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UNITED STATES |
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SECURITIES AND EXCHANGE COMMISSION |
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Washington, D.C. 20549 |
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SCHEDULE 13D |
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(Rule 13d-101)
INFORMATION TO BE INCLUDED IN STATEMENTS FILED PURSUANT
TO § 240.13d-1(a) AND AMENDMENTS THERETO FILED
PURSUANT TO § 240.13d-2(a)
(Amendment No. )*
Sonoma Pharmaceuticals, Inc.
(Name of Issuer)
Common Stock
(Title of Class of Securities)
83558L105
(CUSIP Number)
Daniel K. Turner III
Managing Director
Montreux Equity Partners V, L.P.
One Ferry Building, Suite 255
San Francisco, CA 94111
(650) 234-1200
(Name, Address and Telephone Number of Person
Authorized to Receive Notices and Communications)
November 2, 2018
(Date of Event Which Requires the Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to report the acquisition that is the subject of this Schedule 13D, and is filing this schedule because of Rule 13d-1(e), 13d-1(f) or 13d-1(g), check the following box: x
Note. Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See Rule 13d-7(b) for other parties to whom copies are to be sent.
* The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be deemed to be filed for the purpose of Section 18 of the Securities Exchange Act of 1934 (Act) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).
CUSIP No. 83558L105 | |||||
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Names of Reporting Persons Montreux Equity Partners V, L.P. | |||
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Check the Appropriate Box if a Member of a Group | |||
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(a) |
o | ||
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(b) |
x(1) | ||
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SEC Use Only | |||
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Source of Funds WC (See Item 3) | |||
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Check if Disclosure of Legal Proceedings Is Required Pursuant to Item 2(d) or 2(e) o | |||
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Citizenship or Place of Organization Delaware | |||
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Number of |
7 |
Sole Voting Power 0 | |||
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Shared Voting Power 571,428 | ||||
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9 |
Sole Dispositive Power 0 | ||||
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Shared Dispositive Power 571,428 | ||||
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Aggregate Amount Beneficially Owned by Each Reporting Person 571,428 | |||
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Check if the Aggregate Amount in Row (11) Excludes Certain Shares o | |||
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Percent of Class Represented by Amount in Row (11) 8.8% (2) | |||
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Type of Reporting Person PN | |||
(1) This Schedule 13D is filed by Montreux Equity Partners V, L.P., a Delaware limited partnership (MEP V), Montreux Equity Management V, LLC, a Delaware limited liability company (MEM V) and Daniel K. Turner III (Turner and together with MEP V and MEM V, collectively, the Reporting Persons). The Reporting Persons expressly disclaim status as a group for purposes of this Schedule 13D.
(2) Based upon 6,479,633 shares of Common Stock of the Issuer outstanding as of September 30, 2018, as reported by the Issuer in its Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 12, 2018.
CUSIP No. 83558L105 | |||||
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Names of Reporting Persons Montreux Equity Management V, LLC | |||
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Check the Appropriate Box if a Member of a Group | |||
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(a) |
o | ||
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(b) |
x(1) | ||
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SEC Use Only | |||
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Source of Funds OO (See Item 3) | |||
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Check if Disclosure of Legal Proceedings Is Required Pursuant to Item 2(d) or 2(e) o | |||
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Citizenship or Place of Organization Delaware | |||
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Number of |
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Sole Voting Power 0 | |||
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Shared Voting Power 571,428 | ||||
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Sole Dispositive Power 0 | ||||
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Shared Dispositive Power 571,428 | ||||
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Aggregate Amount Beneficially Owned by Each Reporting Person 571,428 | |||
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Check if the Aggregate Amount in Row (11) Excludes Certain Shares o | |||
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Percent of Class Represented by Amount in Row (11) 8.8% (2) | |||
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Type of Reporting Person CO | |||
(1) This Schedule 13D is filed by the Reporting Persons. The Reporting Persons expressly disclaim status as a group for purposes of this Schedule 13D.
(2) Based upon 6,479,633 shares of Common Stock of the Issuer outstanding as of September 30, 2018, as reported by the Issuer in its Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 12, 2018.
CUSIP No. 83558L105 | |||||
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Names of Reporting Persons Daniel K. Turner III | |||
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Check the Appropriate Box if a Member of a Group | |||
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(a) |
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(b) |
x(1) | ||
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SEC Use Only | |||
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Source of Funds OO (See Item 3) | |||
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Check if Disclosure of Legal Proceedings Is Required Pursuant to Item 2(d) or 2(e) o | |||
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Citizenship or Place of Organization Delaware | |||
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Number of |
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Sole Voting Power 0 | |||
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Shared Voting Power 571,428 | ||||
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Sole Dispositive Power 0 | ||||
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Shared Dispositive Power 571,428 | ||||
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Aggregate Amount Beneficially Owned by Each Reporting Person 571,428 | |||
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Check if the Aggregate Amount in Row (11) Excludes Certain Shares o | |||
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Percent of Class Represented by Amount in Row (11) 8.8% (2) | |||
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Type of Reporting Person IN | |||
(1) This Schedule 13D is filed by the Reporting Persons. The Reporting Persons expressly disclaim status as a group for purposes of this Schedule 13D.
(2) Based upon 6,479,633 shares of Common Stock of the Issuer outstanding as of September 30, 2018, as reported by the Issuer in its Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 12, 2018.
CUSIP No. 83558L105 |
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Item 1. Security and Issuer.
This statement on Schedule 13D relates to the Common Stock of Sonoma Pharmaceuticals, Inc., a Delaware corporation (the Issuer). The address of the principal executive offices of the Issuer is 1129 N. McDowell Blvd., Petaluma, California 94954.
Item 2. Identity and Background.
(a)(b)(c)(f) This statement is being filed by:
1) Montreux Equity Partners V, L.P., a Delaware limited partnership (MEP V);
2) Montreux Equity Management V, LLC, a Delaware limited liability company (MEM V); and
3) Daniel K. Turner IIII, a U.S. citizen (Turner).
MEP V, MEM V and Turner are herein collectively referred to as the Reporting Persons and individually as a Reporting Person. MEP Vs principal business is making investments in the securities of other entities. MEM V is the investment manager to and sole general partner of MEP V and Turner is the sole manager of MEM V.
(d)(e) In the last five years, no Reporting Person has been convicted in a criminal proceeding (excluding traffic violations and similar misdemeanors) or was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.
Item 3. Source and Amount of Funds or Other Consideration.
The aggregate purchase price of the Common Stock is $1,999,998.00. The source of funds for acquiring the foregoing shares of Common Stock was the capital contributions from the general and limited partners of MEP V.
Item 4. Purpose of Transaction.
The shares of Common Stock covered by this Schedule 13D were originally acquired in the ordinary course of business solely for investment purposes and not for the purposes of participating in or influencing the management of the Issuer. However, the Reporting Persons now have the intent to influence the policies of the Issuer and assert shareholder rights, with a goal of maximizing the value of the Common Stock for all shareholders. Consistent with such purpose, on November 2, 2018, Turner on behalf of MEP V, sent a letter (the Letter) to the Board of Directors of the Issuer (the Board) to propose that the following actions be taken:
1. Sharon Barbari, Jay Birnbaum and Jerry McLaughlin should immediately resign as members of the Board and be replaced by new independent directors that will focus on maximizing shareholder value as opposed to entrenchment.
2. The Issuer should immediately reduce Board compensation to reflect a more customary amount for a company of this size by eliminating its tax gross up policy to non-executive members of the Board of Directors of the Issuer.
3. The Issuer should immediately eliminate its unreasonable takeover defenses, including, without limitation, its poison pill rights plan, its staggered board election policy, its prohibition on shareholders calling special meetings and its requirement that two-thirds of voting shares outstanding be required to approve any amendment to the Bylaws and certain amendments to its Certificate of Incorporation.
CUSIP No. 83558L105 |
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4. The Issuer should pursue appropriate strategic alternatives, including the sale of the Issuer (instead of the highly dilutive equity financing currently contemplated).
The reasons for proposing the actions above are discussed in detail in the Letter, a copy of which is attached hereto as Exhibit 2 and incorporated herein by reference.
Except as otherwise described in this statement, including the Letter attached hereto, none of the Reporting Persons currently has any other plans or proposals that would result in or relate to any of the transactions or changes listed in Items 4(a) through 4(j) of Schedule 13D. However, as part of their ongoing evaluation of investment and investment alternatives, the Reporting Persons may consider such matters and, subject to applicable law, may formulate a plan with respect to such matters or make formal proposals to management or the Board, other stockholders of the Issuer or other third parties regarding such matters. The Reporting Persons reserve the right, subject to Rule 13d-1(e) of the Securities Exchange Act of 1934, as amended, to acquire additional securities of the Issuer in the open market, in privately negotiated transactions (which may be with the Issuer or with third parties) or otherwise, to dispose of all or a portion of their holdings of securities of the Issuer or to change their intention with respect to any or all of the matters referred to in this Item 4.
Item 5. Interest in Securities of the Issuer.
(a) and (b) As of the date hereof, the shares of Common Stock are held directly by MEP V. MEM V serves as investment manager to and general partner of MEP V. By reason of such relationships, MEM V may be deemed to share voting and dispositive power over the Common Stock listed as beneficially owned by MEP V. MEM V disclaims beneficial ownership of all such shares. Turner serves as sole manager of MEM V. By reason of such relationship, Turner may be deemed to share voting and dispositive power over the Common Stock listed as beneficially owned by MEP V. Turner disclaims beneficial ownership of all such shares, except to the extent of his pecuniary interest in MEP V and MEM V.
All percentages of Common Stock disclosed in this statement are based on 6,479,633 shares of Common Stock of the Issuer outstanding as of September 30, 2018, as reported by the Issuer in its Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 12, 2018.
(c) During the past sixty days prior to November 2, 2018, the Reporting Persons have not acquired any shares of the Issuers Common Stock.
(d) Under certain circumstances set forth in the limited partnership agreement of MEP V, the general and limited partners of such entity may be deemed to have the right to receive dividends from, or the proceeds from the sale of shares of Common Stock of the Issuer owned by MEP V.
(e) Not applicable.
Item 6. Contracts, Arrangements, Understandings or Relationships With Respect to Securities of the Issuer.
Other than the limited partnership agreement of MEP V, there are no contracts, arrangements, understandings or relationships (legal or otherwise) among the Reporting Persons and between the Reporting Persons and any person with respect to any securities of the Issuer, including but not limited to transfer or voting of any of the securities of the Issuer, finders fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or loss, or the giving or withholding of proxies, or a pledge or contingency the occurrence of which would give another person voting power over the securities of the Issuer.
CUSIP No. 83558L105 |
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Item 7. Materials to be Filed as Exhibits.
Exhibit No. |
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Description |
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Exhibit 1: |
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Exhibit 2: |
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CUSIP No. 83558L105 |
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SIGNATURES
After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct.
Date: November 5, 2018
MONTREUX EQUITY PARTNERS V, L.P. |
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By: MONTREUX EQUITY MANAGEMENT V, LLC, its General Partner |
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By: |
/s/ Daniel K. Turner III |
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Name: Daniel K. Turner III |
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Title: Managing Member |
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MONTREUX EQUITY MANAGEMENT V, LLC |
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By: |
/s/ Daniel K. Turner III |
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Name: Daniel K. Turner III |
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Title: Managing Member |
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DANIEL K. TURNER III |
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/s/ Daniel K. Turner III |
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CUSIP No. 83558L105 |
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JOINT FILING AGREEMENT
THIS JOINT FILING AGREEMENT is entered into as of November 5, 2018, by and among the parties signatories hereto. The undersigned hereby agree that the Statement on Schedule 13D with respect to the shares of Common Stock of Sonoma Pharmaceuticals, Inc. is, and any amendment thereafter signed by each of the undersigned shall be, filed on behalf of each undersigned pursuant to and in accordance with the provisions of 13d-1(k) under the Securities Exchange Act of 1934, as amended.
MONTREUX EQUITY PARTNERS V, L.P. |
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By: MONTREUX EQUITY MANAGEMENT V, LLC, its General Partner |
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/s/ Daniel K. Turner III |
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Name: Daniel K. Turner III |
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Title: Managing Member |
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MONTREUX EQUITY MANAGEMENT V, LLC |
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By: |
/s/ Daniel K. Turner III |
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Name: Daniel K. Turner III |
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Title: Managing Member |
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DANIEL K. TURNER III |
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/s/ Daniel K. Turner III |
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November 2, 2018
Members of the Board of Directors
Sonoma Pharmaceuticals, Inc.
1129 N. McDowell Blvd.
Petaluma, CA 94954
Dear Board Members:
As you know, Montreux Equity Partners V, L.P. (Montreux) is the largest institutional shareholder of Sonoma Pharmaceuticals, Inc. (SNOA or the Company), with a beneficial ownership percentage of approximately 8.8% and is a long-term investor in the Company. We are writing to you to raise serious concerns regarding certain actions of the Company and its Board of Directors (the Board), and to propose ways in which the Company and the Board can address these concerns.
We invested in SNOA because we believe in the Companys products and their market potential, and that there exist opportunities readily within the control of the Board to substantially increase shareholder value. However, despite the more than 45% share price decline since the end of the second quarter of 2018, the Board has not yet taken the necessary steps to help unlock this shareholder value, In fact, the Board instead appears determined to follow a path that we believe will further destroy shareholder value.
For the reasons detailed below, we propose that the following actions be taken:
1. Sharon Barbari, Jay Birnbaum and Jerry McLaughlin should immediately resign as members of the Board and be replaced by new independent directors that will focus on maximizing shareholder value as opposed to entrenchment.
2. The Company should immediately reduce Board compensation to reflect a more customary amount for a company of this size.
3. The Company should immediately eliminate its unreasonable takeover defenses, including, without limitation, its poison pill rights plan, its staggered board election policy, its prohibition on shareholders calling special meetings and its requirement that two-thirds of voting shares outstanding be required to approve any amendment to the Bylaws and certain amendments to its Certificate of Incorporation.
4. The Company should pursue appropriate strategic alternatives, including the sale of the Company (instead of the highly dilutive equity financing currently contemplated).
Prospects
We invested in the Company because we were convinced about its prospects. We continue to believe that the Company has a strong portfolio of hypochlorous acid (HOCl) based products, substantial intellectual property, and attractive growth prospects.
In spite of our optimism for the potential of the business, we are very concerned about issues that we believe have, and we believe could continue to, depress shareholder value and undermine managements ability to realize the Companys full potential. We believe that the sales strategies and tactics adopted by the Company do not adequately exploit the significant market potential of the Companys products. The Companys depressed gross margins and its profitability profile also pose serious challenges to shareholder value.
Issue One: Replace Certain Directors
The Company continues to trade at a very low absolute and relative valuation. We think this is in part the result of numerous missteps by the Board, including the Boards approach to raising capital for the Company and its failure to attract interest from an appropriate institutional shareholder base. We believe that the Board is falling short in its oversight role and is failing to add value in the quest for much improved shareholder value.
We believe that each of Ms. Barbari and Messrs. Birnbaum and McLaughlin have contributed to the Companys failed approach and therefore should immediately resign from the Board.
They should be replaced with new independent directors, with industry experience, who are focused on fulfilling their fiduciary duties to the Company, including maximizing shareholder value. We remain at your disposal to discuss potential candidates who we believe can help improve the Companys performance.
Issue Two: Director Compensation
Despite the Companys poor performance and declining share price, the Board continues to receive compensation benefits that we believe are excessive and not customary for a company of this size. In particular, pursuant to the Companys non-employee director compensation program, all elective and automatic stock grants are subject to a 40% tax gross up granted as an additional cash payment to each non-executive member of the Board. Such a gross up is unusual for a public company and excessive in light of the size of the Company and its subpar performance for its shareholders.
We believe that the Board should immediately eliminate this gross-up policy.
Issue Three: Takeover Defenses Should Be Dismantled
We believe the Board has taken extraordinary steps to entrench itself at the expense of the shareholders. The Board has adopted and implemented multiple takeover defenses, including, a poison pill rights plan, a staggered board election policy, a prohibition on shareholders calling special meetings and requiring two-thirds of outstanding voting shares to approve amendments to the Companys bylaws and certain provisions of its certificate of incorporation.
The combination of these defensive measures supports entrenchment of directors and management and shields them from accountability to shareholders. Dismantling the Companys takeover defenses would improve the responsiveness of Board members and management to shareholders and hold them accountable for poor decision-making.
The Company should immediately: (i) redeem and terminate its poison pill plan to allow shareholders to make investments in the Company without regard to volume limitations, (ii) provide that each director serves a one-year term and must stand for reelection every year, (iii) allow shareholders to call special meetings so that the shareholders can ensure their voices are heard and (iv) eliminate the two-thirds of the outstanding voting shares requirement to approve amendments to the Companys bylaws and certain provisions of its certificate of incorporation so as to allow for majority rule at the shareholder level.
These fixes to the Companys corporate governance policies and practices will help to restore confidence in the Board and serve as a means to further protect shareholder value.
Issue Four: Strategic Alternatives
It has become apparent over the last few months that the Board is more concerned about enriching itself and management, rather than effectively addressing the alarming destruction of shareholder value that has occurred. At the most recent Company shareholder meeting, the number of authorized shares of the Company was increased from 12,000,000 shares to a total of 24,000,000 shares, at the recommendation of the Board. In addition to allowing the Board to continue to grant its members and management additional shares as compensation, the increase in authorized shares also allows the Company to continue on the path of dilutive retail financings, which further destroy the value of shares held by the non-insider shareholders.
We believe that the continued decline in the Companys share price is in part the result of the Boards misguided approach to raising capital for the Company, which has focused on retail rather than institutional shareholders. This situation is materially exacerbated by the recent Form S-1 filing by the Company, which we believe is likely to result in a highly dilutive and damaging capital raise, to the detriment of the Companys existing shareholders. It appears to us that the Company is offering warrants, and creating a preferred stock with an equity ownership cap, in order to attract the necessary interest. We believe that such a capital raise is not in the best interests of the Companys shareholders, and that the Board would be breaching its fiduciary duties to the shareholders by pursuing this strategy.
As the market capitalization of the Company is now around $8 million, rather than embarking on another massively dilutive financing, as appears to be the case, we believe that the Boards fiduciary duties require it to pursue more appropriate strategic alternatives. These alternatives should include a sale of the Company, which is more likely to result in increased value for the Companys shareholders than a highly dilutive capital raise.
We urge the Board to take immediate steps to improve the Companys performance and to protect the investment that we and other shareholders have made in the Company. We believe those steps should include the recommendations we have outlined above. The shareholders cannot afford to wait any longer for the Board to act the time is now.
It is important that we meet with the full Board within the next two weeks to discuss our concerns. Please let us know your availability for a meeting as soon as possible.
Best regards,
/s/ Daniel K. Turner III |
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Daniel K. Turner III |
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Managing Director |
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