Mr. Roger Sykes reports
AUSTRALIS CONCERNED SHAREHOLDERS OUTLINE CONTINUED MAJOR GOVERNANCE CONCERNS WITH PROPOSED RELATED PARTY ACQUISITION OF PASSPORT TECHNOLOGY INC.
A group of shareholders of Australis Capital Inc., including Roger Sykes, 1703469 Alberta Ltd., Duke Fu and Green Therapeutics LLC, and other concerned shareholders, are seeking to oppose the oppressive actions of management and the current board in connection with the proposed acquisition of Passport Technology Inc. Collectively, the concerned shareholders hold 6.2 per cent of Australis's outstanding common shares.
Since announcing the related party transaction on June 25, 2020, alarming new information has brought into question the merits of the related party transaction, the judgment of the current board and management, and how Scott Dowty, the company's executive chairman and former chief executive officer, will be personally enriched at the expense of other Australis shareholders.
The related party transaction is a non-arm's-length transaction and the current board does not have shareholders' best interests in mind. Fifty-one per cent of Passport is indirectly owned by Mr. Dowty and, according to Mr. Dowty, approximately 7 to 8 per cent is owned by his brother. Mr. Dowty confirmed the concerned shareholders' view that the proposed related party transaction creates a win-win proposition for him in an e-mail communication to Passport shareholders that the concerned shareholders have become aware of.
In the communication, Mr. Dowty states: "If AUSA does not gain shareholder approval for the transaction and meet other requirements, the deal will not proceed and, as negotiated, AUSA will pay Passport a $2.5-million (U.S.) break fee. Passport will be back to business as usual with a tiny black eye with a failed deal."
Effectively, Australis is asking shareholders to pay at least $31.4-million for assets of unknown value, based on hockey stick projections which have not been independently verified as reasonable and likely to be met. As a result of his ownership interest in Passport, this translates into Mr. Dowty standing to receive at least 51 per cent or almost $16-million in value through his ownership of Passport (and his brother receiving approximately $2.5-million) or, if the transaction fails, Mr. Dowty indirectly receiving $1.25-million (and his brother indirectly receiving $200,000).
If ever Australis shareholders needed confirmation of Mr. Dowty's self interest in proposing the related party transaction, he has done so by his own hand.
Australis has already paid
$4,175,000 to Passport, including $375,000 in cash and five million shares of Body and Mind Inc. and 1,829,219 shares of Australis. The related party transaction is not the first transaction that the Australis board has approved with Passport. Buried in a press release announcing the appointment of a new auditor on Nov. 29, 2019, was an announcement of the above $4,175,000 payment to Passport. This press release announced the payments without any disclosure regarding the approval process that the board followed nor other disclosure typically included in the announcement of a related party transaction. The payments already made to Passport by Australis only inflate Passport's current valuation and amount to Australis paying for the same assets twice. Australis shareholders will be asked to accept that valuation as the basis for the excessive consideration the company proposes to pay to Passport shareholders under the terms of the related party transaction.
The break fee is much higher than is typical and amounts to an attempt to coerce shareholders. The $2.5-million break fee amounts to approximately 8 per cent of the value of the transaction, whereas typically break fees range between 3 per cent to 5 per cent of transaction value, if included at all. Moreover, for a related party transaction, a break fee of even 3 to 5 per cent is excessive as a break fee for such a transaction should be equal to no more than the transaction costs incurred. The inclusion of a break fee of this scale is a clear failure of the board of directors of Australis to exercise its fiduciary duties and amounts to a blatant attempt to coerce Australis shareholders to vote in favour of the related party transaction by diminishing independent shareholders' incentive to oppose the deal. The concerned shareholders believe that including a break fee of this magnitude is unethical and serves as further evidence of the poor governance practices of Australis and its board of directors. Furthermore, Australis agreed this excessive break fee even though its board was aware on April 8, 2020, that the properties included in the consideration for the related party transaction were subject to litigation by Green Therapeutics at the time of the announcement of the transaction on June 25, 2020.
The related party transaction will destroy value for Australis shareholders. Pursuant to the related party transaction, Australis will pay a minimum of $31.4-million (including $9.6-million of cash) and more than $4-million of contingent consideration for a company that has not publicly disclosed the value of its assets or the amount of revenue it generated in the last 12 months. Furthermore, Mr. Dowty has lauded the financial merits of the related party transaction by citing valuation multiples for Passport based on highly speculative and unsubstantiated forecasted 2021 financial performance. Australis claims that the company will pay roughly 9.1 times 2021 operating income
Passport achieves its expectations. However, Australis has thus far refused to disclose how the transaction is valued based on the
current or historical
financial performance of Passport.
Passport has minimal traction and an unproven business model. Management claims that Passport is a disruptive cash access service for gaming establishments but has failed to provide sufficient disclosure regarding the business development of Passport or any current or historical financial information necessary for shareholders to properly assess the merits of the transaction. Instead, management's weak and selective disclosure has been limited to the fact that Passport has yet to achieve any traction in the United States and has meager run-rate monthly revenues of $23,000 (U.S.) and $50,000 (U.S.) in Canada and the United Kingdom, respectively. With a completely unproven business model and only $3.1-million of run-rate annual revenue, is this really a business worth $31.4-million and possibly more?
During an investor call, Mr. Dowty stated that he represented Passport in its negotiations with Australis. Australis's press release dated June 29, 2020, stated that negotiations on behalf Passport were handled by Kurt Sullivan of Passport Technology. Who in fact negotiated on behalf of Passport? Good governance would dictate that Mr. Dowty recuse himself from negotiations in which he has clear interests on both sides of the transaction. Mr. Dowty also lead the June 26, 2020, corporate update call regarding the related party transaction. It would seem inconsistent if he did not lead the process, as he stated, to lead the corporate update call. Mr. Dowty's involvement in the negotiation process and the inconsistent information relating to the process is yet further evidence of the flawed corporate governance process followed by Australis in negotiating the terms of the related party transaction, and continuing today.
The concerned shareholders firmly believe that fellow shareholders of Australis are in imminent danger of a massive loss of value should the company proceed with the overvalued and dilutive related party transaction. As such, the concerned shareholders are working to protect fellow shareholders from the misinformation tactics and oppressive conduct of Australis's current management and board.
The concerned shareholders are dismayed that the current board and management made no attempt to reach out to the many shareholders, including the concerned shareholders, who have voiced their opposition to the related party transaction. This is another example of an out-of-touch board, failing to even attempt to understand the concerns of the company's shareholders and trying to push through a transaction that primarily benefits Mr. Dowty, executive chairman of Australis and chair of the board of Passport, as well as his family members.
Given the litany of corporate governance and disclosure issues relating to the related party transaction, the concerned shareholders reiterate their view that under no circumstances should Australis be engaging in any material transactions at this time, including any transactions that could adversely impact shareholders, the company's balance sheet and/or the company's ability to effectively progress its plant-touching cannabis operations.
The concerned shareholders are grateful for the calls and e-mails received from other Australis shareholders who share their concerns and have advised that they will vote against any resolution to approve the related party transaction at the annual and special meeting of Australis shareholders that has been called for Sept. 22, 2020, to approve, among other things, the related party transaction.
Register your opposition today
The concerned shareholders encourage shareholders who are opposed to the related party transaction to contact Laurel Hill Advisory Group by phone, toll-free at 1-877-452-7184 (North American shareholders) or 1-416-304-0211 (shareholders outside North America) to register their support for the concerned shareholders.
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