Jan. 26, 2023

The largest shareholder in Brookings-based Daktronics Inc. says it has “no confidence” in the company’s leadership and is calling for its replacement along with other major changes.

Texas-based Alta Fox Capital Management LLC, released the letter sent to Daktronics’ strategy and financing review committee of the board of directors.

Alta Fox owns almost 6 percent of the company’s outstanding common shares. The firm described itself as “extremely disappointed” the board is not “taking decisive action to address deep-rooted issues related to the company’s corporate governance, management team and value creation efforts,” according to the letter signed by managing partner Connor Haley.

“We believe these long-standing issues culminated in the company’s auditor issuing “substantial doubt about the company’s ability to continue as a going concern.”

“Alta Fox has been adamant about the urgent need for governance improvements, leadership changes and an immediate and certain liquidity solution during our private interactions with the board, but no substantive changes have been made.”

The firm accused chairman and CEO Reece Kurtenbach of driving “missteps, nepotism and value destruction” and pointed to how the company’s market capitalization has declined by hundreds of millions during his tenure.

“As we have told you previously, Alta Fox — now the company’s largest shareholder — has no confidence in Mr. Kurtenbach and chief financial officer Sheila Anderson,” Haley said in the letter. “The company’s shares have declined in value by more than 60 percent under Mr. Kurtenbach’s executive leadership, in stark contrast to the Russell 2000’s more than 100 percent long-term appreciation. That fact alone should be grounds for announcing a plan for replacing him. Meanwhile, Ms. Anderson oversaw increased discretionary capital spending and a massive build of net working capital, which greatly contributed to a liquidity crisis.”

The firm also took Kurtenbach and Anderson to task for appearing from home during a video call the morning the company disclosed its auditor had issued doubt about the company as a “going concern.”

“Perhaps we should not be surprised given that when we traveled to the company’s Brookings, South Dakota, headquarters to meet with Mr. Kurtenbach and Ms. Anderson last year, they took us to the company grill — only to discover it was not open on Mondays,” Haley said. “It seems they were hardly in the office as the business was deteriorating under their noses — and your own — during the fall of 2022. This indicates a complete lack of leadership and suggests management is not being held accountable — let alone properly supervised — by the current board.”

The firm is requesting a “substantive response” to its offers to provide certain, immediate capital and collaborate on governance and leadership changes, it said.

“Daktronics’ hardworking employees have been coming into the office for the last two decades. Many of them have also put the bulk of their life savings into Daktronics through the company’s 401(k) plan, which represents the fourth largest shareholder of the company,” Haley said. “That investment has been a disaster based on the fact it is worth less today than it was for employees who invested 20 years ago.”

Alta Fox also said it had received “an outpouring of unsolicited support from fellow Daktronics stakeholders. It appears that many individuals who are dependent on the company share our frustrations, support us and want the leadership changes we are advocating for, including Mr. Kurtenbach’s departure from his current roles,” it said.

In response, Anderson said Daktronics already has made “tangible progress by working with our current lender to extend a $10 million maturity on the company’s credit facility. The committee is now focused on longer-term liquidity and is actively reviewing alternatives, including several proposals that the company has received. We expect to engage with Alta Fox on its proposal in connection with this review as we have told Alta Fox on numerous occasions.”

On Wednesday, Daktronics announced it entered into an amendment to its credit agreement with its current lender, U.S. Bank, to extend the maturity of $10 million of its $45 million credit facility to May 1. The remaining $35 million of the credit facility matures on April 29, 2025. The extension of liquidity is the result of the efforts of the strategy and financing review committee of the Daktronics board of directors, which was formed in December, to address the company’s near-term credit needs and to examine alternatives for strengthening the company’s longer-term financial structure and liquidity profile, it said.

The committee, comprised of the independent directors of the company, is chaired by Howard Atkins, who joined the board Dec. 7 at the recommendation of one of the company’s largest shareholders, Prairieland Holdco LLC. Atkins is the former senior executive vice president and CFO of Wells Fargo & Co., where he was responsible for Wells Fargo’s financial management functions, including during the financial crisis of 2008 and 2009. The committee has hired financial and legal advisers to assist it with its activities.

“This maturity extension is the first step in a concerted effort on the part of the management team, overseen by the committee,” Atkins said in a statement. “We are now shifting our focus to reviewing opportunities for additional longer-term liquidity to generate profitable growth. Together with our financial and legal advisers, our efforts include reviewing several financing proposals the company has already received, as well as engaging with other potential financing sources.”

In the statement, Daktronics said: “There can be no assurance that the committee’s process will result in any transaction or other alternative outcome. There is no set timetable for the conclusion of this process, and the company does not intend to disclose or provide an update concerning developments relating to this process until it determines that further disclosure is appropriate or necessary.”

Daktronics details record backlog, plans to improve liquidity