Open Letter from Dark Horse Capital Management to the Board of Directors of Thunderbird Entertainment Group (TBRD CN)

Chadds Ford, Pennsylvania--(Newsfile Corp. - February 7, 2024) - Open Letter from Dark Horse Capital Management to the Board of Directors of Thunderbird Entertainment Group (TSXV: TBRD): 

January 30, 2024



Ms. Jennifer Twiner-McCarron
Chairman & CEO
Thunderbird Entertainment Group Inc.
123 W 7th Ave Vancouver, BC
V5Y 1L8, Canada

We are writing to you and the rest of the Board of Directors ("Board") to express our deep concern with what appears to be a lack of focus within Thunderbird Entertainment Group Inc. (the "Company"). As you know, we have been long-standing shareholders for well over a year and have been generally very supportive of the Company during this period. However, since mid-2023, there have been numerous actions that reflect weak financial controls, tone deaf communication with the capital markets, and a total lack of basic understanding of a share repurchase program. Judging by the ~50% decline in your stock price over this time period,^[1] there is clearly something wrong. We expect much more from a business with such great potential. We hope you agree and will address what appears to be clear managerial deficiencies in an expedited manner.

Weak Financial Controls

2023 was a difficult year for the entire entertainment industry due to the screenwriters and SAG-AFTRA strikes. While strikes are difficult to predict and even more difficult to estimate the duration and outcome, the result within the entertainment industry is well known. It slows down. This was obvious to essentially all participants as evidenced by quick and decisive reductions in budgets by the end buyers of content. As a result, the entire supply chain followed suit and slowed down operations. Interestingly, the Company accelerated its growth ambitions via regional expansions and team buildouts. Expanding during market weakness is how good companies become great and as a result, create significant value for shareholders. However, these good companies are generally defined by a strong management team, a strong operating team, strong financial controls, and are generally very well capitalized -- several characteristics that the Company does not currently possess. The Company has never attempted to be bold during a period of weakness and has instead opted for slow and steady growth over time. We therefore assume that your 'perceived' boldness in 2023 by accelerating into a slowing market was actually a mistake enabled by weak financial controls and a culture dominated by creative types with little understanding of cost. Simply, no one knew the financial impact of accelerating into a slowing market or else you likely would not have done it, and the Company would be in a better financial position today.

We have been impressed with the Company's products and have been impressed with your specific leadership and managerial style. We think you are incredibly well suited for this industry. We think that you have the ability to attract and lead a high-performance team. However, poor financial controls and the overall lack of capitalization has negatively impacted your ability to successfully navigate the Company through this difficult time. Furthermore, the Board in 2023 was poorly composed, dominated with lawyers,^[2] and absent of financial experts. This was a material breakdown in overall governance. It appears that you agree given the recent board recomposition^[3]; however, more focus is needed. As Chairman and CEO, the overall performance of the Company is your responsibility. Ensuring the Company has the proper team in place is also your responsibility. We think the entire financial team needs to be upgraded.

At the urging of many shareholders, the Company finally decided to provide guidance on your FYE 2023 earnings release on October 5, 2023. The guidance was poorly scripted to the point of incoherence. However, after such a disappointing 2023, this "guidance" at least provided support that FY2023 was in fact, an aberration. After a litany of questions, the Company decided to provide more clarity which implied an EBITDA in the range of CAD 18-20 million for FY2024. During a non-deal roadshow on November 9, 2023, you reiterated the same guidance. However, two weeks later on your FY1Q24 earnings release,^[4] the Company reduced the guidance by a whopping ~20%, to closer to CAD 15 million. The explanation, while rational, was concerning as it further implied very loose financial controls. Your business should be very easy to forecast given the long duration of contractual revenues. Is contractual revenue 100% guaranteed? No -- but it is close and generally a great data point for guidance. You were willing to provide a multiyear revenue forecast through 2026, yet you were unwilling to provide a definitive EBITDA forecast. This further provides evidence that the Company does not have adequate financial controls in place. Revenues are generally based upon your customers and are out of your specific control. Costs are 100% within your control. If you are willing to provide long term revenue guidance, you should absolutely be willing to provide long term EBITDA guidance. The assumption is that you don't provide EBITDA guidance because you can't forecast your costs. This assumption is obvious to us and shared by other shareholders and capital market participants. Again, we think the entire financial team needs to be upgraded and the Board needs to be more focused and thoughtful in how the Company delivers the financial reports to the capital markets.

Tone Deaf Communication with Capital Markets

The Company retained an investment bank to evaluate strategic alternatives in May 2023. The entire summer was basically silent. Interestingly, the Company issued a press release two weeks before its regularly scheduled FYE 2023 earnings release titled: "Thunderbird Entertainment Group Announces Updates From Strategic Review." There was no update in the press release. None. There was no substance in the press release. It was basically saying the Company will continue doing what they have been doing since May. Your stock dropped ~10%. Given there was no substance in the press release it can be assumed the drop had more to do with the market losing confidence in the Company due to the tone deaf communication effort. Interestingly, the stock price has not recovered since. The press release was not necessary and provided no incremental value to the market. We still do not understand why the Company didn't simply wait until the earnings call and mention the strategic alternatives process is still on-going, which would have been in conjunction with what was a relatively positive earnings release. This was a deficiency of managerial oversight and a lack of basic communication skills.

At the urging of many shareholders, the Company finally decided to initiate a normal course issuer bid ("Buyback"). This program was announced with your FY2023 earning release on October 5, 2023. It was discussed that the Company would need to apply for such buyback with the TSX Venture Exchange ("TSXV") and this process would take 30 days.^[5] The Company also said it would apply for the full number of shares to be repurchased, which would be roughly 10% of the outstanding float. 30 days came and went. 45 days came and went. On December 1, 2023, 57 days after the application commenced, the Company made the required press release outlining the Buyback program. Shareholders had been pressing the Company for months to initiate this program -- and for very good reason given the deterioration in the stock price and the excess cash on the balance sheet. This was obviously the first time the Company was to buy back its shares. This was also the first time in Company history that shareholders would see a return of capital. This was a HUGE event. How did the Company celebrate such a monumental event? The Company picked the single worst day and time for such release. Friday at market close is generally reserved for press releases that companies hope people don't see because they are almost exclusively to announce bad news. When asked about the timing of the release, it was obvious that not much thought went into it and it was viewed internally as a menial task that simply needed to get done. This was a deficiency of managerial oversight and a lack of basic communication skills. It was also a missed opportunity to celebrate the Company. These missed opportunities must stop.

Poorly Executed Buyback

So, the Buyback is live! You said multiple times that the Company was going to be aggressive in terms of the Buyback. Given the poor performance of the stock over the prior several months coupled with the relative illiquidity in the stock, everyone was anxiously waiting for some support and perhaps some growth. Obviously, there are exchange rules for the Buyback. The major rules according to the TSXV:

1. Purchases do not, when aggregated with the total of all other purchases in the preceding 30 days exceed 2% of the total issued and outstanding securities of that class; and
2. Over a 12-month period beginning on the date specified in the notice of the bid do not exceed the greater of:
          (i)       10% of the Public Float; and
          (ii)       5% of that class of securities issued and outstanding; on the first day of the 12-month period.

3. The Company must issue a press release outlining the details of the buyback, such as the number of shares to be repurchased and the duration of the buyback period.
4. Purchases made via buyback must not be transacted at a price which is higher than the last independent board lot trade.^[6]

The Company outlined the maximum number of shares to be purchased over a 12-month period as 3,418,509 shares. The 30-day threshold is approximately 1 million shares. The press release was made on December 1, 2023 and the Buyback was to commence the following trading day. Further, the press release would have had to address any additional restrictions the Company implemented on its Buyback plan above and beyond the TSXV rules above. None were provided. Finally, the Company can't drive the price higher. The TSXV rules are actually very clear and reasonable.

When executing a buyback a public company seeks to accomplish one of two goals:

1. Maximize the value of the buyback by buying shares for as little money as possible; or,
2. Provide stability, support the price against downside movements, and minimize volatility.

If the goal is the former, the best strategy is a modified dutch tender offer whereby the company has each shareholder submit how many shares they would be willing to tender and at what price. This strategy is highly useful for illiquid stocks and allows shareholders the ability to exit. Hence, these shareholders are valuing liquidity more than the value of the asset. Those that stay will be rewarded. It is our understanding that this strategy is not permissible under TSXV rules. Therefore, the next best alternative is to put out a fixed price tender at a price below current market price -- then increase the price accordingly over subsequent tender offers until the maximum allowable shares have been purchased. The other goal is to provide stability and downside protection to your stock. This strategy is most common and allows the company to essentially be in the market each day with buying power. Typically, the company gives the executing broker instructions such as daily maximums under various price scenarios. For example, if the stock is up 5%, don't buy. If it is down 5%, buy a lot. Further, many companies give a certain power of attorney to the executing broker so they can continue to buyback during what would otherwise be a blackout period. When asked, the Company said they preferred the second option as it would be easier to execute and provide the much needed stability to the stock price.

If the buyback is executed properly, we would expect the stock to be more stable with less daily volatility and little, if any, downward movements. Obviously, the Company can't drive the price higher, but it can absolutely keep it from going down. Literally from day one of the buyback, it has been poorly executed as evidenced by the material bid/ask spreads, violent price movements, and further deterioration of the stock price. The stock is more volatile now than before the buyback. After 4 days of a poorly executed buyback, we sent the Company the following suggestion:

"Instruct your broker to start each day with a 100,000 share maximum. They should have their 100,000 shares bid at the price of the prior day close. As the price of the stock moves up, their bid moves up. If the price drops then they will buy until the selling stops or they have bought their daily allotment. This is perfectly within the exchange rules. To keep people honest, I would add the following criteria to your buying instructions:

• 100,000 total daily allowance
• Remain on the bid side in 10,000 share increments (show 100 board lot shares like everyone else)
• As your bid gets filled and the 10,000 allocation is exhausted, add another 12,000 share bid 1% below your previous bid (or $0.025 if it is easier). When this is exhausted, add another 14,000 shares bid 1% below the previous limit -- keep doing this and adding to the allocation each time the prior limit is exhausted until you buyback the 100,000 share limit for the day
• As the price moves up, increase the bid limit in lockstep

This is a very easy algorithm that the executing broker should be able to execute. However, if they don't have the technical ability then they need to assign a junior trader to the case. If they are unwilling or unable, find another broker."

You agreed that our suggestion was sound from a regulatory perspective, which we have independently confirmed. Although it was clearly dismissed and the stock recently hit its 52-week low.^[7] The Company repurchased 201,200 shares in December at the average price of CAD2.21, or over 15% above current spot. Again, this is surprising on its own, but even more surprising is that the daily volume over this period never exceeded 62,000 shares^[8] and averaged under 30,000 shares per day. The Company could have theoretically been 100% of the monthly volume and still been ~50% below its monthly volume requirements from TSXV. The Company bought back 20% of the volume it could have. This is not my definition of aggressive. The Company needs to do better.

Given our level of skepticism regarding the Company's financial ability, we also provided the Company with a buyback trading analysis. This analysis supported the need to be aggressive in terms of daily volume as well as the value accretion of the buyback in general. This was in response to a comment we received from the CFO in late 2023 suggesting the Company may pursue M&A opportunities as a means of capital allocation. We basically showed that it was highly unlikely that the Company would be able to find an M&A opportunity that could provide a better investment return than the Company's own stock at current levels. Shockingly, the CFO responded that she "had not thought about it like that before." Our response? "Well how else is there to think about it?" Finally, we showed the return impact of time. You will soon commence a sale process for the Company. The buyer will likely structure the acquisition as a cash tender offer. As such, the cash on the balance sheet accrues to the buyer and not to shareholders. This means you not only need to use all your cash investing in one of the highest IRR opportunities we have ever seen, but you need to do it as quickly as possible. You agreed. You then turned around and bought 20% of the volume allowable per the TSXV rules. At this rate, it will take you 17 months to achieve your 3.4 million share goal.^[9] Again, this is not my definition of aggressive. Either you think your stock is a tremendous value at current levels, or you don't. Which is it?

We manage funds that own over 1.6 million Company shares or ~4% of the current float. We have been large buyers in the recent weakness. We are one of the largest holders of your stock. We urge you to upgrade your financial team, approach your communications in a more thoughtful manner, and provide your executing broker with clear instructions that are monitored daily by a qualified member of your newly upgraded financial team. We also encourage the entire Board to join us in immediately buying the shares of a great company trading at a tremendous discount to fair value. We of course are always available to discuss any of these points in greater detail.

We look forward to your leadership in this difficult time.

Kind Regards,

C.J. Martin
Managing Partner
martin@darkhcm.com 

Dark Horse Capital Management is a SEC-registered investment advisor that employs a research-intensive, catalyst-driven approach to investing in thematic event-driven deep value equity and distressed corporate debt opportunities.

^[1] The S&P 500 was up over 10%, the TSX was up over 7%, and the Russell 2000 was up over 5% during this same time period.

^[2] Our view is that lawyers are the least valuable board members for the simple fact that while generally very smart, they are generally poor operators and stewards of capital. Further, a lawyer board member can't give legal advice and if legal advice is needed, the company always hires outside counsel. Hence, they provide little tangible value.

^[3] We should note that the removal of the former lead director was a very welcome change as the value destruction under his leadership was nothing less than spectacular.

^[4] November 29, 2023.

^[5] We would have thought any publicly traded company would simply have the application on file as a matter of normal business operations.

^[6] The board lot trade must be a round lot of at least 100 shares if the price is above CAD 1.00.

^[7] CAD1.90 on January 26, 2024.

^[8] December 14, 2023: 61,418 shares traded.

^[9] Assumes 250 trading days per year and no blackout days (e.g. very conservative).

To view the source version of this press release, please visit https://www.newsfilecorp.com/release/196672