**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

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

 

**ForQuarterly Period Ended December 31, 2004**

 

**CommissionFile Number 0-14602**

 

**CYANOTECH CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

| **NEVADA**                                                       | ** ** | **91-1206026**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |       | (IRS Employer  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 the registrant (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes  ý  No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).   Yes  o  No  ý

 

Number of common sharesoutstanding as of January 31, 2005:

 
| **Title of  Class**             | ** ** | **Shares  Outstanding** |
|---------------------------------|------------|-------------------------|
| Common stock -  $.005 par value |       | 20,892,140              |

 

 

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CYANOTECHCORPORATION

FORM 10-Q

 

INDEX

 
| PART I.    FINANCIAL INFORMATION |                                                                                                                       |
|-------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------|
|                                            |                                                                                                                       |   |
| Item 1.                                         | Financial Statements                                                                                                       |   |
|                                            |                                                                                                                       |   |
|                                            | Consolidated Balance Sheets  (unaudited)  As of December 31, 2004 and March 31, 2004                                       |   |
|                                            |                                                                                                                       |   |
|                                            | Consolidated  Statements of Operations (unaudited)  For the three and nine month periods ended  December 31, 2004 and 2003 |   |
|                                            |                                                                                                                       |   |
|                                            | Consolidated  Statements of Cash Flows (unaudited)  For the nine month periods ended  December 31, 2004 and 2003           |   |
|                                            |                                                                                                                       |   |
|                                            | 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 6.                                         | Exhibits and  Reports on Form 8-K                                                                                          |   |
|                                            |                                                                                                                       |   |
| SIGNATURES                                      |                                                                                                                       |

 

2

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PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

 

CYANOTECHCORPORATION

CONSOLIDATED BALANCESHEETS

(Dollars inthousands except per share amounts)

(Unaudited)

 
| ** **                                                                                                                                                                                                                             | ** ** | **December 31,****2004** | ** ** | **March 31,****2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|
| ASSETS                                                                                                                                                                                                                                 |       |                     |       |                  |       |
| Current assets:                                                                                                                                                                                                                        |       |                     |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                                                                             |       | $                        | 2,582      |                  | $          | 2,531 |   |
| Accounts  receivable, net                                                                                                                                                                                                              |       | 2,414                    |       | 2,211                 |       |
| Refundable  income taxes                                                                                                                                                                                                               |       | 14                       |       | 11                    |       |
| Inventories (see  Note 3)                                                                                                                                                                                                              |       | 1,476                    |       | 1,099                 |       |
| Prepaid expenses                                                                                                                                                                                                                       |       | 126                      |       | 55                    |       |
| Total current  assets                                                                                                                                                                                                                  |       | 6,612                    |       | 5,907                 |       |
|                                                                                                                                                                                                                                   |       |                     |       |                  |       |
| Equipment and  leasehold  improvements, net (see Note 4)                                                                                                                                                                               |       | 11,393                   |       | 11,844                |       |
| Other assets                                                                                                                                                                                                                           |       | 568                      |       | 606                   |       |
| Total assets                                                                                                                                                                                                                           |       | $                        | 18,573     |                  | $          | 18,357 |   |
|                                                                                                                                                                                                                                   |       |                     |       |                  |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                                             |       |                     |       |                  |       |
| Current  liabilities:                                                                                                                                                                                                                  |       |                     |       |                  |       |
| Current  maturities of long-term debt                                                                                                                                                                                                  |       | $                        | 346        |                  | $          | 346 |   |
| Accounts payable                                                                                                                                                                                                                       |       | 618                      |       | 874                   |       |
| Accrued expenses                                                                                                                                                                                                                       |       | 657                      |       | 604                   |       |
| Total current  liabilities                                                                                                                                                                                                             |       | 1,621                    |       | 1,824                 |       |
|                                                                                                                                                                                                                                   |       |                     |       |                  |       |
| Long-term debt,  excluding  current maturities                                                                                                                                                                                         |       | 1,838                    |       | 2,093                 |       |
| Total  liabilities                                                                                                                                                                                                                     |       | 3,459                    |       | 3,917                 |       |
|                                                                                                                                                                                                                                   |       |                     |       |                  |       |
| Stockholders’  equity:                                                                                                                                                                                                            |       |                     |       |                  |       |
| Common Stock of  $0.005 par value, as of December 31, 2004, 30,000,000 shares authorized,  20,840,365 shares issued and outstanding; and as of March 31, 2004, 25,000,000  shares authorized, 20,714,246 shares issues and outstanding |       | 104                      |       | 104                   |       |
| Additional  paid-in capital                                                                                                                                                                                                            |       | 27,245                   |       | 27,141                |       |
| Accumulated  other comprehensive income - foreign currency translation adjustments                                                                                                                                                     |       | 40                       |       | 30                    |       |
| Accumulated  deficit                                                                                                                                                                                                                   |       | (12,275                  | )          | (12,835               | )          |
| Total  stockholders’ equity                                                                                                                                                                                                       |       | 15,114                   |       | 14,440                |       |
|                                                                                                                                                                                                                                   |       |                     |       |                  |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                       |       | $                        | 18,573     |                  | $          | 18,357 |   |

 

See accompanying Notes toConsolidated Financial Statements.

 

3

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CYANOTECH CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Inthousands, except per share amounts)

(Unaudited)

 
| ** **                                                  | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                  | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                  | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| NET SALES                                                   |       | $                                    | 3,180      |                                | $          | 3,024 |   | $ | 8,885 |   | $ | 8,292 |   |
| COST OF PRODUCT  SALES                                      |       | 2,017                                |       | 1,840                               |       | 5,781 |   | 5,543 |   |
| Gross profit                                                |       | 1,163                                |       | 1,184                               |       | 3,104 |   | 2,749 |   |
|                                                        |       |                                 |       |                                |       |   |   |   |   |
| OPERATING  EXPENSES:                                        |       |                                 |       |                                |       |   |   |   |   |
| Research and  development                                   |       | 38                                   |       | 53                                  |       | 165 |   | 117 |   |
| Sales and  marketing                                        |       | 301                                  |       | 298                                 |       | 892 |   | 961 |   |
| General and  administrative                                 |       | 506                                  |       | 541                                 |       | 1,395 |   | 1,397 |   |
| Total operating  expenses                                   |       | 845                                  |       | 892                                 |       | 2,452 |   | 2,475 |   |
|                                                        |       |                                 |       |                                |       |   |   |   |   |
| Income from  operations                                     |       | 318                                  |       | 292                                 |       | 652 |   | 274 |   |
|                                                        |       |                                 |       |                                |       |   |   |   |   |
| OTHER INCOME  (EXPENSE):                                    |       |                                 |       |                                |       |   |   |   |   |
| Interest income                                             |       | 8                                    |       | 1                                   |       | 25 |   | 13 |   |
| Interest expense                                            |       | (43                                  | )          | (84                                 | )          | (122 | ) | (250 | ) |
| Other income,  net                                          |       | 37                                   |       | 14                                  |       | 26 |   | 17 |   |
| Total other  income (expense)                               |       | 2                                    |       | (69                                 | )          | (71 | ) | (220 | ) |
|                                                        |       |                                 |       |                                |       |   |   |   |   |
| Income before  income taxes                                 |       | 320                                  |       | 223                                 |       | 581 |   | 54 |   |
|                                                        |       |                                 |       |                                |       |   |   |   |   |
| INCOME TAX  EXPENSE (BENEFIT)                               |       | (6                                   | )          | 114                                 |       | 21 |   | 96 |   |
|                                                        |       |                                 |       |                                |       |   |   |   |   |
| NET INCOME (LOSS)                                           |       | $                                    | 326        |                                | $          | 109 |   | $ | 560 |   | $ | (42 | ) |
|                                                        |       |                                 |       |                                |       |   |   |   |   |
| NET INCOME  (LOSS) PER SHARE                                |       |                                 |       |                                |       |   |   |   |   |
| Basic                                                       |       | $                                    | 0.02       |                                | $          | 0.01 |   | $ | 0.03 |   | $ | (0.00 | ) |
| Diluted                                                     |       | $                                    | 0.02       |                                | $          | 0.01 |   | $ | 0.03 |   | $ | (0.00 | ) |
|                                                        |       |                                 |       |                                |       |   |   |   |   |
| SHARES USED IN  CALCULATION OF NET INCOME (LOSS) PER SHARE: |       |                                 |       |                                |       |   |   |   |   |
| Basic                                                       |       | 20,771                               |       | 18,777                              |       | 20,753 |   | 18,471 |   |
| Diluted                                                     |       | 20,988                               |       | 18,934                              |       | 20,981 |   | 18,471 |   |
|                                                        |       |                                 |       |                                |       |   |   |   |   |
| COMPREHENSIVE  INCOME (LOSS):                               |       |                                 |       |                                |       |   |   |   |   |
| Net income  (loss)                                          |       | $                                    | 326        |                                | $          | 109 |   | $ | 560 |   | $ | (42 | ) |
| Other  comprehensive income                                 |       | 20                                   |       | 9                                   |       | 10 |   | 28 |   |
|                                                        |       | $                                    | 346        |                                | $          | 118 |   | $ | 570 |   | $ | (14 | ) |

 

See accompanyingNotes to Consolidated Financial Statements.

 

4

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CYANOTECH CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 
| ** **                                                                                | ** ** | **Nine Months Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                | ** ** | **2004**                            | ** ** | **2003** | ** ** |
|                                                                                      |       |                                |       |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                    |       |                                |       |   |   |
| Net income  (loss)                                                                        |       | $                                   | 560        |   | $ | (42 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                |       |   |   |
| Depreciation and  amortization                                                            |       | 995                                 |       | 1,013 |   |
| 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                                        |       | 23                                  |       | 55 |   |
| Allowance for  doubtful accounts                                                          |       | 30                                  |       | 105 |   |
| Net (increase)  decrease in:                                                              |       |                                |       |   |   |
| Accounts  receivable                                                                      |       | (233                                | )          | (128 | ) |
| Refundable  income taxes                                                                  |       | (3                                  | )          | 6 |   |
| Inventories                                                                               |       | (377                                | )          | (49 | ) |
| Prepaid expenses  and other assets                                                        |       | (46                                 | )          | (104 | ) |
| Net increase  (decrease) in:                                                              |       |                                |       |   |   |
| Accounts payable                                                                          |       | (256                                | )          | 77 |   |
| Accrued expenses                                                                          |       | 53                                  |       | 183 |   |
| Net cash  provided by operating activities                                                |       | 768                                 |       | 1,116 |   |
|                                                                                      |       |                                |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                    |       |                                |       |   |   |
| Investment in  equipment and leasehold improvements                                       |       | (544                                | )          | (185 | ) |
|                                                                                      |       |                                |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                    |       |                                |       |   |   |
| Proceeds from  exercise of stock options                                                  |       | 28                                  |       | 1 |   |
| Proceeds from  exercise of warrants (see Note 6)                                          |       | 54                                  |       | — |   |
| Release of  restricted cash deposit                                                       |       | —                              |       | 250 |   |
| Principal  payments on long-term debt                                                     |       | (255                                | )          | (244 | ) |
| Net cash  provided by (used in) financing activities                                      |       | (173                                | )          | 7 |   |
|                                                                                      |       |                                |       |   |   |
| Net increase in  cash and cash equivalents                                                |       | 51                                  |       | 938 |   |
|                                                                                      |       |                                |       |   |   |
| Cash and cash  equivalents at beginning of period                                         |       | 2,531                               |       | 579 |   |
|                                                                                      |       |                                |       |   |   |
| Cash and cash  equivalents at end of period                                               |       | $                                   | 2,582      |   | $ | 1,517 |   |
|                                                                                      |       |                                |       |   |   |
| Supplemental  disclosure of non-cash financing activities:                                |       |                                |       |   |   |
| Conversion of  long-term debt to common stock                                             |       | $                                   | —     |   | $ | 1,250 |   |
|                                                                                      |       |                                |       |   |   |
| Supplemental  disclosure of cash flow information:                                        |       |                                |       |   |   |
| Cash paid during  the period for:                                                         |       |                                |       |   |   |
| Interest                                                                                  |       | $                                   | 98         |   | $ | 227 |   |
| Income taxes                                                                              |       | $                                   | 188        |   | $ | 11 |   |

 

Seeaccompanying Notes to Consolidated Financial Statements.

 

5

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CYANOTECH CORPORATION

FORM 10-Q

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

As of December 31,2004

(Unaudited)

 

1.                                       BASISOF PRESENTATION

 

The accompanying unaudited consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America for interim financialinformation and with the instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Theseconsolidated financial statements and notes should be read in conjunction withthe Company’s consolidated financial statements contained in the Company’spreviously filed report on Form 10-K for the year ended March 31, 2004.

 

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 the financial information furnished forthe three and nine month periods ended December 31, 2004 is unaudited, thestatements in this report reflect all material items which, in the opinion ofmanagement, are necessary for a fair presentation of the results of operationsfor the interim periods covered and of the financial condition of the Companyat the dates of the consolidated balance sheets. The operating results for theinterim period presented are not necessarily indicative of the results that maybe expected for the year ending March 31, 2005.

 

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 andthe disclosure of any contingent assets and liabilities as of the date of thefinancial statements and the reported amounts of revenues and expenses reportedduring the reporting period.  Managementreviews these estimates and assumptions periodically and reflects the effect ofrevisions in the period that they are determined to be necessary.  Actual results could differ significantly fromthose estimates.

 

2.                                       NEWACCOUNTING PRONOUNCEMENTS

 

In December 2004, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 123 (Revised 2004) “Share-Based Payment”which is a revision of FASB Statement No. 123 “Accounting for Stock-BasedCompensation”.  SFAS No. 123 (Revised2004) requires an entity to measure the cost of employee services received inexchange for an award.  If an award vestsor becomes exercisable based on the achievement of a condition other thanservice, performance or market condition, the award isliability-classified. Liability-classified awards are remeasured to fair value at eachbalance-sheet 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 provisions of Accounting

 

6

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Principles Board OpinionNo. 25 (See Notes 5 and 7).  The Companyis required to adopt the provisions of SFAS No. 123 (Revised 2004) as of thebeginning of the first interim or annual reporting period that begins afterJune 15, 2005, although earlier adoption is permitted.  SFAS No. 123 (Revised 2004) offers severalalternatives for implementation.  At thistime, management has not made a decision as to the alternative it may select.

 

In November 2004, theFASB issued SFAS No. 151 “Inventory Costs – an amendment of Accounting ResearchBulletin No. 43, Chapter 4”.  SFAS No.151 requires that abnormal amounts of freight, handling costs and wastedmaterial (spoilage) be recognized as current-period charges and fixedproduction overhead costs be allocated to inventory based on the normalcapacity of production facilities.  Normalcapacity is defined as “the production expected to be achieved over a number ofperiods or seasons under normal circumstances, taking into account the loss ofcapacity resulting from planned maintenance.” Companies will no longer be permitted to capitalize inventory costs on thebalance sheet when the production defect rate varies significantly from theexpected defect rate.  SFAS No. 151 iseffective for inventory costs incurred during fiscal years beginning after June15, 2005.  Earlier application ispermitted for inventory costs incurred during fiscal years beginning afterNovember 24, 2004.  The Company has yetto determine the impact, if any, of SFAS No. 151 on its consolidated financialstatements.

 

3.                                       INVENTORIES

 

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

 
| ** **      | ** ** | **December 31, 2004** | ** ** | **March 31, 2004** | ** ** |
|-----------------|------------|-----------------------|------------|--------------------|------------|
|            |       |                  |       |               |       |
| Raw materials   |       | $                     | 170        |               | $          | 191 |   |
| Work in process |       | 317                   |       | 154                |       |
| Finished goods  |       | 873                   |       | 567                |       |
| Supplies        |       | 116                   |       | 187                |       |
|            |       | $                     | 1,476      |               | $          | 1,099 |   |

 

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 21 years |   |

 

7

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

 
| ** **                                      | ** ** | **December 31, 2004** | ** ** | **March 31, 2004** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|--------------------|------------|
|                                            |       |                  |       |               |       |
| Equipment                                       |       | $                     | 10,106     |               | $          | 9,753 |   |
| Leasehold  improvements                         |       | 14,602                |       | 14,326             |       |
| Furniture and  fixtures                         |       | 84                    |       | 83                 |       |
|                                            |       | 24,792                |       | 24,162             |       |
| Less accumulated  depreciation and amortization |       | (13,682               | )          | (12,687            | )          |
| Construction  in-progress                       |       | 283                   |       | 369                |       |
| Equipment and  leasehold improvements, net      |       | $                     | 11,393     |               | $          | 11,844 |   |

 

5.                                       INDEPENDENTDIRECTOR STOCK OPTION AND STOCK GRANT PLAN

 

On August 16, 2004, the stockholders approved theIndependent Director Stock Option and Stock Grant Plan (the “2004 Plan”).  300,000 shares of common stock are reservedfor issuance under the 2004 Plan.  Underthe 2004 Plan, upon election to the Board of Directors, a newly electednon-employee director is granted a ten-year option to purchase 4,000 shares ofthe Company’s common stock at a fair market value on the date of grant.  In addition, on the date of each AnnualMeeting of Stockholders, each non-employee director continuing in office willbe automatically granted, without payment, 3,500 shares of common stock,non-transferable for six months following the date of grant.  Concurrently with the 2004 Plan approval, the1994 Non-Employee Director Stock Option and Stock Grant Plan was terminatedexcept for the outstanding options issued thereunder.

 

The Company applies the intrinsic value-based methodof accounting prescribed by Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedinterpretations, in accounting for its fixed plan stock options issued toemployees, including non-employee directors. As such, compensation expense would be recorded on the date of grantonly if the current market price of the underlying stock exceeded the exerciseprice.  An expense of $25,000 wasrecognized in connection with common stock grants and issuances of common stockoptions during the three months ended December 31, 2004.

 

6.                                       WARRANTS

 

In December 2004, awarrant was exercised to acquire 75,000 shares of Common Stock at $0.625 pershare.  This warrant had been granted inDecember 1999 as consideration for services provided by the third party warrantholder.  In May 2004, a warrant wasexercised to acquire 7,000 shares of Common Stock at $1.10 per share andwarrants to acquire 18,500 shares of Common Stock at $1.10 per shareexpired.  These warrants had been grantedin connection with the extension of the Company’s previously outstandingconvertible debentures (see Note 5 of Notes to Consolidated FinancialStatements in the Company’s Annual Report on Form 10-K for the year ended March31, 2004).  As of December 31, 2004, awarrant to acquire 50,000 shares at $1.00 per share and a warrant to acquire20,000 shares at $2.55 per shares remain outstanding.

 

8

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7.                                       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 sharesoutstanding plus the potentially dilutive effect of outstanding stock optionsand warrants using the “treasury stock” method.

 

Reconciliations betweenthe numerator and the denominator of the basic and diluted earnings per sharecomputations for the three and nine months ended December 31, 2004 and for thethree months ended December 31, 2003 are as follows (there were no reconcilingitems for the nine months ended December 31, 2003) (in thousands, except pershare amounts):

 
| ** **                                                              | ** ** | **Three Months Ended December 31, 2004** | ** ** | **Nine Months Ended December 31, 2004** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                              | ** ** | **Net Income**                           | ** ** | **Shares**                              | ** ** | **Per Share  Amount** | ** ** | **Net Income** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
| ** **                                                              | ** ** | **(Numerator)**                          | ** ** | **(Denominator)**                       | ** ** | ** ** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** | ** ** | ** ** |
| Basic earnings  per share                                               |       | $                                        | 326        |                                    | 20,771     |   | $ | 0.02 |   | $ | 560 |   | 20,753 |   | $ | 0.03 |   |
| Effect of  dilutive securities – Common stock options and warrants |       | —                                   |       | 217                                     |       |   |   | — |   | 228 |   |   |   |
| Dilutive  earnings per share                                            |       | $                                        | 326        |                                    | 20,988     |   | $ | 0.02 |   | $ | 560 |   | 20,981 |   | $ | 0.03 |   |

 
| ** **                                                              | ** ** | **Three Months Ended December 31, 2003** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                              | ** ** | **Net Income**                           | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
| ** **                                                              | ** ** | **(Numerator)**                          | ** ** | **(Denominator)** | ** ** | ** ** | ** ** |
| Basic earnings  per share                                               |       | $                                        | 109        |   | 18,777 |   | $ | 0.01 |   |
| Effect of  dilutive securities – Common stock options and warrants |       | —                                   |       | 157 |   |   |   |
| Dilutive  earnings per share                                            |       | $                                        | 109        |   | 18,934 |   | $ | 0.01 |   |

 

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

 
| ** **                  | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                  | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
| Stock options  and warrants |       | 172                                  |       | 990                                 |       | 172 |   | 1,298 |   |
| Convertible  debentures     |       | —                               |       | 1,923                               |       | — |   | 1,923 |   |

 

8.                                       STOCK-BASEDCOMPENSATION

 

As allowed by Statement of Financial AccountingStandards (“SFAS”) No. 123, *Accounting for Stock-BasedCompensation*, the Company has elected to continue to apply the intrinsicvalue-based method of accounting for employee stock options and adopted onlythe disclosure requirements of SFAS No. 123. The following table illustrates the effect on net income (loss) and netincome (loss) per common share if the Company had applied the fair-value methodunder SFAS No. 123 to its employee stock options (in thousands, except pershare amounts):

 

9

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| ** **                                                                     | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                     | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                           |       |                                 |       |                                |       |   |   |   |   |
| Net income  (loss), as reported                                                |       | $                                    | 326        |                                | $          | 109 |   | $ | 560 |   | $ | (42 | ) |
| Less stock-based  employee compensation determined under the fair value method |       | (25                                  | )          | (21                                 | )          | (67 | ) | (65 | ) |
| Pro-forma net  income (loss)                                                   |       | $                                    | 301        |                                | $          | 88 |   | $ | 493 |   | $ | (107 | ) |

 
| ** **                            | ** ** | **Three Months Ended  December 31,** | ** ** | **Nine Months Ended  December 31,** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| ** **                            | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                  |       |                                 |       |                                |       |   |   |   |   |
| Basic net income  (loss) per share:   |       |                                 |       |                                |       |   |   |   |   |
| As reported                           |       | $                                    | 0.02       |                                | $          | 0.01 |   | $ | 0.03 |   | $ | (0.00 | ) |
| Pro-forma                             |       | $                                    | 0.01       |                                | $          | 0.00 |   | $ | 0.02 |   | $ | (0.01 | ) |
|                                  |       |                                 |       |                                |       |   |   |   |   |
| Diluted net  income (loss) per share: |       |                                 |       |                                |       |   |   |   |   |
| As reported                           |       | $                                    | 0.02       |                                | $          | 0.01 |   | $ | 0.03 |   | $ | (0.00 | ) |
| Pro-forma                             |       | $                                    | 0.01       |                                | $          | 0.00 |   | $ | 0.02 |   | $ | (0.01 | ) |

 

10

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**CYANOTECHCORPORATION**

 

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

 

*This report on Form 10-Q containsforward-looking statements regarding the future performance of Cyanotech andfuture events that involve risks and uncertainties that could cause actualresults to differ materially from the statements contained herein. Thisdocument, and the other documents that the Company files from time to time withthe Securities and Exchange Commission, such as its reports on Form 10-K, Form10-Q, Form 8-K, and its proxy materials, contain additional important factorsthat could cause actual results to differ from the Company’s currentexpectations and the forward-looking statements contained herein.*

 

## **Overview**

## ** **

Selectedresults for the three and nine months ended December 31, 2004 with comparisonsto prior periods follows (dollars in thousands):

 
| ** **                    | ** ** | ** **               | ** ** | ** **                                          | ** ** | ** **                           | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** | **Increase (Decrease) From** | ** ** |
|-------------------------------|------------|--------------------------|------------|-----------------------------------------------------|------------|--------------------------------------|------------|------------|------------|--------------|------------|------------|------------|------------------------------|------------|
| ** **                    | ** ** | **Current Period Ended** | ** ** | **Increase (Decrease) From  Prior Year Comparable** | ** ** | **Prior Consecutive  Quarter Ended** | ** ** |
| ** **                    | ** ** | **December 31, 2004**    | ** ** | **Period Ended December 31, 2003**                  | ** ** | **September 30, 2004**               | ** ** |
| ** **                    | ** ** | **3 Months**             | ** ** | **9 Months**                                        | ** ** | **3 Months**                         | ** ** | **%**      | ** ** | **9 Months** | ** ** | **%**      | ** ** | **3 Months**                 | ** ** | **%** | ** ** |
| ** **                    | ** ** | ** **               | ** ** | ** **                                          | ** ** | ** **                           | ** ** | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** |
| Net sales:                    |       |                     |       |                                                |       |                                 |       |       |       |         |       |       |       |                         |       |   |   |
| Spirulina  products           |       | $                        | 1,810      |                                                | $          | 4,985                                |       | $          | 284        |         | 19         | %          | $          | 564                          |       | 13 | % | $ | 21 |   | 1 | % |
| Natural  astaxanthin products |       | 1,324                    |       | 3,766                                               |       | (129                                 | )          | (9         | )%         | 23           |       | 1          | %          | 185                          |       | 16 | % |
| Other products                |       | 46                       |       | 134                                                 |       | 1                                    |       | 2          | %          | 6            |       | 5          | %          | (24                          | )          | (34 | )% |
|                          |       | $                        | 3,180      |                                                | $          | 8,885                                |       | $          | 156        |         | 5          | %          | $          | 593                          |       | 7 | % | $ | 182 |   | 6 | % |
|                          |       |                     |       |                                                |       |                                 |       |       |       |         |       |       |       |                         |       |   |   |
| Gross profit                  |       | $                        | 1,163      |                                                | $          | 3,104                                |       | $          | (21        | )            | (2         | )%         | $          | 355                          |       | 13 | % | $ | 109 |   | 10 | % |
| Operating income              |       | $                        | 318        |                                                | $          | 652                                  |       | $          | 26         |         | 9          | %          | $          | 378                          |       | 138 | % | $ | 145 |   | 84 | % |
|                               |            |                          |            |                                                     |            |                                      |            |            |            |              |            |            |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theselected data presented above is reported herein and in the Company’spreviously filed reports on Form 10-Q for the quarterly period ended September30, 2004 and on Form 10-K for the year ended March 31, 2004.

 

TheCompany’s overall net sales in the current periods increased above comparableprior year periods as well as on a sequential quarter to quarter basis.  Compared to units sold in prior periods,Spirulina sales volumes in the current quarter increased in both our bulk salesto certain international customers and our packaged product sales in the UnitedStates.  These increases allowed theCompany to maintain the level of sales from the second quarter of this year(the second and third quarter’s sales were impacted favorably due to thefulfillment of backlogged orders).  Whilesales of BioAstin®, our natural astaxanthin product for the human nutritionmarket increased from the comparable prior fiscal year period, aggregate salesof our natural astaxanthin products for the three months ended December 31,2004 were lower than comparable prior year period sales.  Sales of NatuRose®, our natural astaxanthinproduct for the animal nutrition market continue to be impacted by depressedsales volumes from our Japan subsidiary as our customers’ operations continueto recover from the effects of the past summer’s heat wave and typhoons.  Although competition is emerging in theastaxanthin market, we expect our natural astaxanthin sales volumes to reboundin the future to levels consistent with prior year volumes.

 

11

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Ourgross profit margin was 37% and 35% of net sales for the three and nine monthsended December 31, 2004, respectively. The current quarter’s gross profit margin is below the 39% gross profitmargin for the comparable prior year period due to lower overall astaxanthinsales which command higher margins.  However,on a consecutive quarter basis for the current fiscal year, the Company hasimproved on its quarterly gross profit margins (33% for the first quarter, 35%for the second quarter and 37% for the third quarter) achieving increasingeconomies of scale during a period of pond conversions and shifting marketdemands.

 

Operatingincome improved to 10% of net sales for the quarter ended December 31,2004 compared to 6% for the quarter ended September 30, 2004.  The quarterly improvement favorably impactedyear-to-date figures with operating income at 7% for the current fiscal yearcompared to 3% a year ago.  Higher grossprofit margins and a decrease in research and development expenses (dueprimarily to reduced personnel costs) accounted for the current quarter’simprovement.  The Company isinvestigating future strategic research and development initiatives.

 

**Results of Operations**

 

*Third Quarter of Fiscal 2005 compared to the Third Quarter of Fiscal2004*

 

Netsales for the three months ended December 31, 2004 were $3,180,000, a 5%increase from the $3,024,000 for the comparable period a year ago.  Sales of Spirulina Pacifica productsincreased 19% due primarily to continued fulfillment of the backlog orders andincreased sales to customers in Asia/Pacific. The increased spirulina sales were offset in part by a 9% decrease insales of natural astaxanthin products from the level achieved in the comparableperiod of the prior fiscal year. International sales represented 51% of net sales for the three monthsended December 31, 2004 compared to 55% for the same period a year agoreflecting lower sales in Japan and Europe.

 

Grossprofit represents net sales less cost of goods sold, which includes the cost ofmaterials, manufacturing overhead costs, direct labor expenses and depreciationand amortization.  Gross profit for thethree months ended December 31, 2004 was $1,163,000, a decrease of 2% fromthe comparable period a year ago due primarily to lower sales of higher marginnatural astaxanthin products.  As apercent of net sales, the gross profit margin of 37% was a decrease of twopercentage points from the same period a year ago.

 

Operatingexpenses for the third quarter of fiscal 2005 were $845,000, a decrease of$47,000 or 5% from the comparable prior year period.  The decrease in spending is primarilyattributable to reductions in research and development and general andadministrative expenses, offset in part by a slight increase in sales andmarketing expenses.

 

Researchand development expenses decreased by 28% from the comparable period of theprior fiscal year due primarily to reduced personnel costs.  The Company expects research and developmentexpenses to increase in the future due to increased costs related tocompany-sponsored clinical trials and new product development costs.  General and administrative expenses decreasedby 6% due primarily to lower accounting and legal expenditures during theperiod.

 

TheCompany continues to manage its operating expenses carefully and anticipatesincreased operating expenses in future periods for scientific clinical trials,expanded sales promotional costs and increased expenses necessary forcompliance with the Sarbanes-Oxley Act of 2002.

 

12

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Netother income was $2,000 for the three months ended December 31, 2004compared to net other expense of $69,000 recorded in the comparable period ofthe prior year.  This result was dueprimarily to reduced interest expense, a result of the conversion of debenturesin December 2003 and gain arising from exchange rate fluctuations in thecurrent period on transactions of our Japan subsidiary (whose transactions aredenominated in Yen).

 

Forthe quarter ended December 31, 2004, the Company recorded an income taxbenefit of $6,000, compared to income tax expense of $114,000 reported for thecomparable period of the prior fiscal year. This net result is due to lower taxable income in our Japan subsidiaryand the effect of net operating loss carryforwards on taxes in the UnitedStates.  The Company does not expect anyUnited States income taxes for the current fiscal year due such losscarryforwards.

 

*Nine Months Ended December 31, 2004 Compared to Nine Months Ended December 31,2003*

 

Netsales for the nine months ended December 31, 2004 were $8,885,000, anincrease of 7% from the comparable period a year ago.  Comparing year-to-year sales by product line,sales of Spirulina Pacifica increased 13%. The increase in spirulina revenue is attributable to increased sales ofpowder and tablets in bulk and to higher sales of packaged spirulina, offset inpart by lower sales of animal grade product. While spirulina is an important component of Cyanotech’s business, theCompany believes that the market is mature and faces established product andpricing competition.  Sales of allnatural astaxanthin increased slightly compared to the comparable period offiscal 2004 due to increased sales of BioAstin, the Company’s naturalastaxanthin product for the human nutrition market.  This increase was offset in large part bydecreased sales of NatuRose, the Company’s natural astaxanthin product for theanimal nutrition market, due to the issues previously mentioned.  The Company believes that its natural astaxanthinproducts are positioned in emerging markets and is investing to increaseacceptance of its natural astaxanthin worldwide.  International sales represented 48% and 59%of net sales for the nine month periods ended December 31, 2004 and 2003,respectively.  For the nine months ended December 31,2004, sales to a distributor in the United States accounted for 10% of netsales.  For comparable period of theprior fiscal year, sales to a European distributor accounted for 10% of netsales.

 

Grossprofit for the nine months ended December 31, 2004 increased 13% from$2,749,000 reported for the comparable period of the prior fiscal year.  As a percentage of net sales, gross profitmargin improved to 35% for the current year period from 33% in the comparableprior year period.  The improvement isprimarily attributable to production scale efficiencies achieved during thesecond and third quarters of the current fiscal year and to increased sales ofhigher margin BioAstin natural astaxanthin products for the first nine monthsof the current fiscal year.

 

Operatingexpenses for the first nine months of fiscal 2005 decreased slightly to$2,452,000, from $2,475,000 for the comparable period of the prior year.  The decrease is primarily attributable tolower sales and marketing expenses, offset in large part by higher research anddevelopment expenditures.  The Companycontinues to carefully monitor its operating expenses and anticipates increasedexpenditures in the future for scientific clinical trials, new productdevelopment, expanded sales promotion and increased expenses necessary forcompliance with the Sarbanes-Oxley Act of 2002.

 

Netother expenses amounted to $71,000, a decrease of $149,000 or 68% from thecomparable period a year ago primarily due to lower interest expense in thecurrent period resulting from the conversion of debentures in December 2003.

 

13

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Netincome of $560,000 or $0.03 per diluted share was recorded for the nine monthperiod ended December 31, 2004 compared to a net loss of $42,000 or $0.00per diluted share for the comparable period of the prior fiscal year.  The $602,000 improvement is primarilyattributable to improvement in all areas of operation.

 

*Variability of Results*

 

TheCompany has experienced significant quarterly fluctuations in operating resultsand anticipates that these fluctuations may continue in future periods.  Future operating results may fluctuate as aresult of changes in sales levels to our largest customers, new productintroductions, production difficulties, weather patterns, the mix between salesof bulk products and packaged consumer products, start-up costs associated withnew facilities, expansion into new markets, sales promotions, competition,increased energy costs, foreign exchange fluctuations, the announcement orintroduction of new products by competitors, changes in our customer mix,overall trends in the market for our products, government regulations and otherfactors beyond our control.  While asignificant 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 also choose to reduce prices orincrease spending in response to market conditions, which may have a materialadverse effect on financial condition and results of operations.

 

**Liquidityand Capital Resources**

 

Working capital for thenine months ended December 31, 2004 increased by $908,000 to $4,991,000from $4,083,000 at March 31, 2004 primarily due to an increase ininventories and accounts receivables and a decrease in trade accountspayable.  Inventory balances increased asa result of an unexpected change in customer demand for our natural astaxanthinproducts in both Japan and Europe.

 

The Company generated netincome of $560,000 in the nine month period ended December 31, 2004,compared to a net loss of $42,000 for the same period of the prior year.  During the nine months ended December 31,2004, cash and cash equivalents increased $51,000 to $2,582,000.  The increase in cash balances resulted fromcash provided by operations of $768,000, offset by cash used for investment inequipment and leasehold improvements primarily for our natural astaxanthinexpansion project and principal payments on long-term debt amounting to$544,000 and $255,000 respectively.

 

Net cash and cashequivalents of $768,000 were provided by operations during the nine monthsended December 31, 2004. Contributing to such result in the current fiscal year were increases ininventory and accounts receivable balances, higher prepaid insurance balancesas well as a decrease in accounts payable.

 

Cash used in investingactivities (for capital expenditures) amounted to $544,000 for the nine monthsended December 31, 2004, primarily due to the Company’s planned equipmentupgrades and conversion of ponds.

 

Cash used in financingactivities amounted to $173,000 for the nine months ended December 31,2004, due primarily to principal payments on the Company’s term loan.  This contrasts with cash provided byfinancing activities of $7,000 for the same period of the prior fiscal year asthe result of the release of $250,000 in restricted cash by the Company’slender in July 2003.

 

14

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The Company’s contractualobligations and commitments (consisting of a term loan and operating leases)are disclosed in the Company’s previously filed report on Form 10-K for thefiscal year ended March 31, 2004 in the following sections:  Item 7, Management’s Discussion and Analysisof Financial Condition and Results of Operations – Liquidity and CapitalResources; and Item 8. Financial Statements and Supplementary Data – Notes 5and 6 of Notes to Consolidated Financial Statements.  There have been no significant changes incontractual obligations and commitments from March 31, 2004 to December 31,2004, other than those reported elsewhere in this Form 10-Q.

 

**CriticalAccounting Policies**

 

Ourunaudited financial statements and accompanying notes are prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information and with the instructions to Form10-Q and Regulation S-X.  Preparingfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets, liabilities, revenues and expenses.  Theses 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 valuation, revenue recognition, equipment andleasehold improvements, income taxes and impairment of long-term assets.  These critical accounting policies arediscussed in the Notes to Consolidated Financial Statements in the Company’spreviously filed report on Form 10-K for the fiscal year ended March 31,2004.  This discussion and analysisshould be read in conjunction with such notes and our consolidated financialstatements and related notes included elsewhere 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 also the discussion of going concern uncertainty included elsewhere in Item2.*

 

The successful productionand marketing of high-value natural products derived from microalgae has beenthe strategy of Cyanotech Corporation since our inception.  Our current product offerings includeCertified Organic and Naturally Cultivated Spirulina Pacifica in powder, flakeand tablet form, NatuRose natural astaxanthin powder for the animal nutritionmarket, BioAstin natural astaxanthin in lipid extract, softgel capsule andmicro-encapsulated beadlet form for the human nutrition and cosmetic industriesand algae-based 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.  Consumer productscan also be purchased online at www.nutrex-hawaii.com.

 

The results for thequarter ended December 31, 2004 were improved over the prior fiscalquarter and the comparable quarter of the prior year in spite of the disruptionof NatuRose sales.  During the thirdquarter of fiscal 2005, sales of spirulina were consistent with the levelachieved during the prior fiscal quarter, amounting to $1,810,000 and$1,789,000 respectively.  Alsocontributing to such improvement were increased sales of BioAstin.  This increase in sales of higher-marginBioAstin products contributed to achievement of gross profit margin of 37% forthe quarter ended December 31, 2004. Also contributing to this improvement were continued productionefficiencies in all product categories.

 

15

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The Company’s continuedto control its operating expenses which amounted to $845,000 for the thirdquarter of fiscal 2005.  As a result, theCompany reported net income of $326,000 or $0.02 per diluted share for thequarter ended December 31, 2004. This result demonstrates our Company’s ability to maintain efficientproduction systems, adapt to changing demand in our markets and controloverhead expenses in order to sustain and improve profitability.

 

As of December 31,2004 we have completed the planned upgrade of our natural astaxanthinprocessing facility and have converted six of the planned ten ponds for suchcultivation.  We have decided to deferconversion of the remaining four ponds until we are more certain of the timingof the rebound of our NatuRose sales.  Animportant fact which we wish to emphasize is that while this project representsan investment of approximately $413,000 during the nine month period ended December 31,2004, it was funded entirely by cash flows generated from operations.

 

During the final quarterof fiscal 2005, we will be expanding our efforts to accelerate the acceptanceof our natural astaxanthin products in both human and animal nutritionmarkets.  Clinical trials on the benefitsof BioAstin are planned to begin in the fourth quarter with results expected infiscal 2006.  We are continuing ourpromotional efforts for BioAstin with an advertising campaign aimed atmanufacturers of nutritional supplements. We are confident that sales of BioAstin will continue to improve, thatour market for NatuRose will resume its growth and that our Company will beable to capitalize on the increased demand.

 

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, included in this report.

 

Cyanotech believes thatit has the product offerings, facilities, personnel, and competitive andfinancial resources for improved results, but future revenues, costs, marginsand profits are all influenced by a number of factors, as discussed above, allof which are inherently difficult to forecast.

 

16

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**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.

 

**Item 4.****           Controlsand Procedures**

 

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 design and operation of our disclosurecontrols and procedures as of the end of the period covered by this report inaccordance with Item 307 of Regulation S-K promulgated by the Securities andExchange Commission.  As defined underSections 13a-15(e) and 15d-15(e) issued under the Securities Exchange Act of1934, as amended (the “Exchange Act”), the term “disclosure controls andprocedures” refers to controls and other procedures of an issuer that aredesigned to ensure that information required to be disclosed by the issuer inthe reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported, within the time periods specified in theCommission’s rules and forms.  Disclosurecontrols and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by an issuer inthe reports that it files or submits under the Exchange Act is accumulated andcommunicated to the issuer’s management, including its principal executiveofficer or officers and principal financial officer or officers, or personsperforming similar functions, as appropriate to allow timely decisionsregarding required disclosure.

 

Based on that evaluation, the CEO and CFO have concluded that theCompany’s disclosure controls and procedures are effective.  There were no changes in our internalcontrols over financial reporting during the quarter ended December 31,2004 that have materially affected, or are reasonably like to materiallyaffect, our internal controls over financial reporting.

 

17

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| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                                                                                                                                                                                 |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                                                  |
| Item 1.      |       | Legal  Proceedings                                                                                                                                                                                                                                                    |
|         |       |                                                                                                                                                                                                                                                                  |
|         |       | None                                                                                                                                                                                                                                                                  |
|         |       |                                                                                                                                                                                                                                                                  |
| Item 6.      |       | Exhibits  and 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 |
|         |       |                                                                                                                                                                                                                                                                  |   |
|         |       | b)                                                                                                                                                                                                                                                                    | Reports on Form  8-K |
|         |       |                                                                                                                                                                                                                                                                  |
|         |       | A report on Form  8-K dated November 1, 2004 in Item 2.02 - The Company’s press release  announcing the financial results for the quarter ended September 30,  2004.                                                                                   |
|         |       |                                                                                                                                                                                                                                                                  |
|         |       | A report on Form  8-K dated December 6, 2004 included Item 7.01 - An interview with the  Company’s President and Chief Executive Officer as published by the Wall  Street Transcript in conjunction with the Company’s press release announcing  same. |
|         |       |                                                                                                                                                                                                                                                                  |
|         |       | A report on Form  8-K dated December 14, 2004 included Item 7.01 - A press release  providing update on the Company’s pond conversion project.                                                                                                              |
|         |       |                                                                                                                                                                                                                                                                  |
|         |       | A report on Form  8-K dated December 30, 2004 included** **Item 7.01 -  A press release announcing the departure of the Company’s Scientific  Director.                                                                                                |

 

18

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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 dulyauthorized.

 

 

CYANOTECH CORPORATION (Registrant)

 

 
| February 11, 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 |
|                   |   | (Principal  Financial and Accounting Officer)       |

 

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