10-K

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended March 31, 2002            Commission file 0-146-02

CYANOTECH CORPORATION
(Exact name of Registrant as specified in its charter)

Nevada	91-1206026
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

73-4460 Queen Kaahumanu Hwy., Suite 102, Kailua-Kona, HI 96740
(Address of principal executive offices)

(808) 326-1353
(Registrant's telephone number)

Securities registered pursuant to Section 12(b) of the Exchange Act:
NONE

Securities registered pursuant to Section 12(g) of the Exchange Act:

Title of class
Common Stock, Par value $.005 per share

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

        At June 26, 2002, the aggregate market value of the registrant's Common Stock held by non-affiliates of the registrant was approximately $10,558,257.

        At June 26, 2002, the number of shares outstanding of Registrant's Common Stock was 17,558,701.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended March 31, 2002 are incorporated by reference into Part II of this Report. Portions of the Registrant's Definitive Proxy Statement for its 2002 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission on or prior to July 29, 2002 and to be used in connection with the Annual Meeting of Stockholders expected to be held on August 22, 2002, are incorporated by reference in Part III of this Form 10-K.

PART I

Item 1. Business

        Except for historical information contained in this document, the matters discussed in this report contain forward-looking statements that involve risks and uncertainties. These future risks and uncertainties could cause actual results to differ materially.

General

        Cyanotech Corporation is a worldwide leader in the development and commercialization of high value natural products derived from microalgae. Microalgae are a diverse group of over 30,000 species of microscopic plants which have a wide range of physiological and biochemical characteristics and naturally contain high levels of proteins, amino acids, vitamins, pigments and enzymes. Since 1983, we have designed, developed and implemented proprietary production and harvesting technologies, systems and processes which eliminate many of the stability and contamination problems frequently encountered in the production of microalgae. We believe that our technology, systems, processes and favorable growing location permit year-round harvesting of our microalgal products in a cost-effective manner. We currently produce natural products from microalgae for the nutritional supplement, aquaculture feed, animal nutrition, and immunological diagnostics markets.

        Since 1985, Cyanotech has been producing microalgae-based "Spirulina" products for the vitamin and supplement market. Spirulina Pacifica®, which is our principal source of revenue, is a unique strain of Spirulina microalga developed by us which provides a vegetable-based, highly absorbable source of natural beta-carotene, mixed carotenoids, B vitamins, gamma linolenic acid ("GLA"), protein, essential amino acids and other phytonutrients. We currently market our Spirulina products in more than eighteen countries through a combination of retail, wholesale, and private label channels.

        In early 1997, we introduced NatuRose® to the worldwide aquaculture industry. NatuRose is the brand name of our natural astaxanthin (pronounced "asta-zan-thin") product for the animal nutrition market which we produce from the microalga, Haematococcus pluvialis ("Haematococcus"). Astaxanthin is a red pigment used in aquaculture to impart a pink to red color to pen-raised fish and shrimp. The worldwide astaxanthin market for animal pigmentation is estimated at more than $200 million in annual sales. NatuRose competes in this marketplace with astaxanthin synthesized from petrochemicals and derived from other sources.

        In March of 1999, we announced the development of BioAstin®, our natural astaxanthin product for the human nutrition market. A growing body of scientific literature is demonstrating that the beneficial antioxidant properties of natural astaxanthin surpass many of the antioxidant properties of vitamin C, vitamin E, beta-carotene and other carotenoids. In August 1999, the United States Food and Drug Administration ("FDA"), completed its review of our application to sell BioAstin without objection, allowing us to offer our new product for sale and use as a human nutritional supplement in the United States. The total market that human astaxanthin products potentially could address is estimated to exceed $5 billion annually.

        Cyanotech Corporation was incorporated in Nevada in 1983. Our principal executive offices are located at 73-4460 Queen Kaahumanu Highway, Suite 102, Kailua-Kona, Hawaii 96740, and our telephone number is (808) 326-1353. Unless otherwise indicated, all references in this report to the "Company," "we," "us," "our," and "Cyanotech" refer to Cyanotech Corporation, a Nevada corporation, and its wholly owned subsidiaries, Nutrex Hawaii, Inc. ("Nutrex Hawaii"), a Hawaii corporation and Cyanotech Japan YK ("Cyanotech Japan"), a Japan corporation.

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Industry Background

        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 proteins, 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 a uniform cell structure with no bark, stems, branches or leaves, permitting easier extraction of products and higher utilization of the microalgae cells; (3) the cellular uniformity of microalgae makes it practical to manipulate and control growing conditions in order to optimize a particular cell characteristic; (4) microalgae contain a wide array of vitamins and other important nutrients; (5) microalgae contain natural pigments; and (6) microalgae are a potential source of medical products.

        Current commercial applications for these microscopic plants include nutritional products, diagnostic products, aquaculture feed and pigments, natural food colorings and research grade chemicals. We believe that microalgae could potentially be used for other commercial applications, including nutraceuticals, polyunsaturated fatty acids, and pharmaceuticals. The most significant microalgae products produced today are algae utilized as food supplements.

        While many unique compounds have been identified in microalgae, the efficient and cost-effective commercial production of microalgae is elusive. Many microalgae culture systems over the last 25 years have failed. Because microalgae produced for food supplements are typically cultivated and harvested outdoors, production is significantly affected by climate, weather conditions and the chemical composition of the culture media. Without consistent sunlight, warm temperature, low rainfall and proper chemical balance, microalgae will not grow quickly, resulting in longer harvesting cycles, decreased pond utilization and increased cost. Furthermore, microalgal growth requires a very nutrient rich environment. The high nutrient levels in the ponds promote the growth of unwanted organisms, or "weeds," when the chemical composition of the ponds changes from its required balance. Once contamination occurs, a pond must be emptied, cleaned and refilled, a process that further decreases pond utilization and increases production costs.

Cyanotech's Technology

        Since 1983, our scientists have designed, developed and implemented proprietary production and harvesting technologies, systems and processes which reduce many of the stability and contamination problems frequently encountered in the production of microalgae. We believe we were the first Spirulina producer to have its products and processes certified organic and we were the first microalgae producer to have its quality system registered under the ISO 9002-94 standards. Our proprietary production system is known as Integrated Culture Biology Management ("ICBM"). Through the application of this technology, our Spirulina culture ponds can be productive year-round without any significant loss in productivity due to contamination. We believe that such an accomplishment remains unique to Cyanotech.

        In addition to the advantages of our ICBM technology, we have developed a patented system for the recovery of carbon dioxide from our drying system exhaust gas, called Ocean-Chill Drying™. Since microalgae are essentially microscopic plants, they require sunlight, water, carbon dioxide and nutrients for optimal growth. By recovering carbon dioxide from the drying system that would otherwise be released into the atmosphere, we can divert the recovered carbon dioxide back to the algae cultures. This process provides us with another significant cost advantage over other microalgae producers who must purchase carbon dioxide. Moreover, Ocean-Chill Drying dries microalgal products in a low oxygen environment, which protects oxygen sensitive nutrients. In addition, we have developed an automated Spirulina processing system, which enables a single operator to harvest and dry the Spirulina powder.

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        Our efforts in commercial production of our natural astaxanthin products have resulted in an improved, large-scale photobioreactor system referred to as the PhytoDome Closed Culture System, or PhytoDome CCS™. To date, this improved technology has resulted in reduced production costs, increased control of product purity and has had a positive effect on production yield compared to other photobioreactor systems previously employed.

        Another major advantage for us is the location of our production facility at the Hawaii Ocean Science and Technology ("HOST") Park at Keahole Point, Hawaii. We believe that the combination of consistent warm temperature, abundant sunlight, and low rainfall at this facility makes this a highly favorable location for the economical, large-scale cultivation of microalgae. In contrast to our facility, microalgae producers in other regions of the world lacking these favorable characteristics stop producing for up to four months a year because of less favorable climate or weather conditions. At the HOST Park, we have access to cold, clean, deep sea water that is pumped from a depth of 2,000 feet. This sea water is used both as a source of nutrients for microalga culture and as a cooling agent in the Ocean-Chill Drying process. Additionally, our facility has access to a complete industrial infrastructure and is located 30 miles from a deep water port and is adjacent to an international airport.

        Applying our experience in cultivating and harvesting Spirulina, we began commercial production of our first natural astaxanthin product, NatuRose, during the fourth quarter of fiscal 1997. By the end of fiscal 1999, our experience with NatuRose processing resulted in the development of its companion product, BioAstin.

        Our primary business objective is to be the leading developer and producer of high-value microalgal products in our existing and future markets. We believe that the combination of our ICBM technology, our PhytoDome CCS technology, our Ocean-Chill Drying process, our automated processing system and a favorable growing location with year-round production capabilities, can be successfully applied to the commercial cultivation of many other species of microalgae.

Products

Spirulina

        Our principal product, accounting for 74% and 77% of net sales for the years ended March 31, 2002 and 2001, respectively, is a nutritional microalgae marketed as Spirulina Pacifica. Developed by us and sold worldwide to the health and natural foods market, Spirulina Pacifica is a unique strain of microalgae that is a highly absorbable source of natural beta carotene, mixed carotenoids, B vitamins, GLA, protein, essential amino acids and other phytonutrients.

        Cyanotech produces Spirulina Pacifica in three forms: powder, flake and tablets. Powder is used as an ingredient in nutritional supplements and health food drinks while flakes are used as a seasoning on various foods. Tablets are consumed as a daily dietary supplement. We also produce and market a blended nutritional supplement product under the Hawaiian Energizer name. Hawaiian Energizer tablets contain Spirulina Pacifica, Bee Pollen and Siberian Ginseng.

        We anticipate that sales of our Spirulina Pacifica products will continue to constitute a substantial portion of net sales during fiscal 2003. Any material decrease in the overall level of sales of, or the prices for, our Spirulina Pacifica products, whether as a result of competition, change in consumer demand, increased worldwide supply of Spirulina or other factors beyond our control, would have a material adverse effect on our business, financial condition and results of operations.

Natural Astaxanthin

        The year ended March 31, 2002 was the fifth year of commercial production of NatuRose, our natural astaxanthin product for the animal nutrition market, and the third year of commercial production of BioAstin, our natural astaxanthin product for the human nutrition market. Astaxanthin is

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a red pigment used primarily in the aquaculture industry to impart pink color to the flesh of pen-raised fish and shrimp. Since its introduction five years ago, dozens of feeding trials have been performed by our customers and potential customers which prove the efficacy of NatuRose as an alternative to the petrochemical-based synthetic astaxanthin presently used by most aquaculture companies. The appeal of our product is that it is derived from a natural source and produces results which are comparable, or in some cases superior, to synthetic astaxanthin. As a result of continued growth in the world aquaculture industry, the world market for astaxanthin pigment is currently estimated to exceed $200 million per year. We therefore believe that sales of NatuRose may increase in future periods.

BioAstin, our natural astaxanthin product for the human nutrition market has been in commercial production since March 1999 and has been available for sale since we received notice from the FDA in August 1999 that it had completed review of our application to sell BioAstin without objection. In January 2000, our wholly-owned subsidiary, Nutrex Hawaii, Inc., began selling BioAstin gelcaps in packaged consumer form. A growing body of scientific literature is demonstrating that the beneficial antioxidant properties of natural astaxanthin surpass many of the antioxidant properties of vitamin C, vitamin E, beta-carotene and other carotenoids, with independent scientific studies indicating that natural astaxanthin has up to 550 times the antioxidant activity of vitamin E and 10 times the antioxidant activity of beta-carotene. We believe that sales of BioAstin, in bulk, packaged consumer form, or as a component of a formulated product, may increase and may ultimately constitute a significant portion of total sales in future periods.

        We have sponsored several scientific clinical trials since introducing this product and during fiscal 2002, results from some of these trials were announced. Among these results, some of the more promising findings are:

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An early clinical trial linked BioAstin with preventing knee soreness after strenuous leg exercises and showed a significantly stronger immune system response compared to the control group after exercise activity.



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A recent clinical study of BioAstin showed improvement in the condition of patients with Carpal Tunnel Syndrome ("CTS"), with patients using BioAstin reporting a reduction in both severity and duration of pain. The Occupational Safety and Health Administration ("OSHA") estimates that three million Americans suffer from CTS. Prior to receiving the results of this trial, Cyanotech was awarded U.S. Patent 6,258,855 "Method of Retarding and Ameliorating Carpal Tunnel Syndrome," based on the protective properties of BioAstin.



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We received positive results from a clinical evaluation of BioAstin to measure its effectiveness in providing sunscreen protection from ultraviolet light ("UV"). The study concluded that daily ingestion of BioAstin for a two week period significantly increased the amount of UV energy required to produce skin reddening. In June 2002, we received a Notice of Allowance from the United States Patent and Trademark Office ("USPTO") for our patent application entitled "Method for Retarding and Preventing Sunburn by UV Light," based on the protective properties of astaxanthin. This patent covers the use of natural and synthetic astaxanthin as a single active ingredient to retard and prevent sunburn in both oral and topical applications.



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In May 2002, we reported results from another clinical trial testing the benefit of BioAstin on subjects suffering from rheumatoid arthritis. Results from this trial show that BioAstin reduced joint pain significantly and improved overall physical performance in the subjects. Rheumatoid arthritis is a chronic destructive disorder that is the most common form of inflammatory arthritis. According to the Arthritis Foundation, over two million Americans suffer from rheumatoid arthritis with an estimated cost to the U.S. economy of $65 billion per year in medical care and indirect expenses for this and similar musculoskeletal conditions.

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Phycobiliproteins

        Cyanotech also produces phycobiliproteins which are sold to the medical and biotechnology research industry. Phycobiliproteins are highly fluorescent pigments purified from microalgae. Their spectral properties make them useful as tags or markers in many kinds of biological assays, such as flow cytometry, fluorescence immunoassays and fluorescence microscopy. We do not anticipate that phycobiliproteins will represent a significant component of total sales in future periods.

        We maintain product liability insurance in limited amounts for products involving human consumption. In the opinion of management, broader product liability insurance coverage is prohibitively expensive at this time.

Research & Development Expenses

        Cyanotech's expertise is in the development of efficient, stable and cost-effective production systems for microalgal products. Our researchers investigate specific microalga identified in scientific literature for potentially marketable products and then strive to develop the technology to grow such microalgae on a commercial scale.

        The Company's current research and development efforts are primarily directed at validating the anecdotal indications of BioAstin through clinical evaluations and trials. In March 2002 we concluded a feeding trial aimed at further validation of the efficacy of NatuRose as an alternative to synthetic pigments in both aquaculture and avian feed markets. As anticipated due to our expanded clinical studies, research and development expenses increased during fiscal 2002 to $343,000, up 29% from the prior fiscal year's expenditures of $265,000, but 33% less than the $514,000 spent in fiscal 2000. The Company continues to investigate new products and prioritizes its research and development activities to focus on projects that we believe will have the greatest market acceptance and achieve the highest return on the Company's investment. Successful microalgal product development is highly uncertain and is dependent on numerous factors, many of which are beyond the Company's control. Products that appear promising in early phases of development may be found to be ineffective, may be uneconomical because of manufacturing costs or other factors, may be precluded from commercialization due to the proprietary rights of other companies, or may fail to receive necessary regulatory approvals.

Manufacturing

        Cyanotech cultivates and processes its microalgae products at a 90-acre production facility on the Kona coast of the island of Hawaii. We have a total of 68 large oval culture ponds, 1 media recycling lake and 17 smaller auxiliary culture ponds totaling approximately 200,000 square meters, all of which are currently available for production. Each of the large ponds has an average surface area of 30,408 square feet (2,825 square meters) and each contain approximately 132,000 gallons (500,000 liters) of culture media. In addition, we have in production eight large-scale photobioreactors, each with a capacity of approximately 12,000 gallons (45,000 liters). Also located at this facility are two processing plants, our Spirulina tableting plant, our research and quality control laboratories and three administration buildings.

Spirulina Pacifica

        Cyanotech began culturing Spirulina Pacifica in 1985 at its present facility at the HOST Park. Since 1994, we have produced two grades of Spirulina Pacifica; an all-natural grade cultivated by using conventional agricultural fertilizers and an organic grade that is cultivated using only organic fertilizers. Our organic Spirulina Pacifica is grown and processed in accordance with the California Organic Food Act of 1990 and is certified annually by Quality Assurance International, a leading third-party agency. Both grades of Spirulina Pacifica are certified Kosher and are cultivated without the use of herbicides

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or pesticides. Since 1996, our Company's Spirulina process has also been certified under the ISO 9002-94 international quality standards.

        Our Spirulina Pacifica is cultivated in a combination of fresh water and a metered amount of nutrient-rich deep ocean water (containing ninety-six trace elements), drawn from a depth of 2,000 feet below sea level. This water is supplemented with the other major required nutrients such as food-grade sodium bicarbonate (baking soda) and infused with carbon dioxide. The Spirulina crop in each pond is circulated by paddlewheels to keep an even blend of nutrients in suspension and a uniform exposure of the algae to sunlight, the other major component of cultivation. Our ponds are engineered to maintain the right media depth for sunlight to permeate each crop completely, facilitating rapid growth. Our system promotes efficient growing conditions, allowing the Spirulina Pacifica algae to reproduce rapidly. Each pond can be harvested, on average, in six days.

        Once ready for harvest, 70% of the Spirulina culture is pumped from a pond through underground pipes to our processing building where the crop is separated from the culture medium by stainless steel screens. The remaining 30% serves as an innoculum for the next growth cycle. Harvested Spirulina is washed with fresh water three times and vacuum filtered before moving to the drying stage. Culture media removed in processing is recycled. Recycled media is treated, tested for nutrient content and, if necessary, fortified with nutrients before being returned to the culture ponds for another cycle of cultivation. Our ICBM technology for microalgae cultivation has proven to be a reliable and stable operating environment, allowing us to grow and harvest Spirulina without significant contamination by unwanted algae and associated loss of productivity. We believe that such an accomplishment remains unique to Cyanotech.

Spirulina Pacifica for use in powder and tablets is dried by our patented low-oxygen Ocean-Chill Drying process which preserves high levels of antioxidant carotenoids. This provides a significant quality edge over competing products. The drying process takes about six seconds and results in a dark green powder. We also employ an alternate proprietary drying method to produce Spirulina Pacifica in the flake form. Bulk Spirulina powder, tablets and flakes are vacuum-sealed in oxygen-barrier foil laminate bags along with a packet of oxygen absorbent. This packaging ensures product freshness and extends the shelf life of bulk Spirulina Pacifica products to three years. Another significant benefit of the Ocean-Chill Drying system is our ability to recover the carbon dioxide produced in the drying process. The recovered carbon dioxide is a major required nutrient for algal culture growth.

        Each lot of Spirulina is sampled and subjected to thorough quality assurance which includes testing for bulk density, moisture, particulate matter, color and taste, among others. In addition, each lot of our Spirulina Pacifica undergoes a prescribed set of microbiological food product tests, including total aerobic bacteria, coliform bacteria and E. coli. All of our Spirulina Pacifica powder is certified free of pesticides and herbicides, and certified Kosher.

        Spirulina powder is difficult to form into tablets. Most tablet manufacturers either add high amounts (from 10% to 30%) of inert substances to "glue" the tablet together or use a heat granulation process that destroys nutrients. In contrast, our Spirulina Pacifica tablets contain a maximum of 2% of such substances and are produced in cold press compression tablet-making machines. Our Spirulina Pacifica flakes are produced by combining freshly harvested Spirulina Pacifica with food-grade lecithin and drying this blend in a proprietary system. The Company's packaged consumer products are bottled and labeled by a subcontractor in California. This subcontractor is a cGMP manufacturer with organic and Kosher certifications, subject to regular government inspections.

Natural Astaxanthin

        The Haematococcus microalgae which produce natural astaxanthin grow in fresh water supplemented with nutrients. As such, it is extremely susceptible to contamination by unwanted algae, protozoa, and amoeba. Cyanotech has developed a proprietary system to overcome this problem known

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as our PhytoDome Closed Culture System or PhytoDome CCS. Using this large-scale photobioreactor, we are able to consistently grow large volumes of contaminant-free Haematococcus cultures.

        For the final stage of culture, the Haematococcus algae is transferred to open ponds. There, an environmental stress is applied causing spores to form which accumulate high levels of astaxanthin. The media containing these spores is transported through underground pipes to our astaxanthin processing building where the culture media and algal spores are separated. Fresh water recovered from this stage of processing is tested and treated using a proprietary water treatment system. It is then recycled for use in the next production cycle. The algal spores are dried to a fine powder using the low-oxygen Ocean-Chill Drying system. During processing, the spores are cracked in a proprietary system to assure high bioavailability of astaxanthin. Finally the bulk powder in vacuum-sealed in oxygen-barrier foil laminate bags along with a packet of oxygen absorbent.

        Unlike Spirulina, astaxanthin is produced in a batch-mode and each cultivation pond must be thoroughly cleaned between cycles. While the entire astaxanthin production cycle takes a total of four weeks, each stage of the four-step process is staggered and continuously feeds the next stage of cultivation. As a result, we are able to produce a new crop of astaxanthin from each of our fifteen 500,000 liter culture ponds approximately once a week.

        Natural astaxanthin powder for human consumption may be processed further utilizing a carbon dioxide extraction process. All natural astaxanthin products destined for human consumption undergo a prescribed set of microbiological food product tests, including total aerobic bacteria, coliform bacteria and E. coli.

Distribution and International Sales

        The majority of our bulk Spirulina sales are to health food manufacturers and health food formulators with their own Spirulina product lines, many of whom identify and promote Cyanotech's Hawaiian Spirulina Pacifica in their products. Our packaged consumer products sell through an established health food distribution network in the domestic market under the Nutrex Hawaii label. Orders for packaged consumer products are taken at the retail level by one of 25 regional broker representatives and shipped through one of 27 wholesale distributors. In selected foreign markets, we have exclusive sales distributors for both our bulk Spirulina and packaged consumer products. During fiscal 2002, our Spirulina Pacifica products were sold in 18 foreign countries and the United States.

NatuRose is presently being sold through a network of agents and distributors directly to aquaculture farmers, aquaculture feed manufacturers, poultry feed formulators, vitamin premix suppliers and other end users in 19 foreign countries and the United States for use in aquaculture feed, poultry feed and pet feed industries. During fiscal 2002, Japan emerged as one of our primary markets for the application of NatuRose in aquaculture. Feeding trials in Japan have proven that NatuRose produces superior results in pen-raised "Tai" or Sea Bream; a major product in that market. Using NatuRose, pen-raised Sea Bream develop an appearance closer to fish caught in the open ocean than cultivated fish fed synthetic astaxanthin. In addition to the more desirable natural coloration, a lower volume of NatuRose is required compared to synthetic astaxanthin. The increased demand for NatuRose in Japan was a major factor in our decision to establish Cyanotech Japan YK as a new channel of distribution in January 2002. In addition to aquaculture, NatuRose is also being used to pigment the yolk of chicken eggs in Scandinavia and Japan and is being used by commercial tropical fish breeders to produce higher-value tropical fish with more desirable coloration. As NatuRose is one of the few non-synthetic astaxanthin feed ingredients available, many feed formulators identify NatuRose and Cyanotech as the source of this component in their feed to capitalize on the appeal of an all-natural feed/cultivation process.

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BioAstin is presently being sold to nutritional supplement manufacturers and health food formulators as well as through our wholly-owned subsidiary, Nutrex Hawaii, Inc. During fiscal 2002, increased interest in packaged BioAstin for the wholesale and retail markets resulted in sales of $535,000, an increase of $340,000, or 174%, over the prior fiscal year sales. Revenues for this product during fiscal 2002 were derived primarily from sales made to natural products distributors, to retailers and directly to consumers using our toll-free order line (1-888-922-2107) and our internet e-commerce website, www.nutrex-hawaii.com. While interest from wholesale distributors and retailers for BioAstin has increased over prior years, we expect that sales through retail channels will continue to grow as consumers become more aware of the product and its benefits. As part of our expansion of sales channels, Twinlab Corporation ("Twinlab") introduced new product formulations containing our natural astaxanthin. Twinlab is a dietary supplement industry leader with extensive distribution in all major consumer channels and markets.

        In our effort to increase the revenue potential of our packaged consumer product, in October 2001 we began development of a national television marketing campaign to promote Nutrex Hawaii's BioAstin in the mass market. A key element in this campaign is a 30-minute television infomercial. This infomercial was tested in several markets in late April and early May 2002. Sales from the infomercial, however, were less than anticipated and the test results are being analyzed to refocus the infomercial to generate improved response. A new website for direct retail ordering online was launched in April 2002 at www.bioastinxp.com.

        In the years ended March 31, 2002, 2001 and 2000, international sales accounted for approximately 47%, 54% and 46%, respectively, of our net sales. We expect that international sales will continue to represent a significant portion of our net sales in future periods. Our business, financial condition and results of operations may be materially adversely affected by any difficulties associated with managing accounts receivable from international customers, tariff regulations, imposition of governmental controls, political and economic instability or other trade restrictions. Through December 2001 all of our international sales were denominated in United States dollars which exposed us to a measure of risk resulting from fluctuations in currency exchange rates. Such fluctuations could cause our products to become relatively more expensive to customers in the affected country, leading to a reduction in sales in that country. To address this issue in one of our major markets, we formed the Japanese business unit, Cyanotech Japan in January 2002. Through this subsidiary, we will be able to better service our increasing customer base in Japan, economize on shipping, provide more timely delivery to our Japanese customers and allow these customers to conduct transactions in Japanese Yen rather than US Dollars.

Customers

Spirulina

        We market and sell our Spirulina products to a variety of customers, which range in size from $500 million in annual sales to small retail stores. Several of our major customers are businesses that were established exclusively to market and sell Spirulina products.

        Approximately $1,031,000, or 13% of our net sales for the year ended March 31, 2002 was to a single customer, Spirulina International B. V. ("Spirulina International"), a Spirulina marketing and distribution company based in the Netherlands. Sales to this customer during the prior fiscal year were $1,533,000 or 19%. We believe that sales to this customer will continue to represent a significant portion of total net sales in future periods. Any changes in demand from this customer could have a material adverse effect on our business, financial condition and results of operations.

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        We market and sell our Spirulina products to a variety of other customers, including:

        Health Food Manufacturers.    Health food manufacturers often use Cyanotech's Spirulina Pacifica products as a key ingredient in their Spirulina-based products, or as an ingredient in their health food formulations. These customers purchase bulk powder or bulk tablets and package the products under their brand label for sale to the health and natural food markets. Many of the products produced by these customers are often marketed and sold domestically in direct competition with our Nutrex Hawaii line of retail consumer products.

        Private Label Customers.    We currently provide private label retail consumer products to seven international customers. Products for these customers are manufactured only upon receipt of an order and no finished product inventories are maintained.

        Retail Distributors.    Retail distributors act as product wholesalers to independent and chain retailers. The majority of domestic Nutrex Hawaii sales in the year ended March 31, 2002 were to 29 distributors.

        Raw Materials Suppliers.    In the year ended March 31, 2002, we sold bulk Spirulina products to fifteen domestic and ten foreign customers engaged in the business of distributing natural raw materials to health and natural food manufacturers. These distributors provide their customers with standardized quality control, warehousing and distribution services, and charge a mark up on the products for providing these services. These distributors may differentiate the products they sell, but they generally treat the products as commodities, with price being the major determining factor in their purchasing decision.

Natural Astaxanthin

NatuRose is presently being sold through a network of agents and distributors directly to aquaculture farmers, aquaculture feed manufacturers, poultry feed formulators, vitamin premix suppliers and other end users in the United states and in 19 foreign countries. As mentioned earlier, in fiscal 2002 our major market for NatuRose was aquaculture customers in Japan. In addition to our aquaculture customers, NatuRose is also being sold to poultry feed formulators to naturally pigment the yolk of chicken eggs and to pet feed formulators for commercial breeders of high-value tropical fish. As our product is a natural astaxanthin derived from microalgae, many of these formulators identify NatuRose and Cyanotech as the source of this component in their feed.

BioAstin is presently being sold as an ingredient to dietary supplement manufacturers and health food formulators as well as through our wholly-owned subsidiary, Nutrex Hawaii, Inc. as a packaged consumer product. During fiscal 2002, BioAstin consumer product revenues were derived primarily from sales made directly to natural product distributors, retailers and consumers using our toll-free order line (1-888-922-2107) and our internet e-commerce website, www.nutrex-hawaii.com.

        A BioAstin infomercial was tested in several television markets in late April and early May, 2002. Sales generated from these test airings were less than anticipated and results are being analyzed to refocus the infomercial to improved the response. To accommodate the orders from this infomercial, we have contracted with a fulfillment call center and established a new BioAstin website at www.bioastinxp.com for direct retail ordering online.

Competition

Spirulina

        Our Spirulina Pacifica products compete with a variety of vitamins, dietary supplements, other algal products and similar nutritional products available to consumers. The nutritional products market is highly competitive. It includes international, national, regional and local producers and distributors,

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many of whom have greater resources than Cyanotech, and many of whom offer a greater variety of products. Our direct competition in the Spirulina market is currently from Dainippon Ink and Chemical Company's Earthrise facility in California and several farms in China. To a lesser extent, we compete with numerous smaller farms in China, India, Thailand, Taiwan, Cuba and South Africa. Packaged consumer products marketed under our Nutrex Hawaii brand also compete with products marketed by health food manufacturing customers of Cyanotech who purchase bulk Spirulina from us and package it for retail sales. A decision by another company to focus on Cyanotech's existing or target markets or a substantial increase in the overall supply of Spirulina could have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that we will not experience competitive pressure, particularly with respect to pricing, that could adversely affect us.

Natural Astaxanthin

        Our natural astaxanthin product for the animal nutrition market, NatuRose, competes directly with the synthetic astaxanthin products produced and marketed for the commercial feed and aquaculture industry worldwide by Hoffmann-LaRoche and BASF. The animal nutrition market for astaxanthin is currently dominated by a single producer, Hoffmann-LaRoche, who produces synthetic astaxanthin from petrochemicals. Hoffmann-LaRoche currently sells astaxanthin synthesized from petrochemicals to the aquaculture industry at approximately $2,400 per pure kilogram, on average. To a lesser extent, our NatuRose also competes in the marketplace with natural astaxanthin derived from other natural sources.

        In August 2000, the FDA affirmed our development work by approving NatuRose for use as a color additive in the feed of salmon and trout grown worldwide and sold in the United States. During fiscal 2001, two additional producers, Archer Daniels Midland and Igene Biotechnology, Inc., entered the market with natural astaxanthin products derived from Phaffia yeast. Several other companies have announced plans to produce commercial quantities of natural astaxanthin but we believe that these companies are presently producing only small quantities for test purposes.

        Although synthetic astaxanthin has widespread use as a pigmentation source in commercial aquaculture, independent scientific analysis has shown that the molecular structure of the astaxanthin derived from the Haematococcus microalga more closely resembles the astaxanthin obtained naturally by fish in the wild. As mentioned earlier in this report, this characteristic has shown significant positive results in feeding trials done in Japan on Sea Bream. The results from these feeding trials affirm our belief that there is an international market demand for pen raised seafood whose diet consists of nutrients derived from natural sources. We believe there is commercial demand for a natural astaxanthin pigment for animal feed and that our NatuRose product can compete against such other products on the basis of performance and price.

BioAstin, our natural astaxanthin product for the human nutrition market, was the first natural astaxanthin product for human consumption to be reviewed without exception by the FDA. Presently, BioAstin competes directly in the United States with "Asta-Factor," a natural astaxanthin product produced and marketed by Aquasearch, Inc. ("Aquasearch"), and in Japan with "AstaReal" produced by Fuji Chemicals, as well as a variety of vitamins, dietary supplements and other antioxidant products available to consumers. In certain portions of the European market, BioAstin competes directly with "Astaxin", a microalgae-based natural astaxanthin product produced by AstaCarotene AB of Sweden. The nutritional products market is highly competitive. It includes international, national, regional and local producers and distributors, many of whom have greater resources than Cyanotech, and many of whom offer a greater variety of products.

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Phycobiliproteins

        Three major competitors manufacture phycobiliprotein products for sale, including Quantify, Inc., Martek Biosciences Corporation and Prozyme, Inc. Cyanotech competes with these companies on the basis of price and quality. New synthetic fluorescent compounds have been developed which are superior to phycobiliproteins in some applications. The advantage of the synthetic compounds is their lower molecular weight and, in some cases, their lower cost. While our phycobiliprotein products may not be able to compete effectively against synthetic compounds in some applications, Cyanotech's phycobiliproteins have gained a reputation for high quality at a competitive price.

Government Regulation

        Cyanotech's products, potential products and its manufacturing and research activities are subject to varying degrees of regulation by a number of government authorities in the United States and in other countries, including the United States Food and Drug Administration pursuant to the Federal Food, Drug and Cosmetic Act. The FDA regulates, to varying degrees and in different ways, dietary supplements, other food products, diagnostic medical devices and pharmaceutical products, including their manufacture, testing, exportation, labeling, and, in some cases, advertising.

        Cyanotech is also subject to other federal, state and foreign laws, regulations and policies with respect to labeling of its products, importation of organisms, environmental protection, and occupational safety laws, among others. Federal, state and foreign laws, regulations and policies are always subject to change and depend heavily on administrative policies and interpretations. We work with foreign distributors to ensure our compliance with foreign laws, regulations and policies. There can be no assurance that any changes with respect to federal, state and foreign laws, regulations and policies, and, particularly with respect to the FDA or other such regulatory bodies, with possible retroactive effect, will not have a material adverse effect on our business, financial condition and results of operations. There can be no assurance that any of our potential products will satisfy applicable regulatory requirements.

        The Federal Dietary Supplement Health and Education Act ("DSHEA") regulates the use and marketing of dietary supplements, including vitamin products. The DSHEA covers only dietary supplements and contains a number of provisions that differentiate dietary supplements from other foods. The DSHEA also sets forth standards for adulteration of dietary supplements or ingredients and provides detailed requirements for the labeling of dietary supplements, including nutrition and ingredient labeling. Compliance with relevant requirements can be onerous and time consuming, and there can be no assurance that Cyanotech can continue to meet relevant FDA manufacturing requirements for existing products or meet such requirements for any future products. Ongoing compliance with applicable regulatory requirements are monitored through periodic inspections by state and federal agencies, including the FDA, the Hawaii Department of Health and comparable agencies in other countries. Our processing facility is also inspected annually for organic certification by Quality Assurance International and for Kosher certification by Organized Kashrus Laboratories.

        A portion of our bulk and packaged Spirulina Pacific products are labeled for sale as "Certified organically grown and processed under the California Organic Foods Act of 1990." By October 2002 all United States products labeled "Organic" will be subject to new guidelines promulgated under the United States Department of Agriculture's ("USDA") National Organic Program ("NOP"). These regulations are primarily directed at soil-based agriculture, a method of cultivation quite different from the aquaculture methodology used to produce microalgae. We have petitioned the USDA National Organic Standards Board to amend their proposed regulations to include exemptions based on the unique aspects of Spirulina cultivation. There can be no guarantee that the USDA will grant our request. In order to comply with the proposed regulations without the requested addendum, we may

12

encounter significant increases in organic Spirulina production costs which in turn may affect our decision to produce "Certified Organic" Spirulina for sale in large quantities.

        In August 2000, we received notice that our natural astaxanthin product for the animal nutrition market, NatuRose, had been approved by the FDA for use as a color additive in the feed of salmon and trout. The FDA approval of NatuRose adds to the clearances we had already received in Japan and Canada and organic registration for use in feed in New Zealand. With FDA approval, we are able to sell NatuRose to US salmon and trout producers as well as to foreign producers whose products are destined for the US market. The process of obtaining clearances for a new color additive is expensive and time consuming. Extensive information is required on the toxicity of the additive, including carcinogenicity studies and other animal testing. No assurances can be given that any of our proposed products intended for use as feed additives will be approved on a timely basis for use in countries other than those mentioned above, if at all.

        As in vitro diagnostic medical device components, phycobiliprotein products do not currently require pre-market clearances by the FDA. However, as a component of a medical device, they can be subject to other various medical device requirements, including cGMP requirements.

Patents, Licenses and Trademarks

        Cyanotech has received four United States patents; two on aspects of our production methods and two for use of our BioAstin products in treatment of CTS and Canker/Cold sores. In addition, we have received notice of allowance from the USPTO for the use of BioAstin as both a topical and oral sunscreen. Although we regard our proprietary technology, trade secrets, trademarks and similar intellectual property as critical to our success, we rely on a combination of trade secret, contract, patent, copyright and trademark law to establish and protect our rights in our products and technology. There can be no assurance that we will be able to protect our technology adequately or that competitors will not be able to develop similar technology independently. In addition, the laws of certain foreign countries may not protect the Company's intellectual property rights to the same extent as the laws of the United States.

        Litigation in the United States or abroad may be necessary to enforce our patent or other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation, even if successful, could result in substantial costs and diversion of resources and could have a material adverse effect on our business, results of operations and financial condition. Additionally, if any such claims are asserted against us, we may seek to obtain a license under the third party's intellectual property rights. There can be no assurance, however, that a license would be available on terms acceptable or favorable to us, if at all.

Associates

        Cyanotech employed 58 full-time associates as of March 31, 2002. Approximately 35 associates are involved in the harvesting and production process, 4 are involved in research and product development, and the remainder are involved in sales, administration and support. Management believes that its relations with its associates are good. We have not experienced difficulty in attracting personnel and none of our associates are represented by a labor union.

Industry Segments and Export Sales

        The Company's business consists of one industry segment and is grouped into six geographic areas: United States, Canada/South America, the Netherlands, Europe, excluding the Netherlands, China, and Asia/Pacific, excluding China. In January 2002, the Company established Cyanotech Japan, a new

13

subsidiary with an office in Tokyo. The following table (dollars in thousands) summarizes the product sales revenues from unaffiliated customers in each of the six geographic regions:

	2002				2001				2000
United States	$	4,393	53	%	$	3,676	46	%	$	3992	54	%
Canada/South America		394	5	%		509	6	%		371	5	%
The Netherlands		1,032	13	%		1,542	19	%		1,715	23	%
Europe, excluding the Netherlands		706	8	%		640	8	%		613	8	%
China		157	2	%		119	1	%		73	1	%
Asia/Pacific, excluding China		1,553	19	%		1,557	20	%		634	9	%
Total Product Sales Revenues	$	8,235	100	%	$	8,043	100	%	$	7,398	100	%

        The Company believes that its profit margin on export sales is not significantly different from that realized on sales in the United States. In January 2002, we established Cyanotech Japan, a new subsidiary with an office in Tokyo. In our consolidated financial reports, sales made through this subsidiary are denominated in Japanese Yen and converted to US Dollars at the exchange rate in effect at the date of the sale.

Item 2. Properties

        Cyanotech Corporation is located in Kailua-Kona, Hawaii, at the HOST Park and also rents 2,500 square feet of warehouse space in a light industrial area located approximately four miles from the HOST Park. The HOST Park facility consists of approximately 183 leased acres. Approximately 90 acres have been fully developed and contain production ponds, a processing facility, a laboratory, and administrative offices. All products are produced at this facility. The property is leased from the State of Hawaii under a 30-year commercial lease expiring in 2025.

        During 1997, we reached a preliminary agreement with the State of Hawaii to lease an additional 93 acres at the HOST Park, which increased the total acreage under lease to 183 acres. The State of Hawaii agreed to allow the Company to lease this additional 93 acres on a year-to-year basis, until such time that the Company determines the need for a longer lease term. The construction work performed on this expansion acreage was the subject of the asset impairment charge of $2,796,000 recorded during fiscal 2000. Due to improvements made in our astaxanthin cultivation and processing over the past five years, in April 2002 we determined that only a portion of this reserved expansion area would be needed and reduced the reserved land under this lease from 93 acres to 30 acres. The State of Hawaii has agreed to allow this change and to continue to lease the 30 acre parcel to us on a year to year basis. Our current lease agreement, as revised, is effective through December 31, 2002. Subject to available funds, we ultimately plan to use this new property to construct a larger astaxanthin production facility and additional culture ponds that would use the PhytoDome CCS technology. We believe that there is sufficient available land at the HOST Park to meet our currently planned needs.

Item 3. Legal Proceedings

        There were no legal matters addressed during fiscal 2002.

Item 4. Submission of Matters to a Vote of Security Holders

        No matters were submitted to a vote of the stockholders during the fourth quarter of fiscal 2002.

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Part II

Item 5. Market for Common Equity and Related Stockholder Matters

        The information required by this Item is incorporated by reference to the Section labeled "Market for Common Equity and Related Stockholder Matters" in the Company's 2002 Annual Report to Stockholders, attached as Exhibit 13.

Item 6. Selected Financial Data

		Years ended March 31,
		2002			2001			2000			1999			1998
		(in thousands, except per share data)
Results of Operations
Net sales		$	8,235		$	8,043		$	7,398		$	6,738		$	7,627
Gross profit(b)			1,562			2,345			1,503			973			3,137
Impairment of long-lived assets			—			—			2,796			—			—
Loss from operations(a)(b)			(2,185	)		(708	)		(4,312	)		(2,642	)		(300	)
Net loss(a)(b)			(2,589	)		(1,067	)		(4,485	)		(2,557	)		(300	)
Net loss per common share
	Basic and Diluted(a)(b)	$	(0.15	)	$	(0.07	)	$	(0.34	)	$	(0.21	)	$	(0.05	)
Average Shares Outstanding
	Basic and Diluted		17,033			15,997			13,775			13,602			12,909
Selected Balance Sheet Data
Cash and investment securities		$	1,051		$	2,269		$	405		$	323		$	1,397
Working capital			1,008			4,177			2,094			917			2,596
Total assets			18,400			21,423			19,689			23,621			25,667
Long-term debt and capital lease obligations, excluding current maturities			2,765			4,336			1,307			13			129
Stockholders' equity			13,191			15,695			16,645			20,707			23,174

(a)

Loss from operations, net loss and net loss per common share for the year ended March 31, 2000 reflect the effect of an asset impairment charge of $2,796. For further detail, see the sections "Operating Expenses—Impairment of Long-Lived Assets" and "Liquidity and Capital Resources" in Management's Discussion and Analysis of Financial Condition and Results of Operations from the Company's fiscal 2000 Annual Report to Stockholders.

(b)

Gross profit, loss from operations, net loss and net loss per common share for the year ended March 31, 2002 reflect the effect of a finished goods inventory adjustment totaling $454. For further detail, see the section "Results of Operations—Fiscal 2002 Compared to Fiscal 2001—Gross Profit" in Management's Discussion and Analysis of Financial Condition and Results of Operations from the Company's fiscal 2002 Annual Report to Stockholders.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

        The information required by this Item is incorporated by reference to the Section labeled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2002 Annual Report to Stockholders, attached as Exhibit 13.

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Item 7a. Quantitative and Qualitative Disclosures About Market Risk

        We have not entered 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 8. Financial Statements and Supplementary Data

        The consolidated balance sheets of the Company and subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 2002, together with the accompanying notes and the related Independent Auditors' Report, all contained in the Company's 2002 Annual Report to Stockholders attached as Exhibit 13, are incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

        Not applicable.

Part III

Item 10. Directors and Executive Officers; Compliance with Section 16(a) of the Exchange Act

(a)  Identification of Directors

        The information required by this Item is incorporated by reference from the Sections captioned "Proposal One: Election of Directors," "Certain Transactions," "Security Ownership of Certain Beneficial Owners and Management" and "Compliance with Section 16(a) of the Exchange Act" contained in Cyanotech's definitive 2002 Proxy Statement.

(b)  Identification of Executive Officers

        The executive officers of Cyanotech and their ages and positions as of March 31, 2002 are as follows:

Name	Age	Position
Gerald R. Cysewski, Ph.D	53	Chairman of the Board, President and Chief Executive Officer
Ronald P. Scott	47	Executive Vice President—Finance and Administration, Secretary and Treasurer
Glenn D. Jensen	43	Vice President—Operations
Kelly J. Moorhead	46	Vice President—Sales and Marketing
R. Shane Rohan	42	Vice President—Production

Dr. Cysewski co-founded Cyanotech in 1983 and has served as a director since that time. Since March 1990, Dr. Cysewski has served as President and Chief Executive Officer of Cyanotech and in October 1990 was also appointed to the position of Chairman of the Board. From 1988 to November 1990, he served as Vice Chairman and from 1983 to June, 1996, he served as Scientific Director of the Company. From 1980 to 1982, Dr. Cysewski was group leader of microalgae research and development at Battelle Northwest, a major contract research and development firm. From 1976 to 1980, Dr. Cysewski was an assistant professor in the Department of Chemical and Nuclear Engineering at the University of California, Santa Barbara, where he received a two-year grant from the National Science Foundation to develop a culture system for blue-green algae. Dr. Cysewski received his doctorate in Chemical Engineering from the University of California at Berkeley.

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Mr. Scott was appointed to the Board of Directors of the Company in November 1995, has served as Executive Vice President—Finance and Administration since August 1995, and has served as Secretary and Treasurer since 1990. From 1990 until August 1995, Mr. Scott served as Vice President—Finance and Administration. Prior to 1990, he was Assistant Controller for PRIAM Corporation, a manufacturer of Winchester disk drives and served in various accounting management positions with Measurex Corporation, a manufacturer of industrial process control systems. Mr. Scott holds a B.S. degree in Finance and Management from California State University, San Jose, and an M.B.A. degree from the University of Santa Clara.

Mr. Jensen has served as Vice President—Operations since May 1993. He joined Cyanotech in 1984 as Process Manager and was promoted to Production Manager in 1991, in which position he served until his promotion to Vice President—Operations. Prior to joining Cyanotech, Mr. Jensen worked for three years as a plant engineer at a Spirulina production facility, Cal-Alga, near Fresno, California. Mr. Jensen holds a B.S. degree in Health Science from California State University, Fresno.

Mr. Moorhead, who joined the Company in 1984, has served as Vice President—Sales and Marketing since September 1999; from June, 1998 to September 1999, he was Vice President of New Product Development; from October 1997 to June 1998, he was Vice President—Sales and Marketing; from August 1996 to October 1997 he was Vice President—International Sales; from December 1991 to August 1996 he was Vice President—Sales and Marketing and President of Nutrex, Inc; from August 1987 to December 1991, he served as Vice President—Production. Prior to joining Cyanotech, Mr. Moorhead worked at the Oceanic Institute in Honolulu, Hawaii where he conducted research on production of Spirulina from agricultural waste. Mr. Moorhead holds a B.S. degree in Aquatic Biology from the University of California, Santa Barbara.

Mr. Rohan has served as Vice President—Production since July 2000. From April 1994 to July 2000, he served as Production Manager. Mr. Rohan joined Cyanotech as a Culture Biologist in November 1992. Prior to joining Cyanotech, Mr. Rohan worked as a Senior Research Assistant in the Marine Biology Department at the Scripps Institute of Oceanography. Mr. Rohan holds a B. S. degree in Marine Natural Products Chemistry from the University of California, San Diego.

Item 11. Executive Compensation

        The information required by this Item is incorporated by reference from the section captioned "Executive Compensation and Other Information," "Director Remuneration" and "Stockholder Return Performance Graph" contained in Cyanotech's definitive 2002 Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

        The security ownership information required by this Item is incorporated by reference from the section captioned "Security Ownership of Certain Beneficial Owners and Management" contained in Cyanotech's definitive 2002 Proxy Statement.

Equity Compensation Plan Information

        The following table provides information about the Company's common stock that may be issued upon the exercise of options and rights under all of the Company's existing equity compensation plans

17

as of December 31, 2001, including the 1994 Non-employee Director Stock Option and Stock Grant Plan and the 1995 Stock Option Plan.

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders
	1994 Non-employee Director Stock Option and Stock Grant Plan	15,000 Shr.	$	2.36	32,000 Shr.
	1995 Stock Option Plan	725,696 Shr.	$	2.10	66,854 Shr.
Total		740,696 Shr.	$	2.10	98,854 Shr.

Item 13. Certain Relationships and Related Transactions

        Not applicable.

18

Part IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) (1). The following Consolidated Financial Statements of Cyanotech Corporation and its subsidiaries are incorporated herein by reference pursuant to Item 8:

	Page in 2002 Annual Report To Stockholders
Independent Auditors' Report	32
Consolidated Balance Sheets as of March 31, 2002 and 2001	14
Consolidated Statements of Operations for each of the years in the three-year period ended March 31, 2002	15
Consolidated Statements of Stockholders' Equity and Comprehensive Loss for each of the years in the three-year period ended March 31, 2002	16
Consolidated Statements of Cash Flows for each of the years in the three-year period ended March 31, 2002	17
Notes to Consolidated Financial Statements	18-31

(a) (2). The following financial statement schedule is included in this report on the pages indicated below:

Schedule II Valuation and Qualifying Accounts	21
Independent Auditors' Report	22

        Schedules not listed above are omitted because of the absence of the conditions under which they are required or because the required information is included in the consolidated financial statements or notes thereto, which financial statements are incorporated by reference.

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(a) (3). Index to exhibits

Exhibit Number	Document Description
3.1	Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-QSB for the quarter ended December 31, 1996, file no. 0-14602.)
3.2	Bylaws of the Registrant, as amended. (Incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995, file no. 0-14602.)
4.1	Specimen Common Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form SB-2 filed on February 28, 1996, file no. 333-00951.)
10.1	Stockholders Agreement dated as of May 17, 1993. (Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1994, file no. 0-14602.)
10.2	1994 Non-Employee Directors Stock Option and Stock Grant Plan. (Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1994, file no. 0-14602.)
10.3	1995 Stock Option Plan for Cyanotech Corporation dated August 9, 1995, as amended. (Incorporated by reference to Exhibit 4(c) to the Company's Registration Statement on Form S-8 filed on October 27, 1995, file no. 33-63789.)
10.4	Sub-Lease Agreement between the Company and Natural Energy Laboratory of Hawaii Authority dated December 29, 1995. (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-QSB for the quarter ended December 31, 1995, file no. 0-14602.)
10.5	Term Loan Agreement dated April 21, 2000 between the Company and B&I Lending, LLC. (Incorporated by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended March 31, 2000, file no 014602.)
11.1	Statement re: Computation of Earnings per Share.
13	2002 Annual Report to Stockholders (portions only) as stated herein.
21.1	Subsidiaries of the Company.
23.1	Accountants' Consent.

(b)    Reports on Form 8-K

        The Registrant did not file any reports on Form 8-K during the fourth quarter of the 2002 fiscal year.

        No Annual Report to Stockholders or proxy material has been sent to Stockholders as of this date. Such report and proxy material will be furnished to Stockholders after the filing of this Form and copies of such materials will be furnished to the Commission when they are sent to Stockholders.

20

Schedule II

Cyanotech Corporation and Subsidiaries
Valuation and Qualifying Accounts (in thousands)
Years Ended March 31, 2002, 2001 and 2000

Column A	Column B		Column C		Column D	Column E
			Additions
Description	Balance at Beginning of Year		Charged to Costs and Expenses	Charged to Other Accounts	Deductions	Balance at End of Year
Allowance for Doubtful Receivables
2002	$	20	20	—	—	$	40
2001	$	10	10	—	—	$	20
2000	$	12	7	—	9	$	10

21

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Cyanotech Corporation:

        Under date of May 1, 2002, except as to notes 5, 8 and 15 which are as of June 17, 2002, we reported on the consolidated balance sheets of Cyanotech Corporation and subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for each of the years in the three-year period ended March 31, 2002, as contained in the 2002 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year ended March 31, 2002. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as listed in Item 14(a)(2). The financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits.

        In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

        The independent auditors' report on the consolidated financial statements of Cyanotech Corporation referred to above also contains an explanatory paragraph that states that the consolidated financial statements have been prepared assuming that Cyanotech Corporation will continue as a going concern. As discussed in note 15 to the consolidated financial statements, the Company has suffered recurring losses from operations and has limited sources of additional liquidity to enable it to sufficiently liquidate its debts, including convertible debentures of $1,238,000 due on October 31, 2002, as they become due that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in note 15. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of this uncertainty.

/s/ KPMG LLP
Honolulu, Hawaii
May 1, 2002

22

SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 22nd day of June, 2002.

CYANOTECH CORPORATION
By:	/s/  GERALD R. CYSEWSKI, PH. D. Gerald R. Cysewski, Ph. D. Chairman of the Board, President and Chief Executive Officer

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signatures	Title	Date
/s/  GERALD R. CYSEWSKI Gerald R. Cysewski, Ph.D.	Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer and Director)	June 27, 2002
/s/  RONALD P. SCOTT Ronald P. Scott	Executive Vice President—Finance and Administration, Secretary and Treasurer (Principal Financial and Accounting Officer and Director)	June 27, 2002
/s/  ERIC H. REICHL Eric H. Reichl	Director	June 27, 2002
/s/  DAVID I. ROSENTHAL David I. Rosenthal	Director	June 27, 2002
/s/  JOHN T. WALDRON John T. Waldron	Director	June 27, 2002
/s/  PAUL C. YUEN Paul C. Yuen	Director	June 27, 2002

23

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DOCUMENTS INCORPORATED BY REFERENCE
PART I

Item 1. Business

Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders

Part II

Item 5. Market for Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Part III

Item 10. Directors and Executive Officers; Compliance with Section 16(a) of the Exchange Act
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions

Part IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

Cyanotech Corporation and Subsidiaries Valuation and Qualifying Accounts (in thousands) Years Ended March 31, 2002, 2001 and 2000
INDEPENDENT AUDITORS' REPORT
SIGNATURES

EX-11.1

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Exhibit 11.1

CYANOTECH CORPORATION
COMPUTATION OF EARNINGS PER SHARE
Fiscal years ended March 31, 2002, 2001 and 2000

	2002			2001			2000
BASIC AND DILUTED LOSS PER SHARE
Net loss	$	(2,589,000	)	$	(1,067,000	)	$	(4,485,000	)
Undeclared Preferred Stock dividends		—			—			(237,000	)
Net loss attributable to Common stockholders	$	(2,589,000	)	$	(1,067,000	)	$	(4,722,000	)
Weighted average Common Shares outstanding		17,033,000			15,997,000			13,775,000
Net loss per Common Share	$	(0.15	)	$	(0.07	)	$	(0.34	)

        For the years ended March 31, 2002, 2001 and 2000, warrants and options to purchase Common Stock shares of the Company were outstanding, but were not included in the 2002, 2001 and 2000 computation of diluted net loss per common share because the inclusion of these securities would have had an antidilutive effect on the net loss per common share.

        During the years ended March 31, 2002 and 2001 convertible debentures were outstanding, but were not included in the computation of diluted net loss per common share because the inclusion of these instruments would have had an antidilutive effect on the net loss per common share.

        During the years ended March 31, 2001 and 2000, convertible preferred stock was outstanding, but was not included in the 2001 and 2000 computation of diluted net loss per common share because the inclusion of these securities would have had an antidilutive effect on the net loss per common share.

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Exhibit 11.1

CYANOTECH CORPORATION COMPUTATION OF EARNINGS PER SHARE Fiscal years ended March 31, 2002, 2001 and 2000

EX-13

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Exhibit 13

Cyanotech develops and commercializes natural products from microalgae.

Cyanotech produces microalgae products for the nutritional supplement, aquaculture feed, animal nutrition, and immunological diagnostics markets.

        Microalgae form a diverse group of over 30,000 species of microscopic plants, which have a wide range of physiological and biochemical characteristics and may contain high levels of natural proteins, amino acids, vitamins, phytonutrients and enzymes. Microalgae are a largely unexplored and unexploited renewable natural resource, and grow much faster than land-based plants. Under favorable growing conditions, microalgae may produce a new crop every week.

        BioAstin® is Cyanotech's natural astaxanthin (pronounced "asta-zan-thin") product for use as a human dietary supplement and nutraceutical. Clinical evaluations have shown that natural astaxanthin can provide such health benefits as helping limit or prevent sunburn as a systemic (oral) sunscreen; alleviate the effects of carpal tunnel syndrome; promote stomach health by inhibiting Gastroesophageal Reflux Disease (GERD); enhance the immune response system; and reduce pain caused by rheumatoid arthritis. BioAstin has the potential of being a dietary supplement with a wide range of health benefits. Laboratory comparisons of free radical absorption show astaxanthin contained in BioAstin, acting as an antioxidant, to be 500 times stronger than vitamin E and 10 times stronger than beta-carotene.

        Spirulina is a lifestyle enhancing dietary supplement used widely by persons seeking extra energy and a strengthened immune system. It is a concentrated source of vegetable-based, highly absorbable natural beta-carotene, mixed carotenoids and other phytonutrients, B vitamins, gamma linolenic acid (GLA), protein and essential amino acids. Spirulina is also a rich source of zeaxanthin, a compound important to human eye health. Cyanotech's product, Spirulina Pacifica®, is widely regarded as the industry standard of quality and is distributed worldwide through wholesale, retail and private label channels.

        NatuRose® is the Company's natural astaxanthin product for the aquaculture industry. It acts as a natural pigment to impart a pink-red color to farm-raised fish and shrimp. Aquaculture sales of synthetic astaxanthin made from petrochemicals exceed $200 million per year. The Company sells NatuRose to feed producers, principally in Japan, for the popular "Tai" or Sea Bream. Demand for NatuRose promises to increase as more aquaculture producers seek Cyanotech's all-natural product over synthetic pigments.

        Cyanotech has designed, developed and implemented proprietary production and harvesting technologies, systems and processes which eliminate many of the stability and contamination problems frequently encountered in the production of microalgae. The Company's technologies, systems, processes and favorable growing location permit year-round harvesting of its microalgae products in a cost-effective manner.

        Cyanotech maintains an environmentally responsible philosophy in the development and production of its products, using natural production methods and resources which employ extensive recycling of raw materials and nutrients. The Company believes that these recycling methods result in lower operating costs. The production system operates without the use of pesticides and herbicides, and does not create erosion, fertilizer runoff or water pollution. Cyanotech was the first producer of microalgae to receive third-party organic certification and also the first microalgae company in the world to have an ISO 9002 Registered Quality System.

        In recent years, Cyanotech has deliberately expanded its prospects beyond single-product and single-customer dominance.

        In fiscal 2002, that effort came to fruition. We now have multiple products—BioAstin®, Spirulina Pacifica® and NatuRose®—providing these important customer benefits, among others:

•

BioAstin—enhanced immune response, antioxidant protection, sunburn protection and relief from pain, such as from carpal tunnel syndrome and rheumatoid arthritis;

•

Spirulina Pacifica—extra energy, strengthened immune system and potential protection from cancer; and



•

NatuRose—superior pigmentation for aquaculture-raised shrimp and fish, particularly "Tai" or Sea Bream.

        We sell through multiple channels—from our own branded products sold directly online and through retailers, to private label packaged products sold to others, to wholesale bulk products sold to manufacturers. We market in the United States and 30 countries around the world from the Kona Coast of Hawaii. We are the world's leading producer of high-value products from microalgae and the largest producer of natural astaxanthin.

        To our stockholders:    Bringing new products to market is challenging, particularly for a company with limited resources, like Cyanotech. Yet, we believe that fiscal 2002, while not successful financially, was indeed fruitful in terms of the advances we made in validating certain health benefits of our leading products, especially BioAstin. As a result, there is growing adoption of our products in formulations by other dietary supplement and skincare companies, both in the United States and overseas.

        There is clearly a groundswell of visibility, acceptance and adoption of BioAstin growing as we progress into fiscal 2003. We began the new fiscal year operating at full capacity to meet current and projected demand for all of our products and we hope it will pay off in increased sales and a return to profitability in fiscal 2003.

BioAstin: studies indicate many health benefits

We ran several clinical evaluations and studies during the past 18 months for our natural astaxanthin product, BioAstin. One study tested the product as a systemic sunscreen and found that BioAstin does effectively act to increase the time required for a person to accumulate the radiant energy or ultraviolet light required for reddening of the skin, in effect, retarding sunburn. We applied for and received a U.S. patent for the use of BioAstin natural astax-anthin as a sunscreen. The patent covers the use of natural and synthetic astaxanthin as a single active ingredient to retard and prevent sunburn in both oral and topical applications. Other companies, like the Sea & Ski skincare products company (www.sea-and-ski.com) have added natural astaxanthin to their product formulations for use as a topical sunscreen and skin protector as well. The additional protective quality comes from natural astaxanthin's proven value as an antioxidant—500 times stronger than vitamin E and 10 times stronger than beta-carotene. We are also working with other suncare and skincare companies who are considering using BioAstin in their formulations. Cyanotech is the largest supplier in the world of natural astaxanthin from microalgae.

        We conducted two separate tests on the effectiveness of BioAstin for the treatment of Carpel Tunnel Syndrome (CTS). The conclusion of these two tests was that correct dosages of BioAstin were effective in CTS treatment as the participants showed improvement as to both the severity and duration of their pain. Twinlab Corporation, a new customer for Cyanotech and a leading nutraceutical manufacturer and marketer, is one of the companies planning to address the CTS market segment using BioAstin in its new "Carp-L-Care" product. In a clinical trial of BioAstin to determine its ability to lower cholesterol levels, it was confirmed that BioAstin had no negative impact in 36 different blood measurements, therefore, proving it's safety for human supplementation.

        Other trials showed that BioAstin prevents knee and joint soreness and increases immune system response after strenuous exercise, which may lead to important applications for sports nutrition. One of the most startling results was the recent finding that BioAstin significantly reduces joint pain and improves physical performance in people with rheumatoid arthritis. We are just beginning to assess the implications of this health benefit.

NatuRose: focus on Japanese aquaculture market

With several feeding trials completed, NatuRose natural astaxanthin has been found particularly effective in Japanese aquaculture for pigmenting the popular "Tai" or Sea Bream fish that is heavily farmed for the Japanese market. One of the largest producers of aquaculture feed in Japan has become a customer of Cyanotech and has begun to use NatuRose in its feed formulations rather than synthetic astaxanthin. Others are following suit. To serve this growing market effectively, we formed Cyanotech Japan YK. Initially we will market NatuRose and Spirulina Pacifica to the Japanese animal feed market and later offer BioAstin and Spirulina Pacifica to the human nutrition market. Cyanotech now can

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economize on shipping, provide more timely delivery to customers and allow customers to conduct business in Japanese Yen rather than US Dollars.

Spirulina: a mature and steady product and market

Spirulina Pacifica, Cyanotech's original product, continues to be sold directly and through resellers in 18 countries around the world despite heavy price competition by producers of lower quality product. Cyanotech's largest customer, Spirulina International BV, based in The Netherlands, markets Spirulina throughout western Europe and South Africa. In fiscal 2002, a study by Japanese researchers resulted in new clinical evidence suggesting that the use of Spirulina stimulates the human immune response to cancer. The researchers at the Osaka Center for Cancer and Cardiovascular Diseases found that a hot water extract of Spirulina taken orally caused a statistically significant increase in both the number and the effectiveness of immune cells called natural killer cells.

Cyanotech: positive indications for fiscal 2003

We have accomplished much of what we sought: to secure a proprietary position for certain major health claims and to develop products that address those benefits; to develop distribution alliances with major end-product manufacturers to place BioAstin products in the marketplace; and to expand direct sales and marketing of our higher margin, finished Spirulina and BioAstin consumer products. During fiscal 2002 the Company invested significant resources to increase distribution, brand awareness, and sales of its Nutrex Hawaii brand of Spirulina Pacifica consumer products. As a result, sales of the higher-margin Nutrex Hawaii products increased 55% during the year to $2.1 million and now accounts for 25% of sales. We can now meet increased demand with 68 large culture ponds on 90 acres producing microalgae products—and additional acreage is partially prepared for more culture ponds. The total available acreage could generate revenues of $25 million to $70 million annually, depending upon product mix. With our growing number of customers, we hope to put this capacity to productive use in fiscal 2003.

/s/ Gerald R. Cysewski
Gerald R. Cysewski, Ph.D.
Chairman, President and CEO
June 24, 2002

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Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to assist in the understanding of Cyanotech Corporation's financial position and results of its operations for the three years ended March 31, 2002. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes To Consolidated Financial Statements included in this report. The financial section of the Cyanotech 2002 Annual Report to Stockholders consisting of this Management Discussion, the Consolidated Financial Statements have been prepared using accounting principles generally accepted in the United States of America ("GAAP").

        The Company's consolidated financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business. During the years ended March 31, 2002, 2001 and 2000, the Company incurred losses of $2,589,000, $1,067,000 and $4,485,000, respectively. The Company's working capital at March 31, 2002 was $1,008,000. As further described in Liquidity and Capital Resources, in May 2002 the Company reached an agreement with the holders of the 6% convertible subordinated debentures ("Debentures") aggregating $1,238,000 at March 31, 2002, to extend the original maturity date by six months to October 31, 2002. If the Company is unable to force conversion of the Debentures prior to their maturity on October 31, 2002, the Company will be required to repay the holders the principal amount. The Company is seeking arrangements for additional financing and/or equity from outside investors. In May 2002, the Company issued 515,000 shares of restricted common stock to a private investor which resulted in net proceeds to the Company totaling approximately $350,000, to be used for working capital purposes. There can be no assurance however, the Company will be able to arrange for additional financing or equity on terms suitable to the Company or in amounts sufficient to liquidate its debts as they become due. Accordingly, if the Company is unable to obtain the alternative financing or equity it is seeking, on terms acceptable to the Company, this would cause substantial doubt as to the ability of the Company to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms of its financing agreements, to obtain additional financing or refinancing as may be required, to attain profitability, or a combination thereof. There can be no assurance that these efforts will be successful or that the Company will return to generating profit on either a quarterly or annual basis.

Company Overview and Critical Accounting Policies and Estimates

Cyanotech Corporation is a worldwide leader in the development and commercialization of high value natural products derived from microalgae, a diverse group of over 30,000 species of microscopic plants which have a wide range of physiological and biochemical characteristics and naturally contain high levels of proteins, amino acids, vitamins, pigments and enzymes. Since 1983, we have designed, developed and implemented proprietary production and harvesting technologies, systems and processes which eliminate many of the stability and contamination problems frequently encountered in the production of microalgae. We believe that our technology, systems, processes and favorable growing location permit year-round harvesting of our microalgal products in a cost-effective manner. Currently, Cyanotech operates as a single segment, producing and selling natural products from microalgae for the nutritional supplement, aquaculture feed, animal nutrition, and immunological diagnostics markets. In response to SEC Release No. 33-8040, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies," the Company has identified certain of its policies as being of particular importance to the understanding of its financial position and results of operations and which require the application of significant judgement by Cyanotech management.

Principles of Consolidation The Company consolidates enterprises in which it has a controlling financial interest. The accompanying consolidated financial statements include the accounts of Cyanotech Corporation and its wholly-owned subsidiaries, Nutrex Hawaii, Inc. and Cyanotech Japan

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YK. All significant intercompany balances and transactions have been eliminated in consolidation. Assets and liabilities of foreign operations and subsidiaries are translated at the year-end exchange rate and resulting translation gains or losses are accounted for in a stockholders' equity account entitled "accumulated other comprehensive loss-foreign currency translation adjustments." Operating results of foreign subsidiaries are translated at average exchange rates during the period.

Inventory Valuation Inventories are stated at the lower of cost (which approximates first-in, first-out) or market. Market is determined by net realizable value.

Revenue Recognition The Company recognizes revenues when goods are shipped and when significant risks and benefits of ownership are transferred. Amounts received in advance under sales and distribution agreements for the right to sell and distribute the Company's products are recognized as revenues on a straight-line basis over the term of such agreements.

Equipment and Leasehold Improvement 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, and the shorter of the lease terms or estimated useful lives for leasehold improvements as described in the section "Notes To Consolidated Financial Statements" included in this report.

Contractual Obligations

The following table presents the Company's contractual obligations at March 31, 2002:

	Payments due by period
(in thousands)	Less than 1 year		1-3 years	4-5 years	After 5 years	Total
Long-term debt	$	1,543	665	747	1,353	4,308
Operating leases		250	447	446	2,666	3,809
Total	$	1,793	1,112	1,193	4,019	8,117

Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

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Results of Operations

The following table sets forth certain consolidated statement of operations data as a percentage of net sales for the periods indicated.

Years Ended March 31,			2002		2001		2000
Net sales			100.0%		100.0%		100.0%
Cost of sales			81.0		70.8		79.7
		Gross profit	19.0		29.2		20.3
Operating expenses:
	Research and development		4.2		3.3		7.0
	General and administrative		20.1		21.2		21.3
	Sales and marketing		21.2		13.5		12.5
	Impairment of long-lived assets		—		—		37.8
		Total operating expenses	45.5		38.0		78.6
		Loss from operations	(26.5	)	(8.8	)	(58.3	)
Other income (expense):
	Interest income		0.8		1.5		0.1
	Interest expense		(6.1	)	(7.7	)	(3.8	)
	Other income, net		0.3		1.6		1.1
		Total other expense	(5.0	)	(4.6	)	(2.6	)
Loss before income taxes			(31.5	)	(13.4	)	(60.9	)
Income tax benefit			0.1		0.1		0.3
		Net loss	(31.4	)%	(13.3	)%	(60.6	)%

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Fiscal 2002 Compared to Fiscal 2001

Net Sales

Net sales for the year ended March 31, 2002 increased by 2.4% from net sales of $8,043,000 for the year ended March 31, 2001, primarily due to increased sales of packaged Spirulina consumer products (an increase of $417,000, or 35%) and higher sales of all BioAstin products (an increase of $682,000, or 292%), offset in part by lower sales of bulk Spirulina Pacifica products (a decrease of $544,000, or 11%) and bulk NatuRose products (a decrease of $354,000, or 26%).

        International sales decreased slightly to 47% of total net sales for the year ended March 31, 2002, down from 54% for the year ended March 31, 2001. This decrease was primarily due to increased domestic sales and lower international sales. Sales of bulk Spirulina products to our largest customer, Spirulina International, BV ("Spirulina International"), a Spirulina marketing and distribution company based in the Netherlands amounted to $1,031,000 or 13% of net sales for the year ended March 31, 2002, a decrease from $1,533,000 or 19% of net sales recorded for the year ended March 31, 2001.

Gross Profit

Gross profit represents net sales less the cost of goods sold, which includes the cost of materials, manufacturing overhead costs, direct labor expenses and depreciation and amortization. Gross profit for the year ended March 31, 2002 decreased $783,000 or 33% compared to the prior year, with the gross profit margin decreasing to 19.0% from 29.2% of net sales. This decrease in gross profit from the prior year is primarily attributable to higher production costs in all products resulting from operating at lower than optimal production levels and the effects of inventory adjustments and a finished goods write off of $454,000 made during the third quarter of fiscal 2002, offset in part by increased sales of higher margin packaged consumer products.

Operating Expenses

Total operating expenses for the year ended March 31, 2002 amounted to $3,747,000, an increase of 22.7% from the $3,053,000 of operating expenses reported for the prior fiscal year primarily due to the significantly increased sales and marketing expenses attributable to expanded advertising and promotion costs. Also contributing to the increase in operating costs were higher research and development expenses of approximately $78,000 related primarily to scientific clinical trials. Increases in both of these functional areas were slightly offset by a 2.8% reduction in general and administrative expenses, primarily due to lower legal expenses.

Research and Development Expenditures for research and development increased 29.4% to $343,000 for the year ended March 31, 2002, from $265,000 for the year ended March 31, 2001. The increase from the prior year resulted primarily from increased outside service expenses due to continuing clinical studies for BioAstin.

General and Administrative General and administrative expenses decreased by $47,000 to $1,653,000 for the year ended March 31, 2002, from $ 1,700,000 for the year ended March 31, 2001. The decrease from the prior year is primarily due to lower legal expenses.

Sales and Marketing Sales and marketing expenses increased significantly due to expanded advertising and promotional expenses for all products. Sales and marketing expenses for the year ended March 31, 2002, amounted to $1,751,000, an increase of 60.9% from $1,088,000 recorded for the prior year.

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Other Expense

Other expense for the year ended March 31, 2002 increased by 12.5% to $413,000. The increase from the prior year is due to decreased other income and lower interest income, partially offset by lower interest expense.

Income Tax Benefit

The income tax benefit of $9,000 and $8,000 for the years ended March 31, 2002 and 2001 respectively, represent current state tax refunds.

Net Loss

The Company recorded a net loss of $2,589,000 for the year ended March 31, 2002 compared to a loss of $1,067,000 for the year ended March 31, 2001. This increased loss can be primarily attributed to higher production costs, inventory adjustments and the subsequent effect on gross profit resulting from operating at lower than optimal levels, combined with increased operating expenses in research and development and sales and marketing and, to a lesser extent, lower other income.

Fiscal 2001 Compared to Fiscal 2000

Net Sales

Net sales for the year ended March 31, 2001 increased by 8.7% from net sales of $7,398,000 for the year ended March 31, 2000, primarily due to increased sales of bulk natural astaxanthin products (both NatuRose and BioAstin) offset in part by lower sales of bulk Spirulina Pacifica products.

        International sales increased to 54% of total net sales for the year ended March 31, 2001, up from 46% for the year ended March 31, 2000. This increase was primarily due to increased Asia/Pacific sales offset in part by lower European sales. Sales of bulk Spirulina products to our largest customer, Spirulina International, were 19% of net sales for the year ended March 31, 2001. This customer accounted for 23% of net sales for the year ended March 31, 2000.

Gross Profit

Gross profit for the year ended March 31, 2001 improved by approximately 56% over that recorded for the prior year, with gross profit margin increasing to 29.2% from 20.3% of net sales. This improvement in gross profit from the prior year is primarily attributable to increased sales of higher margin astaxanthin products combined with significantly decreased astaxanthin production costs, offset in part by increased Spirulina production costs during the last six months of fiscal 2001 because of less than optimal production levels.

Operating Expenses

Total operating expenses for the year ended March 31, 2001 amounted to $3,053,000, a decrease of 47.5% from the $5,815,000 of operating expenses reported for the prior fiscal year primarily due to the recognition of an asset impairment charge of $2,796,000, related to the Company's strategic decision to discontinue joint venture negotiations with Norsk Hydro ASA (Norsk Hydro) in fiscal 2000. In accordance with the provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," the Company was obligated to record the asset impairment charge on the construction-in-progress balance related to the 93-acre astaxanthin expansion project. If the effect of this impairment charge is omitted for the purposes of comparison, operating expenses during the year ended March 31, 2000 amounted to $3,019,000, slightly less than in fiscal 2001.

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Research and Development Expenditures for research and development decreased 48.4% to $265,000 for the year ended March 31, 2001, from $514,000 for the year ended March 31, 2000. The decrease from the prior year resulted primarily from significantly reduced personnel and outside service expenses due to suspension of research work on two projects.

General and Administrative General and administrative expenses increased 7.7% to $1,700,000 for the year ended March 31, 2001, from $ 1,578,000 for the year ended March 31, 2000. The increase from the prior year is primarily due to higher costs related to financing activities and increased costs related to patent litigation. (See Note 13, "Commitments and Contingencies" in Notes to Consolidated Financial Statements).

Sales and Marketing Sales and marketing expenses increased 17.4% to $1,088,000 for the year ended March 31, 2001, from $927,000 for the year ended March 31, 2000. The increase from the prior year is primarily due to increased advertising and promotional expenses, higher consulting and outside service fees and higher commission expenses.

Other Expense

Other expense for the year ended March 31, 2001 amounted to $367,000, an increase of 90.2% from $193,000 for the year ended March 31, 2000. The increase from the prior year is primarily due to increased interest expenses related to debt refinancing efforts (see Note 5, "Long-Term Debt" in Notes to Consolidated Financial Statements), offset in part by higher interest income and other income.

Income Tax Benefit

The income tax benefit for the years ended March 31, 2001 and 2000 represent current state tax refunds.

Net Loss

The Company recorded a net loss of $1,067,000 for the year ended March 31, 2001 compared to a loss of $4,485,000 for the year ended March 31, 2000. For the year ended March 31, 2000, the net loss includes an asset impairment charge of $2,796,000. If the effect of this charge is omitted for comparison purposes, the Company recorded an adjusted net loss of $1,689,000 for the year ended March 31, 2000, an improvement in results of 37% in fiscal 2001. This improvement in results is primarily attributable to increased sales of bulk natural astaxanthin products (both NatuRose and BioAstin) and decreased cost of product sales offset in part by increased interest expense and slightly higher operating expenses.

Variability of Results

Cyanotech Corporation was formed in 1983 and did not become profitable on an annual basis until fiscal 1992 (the twelve month period ended December 31, 1992). From fiscal 1992 through fiscal 1997, the Company had total net sales of $29,401,000 and total net income of $7,931,000. From fiscal 1998 through fiscal 2002, the Company had total net sales of $38,041,000 and net losses totaling $10,998,000. As of March 31, 2002, our accumulated deficit is $11,459,000. There can be no assurance that we will return to generating profits on either a quarterly or an annual basis. We have experienced significant quarterly fluctuations in operating results and anticipate that these fluctuations may continue in future periods. Future operating results may fluctuate as a result of changes in sales to our largest customers, new product introductions, production difficulties, weather patterns, the mix between sales of bulk products and packaged consumer products, start-up costs associated with new facilities, expansion into new markets, sales promotions, competition, increased energy costs, foreign exchange fluctuations, the announcement or introduction of new products by our competitors, changes in our customer mix, overall trends in the market for our products, government regulations and other factors beyond our

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control. While a significant portion of our expense levels are relatively fixed, and the timing of increases in expense levels is based in large part on our 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 the Company's financial condition, results of operations and liquidity. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms of its financing agreements, to obtain additional financing or refinancing as may be required, to attain profitability, or a combination thereof. There can be no assurance that these efforts will be successful or that the Company will return to generating profit on either a quarterly or annual basis.

New Accounting Pronouncements

Goodwill and Other Intangible Assets In July 2001, the FASB Issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired individually or as part of a group of other assets not constituting a business. SFAS No. 142 also addresses, regardless of how acquired, the subsequent accounting and measurement of goodwill and intangible assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No.142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 142 is effective for fiscal years beginning after December 31, 2001. The adoption of SFAS No. 142 is not expected to have a material effect on the Company's financial condition, results of operations or liquidity.

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002. Management has not yet determined the impact, if any, of adoption of SFAS No. 143.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." For the long-lived assets to be held and used, SFAS No. 144 retains the requirements of SFAS No. 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value. Further, SFAS No. 144 eliminates the requirement to allocate goodwill to long-lived assets to be tested for impairment, describes a probability-weighted cash flow estimation approach to deal with situations in which alternative courses of action to recover the carrying amount of a long-lived are under consideration or a range is estimated for the amount of possible future cash flows, and establishes a "primary-asset" approach to determine the cash flow estimation period. For long-lived assets to be disposed of other than by sale (e.g., assets abandoned, exchanged or distributed to owners in a spinoff), SFAS No. 144 requires that such assets be considered held and used until disposed of. Further, an impairment loss should be recognized at the date an asset is exchanged for a similar productive asset or distributed to owners in a spinoff if the carrying amount exceeds its fair value. For long-lived assets to be disposed of by sale, SFAS No. 144 retains the requirement of SFAS No. 121 to measure a long-lived asset classified as held for sale at the

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lower of its carrying amount or fair value less cost to sell and to cease depreciation. Discontinued operations would no longer be measured on a net realizable value basis, and future operating losses would no longer be recognized before they occur. SFAS No. 144 broadens the presentation of discontinued operations to include a component of an entity, establishes criteria to determine when a long-lived asset is held for sale, prohibits retroactive reclassification of the asset as held for sale at the balance sheet date if the criteria are met after the balance sheet date but before issuance of the financial statements, and provides accounting guidance for the reclassification of an asset from "held for sale" to "held and used." The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001. Management has not yet determined the impact, if any, of adoption of SFAS No. 144.

Liquidity and Capital Resources

Cash Flows

Our working capital at March 31, 2002 amounted to $1,008,000, a decrease of $3,169,000 from working capital of $4,177,000 at March 31, 2001. Our cash and cash equivalents decreased by $1,218,000 to $1,051,000, due to cash flows used during fiscal 2002 (primarily from cash flows used in operating activities of $567,000, cash used for investment in equipment and leasehold improvements of $382,000 and cash used in financing activities of $269,000).

        Cash flows used in operating activities for the year ended March 31, 2002 amounted to $567,000, a decrease from cash flows provided by operating activities of $243,000 for the year ended March 31, 2001. The decrease in cash flows from operating activities is due primarily to the net loss of $2,589,000 offset in part by depreciation and amortization charges of $1,312,000 and reduction in inventories of $1,010,000.

        Cash flows used in investing activities (capital equipment purchases and leasehold improvements) for the year ended March 31, 2002 decreased slightly to $382,000 from $437,000 recorded for the prior fiscal year.

        Cash flows used in financing activities amounted to $269,000 compared to cash provided by financing activities of $2,058,000 for the prior fiscal year, primarily as a result of the prior year's term loan and convertible debenture financings.

Term Loan Agreement

On April 21, 2000, the Company executed a Term Loan Agreement ("Term Loan") with a lender which provided for $3.5 million in aggregate credit facilities, secured by substantially all the assets of the Company. The Term Loan has a maturity date of May 1, 2010 and is payable in 120 equal monthly principal and interest payments of approximately $48,000, commencing June 1, 2000 ($39,000 and $45,000 at March 31, 2002 and 2001, respectively). The interest rate under this Term Loan, is the prime rate in effect as of the close of business on the first day of each calendar quarter, plus 1% (at March 31, 2002 and 2001, the prime rate was 4.75%, and 9.5% respectively). The Term Loan contains restrictive covenants which include, among others, maintenance of an annual minimum debt service coverage ratio. The Company failed to meet this covenant requirement for the year ended March 31, 2002. The lender issued the Company a waiver of the covenant violation and deferred the calculation of such ratio until the year ending March 31, 2003.

        A warrant to purchase 20,000 shares of the Company's common stock was issued in conjunction with this Term Loan agreement. The warrant expires in April 2011 and has an exercise price of $2.55 per share. The warrant can only be exercised after the Company has repaid the Term Loan in full.

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Convertible Debentures

On May 2, 2000, the Company completed a private placement of $1,250,000 principal amount 6% convertible subordinated debentures ("Debentures") due April 30, 2002, with net proceeds to the Company of approximately $1.1 million. Interest was payable quarterly, in arrears, at a rate of 6% per annum. The Debentures were convertible into shares of common stock of the Company at a conversion price of $1.50 per share. Warrants to purchase 83,334 shares of the Company's common stock were issued to the placement agent of the Debentures, exercisable for five years from the issue date, at $1.80 per share. At March 31, 2002 and 2001, the outstanding principal amount of these debentures were $1,238,000 and $1,250,000 respectively.

        In May 2002, the Company reached an agreement with the holders of the Debentures to extend the maturity date by six months to October 31, 2002. In exchange for the extension, the Company agreed to: reduce the conversion price from $1.50 per share to $1.00 per share (the approximate market value at date of issuance); increase the interest rate during the remaining period the Debentures are outstanding from 6% to 10%; issue two-year warrants to the Debenture holders to purchase additional shares of common stock of Cyanotech in an amount equal to thirty percent (30%) of the shares into which the Debentures are convertible at $1.10 per share; and reduce the forced conversion price at which the Company can require the conversion of the Debentures from $3.00 per share to $1.50 per share. Although there can be no assurance in this regard, the Company hopes to see improved operating results in the near term and an increase in the price of its common stock. If the market price of the common stock should be above $1.50 for the period specified in the Debenture agreements, the Company intends to exercise its forced conversion rights. However, if the Company is unable to force conversion of the Debentures prior to their maturity on October 31, 2002, the Company will be required to repay the holders the principal amount.

        The terms of the aforementioned warrant issued to the placement agent in conjunction with the initial placement were also revised in this extension agreement. Under the terms of the convertible debenture maturity extension, the warrant exercise price was reduced to $1.10 per share and the expiration date has been accelerated to May 2004.

        As a result of this renegotiation of debt, the Company will record a charge of approximately $236,000 in the quarter ending June 30, 2002, of which approximately $232,000 is a non-cash charge. However, the exercise of all the warrants in the future (which may or may not occur) has the potential of additional cash proceeds to the Company of approximately $500,000.

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Other Material Subsequent Events

In May 2002, the Company issued 515,000 shares of restricted common stock to a private investor which resulted in net proceeds to the Company of approximately $350,000 to be used for working capital purposes.

        On June 17,2002 the Company received a delisting warning letter from NASDAQ for failure to comply with the $1.00 minimum bid price. Cyanotech now has 90 calendar days, or until September 16, 2002, to regain compliance. If the bid price of the Company's common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days prior to September 16, 2002, the NASDAQ staff will provide written notification that the Company is in compliance. However, if the Company is unable to regain compliance prior to September 16, 2002, it intends to apply for listing on the NASDAQ SmallCap Market, which makes available a 180 calendar day SmallCap Market grace period, or until December 16, 2002 to regain compliance. The Company will also then be eligible for an additional 180 calendar day grace period, or until June 16, 2003 to demonstrate compliance provided that it meets additional NASDAQ listing criteria for the SmallCap Market, which Cyanotech currently does. Furthermore, the Company may be eligible to transfer back to the NASDAQ National Market if, by June 12, 2003, its bid price main-tains the $1.00 per share requirement for 30 consecutive trading days and it has maintained compliance with all other continued listing requirements, which it currently does.

        The Company's consolidated financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business. During the years ended March 31, 2002, 2001 and 2000, the Company incurred losses of $2,589,000, $1,067,000 and $4,485,000 respectively. The Company's working capital at March 31, 2002 was $1,008,000. As mentioned above in this section the Company reached an agreement with the holders of the 6% convertible subordinated debentures to extend the original maturity date by six months to October 31, 2002. If the Company is unable to force conversion of the Debentures prior to their maturity on October 31, 2002, the Company will be required to repay the holders the principal amount. The Company is seeking arrangements for addi-tional financing and/or equity from outside investors. There can be no assurance however, the Company will be able to arrange for additional financing or equity on terms suitable to the Company or in amounts sufficient to liquidate its debts as they become due. Accordingly, if the Company is unable to obtain the alternative financing or equity it is seeking, on terms acceptable to the Company, this would cause substantial doubt as to the ability of the Company to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms of its financing agreements, to obtain additional financing or refinancing as may be required, to attain profitability, or a combination thereof. There can be no assurance that these efforts will be successful or that the Company will return to generating profit on either a quarterly or annual basis.

Quantitative and Qualitative Disclosures About Market Risk

We have not entered 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.

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Consolidated Balance Sheets

(in thousands, except share data)		2002			March 31, 2001
Assets
Current Assets:
Cash and cash equivalents		$	1,051		$	2,269
Accounts receivable, net of allowance for doubtful receivables of $40 in 2002 and $20 in 2001			1,340			1,110
Refundable income taxes			9			8
Inventories			994			2,004
Prepaid expenses			58			49
	Total current assets		3,452			5,440
Equipment and leasehold improvements, net			13,931			14,861
Other assets			1,017			1,122
	Total assets	$	18,400		$	21,423
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt		$	1,543		$	242
Accounts payable			685			772
Accrued expenses			216			249
	Total current liabilities		2,444			1,263
Long-term debt, excluding current maturities			2,765			4,336
Deferred revenue			—			129
	Total liabilities		5,209			5,728
Stockholders' equity:
Common stock of $.005 par value, authorized 25,000,000 shares at March 31, 2002 and 2001; issued and outstanding 17,043,701 shares at March 31, 2002 and 16,949,702 shares at March 31, 2001			85			85
Additional paid-in capital			24,567			24,480
Accumulated other comprehensive loss—foreign currency translation adjustments			(2	)		—
Accumulated deficit			(11,459	)		(8,870	)
	Total stockholders' equity		13,191			15,695
	Total liabilities and stockholders' equity	$	18,400		$	21,423

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Operations

	Years ended March 31,
(in thousands, except per-share data)
	2002			2001			2000
Net sales	$	8,235		$	8,043		$	7,398
Cost of sales		6,673			5,698			5,895
Gross profit		1,562			2,345			1,503
Operating expenses:
Research and development		343			265			514
General and administrative		1,653			1,700			1,578
Sales and marketing		1,751			1,088			927
Impairment of long-lived assets		—			—			2,796
Total operating expenses		3,747			3,053			5,815
Loss from operations		(2,185	)		(708	)		(4,312	)
Other income (expense):
Interest income		66			124			10
Interest expense		(499	)		(621	)		(282	)
Other income, net		20			130			79
Total other expense		(413	)		(367	)		(193	)
Loss before income taxes		(2,598	)		(1,075	)		(4,505	)
Income tax benefit		9			8			20
Net loss		(2,589	)		(1,067	)		(4,485	)
Undeclared Preferred Stock dividends		—			—			(237	)
Net loss attributable to Common stockholders	$	(2,589	)	$	(1,067	)	$	(4,722	)
Net loss per Common share—Basic and Diluted	$	(0.15	)	$	(0.07	)	$	(0.34	)
Weighted average number of common shares outstanding—Basic and Diluted		17,033			15,997			13,775

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Stockholders' Equity and Comprehensive Loss

Years ended March 31, 2002, 2001 and 2000

		Preferred Stock					Common Stock
																				Accumulated other com- prehensive loss
(in thousands, except share data)		Number of shares		Par value			Number of shares		Par value		Additional paid-in capital			Accumulated deficit			Comprehen- sive loss						Total stockholders' equity
Balances at March 31, 1999		595,031		$	1		13,603,572		$	68	$	23,956		$	(3,318	)		—			—		$	20,707
Exercise of stock options for cash		—			—		21,650			—		20			—			—			—			20
Common stock purchased and cancelled		—			—		(2,603	)		—		(3	)		—			—			—			(3	)
Issuance of common stock warrants for services, at fair value		—			—		—			—		19			—			—			—			19
Issuance of common stock to nonemployee director for services, at fair value		—			—		38,756			—		35			—			—			—			35
Issuance of common stock for services and rent, at fair value		—			—		97,922			1		131			—			—			—			132
Common stock issued for cash, net of costs of $2		—			—		203,000			1		219			—			—			—			220
Exchange of Series C preferred stock for common stock		(124,000	)		—		620,000			3		(3	)		—			—			—			—
Net loss		—			—		—			—		—			(4,485	)	$	(4,485	)		—			(4,485	)
Balances at March 31, 2000		471,031			1		14,582,297			73		24,374			(7,803	)		—			—			16,645
Exercise of stock options for cash		—			—		6,250			—		6			—			—			—			6
Issuance of common stock warrants in connection with issuance of long-term debt, at fair value		—			—		—			—		121			—			—			—			121
Issuance of common stock to nonemployee director for services, at fair value		—			—		6,000			—		10			—			—			—			10
Exchange of Series C preferred stock for common stock, net of costs of $20		(471,031	)		(1	)	2,355,155			12		(31	)		—			—			—			(20	)
Net loss		—			—		—			—		—			(1,067	)		(1,067	)		—			(1,067	)
Balances at March 31, 2001		—			—		16,949,702			85		24,480			(8,870	)		—			—			15,695
Series C preferred stock conversion costs		—			—		—			—		(11	)		—			—			—			(11	)
Conversion of debentures to common stock		—			—		7,999			—		12			—			—			—			12
Issuance of common stock to nonemployee director for services, at fair value		—			—		6,000			—		6			—			—			—			6
Issuance of common stock for services, at fair value		—			—		80,000			—		80			—			—			—			80
Comprehensive loss:
	Net loss	—			—		—			—		—			(2,589	)		(2,589	)		—			(2,589	)
	Other comprehensive loss—foreign currency translation adjustments	—			—		—			—		—			—			(2	)		(2	)		(2	)
Comprehensive loss		—			—		—			—		—			—		$	(2,591	)		—			—
Balances at March 31, 2002		—			—		17,043,701		$	85	$	24,567		$	(11,459	)				$	(2	)	$	13,191

See accompanying notes to consolidated financial statements.

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Consolidated Statement of Cash Flows

			Years ended March 31,
(In thousands)
			2002			2001			2000
Cash flows from operating activities:
Net loss			$	(2,589	)	$	(1,067	)	$	(4,485	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Depreciation and amortization			1,312			1,322			1,310
	Impairment of long-lived assets			—			—			2,796
	Gain on disposal of assets			—			—			(50	)
	Amortization of debt issue costs			134			162			93
	Issuance of common stock, warrants and options in exchange for services			86			10			186
	Net (increase) decrease in assets:
		Accounts receivable		(230	)		503			(601	)
		Refundable income taxes		(1	)		146			119
		Inventories		1,010			(395	)		496
		Prepaid expenses and other assets		(40	)		(37	)		68
	Net increase (decrease) in liabilities:
		Accounts payable		(87	)		(358	)		384
		Accrued expenses		(33	)		(172	)		27
		Deferred revenue		(129	)		129			—
	Net cash provided by (used in) operating activities			(567	)		243			343
Cash flows from investing activities:
Investment in equipment and leasehold improvements				(382	)		(437	)		(397	)
Proceeds from sale of capital assets				—			—			218
	Net cash used in investing activities			(382	)		(437	)		(179	)
Cash flows from financing activities:
Proceeds from issuance of common stock and exercise of stock options and warrants, net of issuance costs				—			6			237
Cost of conversion of series C preferred stock to common stock				(11	)		(20	)		—
Proceeds from issuance of long-term debt				—			4,750			—
Principal payments on long-term debt				(258	)		(1,665	)		(213	)
Debt issue costs				—			(513	)		(38	)
Borrowings (repayment) on short term revolving line of credit, net				—			—			(1	)
Principal payments on capital lease obligations				—			—			(67	)
Restricted cash deposit				—			(500	)		—
	Net cash provided by (used in) financing activities			(269	)		2,058			(82	)
Net increase (decrease) in cash and cash equivalents				(1,218	)		1,864			82
Cash and cash equivalents at beginning of year				2,269			405			323
Cash and cash equivalents at end of year			$	1,051		$	2,269		$	405
Supplemental disclosure of cash flow information:
Cash paid during the year for interest			$	349		$	378		$	190
Supplemental disclosure of non-cash financing activities: issuance of warrants in connection with issuance of long-term debt			$	—		$	121		$	—
Conversion of convertible debentures to common stock			$	12		$	—		$	—

See accompanying notes to consolidated financial statements.

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Notes to Consolidated Financial Statements

        (all amounts in thousands, except share data)

Note 1 Description of Business and Summary of Accounting Policies

a    Description of Business

Cyanotech Corporation (Company) develops and commercializes natural products from microalgae. The Company is currently producing microalgal products for the nutritional supplement, aquaculture feed/pigments and immunological diagnostics markets.

b    Principles of Consolidation

The Company consolidates enterprises in which it has a controlling financial interest. The accompanying consolidated financial statements include the accounts of Cyanotech Corporation and its wholly owned subsidiaries, Nutrex Hawaii, Inc and Cyanotech Japan YK. All significant intercompany balances and transactions have been eliminated in consolidation.

c    Foreign Currency Translation

Assets and liabilities of foreign operations and subsidiaries are translated at the year-end exchange rate and resulting translation gains or losses are accounted for in a stockholders' equity account entitled "accumulated other comprehensive loss—foreign currency translation adjustments." Operating results of foreign subsidiaries are translated at average exchange rates during the period.

d    Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt securities purchased with original or remaining maturities of three months or less to be cash equivalents.

e    Inventories

Inventories are stated at the lower of cost (which approximates first-in, first-out) or market. Market is determined by net realizable value.

f    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, the shorter of the lease terms or estimated useful lives for leasehold improvements as follows:

Equipment	3 to 10 years
Leasehold improvements	10 to 24 years
Furniture and fixtures	7 years

g    Revenue Recognition

The Company recognizes revenues when goods are shipped and when significant risks and benefits of ownership are transferred. Amounts received in advance under sales and distribution agreements for the right to sell and distribute the Company's products are recognized as revenues on a straight-line basis over the term of such agreements.

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h    Earnings Per Share

Following is a reconciliation of the numerators and denominators of the Basic and Diluted net loss per Common Share computations for the periods presented (in thousands except share data):

Years ended March 31,		2002			2001			2000
Basic and Diluted Loss Per Share
	Net loss	$	(2,589	)	$	(1,067	)	$	(4,485	)
	Undeclared Preferred Stock dividends		—			—			(237	)
	Net loss attributable to Common stockholders	$	(2,589	)	$	(1,067	)	$	(4,722	)
	Weighted average Common Shares outstanding		17,033,000			15,997,000			13,775,000
	Net loss per Common Share	$	(0.15	)	$	(0.07	)	$	(0.34	)

For the years ended March 31, 2002 and 2001 warrants and options to purchase Common Stock shares of the Company and convertible debentures were outstanding, but were not included in the computation of Diluted net loss per common share because the inclusion of these securities would have had an antidilutive effect on the net loss per common share. For the year ended March 31, 2000, warrants and options to purchase Common Stock shares of the Company and con-vertible preferred stock were outstanding, but were not included in the computation of Diluted net loss per common share because the inclusion of these securities would have had an antidilutive effect on the net loss per common share. As of March 31, 2002, warrants and options to acquire 969,030 shares of the Company's common stock and debentures convertible into 825,333 shares of the Company's common stock were outstanding. As of March 31, 2001, warrants and options to acquire 994,030 shares of the Company's common stock and debentures convertible into 833,333 shares of the Company's common stock were outstanding. As of March 31, 2000, warrants and options to acquire 842,796 shares of the Company's common stock and preferred stock convertible into 2,355,155 shares of the Company's common stock were outstanding.

i    Research and Development and Advertising

Research and development and advertising costs are expensed as incurred.

j    Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabili-ties are measured using enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

k    Stock Option Plan

The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for its fixed plan stock options issued to employees and nonemployee directors. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. The Company applies the fair value-based method of accounting prescribed by Statement of Financial Accounting Standards ("SFAS")

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No. 123, Accounting for Stock-Based Compensation, in accounting for its fixed plan stock options issued to outside third parties other than nonemployee directors. As such, expenses representing the fair value of stock-based awards on the date of grant are recognized over the vesting period.

l    Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

m    Segment Information

As the Company's operations are solely related to microalgae-based products, management considers its operations to be one industry segment.

n    Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and lia-bilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those esti-mates.

o    New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133," which defers the effective date of SFAS No. 133 to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, An Amendment of FASB Statement No. 133," which addresses a limited number of issues causing implementation difficulties for certain entities that apply SFAS No. 133. The Company currently holds no derivative instruments, nor is it currently participating in hedging activities. The adoption of SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, did not have a material effect on the Company's financial condition, results of operations or liquidity.

        In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires that all business combinations be accounted for under the purchase method of accounting. SFAS No. 141 also changes the criteria for the separate recognition of intangible assets acquired in a business combination. SFAS No. 141 is effective for all business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 did not have a material effect on the Company's financial condition, results of operations or liquidity.

20

        In July 2001, the FASB Issued SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired individually or as part of a group of other assets not constituting a business. SFAS No. 142 also addresses, regardless of how acquired, the subsequent accounting and measurement of goodwill and intangible assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accor-dance with the provisions of SFAS No.142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 142 is effective for fiscal years beginning after December 31, 2001. The adoption of SFAS No. 142 is not expected to have a material effect on the Company's financial condition, results of operations or liquidity.

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs would be capitalized as part of the carrying amount of the long-lived asset and depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, the Company will recognize a gain or loss on settlement. The provisions of SFAS No. 143 are effective for fiscal years beginning after June 15, 2002. Management has not yet determined the impact, if any, of adop-tion of SFAS No. 143.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." For the long-lived assets to be held and used, SFAS No. 144 retains the requirements of SFAS No. 121 to (a) recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and (b) measure an impairment loss as the difference between the carrying amount and fair value. Further, SFAS No. 144 eliminates the requirement to allocate goodwill to long-lived assets to be tested for impairment, describes a probability-weighted cash flow estimation approach to deal with situations in which alternative courses of action to recover the carrying amount of a long-lived are under consideration or a range is estimated for the amount of possible future cash flows, and establishes a "primary-asset" approach to determine the cash flow estimation Cyanotech Corporation    2002 Annual Report 19 period. For long-lived assets to be disposed of other than by sale (e.g., assets abandoned, exchanged or distributed to owners in a spinoff), SFAS No. 144 requires that such assets be considered held and used until disposed of. Further, an impairment loss should be recognized at the date an asset is exchanged for a similar productive asset or distributed to owners in a spinoff if the carrying amount exceeds its fair value. For long-lived assets to be disposed of by sale, SFAS No. 144 retains the requirement of SFAS No. 121 to measure a long-lived asset classified as held for sale at the lower of its carrying amount or fair value less cost to sell and to cease depreciation. Discontinued operations would no longer be measured on a net realizable value basis, and future operating losses would no longer be recognized before they occur. SFAS No. 144 broadens the presentation of discontinued operations to include a component of an entity, establishes criteria to determine when a long-lived asset is held for sale, prohibits retroactive reclassification of the asset as held for sale at the balance sheet date if the criteria are met after the balance sheet date but before issuance of the financial statements, and provides accounting guidance for the reclassification of an asset from "held for sale" to "held and used." The provisions of SFAS No. 144 are effective for fiscal years beginning after December 15, 2001. Management has not yet determined the impact, if any, of adoption of SFAS No. 144.

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Note 2    Inventories

Inventories consists of the following as of March 31, 2002 and 2001

	2002		2001
Raw materials	$	115	$	82
Work in process		192		174
Finished goods		559		1,607
Supplies		128		141
	$	994	$	2,004

Note 3    Equipment and Leasehold Improvements, Net

Equipment and leasehold improvements consists of the following as of March 31, 2002 and 2001:

		2002			2001
Equipment		$	9,382		$	9,164
Leasehold improvements			14,024			13,926
Furniture and fixtures			83			83
			23,489			23,173
Less accumulated depreciation and amortization			(10,017	)		(8,705	)
Construction in-progress			459			393
	Equipment and leasehold improvements, net	$	13,931		$	14,861

In June 1999, we reached a preliminary agreement with Norsk Hydro ASA ("Norsk Hydro") to produce and market NatuRose in a joint venture that would have been owned 51% by Norsk Hydro and 49% by Cyanotech. The Company decided not to finalize the joint venture relationship. As a result of the Company's decision to end the negotiations, the projected future cash flows expected from the proposed joint venture were reduced to zero. In accordance with the provisions of SFAS No. 121, the Company recorded a non-cash asset impairment charge of $2,796 during the year ended March 31, 2000 on the construction-in-progress balance related to this project.

Note 4    Accrued Expenses

Components of accrued expenses as of March 31, 2002 and 2001 are as follows:

	2002		2001
Accrued wages, commissions and royalties	$	136	$	141
Accrued interest		34		82
Other accrued expenses		46		26
	$	216	$	249

Note 5    Long-Term Debt

Term Loan Agreement

On April 21, 2000, the Company executed a Term Loan Agreement ("Term Loan") with a lender which provided for $3.5 million in aggregate credit facilities, secured by substantially all the assets of the Company. The Term Loan has a maturity date of May 1, 2010 and is payable in 120 equal monthly principal and interest payments of approximately $48, commencing June 1, 2000 ($39 and $45 at March 31, 2002 and 2001 respectively). The interest rate under this Term Loan is the prime rate plus

22

1% (at March 31, 2002 and 2001, the prime rate was 4.75% and 9.5%, respectively). The Term Loan contains restrictive covenants which include, among others, maintenance of an annual minimum debt service coverage ratio. The Company failed to meet this covenant requirement for the year ended March 31, 2002. The lender issued the Company a waiver of the covenant violation and deferred the calculation of such ratio until the year ending March 31, 2003.

        A warrant to purchase 20,000 shares of the Company's common stock was issued in conjunction with this Term Loan agreement. The warrant expires in April 2011 and has an exercise price of $2.55 per share. The warrant can only be exercised after the Company has repaid the Term Loan in full.

Convertible Debentures

On May 2, 2000, the Company completed a private placement of $1,250 principal amount 6% convertible subordinated debentures ("Debentures") due April 30, 2002, with net proceeds to the Company of approximately $1.1 million. Interest was payable quarterly, in arrears, at a rate of 6% per annum. The Debentures were convertible into shares of common stock of the Company at a conversion price equal to $1.50 per share. Warrants to purchase 83,334 shares of the Company's common stock were issued to the placement agent of the Debentures, exercisable for five years from the issue date, at $1.80 per share.

        In May 2002, the Company reached an agreement with the holders of the Debentures to extend the maturity date by six months to October 31, 2002. In exchange for the extension, the Company agreed to: reduce the conversion price from $1.50 per share to $1.00 per share; increase the interest rate during the remaining period the Debentures are outstanding from 6% to 10%; issue two-year warrants to the Debenture holders to purchase additional shares of common stock of Cyanotech in an amount equal to thirty (30%) percent of the shares into which the Debentures are convertible at an exercise price of $1.10 per share; and reduce the forced conversion price at which the Company can require the conversion of the Debentures from $3.00 per share to $1.50 per share. Although there can be no assurance in this regard, the Company hopes to see improved operating results in the near term and an increase in the price of its Common Stock. If the market price of the common stock should be above $1.50 for the period specified in the Debenture agreements, the Company intends to exercise its forced conversion rights. However, if the Company is unable to force conversion of the Debentures prior to their maturity on October 31, 2002, the Company will be required to repay the holders the principal amount. Accordingly, if the Company is unable to obtain the alternative financing or equity it is seeking on terms acceptable to the Company, this would cause substantial doubt as to the ability of the Company to continue as a going concern.

        The terms of the aforementioned warrant issued to the placement agent in conjunction with the initial placement were also revised in this extension agreement. Under the terms of the convertible debenture maturity extension, the warrant exercise price was reduced to $1.10 per share and the expiration date has been accelerated to May 2004.

        As a result of this renegotiation of debt, the Company will record a charge of approximately $236 in the quarter ending June 30, 2002, of which approximately $232 is a non-cash charge. However, the exercise of all the warrants in the future (which may or may not occur) has the potential of additional cash proceeds to the Company of approximately $500.

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        Long-term debt consists of the following as of March 31, 2002 and 2001:

	2002			2001
Term loan	$	3,070		$	3,328
Convertible subordinated debentures		1,238			1,250
Total long-term debt		4,308			4,578
Less current maturities of long-term debt		(1,543	)		(242	)
Long-term debt, excluding current maturities	$	2,765		$	4,336

At March 31, 2002, the aggregate maturities of long-term debt are as follows:

Year ending March 31:
2003	$1,543
2004	323
2005	342
2006	363
2007	384
Thereafter	1,353
	$4,308

Note 6    Leases

The Company leases facilities, equipment and land under operating leases expiring between 2003 and 2025. Future minimum lease payments under non-cancelable operating leases at March 31, 2002 are as follows:

Year ending March 31:
2003	$250
2004	224
2005	223
2006	223
2007	223
Thereafter, through 2025	2,666
Total minimum lease payments	$3,809

Total rent expense under operating leases amounted to $286, $329, and $330 for the years ended March 31, 2002, 2001 and 2000, respectively.

        The land leases provide for contingent rentals in excess of minimum rental commitments based on a percentage of the Company's sales. Contingent rentals for the years ended March 31, 2002, 2001 and 2000 were not material.

        In 1997, the State of Hawaii agreed to allow the Company to lease an additional 93-acre parcel on a year to year basis, until such time that the Company determines the need for a longer lease term. In April 2002 management determined that only a portion of this reserved expansion area would be needed due to improvements made in astaxanthin cultivation and processing. As a result, the current lease was revised to reduce the reserved acreage from 93 to 30 acres and is effective through December 31, 2002.

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Note 7    Series C Preferred Stock

During the first three quarters of fiscal 2001, all outstanding shares of Series C preferred stock totaling 471,031 shares were converted into 2,355,155 shares of common stock. As a result of this conversion, cumulative dividends in arrears on these converted shares, totaling approximately $2.1 million at the time of conversion, were no longer payable.

        Series C preferred stock was convertible into common stock at the rate of one share of preferred stock for five shares of common stock through February 23, 2002, after which date the conversion feature was no longer applicable. Series C preferred stock had voting rights equal to the number of shares of common stock into which it was convertible and had a preference in liquidation over all other series of preferred stock of $5 per share plus any unpaid accumulated dividends. Holders of Series C preferred stock were entitled to 8% cumulative annual dividends at the rate of $.40 per share.

Note 8    Stock Options and Warrants

Stock Options

The Company's 1995 Stock Option Plan (the "1995 Plan"), reserves a total of 800,000 shares of common stock for issuance under the Plan. The 1995 Plan provides for the issuance of both incentive and non-qualified stock options. Options are to be granted at, or above, the fair market value of the Company's common stock at the date of grant and generally become exercisable over a five-year period.

        The Company also has a Non-employee Director Stock Option and Stock Grant Plan, which was approved by stockholders in 1994 (the "1994 Plan"). Under the 1994 Plan, and upon election to the Board of Directors, non-employee directors are granted a ten-year option to purchase 3,000 shares of the Company's common stock at its fair market value on the date of grant. In addition, on the date of each Annual Meeting of Stockholders in each year that the 1994 Plan is in effect, each non-employee director continuing in office will be automatically granted, without payment, 2,000 shares of common stock that is non-transferable for six months following the date of grant. Grants aggregating 6,000 shares of common stock were made under the 1994 Plan in August 2001, 2000, and 1999. Expense recognized as a result of these stock grants amounted to $6 for the year ended March 31, 2002, $10 for the year ended March 31, 2001 and $6 for the year ended March 31, 2000.

        At March 31, 2002, there were 66,854 additional shares available for grant under the 1995 Plan and 32,000 additional shares available under the 1994 Plan. The per share weighted-average fair value of stock options granted during 2002, 2001 and 2000 was $0.84, $1.35 and $0.78, respectively, on the date of grant using a Black Scholes option-pricing model with the following weighted-average assumptions: 2002—expected dividend yield of 0%, risk-free interest rate of 4.5%, expected volatility of 120%, and an expected life of 4.3 years; 2001—expected dividend yield of 0%, risk-free interest rate of 6.0%, expected volatility of 106%, and an expected life of 4.2 years; 2000—expected dividend yield of 0%, risk-free interest rate of 5.5%, expected volatility of 96%, and an expected life of 4.2 years.

        The Company applies the provisions of APB Opinion No. 25 in accounting for employee stock-based compensation and, accordingly, no compensation cost has been recognized for its employee stock options in the accompanying financial statements. Had the Company determined compensation cost based on the estimated fair value at the grant date for its employee stock options under SFAS No. 123,

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the Company's net loss attributable to Common stockholders and net loss per common share would have been as reflected in the pro forma amounts which follow:

		2002			2001			2000
Net loss attributable to Common stockholders
	As reported	$	(2,589	)	$	(1,067	)	$	(4,722	)
	Pro forma	$	(2,710	)	$	(1,383	)	$	(5,103	)
Net loss per common share—Basic and Diluted
	As reported	$	(0.15	)	$	(0.07	)	$	(0.34	)
	Pro forma	$	(0.16	)	$	(0.09	)	$	(0.37	)

Pro forma net loss attributable to Common stockholders and net loss per common share information reflect only options granted since 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss attributable to Common stockholders and net loss per common share amounts presented above because compensation cost is reflected over the options' vesting period of 5 years, and compensation cost for options granted prior to April 1, 1995 is not considered.

        Stock option activity during the periods indicated is as follows:

		Number of shares		Weighted- average exercise price
Balance at March 31, 1999		575,375		$	4.63
	Granted	301,596			1.03
	Exercised	(21,650	)		0.94
	Expired	(42,025	)		0.94
	Forfeited	(95,500	)		2.86
Balance at March 31, 2000		717,796			3.68
	Granted	233,800			1.69
	Exercised	(6,250	)		0.97
	Expired	(87,200	)		5.13
	Forfeited	(92,450	)		2.64
Balance at March 31, 2001		765,696			3.05
	Granted	164,000			1.00
	Exercised	—			—
	Expired	(96,300	)		7.63
	Forfeited	(92,700	)		2.26
Balance at March 31, 2002		740,696		$	2.10

The following table summarizes information about stock options outstanding at March 31, 2002:

	Options Outstanding		Options Exercisable
Range of exercise prices	Number outstanding at 03/31/02	Weighted-avg. remaining contractual life	Weighted-avg. exercise price		Number exercisable at 03/31/02	Weighted-avg. exercise price
$.77 to $1.69	541,296	3.3 years	$	1.25	153,496	$	1.25
$3.13 to $3.69	123,500	2.1 years	$	3.24	98,875	$	3.27
$6.13 to $6.31	75,900	0.3 years	$	6.31	75,900	$	6.31
$.77 to $6.31	740,696	2.8 years	$	2.10	328,271	$	3.03

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Warrants

At March 31, 2002 and 2001, the Company has warrants outstanding to acquire 228,334 shares of the Company's common stock. A warrant to acquire 75,000 shares of common stock was granted in December 1999 in consideration for services provided by a third party. The warrant is exercisable at $.63 per share, and expires in December, 2004. A warrant to acquire 50,000 shares of common stock was granted on January 19, 2000 in connection with the purchase of 50,000 shares of the Company's common stock by an existing stockholder. The warrant is exercisable at $1.00 per share, and expires in January, 2005. A warrant to acquire 20,000 shares of common stock was granted in April 2000 in conjunction with completion of a term loan agreement. The warrant is exercisable at $2.55 per share, and expires in April 2011. A warrant to acquire 83,334 shares of common stock was granted in May 2000 in conjunction with completion of a private placement of convertible debentures. The warrant was exercisable at $1.80 per share, and expired in May 2005. However, under the terms of the convertible debenture maturity extension (see Note 5), the warrant exercise price was reduced to $1.10 per share and the expiration date has been accelerated to May 2004.

Note 9    Major Customers and Export Sales

Sales to major customers for the years ended March 31, 2002, 2001 and 2000 are summarized as follows (percent of product sales):

	2002	2001	2000
Customer A	13%	19%	23%

Net product sales by geographic area for the years ended March 31, 2002, 2001 and 2000 are summarized as follows:

	2002			2001			2000
United States	$	4,393	53%	$	3,676	46%	$	3,992	54%
Canada/South America		394	5%		509	6%		371	5%
The Netherlands		1,032	13%		1,542	19%		1,715	23%
Europe, excluding the Netherlands		706	8%		640	8%		613	8%
China		157	2%		119	2%		73	1%
Asia/Pacific, excluding China		1,553	19%		1,557	19%		634	9%
	$	8,235	100%	$	8,043	100%	$	7,398	100%

Sales made through the Company's subsidiary, Cyanotech Japan YK, are transacted in Japanese yen and converted to US dollars for consolidation purposes.

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Note 10 Income Taxes

The income tax benefit for the years ended March 31, 2002, 2001 and 2000 represent current state tax refunds.

A reconciliation of the amount of income taxes computed at the federal statutory rate of 34% to the amount reflected in the Company's consolidated statements of operations for the years ended March 31, 2002, 2001 and 2000 follows:

	2002			2001			2000
Amount at the federal statutory income tax rate	$	(883	)	$	(366	)	$	(1,532	)
State income taxes, net of federal income tax effect		(6	)		(5	)		(13	)
Increase in the valuation allowance for deferred tax assets		1,017			374			1,855
Other		(137	)		(11	)		(330	)
	$	(9	)	$	(8	)	$	(20	)

The significant components of deferred income taxes for the years ended March 31, 2002, 2001 and 2000 are as follows:

	2002			2001			2000
Deferred tax benefit, exclusive of the change in beginning-of-the-year valuation allowance balance	$	(1,017	)	$	(374	)	$	(1,855	)
Increase in beginning-of-the-year balance of the valuation allowance for deferred tax assets		1,017			374			1,855
	$	—		$	—		$	—

The tax effects of temporary differences related to various assets, liabilities and carryforwards that give rise to deferred tax assets and deferred tax liabilities as of March 31, 2002 and 2001 are as follows:

				2002			2001
Deferred tax assets:
	Net operating loss carryforwards			$	4,771		$	3,250
	Leasehold improvement, impairment loss for financial reporting purposes				1,062			1,062
	Tax credit carryforwards				186			209
	Other				125			478
		Gross deferred tax assets			6,144			4,999
Less valuation allowance					(4,539	)		(3,522	)
			Net deferred tax assets		1,605			1,477
	Deferred tax liability—equipment and leasehold improvements, principally due to differences in depreciation and amortization				(1,605	)		(1,477	)
			Net deferred tax asset	$	—		$	—

The valuation allowance for deferred tax assets as of April 1, 2001, 2000 and 1999 was $3,552, $3,148 and $1,293 respectively. The valuation allowance increased by $1,017, $374 and $1,855 during the years ended March 31, 2002, 2001 and 2000 respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become

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deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

        Based upon the level of historical taxable income and projections for future taxable income over the periods in which the net deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowance at March 31, 2002. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

        At March 31, 2002, the Company has net operating tax loss carryforwards and tax credit carryfor-wards available to offset future federal income taxes as follows:

Expires March 31,	Net operating losses		Research and experimentation tax credits
2003	$	—	$	15
2004		—		52
2005		—		4
2006		400		—
2011		—		23
2012		44		9
2013		1,601		—
2019		3,632		—
2020		2,051		—
2021		1,727		—
2022		3,149		—
	$	12,604	$	103

In addition, at March 31, 2002, the Company has alternative minimum tax credit carryforwards of approximately $83 which are available to reduce future federal regular income taxes over an indefinite period.

At March 31, 2002, the Company has tax net operating loss carryforwards of $8,081, which expire in March 31, 2019 through 2022, available to offset future Hawaii state taxable income.

Note 11    Fair Value of Financial Instruments

SFAS Statement No. 107, "Disclosures about Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties.

        The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of March 31, 2002 and 2001.

Cash and Cash Equivalents

The carrying amounts approximate fair value because of the short-term nature of these instruments.

Long-Term Debt

The carrying amounts approximate fair value because the interest rates on the long-term debt reprice monthly or quarterly at market rates or approximates current market rates for similar debt instruments of comparable maturities.

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Note 12    Profit Sharing Plan

The Company sponsors a 401(k) profit sharing plan for all associates not covered under a separate management incentive plan. Under the 401(k) profit sharing plan, 5% of pre-tax profits may be allocated based on gross wages to non-management associates on a quarterly basis. Fifty percent of each associate's profit sharing bonus is distributed in cash on an after-tax basis, with the remainder deposited in each associate's 401(k) account on a pre-tax basis with a six year vesting schedule, based on years of service with the Company. All associates may make voluntary pre-tax contributions to their 401(k) accounts. Compensation expense relative to this plan was nil for each of the three years ended March 31, 2002, 2001 and 2000.

Note 13    Commitments and Contingencies

In the fourth quarter of fiscal 2001, Cyanotech and Aquasearch settled a patent suit without admission of liability by either party. Terms of the agreement are confidential. Under this agreement, Cyanotech agreed to an injunction that prevents it from using any tube system for microalgal production that infringes Aquasearch's U.S. Patent No. 5,541,056. Aquasearch agreed that Cyanotech's current proprietary process for producing microalgae, known as the PhytoDome CCS system, does not infringe its aforementioned patent. Both parties agreed to dismiss, with prejudice, all claims that the parties asserted in the litigation. The Court entered an Order to that effect and that Aquasearch's aforementioned patent is valid and enforceable. Cyanotech further agreed to pay Aquasearch an undisclosed settlement, including royalties, for a limited time, on future sales of BioAstin. Amounts due at March 31, 2002 under this settlement have been fully accrued by the Company. Cyanotech management does not expect that future royalty payments will have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.

Note 14    Selected Quarterly Financial Data (Unaudited)

($ in thousands, except per share data)			First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total Year
2002
	Net sales		$	2,313		$	1,951		$	1,916		$	2,055		$	8,235
	Gross profit(a)			678			491			53			340			1,562
	Net loss(a)			(413	)		(509	)		(937	)		(730	)		(2,589	)
	Net loss per common share
		Basic and Diluted(a)(b)		(0.02	)		(0.03	)		(0.05	)		(0.04	)		(0.15	)
2001
	Net sales		$	2,166		$	2,360		$	1,762		$	1,755		$	8,043
	Gross profit			704			794			467			380			2,345
	Net loss			(22	)		(40	)		(322	)		(683	)		(1,067	)
	Net loss per common share
		Basic and Diluted(b)		(0.00	)		(0.00	)		(0.02	)		(0.04	)		(0.07	)

(a)

Gross profit, net loss and net loss per common share for the third quarter and for the total fiscal year 2002 reflect the effect of a finished goods inventory adjustment totaling $454.

(b)

due to rounding, quarterly per share amounts may not equal total year.

Note 15    Financial Condition and Liquidity and Subsequent Event

The Company's consolidated financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business. During the years ended March 31, 2002, 2001 and 2000, the Company incurred

30

losses of $2,589, $1,067 and $4,485, respectively. The Company's working capital at March 31, 2002 was $1,008. As mentioned in Note 5 "Long-Term Debt" in May 2002 the Company reached an agreement with the holders of the Debentures aggregating $1,238 at March 31, 2002, to extend the original maturity date by six months to October 31, 2002. If the Company is unable to force conversion of the Debentures prior to their maturity on October 31, 2002, the Company will be required to repay the holders the principal amount. In May 2002, the Company issued 515,000 shares of restricted common stock to a private investor which resulted in net proceeds to the Company of approximately $350 to be used for working capital purposes. The Company is seeking arrangements for additional financing and/or equity from outside investors. There can be no assurance however, the Company will be able to arrange for additional financing or equity on terms suitable to the Company or in amounts sufficient to liquidate its debts as they become due. Accordingly, if the Company is unable to obtain the alternative financing or equity it is seeking, on terms acceptable to the Company, this would cause substantial doubt as to the ability of the Company to continue as a going concern.

        The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to comply with the terms of its financing agreements, to obtain additional financing or refinancing as may be required, to attain profitability, or a combination thereof. Unless it is successful, there may be liquidity shortfalls in future periods. There can be no assurance that these efforts will be successful or that the Company will have sufficient cash resources to support its continued operations. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

        On June 17,2002 the Company received a delisting warning letter from NASDAQ for failure to comply with the $1.00 minimum bid price. Cyanotech now has 90 calendar days, or until September 16, 2002, to regain compliance. If the bid price of the Company's common stock closes at $1.00 per share or more for a minimum of 10 consecutive trading days prior to September 16, 2002, the NASDAQ staff will provide written notification that the Company is in compliance. However, if the Company is unable to regain compliance prior to September 16, 2002, it intends to apply for listing on The NASDAQ SmallCap Market, which makes available a 180 calendar day SmallCap Market grace period, or until December 16, 2002 to regain compliance. The Company will also then be eligible for an additional 180 calendar day grace period, or until June 16, 2003 to demonstrate compliance provided that it meets additional NASDAQ listing criteria for the SmallCap Market, which Cyanotech currently does. Furthermore, the Company may be eligible to transfer back to The NASDAQ National Market if, by June 12, 2003, its bid price maintains the $1.00 per share requirement for 30 consecutive trading days and it has maintained compliance with all other continued listing requirements, which it currently does.

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Independent Auditors' Report

The Board of Directors
Cyanotech Corporation:

We have audited the accompanying consolidated balance sheets of Cyanotech Corporation and subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for each of the years in the three-year period ended March 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cyanotech Corporation and subsidiaries as of March 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2002 in conformity with accounting principles generally accepted in the United States of America.

        The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 15 to the consolidated financial statements, the Company has suffered recurring losses from operations and has limited sources of additional liquidity to enable it to sufficiently liquidate its debts, including convertible debentures of $1, 238,000 due on October 31, 2002, as they become due that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in note 15. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ KPMG LLP
Honolulu, Hawaii
May 1, 2002, except as to notes 5, 8, and 15 which are as of June 17, 2002

32

Officers and Directors

Officers

Gerald R. Cysewski, Ph.D.
President, Chief Executive Officer
and Chairman of the Board

Ronald P. Scott
Executive Vice President—
Finance and Administration
Treasurer and Secretary

Glenn D. Jensen
Vice President—Operations

Kelly J. Moorhead
Vice President—Sales and Marketing

R. Shane Rohan
Vice President—Production

Other Senior Managers

Robert J. Capelli
Director of Sales

John E. Dore, Ph.D.
Scientific Director

J. Hiroshi Sakamoto
Corporate Controller

Board of Directors

Gerald R. Cysewski, Ph.D.
Eric H. Reich1(1)(2)
David I. Rosentha1(1)(2)
Ronald P. Scott
John T. Waldron(2)
Paul C. Yuen, Ph.D.(1)

(1)

Member of the Audit Committee

(2)

Member of the Compensation and Stock Option Committee

Corporate Information

Corporate Headquarters
Cyanotech Corporation
73-4460 Queen Kaahumanu Hwy.
Suite 102
Keahole Point
Kailua-Kona, HI 96740
Tel (808) 326-1353
Fax (808) 329-3597

Wholly-Owned Subsidiaries
Nutrex Hawaii, Inc.
Cyanotech Japan YK

Transfer Agent and Registrar
Computershare Investor Services
350 Indiana Street, Suite 800
Golden, CO 80401
(303) 262-0600
www.computershare.com

Independent Accountants
KPMG LLP
1001 Bishop Street
Pauahi Tower, Suite 2100
Honolulu, HI 96813-3421

Legal Counsel
Goodsill Anderson Quinn & Stifel
P.O. Box 3196
Honolulu, HI 96801-3196

Form 10-K

A copy of Cyanotech's annual report to the Securities and Exchange Commission on Form 10-K is available without charge upon written request to:

Secretary, Cyanotech Corporation
73-4460 Queen Kaahumanu Hwy.
Suite 102
Kailua-Kona, HI 96740

Notice of Annual Meeting

The 2002 annual meeting of stockholders will be held on Thursday, August 22, 2002, at 7:00 P.M. Hawaii Standard Time at the Ala Moana Hotel, 410 Atkinson Drive, Honolulu, HI 96814

Additional Information

As a service to our stockholders and prospective investors, copies of Cyanotech news releases and financial statements issued in the last 12 months are available 24 hours a day, seven days a week on the Internet's World Wide Web at http://www.cyanotech.com

Forward-Looking Information

Certain statements herein set forth management's intentions, plans, beliefs, expectations or predictions of the future based on current facts and analyses. Actual results may differ materially due to a variety of factors including reduced product demand, price competition, government action, and weather conditions. Additional information on factors that may affect the Company and cause actual results to differ from current expectations can be found in Cyanotech's filings with the SEC.

Market for Common Equity and Related Stockholder Matters

Cyanotech's Common Stock is traded on the NASDAQ National Market under the symbol "CYAN." The following table sets forth the high and low selling prices as reported by the NASDAQ Stock Market for the periods indicated.

Three Months Ended	High		Low
2002
March 31, 2002	$	1.43	$	0.96
December 31, 2001	$	1.16	$	0.55
September 30, 2001	$	1.50	$	0.48
June 30, 2001	$	1.75	$	0.87
2001
March 31, 2001	$	1.38	$	0.72
December 31, 2000	$	1.75	$	0.63
September 30, 2000	$	2.06	$	1.47
June 30, 2000	$	2.63	$	1.13

Cyanotech has never declared or paid cash dividends on its Common Stock. We currently intend to retain all of our earnings for use in the business and do not anticipate paying any cash dividends on Common Stock in the foreseeable future.

        The approximate number of record holders of outstanding Common Stock as of June 26, 2002 was 1,357.

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Exhibit 13

EX-21.1

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Exhibit 21.1

CYANOTECH CORPORATION

Subsidiaries of the Company
(all wholly-owned by the Company)

1.

NUTREX HAWAII, Inc., incorporated in the State of Hawaii.

2.

CYANOTECH JAPAN YK, incorporated in Japan.

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Exhibit 21.1

CYANOTECH CORPORATION

EX-23.1

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Exhibit 23.1

ACCOUNTANTS' CONSENT

The Board of Directors
Cyanotech Corporation:

        We consent to incorporation by reference in Registration Statement Nos. 33-63789, 33-55310 and 333-42484 on Form S-8 and 333-42486 on Form S-3 of Cyanotech Corporation of our report dated May 1, 2002, except as to notes 5, 8, and 15, which are as of June 17, 2002, relating to the consolidated balance sheets of Cyanotech Corporation and subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and comprehensive loss, and cash flows for each of the years in the three-year period ended March 31, 2002, which report is incorporated by reference in the 2002 annual report on Form 10-K of Cyanotech Corporation. We also consent to incorporation by reference of our report dated May 1, 2002 relating to the financial statement schedule of Cyanotech Corporation and subsidiaries in the aforementioned 2002 annual report on Form 10-K, which report is included in said Form 10-K.

        Our report dated May 1, 2002, except as to notes 5, 8, and 15, which are as of June 17, 2002, relating to the consolidated financial statements of Cyanotech Corporation and subsidiaries and our report dated May 1, 2002, relating to the financial statement schedule of Cyanotech Corporation and subsidiaries contain an explanatory paragraph that states that the Company has suffered recurring losses from operations and has limited sources of additional liquidity to enable it to sufficiently liquidate its debts, including convertible debentures of $1,238,000 due on October 31, 2002, as they be come due, which raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements and financial statement schedule do not include any adjustments that might result from the outcome of that uncertainty.

/s/ KPMG LLP
Honolulu, Hawaii
June 27, 2002

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Exhibit 23.1

ACCOUNTANTS' CONSENT