Thursday, November 16, 2017

Michael A. Davis appears to have Violated SEC 13(d) since 2002

Michael A. Davis and his father Leonard Davis

It seems obvious that Michael A. Davis violated SEC 13(d) of the Exchange Act from 2002 to 2016 by failing to file on Schedule 13D because he had the ability to influence and control Cyanotech.

The terms of Davis' 2002 investment in Cyanotech were predatory. The company was facing a $1.25M bond maturity at the end of October 2002, and the company went to the proverbial cross-roads where they agreed to a deal with Davis in late September 2002.

The egregious terms of Davis' investment, and subsequent activities around the company, make him seem like a financial predator, and a malignant individual who will not go away until law enforcement escorts him to Cyanotech's front gate.  The terms of Davis' 2002 Cyanotech investment are outlined below:

Michael A. Davis' September 2002 Cyanotech Investment

  • $1.25M 10% convertible debentures due 9/30/04, convertible into Cyan shares at a price of $0.65 per share,  a massive 71% discount to Cyan's public stock price, which closed at $2.24 per share on 9/30/02
  • 750,000 Cyan shares at $.040 per share (net to to company) representing an 82% discount to the $2.24/share closing price on 9/30/02
  • Cyanotech's 2003 10K discloses "Subsequent to the transaction the debenture holder (e.g. Davis) was elected to the Company's Board of Directors" This belated disclosure implies Davis asked for and received a Cyanotech board seat as a condition to his 2002 investment.
  • Davis' 2002 IRS 990 filing for his Skywords Foundation predecessor entity (EIN: 52-2212000) reported a +$272K net gain in public securities trading, related to Davis converting his 10% convertible bonds to Cyanotech shares shortly after his September 2002 deal closed.
  • This transaction gave Davis about 20% of Cyanotech's public stock, making him the company's largest shareholder.

The $272K public securities trading gains Davis reported for 2002 covered most of his purchase price for the 750,000 shares of new Cyan stock which delivered a paltry $300K of proceeds to the company. Great deal for Davis, not for the company.

That Davis was likely granted a board seat as a condition of his predatory Cyanotech investment underscores that Davis had the ability to influence Cyanotech, and that Davis intended to influence Cyanotech, starting with his investment in late 2002.

Why did Davis file on schedule 13G, and not 13D, from 2002 until 2016 if not to obscure his intentions and subsequent investment activities around Cyanotech?

Unfortunately for outside shareholders and employees today,  Cyanotech's founder and board in 2002 appear utterly incompetent for agreeing to Davis' blatantly predatory deal terms.  I believe the company would be in a much healthier position today had they instead defaulted and gone through a restructuring,  which would have been relatively easy given Cyanotech's simple capital structure.