the respective plans.  Discussionrelative to option granting, vesting, exercising, and other conditions are setforth in a Stock Option Agreement evidencing each grant. No option can have alife in excess of ten (10) years.  The Company records compensationexpense for employee stock options based on the estimated fair value of theoptions on the date of grant using the Black-Scholes option-pricing model. Themodel will use various assumptions, including a risk-free interest rate, theexpected term of the options, the expected stock price volatility over theexpected term of the options, and the expected dividend yield. Compensationexpense for employee stock options will be recognized ratably over the vestingterm.  Compensation expense recognizedfor options issued under the 2005 Plan was $66,000 for the three and six monthsended September 30, 2008.

 

Asummary of option activity under Cyanotech Corporation’s Stock Plans for thesix months ended September 30, 2008 is presented below:

 
| **Option Activity**               | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------|------------|------------|------------|------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at March 31, 2008     |       | 111,447    |       | $                                              | 3.15       |                                                        | 4.9 years  |                            | $          | (176,086 | ) |
| Granted                                |       | 393,168    |       | 2.12                                           |       | 9.8 years                                                   |       | (6,553                          | )          |
| Exercised                              |       | —     |       | $                                              | —     |                                                        | —     |                            | —     |   |
| Forfeited or expired                   |       | (35,394    | )          | $                                              | 4.50       |                                                        | —     |                            | (92,129    | ) |
| Outstanding at September 30, 2008 |       | 469,221    |       | $                                              | 1.99       |                                                        | 9.3 years  |                            | $          | (41,330 | ) |
| Exercisable at September 30, 2008 |       | 29,739     |       | $                                              | 3.97       |                                                        | 1.3 years  |                            | $          | (61,597 | ) |

 

Theaggregate intrinsic value in the tables above is before applicable income taxesand represents the amount optionees would have received if all options had beenexercised on the last business day of the period indicated, based on theCompany’s closing stock price of $1.90 per share for that day.

 

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Asummary of Cyanotech Corporation’s non-vested options for the six months ended September 30,2008 is presented below:

 
| **Nonvested Options**           | ** ** | **Shares** | ** ** | **Weighted Average  Grant-Date  Fair Value** | ** ** |
|--------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|
| Nonvested at March 31, 2008     |       | 47,529     |       | $                                                      | 1.61       |   |
| Granted                              |       | 393,168    |       | 1.88                                                   |       |
| Vested                               |       | (115       | )          | 4.40                                                   |       |
| Forfeited or expired                 |       | (1,100     | )          | 1.60                                                   |       |
| Nonvested at September 30, 2008 |       | 439,482    |       | $                                                      | 1.85       |   |

 

Thefollowing table summarizes the weighted average characteristics of outstandingstock options as of September 30, 2008:

 
| ** **                              | ** ** | **Outstanding Options** | ** ** | **Exercisable Options**     | ** ** |
|-----------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number  of Shares**   | ** ** | **Remaining  Life (Years)** | ** ** | **Weighted  Average Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average Price** | ** ** |
| $1.41 -  $2.60                          |       | 445,918                      |       | 9.7                              |       | $ | 1.86 |   | 6,500 |   | $ | 2.46 |   |
| $4.20 -  $6.50                          |       | 23,303                       |       | 1.2                              |       | 4.39 |   | 23,239 |   | 4.39 |   |
| Total stock options                     |       | 469,221                      |       | 9.3                              |       | $ | 1.99 |   | 29,739 |   | $ | 3.97 |   |

 

Therewere 262,112 and 393,168 stock options granted during the three and six monthsended September 30, 2008.  Theaverage fair value assumptions relate to options granted during the periods endingSeptember 30, 2008 are:

 

| Exercise Price:   |   | $             | 2.12   |   |
|-------------------|--------|---------------|--------|--------|
| Volatility:       |   | 103.1         | %      |
| Risk Free Rate:   |   | 4.7           | %      |
| Vesting Period:   |   | Up to 3 years |   |
| Termination Rate: |   | 0.0           | %      |
| Expected Life     |   | 5 years       |   |

 

Asof September 30, 2008, total unrecognized stock-based compensation expenserelated to all unvested stock options was $531,679. Of the 439,482 unvestedoptions, 393,168 options cliff vest as follows: 131,056 of the options have anexercise price of $1.41 and cliff vest 100% on May 16, 2009; 131,056 ofthe options have an exercise price of $2.12 and cliff vest 100% on May 16,2010; and 131,056 of the options have an exercise price of $2.12 and cliff vest100% on May 16, 2011. These cliff vesting options have a combinedunrecognized compensation expense of $514,061 as of September 30, 2008that will be amortized over 7.5 months, 19 months and 31 months, respectively.The remaining 46,250 unvested options are expected to be amortized over aremaining weighted-average period of 4.0 years through February 22, 2013with an unrecognized compensation expense of $17,618 as of September 30,2008.

 

Theweighted average grant date fair value of 35,394 options granted prior to April 1,2008, and vested, expired and forfeited during the six months ended September 30,2008 is $159,378. The aggregate intrinsic value of the Company’s 29,739 fullyvested share options at September 30, 2008 is $61,597.

 

***Warrants***

 

TheCompany had issued a warrant which allows the warrant holder rights to acquire5,000 shares of common stock at $10.20 per share. Warrants outstanding duringthe periods were granted to lenders in connection with the Term Loan Bdescribed in Note 4.  The warrant wasgranted in April 2000 and expires in April 2011, and may only beexercised after the Company has repaid the Term Loan B in full.

 

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**7.****                                     ****INCOME TAXES**

 

TheCompany is subject to taxation in the United States and two state jurisdictions.No remaining or future tax liabilities are expected with respect to thedissolution of CJYK.  The preparation of tax returns requires managementto interpret the applicable tax laws and regulations in effect in suchjurisdictions, which could affect the amount of tax paid by the Company.Management, in consultation with its tax advisors, files its tax returns oninterpretations that are believed to be reasonable under the circumstances. Thetax returns, however, are subject to routine reviews by the various taxingauthorities in the jurisdictions in which the Company files its returns. As part of these reviews, a taxing authority may disagree with respect to thetax positions taken by management (“uncertain tax positions”) and thereforerequire the Company to pay additional taxes. As required under applicableaccounting rules, management evaluates the requirement for additional taxaccruals, and for the three and six months ended September 30, 2008 and2007, no accrual was recorded based on this evaluation of potential additionaltax liability, including interest and penalties, which the Company could incuras a result of the ultimate resolution of its uncertain tax positions.Management reviews and updates the accrual for uncertain tax positions as more definitiveinformation becomes available from taxing authorities, completion of taxaudits, expiration of statute of limitations, or upon occurrence of otherevents.

 

Asa result of the implementation of Financial Accounting Standards Board (“FASB”)Interpretation No.48 (“FIN 48”) “Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109,” the Company did not recognize aliability for unrecognized tax benefits and, accordingly, did not record anycumulative effect adjustment to beginning retained earnings, at the date ofadoption, April 1, 2007.  As of September 30,2008, there was no significant liability for income tax associated withunrecognized tax benefits.

 

Incometaxes are provided on the earnings in the consolidated financial statements.The provision is based on the current quarter activity of the legal entitiesand jurisdictions in which the Company operates. Tax credits such as Hawaiicapital goods excise tax credits, are recognized as a reduction to income taxesin the year the credits are earned. Accordingly, the effective tax rate may vary from the customaryrelationship between income tax expense (benefit) and pre-tax income (loss).

 

TheCompany recognizes accrued interest related to unrecognized tax benefits as wellas any related penalties in interest income or expense in its consolidatedcondensed statements of operations, which is consistent with the recognition ofthese items in prior reporting periods.  With few exceptions, the Companyis no longer subject to U.S. federal, state and local, and non-U.S. income taxexamination by tax authorities for tax years before 2001.

 

**8.**                                      **EARNINGS PER SHARE**

 

Basicearnings per share is computed on the basis of the weighted average number ofcommon shares outstanding.  Diluted earnings per share is computed on thebasis of the weighted average number of common shares outstanding plus thepotentially dilutive effect of outstanding stock options and warrants using the“treasury stock” method and convertible securities using the “if-converted”method.

 

Reconciliationsbetween the numerator and the denominator of the basic and diluted earnings pershare computations for the three months ended September 30, 2008 and 2007are as follows (in thousands, except per share amounts):

 
| ** **                                                              | ** ** | **Three Months Ended September 30, 2008** | ** ** | **Three Months Ended September 30, 2007** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **Net Loss**                                                  | ** ** | **Shares**                                                         | ** ** | **Per Share** | ** ** | **Net Loss** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                                              | ** ** | **(Numerator)**                                                    | ** ** | **(Denominator)**                                                  | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic net income (loss) per share                                       |       | $                                                                  | 163        |                                                               | 5,242      |   | $ | 0.03 |   | $ | (344 | ) | 5,234 |   | $ | (0.07 | ) |
| Effect of dilutive securities — Common  stock options and warrants |       | —                                                             |       | —                                                             |       | — |   | — |   | — |   | — |   |
| Diluted net income (loss) per share                                     |       | $                                                                  | 163        |                                                               | 5,242      |   | $ | 0.03 |   | $ | (344 | ) | 5,234 |   | $ | (0.07 | ) |

 

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Reconciliationsbetween the numerator and the denominator of the basic and diluted earnings pershare computations for the six months ended September 30, 2008 and 2007are as follows (in thousands, except per share amounts):

 
| ** **                                                              | ** ** | **Six Months Ended September 30, 2008** | ** ** | **Six Months Ended September 30, 2007** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                              | ** ** | **Net Loss**                                                | ** ** | **Shares**                                                       | ** ** | **Per Share** | ** ** | **Net Loss** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                                              | ** ** | **(Numerator)**                                                  | ** ** | **(Denominator)**                                                | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic net income (loss) per share                                       |       | $                                                                | 434        |                                                             | 5,242      |   | $ | 0.08 |   | $ | (726 | ) | 5,234 |   | $ | (0.14 | ) |
| Effect of dilutive securities — Common  stock options and warrants |       | —                                                           |       | —                                                           |       | — |   | — |   | — |   | — |   |
| Diluted net income (loss) per share                                     |       | $                                                                | 434        |                                                             | 5,242      |   | $ | 0.08 |   | $ | (726 | ) | 5,234 |   | $ | (0.14 | ) |

 

Basicand diluted earnings per share are the same in periods of a net loss, thusthere is no effect of dilutive securities when a net loss is recorded. There were approximately 474,221 potentially dilutive securities for thethree and six months ended September 30, 2008 and 67,000 potentially dilutivesecurities for the three and six months end September 30, 2007, that wereexcluded from the calculation of diluted income (loss) per share because theireffect was anti-dilutive.

 

**9.**                                      **CUSTOMER DEPOSIT**

 

TheCompany received a restricted security deposit of $200,000 cash in conjunctionwith a sales contract dated November 1, 2007. On June 30, 2008 thecontract was modified to release the restricted funds to settle outstandingaccounts receivable balances and to prepay portions of new product orders fromthe customers. At September 30, 2008, no restricted funds are held.

 

**10.****                              ****NEW ACCOUNTING PRONOUNCEMENTS**

 

In September 2006, theFASB issued SFAS No. 157, “Fair Value Measurements”. This statementclarifies the definition of fair value, establishes a framework for measuringfair value, and expands the disclosures on fair measurements. SFAS 157 definesfair value as the exchange price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date. SFAS 157 also establishes a fair valuehierarchy which requires an entity to maximize the use of observable inputs andminimize the use of unobservable inputs when measuring fair value. The standarddescribes three levels of inputs that may be used to measure fair value:

 

Level 1 - Quoted prices inactive markets for identical assets or liabilities.

Level 2 - Inputs other thanquoted prices included within Level 1 that are either directly or indirectlyobservable;

Level 3 - Unobservableinputs that are supported by little or no market activity, therefore requiringan entity to develop its own assumptions about the assumptions that marketparticipants would use in pricing.

 

SFASNo. 157 was effective for our fiscal year beginning after April 1,2008, except for non-financial assets and liabilities recognized or disclosedat fair value on a non-recurring basis, for which the effective date is fiscalyears beginning after November 15, 2008. The adoption of SFAS No. 157 did not have an impact on theCompany’s consolidated results of operations, cash flows or financialcondition. The Company will adopt SFAS No. 157 for non-financial assetsthat are recognized or disclosed on a non-recurring basis on April 1, 2009and the Company is currently evaluating the effect, if any, on the Company’sconsolidated results of operations, cash flows or financial condition.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities — Including an amendment of FASBStatement No. 115”. SFAS No. 159 permits entities to choose tomeasure eligible items at fair value at specified election dates and reportunrealized gains and losses on items for which the fair market value option hasbeen elected in earnings at each subsequent reporting date. SFAS No. 159was effective for our fiscal year beginning April 1, 2008. The adoption ofthis statement did not have a material impact on the company’s financialposition and results of operations.

 

InDecember 2007, the FASB issued SFAS No. 141R, “Business Combinations”. SFAS No. 141Rrequires the acquiring entity in a business combination to recognize all theassets acquired and liabilities assumed in the transaction at fair value as ofthe acquisition date. SFAS No. 141R is effective for business combinationsfor which the acquisition date is on or after the beginning of the firstquarterly reporting period beginning on or after December 15, 2008. We arerequired to adopt SFAS No. 141R in the first quarter of calendar year2009.

 

InDecember 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.”SFAS No. 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,”to establish accounting and reporting standards for the non-controllinginterest in a subsidiary and for the deconsolidation of a subsidiary. SFASNo.160 is effective for fiscal years beginning after December 15, 2008. Wedo not expect the adoption of this statement to have a material impact on ourconsolidated financial statements

 

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In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities — an amendmentof FASB Statements No. 133.” This statement enhances the disclosurerequirements for derivative instruments and hedging activities, and thereby isdesigned to improve the transparency of financial reporting.  SFAS No. 161 is effective for fiscalyears beginning after November 15, 2008. We do not expect the adoption of this statement to have a materialimpact on our consolidated financial statements.

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.”SFAS No. 162 identifies the sources of accounting principles and theframework for selecting the principles used in the preparation of financialstatements of nongovernmental entities that are presented in conformity withgenerally accepted accounting principles. SFAS No. 162 is effective60 days following the SEC’s approval of the Public Company AccountingOversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally AcceptedAccounting Principles on September 16, 2008”. We do not expect theadoption of this statement to have a material effect on our consolidatedfinancial statements.

 

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**Item 2.  Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

**FORWARDLOOKING STATEMENTS**

 

This Report on Form 10-Qand other presentations made by Cyanotech Corporation (“CYAN”) and itssubsidiaries contain “forward-looking statements,” which include statementsthat are predictive in nature, depend upon or refer to future events orconditions, and usually include words such as “expects,” “anticipates,” “intends,”“plan,” “believes,” “predicts,” “estimates” or similar expressions. Inaddition, any statement concerning future financial performance, ongoingbusiness strategies or prospects and possible future actions are also forward-lookingstatements. Forward-looking statements are based upon current expectations andprojections about future events and are subject to risks, uncertainties and theaccuracy of assumptions concerning CYAN and its subsidiaries (collectively, the“Company”), the performance of the industry in which they do business andeconomic and market factors, among other things. **These forward-looking statements are not guarantees of futureperformance.**

 

Forward-looking statementsspeak only as of the date of the Report, presentation or filing in which theyare made or were made.  Investors arecautioned not to place undue reliance on forward looking statements. Except tothe extent required by the Federal Securities Laws, the Company undertakes noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise. Our forward-lookingstatements in this Report include, but are not limited to:

 

·                  statements relating to our business strategy;

 

·                  statements relating to our businessobjectives; and,

 

·                  expectations concerning future operations,profitability, liquidity and financial resources.

 

These forward-lookingstatements are subject to risk, uncertainties and assumptions about us and ouroperations that are subject to change based on various important factors, someof which are beyond our control. The following factors, among others, couldcause our financial performance to differ significantly from the goals, plans,objectives, intentions and expectations expressed in our forward-lookingstatements:

 

·                  the effects of competition, includinglocations of competitors and operating and market competition;

 

·                  worldwide economic conditions andtheir effects on costs, pricing and descretionary spending on health products;

 

·                  environmental restrictions, soil and waterconditions, weather and other hazards;

 

·                  access to available and reasonable financingon a timely basis;

 

·                  changes in laws, including increased taxrates, regulations or accounting standards, and decisions of courts, regulatorsand governmental bodies;

 

·                  demand for the company’s products, thequantities and qualities thereof available for sale and levels of customersatisfaction;

 

·                  changesto capital markets and access to sufficient capital on satisfactory terms;

 

·                  our dependence on the experience andcompetence of our executive officers and other key employees;

 

·                  the risk associated with the geographicconcentration of the company’s business;

 

·                  acts of war, terrorists incidents or naturaldisasters; and,

 

·                  other risks or uncertainties describedelsewhere in this Report in our most recent annual report on Form 10-K and inother periodic reports previously and subsequently filed by the Company withthe Securities and Exchange Commission.

 

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**Overview**

 

Comparisons of selectedconsolidated statements of operations data as reported herein follow for theperiods indicated (dollars in thousands):

 
| ** **                    | ** ** | **Three Months Ended  September 30, 2008** | ** ** | **Three Months Ended  September 30, 2007** | ** ** | **Change** | ** ** |
|-------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------|------------|------------|------------|
| Net sales:                    |       |                                                           |       |                                                           |       |       |       |
| Spirulina products            |       | $                                                              | 1,644      |                                                           | $          | 1,407      |       | 17 | % |
| Natural astaxanthin products  |       | 1,621                                                          |       | 1,176                                                          |       | 38         | %          |
| Other products                |       | 9                                                              |       | 21                                                             |       | (57        | )%         |
| Total sales, all products     |       | $                                                              | 3,274      |                                                           | $          | 2,604      |       | 26 | % |
|                          |       |                                                           |       |                                                           |       |       |       |
| Gross profit             |       | $                                                              | 1,378      |                                                           | $          | 768        |       | 79 | % |
| Income (loss) from operations |       | $                                                              | 205        |                                                           | $          | (314       | )          | — |   |
| Net income (loss)             |       | $                                                              | 163        |                                                           | $          | (344       | )          | — |   |

 
| ** **                    | ** ** | **Six Months Ended  September 30, 2008** | ** ** | **Six Months Ended  September 30, 2007** | ** ** | **Change** | ** ** |
|-------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------|------------|
| Net sales:                    |       |                                                         |       |                                                         |       |       |       |
| Spirulina products            |       | $                                                            | 3,684      |                                                         | $          | 2,938      |       | 25 | % |
| Natural astaxanthin products  |       | 3,242                                                        |       | 2,173                                                        |       | 49         | %          |
| Other products                |       | 49                                                           |       | 76                                                           |       | (36        | )%         |
| Total sales, all products     |       | $                                                            | 6,975      |                                                         | $          | 5,187      |       | 35 | % |
|                          |       |                                                         |       |                                                         |       |       |       |
| Gross profit             |       | $                                                            | 2,682      |                                                         | $          | 1,514      |       | 77 | % |
| Income (loss) from operations |       | $                                                            | 497        |                                                         | $          | (655       | )          | — |   |
| Net income (loss)             |       | $                                                            | 434        |                                                         | $          | (726       | )          | — |   |

 

Salesfor the second quarter of fiscal year 2009 increased from the comparable prioryear period by $670,000 or 26% due to increases in both spirulina and naturalastaxanthin product sales.

 

Spirulinasales increased 17% over the same period of fiscal year 2008, primarily due toincreased pricing of both bulk and packages products while units remainedlevel.

 

Naturalastaxanthin product sales increased as well over the comparable prior yearperiod due to an increase in sales of both bulk and packaged astaxanthinproducts. Bulk products sales increased by 90% while packaged nutritionproducts increased by 50%. The Company is now focused on building market sharebased on nutritional brands which promote health and well-being.

 

Grossprofit margin as a percentage of sales increased to 42% for the three monthsended September, 30, 2008 from 29% for the same period a year ago.  Salesfor the second quarter of fiscal year 2009 increased 26% from the comparableprior year period while cost of products sold increased only 3% for the samerespective period. Variable production costs increased 18% in the currentperiod compared to one year ago primarily as a result of the impact of risingfuel costs on electrical rates and on the shipping costs of chemicals used inproduction. Fixed costs have declined by 16% compared to one year ago primarilydue to reduced related headcount and production equipment becoming fullydepreciated. We expect continued pressure on input costs going forward and thiscould cause gross margins to decline in future periods. Management isconsistently researching methodology to promote and sustain production atdesired capacity and quality levels.

 

Thenet income of $163,000 for the second quarter of fiscal 2009 represents apositive improvement of $507,000 over the comparable quarter of fiscal 2008which had a net loss of $344,000. The improvement is the result of increasedsales volume, improved gross profit and an 8% reduction in operating expensesas a percentage of sales due to reduced sales and marketing expenses.

 

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# ***Second Quarter of Fiscal 2009 Compared toSecond Quarter of Fiscal 2008***

# ** **

Netsales for the second quarter of fiscal 2009 increased to $3,274,000 a 26%increase from the $2,604,000 reported for the comparable period a yearago.  Company sales of Spirulina products for the second quarter of fiscal2009 were $1,644,000, which is a 17% increase over sales generated in thesecond quarter of fiscal 2008.  As a percentage of sales, Spirulinaaccounted for 50% of total sales in the second quarter of fiscal 2008, comparedto 54% for the comparable period a year ago. Spirulina sales have declined as apercentage of total sales due to greater emphasis on sales of NaturalAstaxanthin products, producing a favorable margin impact.

 

Naturalastaxanthin product sales were $1,622,000 during the second quarter of 2009, a38% increase from $1,176,000 in the second quarter of the prior year.  Thenatural astaxanthin product lines increased to 50% of total sales from 46% oftotal sales in the second quarter of fiscal 2008. This increase is the resultof the Company focusing its products to build nutritional brands which promotehealth and well-being. During fiscal year 2008, the Company closed it’s whollyowned Japan subsidiary CJYK, which sold to the aquaculture market, anddiscontinued its NatuRose animal nutrition product. The aquaculture and animalnutrition market had been experiencing declines in both demand and profitmargins. Other products sales were $9,000 during the second quarter of fiscal2009 and $21,000 during the second quarter of fiscal 2008, and represented lessthan 1% in both periods.

 

Internationalsales were 52% of total sales for the second quarter of fiscal year 2009 and44% of sales for the second quarter of fiscal year 2008. Major customers arethose equaling or exceeding 10% of the Company’s sales for the period. For thesecond quarter of fiscal 2009, two European distributors each had sales equalto 10% of the Company’s total sales for the quarter. Only one distributor, with12% of sales for the period, met or exceeded major customer sales volume in thesecond quarter of fiscal year 2008.

 

Grossprofit, derived from net sales less the cost of product sales, includes thecost of materials, direct labor, manufacturing overhead and depreciation. Grossprofit for the second quarter of fiscal 2009 was $1,378,000, with a grossprofit margin percentage of 42%. This was an increase from gross profit marginof $768,000 and gross profit margin of 30% reported for the comparable prioryear quarter. Sales for the second quarter of fiscal year 2009 increased 26%from the comparable prior year period while costs of products sold increased 3%for the same respective period, resulting in the 12% improvement in grossprofit margin percentage. Variable production costs increased 5% in the currentperiod compared to one year ago. Rising fuel costs have resulted in an increasein electrical rates, freight costs and the cost of chemicals used inproduction. These increases were partially offset by decreased labor costs of12% for the current quarter compared to the quarter ended September 30,2008 due to maintaining reduced work force levels implemented in the thirdquarter of fiscal year 2008. Fixed costs have declined by 15% primarily due toreduced headcount compared to the quarter prior and production equipmentbecoming fully depreciated. Direct cost increases are expected to continue inall areas consistent with the local and national economy.

 

Pursuantto SFAS No. 151, “Inventory Costs – an amendment of ARB No. 43,Chapter 4,” all fixed production overhead costs were inventoriable for thecurrent quarter.  Approximately $34,000of fixed production overhead cost was not inventoriable during the three monthsended September 30, 2007. Additionally $126,000 of production cost was notinventoriable in the second quarter of fiscal year 2008 because such costswould have exceeded the market value of the inventory. There were no such lowerof cost or market issues for the second quarter of fiscal year 2009.

 

Operatingexpenses for the second quarter of fiscal 2009 were 36% of sales or $1,173,000,compared to 42% of sales or $1,082,000 for the second quarter of fiscal 2008.This decrease in operating expenses as a percentage of sales in the threemonths ended September 30, 2008 as compared with the three months ended September 30,2007, was primarily the result of sales and marketing expense reductions of$82,000 or 24% offset by an $154,000 or 22% increase in general andadministrative expense and an $18,000 or 50% increase in research anddevelopment expense for the second quarter of 2009 from the second quarter of2008.

 

Incometaxes are provided on the earnings in the consolidated financial statements.The provision is based on the current quarter activity of the legal entitiesand jurisdictions in which the Company operates. Tax credits such as Hawaiicapital goods excise tax credits are recognized as a reduction to income taxesin the year the credits are earned. Accordingly, the effective tax rate mayvary from the customary relationship between income tax expense (benefit) andpre-tax income (loss). The Company’s effective tax rate is reconciled toconsider the tax effect of net operating losses incurred in prior periods.

 

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Noexpense or benefit from income taxes was recorded in the quarter ended September 30,2008 or 2007. The Company does not expect any U.S. Federal or state incometaxes to be recorded for the current fiscal year because of available netoperating loss carry-forwards.

 

TheCompany had net income of $163,000 or $0.03 per diluted share, for the threemonths ended September 30, 2008 compared****to a net loss of $344,000, or ($0.07) per diluted share for thethree months ended September 30, 2007.

 

*Six Months Ended September 30, 2008 Compared to SixMonths Ended September 30, 2007*

 

Netsales for the six months ended September 30, 2008 were $6,975,000, anincrease of 35% from sales of $5,187,000 reported for the comparable period ayear ago.  The increase in sales over the prior year’s six-month periodwas largely the result of increased sales of both spirulina and naturalastaxanthin products.  International sales represented 46% of net salesfor the six months ended September 30, 2008 compared to 43% for the sameperiod a year ago.  For the six monthsended September 30, 2008 and September 30, 2007, our Europeandistributors accounted for 13% and 11% of total sales respectively.

 

Forthe six months ended September 30, 2008, cost of sales decreased as apercentage of sales by 13% from the comparable prior year period.  For thesix months ended September 30, 2008, variable production costs increased12% and were fully inventoriable due to increased production compared withnon-inventoriable period costs of approximately $43,000 for the six monthsended September 30, 2007.  For thesix months ended September 30, 2008 fixed cost overhead increased 8%.  Pursuant to SFAS No. 151, $20,000 and$57,000 of fixed overhead costs were not inventoriable during the six monthsended September 30, 2008 and 2007 respectively because production levelswere below normal capacity.  No marketvalue adjustment was required for inventory at September 30, 2008.However, production costs associated with the Company’s inventory totalingapproximately $156,000 incurred during the six months ended September 30,2007 were not inventoriable because such costs would have exceeded the marketvalue for such inventory.  As a result ofthe increase in sales and improved production volumes, gross profit margins asa percentage of sales increased to 38% for the six months ended September 30,2008 as compared to 29% for the comparable prior year period.

 

Operatingexpenses for the six months ended September 30, 2008 were $2,185,000, an increaseof $16,000 or 1% from the comparable prior year period.  Sales andmarketing expense decreased by $183,000 or 26% as a result of cost reductionmeasures taken in the third quarter of fiscal year 2008.  General and administrative expense increased$192,000 due to $66,000 of stock related compensation and inflationaryincreases rather than additional spending in the six month period.  While it is our goal to contain discretionaryoperating spending it may become necessary for the Company to selectivelyincrease spending in some or all of these areas to remain competitive and tocomply with regulatory requirements.

 

Netother expense, which includes interest on the Company’s debt, for the sixmonths ended September 30, 2008 increased by 21% to $74,000 from $61,000for the same prior year period. The current year increase represents intereston the additional long-term debt secured in the fourth quarter of fiscal year2008.

 

Forthe six months ended September 30, 2008, the Company recorded an incometax receivable of $11,000 related to Federal and state tax credits. An incometax expense of $10,000 was recorded for the same period of the prioryear.  The Company does not expect any additional United States incometaxes for the current fiscal year as a result of available net operating losscarry-forwards.

 

TheCompany recorded net income of $434,000 or $0.08 per diluted share for the sixmonth period ended September 30, 2008. For the same period a year ago the Companyreported a net loss of $726,000 or ($0.14) per diluted share.

 

### ***Variability ofResults***

### ** **

TheCompany has experienced significant quarterly fluctuations in operating resultsand anticipates that these fluctuations may continue in future periods. Asdescribed in previous paragraphs, operating results have fluctuated as a resultof changes in sales levels to our customers, competition (both pricing, newproducts and other market trends) and production difficulties, including increasedproduction costs and variable production results. The Company has also, duringits history, experienced production difficulties as a result of inclementweather, changes in the mix between sales of bulk and packaged consumerproducts and start up costs associated with new product introductions, newfacilities and expansion into new markets. In addition, future operatingresults may fluctuate as a result of factors beyond the Company’s control suchas 

 

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foreign exchangefluctuations, changes in government regulations, and economic changes in theregions it operates in and sells to. A portion of our operating expenses arerelatively fixed and the timing of increases in expense levels is based inlarge part on forecasts of future sales. Therefore, if net sales are belowexpectations in any given period, the adverse impact on results of operationsmay be magnified by our inability to meaningfully adjust spending in certainareas, or the inability to adjust spending quickly enough, as in personnel andadministrative costs, to compensate for a sales shortfall. We may also chooseto reduce prices or increase spending in response to market conditions, andthese decisions may have a material adverse effect on financial condition andresults of operations.

 

**Financial Condition**

 

Cashand cash equivalents decreased $101,000 or 9% to $989,000 at September 30,2008, from $1.1 million at March 31, 2008.  This decrease in cashresulted from cash used in investing activities of $151,000, and cash used infinancing activities of $279,000 offset by cash provided by operatingactivities of $329,000.  Cash provided by operating activities for the sixmonths ended September 30, 2008 represents the results of operationsadjusted for non-cash depreciation, amortization 2nd stock option compensation expensesof $309,000, increases in accounts payable and accrued expenses of $534,000 offsetby increases in inventory of $1,012,000 and other less significant changes. Cash flows used in investing activities reflect capital expenditures during thesecond six months of fiscal 2008. Cash flows used in financing activities areattributable to debt payments during that period.

 

Asof September 30, 2008, the Company’s net accounts receivable increased$110,000 to $2,052,000 from $1,934,000 as of March 31, 2008.  Theincrease in accounts receivable is primarily the result of the timing of salesand collections on the customer’s accounts.  Management believes that itsaccounts receivable are collectible net of the allowance for doubtful accountsof $15,000 at September 30, 2008.

 

TheCompany’s net inventory increased $1,012,000 or 63% to $2,613,000 as of September 30,2008 compared to $1,601,000 as of March 31, 2008.  The increase ininventory during the first six months of fiscal 2008 is primarily due toincreased production levels of both spirulina and astaxanthin during the sixmonths with little or no rainfall and longer daylight hours. Managementconsiders this buildup of inventory prudent entering the winter quarters withhistorically lower production resulting from fewer daylight hours and seasonalrain. Spirulina production was 14% higher in the six months ending September 30,2008 as compared to the six months ended March 31, 2008.  Astaxanthin production was 140% higher in thesix months ending September 30, 2008 as compared to the six months ended March 31,2008.  The increase is the result of theCompany’s focus on astaxanthin production in order to expand its *BioAstin*® based health and nutrition products.

 

**Liquidity and Capital Resources**

 

At September 30, 2008,the Company’s working capital was $3,381,000, an increase of $289,000 comparedto $3,092,000 at March 31, 2008. Cash and cash equivalents at September 30,2008 totaled $989,000, a decrease of $101,000 from $1,090,000 at March 31,2008.

 

The Company has two TermLoan Agreements (“Term Loans”) with a lender. These provided up to $4.6 millionin combined credit facilities and are secured by substantially all the assetsof the Company. The outstanding combined balance under the Term Loans as of September 30,2008 is approximately $1,793,000. The Term Loans have maturity dates of May 1,2010 as to $777,000 and March 1, 2015 as to $1,017,000 and are payable inequal monthly principal and interest payments of totaling approximately$57,000.

 

The interest rate under theTerm Loans, in absence of a default under the agreement, is the prime rate, asdefined, in effect as of the close of business on the first day of eachcalendar quarter, plus 1% (the prime rate was 5.00% at September 30,2008). The Company is prohibited by the Term Loan from declaring any cashdividends without the lender’s prior written consent. A $250,000 restrictedcash deposit is held in an interest-bearing restricted cash account per theterms of the Term Loan and is included in other assets in the consolidatedbalance sheet at September 30, 2008.

 

The Company has, as previously reported, experienced a number offactors that have negatively impacted its balance sheet and liquidity,including the following:

 

·                  TheCompany has experienced significant recurring net losses. At September 30,2008, the Company had an accumulated deficit of $20,629,000 compared to anaccumulated deficit of $21,063,000 at March 31, 2008. The accumulateddeficit decreased by $163,000 for the quarter ended September 30, 2008. Asdiscussed earlier, and as required under SFAS No. 144, “Accounting for theImpairment and Disposal of Long-Lived Assets,” as of March 31, 2007 the Company recorded a non-cash impairmentcharge reducing, by $4.5 million, the values of certain production equipmentand leasehold improvement assets. Thisnon-cash charge did not impact liquidity.

 

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·                  The Company’s business did not generatepositive cash from operating activities in seven of the eight quarters duringfiscal years ended March 31, 2008 and 2007. The first two quarters of thefiscal year ended March 31, 2009 did generate positive cash from operatingactivities.

 

·                  Material weaknesses in its internal controls,as previously reported, have caused the Company to experience delays incompleting its consolidated financial statements and filing periodic reportswith the SEC on a timely basis. Accordingly, the Company continues to devotesubstantial additional internal resources, and to experience higher thanexpected fees for audit services. At present the Company has concluded thatmore rigorous emphasis on improving the capabilities of existing systems,procedures, and existing personnel, will correct the material weakness.

 

·                  In addition to the foregoing item, toconserve liquidity and reduce costs as previously announced, the Company cutits workforce by approximately 20% in early December 2007. The lay-offshave not had a negative impact on productivity and are not expected to do so.However, to achieve and sustain improved sales and enhanced productionefficiency and effectiveness, it has been necessary for the Company to increaseits operations workforce in subsequent quarters.

 

·                  Finally, as part of its request to the seniordebt holder for additional funding, the Company has undertaken an aggressiveplan to de-emphasize new product introductions and related sales and marketingexpenses, and to aggressively reduce administrative and sales and marketingexpenses in general. However, to achieve and sustain improved sales andenhanced production efficiency and effectiveness, it may be necessary toincrease such expenses in future quarters.

 

***Sufficiency of Liquidity***

 

Basedupon our current operating plan, analysis of our consolidated financialposition and projected future results of operations, we believe that ouroperating cash flows, cash balances, and working capital, together with amoderate amount of additional borrowing, will be sufficient to finance currentoperating requirements, debt service, and planned capital expenditures, for thenext 12 months. Management expects liquidity in the remainder of fiscal 2009 tobe generated from operating cash flows.

 

**Capital Resources**

 

TheCompany does not currently have any material commitments for capitalexpenditures.  The Company expects fiscal 2009 capital expenditures to beunder $250,000 and to be funded by operating cash flows.  This includescapital expenditures in support of the Company’s normal operations, andexpenditures that we may incur in conjunction with initiatives to improve grossmargins and reduce expenses.

 

## **Outlook**

## ** **

*This outlook section contains a number offorward-looking statements, all of which are based on current expectations.Actual results may differ materially.*

 

CyanotechCorporation’s strategic direction has always been to position itself as a worldleader in the production and marketing of high-value natural products frommicroalgae. We are vertically aligned, producing raw materials in the form ofmicroalgae processed at our 90-acre facility in Hawaii, and integrating thoseraw materials into finished products. In fiscal 2009, we will put greateremphasis on our Nutrex Hawaii consumer products. Our focus going forward willbe to leverage our experience and reputation for quality, building nutritionalbrands which promote health and well-being. The foundation of our nutritionalproducts is naturally cultivated *Spirulina Pacifica*®in powder, flake and tablet form; and *BioAstin*®natural astaxanthin antioxidant in extract, softgel caplet andmicro-encapsulated beadlet form. Information about our Company and our productscan be viewed at www.cyanotech.com, www.nutrex-hawaii.com. Consumer productscan also be purchased online at www.nutrex-hawaii.com.

 

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Weare currently experiencing an upward trend in sales with unit sales increasingduring the first six months of fiscal 2009 as compared to the first six monthsof fiscal 2008. The most significant impact was due to an increase in theastaxanthin bulk product line. The Company expects spirulina sales to remainessentially level since the product has reached a mature life cycle stage. Aportion of the upward trend in sales is attributable to filling orders we couldnot fill during the third and fourth quarters of fiscal year 2008 due toinsufficient inventory. Accordingly, sales may trend down or remain level infuture periods depending on the rate orders are backlogged and fulfilled.Significant sales variability between periods and even across several periodscan be expected based on historical results.

 

Asdiscussed in Note 1 to Consolidated Condensed Financial Statements, the Companyhas discontinued all business activity of its wholly owned Japanese subsidiaryCJYK. Management made this decision due to declining sales of approximately 40%in each of the prior two fiscal years. Discontinuance of this subsidiary hasnot had a significant impact on our consolidated financial statements.

 

Overallcosts have been increasing in part because of increasing utility, chemical, andtransportation costs which reflect and respond to oil prices. We feel thatthese conditions will likely continue, and consequently, we are putting greaterfocus on cost controls and expense avoidance.

 

Grossprofit margin percentages in fiscal year 2009 will be impacted by continuedpressure on input costs and this could cause margins to decline in future periods.Management will continue its focus on health and well-being, promoting highergross margin items. Management is also focused on improvements in process andproduction methods to stabilize and increase production levels for the future.

 

Withthe adoption of SFAS 151, the Company recognizes costs associated with abnormalamounts of idle facility expense, freight, handling costs and wasted materials(such as spoilage) as current-period charges in cost of sales. When productioncosts exceed historical averages, management evaluates whether such costs arecurrent-period charges or are inventoriable costs. In addition, the allocationof fixed production overheads (such as depreciation and general insurance) toinventories is determined based on normal production capacity. When the Company’sproduction volumes are below normal capacity limits, certain fixed productionoverhead costs cannot be inventoried and are recorded immediately in cost ofsales. Producing the highest quality microalgae is a complex biological processwhich requires balancing numerous factors including microalgal strainvariation, temperature, acidity, nutrient and other environmentalconsiderations, some of which are not within the Company’s control.

 

Tomanage its cash resources effectively, the Company will continue to balanceproduction in light of sales demand, minimizing the cost associated withbuild-ups in inventory when appropriate. The Company has experienced other significant cash outflows and may needto utilize other cash resources to meet working capital needs if prolonged netlosses are incurred in future periods. A prolonged downturn in sales couldimpair the Company’s ability to generate sufficient cash for operations andminimize the Company’s ability to attract additional capital investment whichcould become necessary in order to expand into new markets or increase productofferings.

 

TheCompany expects operating expense spending to remain consistent fiscal year2008 levels. However, by March 31, 2010, the Company is required to be infull compliance with the Sarbanes-Oxley Act and Rules issued thereunder bythe SEC, including Section 404 Compliance Standards established by thePublic Companies Accounting Oversight Board. The cost of attaining and maintaining such compliance could materiallydecrease reported net income or increase reported net losses in future periods.

 

TheCompany’s future results of operations and the other forward-looking statementscontained in this Outlook, in particular the statements regarding revenues,gross margin and capital spending involve a number of risks and uncertainties.In addition to the factors discussed above, any of the following could causeactual results to differ materially: business conditions and growth in thenatural products 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. Risk factors arediscussed in detail in Item 1A in our Form 10-K report for the year ended March 31,2008.

 

Management believes that ourtechnology, systems, processes and favorable growing location generally permityear-round harvest of our microalgal products in a cost-effective manner.However, imbalances in astaxanthin production in fiscal year 2007 and spirulinaproduction in 2008, together with increasing energy costs, suggest a need forcontinuing caution. We cannot, and do not attempt to, provide any form ofassurance with regard to our technology, systems, processes, location, orcost-effectiveness.

 

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**Item 3.  Quantitativeand Qualitative Disclosures about Market Risk**

 

Wehave never entered into any transactions using derivative financial instrumentsor derivative commodity instruments and believe that our exposure to marketrisk associated with other financial instruments is not material.

 

Wehave a term loan agreement that adjusts quarterly based on the primerate.  As such, we are exposed to the interest rate risk whereby a 1%increase in the prime rate would lead to an increase of approximately $18,000in interest expense for the year ending March 31, 2009 (based on September 30,2008 amounts outstanding).

 

**Item 4.  Controls and Procedures**

 

(a) **Disclosure Controls and Procedures**

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and15 (d)-15(e) under the Exchange Act that are designed to ensure thatinformation required to be disclosed in our reports filed or submitted underthe Exchange Act is recorded, processed, summarized and reported, within thetime periods specified in the Security and Exchange Commissions’ rules andforms, and that such information is accumulated and communicated to management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow for timely decisions regarding required disclosure.

 

This Form 10-Q should be read in conjunction with Item 9A(T) “Controlsand Procedures” of the Company’s Form 10-K for the fiscal year ended March 31,2008 filed June 26, 2008. There were no material changes in controls andProcedures during the current quarter. As of September 30, 2008,management believes systems and procedures were in place to reasonably ensureaccurate financial data.  However, thesecontrols and procedures have not been in place for a sufficient amount of timeto demonstrate a high level of assurance of the effectiveness and to concludethat the material weakness previously identified has been remediated.

 

As discussed in the Company’s Form 10-K for the year ended March 31,2008, errors were identified in the application of certain accounting practicesand procedures related to accounting for certain fixed costs such as portionsof depreciation, general insurance and minor compensation costs which should beincluded in the carrying value of inventory. The Company has taken extensivemeasures over the past year to correct the identified weakness: (1) TheCompany engaged the services of qualified independent consultants to advise theCompany on improvements to internal controls and procedures. (2) In January 2008,the Company hired a Controller, replacing the former controller and controllerof cost accounting. and (3) Consultants independent from those whoassisted with improvements and procedures have tested the Company’s internalcontrols over financial reporting.  Inaddition to those measures, management is re-evaluating its overall informationtechnology (“IT”) systems as it relates to the weakness and its remediation,and will make sufficient upgrades in the future to improve the efficiency andeffectiveness of system information.

 

(b) **Changes to Internal Control Over Financial Reporting**

 

Therewas no change in our internal control over financial reporting during thecurrent quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II.  OTHER INFORMATION**

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

 

None.

 
| **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 aVote of Security Holders  —

 

On September 9, 2008,the following matters were submitted and voted by stockholders entitled to voteat the Company’s Annual Meeting of Stockholders:

 

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 |       | 3,758,661          |       | 112,933                 |       |
| Michael A. Davis   |       | 3,764,225          |       | 107,368                 |       |
| Andrew H. Jacobson |       | 3,762,361          |       | 109,233                 |       |
| Gregg W. Robertson |       | 3,757,421          |       | 190,010                 |       |
| David I. Rosenthal |       | 3,756,821          |       | 114,733                 |       |
| John T. Waldron    |       | 3,763,950          |       | 107,643                 |       |

 

b)                   Amendment of the 2005 Stock Option Plan toincrease by 500,000 shares to a total of 700,000 shares the amount of theCompany’s common stock available for issuance under the 2005 Stock OptionPlan.  The vote to approve was 1,762,174for; 301,545 against; 12,835 abstain; and 1,885,041 non-votes.

 

c)                    Ratification of the selection of GrantThornton LLP as the Company’s Independent Registered Public Accounting Firm forthe fiscal year ending March 31, 2009.  The vote on the ratificationwas 3,624,479 for, 229,596 against, and 17,520 abstaining.

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

 

None.

 

**Item 6.****          ****Exhibits**

 
| a)     | The  following exhibits are furnished with this report: |
|--------|---------------------------------------------------------|
|   |                                                    |
|   | 31.1                                                    |   | Certification  by the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of  the Exchange Act |
|   |                                                    |   |   |
|   | 31.2                                                    |   | Certification  by the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of  the Exchange Act |
|   |                                                    |   |   |
|   | 32.1                                                    |   | Certification  by the Chief Executive Officer pursuant to 18 U. S. C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |                                                    |   |   |
|   | 32.2                                                    |   | Certification  by the Chief Financial Officer pursuant to 18 U. S. C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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SIGNATURES

 

**Inaccordance with the requirements of the Securities Exchange Act of 1934, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.**

 
|                   |   |   | CYANOTECH  CORPORATION                                    |
|------------------------|--------|--------|-----------------------------------------------------------|
|                   |   |   | (Registrant)                                              |
|                   |   |   |                                                      |
|                   |   |   |                                                      |
| November 13, 2008 |   | By:    | /s/ Andrew H.  Jacobson                              |
|                   |   |   |                                                      |
| (Date)                 |   |   | Andrew H. Jacobson                                        |
|                   |   |   | President and Chief  Executive  Officer                   |
|                   |   |   |                                                      |
|                   |   |   |                                                      |
| November 13, 2008 |   | 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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