**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**Quarterly Report Under Section 13or 15(d)of the Securities Exchange Act of 1934**

 

**For Quarterly Period Ended September 30, 2005**

 

**Commission File Number 0-14602**

 

**CYANOTECH CORPORATION**

(Exact name of registrant as specified in its charter)

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

 

**73-4460 Queen Kaahumanu Hwy.#102, Kailua-Kona, HI  96740**

(Address of principal executive offices)

 

**(808) 326-1353**

(Registrant’s telephone number)

 

Check whether theregistrant (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

Yes  ý  No  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).   Yes  o  No  ý

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes  o  No  ý

 

Numberof common shares outstanding as of October 31, 2005:

 
| **Title of Class**               | ** ** | **Shares Outstanding** | ** ** |
|----------------------------------|------------|------------------------|------------|
| Common stock - $0.005  par value |       | 20,896,265             |       |

 

 

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CYANOTECH CORPORATION

FORM 10-Q

 

INDEX

 
| PART I.   FINANCIAL INFORMATION |                                                        |
|------------------------------------------------|-------------------------------------------------------------|
|                                           |                                                        |   |
| Item 1.                                        | Financial Statements                                        |   |
|                                           |                                                        |   |
|                                           | Consolidated  Balance Sheets (unaudited)                    |   |
|                                           | As of  September 30, 2005 and March 31, 2005.     |   |
|                                           |                                                        |   |
|                                           | Consolidated Statements of  Operations (unaudited)          |   |
|                                           | For  the three and six month periods ended                  |   |
|                                           | September 30, 2005 and  2004                           |   |
|                                           |                                                        |   |
|                                           | Consolidated Statements of  Cash Flows (unaudited)          |   |
|                                           | For  the six month periods ended                            |   |
|                                           | September 30, 2005 and  2004                           |   |
|                                           |                                                        |   |
|                                           | Notes to Consolidated  Financial Statements (unaudited)     |   |
|                                           |                                                        |   |
| Item  2.                                       | Management’s  Discussion and Analysis of Financial     |   |
|                                           | Condition  and Results of Operations                        |   |
|                                           |                                                        |   |
| Item  3.                                       | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                                           |                                                        |   |
| Item 4.                                        | Controls and Procedures.                                    |   |
|                                           |                                                        |   |
| PART II. OTHER INFORMATION                |                                                        |
|                                           |                                                        |   |
| Item 1.                                        | Legal  Proceedings                                          |   |
|                                           |                                                        |   |
| Item  4.                                       | Submission  of Matters to a Vote of Security Holders        |   |
|                                           |                                                        |   |
| Item  6.                                       | Exhibits  and Reports on Form 8-K.                     |   |
|                                           |                                                        |   |
| SIGNATURES                                     |                                                        |

 

2

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PART 1.  FINANCIAL INFORMATION

Item 1.  Financial Statements

 

CYANOTECH CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

(Unaudited)

 
| ** **                                                                                                                                                    | ** ** | **September 30,** | ** ** | **March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|
| ** **                                                                                                                                                    | ** ** | **2005**               | ** ** | **2005**           | ** ** |
|                                                                                                                                                          |       |                   |       |               |       |
| ASSETS                                                                                                                                                        |       |                   |       |               |       |
| Current assets:                                                                                                                                               |       |                   |       |               |       |
| Cash and cash  equivalents                                                                                                                                    |       | $                      | 2,054      |               | $          | 2,005 |   |
| Short-term  investments                                                                                                                                       |       | 1,000                  |       | 1,000              |       |
| Accounts  receivable, net                                                                                                                                     |       | 1,612                  |       | 2,069              |       |
| Refundable  income taxes                                                                                                                                      |       | 51                     |       | 97                 |       |
| Inventories (see  Note 3)                                                                                                                                     |       | 1,747                  |       | 1,565              |       |
| Prepaid expenses                                                                                                                                              |       | 141                    |       | 85                 |       |
| Total current  assets                                                                                                                                         |       | 6,605                  |       | 6,821              |       |
|                                                                                                                                                          |       |                   |       |               |       |
| Equipment and  leasehold improvements, net (see Note 4)                                                                                                       |       | 10,621                 |       | 11,174             |       |
| Other assets                                                                                                                                                  |       | 543                    |       | 547                |       |
| Total assets                                                                                                                                                  |       | $                      | 17,769     |               | $          | 18,542 |   |
|                                                                                                                                                          |       |                   |       |               |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                    |       |                   |       |               |       |
| Current  liabilities:                                                                                                                                         |       |                   |       |               |       |
| Current  maturities of long-term debt                                                                                                                         |       | $                      | 354        |               | $          | 355 |   |
| Accounts payable                                                                                                                                              |       | 473                    |       | 977                |       |
| Accrued expenses                                                                                                                                              |       | 466                    |       | 387                |       |
| Total current  liabilities                                                                                                                                    |       | 1,293                  |       | 1,719              |       |
|                                                                                                                                                          |       |                   |       |               |       |
| Long-term debt,  excluding current maturities                                                                                                                 |       | 1,572                  |       | 1,743              |       |
| Total  liabilities                                                                                                                                            |       | 2,865                  |       | 3,462              |       |
|                                                                                                                                                          |       |                   |       |               |       |
| Stockholders’  equity:                                                                                                                                   |       |                   |       |               |       |
| Common Stock of  $0.005 par value; shares authorized 30,000,000; 20,896,265 shares issued and  outstanding at September 30, 2005 and March 31, 2005 |       | 104                    |       | 104                |       |
| Additional  paid-in capital                                                                                                                                   |       | 27,298                 |       | 27,298             |       |
| Accumulated  other comprehensive income - foreign currency translation adjustments                                                                            |       | 19                     |       | 27                 |       |
| Accumulated  deficit                                                                                                                                          |       | (12,517                | )          | (12,349            | )          |
| Total  stockholders’ equity                                                                                                                              |       | 14,904                 |       | 15,080             |       |
|                                                                                                                                                          |       |                   |       |               |       |
| Total  liabilities and stockholders’ equity                                                                                                              |       | $                      | 17,769     |               | $          | 18,542 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

3

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CYANOTECH CORPORATION

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 
| ** **                                                  | ** ** | **Three Months Ended   September 30,** | ** ** | **Six Months Ended   September 30,** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                  | ** ** | **2005**                                    | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                        |       |                                        |       |                                      |       |   |   |   |   |
| NET SALES                                                   |       | $                                           | 2,517      |                                      | $          | 2,998 |   | 5,546 |   | $ | 5,705 |   |
| COST OF PRODUCT  SALES                                      |       | 1,936                                       |       | 1,944                                     |       | 3,940 |   | 3,764 |   |
| Gross profit                                                |       | 581                                         |       | 1,054                                     |       | 1,606 |   | 1,941 |   |
|                                                        |       |                                        |       |                                      |       |   |   |   |   |
| OPERATING  EXPENSES:                                        |       |                                        |       |                                      |       |   |   |   |   |
| Research and  development                                   |       | 53                                          |       | 62                                        |       | 99 |   | 127 |   |
| Sales and  marketing                                        |       | 304                                         |       | 297                                       |       | 637 |   | 591 |   |
| General and  administrative                                 |       | 522                                         |       | 522                                       |       | 960 |   | 889 |   |
| Total operating  expenses                                   |       | 879                                         |       | 881                                       |       | 1,696 |   | 1,607 |   |
|                                                        |       |                                        |       |                                      |       |   |   |   |   |
| Income (loss)  from operations                              |       | (298                                        | )          | 173                                       |       | (90 | ) | 334 |   |
|                                                        |       |                                        |       |                                      |       |   |   |   |   |
| OTHER INCOME  (EXPENSE):                                    |       |                                        |       |                                      |       |   |   |   |   |
| Interest income                                             |       | 8                                           |       | 9                                         |       | 23 |   | 17 |   |
| Interest expense                                            |       | (35                                         | )          | (40                                       | )          | (90 | ) | (79 | ) |
| Other income  (expense), net                                |       | 2                                           |       | (9                                        | )          | (8 | ) | (11 | ) |
|                                                        |       |                                        |       |                                      |       |   |   |   |   |
| Total other  expense, net                                   |       | (25                                         | )          | (40                                       | )          | (75 | ) | (73 | ) |
|                                                        |       |                                        |       |                                      |       |   |   |   |   |
| Income (loss)  before income taxes                          |       | (323                                        | )          | 133                                       |       | (165 | ) | 261 |   |
|                                                        |       |                                        |       |                                      |       |   |   |   |   |
| INCOME TAX  BENEFIT (EXPENSE)                               |       | 2                                           |       | (12                                       | )          | (3 | ) | (27 | ) |
|                                                        |       |                                        |       |                                      |       |   |   |   |   |
| NET INCOME  (LOSS)                                          |       | $                                           | (321       | )                                         | $          | 121 |   | $ | (168 | ) | $ | 234 |   |
|                                                        |       |                                        |       |                                      |       |   |   |   |   |
| NET INCOME  (LOSS) PER SHARE                                |       |                                        |       |                                      |       |   |   |   |   |
| Basic                                                       |       | $                                           | (0.02      | )                                         | $          | 0.01 |   | $ | (0.01 | ) | $ | 0.01 |   |
| Diluted                                                     |       | $                                           | (0.02      | )                                         | $          | 0.01 |   | $ | (0.01 | ) | $ | 0.01 |   |
|                                                        |       |                                        |       |                                      |       |   |   |   |   |
| SHARES USED IN  CALCULATION OF NET INCOME (LOSS) PER SHARE: |       |                                        |       |                                      |       |   |   |   |   |
| Basic                                                       |       | 20,896                                      |       | 20,752                                    |       | 20,896 |   | 20,744 |   |
| Diluted                                                     |       | 20,896                                      |       | 21,035                                    |       | 20,896 |   | 21,017 |   |
|                                                        |       |                                        |       |                                      |       |   |   |   |   |
| COMPREHENSIVE  INCOME (LOSS):                               |       |                                        |       |                                      |       |   |   |   |   |
| Net income  (loss)                                          |       | $                                           | (321       | )                                         | $          | 121 |   | $ | (168 | ) | $ | 234 |   |
| Other  comprehensive loss                                   |       | (6                                          | )          | (24                                       | )          | (8 | ) | (10 | ) |
|                                                        |       | $                                           | (327       | )                                         | $          | 97 |   | $ | (176 | ) | $ | 224 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

4

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CYANOTECH CORPORATION

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 
| ** **                                                                                | ** ** | **Six Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                                                                      |       |                                     |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |       |                                     |       |   |   |
| Net income  (loss)                                                                        |       | $                                        | (168       | ) | $ | 234 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                     |       |   |   |
| Depreciation and  amortization                                                            |       | 676                                      |       | 657 |   |
| Issuance of  stock in exchange for services                                               |       | —                                   |       | 15 |   |
| Issuance of  stock options in exchange for services                                       |       | —                                   |       | 7 |   |
| Amortization of  debt issue costs and other assets                                        |       | 16                                       |       | 15 |   |
| Net (increase)  decrease in:                                                              |       |                                     |       |   |   |
| Accounts  receivable                                                                      |       | 457                                      |       | 109 |   |
| Refundable  income taxes                                                                  |       | 46                                       |       | 11 |   |
| Inventories                                                                               |       | (182                                     | )          | (305 | ) |
| Prepaid expenses  and other assets                                                        |       | (76                                      | )          | (161 | ) |
| Net increase  (decrease) in:                                                              |       |                                     |       |   |   |
| Accounts payable                                                                          |       | (504                                     | )          | (198 | ) |
| Accrued expenses                                                                          |       | 79                                       |       | 26 |   |
| Net cash  provided by operating activities                                                |       | 344                                      |       | 410 |   |
|                                                                                      |       |                                     |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |       |                                     |       |   |   |
| Investment in  equipment and leasehold improvements                                       |       | (123                                     | )          | (411 | ) |
|                                                                                      |       |                                     |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |       |                                     |       |   |   |
| Proceeds from  exercise of stock options and warrants                                     |       | —                                   |       | 34 |   |
| Principal  payments on long-term debt                                                     |       | (172                                     | )          | (169 | ) |
| Net cash used in  financing activities                                                    |       | (172                                     | )          | (135 | ) |
|                                                                                      |       |                                     |       |   |   |
| Net increase (decrease) in cash and cash equivalents                                      |       | 49                                       |       | (136 | ) |
|                                                                                      |       |                                     |       |   |   |
| Cash and cash equivalents at beginning of period                                          |       | 2,005                                    |       | 2,531 |   |
|                                                                                      |       |                                     |       |   |   |
| Cash and cash equivalents at end of period                                                |       | $                                        | 2,054      |   | $ | 2,395 |   |
|                                                                                      |       |                                     |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                         |       |                                     |       |   |   |
| Cash paid during the period for:                                                          |       |                                     |       |   |   |
| Interest                                                                                  |       | $                                        | 74         |   | $ | 65 |   |
| Income taxes                                                                              |       | $                                        | 4          |   | $ | 118 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

5

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CYANOTECH CORPORATION

FORM 10-Q

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

As of September 30, 2005

(Unaudited)

 

1.                                       BASISOF PRESENTATION

 

The accompanying unaudited consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim financial information and with theinstructions to Form 10-Q and Regulation S-X.  Accordingly, they do not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. These consolidated financial statements and notes should be read inconjunction with the Company’s consolidated financial statements contained inthe Company’s previously filed report on Form 10-K for the year ended March 31, 2005.

 

The Company consolidatesenterprises in which it has a controlling financial interest. The accompanyingconsolidated financial statements include the accounts of Cyanotech Corporationand its wholly-owned subsidiaries, Nutrex Hawaii, Inc. and Cyanotech JapanYK.  All significant intercompanybalances and transactions have been eliminated in consolidation. While thefinancial information furnished for the three and six month periods ended September 30,2005 is unaudited, the statements in this report reflect all material itemswhich, in the opinion of management, are necessary for a fair presentation ofthe results of operations for the interim periods covered and of the financialcondition of the Company at the dates of the consolidated balance sheets. Theoperating results for the interim period presented are not necessarilyindicative of the results that may be expected for the year ending March 31,2006.

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities and thedisclosure of any contingent assets and liabilities as of the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Management reviewsthese estimates and assumptions periodically and reflects the effect of revisionsin the period that they are determined to be necessary.  Actual results could differ significantlyfrom those estimates.

 

2.                                       STOCK-BASEDCOMPENSATION

 

Pursuant to theprovisions of Statement of Financial Accounting Standards (“SFAS”) No. 123,*Accounting for Stock-Based Compensation*,the Company has elected to continue to apply the intrinsic value-based methodof accounting for employee based stock options and adopted the disclosurerequirements of SFAS No.123.  Thefollowing table illustrates the effect on net income and net income per commonshare if the Company had applied the fair-value method under SFAS No. 123to its employee stock option plans:

 
| ** **                                                 | ** ** | **Three Months Ended   September 30,** | ** ** | **Six Months Ended   September 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                 | ** ** | **2003**                                    | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                       |       |                                        |       |                                      |       |   |   |   |   |
| Net income  (loss), as reported                            |       | $                                           | (321       | )                                         | $          | 121 |   | $ | (168 | ) | $ | 234 |   |
| Deduct  stock-based employee compensation                  |       |                                        |       |                                      |       |   |   |   |   |
| Expense  determined under fair-value method for all awards |       | (18                                         | )          | (24                                       | )          | (39 | ) | (41 | ) |
| Pro-forma net  income (loss)                               |       | $                                           | (339       | )                                         | $          | 97 |   | $ | (207 | ) | $ | 193 |   |
| Basic net income  (loss) per common share:                 |       |                                        |       |                                      |       |   |   |   |   |
| As reported                                                |       | $                                           | (0.02      | )                                         | $          | 0.01 |   | $ | (0.01 | ) | $ | 0.01 |   |
| Pro-forma                                                  |       | $                                           | (0.02      | )                                         | $          | 0.00 |   | $ | (0.01 | ) | $ | 0.01 |   |
|                                                       |       |                                        |       |                                      |       |   |   |   |   |
| Diluted net income  (loss) per common share:               |       |                                        |       |                                      |       |   |   |   |   |
| As reported                                                |       | $                                           | (0.02      | )                                         | $          | 0.01 |   | $ | (0.01 | ) | $ | 0.01 |   |
| Pro-forma                                                  |       | $                                           | (0.02      | )                                         | $          | 0.00 |   | $ | (0.01 | ) | $ | 0.01 |   |

 

6

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The following securitieswere excluded from the calculation of diluted earnings per share because theireffect was antidilutive (in thousands):

 
| ** **                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Six Months Ended  September 30,** | ** ** |
|----------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                 | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Stock options and warrants |       | 522                                   |       | 169                                 |       | 522 |   | 172 |   |

 

3.                                       INVENTORIES

 

Inventories are stated atthe lower of cost (which approximates first-in, first-out) or market andconsist of the following (dollars in thousands):

 
| ** **      | ** ** | **September 30, 2005** | ** ** | **March 31, 2005** | ** ** |
|-----------------|------------|-----------------------------|------------|-------------------------|------------|
|            |       |                        |       |                    |       |
| Raw materials   |       | $                           | 287        |                    | $          | 246 |   |
| Work in process |       | 295                         |       | 243                     |       |
| Finished goods  |       | 1,036                       |       | 957                     |       |
| Supplies        |       | 129                         |       | 119                     |       |
|            |       | $                           | 1,747      |                    | $          | 1,565 |   |

 

4.                                       EQUIPMENTAND LEASEHOLD IMPROVEMENTS

 

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

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

 

Equipment and leaseholdimprovements consist of the following (dollars in thousands):

 
| ** **                                      | ** ** | **September 30, 2005** | ** ** | **March 31, 2005** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Equipment                                       |       | $                           | 10,304     |                    | $          | 10,241 |   |
| Leasehold  improvements                         |       | 14,613                      |       | 14,603                  |       |
| Furniture and  fixtures                         |       | 86                          |       | 86                      |       |
|                                            |       | 25,003                      |       | 24,930                  |       |
| Less accumulated  depreciation and amortization |       | (14,682                     | )          | (14,006                 | )          |
| Construction  in-progress                       |       | 300                         |       | 250                     |       |
| Equipment and  leasehold improvements, net      |       | $                           | 10,621     |                    | $          | 11,174 |   |

 

7

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5.             EARNINGSPER SHARE

 

Basic earnings per shareis computed on the basis of the weighted average number of common sharesoutstanding.  Diluted earnings per shareis computed on the basis of the weighted average number of common shares outstandingplus the potentially dilutive effect of outstanding stock options and warrantsusing the “treasury stock” method and convertible securities using the “if-converted”method.

 

Reconciliations betweenthe numerator and the denominator of the basic and diluted earnings per sharecomputations for the three months ended September 30, 2005 and 2004 are asfollows (in thousands, except per share amounts):

 
| ** **                                                              | ** ** | **Three Months Ended September 30, 2005** | ** ** | **Three Months Ended September 30, 2004** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                              | ** ** | **Net Loss**                                   | ** ** | **Shares**                                     | ** ** | **Per Share** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                                              | ** ** | **(Numerator)**                                | ** ** | **(Denominator)**                              | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic net  income, (loss) per share                                     |       | $                                              | (321       | )                                              | 20,896     |   | $ | (0.02 | ) | $ | 121 |   | 20,752 |   | $ | 0.01 |   |
| Effect of  dilutive securities – Common stock options and warrants |       | —                                         |       | —                                         |       |   |   | — |   | 283 |   |   |   |
| Diluted net  income, (loss) per share                                   |       | $                                              | (321       | )                                              | 20,896     |   | $ | (0.02 | ) | $ | 121 |   | 21,035 |   | $ | 0.01 |   |

 

Reconciliations between the numerator and the denominator of the basicand diluted earnings per share computations for the six months ended September 30,2005 and 2004 are as follows (in thousands, except per share amounts):

 
| ** **                                                              | ** ** | **Six Months Ended September 30, 2005** | ** ** | **Six Months Ended September 30, 2004 ,** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                              | ** ** | **Net Loss**                                 | ** ** | **Shares**                                          | ** ** | **Per Share** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| ** **                                                              | ** ** | **(Numerator)**                              | ** ** | **(Denominator)**                                   | ** ** | **Amount** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | **Amount** | ** ** |
| Basic net  income, (loss) per share                                     |       | $                                            | (168       | )                                                   | 20,896     |   | $ | (0.01 | ) | $ | 234 |   | 20,744 |   | $ | 0.01 |   |
| Effect of  dilutive securities – Common stock options and warrants |       | —                                       |       | —                                              |       |   |   | — |   | 273 |   |   |   |
| Diluted net  income, (loss) per share                                   |       | $                                            | (168       | )                                                   | 20,896     |   | $ | (0.01 | ) | $ | 234 |   | 21,017 |   | $ | 0.01 |   |

 

Thefollowing securities were excluded from the calculation of diluted earnings pershare because their effect was antidilutive (in thousands):

 
| ** **                 | ** ** | **Three Months Ended   September 30,** | ** ** | **Six Months Ended   September 30,** | ** ** |
|----------------------------|------------|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                 | ** ** | **2005**                                    | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Stock options and warrants |       | 522                                         |       | 169                                       |       | 522 |   | 172 |   |

 

8

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6.             NEW ACCOUNTINGPRONOUNCEMENTS

 

In December 2004, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 123 (Revised2004) “Share-Based Payment” which is a revision of FASB Statement No. 123 “Accountingfor Stock-Based Compensation.”  SFAS No. 123(Revised 2004) requires an entity to measure the cost of employee servicesreceived in exchange for an award.  If anaward vests or becomes exercisable based on the achievement of a conditionother than service, performance or market condition, the award isliability-classified. Liability-classified awards are remeasured to fair value at each balancesheet date until the award is settled. Equity –classified awards, including grants of employee stock options,are measured at the grant-date fair value of the award and are not subsequentlyremeasured.  The cost ofequity-classified awards is recognized in the income statement over the periodduring which an employee is required to provide the service in exchange for theaward.  Currently the company accountsfor its employee and non-employee director stock options under the intrinsicvalue provision of APB Opinion No. 25.  The Company is required to adopt the provisions for SFAS No. 123(Revised 2004) as of the beginning of the first annual reporting period thatbegins after June 15, 2005, although earlier adoption is permitted.   SFAS No. 123 (Revised 2004) offersseveral alternatives for implementation. At this time, management has not made a decision as to the alternativeit may select.

 

In November 2004, theFASB issued SFAS No. 151 “Inventory Costs – an amendment of AccountingResearch Bulletin No. 43, Chapter 4”. SFAS No. 151 requires that abnormal amounts of freight, handlingcosts and wasted material (spoilage) be recognized as current-period chargesand fixed production overhead costs be allocated to inventory based on thenormal capacity of production facilities. Normal capacity is defined as “the production expected to be achievedover a number of periods or seasons under normal circumstances, taking intoaccount the loss of capacity resulting from planned maintenance.”  Companies will no longer be permitted tocapitalize inventory costs on the balance sheet when the production defect ratevaries significantly from the expected defect rate.  SFAS No. 151 is effective for inventorycosts incurred during fiscal years beginning after June 15, 2005.   Earlier application is permitted forinventory costs incurred during fiscal years beginning after November 24,2004.  The Company has yet to determinethe impact, if any, of SFAS No. 151 on its consolidated financialstatements.

 

In December 2004, the FASB issued SFAS No. 153,“Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29, ‘Accountingfor Nonmonetary Transactions.’”  SFAS No. 153 is based on theprinciple that exchange of nonmonetary assets should be measured based on thefair market value of the assets exchanged.  SFAS No. 153 eliminatesthe exception of nonmonetary exchanges of similar productive assets andreplaces it with a general exception for exchanges of nonmonetary assets thatdo not have commercial substance.  SFAS No. 153 is effective fornonmonetary asset exchanges in fiscal periods beginning after June 15,2005.  Adoption of the provisions of SFAS No. 153 is not expected tohave a material impact on the Company’s financial condition, results ofoperations, or liquidity.

 

In March 2005, the FASB issued FASBInterpretation No. 47 (“FIN 47”), “Accounting for Conditional AssetRetirement Obligations — an interpretation of FASB Statement No. 143.” FIN 47 clarifies that the term “conditional asset retirement obligation” asused in FASB Statement No. 143, “Accounting for Asset RetirementObligations,” refers to a legal obligation to perform an asset retirementactivity in which the timing and (or) method of settlement are conditional on afuture event that may or may not be within the control of the entity. Accordingly, an entity is required to recognize a liability for the fair valueof a conditional asset retirement obligation if the fair value of the liabilitycan be reasonably estimated.  FIN 47 is effective for fiscal years endingafter December 15, 2005.  The Company adopted the provisions of FIN47 effective April 2005.    Adoptionof the provisions of FIN 47 had no material impact on the Company’s financialcondition, results of operations or liquidity.

 

9

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On March 29, 2005, the Securities and ExchangeCommission (SEC) staff issued Staff Accounting Bulletin No. 107, “Share-BasedPayment” (SAB No. 107), which expressed the SEC staff’s views on SFAS No. 123(Revised 2004), but did not modify any provisions of Statement No. 123(Revised 2004). The Company is evaluating the views expressed by the SEC in SABNo. 107 in conjunction with its assessment of the impact of SFAS No. 123(Revised 2004) to the Company.

 

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections, a replacement of APB Opinion No. 20 andFASB Statement No. 3.”  SFAS No. 154requires retrospective application for voluntary changes in accountingprinciple unless it is impracticable to do so. In addition, indirect effects of a change in accounting principle shouldbe recognized in the period of the accounting change. SFAS No. 154 iseffective for accounting changes and corrections of errors made in fiscal yearsbeginning after December 15, 2005.

 

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**CYANOTECHCORPORATION**

 

**Item 2.****           Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

*Thisreport on Form 10-Q contains forward-looking statements regarding thefuture performance of Cyanotech and future events that involve risks anduncertainties that could cause actual results to differ materially from thestatements contained herein. This document, and the other documents that theCompany files from time to time with the Securities and Exchange Commission,such as its reports on Form 10-K, Form 10-Q, Form 8-K, and itsproxy materials, contain additional important factors that could cause actualresults to differ from the Company’s current expectations and theforward-looking statements contained herein.*

 

**Overview**

 

Acomparison of selected consolidated statements of operations data asreported herein and in the Company’s previously filed reports on Form 10-Qfor the quarterly period ended June 30, 2005 and on Form 10-K for theyear ended March 31, 2005 follows for the periods indicated (dollars inthousands):

 
| ** **                     | ** ** | **(A)  Three Months Ended  September 30, 2005** | ** ** | **(B)  Prior Year Comparable  Quarter  Three Months Ended  September 30, 2004** | ** ** | **(C)  Prior Consecutive  Quarter  Three Months Ended  June 30, 2005** | ** ** |
|--------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| Net sales:                     |       |                                                 |       |                                                                                 |       |                                                                        |       |
| Spirulina  products            |       | $                                                    | 1,377      |                                                                                 | $          | 1,789                                                                       |       | $ | 1,889 |   |
| Natural  astaxanthin products  |       | 1,084                                                |       | 1,139                                                                                |       | 1,054                                                                       |       |
| Other products                 |       | 56                                                   |       | 70                                                                                   |       | 86                                                                          |       |
| Total sales, all  products     |       | $                                                    | 2,517      |                                                                                 | $          | 2,998                                                                       |       | $ | 3,029 |   |
|                           |       |                                                 |       |                                                                                 |       |                                                                        |       |
| Gross profit                   |       | $                                                    | 581        |                                                                                 | $          | 1,054                                                                       |       | $ | 1,025 |   |
| Income (loss)  from operations |       | $                                                    | (298       | )                                                                                    | $          | 173                                                                         |       | $ | 208 |   |
| Net income  (loss)             |       | $                                                    | (321       | )                                                                                    | $          | 121                                                                         |       | $ | 153 |   |

 
| ** **                    | ** ** | **Year to Year  Comparison,  Three Month  Comparable Period  Percentage Change  (A) – (B) / (B)** | ** ** | **Sequential Quarter  Comparison,  Three Month  Prior Sequential Period  Percentage Change  (A) – (C) / (C)** | ** ** |
|-------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|
|                          |       |                                                                                                             |       |                                                                                                                         |       |
| Net sales:                    |       |                                                                                                             |       |                                                                                                                         |       |
| Spirulina  products           |       | (23                                                                                                              | )%         | (27                                                                                                                          | )%         |
| Natural  astaxanthin products |       | (5                                                                                                               | )%         | 3                                                                                                                            | %          |
| Other products                |       | (20                                                                                                              | )%         | (35                                                                                                                          | )%         |
| Total sales, all products     |       | (16                                                                                                              | )%         | (17                                                                                                                          | )%         |
|                          |       |                                                                                                             |       |                                                                                                                         |       |

 

For the three monthsended September 30, 2005, net sales decreased by 16% and 17% from thecomparable prior year quarter and from the current year’s first quarterresults, respectively.  The Company’ssales by product line reflected lower Spirulina sales compared to both thecomparable prior year quarter and the first quarter of the current fiscalyear.  In comparison, sales of naturalastaxanthin remained consistent with levels achieved during both the comparableprior year quarter and the first quarter of the current fiscal year.  The

 

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decreased total salesresult is attributable primarily to lower orders for all Spirulina products andreduced demand for NatuRose® from the Japan Sea Bream market, offset in part byincreased sales of BioAstin®.

 

Gross profit for thesecond quarter of fiscal 2006 was $581,000, with gross profit margin of23%.  This is a decrease from grossprofit and gross profit margin from both the comparable period of the priorfiscal year and the prior sequential quarter, due to increased per unitproduction costs for natural astaxanthin resulting from lower productionvolumes.

 

During the second quarterof fiscal 2006 the Company incurred operating expenses comparable in amount tothe same quarter of the prior fiscal year and $62,000 higher than operatingexpenses for the prior sequential quarter.

 

The effect of lower grossprofit combined with an unchanged level of operating expenses resulted in a netloss of $321,000 for the second quarter of fiscal 2006, contrasting with netincome of $121,000 and $153,000 for the second quarter of the prior fiscal yearand the prior sequential quarter, respectively.

 

**Resultsof Operations**

 

*SecondQuarter of Fiscal 2006 Compared to Second Quarter of Fiscal 2005*

 

Net sales for the threemonths ended September 30, 2005 were $2,517,000, a 16% decrease from the$2,998,000 for the comparable period a year ago. Sales of Spirulina productsdecreased 23% due primarily to lower sales volumes of spirulina tablets duringthe quarter. Such fluctuation in demand for spirulina tablets was due in largepart to the variance in order patterns from some of our larger customers. Alsoaffecting net sales for the quarter were reduced demand for NatuRose from theJapan aquaculture market, offset in part by increased sales of BioAstin for thehuman nutritional market. International sales were 50% of total sales for thesecond quarter of fiscal 2006, compared to 47% a year ago.  Historically, our major customers (salesexceeding 10% of total sales) have been two distributors, one based in Europeand one in the United States.  For thethree months ended September 30, 2005, our European distributor, SpirulinaInternational, accounted for 12% of total sales as compared to less than 10% oftotal sales for the comparable prior year period.  Sales to the United States distributor wereless than 10% of total sales for each of the three months ended September 30,2005 and 2004.

 

Gross profit representsnet sales less the cost of product sales, which includes the cost of materials,manufacturing overhead costs, direct labor costs and depreciation andamortization.  Gross profit for the threemonths ended September 30, 2005 was $581,000, with gross profit margin of 23%.  In contrast, gross profit for the comparableperiod of the prior fiscal year was $1,054,000 with gross profit margin of35%.  This decrease in gross profit isprimarily attributable to higher per unit natural astaxanthin production costsresulting from the Company’s decision to reduce production in response toreduced orders of NatuRose and decreased sales volume for Spirulina tabletsduring the period.

 

Operating expenses forthe three months ended September 30, 2005 and 2004 were comparable,amounting to $879,000 and $881,000, respectively.  As a percentage of net sales, operatingexpenses for the second quarter of fiscal 2006 were 35%, compared to 29% forthe comparable prior year period, due primarily to lower net sales in thecurrent year period.   In the secondquarter of fiscal 2006 a slight increase in sales and marketing expense wasoffset in entirety by a decrease in research and development expense comparedto the operating expenses for the comparable period of the prior fiscal year.

 

Total other expense, netfor the second quarter of fiscal 2006 was $25,000, a decrease from otherexpense, net of $40,000 for the same period a year ago.

 

For the quarter secondquarter of fiscal 2006, an income tax benefit of $2,000 was recorded for ouroperations in Japan, compared to income tax expense of $12,000 reported for thecomparable period of the prior fiscal year. The Company does not expect any expenseto be recorded for UnitedStates income taxes for the current fiscal year as a result of available netoperating loss carryforwards.

 

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The result of theforegoing was a net loss of $321,000, or ($0.02) per diluted share, for thethree months ended September 30, 2005, in contrast to net income of$121,000, or $0.01 per diluted share, for the comparable prior yearquarter.  The net loss occurred becauseof lower net sales and lower gross profit in proportion to operating expenses.

 

*SixMonths Ended September 30, 2005 Compared to Six Months Ended September 30,2004*

 

Net sales for the sixmonths ended September 30, 2005 were $5,546,000, a decrease of 3% fromsales of $5,705,000 reported for the comparable period a year ago.  This decrease during the current year periodis primarily attributable to lower sales of all natural astaxanthin products,offset by slight increases in sales of all Spirulina products and phycobiliproteins as compared to the comparable period of the prior fiscal year.  International sales represented 54% of netsales for the six months ended September 30, 2005 compared to 57% for thesame period a year ago due to lower sales in Japan and Europe.  For the six months ended September 30,2005, our European distributor, Spirulina International, accounted for 12% oftotal sales, with sales to our United States distributor accounting for lessthan 10% of total sales.  In comparisonsales to our United States distributor were 10% of total sales with sales toour European distributor accounting for less than 10% of net sales during thecomparable period of the prior fiscal year.

 

Gross profit for the sixmonths ended September 30, 2005 was $1,606,000 with gross profit margin of29%, compared to gross profit of $1,941,000 and gross profit margin of 34% forthe comparable period of the prior fiscal year.   The lower gross profit is primarilyattributable to higher per unit natural astaxanthin production costs resultingfrom the Company’s decision to reduce production in response to lower ordersfor NatuRose.

 

Operating expenses forthe six months ended September 30, 2005 were $1,696,000, an increase of$89,000 or 6% from the comparable prior year period.   The increase in spending reflects highergeneral and administrative and sales and marketing expenses, which were offset byslightly lower research and development expenses.  Higher general and administrative expensesduring the current six month period were due to increased personnel and annualreport expenses offset by reduced bad debt expense.  Sales and marketing expenses for the currentsix month period were higher than the comparable period of the prior fiscalyear due to increased advertising and travel expenses.  Research and development expenses decreasedcompared to the same period of the prior fiscal year, because of lower clinicalstudy expenses and decreased personnel expenses.

 

Net other expense for thesix months ended September 30, 2005 was comparable to net other expensefor the same period of the prior fiscal year. However, current year’s interest expense increased due to increases in theprime rate, on which term loan interest is based.  This increase was offset in part by increasedinterest income on short-term investments.

 

Forthe six months ended September 30, 2005, an income tax provision of $3,000was recorded for our operations in Japan compared to an income tax provision of$27,000 recorded for the same period of the prior year.   The Company does not expect any UnitedStates income taxes for the current fiscal year as a result of available netoperating loss carryforwards.

 

The Company recorded netloss of $168,000 or ($0.01) per diluted share for the six month period ended September 30,2005.  For the same period a year ago theCompany reported net income of $234,000 or $0.01 per diluted share.  The net loss in the current period isprimarily attributable to increased cost of goods sold and higher operatingexpenses as compared to the same period a year ago.

 

*Variabilityof Results*

 

The Company hasexperienced significant quarterly fluctuations in operating results andanticipates that these fluctuations may continue in future periods. Futureoperating results may fluctuate as a result of changes in

 

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sales levels to ourlargest customers, new product introductions, production difficulties, weatherpatterns, the mix between sales of bulk products and packaged consumerproducts, start-up costs associated with new facilities, expansion into newmarkets, sales promotions, competition, increased energy costs, foreignexchange fluctuations, the announcement or introduction of new products bycompetitors, changes in our customer mix, overall trends in the market forour  products, government regulations andother factors beyond our control.  Whilea significant portion of our expense levels are relatively fixed and the timingof increases in expense levels is based in large part on forecasts of futuresales, if net sales are below expectations in any given period, the adverseimpact on results of operations may be magnified by our inability to adjustspending quickly enough to compensate for the sales shortfall. We may alsochoose to reduce prices or increase spending in response to market conditions,which may have a material adverse effect on the Company’s financial conditionand results of operations.

 

**Liquidityand Capital Resources**

 

Working capital at September 30,2005 increased by $210,000 to $5,312,000 from $5,102,000 at March 31, 2005primarily due to reduction in trade accounts payable, offset in part by loweraccounts receivable balances.  At September 30,2005, inventories were $1,747,000, an increase of $182,000 from inventories of$1,565,000 at the beginning of the fiscal year.

 

At September 30,2005, cash, cash equivalents and short-term investments was $3,054,000, aslight increase from $3,005,000 at the beginning of the fiscal year.

 

Net cash and cashequivalents of $344,000 and $410,000 were provided by operations for the sixmonths ended September 30, 2005 and 2004, respectively.   Despite the net loss of $168,000 in the currentperiod (compared to net income of $234,000 for the same period a year ago), theCompany generated cash from operations in the current period by the collectionof accounts receivable, offset in part by payments on trade accounts payable.

 

Cash used in investingactivities (for capital expenditures) for the current six month period was$123,000, a decrease from $411,000 of such cash expenditures in the comparableprior year period principally due to completion of the natural astaxanthinexpansion project in the prior fiscal year.

 

Cash used in financingactivities amounted to $172,000 and $135,000 for the six months ended September 30,2005 and 2004, respectively.  Proceeds of$34,000 from the exercise of stock options and warrants in the prior year did notoccur in the current year.

 

There have been nosignificant changes in contractual obligations and commitments from March 31,2005 to September 30, 2005, other than those reported elsewhere in this Form 10-Q.  The Company’s contractual obligations and commitments(consisting of a term loan and operating leases) are disclosed in the Company’spreviously filed report on Form 10-K for the fiscal year ended March 31,2005 in the following sections:  Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Liquidity and Capital Resources, and Item 8. Financial Statementsand Supplementary Data – Notes 5 and 6 of Notes to Consolidated FinancialStatements.

 

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## **Critical AccountingPolicies**

## ** **

Our unaudited financialstatements and accompanying notes are prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and with the instructions to Form 10-Q and RegulationS-X.  Preparing financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets, liabilities, revenue and expenses.  These estimates and assumptions are affectedby management’s application of accounting policies.  The Company has identified certain policiesthat require the application of significant judgment by management.  Our most critical accounting policies arethose related to inventory valuations, valuation of equipment and leasehold improvementsand long-lived assets and income taxes. These critical accounting policies are stated in the notes toconsolidated financial statements in the Company’s previously filed report on Form 10-Kfor the fiscal year ended March 31, 2005. This discussion and analysis should be read in conjunction with suchnotes and our consolidated financial statements and related notes includedelsewhere in this report.

 

**Outlook**

 

*Thisoutlook section contains a number of forward-looking statements, all ofwhich are based on current expectations. Actual results may differ materially.See first paragraph of this Item 2.*

 

The goal of CyanotechCorporation is based on its strategy to be a world-leader in the production andmarketing of high-value natural products from microalgae.  For fiscal 2006 we have refined this strategywith a heightened focus on the business-to-business wholesale market for theproducts and compounds that we extract from the microalgae processed at our 90acre facility in Hawaii.  Our currentproduct offerings include “All-Natural” Spirulina Pacifica® in powder, flakeand tablet form, NatuRose® natural astaxanthin powder for the animal nutritionmarket, BioAstin® natural astaxanthin antioxidant in lipid extract, softgelcaplet and micro-encapsulated beadlet form for the human nutrition and cosmeticindustries and Phycobiliproteins for use in medical diagnostics.  Information about our Company and ourproducts can be viewed at www.cyanotech.com, www.nutrex-hawaii.com orwww.phycobiliprotein.com .  Consumerproducts can also be purchased online at www.nutrex-hawaii.com .

 

Our net sales for thesecond quarter of fiscal 2006 (the quarter ended September 30, 2005) of$2,517,000, were lower than the $2,998,000 and $3,029,000 reported for thesecond quarter of fiscal 2005 and the prior sequential quarter of fiscal 2006,respectively.  These decreases can beattributed to lower than usual orders for our Spirulina and NatuRose products,offset in part by increased sales of BioAstin, our natural astaxanthin productfor the human nutraceutical market.  Wehave experienced such fluctuation in demand for Spirulina in the past andbelieve that the ordering patterns of our customers will return to historicallevels.  We are, however, concerned aboutthe recovery of our largest market for NatuRose (fish coloring in Japanaquaculture) and are taking action to improve sales of this product throughfeeding trials aimed at enhancing this product’s appeal for use as animalnutrition.  We believe increasedadvertising and promotion aimed at generating higher sales of our BioAstinproducts are beginning to bring improve sales. We believe that our product mix may change with increases in sales ofBioAstin as more manufacturers expand their product offerings to incorporatethis unique anti-inflammatory compound. There can be no assurance of the timing of such increased sales or whensuch increased promotional effort will bear results.

 

Our operating expensesduring the second quarter of fiscal 2006 were $879,000, in line with operatingexpenses of $881,000 reported for the same quarter of the prior year and up by8% from $817,000 of such expenses reported for the prior sequentialquarter.  This increase is primarilyattributable to higher general and administrative, and sales and marketingexpenses during the current period. Operating expenses as a percentage of net sales were 35% compared to 29%and 27% for the comparable quarter of the prior year and the prior sequentialquarter, respectively.  We will continueto restrain discretionary operating spending but have increased advertising forBioAstin and NatuRose and may participate in further scientific studies toestablish the efficacy of our products for new uses.

 

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The Company’s futureresults of operations and the other forward-looking statements contained inthis Outlook, in particular the statements regarding revenues, gross margin andcapital spending involve a number of risks and uncertainties.  In addition to the factors discussed abovethat could cause actual results to differ materially are the following:  business conditions and growth in the naturalproducts industry and in the general economy; changes in customer orderpatterns; changes in demand for natural products in general; changes in weatherconditions; competitive factors, such as competing spirulina and astaxanthinproducers increasing their production capacity and the resulting impact, ifany, on world market prices for these products; government actions; shortage ofmanufacturing capacity; and other factors beyond our control.  Risk factors are discussed in detail inexhibit 99.1, hereto included in this report.

 

Cyanotech believes thatit has the product offerings, facilities, personnel, and competitive and financialresources for improved results, but future revenues, costs, margins and profitsare all influenced by a number of factors, as discussed above, all of which areinherently difficult to forecast.

 

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

 

We have not entered intoany transactions using derivative financial instruments or derivative commodityinstruments and believe that our exposure to market risk associated with otherfinancial instruments is not material.

 

We have a term loanagreement which adjusts quarterly based on the prime rate.  As such we are exposed to interest rate riskwhereby a 1% increase in the prime rate would lead to an increase ofapproximately $15,000 in interest expense for the year ending March 31,2006 (based on March 31, 2005 amounts outstanding).

 

**Item 4.****                     Controls andProcedures**

 

Under the supervision and with the participation of management,including the President and Chief Executive Officer (“CEO”) and the ChiefFinancial Officer (“CFO”) of the Company (the “Certifying Officers”), we haveevaluated the effectiveness of the Company’s disclosure controls and proceduresas of the end of the period covered by this report in accordance with Item 307of Regulation S-K promulgated by the Securities and Exchange Commission.  As defined under Rules 13a-15(e) or15d-15(e) issued under the Securities Exchange Act of 1934, as amended(the “Exchange Act”), the term “disclosure controls and procedures” refers tocontrols and other procedures of an issuer that are designed to ensure thatinformation required to be disclosed by the issuer in the reports that it filesor submits under the Exchange Act is recorded, processed, summarized andreported, within the time periods specified in the Commission’s rules andforms.  Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by an issuer in the reportsthat it files or submits under the Exchange Act is accumulated and communicatedto the issuer’s management, including its principal executive officer orofficers and principal financial officer or officers, or persons performingsimilar functions, as appropriate to allow timely decisions regarding requireddisclosure.

 

Based on that evaluation, the CEO and CFO have concluded that theCompany’s disclosure controls and procedures are effective. There were nochanges in our internal controls over financial reporting during the quarterended September 30, 2005 that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

 

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**PART II.****         ****OTHER INFORMATION**

 

Item 1.                                                             LegalProceedings

None

 

Item 4.                                                             Submissionof Matters to a Vote of Security Holders

 

On August 22,2005, the following matters were submitted and voted by stockholders entitledto vote at the Company’s Annual Meeting of Stockholders:

 

a)              Thefollowing directors were elected to serve until the next Annual Meeting oruntil their successors are elected:

 

| ** **         | ** ** | **For Votes** | ** ** | **Withheld Votes** | ** ** |
|--------------------|------------|---------------|------------|--------------------|------------|
| Gerald R. Cysewski |       | 15,030,894    |       | 88,383             |       |
| Michael A. Davis   |       | 14,988,998    |       | 130,279            |       |
| Gregg W. Robertson |       | 14,976,594    |       | 142,683            |       |
| David I. Rosenthal |       | 14,984,644    |       | 144,633            |       |
| John T. Waldron    |       | 14,994,694    |       | 124,583            |       |
| Paul C. Yuen       |       | 15,005,194    |       | 114,083            |       |

 

b)             Approvalof the 2005 Stock Option Plan (the “2005 Plan”), reserving a total of 800,000authorized shares of common stock of the Company for issuance of options underthe 2005 Plan.   The vote was 4,043,292for, 423,236 against, 40,851 abstaining and 10,611,898 not voted by brokers.

 

d)             Ratification of theselection of KPMG LLP as the Company’s independent Registered Public AccountingFirm for the fiscal year ending March 31, 2006.  The vote on the ratification was 15,062,416for, 23,736 against and 32,955 abstaining.

 

Item 6.                                                           Exhibitsand Reports on Form 8-K

 
| 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 |
|   |                                                    |   |
|   | 99.1                                                    | Risk Factors |

 

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b)         Reports on Form 8-K

 

Areport on Form 8-K dated August 15, 2005 included Item 2.02, Resultsof Operations and Financial Condition in conjunction with the Company’s pressrelease dated August 11, 2005, announcing the financial results for theQuarter ended June 30, 2005.

 

Areport on Form 8-K dated October 19, 2005 included Item 8.01, OtherEvents, in conjunction with the Company’s press release dated October 19,2005, announcing the resignation of Chief Financial Officer, Jeffrey H.Sakamoto.

 

Areport on Form 8-K dated October 28, 2005 included Item 5.04,Temporary Suspension of Trading Under Registrant’s Employee Benefit Plans, inconjunction with issuance of a notice dated October 24, 2005, to allparticipants of such plan.

 

Areport on Form 8-K dated October 28, 2005 included Item 8.01, OtherEvents, in conjunction with the Company’s press release dated October 24,2005 announcing the date of its earnings release and investor conference callfor the quarter ended September 30, 2005.

 

Areport on Form 8-K dated November 4, 2005 included Item 2.02 Resultsof Operations and Financial Condition in conjunction with the Company’s pressrelease dated November 4, 2005, announcing the financial results for theQuarter ended September 30, 2005.

 

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** **

**SIGNATURES**

 

In accordance with therequirements of the Securities Exchange Act of 1934, the registrant caused thisreport to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|                   | CYANOTECH  CORPORATION (Registrant) |
|------------------------|-------------------------------------|
|                   |                                |   |
|                   |                                |   |
| November 14, 2005 |                                |   | By: |   | /s/ Gerald R. Cysewski |   |
| (Date)                 |                                |   |   | Gerald R.  Cysewski |
|                   |                                |   | Chairman of the  Board, |
|                   |                                |   | President and  Chief Executive Officer |
|                   |                                |   |   |
|                   |                                |   |   |
|                   |                                | By: |   | /s/ Jeffrey H. Sakamoto |   |
|                   |                                |   | Jeffrey H.  Sakamoto |
|                   |                                |   | Vice President –  Finance & Administration |
|                   |                                |   | and Chief  Financial Officer |
|                   |                                |   | (Principal  Financial and Accounting Officer) |

 

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