10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

x  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For Quarterly Period Ended December 31, 2012

Or

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

For the Transition Period From               to             

Commission File Number 0-14602

CYANOTECH CORPORATION

(Exact name of registrant 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)

Not Applicable

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

Number of common shares outstanding as of February 6, 2013:

Title of Class	Shares Outstanding
Common stock - $0.02 par value	5,463,938

CYANOTECH CORPORATION

FORM 10-Q

INDEX

PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of December 31, 2012 and March 31, 2012	3
	Condensed Consolidated Statements of Operations for the three and nine month periods ended December 31, 2012 and 2011	4
	Condensed Consolidated Statements of Cash Flows for the nine month periods ended December 31, 2012 and 2011	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	19
Item 3.	Defaults upon Senior Securities	19
Item 5.	Other Information	19
Item 6.	Exhibits	20
SIGNATURES		21

2

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

CYANOTECH CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands except par value and number of shares)

(Unaudited)

	December 31, 2012			March 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	3,609		$	5,061
Accounts receivable, net of allowance for doubtful accounts of $6 at December 31, 2012 and $16 at March 31, 2012	4,242			2,373
Inventories, net	3,488			3,548
Deferred tax assets	137			137
Prepaid expenses and other current assets	279			300
Total current assets	11,755			11,419
Equipment and leasehold improvements, net	8,471			5,834
Restricted cash	281			—
Deferred tax assets	1,307			1,307
Other assets	769			478
Total assets	$	22,583		$	19,038
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	64		$	234
Customer deposits	42			49
Accounts payable	1,956			1,726
Accrued expenses	793			1,352
Total current liabilities	2,855			3,361
Long-term debt, excluding current maturities	2,286			400
Deferred rent	16			12
Total liabilities	5,157			3,773
Commitments and contingencies
Stockholders’ equity:
Common stock of $0.02 par value, shares authorized 50,000,000; 5,463,938 shares issued and outstanding at December 31, 2012 and 5,440,968 shares at March 31, 2012	109			109
Additional paid-in capital	28,910			28,324
Accumulated deficit	(11,593		)	(13,168		)
Total stockholders’ equity	17,426			15,265
Total liabilities and stockholders’ equity	$	22,583		$	19,038

See accompanying Notes to Condensed Consolidated Financial Statements.

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CYANOTECH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

(Unaudited)

	Three Months Ended December 31,						Nine Months Ended December 31,
	2012			2011			2012			2011
NET SALES	$	7,242		$	6,706		$	20,684		$	18,645
COST OF SALES	4,377			3,879			12,433			10,924
Gross profit	2,865			2,827			8,251			7,721
OPERATING EXPENSES:
General and administrative	1,175			955			3,608			3,019
Sales and marketing	1,004			631			2,722			1,808
Research and development	52			77			183			237
Loss on disposal of equipment and leasehold improvements	1			1			36			65
Total operating expenses	2,232			1,664			6,549			5,129
Income from operations	633			1,163			1,702			2,592
OTHER EXPENSE:
Loss on extinguishment of debt	—			—			(51		)	—
Interest expense, net	(14		)	(14		)	(43		)	(38		)
Total other expense, net	(14		)	(14		)	(94		)	(38		)
Income before provision for income taxes	619			1,149			1,608			2,554
PROVISION FOR INCOME TAXES	(12		)	(36		)	(32		)	(81		)
NET INCOME	$	607		$	1,113		$	1,576		$	2,473
NET INCOME PER SHARE:
Basic	$	0.11		$	0.21		$	0.29		$	0.46
Diluted	$	0.11		$	0.20		$	0.28		$	0.45
SHARES USED IN CALCULATION OF NET INCOME PER SHARE:
Basic	5,464			5,424			5,451			5,406
Diluted	5,617			5,571			5,692			5,490

See accompanying Notes to Condensed Consolidated Financial Statements.

4

CYANOTECH CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Nine Months Ended December 31,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,576		$	2,473
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on extinguishment of debt	51			—
Loss on disposal of equipment and leasehold improvements	35			65
Depreciation and amortization	619			513
Amortization of debt issue costs and other assets	84			32
Share based compensation expense	563			326
Reduction of allowance for doubtful accounts	(10		)	(6		)
Net (increase) decrease in operating assets:
Accounts receivable	(1,859		)	(208		)
Inventories	60			71
Prepaid expenses and other assets	(95		)	(275		)
Net increase (decrease) in operating liabilities:
Customer deposits	(7		)	(76		)
Accounts payable	230			140
Accrued expenses	(559		)	520
Deferred rent	4			—
Net cash provided by operating activities	692			3,575
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash from issuance of long term debt	(281		)	—
Investment in equipment and leasehold improvements	(3,292		)	(1,438		)
Net cash used in investing activities	(3,573		)	(1,438		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt, net of costs	2,281			95
Principal payments on long-term debt	(616		)	(160		)
Payments for debt issuance costs	(259		)	—
Proceeds from stock options exercised	23			56
Net cash provided by (used in) financing activities	1,429			(9		)
Net (decrease) increase in cash and cash equivalents	(1,452		)	2,128
Cash and cash equivalents at beginning of period	5,061			2,062
Cash and cash equivalents at end of period	$	3,609		$	4,190
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	98		$	30
Income taxes	$	57		$	60

See accompanying Notes to Condensed Consolidated Financial Statements.

5

CYANOTECH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2012

(Unaudited)

1.BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information pursuant to the instructions to Form 10-Q and Regulation S-X of the Securities and Exchange Commission (SEC).  These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, and Condensed Consolidated Statements of Cash Flows for the periods presented in accordance with GAAP. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The Condensed Consolidated Balance Sheet as of March 31, 2012 was derived from the audited financial statements. These condensed consolidated financial statements and notes should be read in conjunction with the Company’s consolidated financial statements for the year ended March 31, 2012, contained in the Company’s annual report on Form 10-K as filed with the SEC on June 21, 2012.

The accompanying condensed consolidated financial statements include the accounts of Cyanotech Corporation and its wholly owned subsidiary, Nutrex Hawaii, Inc. (“Nutrex Hawaii” or “Nutrex”, collectively the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods reported.  Management reviews these estimates and assumptions periodically and reflects the effect of revisions in the period that they are determined to be necessary.  Actual results could differ from those estimates and assumptions.

2.INVENTORIES

Inventories are stated at the lower of cost or market.  Cost is determined by the first-in, first-out method.  Inventories consist of the following:

	December 31, 2012		March 31, 2012
	(in thousands)
Raw materials	$	840	$	344
Work in process	364		253
Finished goods(1)	2,051		2,722
Supplies	233		229
	$	3,488	$	3,548

(1)Net of reserve for obsolescence of $11,000 and $41,000 at December 31, 2012 and March 31, 2012, respectively.

The Company recognizes abnormal production costs, including fixed cost variances from normal production capacity, as an expense in the period incurred. Approximately $161,000 and $875,000 of abnormal production costs were charged to cost of sales for the three and nine months ended December 31, 2012, respectively.  Approximately $236,000 and $652,000 of abnormal production costs were charged to cost of sales for the three and nine months ended December 31, 2011.

3.EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

Equipment	3 to 10 years
Furniture and fixtures	3 to 7 years
Leasehold improvements	10 to 25 years

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Equipment and leasehold improvements consist of the following:

	December 31, 2012			March 31, 2012
	(in thousands)
Equipment(1)	$	7,131		$	6,695
Leasehold improvements	8,313			7,524
Furniture and fixtures	176			154
	15,620			14,373
Less accumulated depreciation and amortization	(10,313		)	(9,867		)
Construction-in-progress	3,164			1,328
Equipment and leasehold improvements, net	$	8,471		$	5,834

(1)Includes $97,000 of equipment under capital lease with accumulated amortization of $53,000 and $39,000 at December 31, 2012 and March 31, 2012, respectively.

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amount to forecasted undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future cash flows, then an impairment charge is recognized to the extent that the carrying amount exceeds the asset’s fair value. Management has determined no asset impairment existed as of December 31, 2012. The Company recognized a loss on disposal of assets in the amount of $1,000 and $36,000 for the three and nine months ended December 31, 2012, respectively.  The Company recognized a loss on disposal of assets in the amount of $1,000 and $65,000 for the three and nine months ended December 31, 2011, respectively.

4.ACCRUED EXPENSES

Accrued expenses consist of the following:

	December 31, 2012		March 31, 2012
	(in thousands)
Wages, commissions	$	487	$	491
Customer rebates	116		69
Bonuses	—		642
Rent	72		17
Other expenses	118		133
	$	793	$	1,352

5.LONG-TERM DEBT

Long-term debt consists of the following:

	December 31, 2012			March 31, 2012
	(in thousands)
Term loans	$	2,350		$	634
Less current maturities	(64		)	(234		)
Long-term debt, excluding current maturities	$	2,286		$	400

Term Loan Agreements

On September 7, 2012, the Company completed a loan agreement with a lender providing for $5,500,000 in aggregate credit facilities (the “Loan”) secured by substantially all the Company’s assets, pursuant to a Term Loan Agreement dated August 14, 2012 (the “Loan Agreement”). The Loan Agreement is evidenced by promissory notes in the amounts of $2,250,000 and $3,250,000, the repayment of which is partially guaranteed under the provisions of a United States Department of Agriculture (“USDA”) Rural Development Guarantee program (the “Guarantees”). The proceeds of the Loan will be used to acquire new processing equipment and leasehold improvements at its Kona, Hawaii facility.

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The provisions of the Loan require the payment of interest only for the first 12 months of the term; thereafter, and until its maturity on August 14, 2032, the obligation fully amortizes over nineteen (19) years. Interest on the Loan accrues on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate (3.25% at December 31, 2012) plus 1.0% and is adjustable on the first day of each calendar quarter and fixed for that quarter. At no time shall the annual interest rate be less than 5.50%. The Loan has a prepayment penalty of 5% for any prepayment made prior to the first anniversary of the date of the Loan Agreement, which penalty is reduced by 1% each year thereafter until the fifth anniversary of such date, after which there is no prepayment penalty. The balance under this Loan was $2,250,000 at December 31, 2012. Proceeds from the Loan are classified as restricted cash until drawn upon to acquire new processing equipment and leasehold improvements.

The Loan includes a one-time origination and guaranty fees totaling $214,500 and an annual renewal fee payable in the amount of 0.25% of the USDA guaranteed portion of the outstanding principal balance as of December 31 of each year, beginning December 31, 2012.  The USDA has guaranteed 80% of all amounts owing under the Loan. The Company is subject to financial covenants and customary affirmative and negative covenants. The Company was in compliance with these financial covenants at December 31, 2012.

The Company has five equipment loans with John Deere credit providing for $163,000 in equipment financing; four of these loans are payable in 48 equal monthly principal payments and one is payable in 36 equal monthly principal payments.  At December 31, 2012 and March 31, 2012 the total outstanding combined balance was approximately $76,000. The equipment loans have maturity dates of  March 2013 as to $2,000, May 2015 as to $26,000, November 2015 as to $22,000 and June 2016 as to $26,000. The loans are at a 0% rate of interest and are net of unamortized discount of $3,000 at December 31, 2012.

In September 2011, the Company executed a Term Loan Agreement with Nissan Motor Acceptance Corporation providing for $23,000 in equipment financing, secured by the equipment. The Term Loan has a maturity date of September 13, 2016 and is payable in 60 equal monthly principal payments. The interest rate under this Term Loan is 0%. Imputed interest at a rate of 2% (cash discount offered by seller) has been recorded and is being amortized as interest over the term of the loan. The face value of the term loan is reported in the balance sheets at $16,000, less the unamortized discount of $600 at December 31, 2012.

Capital Lease

In March 2010, the Company executed a capital lease agreement with Thermo Fisher Financial providing for $97,000 in equipment, secured by the equipment financed. The capital lease has a maturity date of March 2013 and is payable in 36 equal monthly payments. The interest rate under this capital lease is 6.6%. The balance under this capital lease was $9,000 and $34,000 at December 31, 2012 at March 31, 2012, respectively.

Future principal payments under the term loans and capital lease agreement as of December 31, 2012 are as follows:

Payments Due	(in thousands)
Next 12 Months	$	64
Year 2	99
Year 3	97
Year 4	85
Year 5	83
Thereafter through 2032	1,922
Total principal payments	$	2,350

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6.LEASES

The Company leases facilities, equipment and land under operating leases expiring between 2012 and 2035.  The land lease provides for contingent rental in excess of minimum rental commitments based on a percentage of the Company’s sales. Management has accrued for the estimated contingent rent as of December 31, 2012.

Future minimum lease payments under all non-cancelable operating leases at December 31, 2012 are as follows:

Payments Due	(in thousands)
Next 12 Months	$	466
Year 2	472
Year 3	425
Year 4	331
Year 5	299
Thereafter through 2026	5,385
Total minimum lease payments	$	7,378

7.COMMITMENTS AND CONTINGENCIES

On September 12, 2012, the Company entered into an agreement with Uhde Corporation of America (“Uhde”) for the purchase of supercritical carbon dioxide extraction equipment to be used in the processing of its natural astaxanthin (“Equipment”). Pursuant to the terms of the agreement, Uhde will build, ship and provide assistance in installing the Equipment, which is required to be delivered in approximately 14 months from the date of the agreement. The Company will pay Uhde an aggregate of $3,222,000 for the equipment and services, of which $1,612,000  remains unpaid as of December 31, 2012.

8.SHARE-BASED COMPENSATION

The Company accounts for share-based payment arrangements using fair value. If an award vests or becomes exercisable based on the achievement of a condition other than service, such as for meeting certain performance or market conditions, the award is classified as a liability. Liability-classified awards are remeasured to fair value at each balance sheet date until the award is settled. The Company currently has no liability-classified awards. Equity- classified awards, including grants of employee stock options, are measured at the grant-date fair value of the award and are not subsequently remeasured unless an award is modified. The cost of equity-classified awards is recognized in the statement of operations over the period during which an employee is required to provide the service in exchange for the award, or the vesting period. All of the Company’s stock options are service-based awards, and because the Company’s stock options are “plain vanilla,” as defined by the U.S. Securities and Exchange Commission in Staff Accounting Bulletin No. 107, they are reflected only in Equity and Compensation Expense accounts.

Stock Options

As of December 31, 2012, the Company had the following two shareholder approved plans under which shares were available for equity based awards: The 2005 Stock Option Plan (the “2005 Plan”) wherein 2,075,000 shares of common stock are reserved for issuance until the Plan terminates on August 21, 2015, and; The Independent Director Stock Option and Stock Grant Plan (the “2004 Directors Plan”) wherein 200,000 shares of common stock are reserved for issuance until the plan terminates in 2014.

Under the 2005 Plan, eligible employees and certain independent consultants may be granted options to purchase shares of the Company’s common stock. The shares issuable under the 2005 Plan will either be shares of the Company’s authorized but previously unissued common stock or shares reacquired by the Company, including shares purchased on the open market.  As of December 31, 2012, there were 411,478 options available for grant under the 2005 Plan.

Under the 2004 Directors Plan, upon election to the Board of Directors at an annual stockholders meeting, a newly elected non-employee director will be granted a ten-year option to purchase 6,000 shares of the Company’s common stock. Options vest and become exercisable six months from the date of grant. In addition, on the date of each annual stockholders meeting, each non-employee director continuing in office is automatically issued 4,000 shares of the Company’s common stock, and an additional 1,000 shares to the director serving as Chairman of the Board, non-transferable for six months following the date of grant. During the nine months ended December 31, 2012 and 2011, there were 13,000 and 8,000 shares issued under the 2004 directors Plan, respectively. As of December 31, 2012, there were 130,123 shares available for grant under the 2004 Directors Plan.

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The following table presents shares authorized, available for future grant and options outstanding under each of the Company’s plans:

	As of December 31, 2012
	Authorized	Available	Outstanding
2005 Plan	2,075,000	411,478	1,483,856
2004 Directors Plan	200,000	130,123	12,000
Total	2,275,000	541,601	1,495,856

All stock option grants made under the 2005 Plan and the 2004 Directors Plan were at exercise prices no less than the Company’s closing stock price on the date of grant. Options under the 2005 Plan and 2004 Directors Plan were determined by the Board of Directors or the Stock Option and Compensation Committee of the Board in accordance with the provisions of the respective plans.  The terms of each option grant include vesting, exercise and other conditions are set forth in a Stock Option Agreement evidencing each grant. No option can have a life in excess of ten (10) years.  The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The model requires various assumptions, including a risk-free interest rate, the expected term of the options, the expected stock price volatility over the expected term of the options and the expected dividend yield. Compensation expense for employee stock options is recognized ratably over the vesting term which ranges from 4 to 7 years. Compensation expense recognized for options issued under the 2005 Plan was $191,000 and $486,000 for the three and nine months ended December 31, 2012, respectively. Compensation expense recognized for options issued under the 2005 Plan was $121,000 and $289,000 for the three and nine months ended December 31, 2011, respectively. Compensation expense recognized for options and shares issued under the 2004 Directors Plan was $0 and $77,000 for the three and nine months ended December 31, 2012, respectively. Compensation expense recognized for options and shares issued under the 2004 Directors Plan was $6,000 and $37,000 for the three and nine months ended December 31, 2011, respectively. All share-based compensation has been classified as General and Administrative expense.

A summary of option activity under the Company’s stock plans for the nine months ended December 31, 2012 is presented below:

Option Activity	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at March 31, 2012	1,251,166		$	3.54	9.0 years	$	8,243,956
Granted	258,000		6.30		—	—
Exercised	(9,970	)	$	2.34	—	—
Forfeited or expired	(3,340	)	$	3.21	—	—
Outstanding at December 31, 2012	1,495,856		$	4.03	8.5 years	$	1,364,067
Exercisable at December 31, 2012	257,290		$	3.15	7.7 years	$	393,087

The aggregate intrinsic value as of December 31, 2012 in the table above is before applicable income taxes and represents the excess amount over the exercise price optionees would have received if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price of $4.63 for such day.

A summary of the Company’s non-vested options for the nine months ended December 31, 2012 is presented below:

Nonvested Options	Shares		Weighted Average Grant-Date Fair Value
Nonvested at March 31, 2012	1,109,066		$	2.57
Granted	258,000		4.35
Vested	125,560		2.09
Forfeited or expired	(2,940	)	2.14
Nonvested at December 31, 2012	1,238,566		$	2.99

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The following table summarizes the weighted average characteristics of outstanding stock options as of December 31, 2012:

	Outstanding Options				Exercisable Options
Range of Exercise Prices	Number of Shares	Remaining Life (Years)	Weighted Average Price		Number of Shares	Weighted Average Price
$ 1.60 - $3.70	450,210	7.7	$	2.92	181,370	$	2.72
$ 3.71 - $4.42	732,646	8.7	3.82		56,920	3.82
$ 4.43 - $5.40	77,500	9.1	5.19		19,000	5.26
$ 5.41 - $7.08	235,500	9.5	6.40		—	—
Total stock options	1,495,856	8.5	$	4.03	257,290	$	3.15

There were 45,000 and 258,000 stock options granted during the three and nine months ended December 30, 2012, respectively. There were 55,000 and 922,516 stock options granted during the three and nine months ended December 31, 2011, respectively. The value assumptions related to options granted during the nine months ended December 31, 2012 and 2011 were as follows:

	2012	2011
Exercise Price:	$5.26 - 7.08	$3.58 - 5.40
Volatility:	78.26 - 80.39%	56.18 - 78.61%
Risk Free Rate:	0.85 - .93%	0.09 - 2.25%
Vesting Period:	5 - 7 years	0 - 5 years
Forfeiture Rate:	7.66 - 9.00%	0 - 16.88%
Expected Life	6.25 years	0.25 - 8.25 years
Dividend Rate	0%	0%

As of December 31, 2012, total unrecognized share-based compensation expense related to all unvested stock options was $2,654,000, which is expected to be recognized over a weighted average period of 4.3 years.

9.INCOME TAXES

Income taxes are provided on the pretax income in the consolidated financial statements. The tax provision is based on the current quarter activity of the legal entities and jurisdictions in which the Company operates. Tax credits are recognized as a reduction to income taxes in the year the credits are earned, accordingly, the effective tax rate may vary from the customary relationship between income tax expense (benefit) and pretax income.  The effective tax rate for the three and nine months ended December 31, 2012 differs from the statutory rate due to utilization of net operating loss carryforwards that have been fully reserved due to the Company’s inconsistent taxable income in recent years and uncertainty about taxable income in future years.

The Company is subject to taxation in the United States and two state jurisdictions.  The preparation of tax returns requires management to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. Management, in consultation with its tax advisors, files its tax returns based on interpretations that are believed to be reasonable under the circumstances. The income tax returns, however, are subject to routine reviews by the various taxing authorities.  As part of these reviews, a taxing authority may disagree with respect to the tax positions taken by management (“uncertain tax positions”) and therefore may require the Company to pay additional taxes. Management evaluates the requirement for additional tax accruals, including interest and penalties, which the Company could incur as a result of the ultimate resolution of its uncertain tax positions. Management reviews and updates the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, completion of tax audits, expiration of statute of limitations, or upon occurrence of other events.

As of December 31, 2012, there was no liability for income tax associated with unrecognized tax benefits. The Company recognizes accrued interest related to unrecognized tax benefits as well as any related penalties in interest expense in its consolidated condensed statements of operations, which is consistent with the recognition of these items in prior reporting periods.

With few exceptions, the Company is no longer subject to U.S. federal, state, local, and non-U.S. income tax examination by tax authorities for tax years before 2008.

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10.COMMON AND PREFERRED STOCK

Following shareholder approval, the Company filed a Certificate of Amendment to its Articles of Incorporation to increase the total number of authorized shares from 12,500,000 to sixty million (60,000,000) shares of which fifty million (50,000,000) shares shall be common stock, par value $0.02, and ten million (10,000,000) shares shall be preferred stock, par value $0.01. There are no preferred shares issued or outstanding. The Amendment was effective as of November 2, 2012.

11.EARNINGS PER SHARE

Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding.  Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the potentially dilutive effect of outstanding stock options using the “treasury stock” method.

Reconciliations between the numerator and the denominator of the basic and diluted earnings per share computations for the three months ended December 31, 2012 and 2011 are as follows:

	Three Months Ended December 31, 2012
	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
	(in thousands)
Basic income per share	$	607	5,464	$	0.11
Effect of dilutive securities — Common stock options	—		153	—
Diluted income per share	$	607	5,617	$	0.11

	Three Months Ended December 31, 2011
	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
	(in thousands)
Basic income per share	$	1,113	5,424	$	0.21
Effect of dilutive securities — Common stock options	—		147	(0.01		)
Diluted income per share	$	1,113	5,571	$	0.20

Reconciliations between the numerator and the denominator of the basic and diluted earnings per share computations for the six months ended December 31, 2012 and 2011 are as follows:

	Nine Months Ended December 31, 2012
	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
	(in thousands)
Basic income per share	$	1,576	5,451	$	0.29
Effect of dilutive securities—Common stock options	—		241	(0.01		)
Diluted income per share	$	1,576	5,692	$	0.28

	Nine Months Ended December 31, 2011
	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
	(in thousands)
Basic income per share	$	2,473	5,406	$	0.46
Effect of dilutive securities — Common stock options	—		84	(0.01		)
Diluted income per share	$	2,473	5,490	$	0.45

Diluted earnings per share does not include the impact of common stock options totaling 732,032 and 786,756 for the three months ended December 31, 2012 and 2011, respectively, and 198,000 and 1,134,116 for the nine months ended December 31, 2012 and 2011, respectively, as the effect of their inclusion would be anti-dilutive.

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

FORWARD-LOOKING STATEMENTS

This Report and other presentations made by Cyanotech Corporation (“CYAN”) and its subsidiary contain “forward-looking statements,” which include statements that are predictive in nature, depend upon or refer to future events or conditions, and usually include words such as “expects,” “anticipates,” “intends,” “plan,” “believes,” “predicts”, “estimates” or similar expressions. In addition, any statement concerning future financial performance, ongoing business strategies or prospects and possible future actions are also forward-looking statements. Forward-looking statements are based upon current expectations and projections about future events and are subject to risks, uncertainties and the accuracy of assumptions concerning CYAN and its subsidiaries (collectively, the “Company”), the performance of the industry in which CYAN does business, and economic and market factors, among other things. These forward-looking statements are not guarantees of future performance.  You should not place undue reliance on forward-looking statements.

Forward-looking statements speak only as of the date of the Report, presentation or filing in which they are made. Except to the extent required by the Federal Securities Laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Our forward-looking statements in this Report include, but are not limited to:

·Statements relating to our business strategy;

·Statements relating to our business objectives; and

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

These forward-looking statements are subject to risk, uncertainties and assumptions about us and our operations that are subject to change based on various important factors, some of which are beyond our control. The following factors, among others, could cause our financial performance to differ significantly from the goals, plans, objectives, intentions and expectations expressed in our forward-looking statements:

·Environmental restrictions, soil and water conditions, levels of sunlight and seasonal weather patterns, particularly heavy rain, wind and other hazards;

·Consumer perception of our products due to adverse scientific research or findings, publicity regarding nutritional supplements, litigation, regulatory investigations or other events, conditions and circumstances involving the Company which receive national media coverage;

·The effects of competition, including tactics and locations of competitors and operating and market competition;

·Demand for our products, the quantities and qualities thereof available for sale and levels of customer satisfaction, including significant unforeseen fluctuations in global demand for products similar to our products;

·Our dependence on the experience, continuity and competence of our executive officers and other key employees;

·The added risks associated with the current local, national and world economic crises, including but not limited to, the volatility of crude oil prices, inflation and currency fluctuations;

·Changes in domestic and/or foreign laws, regulations or standards, affecting nutraceutical products or our methods of operation;

·Access to available and reasonable financing on a timely basis;

·Changes in laws, corporate governance requirements and tax rates, regulations, accounting standards and the application to us or the nutritional products industry of new decisions by courts, regulators or other government authorities;

·The risk associated with the geographic concentration of our business;

·Acts of war, terrorist incidents or natural disasters; and

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Other risks or uncertainties described elsewhere in this Report and in other periodic reports previously and subsequently filed by us with the Securities and Exchange Commission.

Overview:

We are a world leader in the production of high value natural products derived from microalgae. Incorporated in 1983, we are guided by the principle of providing beneficial, quality microalgal products for health and human nutrition in a sustainable, reliable and environmentally sensitive operation. We are ISO 9001:2008 compliant and GMP (Good Manufacturing Practices) certified by the Natural Products Association™, reinforcing our commitment to quality in our products, quality in our relationships (with our customers, suppliers, co-workers and the communities we live in), and quality of the environment in which we work. Our products include:

·Hawaiian Spirulina Pacifica® - a nutrient-rich dietary supplement used for extra energy, a strengthened immune system, cardiovascular benefits and as a source of antioxidant carotenoids; and

·Hawaiian BioAstin® natural astaxanthin - a powerful dietary antioxidant shown to support and maintain the body’s natural inflammatory response, to enhance skin, and to support eye and joint health.  It has expanding applications as a human nutraceutical and functional food ingredient

Microalgae are a diverse group of microscopic plants that have a wide range of physiological and biochemical characteristics and contain, among other things, high levels of natural protein, amino acids, vitamins, pigments and enzymes. Microalgae have the following properties that make commercial production attractive: (1) microalgae grow much faster than land grown plants, often up to 100 times faster; (2) microalgae have uniform cell structures with no bark, stems, branches or leaves, permitting easier extraction of products and higher utilization of the microalgae cells; and (3) the cellular uniformity of microalgae makes it practical to control the growing environment in order to optimize a particular cell characteristic. Efficient and effective cultivation of microalgae requires consistent light, warm temperatures, low rainfall and proper chemical balance in a very nutrient-rich environment, free of environmental contaminants and unwanted organisms. This is a challenge that has motivated us to design, develop and implement proprietary production and harvesting technologies, systems and processes in order to provide human nutritional products derived from microalgae.

Our production of these products at the 90-acre facility on the Kona Coast of the island of Hawaii provides several benefits. We selected the Keahole Point location in order to take advantage of relatively consistent warm temperatures, sunshine and low levels of rainfall needed for optimal cultivation of microalgae. This location also offers us access to cold deep ocean water, drawn from an offshore depth of 2,000 feet, which we use in our Ocean-Chill Drying system to eliminate the oxidative damage caused by standard drying techniques and as a source of trace nutrients for microalgal cultures. The area is also designated a Biosecure Zone, free of pesticides and herbicides. We believe that our technology, systems, processes and favorable growing location generally permit year-round harvest of our microalgal products in a cost-effective manner.

Results of Operations

Because our core operations are agricultural and dependent on favorable environmental factors, from time to time we experience cycles of low production in our harvests. Our spirulina production has been experiencing one of those cycles over the past twelve months. Specifically, we have harvested microalgae with smaller cell sizes than had been typical over the past several years. While the quality of our spirulina remains very high, with nutrient levels at or above our high standards, the physical size of the cells has impacted our harvest levels. We continue to take steps to improve our harvest efficiency and maintain a large size cell. Our harvest level has improved and stabilized at a significantly higher level in the third quarter and through the first month of the fourth quarter but has not yet returned to targeted levels.

We have continued to make progress in developing our total consumer business. Our astaxanthin pond expansion project completed early this year and, the overall expertise we have developed in cultivating and harvesting our natural Hawaiian astaxanthin have helped us offset the downturn in our spirulina target harvest cycle.

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The following tables present selected consolidated financial data for each of the periods indicated ($ in thousands):

	Three Months Ended						Nine Months Ended
	December 31, 2012			December 31, 2011			December 31, 2012			December 31, 2011
Net sales	$	7,242		$	6,706		$	20,684		$	18,645
Net sales increase	8.0		%				10.9		%
Gross profit	$	2,865		$	2,827		$	8,251		$	7,721
Gross profit as % of net sales	39.6		%	42.2		%	39.9		%	41.4		%
Operating expenses	$	2,232		$	1,664		$	6,549		$	5,129
Operating expenses as % of net sales	30.8		%	24.8		%	31.7		%	27.5		%
Operating income	$	633		$	1,163		$	1,702		$	2,592
Operating income as % of net sales	8.7		%	17.3		%	8.2		%	13.9		%
Income tax expense	$	12		$	36		$	32		$	81
Net income	$	607		$	1,113		$	1,576		$	2,473
Net sales by product
Bulk sales
Spirulina bulk	$	755		$	1,236		$	2,646		$	3,963
Spirulina bulk sales decrease	(38.9		)%				(33.2		)%
Astaxanthin bulk	$	3,345		$	3,258		$	9,261		$	8,432
Astaxanthin bulk sales increase	2.7		%				9.8		%
Total Bulk sales	$	4,100		$	4,494		$	11,907		$	12,395
Total Bulk sales decrease	(8.8		)%				(3.9		)%
Packaged sales
Spirulina packaged	$	1,218		$	859		$	3,622		$	2,703
Spirulina packaged sales increase	41.8		%				34.0		%
Astaxanthin packaged	$	1,924		$	1,353		$	5,155		$	3,547
Astaxanthin packaged sales increase	42.2		%				45.3		%
Total Packaged sales	$	3,142		$	2,212		$	8,777		$	6,250
Total Packaged sales increase	42.0		%				40.4		%

Comparison of the Three Months Ended December 31, 2012 and 2011

Net SalesThe net sales growth of 8% for the quarter was driven by a 42% increase in our packaged products consistent with our focus and investment in the consumer packaged goods side of our business.  Within this growth, sales of spirulina increased 42% and sales of astaxanthin increased 42%.  Sales of our bulk products decreased only 9% as a result of the lower production of spirulina.  Within this decrease, sales of bulk spirulina decreased 39% as a result of low production during the quarter and sales of bulk astaxanthin increased 3%.  International sales represented 38% of net sales for the three months ended December 31, 2012 compared to 29% for the same period a year ago. There were no customers with sales equaling or exceeding 10% of our total sales for the three months ended December 31, 2012 and 2011.

Gross Profit  Our gross profit percent of net sales decreased by 2.6 points in the third quarter. Gross profit was impacted by lower spirulina production which resulted in the recognition of abnormal production costs of approximately $161,000 and $236,000, in the third quarter of fiscal years 2013 and 2012, respectively.  The abnormal costs were driven by a 17.5% decrease in spirulina production from the similar period in the prior year and a 6.2% increase in costs as compared with the similar period in the prior year.

Operating Expenses  Operating expenses increased by $568,000 for the third quarter compared to the same period in 2012.  Included in this is an increase in Sales and Marketing expenses of $373,000, or 59.1%, due to an increase in brand development costs, advertising programs for our packaged products and added management level staffing.  General and administrative expenses increased $220,000, or 23%, due to increases in costs associated with stock options granted to key employees and increased legal costs.

Income Taxes  We recorded income tax expense of $12,000 in the current quarter compared to $36,000 for the same period in 2012.  Our effective tax rate was 2.0% for the current quarter and 3.55% for the same period last year.  We do not expect any material federal or state income taxes to be recorded in the current fiscal year due to our available net operating loss carry forwards.

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Comparison of the Nine Months Ended December 31, 2012 and 2011

Net SalesThe net sales growth of 10.9% for the first nine months of fiscal 2013 was driven by a 40% increase in our packaged products consistent with our focus and investment in the consumer packaged goods side of our business.  Within this growth, sales of spirulina increased 34% and sales of astaxanthin increased 45%.  Sales of our bulk products decreased 4%, driven by lower production of spirulina in the third quarter.  Within this decrease, sales of bulk spirulina decreased 33% and sales of bulk astaxanthin increased 10%.  International sales represented 36% of net sales for the nine months ended December 31, 2012 compared to 32% for the same period a year ago. There were no customers with sales equaling or exceeding 10% of our total sales for the nine months ended December 31, 2012 and 2011.

Gross Profit  Our gross profit percent of net sales decreased by 1.5 points in the first nine months of fiscal 2013.  Gross profit was impacted by the reduction in spirulina production which resulted in the recognition of abnormal production costs of approximately $875,000 and $652,000, for the nine months ended December 31, 2012 and 2011, respectively.  The abnormal costs were driven by a 25.9% decrease in spirulina production from the similar period in the prior year and a 2.2% increase in costs as compared with the similar period in the prior year.

Operating Expenses  Operating expenses increased by $1,420,000 for the nine months ended December 31, 2012, compared to the same period in 2012.  Included in this is an increase in Sales and Marketing expenses of $914,000, or 50.6%, due to an increase in brand development costs, advertising programs for our packaged products and added management level staffing.  General and administrative expenses increased $589,000, or 19.5%, due to increases in costs associated with stock options granted to key employees and increased legal costs.

Income Taxes  We recorded income tax expense of $32,000 for the first nine months of fiscal 2013 compared to $81,000 for the same period last year.  Our effective tax rate was 2.1% for the first nine months of fiscal 2013 compared to 3.42% for the same period last year.  We do not expect any material federal or state income taxes to be recorded in the current fiscal year due to our available net operating loss carry forwards.

Variability of Results

We have experienced significant quarterly fluctuations in operating results and such fluctuations could occur in future periods. We have, during our history, experienced fluctuations in operating results due to the following:  changes in sales levels to our customers; competition including pricing, new products and shifts in market trends; production difficulties from environmental influences; increased production costs and variable production results due to inclement weather; and start up costs associated with new product introductions, new facilities and expansion into new markets. In addition, future operating results may fluctuate as a result of factors beyond our control such as foreign exchange fluctuations, changes in government regulations, and economic changes in the regions we have customers. A portion of our operating expenses are relatively fixed and the timing of increases in expense levels is based in large part on forecasts of future sales. Therefore, if net sales are below expectations in any given period, the adverse impact on results of operations may be magnified by our inability to effectively adjust spending in certain areas, or to adjust spending in a timely manner, as in personnel and administrative costs. We may also choose to reduce prices or increase spending in response to market conditions, and these decisions may have a material adverse effect on financial condition and results of operations.

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Liquidity and Capital Resources

Cash Flows The following table summarizes our cash flows for the period indicated ($ in thousands):

	Nine months ended December 31
	2012			2011
Total cash is (used in) provided by:
Operating activities	$	692		$	3,575
Investing activities	(3,573		)	(1,438		)
Financing activities	1,429			(9		)
(Decrease) increase in cash and cash equivalents	$	(1,452	)	$	2,128

Cash provided by operating activities decreased $2,883,000 compared to the same period last year due primarily to lower income and an increase in receivables of $1,859,000 compared to an increase of $208,000 last year. This increase is a function of higher sales and the timing of those sales.

Cash used in investing activities in the current period includes the addition of $281,000 in restricted cash from loan proceeds that can only be used to acquire certain new processing equipment and leasehold improvements.  In addition, we expended $3,292,000 on leasehold improvements and equipment acquisitions at our Kona facility compared to $1,438,000 during the same period last year.

Cash provided by (used in) financing activities in the period consists of proceeds from long-term debt offset by payoff of existing long-term debt and debt issuance cost for the new loan.  The prior year result is the net of receipt of proceeds from long-term debt and principal payments in the normal course of business.

Sources and Uses of Capital

At December 31, 2012, our working capital was $8.9 million, an increase of $842,000 compared to March 31, 2012. Cash and cash equivalents at December 31, 2012 totaled $3,609,000, a decrease of $1,452,000 compared to March 31, 2012.

On September 7, 2012, the Company completed a Term Loan Agreement with a lender providing for $5,500,000 in aggregate credit facilities pursuant to a Term Loan Agreement dated August 14, 2012.  The Term Loan Agreement is evidenced by promissory notes in the amounts of $2,250,000 and $3,250,000, and was secured under the provisions of a United States Department of Agriculture (“USDA”) Rural Development Guarantee program.  The proceeds of the Term Loan can only be used for specific new processing equipment and leasehold improvements at its Kona, Hawaii facility.  Until their disbursement for approved projects, the funds advanced are classified as restricted cash.

Our results of operations and financial condition can be affected by numerous factors, many of which are beyond our control and could cause future results of operations to fluctuate materially as it has in the past. Future operating results may fluctuate as a result of changes in sales volumes to our largest customers, weather patterns, increased competition, increased materials, nutrient and energy costs, government regulations and other factors beyond our control.

A significant portion of our expense levels are relatively fixed, so the timing of increases in expenses is based in large part on forecasts of future sales. If net sales are below expectations in any given period, the adverse impact on results of operations may be magnified by our inability to adjust spending quickly enough to compensate for the sales shortfall. We may also choose to reduce prices or increase spending in response to market conditions, which may have a material adverse effect on financial condition and results of operations.

Based upon our current operating plan, analysis of our consolidated financial position and projected future results of operations, we believe that our operating cash flows, cash balances, and working capital will be sufficient to finance current operating requirements, debt service requirements, and routine planned capital expenditures, for the next twelve (12) months. We expect liquidity in the remainder of fiscal 2013 to be generated from operating cash flows.

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Outlook

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

Our strategic direction has been to position the Company as a world leader in the production and marketing of high-value natural products from microalgae. We are vertically aligned, producing raw materials in the form of microalgae processed at our 90-acre facility in Hawaii, and integrating those raw materials into finished products. In fiscal 2013, our primary focus has been to put a scalable foundation in place, improving our processes, systems, facilities and organization. We will continue putting increased emphasis on our Nutrex Hawaii consumer products to introduce them to a broader consumer market than in prior years. Our focus going forward will continue to be to leverage our experience and reputation for quality, building nutritional brands which promote health and well-being. The foundation of our nutritional products is naturally cultivated Hawaiian Spirulina Pacifica® in powder and tablet form; and BioAstin® Hawaiian Astaxanthin™ antioxidant in extract, softgel caplet and micro-encapsulated beadlet form.  Information about our Company and our products can be viewed at www.cyanotech.com and www.nutrex-hawaii.com. Consumer products can also be purchased online at www.nutrex-hawaii.com.

We are focused on sustainability of production levels in order to promote growth in our astaxanthin and spirulina product lines. We will continue to improve and expand this line to meet the demand of consumers. Cyanotech filed a New Dietary Ingredient (NDI) notice with the US FDA to allow a 12 mg dosage of BioAstin Natural Astaxanthin to cover the broad spectrum of potential users. The NDI was reviewed by the FDA without comment and Cyanotech’s BioAstin® Natural Astaxanthin is now permitted at 12 mg per day. This compares to other brands whose allowed levels range from 4 mg — 7.8 mg per daily serving. The Company has now introduced a new 12 mg BioAstin softgel capsule which is available as a bulk gelcap product and as a finished consumer product through Nutrex Hawaii. We will continue to promote the nutritional superiority of Hawaiian grown spirulina to maintain and expand market share. Significant sales variability between periods and even across several periods can be expected based on historical results.

Rising crude oil prices in prior years resulted in increased nutrient, utility and transportation costs which reflect and respond to oil prices. We feel that these conditions are likely to continue and/or reoccur from time to time in the future, and consequently, we are putting greater focus on prudent cost controls and expense avoidance.

Gross profit margin percentages going forward will be impacted by continued pressure on input costs and greater competition in the market place. This could cause margins to decline in future periods. We will continue to focus on health and well-being and promoting higher gross margin items. We are dedicated to continuous improvements in process and production methods to stabilize and increase production levels for the future.

Producing the highest quality microalgae is a complex biological process which requires balancing numerous factors including microalgal strain variation, temperature, acidity, nutrient and other environmental considerations, some of which are not within our control. An imbalance or unexpected event can occur resulting in production levels below normal capacity. The allocation of fixed production overheads (such as depreciation, rent and general insurance) to inventories is determined based on normal production capacity. When our production volumes are below normal capacity limits, certain fixed production overhead costs cannot be inventoried and are recorded immediately in cost of sales. In addition, when production costs exceed historical averages, we evaluate whether such costs are one-time period charges or an ongoing component of inventory cost.

To manage our cash resources effectively, we will continue to balance production in light of sales demand, minimizing the cost associated with build-ups in inventory when appropriate. We could experience unplanned cash outflows and may need to utilize other cash resources to meet working capital needs. A prolonged downturn in sales could impair our ability to generate sufficient cash for operations and minimize our ability to attract additional capital investment which could become necessary in order to expand facilities, enter into new markets or maintain optimal production levels.

Our future results of operations and the other forward-looking statements contained in this Outlook, in particular the statements regarding revenues, gross margin and capital spending, involve a number of risks and uncertainties. We believe that our technology, systems, processes and favorable growing location generally permit year-round harvest of our microalgal products in a cost-effective manner. However, previously experienced imbalances in the highly complex biological production systems, together with volatile energy costs and rapidly changing world markets, suggest a need for continuing caution with respect to variables beyond our reasonable control. Therefore, we cannot, and do not attempt to, provide any definitive assurance with regard to our technology, systems, processes, location, or cost-effectiveness. Risk factors are discussed in detail in Item 1A in our Form 10-K report for the year ended March 31, 2012.

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Item 3.Quantitative and Qualitative Disclosures about Market Risk

We do not enter into any transactions using derivative financial instruments or derivative commodity instruments and believe that our exposure to market risk associated with other financial instruments is not material.

Item 4.Controls and Procedures

(a) Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15 (d)-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Security and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.  Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the fiscal period covered by this Quarterly Report on Form 10-Q.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of such date, our disclosure controls and procedures were effective to meet the objective for which they were designed and operate at the reasonable assurance level.

This Form 10-Q should be read in conjunction with Item 9A “Controls and Procedures” of the Company’s Form 10-K for the fiscal year ended March 31, 2012, filed June 21, 2012.

(b) Changes to Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarterly period ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II.OTHER INFORMATION

Item 1.Legal Proceedings

We are subject to legal proceedings and claims from time to time in the ordinary course of business.  Although we cannot predict with certainty the ultimate resolution of legal proceedings and claims asserted against us, we do not believe that any currently pending legal proceeding to which we are a party is likely to have a material adverse effect on our business, results of operations, cash flows or financial condition.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.Defaults upon Senior Securities

None.

Item 5.Other Information

None.

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Item 6. Exhibits

a)The following exhibits are furnished with this report:

31.1Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 7, 2013.

31.2Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 7, 2013.

32Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of February 7, 2013.

101The following financial statements from Cyanotech Corporation’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements

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SIGNATURES

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

	CYANOTECH CORPORATION
	(Registrant)
February 7, 2013	By:	/s/ Brent D. Bailey
(Date)		Brent D. Bailey
		President and Chief Executive Officer and Director
February 7, 2013	By:	/s/ Jole Deal
(Date)		Jole Deal
		Vice President — Finance & Administration and CFO
		(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit Number	Description
31.1	Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 7, 2013.
31.2	Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed as of February 7, 2013.
32	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed as of February 7, 2013.
101	The following financial statements from Cyanotech Corporation’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) Notes to Condensed Consolidated Financial Statements

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EX-31.1

Exhibit 31.1

Certification Pursuant

To 18 U. S. C. Section 1350,

As Adopted Pursuant To

Section 302 of the Sarbanes-Oxley Act of 2002

I, Brent D. Bailey, President and Chief Executive Officer certify that:

1.I have reviewed this quarterly report on Form 10-Q of Cyanotech Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and we have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date February 7, 2013	/s/ Brent D. Bailey
	Brent D. Bailey
	President and Chief Executive Officer and Director

EX-31.2

Exhibit 31.2

Certification Pursuant

To 18 U. S. C. Section 1350,

As Adopted Pursuant To

Section 302 of the Sarbanes-Oxley Act of 2002

I, Jole Deal, Chief Financial Officer, certify that:

1.I have reviewed this quarterly report on Form 10-Q of Cyanotech Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and we have:

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a)All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date February 7, 2013	/s/ Jole Deal
	Jole Deal
	Vice President — Finance & Administration and CFO (Principal Financial and Accounting Officer)

EX-32

Exhibit 32

CERTIFICATION OF CEO AND CFO
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned certifies that this Quarterly Report on Form 10-Q for the period ended December 31, 2012, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of Cyanotech Corporation.

Date: February 7, 2013	/s/ Brent D. Bailey
	Brent D. Bailey
	President and Chief Executive Officer and Director
Date: February 7, 2013	/s/ Jole Deal
	Jole Deal
	Vice President — Finance and Administration and Chief Financial Officer

XML

SHARE-BASED COMPENSATION (Details 3) (USD $)	9 Months Ended
	Dec. 31, 2012
Outstanding Options
Number of Shares	1,495,856
Remaining Life	8 years 6 months
Weighted Average Price (in dollars per share)	$ 4.03
Exercisable Options
Number of Shares	257,290
Weighted Average Price (in dollars per share)	$ 3.15
$1.60 - $3.70
Weighted average characteristics of outstanding stock options
Range of Exercise Prices, lower limit (in dollars per share)	$ 1.60
Range of Exercise Prices, upper limit (in dollars per share)	$ 3.70
Outstanding Options
Number of Shares	450,210
Remaining Life	7 years 8 months 12 days
Weighted Average Price (in dollars per share)	$ 2.92
Exercisable Options
Number of Shares	181,370
Weighted Average Price (in dollars per share)	$ 2.72
$3.71 - $4.42
Weighted average characteristics of outstanding stock options
Range of Exercise Prices, lower limit (in dollars per share)	$ 3.71
Range of Exercise Prices, upper limit (in dollars per share)	$ 4.42
Outstanding Options
Number of Shares	732,646
Remaining Life	8 years 8 months 12 days
Weighted Average Price (in dollars per share)	$ 3.82
Exercisable Options
Number of Shares	56,920
Weighted Average Price (in dollars per share)	$ 3.82
$4.43 - $5.40
Weighted average characteristics of outstanding stock options
Range of Exercise Prices, lower limit (in dollars per share)	$ 4.43
Range of Exercise Prices, upper limit (in dollars per share)	$ 5.40
Outstanding Options
Number of Shares	77,500
Remaining Life	9 years 1 month 6 days
Weighted Average Price (in dollars per share)	$ 5.19
Exercisable Options
Number of Shares	19,000
Weighted Average Price (in dollars per share)	$ 5.26
$5.41 - $7.08
Weighted average characteristics of outstanding stock options
Range of Exercise Prices, lower limit (in dollars per share)	$ 5.41
Range of Exercise Prices, upper limit (in dollars per share)	$ 7.08
Outstanding Options
Number of Shares	235,500
Remaining Life	9 years 6 months
Weighted Average Price (in dollars per share)	$ 6.40

XML

EQUIPMENT AND LEASEHOLD IMPROVEMENTS (Details) (USD $)	3 Months Ended		9 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Mar. 31, 2012
Equipment and leasehold improvements
Equipment and leasehold improvements, gross, excluding construction-in-progress	$ 15,620,000		$ 15,620,000		$ 14,373,000
Less accumulated depreciation and amortization	(10,313,000)		(10,313,000)		(9,867,000)
Construction-in-progress	3,164,000		3,164,000		1,328,000
Equipment and leasehold improvements, net	8,471,000		8,471,000		5,834,000
Equipment under capital lease	97,000		97,000		97,000
Accumulated amortization on equipment under capital lease	53,000		53,000		39,000
Loss on disposal of equipment	1,000	1,000	36,000	65,000
Equipment
Equipment and leasehold improvements
Equipment and leasehold improvements, gross	7,131,000		7,131,000		6,695,000
Equipment | Minimum
Equipment and leasehold improvements
Estimated useful lives			3 years
Equipment | Maximum
Equipment and leasehold improvements
Estimated useful lives			10 years
Furniture and fixtures
Equipment and leasehold improvements
Equipment and leasehold improvements, gross	176,000		176,000		154,000
Furniture and fixtures | Minimum
Equipment and leasehold improvements
Estimated useful lives			3 years
Furniture and fixtures | Maximum
Equipment and leasehold improvements
Estimated useful lives			7 years
Leasehold improvements
Equipment and leasehold improvements
Equipment and leasehold improvements, gross	$ 8,313,000		$ 8,313,000		$ 7,524,000
Leasehold improvements | Minimum
Equipment and leasehold improvements
Estimated useful lives			10 years
Leasehold improvements | Maximum
Equipment and leasehold improvements
Estimated useful lives			25 years

XML

EARNINGS PER SHARE (Details) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011
Net Income (Numerator)
Basic (in dollars)	$ 607	$ 1,113	$ 1,576	$ 2,473
Diluted (in dollars)	$ 607	$ 1,113	$ 1,576	$ 2,473
Shares (Denominator)
Basic (in shares)	5,464,000	5,424,000	5,451,000	5,406,000
Effect of dilutive securities - Common stock options (in shares)	153,000	147,000	241,000	84,000
Diluted (in shares)	5,617,000	5,571,000	5,692,000	5,490,000
Per Share Amount
Basic income per share (in dollars per share)	$ 0.11	$ 0.21	$ 0.29	$ 0.46
Effect of dilutive securities - Common stock options (in dollars per share)		$ (0.01)	$ (0.01)	$ (0.01)
Diluted income per share (in dollars per share)	$ 0.11	$ 0.20	$ 0.28	$ 0.45
Common stock options excluded from diluted earnings per share as effect of inclusion would be anti-dilutive (in shares)	732,032	786,756	198,000	1,134,116

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ACCRUED EXPENSES

9 Months Ended

Dec. 31, 2012

ACCRUED EXPENSES

ACCRUED EXPENSES

4. ACCRUED EXPENSES

Accrued expenses consist of the following:

	December 31, 2012		March 31, 2012
	(in thousands)
Wages, commissions	$	487	$	491
Customer rebates	116		69
Bonuses	—		642
Rent	72		17
Other expenses	118		133
	$	793	$	1,352

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LEASES (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012
Future minimum lease payments due under all non-cancellable operating leases
Next 12 Months	$ 466
Year 2	472
Year 3	425
Year 4	331
Year 5	299
Thereafter through 2026	5,385
Total minimum lease payments	$ 7,378

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LONG-TERM DEBT (Details 2) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Mar. 31, 2012
Future principal payments under the term loan and capital lease agreements
Next 12 Months	$ 64
Year 2	99
Year 3	97
Year 4	85
Year 5	83
Thereafter through 2032	1,922
Total principal payments	$ 2,350	$ 634

XML

COMMITMENTS AND CONTINGENCIES (Details) (Supercritical carbon dioxide extraction equipment, USD $)	0 Months Ended
	Sep. 12, 2012	Dec. 31, 2012
Supercritical carbon dioxide extraction equipment
COMMITMENTS AND CONTINGENCIES
Estimated delivery period from the date of agreement	14 months
Aggregate amount to be paid	$ 3,222,000
Unpaid amount		$ 1,612,000

XML

SHARE-BASED COMPENSATION (Details) (USD $)				9 Months Ended			3 Months Ended		9 Months Ended				3 Months Ended		9 Months Ended
	Dec. 31, 2012 item	Dec. 31, 2012 Stock options	Mar. 31, 2012 Stock options	Dec. 31, 2012 Stock options Maximum	Dec. 31, 2012 Stock options Minimum	Dec. 31, 2012 2005 Plan	Dec. 31, 2012 2005 Plan Stock options	Dec. 31, 2011 2005 Plan Stock options	Dec. 31, 2012 2005 Plan Stock options	Dec. 31, 2011 2005 Plan Stock options	Dec. 31, 2012 2004 Directors Plan	Dec. 31, 2011 2004 Directors Plan	Dec. 31, 2012 2004 Directors Plan Stock options	Dec. 31, 2011 2004 Directors Plan Stock options	Dec. 31, 2012 2004 Directors Plan Stock options	Dec. 31, 2011 2004 Directors Plan Stock options	Dec. 31, 2012 2004 Directors Plan Stock options Non-employee director	Dec. 31, 2012 2004 Directors Plan Restricted stock Non-employee director	Dec. 31, 2012 2004 Directors Plan Restricted stock Director serving as Chairman of the Board
SHARE-BASED COMPENSATION
Number of shareholder approved equity based plans	2
Share-based compensation
Life of award				10 years													10 years
Initial option grant upon joining the Board (in shares)																	6,000
Vesting Period				7 years	4 years												6 months	6 months	6 months
Shares issued to each non-employee director annually																		4,000	1,000
Shares authorized, available for future grant and outstanding
Authorized (in shares)	2,275,000					2,075,000					200,000
Available (in shares)	541,601					411,478					130,123
Outstanding (in shares)	1,495,856	1,495,856	1,251,166			1,483,856					12,000
Shares issued under the plan											13,000	8,000
Share-based compensation
Compensation expense (in dollars)							$ 191,000	$ 121,000	$ 486,000	$ 289,000			$ 0	$ 6,000	$ 77,000	$ 37,000

XML

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

9 Months Ended

Dec. 31, 2012

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

3. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

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

Equipment	3 to 10 years
Furniture and fixtures	3 to 7 years
Leasehold improvements	10 to 25 years

Equipment and leasehold improvements consist of the following:

	December 31, 2012			March 31, 2012
	(in thousands)
Equipment(1)	$	7,131		$	6,695
Leasehold improvements	8,313			7,524
Furniture and fixtures	176			154
	15,620			14,373
Less accumulated depreciation and amortization	(10,313		)	(9,867		)
Construction-in-progress	3,164			1,328
Equipment and leasehold improvements, net	$	8,471		$	5,834

(1) Includes $97,000 of equipment under capital lease with accumulated amortization of $53,000 and $39,000 at December 31, 2012 and March 31, 2012, respectively.

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Recoverability of these assets is measured by a comparison of the carrying amount to forecasted undiscounted future cash flows expected to be generated by the asset. If the carrying amount exceeds its estimated future cash flows, then an impairment charge is recognized to the extent that the carrying amount exceeds the asset’s fair value. Management has determined no asset impairment existed as of December 31, 2012. The Company recognized a loss on disposal of assets in the amount of $1,000 and $36,000 for the three and nine months ended December 31, 2012, respectively.  The Company recognized a loss on disposal of assets in the amount of $1,000 and $65,000 for the three and nine months ended December 31, 2011, respectively.

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SHARE-BASED COMPENSATION (Details 2) (USD $)	3 Months Ended		9 Months Ended		12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Mar. 31, 2012
Shares
Outstanding at the end of the period (in shares)	1,495,856		1,495,856
Stock options
Shares
Outstanding at the beginning of the period (in shares)			1,251,166
Granted (in shares)	45,000	55,000	258,000	922,516
Exercised (in shares)			(9,970)
Forfeited or expired (in shares)			(3,340)
Outstanding at the end of the period (in shares)	1,495,856		1,495,856		1,251,166
Exercisable at the end of the period (in shares)	257,290		257,290
Weighted Average Exercise Price
Outstanding at the beginning of the period (in dollars per share)			$ 3.54
Granted (in dollars per share)			$ 6.30
Exercised (in dollars per share)			$ 2.34
Forfeited or expired (in dollars per share)			$ 3.21
Outstanding at the end of the period (in dollars per share)	$ 4.03		$ 4.03		$ 3.54
Exercisable at the end of the period (in dollars per share)	$ 3.15		$ 3.15
Weighted Average Remaining Contractual Term
Outstanding at the end of the period			8 years 6 months		9 years
Exercisable at the end of the period			7 years 8 months 12 days
Aggregate Intrinsic Value
Outstanding at the end of the period (in dollars)	$ 1,364,067		$ 1,364,067		$ 8,243,956
Exercisable at the end of the period (in dollars)	$ 393,087		$ 393,087
Closing stock price for last business day (in dollars per share)	$ 4.63		$ 4.63
Nonvested Options, Shares
Nonvested at the beginning of the period (in shares)			1,109,066
Granted (in shares)	45,000	55,000	258,000	922,516
Vested (in shares)			(125,560)
Forfeited or expired (in shares)			(3,340)
Nonvested at the end of the period (in shares)	1,238,566		1,238,566		1,109,066
Nonvested Options, Weighted Average Grant-Date Fair Value
Nonvested at the beginning of the period (in dollars per share)			$ 2.57
Granted (in dollars per share)			$ 4.35
Vested (in dollars per share)			$ 2.09
Forfeited or expired (in dollars per share)			$ 2.14
Nonvested at the end of the period (in dollars per share)	$ 2.99		$ 2.99		$ 2.57

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Mar. 31, 2012
Current assets:
Cash and cash equivalents	$ 3,609	$ 5,061
Accounts receivable, net of allowance for doubtful accounts of $6 at December 31, 2012 and $16 at March 31, 2012	4,242	2,373
Inventories, net	3,488	3,548
Deferred tax assets	137	137
Prepaid expenses and other current assets	279	300
Total current assets	11,755	11,419
Equipment and leasehold improvements, net	8,471	5,834
Restricted cash	281
Deferred tax assets	1,307	1,307
Other assets	769	478
Total assets	22,583	19,038
Current liabilities:
Current maturities of long-term debt	64	234
Customer deposits	42	49
Accounts payable	1,956	1,726
Accrued expenses	793	1,352
Total current liabilities	2,855	3,361
Long-term debt, excluding current maturities	2,286	400
Deferred rent	16	12
Total liabilities	5,157	3,773
Commitments and contingencies
Stockholders' equity:
Common stock of $0.02 par value, shares authorized 50,000,000; 5,463,938 shares issued and outstanding at December 31, 2012 and 5,440,968 shares at March 31, 2012	109	109
Additional paid-in capital	28,910	28,324
Accumulated deficit	(11,593)	(13,168)
Total stockholders' equity	17,426	15,265
Total liabilities and stockholders' equity	$ 22,583	$ 19,038

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BASIS OF PRESENTATION

9 Months Ended

Dec. 31, 2012

BASIS OF PRESENTATION

BASIS OF PRESENTATION

1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information pursuant to the instructions to Form 10-Q and Regulation S-X of the Securities and Exchange Commission (SEC).  These interim condensed consolidated financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary to present fairly the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, and Condensed Consolidated Statements of Cash Flows for the periods presented in accordance with GAAP. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The Condensed Consolidated Balance Sheet as of March 31, 2012 was derived from the audited financial statements. These condensed consolidated financial statements and notes should be read in conjunction with the Company’s consolidated financial statements for the year ended March 31, 2012, contained in the Company’s annual report on Form 10-K as filed with the SEC on June 21, 2012.

The accompanying condensed consolidated financial statements include the accounts of Cyanotech Corporation and its wholly owned subsidiary, Nutrex Hawaii, Inc. (“Nutrex Hawaii” or “Nutrex”, collectively the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the periods reported.  Management reviews these estimates and assumptions periodically and reflects the effect of revisions in the period that they are determined to be necessary.  Actual results could differ from those estimates and assumptions.

XML

INCOME TAXES (Details)	9 Months Ended
	Dec. 31, 2012 item
INCOME TAXES
Number of state jurisdictions in which the entity is subject to taxation	2

XML

SHARE-BASED COMPENSATION (Tables)

9 Months Ended

Dec. 31, 2012

SHARE-BASED COMPENSATION

Schedule presenting shares authorized, available for future grant and outstanding under each plan

	As of December 31, 2012
	Authorized	Available	Outstanding
2005 Plan	2,075,000	411,478	1,483,856
2004 Directors Plan	200,000	130,123	12,000
Total	2,275,000	541,601	1,495,856

Summary of option activity under stock plans

Option Activity	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at March 31, 2012	1,251,166		$	3.54	9.0 years	$	8,243,956
Granted	258,000		6.30		—	—
Exercised	(9,970	)	$	2.34	—	—
Forfeited or expired	(3,340	)	$	3.21	—	—
Outstanding at December 31, 2012	1,495,856		$	4.03	8.5 years	$	1,364,067
Exercisable at December 31, 2012	257,290		$	3.15	7.7 years	$	393,087

Summary of non-vested options

Nonvested Options	Shares		Weighted Average Grant-Date Fair Value
Nonvested at March 31, 2012	1,109,066		$	2.57
Granted	258,000		4.35
Vested	125,560		2.09
Forfeited or expired	(2,940	)	2.14
Nonvested at December 31, 2012	1,238,566		$	2.99

Summary of the weighted average characteristics of outstanding stock options

	Outstanding Options				Exercisable Options
Range of Exercise Prices	Number of Shares	Remaining Life (Years)	Weighted Average Price		Number of Shares	Weighted Average Price
$ 1.60 - $3.70	450,210	7.7	$	2.92	181,370	$	2.72
$ 3.71 - $4.42	732,646	8.7	3.82		56,920	3.82
$ 4.43 - $5.40	77,500	9.1	5.19		19,000	5.26
$ 5.41 - $7.08	235,500	9.5	6.40		—	—
Total stock options	1,495,856	8.5	$	4.03	257,290	$	3.15

Summary of valuation assumptions related to options granted

	2012	2011
Exercise Price:	$5.26 - 7.08	$3.58 - 5.40
Volatility:	78.26 - 80.39%	56.18 - 78.61%
Risk Free Rate:	0.85 - .93%	0.09 - 2.25%
Vesting Period:	5 - 7 years	0 - 5 years
Forfeiture Rate:	7.66 - 9.00%	0 - 16.88%
Expected Life	6.25 years	0.25 - 8.25 years
Dividend Rate	0%	0%

XML

COMMON AND PREFERRED STOCK (Details) (USD $)	Dec. 31, 2012	Nov. 02, 2012	Mar. 31, 2012
COMMON AND PREFERRED STOCK
Number of common and preferred stock shares prior to authorization to increase total number of shares	12,500,000
Total number of share authorized		60,000,000
Common stock authorized (in shares)	50,000,000	50,000,000
Common stock, par value (in dollars per share)	$ 0.02		$ 0.02
Preferred stock authorized		10,000,000
Preferred stock, par value (in dollars per share)		$ 0.01

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INVENTORIES (Details) (USD $)	3 Months Ended		9 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Mar. 31, 2012
INVENTORIES
Raw materials	$ 840,000		$ 840,000		$ 344,000
Work in process	364,000		364,000		253,000
Finished goods	2,051,000		2,051,000		2,722,000
Supplies	233,000		233,000		229,000
Inventories, net	3,488,000		3,488,000		3,548,000
Reserve for obsolescence	11,000		11,000		41,000
Abnormal production costs, charged to cost of sales	$ 161,000	$ 236,000	$ 875,000	$ 652,000

XML

INVENTORIES

9 Months Ended

Dec. 31, 2012

INVENTORIES

INVENTORIES

2. INVENTORIES

Inventories are stated at the lower of cost or market.  Cost is determined by the first-in, first-out method.  Inventories consist of the following:

	December 31, 2012		March 31, 2012
	(in thousands)
Raw materials	$	840	$	344
Work in process	364		253
Finished goods(1)	2,051		2,722
Supplies	233		229
	$	3,488	$	3,548

(1) Net of reserve for obsolescence of $11,000 and $41,000 at December 31, 2012 and March 31, 2012, respectively.

The Company recognizes abnormal production costs, including fixed cost variances from normal production capacity, as an expense in the period incurred. Approximately $161,000 and $875,000 of abnormal production costs were charged to cost of sales for the three and nine months ended December 31, 2012, respectively.  Approximately $236,000 and $652,000 of abnormal production costs were charged to cost of sales for the three and nine months ended December 31, 2011.

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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Dec. 31, 2012	Mar. 31, 2012
CONDENSED CONSOLIDATED BALANCE SHEETS
Accounts receivable, allowance for doubtful accounts (in dollars)	$ 6	$ 16
Common stock, par value (in dollars per share)	$ 0.02	$ 0.02
Common stock, shares authorized	50,000,000
Common stock, shares issued	5,463,938	5,440,968
Common stock, shares outstanding	5,463,938	5,440,968

XML

INVENTORIES (Tables)

9 Months Ended

Dec. 31, 2012

INVENTORIES

Schedule of components of inventory

	December 31, 2012		March 31, 2012
	(in thousands)
Raw materials	$	840	$	344
Work in process	364		253
Finished goods(1)	2,051		2,722
Supplies	233		229
	$	3,488	$	3,548

(1) Net of reserve for obsolescence of $11,000 and $41,000 at December 31, 2012 and March 31, 2012, respectively.

XML

Document and Entity Information	9 Months Ended
	Dec. 31, 2012	Feb. 06, 2013
Document and Entity Information
Entity Registrant Name	CYANOTECH CORP
Entity Central Index Key	0000768408
Document Type	10-Q
Document Period End Date	Dec. 31, 2012
Amendment Flag	false
Current Fiscal Year End Date	--03-31
Entity Current Reporting Status	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		5,463,938
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q3

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EQUIPMENT AND LEASEHOLD IMPROVEMENTS (Tables)

9 Months Ended

Dec. 31, 2012

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Schedule of estimated useful lives of equipment, furniture and fixtures and leasehold improvements

Equipment	3 to 10 years
Furniture and fixtures	3 to 7 years
Leasehold improvements	10 to 25 years

Schedule of components of equipment and leasehold improvements

	December 31, 2012			March 31, 2012
	(in thousands)
Equipment(1)	$	7,131		$	6,695
Leasehold improvements	8,313			7,524
Furniture and fixtures	176			154
	15,620			14,373
Less accumulated depreciation and amortization	(10,313		)	(9,867		)
Construction-in-progress	3,164			1,328
Equipment and leasehold improvements, net	$	8,471		$	5,834

(1) Includes $97,000 of equipment under capital lease with accumulated amortization of $53,000 and $39,000 at December 31, 2012 and March 31, 2012, respectively.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		9 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NET SALES	$ 7,242	$ 6,706	$ 20,684	$ 18,645
COST OF SALES	4,377	3,879	12,433	10,924
Gross profit	2,865	2,827	8,251	7,721
OPERATING EXPENSES:
General and administrative	1,175	955	3,608	3,019
Sales and marketing	1,004	631	2,722	1,808
Research and development	52	77	183	237
Loss on disposal of equipment and leasehold improvements	1	1	36	65
Total operating expenses	2,232	1,664	6,549	5,129
Income from operations	633	1,163	1,702	2,592
OTHER EXPENSE:
Loss on extinguishment of debt			(51)
Interest expense, net	(14)	(14)	(43)	(38)
Total other expense, net	(14)	(14)	(94)	(38)
Income before provision for income taxes	619	1,149	1,608	2,554
PROVISION FOR INCOME TAXES	(12)	(36)	(32)	(81)
NET INCOME	$ 607	$ 1,113	$ 1,576	$ 2,473
NET INCOME PER SHARE:
Basic (in dollars per share)	$ 0.11	$ 0.21	$ 0.29	$ 0.46
Diluted (in dollars per share)	$ 0.11	$ 0.20	$ 0.28	$ 0.45
SHARES USED IN CALCULATION OF NET INCOME PER SHARE:
Basic (in shares)	5,464	5,424	5,451	5,406
Diluted (in shares)	5,617	5,571	5,692	5,490

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COMMITMENTS AND CONTINGENCIES

9 Months Ended

Dec. 31, 2012

COMMITMENTS AND CONTINGENCIES

COMMITMENTS AND CONTINGENCIES

7. COMMITMENTS AND CONTINGENCIES

On September 12, 2012, the Company entered into an agreement with Uhde Corporation of America (“Uhde”) for the purchase of supercritical carbon dioxide extraction equipment to be used in the processing of its natural astaxanthin (“Equipment”). Pursuant to the terms of the agreement, Uhde will build, ship and provide assistance in installing the Equipment, which is required to be delivered in approximately 14 months from the date of the agreement. The Company will pay Uhde an aggregate of $3,222,000 for the equipment and services, of which $1,612,000  remains unpaid as of December 31, 2012.

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LEASES

9 Months Ended

Dec. 31, 2012

LEASES

LEASES

6. LEASES

The Company leases facilities, equipment and land under operating leases expiring between 2012 and 2035.  The land lease provides for contingent rental in excess of minimum rental commitments based on a percentage of the Company’s sales. Management has accrued for the estimated contingent rent as of December 31, 2012.

Future minimum lease payments under all non-cancelable operating leases at December 31, 2012 are as follows:

Payments Due	(in thousands)
Next 12 Months	$	466
Year 2	472
Year 3	425
Year 4	331
Year 5	299
Thereafter through 2026	5,385
Total minimum lease payments	$	7,378

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EARNINGS PER SHARE (Tables)

9 Months Ended

Dec. 31, 2012

EARNINGS PER SHARE

Summary of reconciliations between the numerator and the denominator of the basic and diluted earnings per share computations

	Three Months Ended December 31, 2012
	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
	(in thousands)
Basic income per share	$	607	5,464	$	0.11
Effect of dilutive securities — Common stock options	—		153	—
Diluted income per share	$	607	5,617	$	0.11

	Three Months Ended December 31, 2011
	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
	(in thousands)
Basic income per share	$	1,113	5,424	$	0.21
Effect of dilutive securities — Common stock options	—		147	(0.01		)
Diluted income per share	$	1,113	5,571	$	0.20

	Nine Months Ended December 31, 2012
	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
	(in thousands)
Basic income per share	$	1,576	5,451	$	0.29
Effect of dilutive securities—Common stock options	—		241	(0.01		)
Diluted income per share	$	1,576	5,692	$	0.28

	Nine Months Ended December 31, 2011
	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
	(in thousands)
Basic income per share	$	2,473	5,406	$	0.46
Effect of dilutive securities — Common stock options	—		84	(0.01		)
Diluted income per share	$	2,473	5,490	$	0.45

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ACCRUED EXPENSES (Tables)

9 Months Ended

Dec. 31, 2012

ACCRUED EXPENSES

Schedule of components of accrued expenses

	December 31, 2012		March 31, 2012
	(in thousands)
Wages, commissions	$	487	$	491
Customer rebates	116		69
Bonuses	—		642
Rent	72		17
Other expenses	118		133
	$	793	$	1,352

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COMMON AND PREFERRED STOCK

9 Months Ended

Dec. 31, 2012

COMMON AND PREFERRED STOCK

COMMON AND PREFERRED STOCK

10. COMMON AND PREFERRED STOCK

Following shareholder approval, the Company filed a Certificate of Amendment to its Articles of Incorporation to increase the total number of authorized shares from 12,500,000 to sixty million (60,000,000) shares of which fifty million (50,000,000) shares shall be common stock, par value $0.02, and ten million (10,000,000) shares shall be preferred stock, par value $0.01. There are no preferred shares issued or outstanding. The Amendment was effective as of November 2, 2012.

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SHARE-BASED COMPENSATION

9 Months Ended

Dec. 31, 2012

SHARE-BASED COMPENSATION

SHARE-BASED COMPENSATION

8. SHARE-BASED COMPENSATION

The Company accounts for share-based payment arrangements using fair value. If an award vests or becomes exercisable based on the achievement of a condition other than service, such as for meeting certain performance or market conditions, the award is classified as a liability. Liability-classified awards are remeasured to fair value at each balance sheet date until the award is settled. The Company currently has no liability-classified awards. Equity- classified awards, including grants of employee stock options, are measured at the grant-date fair value of the award and are not subsequently remeasured unless an award is modified. The cost of equity-classified awards is recognized in the statement of operations over the period during which an employee is required to provide the service in exchange for the award, or the vesting period. All of the Company’s stock options are service-based awards, and because the Company’s stock options are “plain vanilla,” as defined by the U.S. Securities and Exchange Commission in Staff Accounting Bulletin No. 107, they are reflected only in Equity and Compensation Expense accounts.

Stock Options

As of December 31, 2012, the Company had the following two shareholder approved plans under which shares were available for equity based awards: The 2005 Stock Option Plan (the “2005 Plan”) wherein 2,075,000 shares of common stock are reserved for issuance until the Plan terminates on August 21, 2015, and; The Independent Director Stock Option and Stock Grant Plan (the “2004 Directors Plan”) wherein 200,000 shares of common stock are reserved for issuance until the plan terminates in 2014.

Under the 2005 Plan, eligible employees and certain independent consultants may be granted options to purchase shares of the Company’s common stock. The shares issuable under the 2005 Plan will either be shares of the Company’s authorized but previously unissued common stock or shares reacquired by the Company, including shares purchased on the open market.  As of December 31, 2012, there were 411,478 options available for grant under the 2005 Plan.

Under the 2004 Directors Plan, upon election to the Board of Directors at an annual stockholders meeting, a newly elected non-employee director will be granted a ten-year option to purchase 6,000 shares of the Company’s common stock. Options vest and become exercisable six months from the date of grant. In addition, on the date of each annual stockholders meeting, each non-employee director continuing in office is automatically issued 4,000 shares of the Company’s common stock, and an additional 1,000 shares to the director serving as Chairman of the Board, non-transferable for six months following the date of grant. During the nine months ended December 31, 2012 and 2011, there were 13,000 and 8,000 shares issued under the 2004 directors Plan, respectively. As of December 31, 2012, there were 130,123 shares available for grant under the 2004 Directors Plan.

The following table presents shares authorized, available for future grant and options outstanding under each of the Company’s plans:

	As of December 31, 2012
	Authorized	Available	Outstanding
2005 Plan	2,075,000	411,478	1,483,856
2004 Directors Plan	200,000	130,123	12,000
Total	2,275,000	541,601	1,495,856

All stock option grants made under the 2005 Plan and the 2004 Directors Plan were at exercise prices no less than the Company’s closing stock price on the date of grant. Options under the 2005 Plan and 2004 Directors Plan were determined by the Board of Directors or the Stock Option and Compensation Committee of the Board in accordance with the provisions of the respective plans.  The terms of each option grant include vesting, exercise and other conditions are set forth in a Stock Option Agreement evidencing each grant. No option can have a life in excess of ten (10) years.  The Company records compensation expense for employee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. The model requires various assumptions, including a risk-free interest rate, the expected term of the options, the expected stock price volatility over the expected term of the options and the expected dividend yield. Compensation expense for employee stock options is recognized ratably over the vesting term which ranges from 4 to 7 years. Compensation expense recognized for options issued under the 2005 Plan was $191,000 and $486,000 for the three and nine months ended December 31, 2012, respectively. Compensation expense recognized for options issued under the 2005 Plan was $121,000 and $289,000 for the three and nine months ended December 31, 2011, respectively. Compensation expense recognized for options and shares issued under the 2004 Directors Plan was $0 and $77,000 for the three and nine months ended December 31, 2012, respectively. Compensation expense recognized for options and shares issued under the 2004 Directors Plan was $6,000 and $37,000 for the three and nine months ended December 31, 2011, respectively. All share-based compensation has been classified as General and Administrative expense.

A summary of option activity under the Company’s stock plans for the nine months ended December 31, 2012 is presented below:

Option Activity	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at March 31, 2012	1,251,166		$	3.54	9.0 years	$	8,243,956
Granted	258,000		6.30		—	—
Exercised	(9,970	)	$	2.34	—	—
Forfeited or expired	(3,340	)	$	3.21	—	—
Outstanding at December 31, 2012	1,495,856		$	4.03	8.5 years	$	1,364,067
Exercisable at December 31, 2012	257,290		$	3.15	7.7 years	$	393,087

The aggregate intrinsic value as of December 31, 2012 in the table above is before applicable income taxes and represents the excess amount over the exercise price optionees would have received if all options had been exercised on the last business day of the period indicated, based on the Company’s closing stock price of $4.63 for such day.

A summary of the Company’s non-vested options for the nine months ended December 31, 2012 is presented below:

Nonvested Options	Shares		Weighted Average Grant-Date Fair Value
Nonvested at March 31, 2012	1,109,066		$	2.57
Granted	258,000		4.35
Vested	125,560		2.09
Forfeited or expired	(2,940	)	2.14
Nonvested at December 31, 2012	1,238,566		$	2.99

The following table summarizes the weighted average characteristics of outstanding stock options as of December 31, 2012:

	Outstanding Options				Exercisable Options
Range of Exercise Prices	Number of Shares	Remaining Life (Years)	Weighted Average Price		Number of Shares	Weighted Average Price
$ 1.60 - $3.70	450,210	7.7	$	2.92	181,370	$	2.72
$ 3.71 - $4.42	732,646	8.7	3.82		56,920	3.82
$ 4.43 - $5.40	77,500	9.1	5.19		19,000	5.26
$ 5.41 - $7.08	235,500	9.5	6.40		—	—
Total stock options	1,495,856	8.5	$	4.03	257,290	$	3.15

There were 45,000 and 258,000 stock options granted during the three and nine months ended December 30, 2012, respectively. There were 55,000 and 922,516 stock options granted during the three and nine months ended December 31, 2011, respectively. The value assumptions related to options granted during the nine months ended December 31, 2012 and 2011 were as follows:

	2012	2011
Exercise Price:	$5.26 - 7.08	$3.58 - 5.40
Volatility:	78.26 - 80.39%	56.18 - 78.61%
Risk Free Rate:	0.85 - .93%	0.09 - 2.25%
Vesting Period:	5 - 7 years	0 - 5 years
Forfeiture Rate:	7.66 - 9.00%	0 - 16.88%
Expected Life	6.25 years	0.25 - 8.25 years
Dividend Rate	0%	0%

As of December 31, 2012, total unrecognized share-based compensation expense related to all unvested stock options was $2,654,000, which is expected to be recognized over a weighted average period of 4.3 years.

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INCOME TAXES

9 Months Ended

Dec. 31, 2012

INCOME TAXES

INCOME TAXES

9. INCOME TAXES

Income taxes are provided on the pretax income in the consolidated financial statements. The tax provision is based on the current quarter activity of the legal entities and jurisdictions in which the Company operates. Tax credits are recognized as a reduction to income taxes in the year the credits are earned, accordingly, the effective tax rate may vary from the customary relationship between income tax expense (benefit) and pretax income.  The effective tax rate for the three and nine months ended December 31, 2012 differs from the statutory rate due to utilization of net operating loss carryforwards that have been fully reserved due to the Company’s inconsistent taxable income in recent years and uncertainty about taxable income in future years.

The Company is subject to taxation in the United States and two state jurisdictions.  The preparation of tax returns requires management to interpret the applicable tax laws and regulations in effect in such jurisdictions, which could affect the amount of tax paid by the Company. Management, in consultation with its tax advisors, files its tax returns based on interpretations that are believed to be reasonable under the circumstances. The income tax returns, however, are subject to routine reviews by the various taxing authorities.  As part of these reviews, a taxing authority may disagree with respect to the tax positions taken by management (“uncertain tax positions”) and therefore may require the Company to pay additional taxes. Management evaluates the requirement for additional tax accruals, including interest and penalties, which the Company could incur as a result of the ultimate resolution of its uncertain tax positions. Management reviews and updates the accrual for uncertain tax positions as more definitive information becomes available from taxing authorities, completion of tax audits, expiration of statute of limitations, or upon occurrence of other events.

As of December 31, 2012, there was no liability for income tax associated with unrecognized tax benefits. The Company recognizes accrued interest related to unrecognized tax benefits as well as any related penalties in interest expense in its consolidated condensed statements of operations, which is consistent with the recognition of these items in prior reporting periods.

With few exceptions, the Company is no longer subject to U.S. federal, state, local, and non-U.S. income tax examination by tax authorities for tax years before 2008.

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EARNINGS PER SHARE

9 Months Ended

Dec. 31, 2012

EARNINGS PER SHARE

EARNINGS PER SHARE

11. EARNINGS PER SHARE

Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding.  Diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the potentially dilutive effect of outstanding stock options using the “treasury stock” method.

Reconciliations between the numerator and the denominator of the basic and diluted earnings per share computations for the three months ended December 31, 2012 and 2011 are as follows:

	Three Months Ended December 31, 2012
	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
	(in thousands)
Basic income per share	$	607	5,464	$	0.11
Effect of dilutive securities — Common stock options	—		153	—
Diluted income per share	$	607	5,617	$	0.11

	Three Months Ended December 31, 2011
	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
	(in thousands)
Basic income per share	$	1,113	5,424	$	0.21
Effect of dilutive securities — Common stock options	—		147	(0.01		)
Diluted income per share	$	1,113	5,571	$	0.20

Reconciliations between the numerator and the denominator of the basic and diluted earnings per share computations for the six months ended December 31, 2012 and 2011 are as follows:

	Nine Months Ended December 31, 2012
	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
	(in thousands)
Basic income per share	$	1,576	5,451	$	0.29
Effect of dilutive securities—Common stock options	—		241	(0.01		)
Diluted income per share	$	1,576	5,692	$	0.28

	Nine Months Ended December 31, 2011
	Net Income		Shares	Per Share
	(Numerator)		(Denominator)	Amount
	(in thousands)
Basic income per share	$	2,473	5,406	$	0.46
Effect of dilutive securities — Common stock options	—		84	(0.01		)
Diluted income per share	$	2,473	5,490	$	0.45

Diluted earnings per share does not include the impact of common stock options totaling 732,032 and 786,756 for the three months ended December 31, 2012 and 2011, respectively, and 198,000 and 1,134,116 for the nine months ended December 31, 2012 and 2011, respectively, as the effect of their inclusion would be anti-dilutive.

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SHARE-BASED COMPENSATION (Details 4) (Stock options, USD $)	3 Months Ended		9 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011
Share-based compensation
Granted (in shares)	45,000	55,000	258,000	922,516
Valuation assumptions related to options granted
Expected Life			6 years 3 months
Dividend Rate (as a percent)			0.00%	0.00%
Unrecognized share-based compensation related to unvested stock options
Unrecognized share-based compensation	$ 2,654,000		$ 2,654,000
Weighted average period over which expected to be recognized			4 years 3 months 18 days
Minimum
Valuation assumptions related to options granted
Exercise Price (in dollars per share)	$ 5.26	3.58	$ 5.26	3.58
Volatility (as a percent)			78.26%
Volatility (as a percent)				56.18%
Risk Free Rate (as a percent)			0.85%
Risk Free Rate (as a percent)				0.09%
Vesting Period			5 years	0 years
Forfeiture Rate (as a percent)			7.66%	0.00%
Expected Life				3 months
Maximum
Valuation assumptions related to options granted
Exercise Price (in dollars per share)	$ 7.08	5.40	$ 7.08	5.40
Volatility (as a percent)			80.39%	78.61%
Risk Free Rate (as a percent)			0.93%	2.25%
Vesting Period			7 years	5 years
Forfeiture Rate (as a percent)			9.00%	16.88%
Expected Life				8 years 3 months

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LEASES (Tables)

9 Months Ended

Dec. 31, 2012

LEASES

Summary of future minimum lease payments under all non-cancelable operating leases

Future minimum lease payments under all non-cancelable operating leases at December 31, 2012 are as follows:

Payments Due	(in thousands)
Next 12 Months	$	466
Year 2	472
Year 3	425
Year 4	331
Year 5	299
Thereafter through 2026	5,385
Total minimum lease payments	$	7,378

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ACCRUED EXPENSES (Details) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Mar. 31, 2012
ACCRUED EXPENSES
Wages, commissions	$ 487	$ 491
Customer rebates	116	69
Bonuses		642
Rent	72	17
Other expenses	118	133
Total accrued expenses	$ 793	$ 1,352

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands, unless otherwise specified	9 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$ 1,576	$ 2,473
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on extinguishment of debt	51
Loss on disposal of equipment and leasehold improvements	36	65
Depreciation and amortization	619	513
Amortization of debt issue costs and other assets	84	32
Share based compensation expense	563	326
Reduction of allowance for doubtful accounts	(10)	(6)
Net (increase) decrease in operating assets:
Accounts receivable	(1,859)	(208)
Inventories	60	71
Prepaid expenses and other assets	(95)	(275)
Net increase (decrease) in operating liabilities:
Customer deposits	(7)	(76)
Accounts payable	230	140
Accrued expenses	(559)	520
Deferred rent	4
Net cash provided by operating activities	692	3,575
CASH FLOWS FROM INVESTING ACTIVITIES:
Restricted cash from issuance of long term debt	(281)
Investment in equipment and leasehold improvements	(3,292)	(1,438)
Net cash used in investing activities	(3,573)	(1,438)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt, net of costs	2,281	95
Principal payments on long-term debt	(616)	(160)
Payments for debt issuance costs	(259)
Proceeds from stock options exercised	23	56
Net cash provided by (used in) financing activities	1,429	(9)
Net (decrease) increase in cash and cash equivalents	(1,452)	2,128
Cash and cash equivalents at beginning of period	5,061	2,062
Cash and cash equivalents at end of period	3,609	4,190
Cash paid during the period for:
Interest	98	30
Income taxes	$ 57	$ 60

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LONG-TERM DEBT

9 Months Ended

Dec. 31, 2012

LONG-TERM DEBT

LONG-TERM DEBT

5. LONG-TERM DEBT

Long-term debt consists of the following:

	December 31, 2012			March 31, 2012
	(in thousands)
Term loans	$	2,350		$	634
Less current maturities	(64		)	(234		)
Long-term debt, excluding current maturities	$	2,286		$	400

Term Loan Agreements

On September 7, 2012, the Company completed a loan agreement with a lender providing for $5,500,000 in aggregate credit facilities (the “Loan”) secured by substantially all the Company’s assets, pursuant to a Term Loan Agreement dated August 14, 2012 (the “Loan Agreement”). The Loan Agreement is evidenced by promissory notes in the amounts of $2,250,000 and $3,250,000, the repayment of which is partially guaranteed under the provisions of a United States Department of Agriculture (“USDA”) Rural Development Guarantee program (the “Guarantees”). The proceeds of the Loan will be used to acquire new processing equipment and leasehold improvements at its Kona, Hawaii facility.

The provisions of the Loan require the payment of interest only for the first 12 months of the term; thereafter, and until its maturity on August 14, 2032, the obligation fully amortizes over nineteen (19) years. Interest on the Loan accrues on the outstanding principal balance at an annual variable rate equal to the published Wall Street Journal prime rate (3.25% at December 31, 2012) plus 1.0% and is adjustable on the first day of each calendar quarter and fixed for that quarter. At no time shall the annual interest rate be less than 5.50%. The Loan has a prepayment penalty of 5% for any prepayment made prior to the first anniversary of the date of the Loan Agreement, which penalty is reduced by 1% each year thereafter until the fifth anniversary of such date, after which there is no prepayment penalty. The balance under this Loan was $2,250,000 at December 31, 2012. Proceeds from the Loan are classified as restricted cash until drawn upon to acquire new processing equipment and leasehold improvements.

The Loan includes a one-time origination and guaranty fees totaling $214,500 and an annual renewal fee payable in the amount of 0.25% of the USDA guaranteed portion of the outstanding principal balance as of December 31 of each year, beginning December 31, 2012.  The USDA has guaranteed 80% of all amounts owing under the Loan. The Company is subject to financial covenants and customary affirmative and negative covenants. The Company was in compliance with these financial covenants at December 31, 2012.

The Company has five equipment loans with John Deere credit providing for $163,000 in equipment financing; four of these loans are payable in 48 equal monthly principal payments and one is payable in 36 equal monthly principal payments.  At December 31, 2012 and March 31, 2012 the total outstanding combined balance was approximately $76,000. The equipment loans have maturity dates of  March 2013 as to $2,000, May 2015 as to $26,000, November 2015 as to $22,000 and June 2016 as to $26,000. The loans are at a 0% rate of interest and are net of unamortized discount of $3,000 at December 31, 2012.

In September 2011, the Company executed a Term Loan Agreement with Nissan Motor Acceptance Corporation providing for $23,000 in equipment financing, secured by the equipment. The Term Loan has a maturity date of September 13, 2016 and is payable in 60 equal monthly principal payments. The interest rate under this Term Loan is 0%. Imputed interest at a rate of 2% (cash discount offered by seller) has been recorded and is being amortized as interest over the term of the loan. The face value of the term loan is reported in the balance sheets at $16,000, less the unamortized discount of $600 at December 31, 2012.

Capital Lease

In March 2010, the Company executed a capital lease agreement with Thermo Fisher Financial providing for $97,000 in equipment, secured by the equipment financed. The capital lease has a maturity date of March 2013 and is payable in 36 equal monthly payments. The interest rate under this capital lease is 6.6%. The balance under this capital lease was $9,000 and $34,000 at December 31, 2012 at March 31, 2012, respectively.

Future principal payments under the term loans and capital lease agreement as of December 31, 2012 are as follows:

Payments Due	(in thousands)
Next 12 Months	$	64
Year 2	99
Year 3	97
Year 4	85
Year 5	83
Thereafter through 2032	1,922
Total principal payments	$	2,350

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LONG-TERM DEBT (Details) (USD $)			0 Months Ended	9 Months Ended		0 Months Ended		9 Months Ended		9 Months Ended						1 Months Ended		1 Months Ended
	Dec. 31, 2012	Mar. 31, 2012	Sep. 07, 2012 Term loan agreement, maturing on August 14, 2032	Dec. 31, 2012 Term loan agreement, maturing on August 14, 2032	Dec. 31, 2012 Term loan agreement, maturing on August 14, 2032 Minimum	Sep. 07, 2012 Term loan agreement, promissory note one	Sep. 07, 2012 Term loan agreement, promissory note two	Dec. 31, 2012 Equipment loans with John Deere item	Mar. 31, 2012 Equipment loans with John Deere	Dec. 31, 2012 Equipment loans with John Deere Minimum item	Dec. 31, 2012 Equipment loans with John Deere Maximum item	Dec. 31, 2012 Term loan agreement with John Deere, maturing in March, 2013	Dec. 31, 2012 Term loan agreement with John Deere, maturing in May, 2015	Dec. 31, 2012 Term loan agreement with John Deere, maturing in November, 2015	Dec. 31, 2012 Term loan agreement with John Deere, maturing in June, 2016	Sep. 30, 2011 Term loan agreement with Nissan Motor Acceptance Corporation, maturing on September 13, 2016 item	Dec. 31, 2012 Term loan agreement with Nissan Motor Acceptance Corporation, maturing on September 13, 2016	Mar. 31, 2010 Capital lease item	Dec. 31, 2012 Capital lease	Mar. 31, 2012 Capital lease
Long-term debt
Total principal payments	$ 2,350,000	$ 634,000		$ 2,250,000				$ 76,000	$ 76,000			$ 2,000	$ 26,000	$ 22,000	$ 26,000				$ 9,000	$ 34,000
Less current maturities	(64,000)	(234,000)
Long-term debt, excluding current maturities	2,286,000	400,000
Amount borrowed			5,500,000			2,250,000	3,250,000	163,000								23,000		97,000
Period for which interest is payable				12 months
Period over which obligation fully amortizes				19 years
Reference rate (as a percent)				3.25%
Variable interest rate margin (as a percent)				1.00%
Annual interest rate (as a percent)					5.50%
Prepayment penalty (as a percent)				5.00%
Reduction in prepayment penalty each year (as a percent)				1.00%
One-time origination and guaranty fees				214,500
Annual renewal fee payable (as a percent)				0.25%
Conditionally guaranteed portion of the loan (as a percent)				80.00%
Number of equal monthly payments										36	48					60		36
Interest rate (as a percent)								0.00%									0.00%		6.60%
Number of equipment loans								5
Number of equipment loans payable in 48 equal monthly principal payments								4
Number of equipment loans payable in 36 equal monthly principal payments								1
Imputed interest rate (as a percent)																	2.00%
Face value of term loan																	16,000
Unamortized discount								$ 3,000									$ 600

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LONG-TERM DEBT (Tables)

9 Months Ended

Dec. 31, 2012

LONG-TERM DEBT

Summary of long-term debt

	December 31, 2012			March 31, 2012
	(in thousands)
Term loans	$	2,350		$	634
Less current maturities	(64		)	(234		)
Long-term debt, excluding current maturities	$	2,286		$	400

Summary of future principal payments under the term loan and capital lease agreements

Future principal payments under the term loans and capital lease agreement as of December 31, 2012 are as follows:

Payments Due	(in thousands)
Next 12 Months	$	64
Year 2	99
Year 3	97
Year 4	85
Year 5	83
Thereafter through 2032	1,922
Total principal payments	$	2,350