COMMTOUCH SOFTWR LTD (CTCH)

[midastouch017]

Reis steadies Commtouch

For the first time since 1999, the company has someone with a firm grip.

Gitit Pincas 20 Oct 05 16:22

Last week, Commtouch Software Ltd. (Nasdaq: CTCH) announced a new $3 million private placement. On the face of it, this is not particularly interesting news, since the company has held private placements of this size more than once in recent years. Commtouch has struggled time and again to obtain financing and new believers, while substantially diluting the stakes of its existing shareholders over the years.
But this private placement has some interesting aspects, including the identity of the investors; the fact that, for the first time since venture capital funds invested in the company in 1999, there is someone with a firm grip of 15%; and the circumstances, since this round was not intended to finance hand-to-mouth survival, but to strengthen the company’s financial stability.

Commtouch now develops e-mail protection solutions, and has real-time anti-virus and anti-spam solutions. It had $3.9 million in cash at the end of the second quarter of 2005, and hopes to reach cash flow break even by the end of 2005 or in early 2006.

Aviv Reis led the present private placement. Reis is a businessman whose returned to the headlines thanks to his partnership with Empire Online Ltd. (AIM: EOL) controlling shareholder Noam Lanir. Reis owns a stake in Empire Online through Sidmore Holdings Ltd. His name again came up in the business press last week when he joined Roni Yitzhaki, Shimon Weintraub and Ronen Peled’s offer to buy a controlling interest in real estate and venture capital company Brack Capital Holdings Ltd. (TASE:BCH)

This is the first time that Reis has led a private placement in a public company, investing $2 million in Commtouch. Together with an investment from a year ago, he will now probably own about 15% of the company. Since it was floated, no single shareholder has ever owned such a large stake in Commtouch, unquestionably indicating Reis’s confidence in the company. It should be noted that Reis also led a financing round in Empire Online when it was still a private company.

This is also the first time since Commtouch’s great crisis that an investment house has invested in the company: DS-Apex Holdings Ltd., through two subsidiaries. Altogether, it invested $500,000 in Commtouch, including through Yuvalim pension fund.

The final $500,000 of the $3 million private placement came from two of Reis’s business partners: Ilan Raviv and Yehuda Keren. Raviv, Reis’s brother-in-law, is CEO of Ubank Ltd. (formerly Investec Israel), and is also Reis’s partner in Empire Online.

Reis studied business administration with Commtouch CEO Gideon Mantel at Tel Aviv University in 1984, and Mantel says they have been in contact ever since. Commtouch undoubtedly hopes that Reis’s investment and the support his 15% stake in the company gives will change investor sentiment towards it. Nevertheless, it is hard to imagine that anyone who bought Commtouch shares when it had a market cap of $1 billion will easily change his or her mind about it when it has a present market cap of $30 million, diluted following the latest private placement. Mantel’s message is that Rome wasn’t built in a day.

Commtouch issued six million shares to its new investors at $0.50 each, a $0.03 discount on its share price at the time ($0.53). The investors also received two sets of warrants, each representing an option to purchase up to 1.5 million ordinary shares, with one set exercisable within nine months at a per share price of $0.50 and the other set exercisable within five years at a per share price of $0.65.

The new investors may appoint a director to Commtouch, who will reportedly be Reis. He said, “Commtouch operates in an important and growing sector, and I have no doubt that its unique, proprietary technology, in conjunction with its business model, will result in a growing and profitable company.”

Apex Underwriting CEO Aharon Samara said, “Commtouch has successfully turned its business around in the past two years, and we believe in the company’s management and business direction.”

Mantel said, “This financing has only one purpose: financial stability. We didn’t need the money for current activities, and our cash flow will cease being negative within three to six months from today. We’re beginning to win larger contracts, and our customers want to see a stronger balance sheet than we had. In addition, we were hovering around the Nasdaq minimum equity limit for a long time. With this financing, all concern that we won’t meet Nasdaq’s threshold will disappear. Our equity will be about $4.5 million.”

“Globes”: What can you say to placate investors whose stakes were diluted so much over the years because of your numerous private placements?

Mantel: “Our business results are steadily improving. The company will soon have a positive cash flow and become profitable, and we’ll get more contracts. We’re building a stable company, and this placement has other significance. This time, it wasn’t a ‘no choice’ financing, and investors are getting a more stable company, without any worries about a going concern warning or delisting. Our business has significantly improved. Our technology has clear advantages.”

Commtouch lost $737,000 on $880,000 revenue for the second quarter of 2005.

Published by Globes [online], Israel business news - www.globes.co.il - on October 20, 2005

http://www.globes.co.il/serveen/globes/DocView.asp?did=1000021501&fid=980

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