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The Reporting Persons acquired the Common Stock to which this Schedule 13D relates for investment purposes in the ordinary course of business. The Reporting Persons acquired the Common Stock because they believed that the Common Stock reported herein, when purchased, represented an attractive investment opportunity.
On September 14, the Issuer (the "Company") disclosed that it had received an indication of interest from its second largest shareholder, AVI Partners, LLC, ("AVI") regarding a conditional offer to acquire all of the outstanding shares of the Issuer at a purchase price in the range of $4.52 to $5.22 per share. In response to this, the Issuer reported that the Company's Board of Directors ("Board") had established a special committee of independent directors to assist in the consideration of this offer.
Edenbrook Capital, LLC ("Edenbrook" or "the Reporting Persons"), having previously asked for the formation of such a committee in an amended 13D on June 28, 2016, now ask that the committee run a full and fair process to surface other potential buyers as we believe AVI's offer dramatically undervalues the Company. As value investors ourselves, Edenbrook understands AVI's opportunistic attempt to take advantage of a depressed valuation in a beaten down sector. But as the Company has demonstrated that it is in the early stages of meaningful profitability enhancement, the Reporting Persons believe that an offer in this range does not appropriately reflect the value that the Company is creating and does not deliver fair value to all shareholders.
When the Reporting Persons filed an initial 13D on February 12, 2016, we outlined a series of steps that we believed the Issuer should undertake in the interests of creating more long-term value for all shareholders. These steps included showing a path to higher levels of profitability, which we estimated could conservatively yield an incremental $15 million in profitability. Since then, the Company has delivered several quarters of higher year-over-year profitability and indicated during a management presentation at the Citi Global Technology Conference last week (September 8
th
) that the Company was tracking towards $11 million in year-over-year EBITDA improvement through the first three quarters of 2016, with the historically most profitable fourth quarter still to come. At the same conference, management of the Issuer also indicated that the Company was ahead of its original guidance on programmatic platform and managed service revenue for 2016. Further, in its Citi presentation, management provided longer term examples for even higher levels of growth-enabled profitability that could result in another $15 million of EBITDA being generated in the medium term. As such, we believe that the Company could be quarters away from a model that can deliver $20-25 million in EBITDA, and $30 million or more in the medium term.
In Edenbrook's initial 13D, and in the amended 13D filed by Edenbrook on April 29, 2016, we discussed the opportunity for the Company to achieve sales and marketing efficiencies in international markets, and to improve the Company's go-to-market and salesforce execution through increased emphasis on the larger clients and prospects. We believe we have seen evidence that these efforts are bearing fruit, as demonstrated by the following: 1) sales and marketing expenses as a percentage of revenue continue to decline; 2) in the most recently reported second quarter on August 9, 2016, revenue from the top 20 customers increased 24% year-over-year; and 3) the Company's strategic decision, disclosed on that second quarter call, that the Company would focus its European operations on the three markets that hold the most promise for larger, more profitable business. We believe that the investment community placed too much emphasis on the modest revenue guidance reductions that resulted from shutting unprofitable operations, and too little on emphasis on the sustained improvements in Company profitability that are likely to result. We applaud the Company's shift towards focusing on profitable growth.
While it has taken some time to optimize the operational expense structure, and while we believe that process is not yet at completion, the Company has maintained strong, and recently expanding, gross margins. We believe that the strong gross margins and improvement in customer metrics amongst the largest brand advertisers best exemplify the importance of the Company's product offering to customers.
Ultimately, we believe that Company's book of business amongst top customers, strong gross margins, unique product offering and proprietary data capture make the Company potentially more valuable to a strategic buyer, as compared to a depressed offer made by a financial buyer. However, even on a financial basis, we believe this deal represents too low a price. Recently ad tech company Sizmek (SZMK), which has gross margins that are several hundred basis points lower than the Company's, received a takeout offer from a financial buyer that was valued at 9x EBITDA. If the Company can reasonably achieve the $20-30 million of EBITDA identified above, then at that same valuation, the Company would be worth approximately $7.15-9.80 per share, before giving credit to any cash generated (and we believe the Company will be cash generative on an annual basis going forward). That price range is 46-101% above the midpoint of AVI's offer, and Edenbrook further believes that a strategic buyer could reasonably pay more than a financial buyer. Given this discrepancy, we urge the Board and the special committee to engage in a full and fair process that equitably rewards all shareholders for the value being created.
The Reporting Persons and their representatives have, from time to time, engaged in, and expect to continue to engage in, discussions with members of management and the board of directors of the Issuer, other current or prospective shareholders, industry analysts, existing or potential strategic partners or competitors, investment and financing professionals, sources of credit and other third parties regarding a variety of matters relating to the Issuer, which may include, among other things, the Issuer's business, management, capital structure and allocation, corporate governance, Board composition and strategic alternatives and direction, and may take other steps seeking to bring about changes to increase shareholder value.
The Reporting Persons continually evaluate their investment in the Common Stock and may in the future seek to acquire additional Shares or to dispose of all or a portion of the Common Stock beneficially owned by them. Any such acquisition or disposition may be effected through privately negotiated transactions, in the open market, in block transactions or otherwise. In addition, the Reporting Persons may enter into hedging or derivative transactions with respect to the securities of the Issuer, including Common Stock beneficially owned by them. Any determination to acquire or dispose of securities of the Issuer will depend on a number of factors, including the Issuer's business and financial position and prospects, other developments concerning the Issuer, the price levels of the Common Stock, general market and economic conditions, the availability of financing and other opportunities available to the Reporting Persons.
Other than the above, The Reporting Persons have no plan or proposal which relates to, or would result in, any of the actions enumerated in Item 4 of the instructions to Schedule 13D.
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