Friday, June 30, 2017

Cyanotech Potentially Worth $20 per Share

Meridian explained in one of its first Schedule 13D filings why Cyanotech is worth the effort: 

"Astaxanthin is a new supplement category.  It is a natural and highly-effective antioxidant and anti-inflammatory with benefits that Meridian believes will attract consumers from across the retail spectrum, from serious athletes seeking help in recovering from extreme physical exertions to seniors looking for relief from chronic inflammation related to arthritis.  Awareness and demand for astaxanthin exploded in 2012 prompting a world-wide rush of companies seeking to increase supply and win market share.  Cyanotech won the contest for market share – almost certainly due to its good fortune of having recently put in place a management team experienced in retail supplements and new product introductions.  Meridian believes Cyanotech's BioAstin Hawaiian Astaxanthin® brand has the potential to be the category-identifying brand (e.g., like Kleenex® is to facial tissue and Xerox® is to copy machines.

As awareness and demand for astaxanthin grows, Cyanotech'sproducts are well-positioned to retain their current outsized market share allocation.  The Company's strong and friendly relationship with Costco is extremely relevant in this regard.  Costco is a single channel partner through whom Cyanotech can efficiently drive market awareness and brand-identification within a highly-favorable demographic group.  Costco is an enormous distributor of consumer supplements and a very strong and trusted brand in its own right.  For many Costco shoppers, learning that Costco sells something, is reason enough to considering buying that something.

Meridian develops financial models to help it and the companies in which it invests evaluate different strategic options and various performance levels.  Meridian uses these models together with sophisticated tools available to institutional investors to value these various scenarios.  Below are two simple scenarios that Meridian has created and evaluated with these valuation tools.

Scenario 1 is a slower growth approach with limited spending on new production and reduced rates of spending on sales and marketing.  This model still shows 10% growth reflecting Meridian's belief that the investment to date will deliver gradually rising levels of astaxanthin production over the next few years.

Scenario 1 has Cyantech adding approximately $10 million in additional sales over the next three years and enjoying higher margins due to improving production techniques.  Running this scenario through a third party valuation application, shows a resulting valuation of approximately $9.93 per share.

Next, Scenario 2 provides for heavier spending on production, sales and marketing, with this greater investment projected to deliver 20% annual growth.  Scenario 2 has Cyantech adding approximately $24 million in additional sales over the next three years and enjoying even higher margins due to economies of scale and increased production efficiencies.  Running this scenario through a third party valuation application, shows a resulting valuation of approximately $22.48 per share."

The Source of Michael Arlen Davis' Fortune

Leonard "Notorious BIG Shady" Davis
Michael Arlen Davis (MAD) is a rich man. Inquiring minds want to know how that came to be.  The answer will likely surprise you.  MAD's dad, Leonard Davis, was a co-founder of AARP - though it will take some research to uncover that fact.

Old Leonard put up the original $50,000 to start AARP, but his motivations might not have been to help the elderly.  According to Charles R. Morris, author of a book chronicling AARP's history, Leonard Davis used the organization as a front for selling overpriced insurance to the elderly--its political activism on behalf of retired people largely a cynical effort to establish credibility.

Shortly after co-founding AARP, Leonard Davis created Colonial Penn, a for-profit insurance company under his control:

"Although the Colonial Penn companies were theoretically separate from AARP, Davis, to protect his marketing bonanza, wrapped Colonial Penn tentacles firmly around every aspect of the operation. According to a 1977 lawsuit by former executive director, Harriet Miller, Davis had carefully insulated the board from AARP's financial operations, and at the same time he had made them almost utterly dependent on Colonial Penn...In the early 1970s, [Leonard] Davis shored up his control by introducing a new law firm as AARP's outside counsel. The firm...maintained offices in the same Madison Avenue building that house Colonial Penn's New York offices, ARRP's local offices, and Davis's personal offices and those of the Davis Family Foundation...

AARP, which to all appearances was a dowdy nonprofit organization serving the elderly, had been turned into a money-minting machine - it was the alchemists trick, said one reporter, converting base metal into gold.  From 1967 to 1976, Colonial Penn's revenue had grown a stunning tenfold, from $46 million to $445 million. Pretax income had grown from almost nothing in 1967 to more than $50 million. Almost all of its revenues - 92% of its health insurance revenues - came from AARP members. An analysis by Forbes magazine in 1976 showed that Colonial Penn, measured by average 5-year return-on-capital, was the most profitable company in the country.

Davis, with about 19.5% of the company, was the controlling shareholder. The market value of his shares, depending on the ups and downs of the stock market, fluctuated between $90 million and $125 million in 1975 and 1976. And that did not count the large blocks of stock Davis had already unloaded. In 1970-72 alone, the Davis family realized more than $80 million from the sale of Colonial Penn stock."
The lid was blown off the scam in 1978, when Andy Rooney and CBS's 60 Minutes did one of their famous sting operations. 
"The 60 Minutes expose of AARP which aired on May 14, 1978, at the seven o'clock prime time news hour under the title "Super Salesman," was devastating.  A former Colonial Penn executive remembers it was a turning point in the company's fortunes. AARP and Colonial Penn made all the wrong tactical moves. They tried stonewalling Rooney...In any case, AARP national officers, fed up with the Colonial Penn domination, were quietly feeding Rooney information and rumors...The AARP volunteers and members Rooney did manage to talk to clearly had no idea of the role Colonial Penn played in their organization. Most tellingly, AARP members had no idea that editorial like articles in the health insurance on health insurance in modern maturity were actually Colonial Penn advertisements...
The Rooney show marked the beginning of the end of the Colonial Penn/AARP relationship.  In a related development,  the postal service at begun a serious investigation into the Colonial Penn/AARP abuse of the nonprofit mailing privilege...the investigation continued until 1981 and resulted in the recommendation to the US District Attorney for a criminal fraud action against AARP and Colonial Penn...
Although Colonial Penn's fingerprints stayed on the organization for a long time...[AARP] began a serious redirection in the 1980s...While Andrus's [Davis' co-founder] picture is everywhere and she is quoted frequently, I could not find a single mention of [Leonard] Davis anywhere. The former honorary president, whom the official histories once billed as Andrus's closest collaborator is now a non-person."
Hyperbole, Leonard had hair

Read More: Leonard Davis, Andy Rooney, and the CBS 60 Minutes Expose

Read More: The AARP--Exposing Leonard Davis for what he was

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Thursday, June 29, 2017

So, This is where Michael Arlen Davis Learned His Tricks

Leonard "Notorious BIG Shady" Davis

Michael Arlen Davis may not have earned a Harvard degree, but he appears to have earned a virtual degree from the "Leonard Davis School of Business and Charity."

As detailed in publicly available court documents,  chairman Davis is accused of:
  1. Forming an undisclosed investment group and secretly accumulating Cyan public stock with close long time partners Rudolph Steiner Foundation
  2. Running Cyanotech for his own benefit while ignoring the interests of other shareholders
  3. Entrenching himself as Cyanotech's chairman with a captive Board of Directors.
  4. Further entrenching his control by replacing Cyanotech's corporate law firm with his own law firm, the very same law firm that he used to create the supposedly charitable network of nonprofit entities used to obscure public/regulatory scrutiny of his activities.
Now take a look at what MAD's father Leonard Davis did when he controlled AARP,  running it for the benefit of his for-profit Colonial Penn insurance companies (link to main article):
"Although the Colonial Penn companies were theoretically separate from AARP,  Davis, to protect his marketing bonanza, wrapped Colonial Penn tentacles firmly around every aspect of the operation. According to a 1977 lawsuit by former executive director, Harriet Miller, Davis had carefully insulated the board from AARP's financial operations, and at the same time he had made them almost utterly dependent on Colonial Penn.  Contracts drafted for AARP by lawyers close to Davis, for example, delegated the right to select insurance carriers for AARP and NRTA members to a private company called National Association Plans Inc - a subsidiary of Colonial Penn.
In the early 1970s, Davis shored up his control by introducing a new law firm as AARP's outside counsel. The firm, which went through several name changes, maintained offices in the same Madison Avenue building that house Colonial Penn's New York offices, ARRP's local offices, and Davis's personal offices and those of the Davis Family Foundation."

Tuesday, June 27, 2017


From Meridian's May 6, 2016 letter to Cyanotech's board of directors:
"The Chairman [Michael Arlen Davis] has elected to make his filings on Schedule 13G rather than Schedule 13D. This is extremely odd - the Chairman has been on Cyanotech's board of directors since the time of his first filing in 2002 and he has served as chairman of the board since 2011. Anyone familiar with SEC reporting requirements, whether counsel to Cyanotech or one of the parties that has assisted the Chairman with the management of his many foundations and trusts, would/should have told the Chairman that he has been filing on the wrong form. Meridian believes it inconceivable that the Chairman made filings over 14 years without becoming aware of the error. Accordingly, it seems likely that the Chairman knew or was told he was filing on the wrong form, but continued using Schedule 13G as part of an effort to minimize public disclosure and scrutiny."

Sunday, June 25, 2017

Shareholders must disclose when they are a "Group"

From Meridian's original complaint against Michael Arlen Davis and Rudolph Steiner Foundation (at page 4)
Section 13(d)(3) of the Exchange Act addresses group membership for purposes of Section 13(d) and provides that "[w]hen two or more persons act as a partnership, limited partnership, syndicate, or other group for the purpose of acquiring, holding, or disposing of securities of an issuer, such syndicate or group shall be deemed a 'person' for the purposes of this subsection." 15 U.S.C. § 78m(d)(3). The SEC regulation under Section 13(d)(3) further provides that "[w]hen two or more persons agree to act together for the, purpose of acquiring, holding, voting or disposing of equity securities of an issuer, the group formed thereby shall be deemed to have acquired beneficial ownership . . . of all equity securities of that issuer beneficially owned by any such persons." Rule 13d-5(b)(1), codified at 17 C.F.R. § 240.13d-5(b)(1).

Saturday, June 24, 2017

“Group” Liability for 4943 Violation Could Be in $Millions

The most likely reason Michael Arlen Davis (MAD) has been “parking” shares with Rudolf Steiner Foundation (RSF) is to avoid the penalties created by Internal Revenue Code Section 4943.  That section creates severe economic penalties when not-for profits own in excess of 20% of an operating business.  MAD has been very careful over the years making sure that his own holdings never go above 20%.  The combined holdings of MAD and RSF, however, now stand at 33%.

So what does Section 4943 say about two entities holding more than 20%?  It seems to have anticipated MAD’s behavior – Section 4943(c) provides that the permitted holdings of any private foundation is (i) 20 percent of the voting stock, reduced by (ii) the percentage of the voting stock owned by all disqualified persons.

What is a disqualified person?  The term “disqualified person” meansa person who is (A) a substantial contributor to the foundation with that being defined as anyone any person who contributed more than $5,000 to the private foundation, if such amount is more than 2 percent of the total contributions received in that year by the foundation.  The status of being a “disqualified person” continues for 10 years.  Since Skywords Family Foundation contributed more than 2% of the total contributions received by RSF in 2011, Davis and Skywords are each a “disqualified person” until at least 2021.

Looks like a 200 percent penalty tax could possibly be in in the future for the MAD/RSF “Group”

Dayisun Tngri

READ MORE:  RSF's Likely Violation of Section 4943 Internal Revenue Code

Friday, June 23, 2017

Thursday, June 22, 2017

Why Meridian Initiated its Lawsuit Against Michael Arlen Davis

 From Meridian Schedule 13D filing on May 25, 2016

"On May 24, 2016, Meridian filed a shareholder derivative action on behalf of Cyanotech's stockholders against the Company, its Chairman of the board of directors and the Rudolf Steiner Foundation ("RSF").  The civil complaint, filed in the United States District Court for the District of Nevada, seeks Declaratory and Injunctive Relief under the Securities Exchange Act of 1934 and the Nevada Control Share Statute due to the undisclosed group created by the Chairman and RSF, and that group's ability to control Cyanotech.

Meridian also claims that the misrepresentations or omissions of material facts by the Chairman caused Cyanotech to violate Section 10(b)(5) of the Securities Exchange Act of 1934.  Finally, Meridian claims that the Chairman's actions breached his fiduciary duties as a member of the board of directors of Cyanotech.

A copy of Meridian's complaint may be read--here

Meridian brought its claims in Federal court after Cyanotech's board of directors failed to take action with respect to numerous securities disclosure and corporate governance deficiencies detailed by Meridian in a letter to the board of directors (see the above link starting at page 27).  On May 6, 2016, Meridian delivered the letter to Cyanotech's interim CEO, who is also a board member, and encouraged him to first share the letter with the chairman of the Company's audit committee and then for these two directors to consider engaging legal counsel independent of Cyanotech's Chairman to consider the contents of the letter and appropriate next steps.

Since delivering the May 6, 2016 letter, Meridian has received no indication that Cyanotech's board of directors has taken action to address the issues raised by the letter.  To the contrary, on May 23, 2016, the Company issued a press release reporting that the chairman of its audit committee had resigned from the board of directors on May 17, 2016.  One possible interpretation of this news is that the audit chairman attempted to take the appropriate actions in response to Meridian's May 6, 2016 letter, was blocked and therefore considered it impossible to continue to serve on Cyanotech's board of directors.  Meridian believes the audit chairman's resignation is further evidence of the inability of the Cyanotech board to function properly under the leadership of its current Chairman."

Wednesday, June 21, 2017

A Message to Cyanotech Shareholders

Welcome to the Seeking Justice for Cyanotech Shareholders website! We are happy you found us!

This website was created as a service to Cyanotech shareholders. It is a platform for us to share and discuss news, analysis, and other information related to Cyanotech. It is also intended as a "24/7" opportunity for company employees and/or management to share anything that might add value to the discussion.

Who is Michael Arlen Davis?
The elephant in the room for shareholders is Chairman and largest shareholder Michael Arlen Davis (MAD) and his recently discovered investment "group" relationship with Rudolf Steiner Foundation (RSF), Cyanotech's second largest shareholder of record. Davis became Cyanotech's Chairman in 2011, but he started building the 33% control position he enjoys today way back in the early 2000s, shortly after the sudden death of his father,  the controversial AARP founder Leonard Davis. The sudden passing of Leonard Davis' tainted AARP fortune to his two sons had a profound impact on Michael Arlen Davis, essentially transforming him overnight from a rich kid with an allowance into an extremely wealthy man craving influence and power.

Read More: Leonard Davis, Andy Rooney, and the famous CBS 60 Minutes Expose
Read More: The AARP--Exposing Leonard Davis for what he was

With his new inheritance, Davis went to work with his RSF associates creating a network of purpose-built non profit entities through which he could direct his AARP fortune unobtrusively,  thus evading shareholder or regulator scrutiny.  Mr Davis has long relied on this network of "philanthropic entities" to obscure the nature and intent of his activities, while reducing his cost of capital at the expense of US taxpayers.

Davis and RSF are being sued in Nevada District court by Meridian, Cyanotech's third largest shareholder. Meridian has done a thorough job memorializing the history of Davis' Cyanotech activities through their many SEC and Nevada Court filings. Their public filings are a prime source of content for this website, and shareholders/employees should be very grateful for their efforts.

Link: Cyanotech SEC Filings

A lot of time and effort has also been invested in reviewing the many annual IRS form 990 filings made by Davis and RSF during the 2001 - 2014 period. It seems aspects of Davis/RSF's  IRS and SEC filings can sometimes contradict each other. For example, when Davis and RSF first formed their investment group. IRS and Court filings indicate Davis/RSF formed an investment partnership no later than year 2001. However, Davis/RSF told the SEC in their April 17, 2017 filing that the group formed as of April 17, 2017, which seems absurd.

It is time for Cyanotech Shareholders to examine the historical record of Chairman Davis' activities around Cyanotech, especially with respect to Rudolf Steiner Foundation. That Davis orchestrated and funded RSF's rapid accumulation of shares during 2010-2011 in an apparent effort to entrench himself as Chairman, without proper disclosure, is worthy of investor focus and concern. 

Please take full advantage of the comments section below the featured blog posts, as well as the research provided elsewhere in the website. There is already a large volume of content provided, and more will be added, so please keep checking back in.  

We hope to hear from all interested shareholders. We also want to reiterate that Cyanotech employees and management are encouraged to contribute to the discussion. Comments will be left up for discussion. 

Anyone with comments/information they would rather share privately are encouraged to email