Feb 8, 2023   SOURCE: BusinessWire

Former Chairman of Velodyne, Michael Dee, Suggests Shareholders “Abstain” on the Ouster Merger Vote February 10th until Outstanding Issues Resolved and Terms Improved

On January 24rd it was announced that resigned from the Velodyne Board of Directors due to, in the words of the Company, “considerable differences of opinion with certain board members and management”. Since then, three major events have happened;

  1. Velodyne released in an 8-K on January 29th two of the letters I had written to the board outlining my issues and concerns (https://investors.velodynelidar.com/node/10921/html),
  2. Velodyne has agreed with my calls for greater disclosure yet only responded with a portion of the additional disclosure I recommended, and
  3. The shareholder vote to approve the merger with Ouster has been adjourned twice on January 26th and February 3rd , and is now rescheduled again a third time for this Friday February 10th.

It is now obvious to any reasonable observer, shareholder and stakeholder that following two failed shareholder votes that there remain issues with this transaction that need to be addressed.

Due to the lack of regard for shareholders and stakeholders, which I have outlined in great detail to my letters to the board previously, and explain again in this letter, I am compelled to suggest that shareholders carefully review all the public material I have referenced in forming a considered judgment as to whether to support this merger.

I cannot tacitly consent to this merger in its current form without additional disclosure, restructuring of the terms and a new slate of directors. Speaking solely for myself, and with no formal recommendation to shareholders, I cannot in good conscience support this merger in its current configuration. Velodyne shareholders, entitled to vote as of the December 5th Record Date, who concur are able to change their vote to “Abstain”, to pause the transaction, rectify the serious deficiencies that have been raised, improve the terms and encourage Velodyne to name a new slate of directors. With additional appropriate and timely disclosures and changes to the merger terms and directors I believe this merger can more successfully benefit the Velodyne shareholders. In particular, I cannot support the Velodyne directors nominated to the new board, as their lack of responsiveness to these issues both recently and over many months has been deficient.

Additional Background

I was a member of the Velodyne Board of Directors since September 29th 2020, when our company, Graf Industrial Inc. (“GRAF”), merged with Velodyne Lidar Inc. and took it public, raising approximately $430 million. I was voted Velodyne’s Chairman of the Board from mid-2021 to mid-2022 and served as Chairman of Velodyne’s Nominating and Governance Committee, and as a member of the Audit Committee. Immediately prior to the Velodyne merger I was the President, CFO and a Director of GRAF. I was an honors graduate of the Wharton School and spent 26 years of a 40-year financial career in Investment Banking at Morgan Stanley.

Velodyne was and is the leader in the emerging field of Lidar. Velodyne’s Lidar’s technology holds immense promise for the future in fields from automotive to robotics to smart cities to security to space and beyond. Lidar is a once-in-a generation disruptive technology, and Velodyne created this industry, which holds the potential to transform our world through ‘enhanced vision”. I was first attracted to Velodyne by the mission to significantly reduce, if not eliminate, vehicular accidents which cause about 1.5 million deaths and up to 50 million injuries a year globally, according to the World Health Organization.

On June 30th 2020 Velodyne had only about $30 million of cash and was on a path to insolvency at year end. Velodyne had hired two major investment banks, and filed to complete an IPO. Then Covid hit, and this was impossible, leaving the only viable long-term solution a merger with GRAF. This merger ultimately raised about $430 million of cash to put Velodyne on a sound financial footing and allow for the future development of Velodyne’s advanced and broad product suite. Post-merger I joined the Board of Directors, became Chairman in 2021, and steered the company successfully through a very difficult ownership and leadership transition.

On November 7th, Velodyne announced a merger of equals with Ouster, another lidar company. As a board member, despite certain reservations, I supported the merger at the time as a means to broaden our product portfolio, reduce costs and lengthen our runway to profitability. These were and are reasonable goals and objectives that I could and do support. However, between the merger announcement and today, three months have passed and much has happened to alter my view from early November. As a former representative of shareholders and as a current common stock and warrant holder myself, new information and the actions of Velodyne have significantly altered my view of the advisability of this merger as currently structured.

Thus, I personally have now concluded that the merger, as is, is not in the best interests of Velodyne shareholders. This is not to say the disclosure, terms and directors cannot be improved to be acceptable, but efforts to date by Velodyne and Ouster have been too little and too late and not widely disclosed on a timely basis to all investors. It is clear that the Velodyne board prefers further obfuscation of the reality of the transaction rather than a higher standard of transparency.

The main issues I have are outlined in greater detail below:

  • The lack of disclosure of the approved Velodyne directors for the new board until after the January 26th failed vote, and immediately before the February 3rd failed vote, disqualify these directors for the new board because the Velodyne board voted on this December 2nd, two months earlier. The disclosure was only done after most investors had already voted and did not offer time for the information to be disseminated to investors. I believe these directors have breached trust and transparency with investors and new directors must be sought out.

  • Ouster has $40 million of very expensive debt with an interest rate in excess of 14% that may total over $15 million during its three-year term. That $20 million of this debt was drawn down on October 17th and not disclosed at all in the Proxy, was only incorporated by reference in and amongst over 20 other documents, is another critical disclosure failure. Why this debt was borrowed in the first place and whether and how this debt is to be paid off remains unclear.

  • Ouster has committed to its $40 million debt lender, to maintain $60 million liquidity in cash on its balance sheet. This cash cannot be used to grow and develop the business while the debt is outstanding. Thus, $60 million of AAA cash supports only $40 million of high yield debt. This debt is ill-advised, incredibly expensive for such an early-stage company, and the concept of borrowing such high-yield debt and then backing it with 150% of cash is the pinnacle of absurdity. This debt should be paid down before the merger is approved, and then the relative valuations recalculated to arrive at a “Fair Exchange Ratio” for Velodyne shareholders.

  • Based on the recent disclosure that the combined cash position of Velodyne and Ouster was $315 million at year end, and adjusting the relative cash positions in the Proxy as of September 30, 2022 it seems Ouster only has about $115 million of cash. Whether Ouster leaves the debt outstanding with the $60 million cash requirement or if the $40 million is paid down, their financial viability through the end of 2023 could be questioned. Thus, more disclosure is needed to demonstrate that Ouster is viable as a going concern through 2023. Their last audited financials were almost a year ago and their disclosure in the Proxy and in the 8-K’s is opaque and not transparent. Thus, it would be better to pause the merger in order to allow Ouster to file their audited financials in a 10-K and see the Auditors report as to whether they are a going concern and can meet all their financial obligations.

  • On October 24th, as per the Background to the Merger (page 70 of the Proxy), Velodyne’s CEO and Board reiterated that Ouster’s proposal for a 50/50 equity split was unacceptable, as it implied a discount to Velodyne’s value. I was adamant Velodyne shareholders must receive a premium. The following morning of October 25th after this was communicated to Ouster, the value of Ouster shares jumped as much as 35%, on 700% of the prior days volume, in just a matter of hours. This dramatic move in the share price was based on no significant public news and was short-lived, however it allowed the merger to achieve a 50/50 split of the equity and a very slight premium for Velodyne. The question remains; “Who was buying those shares on the morning of October 25th and was it done with information provided by an insider in order to achieve the targeted exchange ratio?”. FINRA and the SEC should be investigating this.

  • If you are a holder of Velodyne warrants you should be very aware of how unfairly you are being treated in this merger. Consider that since the close on Friday, November 4th, the last day before the merger was announced on Monday, November 7th until Friday, November 3rd, Velodyne’s stock has increased 67%, however, the value of the warrants has declined 30%. This is not how warrants, which are long dated call options, work in practice. The situation warrant holders find themselves in with this merger is virtually unprecedented. While technically in line with the Warrant Agreement, the warrant treatment is very unfair because it does not take into account the unique situation and circumstances involved. This has led to a dramatic destruction of value, with potentially more to come.

    There is absolutely no reason for this loss of warrant value other than the structural flaw in the fairness of the warrant treatment. It was not disclosed clearly and numerically that the warrant exchange ratio would decline from 75% of a share to only 61.53% of a share, which is 38.47% less that the exchange ratio of the Ouster warrants. It was also not disclosed clearly and numerically that the strike rate would increase from $11.50 to $14.02 an increase of 22%, while the Ouster warrants remain at $11.50. Both of these together represent a substantial reduction of value to Velodyne’s warrant holders, both on an absolute basis and relative to Ouster’s warrants where Velodyne’s have traded recently as much as 4.5 times the Ouster value. Such treatment of the warrant holders may make it difficult to gain investor trust and interest in the merged company when it requires funds in the future.

    Velodyne has 5.973 million public warrants outstanding from the original IPO of GRAF. It has been fully disclosed for over four years that I am a small warrant holder having bought the warrants at market prices in October 2018. Through exercises of warrants in 2020-21 the warrant holders were the largest source of cash to Velodyne, providing $163 million. The Velodyne warrant holders also receive none of the Proxy materials nor any disclosure of the impact of this merger on their warrants. The management and board refused to even seek out who those warrant holders are, even after I personally offered to pay for the warrant holder list. These warrants represent less than 1% of the post-merger shares outstanding. The solution is to exchange the warrants for common stock, and the merger should not be approved until the warrant holders are treated with proper respect and fairness. Long term, I believe this is in the best interests of Velodyne’s shareholders.

  • We are now well into February and both Velodyne and Ouster know what their fourth quarter financials look like, yet they are not being fully transparent with investors. Up until early August Ouster’s revenue projection for the year was $65-85 million at which point it was lowered to $40-55 million, a material decrease, of as much as 53%, with no specifics as to what happened. Up until my letter of January 29th there was no disclosure of Ouster’s revenue for the fourth quarter, and thus the year, relative to these critically important projections. On February 1st, six days after the January 26th failed vote, 24 hours before the February 3rd failed vote, and after the vast majority of shareholders had already voted, Ouster issued an 8-K. In this filing, which the vast majority of investors would be unaware of and able to process due to the lateness of the filing, Ouster said:

    “Ouster achieved its Fiscal Year guidance of $40 to $55 million in revenue…”

    So, what were fiscal year results? There is a world of difference between the high and the low range, 37.5% to be exact. Is it closer to $55 million or $40 million? That information should be disclosed now that we are six weeks into the new year and many companies are already reporting results. I must say that I have known the answer for a while, yet I am not permitted to disclose it publicly, only the company can do that. There should be no approval of the merger until that number is known by Velodyne shareholders. It is one of the reasons I resigned from the board, and why I believe the disclosure is incomplete and effectively late. Shareholders are the owners of the business and deserve full disclosure of the financial results as they are known.

  • In fairness and symmetry, I must make the same point regarding Velodyne’s results, as the 8-K also disclosed the following:

    “Velodyne exceeded its fourth quarter 2022 guidance of $13 million to $15 million in billings and $12 to $14 million in revenue.”

    While exceeding a tight band of guidance is hardly a similar problem as with Ouster, the question remains; “Why not disclose the actual number so shareholders can compare the 2022 performance of both companies to be able to determine if the merger terms are offering fair value as was expressed in the Fairness Opinions of BofA Securities and Barclays Capital Inc.?” (Annex F and G of the Proxy). You will notice that both of those opinions were dated as of November 4th, 2022, three months ago. To quote from the BofA Fairness Opinion (emphasis added):

    “Based upon, and subject to the foregoing, including the various assumptions and limitations set forth herein, we are of the opinion on the date hereof that the Exchange Ratio provided for in the Merger is fair, from a financial point of view, to the holders of Velodyne Common Stock.”

    Let’s dig behind this a bit shall we and read two sentences prior to that above:

    “It should be understood that subsequent developments may affect this opinion, and we do not have any obligation to update, revise, or reaffirm this opinion.”

    So, are those Fairness Opinions still valid today? With all that has taken place in the last three months and given the recent disclosures made under efforts I have led, would BofA still concur the merger terms represent that “…the Exchange Ratio provided for in the Merger is fair…”? We will never know because BofA has “no obligation to update, revise, or reaffirm this opinion.”

  • I am brought back to the original issue of the nominees to the new board and how I am now of the view they should be rejected by shareholders over the failure to ensure what I consider proper disclosure. They are complicit in the lack of disclosure and thus have lost all credibility. The merged company is to have eight directors. Prior to the last shareholder vote, which failed on January 26th, six of the future directors were undisclosed and not named. How is it shareholders are asked to vote for a merger without disclosure of their representatives on the board? The four new board members to be named by Velodyne, were approved by Velodyne at the Friday, December 2nd board meeting, two months ago and there was no discussion these names would not be disclosed for two months. I was told by our Chairwoman, of the Board and the Nominating and Governance Committee, on the evening of December 1st, that Ouster’s chairwoman had said the Velodyne names were acceptable to Ouster.

    These shareholder representatives were not disclosed in the original proxy. This lack of disclosure was a point I made in my January 23rd letter to the Velodyne Board prior to my decision to resign. The nominees were finally disclosed, but only after the first vote failed, and only 24 hours before the second vote failed on February 3rd. Ouster disclosed that they did not even vote on the new directors until the first vote had failed. There is no excuse for not deciding and disclosing all the new directors well in advance of the vote.

  • Velodyne has three important common shareholders, warrant holders and/or stakeholders; Baidu, Hyundai Mobis and Amazon. I would propose that they be sought out and offered the opportunity to recommend and nominate new directors to the new board. These companies have it within their power and incentives to ensure the new board remains on track with their desired strategic goals and such would solidify their commitment to the long-term success of Velodyne. I know all these stakeholders well and have the highest regard for their professionalism and commitment to the success of Velodyne. I can think of no better entities to make nominations to the new board on behalf of the Velodyne shareholders.

Look, investors deserve the truth from their board representatives and they most certainly deserve to know who will represent them at the board level. That all this critical information was held in abeyance from investors was unconscionable and contrary to my entire 40-year financial career and commitment to investor rights. I was put in the position that the only option I had was to resign the board based on fidelity to my training, morals and ethics.

At this point the only means by which shareholders can assert their rights is by either; not voting, to achieve a failed quorum again, or (ii) voting to “Abstain” or voting “Against”; (a) the flawed Velodyne proposed merger, and (b) the very generous Velodyne management compensation package. Again, I believe the combination of both businesses, done on proper terms, with full and timely disclosure, improved terms and new board nominees, will benefit all Velodyne shareholders.

Summary

Shareholders as of the December 5th Record Date, whether they have subsequently sold shares or not, or voted already, can easily change their vote to “Abstain” to register their desire to postpone this merger until;

(i) all disclosure is rectified,
(ii) the Ouster debt is paid off,
(iii) the warrant situation is rectified,
(iv) the Exchange Ratio is modified,
(v) Ouster’s financial viability is assured,
(vi) and most importantly, there is a new slate of directors put forward who take seriously their responsibilities to the owners of Velodyne.

Michael Dee
Former Chairman of Velodyne
Former President, CFO and Director, Graf Industrial Corp.