Sidus Investment Management (Sidus), a stockholder of Amber Road, Inc. (NYSE: AMBR) (Amber Road or the Company), announced today that it will vote its shares in support of both Altai Capital Management nominees, Marshall Heinberg, and James Watson, at the Companys postponed 2019 Annual Meeting of Stockholders (the Annual Meeting). Sidus cautions Amber Road not to take any further stockholder-unfriendly actions and to hold the postponed Annual Meeting in June without further delay.
In Sidus view, Amber Road has been a failure as a public company for all stakeholders except its CEO, Jim Preuninger. Since its IPO in March 2014, shares have declined in value by 47%. Yet, Amer Road has rewarded CEO Preuninger with cash and stock awards of $16.7m during this period. Barry Williams, Chairman since 2004, has supervised this alarming transfer of wealth from stockholders to management.
Sidus has consulted with numerous financial and industry analysts regarding Amber Road and has engaged with senior management on multiple occasions. Based on these meetings, we conclude that Amber Road is not attractive as a standalone public company. It is a subscale, single product-line firm. Management has failed to execute its self-generated growth strategy. As such, Sidus concludes that Amber Roads stockholder value proposition exists solely as an acquisition target for a larger software company.
We believe that the Altai nominees are clearly independent, credible shareholder representatives that bring relevant industry and M&A experience to a Board sorely in need of refreshment.
For the reasons set forth below, Sidus believes the incumbent Board of Directors (the Board) has abjectly failed to protect stockholder interests. Consider the following:
- On Feb 12, 2019, E2open announced that it submitted a proposal (the Proposal) to the Board of Amber Road to acquire all outstanding shares of common stock that E2open did not already own for $10.50 per share in cash. On the same day, Amber Road issued a press release rejecting the Proposal.
- In a follow-up letter to the Board, E2open CEO Michael Farlekas wrote that E2open received feedback from several of [Amber Roads] largest stockholder expressing frustration that the company has not engaged with E2open. These same stockholders advised us that they had communicated to you verbally or in writing their desire for the company to engage with E2open in a potential transaction.
Among other reasons, by failing to engage E2open or even retain advisers to consider whether a higher bid may be forthcoming from E2open or others, we believe Chairman Williams breached his fiduciary duty to stockholders. He is now asking you to support his handpicked nominee and known associate, Albert G.F. Toet, and fellow director Rudy Howard.
Misaligned Compensation Structure
Sidus believes the Board has failed in one of its most fundamental tasks: to properly incentivize management to take actions that create stockholder value and protect stockholders interests. To the contrary, Amber Roads Board of Directors structured an equity compensation program, with laughably low targets, that excessively benefited management and condoned the use of aggressive accounting assumptions to ensure maximum payouts.
Non-Rigorous Performance Targets Based on non-GAAP Reporting Metrics Resulting in Outsized Pay
Two years ago, the Board modified the pay for top executives. In early 2017, the Board structured one-third of the 2017 Short-Term Incentive as two-year Performance Stock Units (PSUs) that would vest upon achievement of a 2018 adjusted EBITDA target of $1.3m. After being public since 2014, how much of an achievement is it to earn $1.3m of EBITDA?
2018 Target adjusted EBITDA
|up to $2.6m||+4x more||(increases in a linear fashion up to 4x)|
|actual = $5.4m||actual = 5x|
Management needed merely to clear the low bar of $1.3m of adjusted EBITDA in 2018 to collect on the scaling equity grant. 2017 was roughly breakeven, but adjusted EBITDA of $5.4m in 2018 easily exceeded the $2.6m target threshold. As a result, management received five RSUs for each PSU grant.
CEO Preuninger received an additional award of 107,792 PSUs under the 2017 Long-Term (Equity) Incentive Program because he did not receive this component in 2016 due to the exhaustion of shares remaining at the time in the companys plan. This make-up PSU award was also tied to achieving the 2018 Adjusted EBITDA PSU Target and, for exceeding the top of the range, CEO Preuninger vested 682,685 RSUs worth more than $6m in March 2019.
We view utilizing this excessive equity grant as short-term compensation to be oxymoronic.
Shareholders should ask why the Board approved such a poorly structured compensation program?
The bottom line is this: for a contrived $9.1m increase in adjusted EBITDA over two years, top executives reaped more than $7m of equity. Investors should ask if CEO Preuninger coerced the Board to rebuff the E2open bid because it would have interfered with harvesting this corporate giveaway?
Aggressive Accounting Maneuvers Overlooked “ Three Levers Pulled.
1. ASC 606 Adoption ($675k y/y). The biggest piece here is the lengthening of the amortization period for certain selling expenses. Instead of recognizing the cost in-period, it is capitalized on the balance sheet.
2. Capitalized Software ($1.7m y/y). Increasing capitalized software reduced 2018 expenses and increased adjusted EBITDA.
Year-end R&D Headcount
3. Bad Debt Expense ($375k y/y). As unbilled receivables went up and the percent of billings to foreign customers increased, management cut back on bad debt expense charges. This also reduced 2018 expenses and increased adjusted EBITDA.
|Accounts Receivable, net||19,661||16,957||17,172|
|Receivables Write-off, net||(252)||(448)||(110)|
|Bad Debt Expense||509||568||195|
The Board failed to recognize the obvious flaws in a compensation plan that encourages the use of one-time bumps to maximize payouts. In Sidus view, the current Board is ill-suited to discharge its oversight responsibilities for stockholders effectively.
What exactly does the Compensation Committee do?
Pamela Craven has chaired the Committee since 2014, and Chairman Williams has served on it since 2016. They retained Pearl Meyer Partners, LLC (Pearl Meyer) in 2016. In concert, their work resulted in a handpicked peer group (source 2016 proxy) with a median market capitalization 2.4x larger than Amber Roads.
In the 2017 proxy, the same ˜peer group market cap stood at 4.6x Amber Roads. Since the Committee ˜makes adjustments as needed, what is the purpose of ˜handpicking a group of peers with a 37% higher market capitalization in 2017 vs. 2016, given that Amber Roads market capitalization declined by 27% during the same period? Was the committee trying to justify the excessive compensation lavished on Mr. Preuninger? Despite this distorted peer group, ISS noted that Mr. Preuningers pay was 3.1x the median of its ˜peers.
This governance shortfall was not lost on ISS. They issued a Quick Score rating of 10, the worst possible, on Amber Roads compensation governance risk.
The Boards replaced Pearl Meyer with FW Cook & Co. (FW Cook) in August 2018. Incredibly, FW Cook used almost the same peer group (page 411) “ lather, rinse, repeat.
We would remind Ms. Craven that neither Pearl Meyer nor FW Cook sits on the Board of Amber Road. They cannot shield her from her responsibilities. She is charged with creating a plan to align management and stockholder interests. Sadly, she has done just the opposite. The word ˜peer seems to have no meaning to Ms. Craven, as she continues to rubber stamp peer groups with median market caps approaching 5x that of Amber Roads.
Chairman Barry Williams has failed to hold executives or directors sufficiently accountable for their lack of performance; we believe he has not adequately represented stockholder interests in the boardroom.
Stockholders deserve a significant board reconstitution. Sidus strongly believes Barry Williams and Pamela Craven should immediately step down from their respective roles as Chairman of the Board and Compensation Committee Chair in favor of the Altai nominees; a strategic committee must be formed and tasked with evaluating alternatives.
Chairman Williams is asking stockholders to support his handpicked nominee and an existing board member. That alone is reason to take the other side.
About Sidus Investment Management, LLC
Founded in 2000 by Michael Barone and Alfred V. Tobia Jr., Sidus specializes in small/midcap securities with a bias towards technology, media, and telecommunications. The Partnership targets underfollowed, misunderstood companies with asymmetric upside potential and has historically protected shareholder rights with activist activity.
____________________________ 1 3/25/19 Amber Road Preliminary Proxy Statement
Michael J. Barone / Alfred V. Tobia Jr.
Sloane & Company