STONEHOUSE CAPITAL URGES BOARD OF D-BOX TECHNOLOGIES INC. TO PURSUE SALE OF COMPANY
Stonehouse Capital, one of D-Box's largest shareholders, with control or
direction over 7.9% of the D-Box Shares, intends to vote in favour of
Shareholder Proposal at the Company's upcoming shareholder meeting
TORONTO, Aug. 30, 2023 /CNW/ - Stonehouse Capital Management Inc. ("Stonehouse"), which has control or direction over 17.38 million Class A common shares of D-BOX Technologies Inc. ("D-BOX" or the "Company"), representing approximately 7.9% of the outstanding shares, responds to the Company's statements regarding the Shareholder Proposal submitted by Daniel Marks, President of Stonehouse Capital. Both the Shareholder Proposal and the Company's response are included in Schedule A to the Company's Management Proxy Circular dated August 18, 2023 (the "MPC").
On June 14, 2023, Daniel Marks, President of Stonehouse, sent a letter to the Company (reproduced below) which also enclosed a Shareholder Proposal for inclusion in the Company's MPC to allow shareholders to vote on the formation of a special committee to conduct a review of strategic alternatives, which alternatives were to include a sale of the Company.
On August 16, 2023, a mere few days prior to printing the MPC, but over two months after receiving the Shareholder Proposal, D-BOX issued a press release disclosing that the Company had commenced a "formal review process of strategic alternatives and has been engaged in ongoing discussions in the last few months with a number of parties" and immediately thereafter contacted Stonehouse to request the Shareholder Proposal be withdrawn.
Stonehouse is uncertain why this announcement was delayed so long, but believes that D-BOX's actions are evidence of a board that seems more concerned with extending its tenure than one looking to maximize value for shareholders. Even within the press release, the Company states that it will not provide any updates to its strategic review, nor does it have a target end date or preferred outcome, leaving stakeholders completely in the dark as to the current and future direction of the Company.
Contrary to the Company's commentary in the MPC, Stonehouse does not believe that the Shareholder Proposal is a "moot point". In fact, Stonehouse has serious concerns regarding the process announced by the Company and, as a result, believes that the Shareholder Proposal serves as a legitimate item of business at the upcoming shareholder meeting.
Stonehouse intends to vote all of its shares in favour of the Shareholder Proposal.
In aggregate, independent directors of D-BOX own 2,171,610 shares with an aggregate value of $217,161 (based on a $0.10 per share closing price on August 24, 2023) or less than 1% of the outstanding Class A common shares of the Company. In contrast, as disclosed in the MPC, the board received cash compensation totalling an aggregate $301,000 for the 2023 fiscal year. In addition, half the directors do not even meet the minimum standard of ownership required by the Company's Share Ownership Policy. Stonehouse views this as evidence that the board's interests are not aligned with those of its shareholders.
Further, the Strategic Review Committee (the "SRC" or the "Committee") has retained the Company's existing counsel, Fasken Martineau DuMoulin LLP, as legal counsel to assist the Committee rather than retaining independent counsel. In addition, Louis Bernier, a D-Box director since 2014, is also a partner at Fasken. Mr. Bernier and his firm stand to benefit from the legal fees that his firm will receive in addition to Mr. Bernier's receipt of director compensation.
D-BOX disclosed that the SRC was formed in the third quarter of 2022 and apparently all that it has accomplished in about a year's time was to come up with the typical four alternatives of almost every strategic review and "has been engaged in ongoing discussions in the last few months with a number of parties". This disclosure suggests a lack of urgency regarding strategy and does not serve stakeholders' best interests.
For the Company to seriously consider the first two options of maintaining the status quo or raising additional capital illustrates a lack of good business sense. In that regard, the status quo has led to a 56.25% decline in the price of D-BOX shares over the 5 years ended March 31, 2023 as compared to the S&P/TSX SmallCap 5-year return which was a positive 17.81% (as disclosed in the Company's Performance Graph included in the MPC). Furthermore, the Company's most recent capital raise was completed in 2021 and the share price has not closed above the $0.13 issue price since then. If sufficient investor interest in D-BOX existed, Stonehouse believes that the share price would reflect it.
Regarding the third and fourth options involving the sale of the Company in whole or in parts, Stonehouse is concerned that the SRC has determined "to commence a confidential outreach, in phases…to various parties that would potentially be interested in a strategic transaction", which limits the potential buyer universe. Stonehouse believes a better approach would be to do a wide survey of both strategic and financial buyers in a formal auction process with a clear timetable. Approaching limited parties in phases leads to a slower process that could omit a universe of potential buyers.
For example, Stonehouse believes the royalty nature of the Company's Right-of-Use theatrical revenues would be attractive to private equity investors and other financial buyers and if the strategic review is focussing on a strategic partner, then D-Box is limiting the upside in a potential transaction.
Stonehouse believes that the Company's theatrical business, particularly the Right-of-Use revenue stream with its high margins, provides attractive cash flows, but that D-BOX spends too much money on excessive operating expenses tied to less profitable pursuits in other business segments. This has severely limited any potential for stock price appreciation. Stonehouse believes the sale of the Company in whole or in parts would provide a significant return for long-suffering shareholders.
Stonehouse believes D-BOX needs to be more transparent about the review process so shareholders can be assured it is being conducted in a rigorous and independent manner and includes a wide canvass of both strategic and financial buyers to achieve the successful result of the sale of the Company or its assets. Without further information or assurance, Stonehouse believes that the Company's strategic review process is inconsistent with the letter and spirit of the Shareholder Proposal and therefore the proposal remains an important item of business at the upcoming shareholder meeting.
Stonehouse intends to vote all of its shares in favour of the Shareholder Proposal.
The Shareholder Proposal contained at Appendix A to the MPC and the letter to the Company reproduced below, all reflect the views of Stonehouse, one of D-BOX's largest shareholders.
The foregoing solely reflects Stonehouse's voting intentions with respect to the Shareholder Proposal and the reasons therefor. This press release does not constitute a solicitation of a proxy within the meaning of applicable laws, and accordingly, D-BOX shareholders are not being asked to give, withhold or revoke a proxy.
June 14, 2023
BY E-MAIL AND COURIER
Board of Directors
D-Box Technologies Inc.
2172, rue de la Province
Longueuil, Québec
J4G 1R7
Attention: Mr. Sébastien Mailhot, Chief Executive Officer (e-mail: [email protected])
Dear Sirs/Mesdames,
Re: D-Box Technologies Inc. ("D-Box" or the "Company") Shareholder Proposal
As you know, I have been a shareholder of the Company since 2021. I personally beneficially own 7,800,000 Class A common shares, representing approximately 3.5% of the outstanding Class A common shares of the Company. I have beneficially owned at least 1% of the outstanding Class A common shares for the six-month period immediately before the date of this letter. In addition, I am also the President of Stonehouse Capital Management Inc. ("Stonehouse") which has control and direction over an additional 9,580,000 Class A common shares, representing approximately 4.4% of the outstanding shares of the Company. Attached to this letter as Schedule "A" [Not included] is my address as well as the dates on which the Class A common shares which I beneficially own were acquired.
I am attaching to this letter as Schedule "B" [Not included] a proposal (the "Proposal") to be included in the management proxy circular relating to the next annual meeting of the shareholders of the Company (the "2023 Circular") pursuant to section 137 of the Canada Business Corporations Act ("CBCA"). Schedule "B" also includes a statement in support of the Proposal (the "Supporting Statement"). I hereby request, pursuant to subsection 137(3) of the CBCA, that the Supporting Statement be included in the 2023 Circular together with the Proposal.
Both in my personal capacity and as President of Stonehouse, I have been concerned for some time that D-Box is not monetizing the value of its leading-edge haptic technology and, in particular, seems content to use the positive cash flow from the right-of-use side of the theatrical business to fund excessive operating expenses. Upon reading the 2022 financial statements, viewing the June 1, 2023 financial results webinar and hearing your input on our call of June 5, 2023 where you advised that spending is not going to be tempered anytime in the near future, I believe that the Company should be put up for sale. I have lost faith in management's ability to generate profitability and believe a sale in whole or parts is the best way to maximize value for shareholders.
D-Box failure to create shareholder value
During our discussions in Montreal on June 28, 2022 you and David agreed with my view that the theatrical side of the business, at $8-$10 million in revenue and 90-95% gross margin, was worth multiples of the $20 million market capitalization of the entire Company at that time. You indicated at that time that increasing the share price was a priority for D-Box and that you believed that the upcoming launch of new products would be a catalyst both to increase revenues and to gain interest from new investors. Almost one year has passed since our meeting and the share price has not improved and while Q4 revenues increased by $3,441k year over year, gross margin only increased $885k and this was more than offset by a $1,293k increase in operating expenses. The new products have not generated profits or sufficient interest from prospective investors and the stock price continues to languish.
D-Box is celebrating its 25th anniversary this year and after all that time it is still struggling to reach profitability. Without profits, there will be no positive performance for the share price of such a "seasoned" public company and longstanding shareholders will continue to suffer. Given this track record, it seems clear that share price performance is not a priority for the management team.
Lack of expense control
Also at our June 28, 2022 meeting I informed you that my biggest concern was D-Box's history of runaway operating expenses and that it would be difficult to gain new shareholders if expenses were not controlled. You and David advised me that the levels of operating expenses experienced in Q4 2022 would be sustained other than inflation-related raises for employees and one or two key trade shows that had been skipped during the pandemic. Despite these assurances, 2023 operating expenses increased by almost $4.5 million with administrative expenses alone growing by $1.65 million. While some increase in R&D is understandable as it relates to the G5 and Motion 1 products, the combined 30% increase in sales, marketing and administrative expenses is unproductive and wasteful.
An obvious example of this waste comes at the board level where D-Box, in its 2022 Management Proxy Circular ("MPC"), disclosed that it paid $60k to Hexarem Inc. for a benchmarking analysis for executive and board compensation. Stonehouse conducted its own analysis of the 9 companies in Hexarem's Comparative Group and found that D-Box executives were compensated at 20-40% above the average for their peer group and yet, as disclosed in the MPC:
Although the CCGC may rely on information and advice obtained from consultants such as Hexarem, all decisions with respect to executive compensation are made by the Board of Directors upon recommendation of the CCGC and may reflect factors and considerations that differ from information and recommendations provided by such consultants, such as merit and the need to retain high-performing executives.
What was the purpose of paying a consultant just to ignore their input? The MPC also provided that the board had voted themselves a substantial increase in cash compensation in April 2022 despite the Company's ongoing lack of profitability.
Governance Issues
Stonehouse has numerous issues with D-Box's Board of Directors beyond this recent pay increase and it starts with the size and makeup. This is a $40 million revenue company and as such 5 directors should be more than sufficient. A 7 member board is wasteful, especially with redundancies in accounting and human resources skill sets. There are obvious skill gaps in key areas such as engineering, public capital markets, operations and even technology.
Despite having 4 CPA's on the board, the Company has been required to restate its financial statements twice in the last 3 years, including in August 2022 when I alerted you to errors in the 2023 Q1 MD&A. Furthermore, when I informed you that I and Stonehouse would withhold our votes against members of the Audit Committee because of these restatements and invited any members to contact me to discuss my concerns, nobody bothered to reach out. This shows not only an absence of diligence, but also a lack of concern for shareholders.
Perhaps the lack of interest is related to the failure of the Board of Directors to align their interests with those of shareholders. D-Box instituted a Share Ownership Policy in February 2020 requiring directors to own a mere one (1) time their annual fees in Company shares despite best practices calling for a three (3) times multiple. Even at this level half the directors do not satisfy the minimum requirement. After the pay increases in April 2022 the board restarted the three year window to achieve the required minimum which seems to be accommodating directors' aversion to buying shares.
With an aggregate ownership level of less than 1% and combined compensation that greatly exceeds the value of their holdings it is very apparent that the independent directors have greater incentive to receive cash compensation than exercise fiscal prudence, align themselves with shareholders and drive improved stock price performance.
For these reasons I believe the Company needs to be sold in order to maximize shareholder value and, accordingly, I am submitting the attached Proposal and Supporting Statement for inclusion in the Company's 2023 Circular. I would also ask that you promptly share this letter and the attachments with the other members of the board of directors of the Company.
Yours truly,
Daniel Marks, CFA
President
Stonehouse Capital Management Inc.
SOURCE Stonehouse Capital Management Inc.
Share this article