The CEO of CF Energy Corp. ("CF Energy" or the "Company") recently proclaimed "the SYDRC decision is no surprise to us".
TORONTO, Oct. 26, 2020 /CNW/ - However, the CEO and the board of directors (the "Board") have neglected to tell shareholders what their plan is to mitigate the ¥39 Million loss that is likely to result from the imposition of a pricing formula (the "Pricing Formula") by the Sanya City Development and Reform Commission (the "SYDRC"): as discussed in the press release by 11882716 Canada Inc. (the "Concerned Shareholder") on October 16, 2020, according to an article published on the Official Website of The People's Government of Sanya City on August 1, 2020, the SYDRC required Sanya Changfeng Offshore Natural Gas Distribution Co., Ltd., a wholly owned subsidiary of CF Energy, to decrease the selling price of its natural gas by RMB 1.0734 per cubic metre, and based on the Company's reported sales volumes in 2019, this price reduction can be expected to result in ¥39 Million in lost revenue annually. Given these significant challenges, the shareholders of CF Energy are interested in solutions and concrete plans of action.
We ask management, the Board and the CEO to explain:
- What concrete steps did you take to mitigate lost revenue as a result of the Pricing Formula?
- What is the projected impact of the Pricing Formula on the Company's revenue and profit?
- Why has the Company not disclosed any particulars regarding the Pricing Formula or the impact it is likely to have on the Company? Was this non-disclosure compliant with the Company's disclosure policy, and what was the recommendation of the Company's disclosure committee with respect to disclosing this information? Simply disclosing that the Pricing Formula will "negatively impact" the Company does not satisfy the disclosure obligations of a reporting issuer and does not provide shareholders the information they need to make informed decisions about the Company.
The silence from the Company at this critical time is deafening. It seems clear that management and the Board have no plan to minimize losses and grow the Company's operations.
The Concerned Shareholder's Director Nominees Have a Plan
The new slate of director nominees (the "Director Nominees") proposed by the Concerned Shareholder has developed a three-step strategy to overcome the detrimental impact the ¥39M loss is likely to have on the Company's bottom line.
The first step that the Director Nominees will take is to streamline all unnecessary expenses to increase the operational bottom and to "stop the bleeding".
After the bleeding is stopped, the Director Nominees will start a new phase of expansion and acquisition into more profitable segments of the natural gas industry. According to an article published by Argus on September 23, 2020, the market for liquefied natural gas ("LNG") in China grew 16% in the last year alone, despite COVID-19. The Director Nominees would further expand into the LNG segment, where it is possible to achieve much higher profit margins due to the market-based pricing mechanism in the LNG segment. Traditional pipeline-based gas supply, which forms the core of the Company's current operational model, is heavily exposed to policy risks and the pitfalls of poor relationship management with local government officials. Furthermore, through existing relationships at the Guangzhou Port, the Director Nominees have also been discussing opportunities to import, store, and transport LNG, with a core focus on the Guangdong, Hong Kong, and Macau markets and their combined 70 million residents.
In the final step towards long-term profitability and shareholder profit maximization, the Director Nominees will continue on the path to achieving greater economies of scale by pursuing further integration — especially the integration between the Company's existing pipeline supply segment and the new LNG growth engine. The Company would be in an excellent position to demonstrate and grow its corporate image from a reliable municipal supplier of natural gas to a respected regional diversified energy company. This development may lend prestige to the Company's brand and capture interest from large institutional investors.
The Concerned Shareholder recommends delaying the Normal Course Issuer Bid application
On October 21, 2020, the Company issued a press release announcing that it intends to apply for approval to commence a normal course issuer bid (the "NCIB"). However, the Concerned Shareholder believes that the NCIB will result in even lower liquidity for the stock and give the estate of Mr. Huajun Lin an even higher ownership percentage. In contrast, the Director Nominees can utilize the cash allocated for NCIB for the recovery plan recommended above. In short, the NCIB would spend much-needed cash to buy back shares when it could instead be spent expanding profitable operations to recover from recent losses. For these reasons, the Concerned Shareholder requests that the Company delay the NCIB until an appropriate time.
The Concerned Shareholder recommends proceeding carefully with the Stock Award Plan
In the Company's October 29, 2020 management proxy circular, the Company asked the shareholders to authorize the Company's 2020 Employee Stock Award Plan (the "Stock Award Plan"). Under the Stock Award Plan, 6,546,315 common shares of the Company ("Common Shares") will be reserved for issuance, representing 10% of the Common Shares outstanding as at October 29, 2020. The Stock Award Plan provides that eligible employees may be awarded Common Shares twice a year, or as otherwise determined by the Board, provided that eligible employees have met any performance conditions set by the Board.
At this point in time, the extent of the loss that will result from the Pricing Formula is slowly becoming apparent, and it remains to be determined how the Company will recover from this loss. Accordingly, the Company needs to proceed cautiously in awarding options equal to 10% of the outstanding Common Shares to employees. The Director Nominees support the implementation of the Stock Award Plan, but they intend to be very careful in setting performance conditions that will ensure that awards made under the plan are closely tied to the results of the recovery plan outlined above, concrete KPI figures, and the performance of the Company.
Vote NOW for positive change by voting FOR the Director Nominees using only the BLUE Form of Proxy or Voting Instruction Form. The deadline to submit your vote is Monday, October 26, 2020, at 5:00 p.m. (Toronto time).
Except for the historical information contained herein, the matters addressed in these materials are forward looking statements that involve certain risks and uncertainties. You should be aware that actual results could differ materially from those contained in the forward-looking statements. 11882716 Canada Inc. does not assume any obligation to update the forward-looking information.
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