7DIG.L Regulatory News (7DIG)

THIS ANNOUNCEMENT AND THE INFORMATION CONTAINED HEREIN IS RESTRICTED AND IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN, INTO OR FROM THE UNITED STATES, AUSTRALIA, CANADA, JAPAN, THE REPUBLIC OF SOUTH AFRICA OR ANY OTHER JURISDICTION IN WHICH SUCH RELEASE, PUBLICATION OR DISTRIBUTION WOULD BE UNLAWFUL. PLEASE SEE THE IMPORTANT NOTICES AT THE END OF THIS ANNOUNCEMENT.

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

For immediate release

7 June 2019

7digital Group plc

Proposed subscription for 634,132,641 New Ordinary Shares

at 0.2 pence per share to raise up to £1.3 million

and

Proposed Debt for Equity Swap

Summary

7digital Group plc (AIM: 7DIG) ("7digital", the "Company" and together with its subsidiary undertakings, the "Group") is pleased to announce the following important developments to raise additional finance to meet the immediate working capital requirements of the Group:

· a consortium, comprising Magic Investments S.A. (a technology investment holding company) ("Magic") and Shmuel Koch Holdings Limited ("SKH"), has conditionally agreed to subscribe for, an aggregate of, 634,132,641 new Ordinary Shares (the "Subscription Shares") at 0.2 pence per share (the "Issue Price"), to raise £1.3 million (before expenses);

· Magic has agreed to capitalise the outstanding £585,932 principal and accrued interest of the Convertible Loan Notes held by it at into 332,915,704 new Ordinary Shares (the "Exchange Shares") (at a 12 per cent. discount to the Issue Price (the "Exchange Price")); 

· a number of changes to the Board have been proposed, conditional upon the passing of the Resolutions at the General Meeting to be convened for 10.00 a.m. on 25 June 2019, details of which are set out below.

The Issue Price represents a discount of 11 per cent. to the closing middle market price of an Ordinary Share on 6 June 2019 (being the last dealing date prior to the publication of this announcement).

In order for the Company to lawfully allot the Subscription Shares and the Exchange Shares the Company is proposing a subdivision of each Existing Ordinary Share of one penny into one New Share of 0.01 pence and one Deferred A Share of 0.99 pence (the "Capital Reorganisation").

If the Debt for Equity Swap and the Subscription are completed, the Consortium will hold, in aggregate, up to a maximum of 69.7 per cent. of the Enlarged Share Capital, with Magic individually holding up to a maximum of 39.1 per cent. of the Enlarged Share Capital and SKH individually holding up to a maximum of 30.6 per cent. of the Enlarged Share Capital.

The Debt for Equity Swap and the Subscription are conditional upon, amongst other things, the Capital Reorganisation being approved by Shareholders, the Company obtaining approval from its Shareholders to disapply statutory pre-emption rights and to grant the Board authority to allot the New Ordinary Shares in connection with the Debt for Equity Swap and the Subscription, and the Independent Shareholders approving the waiver of the obligation to make a general offer pursuant to Rule 9 of the Code which would otherwise fall upon the Concert Party as a result of the issue and allotment to the Consortium of the New Ordinary Shares. In addition, the Capital Reorganisation is conditional upon Shareholder approval to sub-divide the Existing Ordinary Shares and adopt the New Articles.

The Proposals are necessary to finance the immediate working capital requirements of the Company as announced on 9 April 2019 and on 13 May 2019. The Board, however, remains of the view that equity investment in addition to the Subscription and Debt to Equity Swap is required to meet the short-term working capital requirements of the Company. It is intended that, on publication of the Company's annual report for the year ended 31 December 2018 which is anticipated shortly after Admission, the Company will seek to raise an additional £4.5 million (the "Additional Funds") by way of a placing and further subscription of new Ordinary Shares with new and existing shareholders at the Issue Price. The Consortium has indicated that, acting together with its business partners and associates, it may subscribe for up to £2.5 million of this amount, subject to review of the annual report, however no assurance can be given in this respect.

Shareholders should be aware that if Resolutions 1 to 5 are not approved at the General Meeting, the Subscription will not complete and none of the net proceeds of the Subscription will be received. If this were to happen then the Group would only have sufficient working capital to trade through to late June 2019. Accordingly, based on the projected cash flows of the Group, it is highly likely the Company would need to be placed into administration.

Furthermore, if the Subscription completes but the Company is unable to raise Additional Funds of at least £4.5 million by 31 July 2019 then, based on the projected cash flows of the Group, the Company will be unable to pay its creditors and it is highly likely that it would need to be placed into administration. If Resolutions 6 and 7 are not approved at the General Meeting the Company will be unable to raise the Additional Funds.

In the event that the Company is unable to meet such obligations as a result of the failure of the Subscription to complete and/or the failure to raise Additional Funds by 31 July 2019, it is unlikely that the Company will be able to continue trading and it is highly likely that the Directors would need (in order to fulfil their duties to the Company's creditors (and to other applicable stakeholders)) to place the Company into administration. Any such administration would be likely to result in little or no value for Shareholders.

These possibilities are considered to be realistic, not remote.

Background to the Proposals

Following the appointment of John Aalbers, Chief Executive Officer, and Julia Hubbard, Chief Financial Officer, the Company announced on 9 April 2019 that under Julia Hubbard's supervision, the Company had started work on the preparation of the accounts for the financial year ended 31 December 2018 and reviewing budgets for the current year in conjunction with John Aalbers' review of the Company strategy. The announcement noted that the review was taking a more circumspect view of the sales pipeline and that, whilst the work was not yet concluded and no final conclusions had been reached as to quantum, the Board's view at the time of the announcement was that the Group would require material further equity and/or debt funding in the next quarter without which the Company would be unable to continue as a going concern.

Furthermore, on 11 April 2019, the Company announced that it had received a notice of redemption from a holder in respect of a tranche of the Convertible Loan Notes previously issued to certain investors, due to non-payment of interest. The Convertible Loan Notes provide for a maturity date of 31 December 2019. The notice related to outstanding Convertible Loan Notes and interest amounting to £325,570.

Following initial discussions between the Consortium and the Company regarding a possible investment in the Company, on 13 May 2019, Magic agreed to purchase all of the outstanding Convertible Loan Notes and entered into the Standstill Agreement with the Company pursuant to which Magic agreed not to seek early redemption or conversion of the notes before 30 June 2019, except in certain limited circumstances (including a major equity issuance or the insolvency of the Company). As part of this arrangement, the redemption notice served by one of the loan noteholders was revoked.

Working capital

Assuming the Proposals complete and the Additional Funds are secure, the Company's business plan and working capital requirement make certain assumptions as to the:

• time to implement the Company's new strategy set out below;

• growth in revenue from the new standardised product; and

• timing of and ability to reduce certain costs.

If the implementation of the Company's new strategy takes longer than currently expected, growth in revenue is slower or the Company is unable to reduce certain costs as anticipated then it is highly likely that the Company will be required to raise additional finance during 2020.

Update on strategy

Following the appointment of John Aalbers and Julia Hubbard, the Directors undertook a review of the Company's overall strategy. The primary outcome from that review was to recognise that the Company was, foremost, a technology company rather than a media company. Accordingly, the Company's focus should be winning repeatable, long-term business through the provision of a standardised product that can be provided to a wide range of enterprises as a "Platform as a Service" ("PaaS") with the appropriate operating structure to support this model. This compares to previous strategies in which the Company implemented bespoke solutions for a diverse range of customers often with divergent needs, leading to unprofitable business at higher risk.

Subject to the completion of the Proposals and the raising of the Additional Funds, the vision of the new management team is to become the leading supplier of business-to-business ("B2B") music streaming solutions globally. While the Company will continue to sell into and build on the "music industry" customer base that the Company has historically been able to secure and service, the Directors intend to focus on growing other B2B markets. Expansion into new markets will be targeted through a focus on identification of specific verticals that exhibit ideal customer characteristics for the deployment of the Company's solutions.

To this end, the Company has identified the following market verticals in which enterprises with these characteristics reside and the Directors have determined that demand is potentially high. These include:

• Mobile Telecommunications - Specifically Mobile Virtual Network Operators (MVNOs);

• Retail Loyalty Program Providers; and

• Automotive Systems Providers.

7digital's primary offering would be a "turn-key", advanced feature, music streaming platform, which enterprises can brand as their own. The Company's platform already provides an extensive music catalogue (in excess of 70 million songs) and can be offered to the enterprise's consumer customers as part of a loyalty and churn reduction programme to increase customer retention. 

In addition, the Company's core strategy described above, incremental revenue and competitive advantage is expected be achieved from the second half of 2020 through an arms-length commercial agreement with eMusic.com, Inc., a leading source of discovery and sales for independent music and artists a company of which Tamir Koch is President. Synergy is expected to be created with eMusic and its blockchain infrastructure which would allow DIY artists to upload content to 7digital's platform directly.

The Directors expect this to benefit 7digital by:

• enabling 7digital to distribute to all music digital subscription providers; and

• enabling 7digital to offer unique content when selling to new music service providers.

The Company's sales strategy will be restructured to focus on the tightly defined market verticals where the Company's core customers operate. The Company accordingly intends to both enhance its direct sales force with experienced sales personnel and to also scale up the Company's reach to a much wider market by creating a global partner programme.

Terms of the Subscription and the Debt for Equity Swap

The Consortium has conditionally agreed to subscribe for the Subscription Shares at the Issue Price pursuant to the Subscription Agreement. The Subscription Shares will represent 45.7 per cent. of the Enlarged Share Capital on Admission.

In addition, the Subscription Agreement sets out the mechanism pursuant to which the Company has conditionally agreed to reduce certain of its outstanding indebtedness through the capitalisation of £585,932 in principal and interest under the Convertible Loan Notes pursuant to the Debt for Equity Swap. Under this arrangement, the Company will extinguish its liability by the issue to Magic of the Exchange Shares at the Exchange Price. The Exchange Shares will represent 24.0 per cent. of the Enlarged Share Capital on Admission.

The Subscription Agreement is conditional upon, amongst other things, the Resolutions being passed at the General Meeting and Admission becoming effective on or before 8.00 a.m. on 26 June 2019.

The Subscription Shares and the Exchange Shares, when issued fully paid, will rank equally in all respects with the New Shares including the right to receive any dividends or other distributions declared, made or paid after the date of issue of the New Ordinary Shares.

Application will be made to the London Stock Exchange for the Subscription Shares and the Exchange Shares to be admitted to trading on AIM and such admission is expected to become effective at 8.00 a.m. on 26 June 2019.

The net proceeds of the Subscription will be used to settle certain of the Group's existing creditors.

The Capital Reorganisation

As at 6 June 2019 (being the latest practicable date prior to the publication of this announcement), the Company had 419,622,489 Existing Ordinary Shares in issue, with an Existing Ordinary Share having a mid-market price at the close of business on such date (as derived from the AIM Appendix of the Daily Official List) of 0.23 pence per Existing Ordinary Share. The Sub-Division is necessary as a company is unable to lawfully issue shares for less than the nominal value of its ordinary shares. Therefore, without the Sub-Division, the Company would not be able issue the Subscription Shares and the Exchange Shares.

The Board is therefore of the view that the Sub-Division would benefit the Company and its Shareholders as it would reduce the nominal value of Existing Ordinary Shares in issue to enable the Company to issue the Subscription Shares and Exchange Shares.

The Capital Reorganisation will consist of the following steps:

• Shareholder approval of the Sub-Division, including the creation of a new class of Deferred A Shares;

• the sub-division of each Existing Ordinary Share of one penny into one New Share of 0.01 pence and one Deferred A Share of 0.99 pence; and

• the adoption of the New Articles which include the rights and restrictions attaching to the Deferred A Shares.

Proposed changes to the Board

On completion of the Proposals, and subject to the completion of Arden's due diligence as nominated adviser to the Company, Tamir Koch will join the Board as Non-Executive Chairman and David Lazarus will join the Board as a Non-Executive Director. At the same time, Sir Donald Cruickshank has agreed to step down as Chairman and Eric Cohen will step down as a Non-Executive Director. Following these changes, the Board will consist of six directors, with two executive directors and four non-executive directors of whom two are independent. It is anticipated that a further independent non-executive director may be appointed in due course. Anne De Kerckhove Dit Van Der Varent has agreed to remain on the Board until such time that a further independent non-executive director is appointed.

Further details of the Proposed Directors are as follows:

Tamir Koch, aged 47 - Proposed Non-Executive Chairman

Tamir Koch is President of eMusic.com, Inc., an online music and audiobook store and brand which started trading in 1998 and focused on discovery and sales of independent music and artists. Most recently Tamir has led, the eMusic Blockchain Project, seeking to provide a decentralised approach to music distribution and rights management to facilitate the utilisation of blockchain within the music industry.

Tamir has previously founded several successful startups including Orca Interactive and Dotomi. Orca was sold to Emblaze Systems in 2000, which then floated Orca on AIM. It was subsequently acquired by France Telecom in 2008. Dotomi was acquired by ValueClick in 2011.

David Lazarus, aged 55 - Proposed Non-Executive Director

David is an industrialist and international entrepreneur. David spent six years at Lloyds of London as an accredited Lloyds Broker attending to Insurance and Re‐Insurance. David is currently an Executive Director of the RAM Hand‐to‐Hand Couriers Group, a leader in the Courier, Logistics and Express Parcel Industry in Southern Africa. The RAM Group operates from approximately 40 hubs, with approximately 1,700 vehicles and over 2,800 staff across Southern Africa. David is also a member of the Young Presidents Organisation. David has been involved in several international businesses, including having knowledge of the various investments of Magic.

Current trading

Period ended 31 December 2018

The interim results for the six months ended 30 June 2018 were released on the 28 September 2018. The Company expects revenue in the six months ended 31 December 2018 to be marginally higher than the first half, although this benefit will be largely offset by higher costs.

Year end accounts

The Company is currently preparing its results for the year ended 31 December 2018 which it expects to release before 30 June 2019. The Board confirms that the Company's accounts will be prepared on a going concern basis but subject to completion of the Proposals and the Company obtaining Additional Funds to support the future strategy.

As previously announced on 28 September, the Company consolidated acquired businesses and technology platforms in the second half of 2018.

In addition, following the loss of the Company's largest customer, MediaMarktsaturn, announced on 4 January 2019 and the subsequent sale of an unprofitable technology platform to TDC on 2 May 2019, the Company has undertaken a review of intangible assets, acquired goodwill, capitalised assets and other assets which will result in a significant impairment charge being recognised in the year.

Post year end trading update

Following the appointment of John Aalbers and Julia Hubbard and the loss of MediaMarktsaturn, a major customer, in March 2019 the Board has been undertaking a review of the Company's strategy and budgets taking a more circumspect view of the sales pipeline. Consequently, there has been significant disruption within the business since the beginning of the year which has had a marked effect on customer sentiment. Trading has continued to be challenging and the Board expects revenue for the six months to the 30 June 2019 to be significantly behind the equivalent period in the prior year.

A circular (the "Circular") containing, amongst other things, further details of the Proposals and the Concert Party and the notice of the General Meeting is expected to be published by the Company later today.

The person responsible for the release of this announcement is Julia Hubbard, Chief Financial Officer of the Company.

Don Cruickshank, Chair of 7digital, commented:

"Our new management team of John Aalbers and Julia Hubbard have engineered a new partnership with new investors.  This should bring both the capacity to exploit the streaming services market that grows by the day and to exploit new sources of income from blockchain based services for artists."

For further information please contact:

The following definitions are used throughout this announcement, unless the context provides otherwise:

Important notices

The distribution of this announcement and any other documentation associated with the Proposals into jurisdictions other than the United Kingdom may be restricted by law. Persons into whose possession these documents come should inform themselves about and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of the securities laws or regulations of any such jurisdiction. In particular, this announcement should not be distributed, forwarded to or transmitted, directly or indirectly, in whole or in part, in, into or from the United States, Australia, Canada, Japan or the Republic of South Africa or any other jurisdiction where to do so may constitute a violation of the securities laws or regulations of any such jurisdiction (each a "Restricted Jurisdiction").

The New Ordinary Shares have not been and will not be registered under the US Securities Act 1933 (as amended) (the "US Securities Act") or with any securities regulatory authority of any state or other jurisdiction of the United States and, accordingly, may not be offered, sold, resold, taken up, transferred, delivered or distributed, directly or indirectly, within the United States except in reliance on an exemption from the registration requirements of the US Securities Act and in compliance with any applicable securities laws of any state or other jurisdiction of the United States.

The New Ordinary Shares have not been and will not be registered under the relevant laws of any state, province or territory of any Restricted Jurisdiction and may not be offered, sold, resold, taken up, transferred, delivered or distributed, directly or indirectly, within any Restricted Jurisdiction except pursuant to an applicable exemption from registration requirements. There will be no public offer of New Ordinary Shares in Australia, Canada, Japan, or the Republic of South Africa.

This announcement is for information purposes only and does not constitute or form part of any offer to issue or sell, or the solicitation of an offer to acquire, purchase or subscribe for, any securities in any jurisdiction and should not be relied upon in connection with any decision to subscribe for or acquire any of the New Ordinary Shares. In particular, this announcement does not constitute or form part of any offer to issue or sell, or the solicitation of an offer to acquire, purchase or subscribe for, any securities in the United States.

This announcement has been issued by, and is the sole responsibility of, the Company. No person has been authorised to give any information or to make any representations other than those contained in this announcement and, if given or made, such information or representations must not be relied on as having been authorised by the Company or Arden Partners PLC ("Arden"). Subject to the AIM Rules for Companies, the issue of this announcement shall not, in any circumstances, create any implication that there has been no change in the affairs of the Company since the date of this announcement or that the information contained in it is correct at any subsequent date.

Arden, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting exclusively for the Company and no one else in connection with the Proposals and will not regard any other person (whether or not a recipient of this announcement) as a client in relation to the Proposals and will not be responsible to anyone other than the Company for providing the protections afforded to its clients or for providing advice in relation to the Proposals or any matters referred to in this announcement.

Apart from the responsibilities and liabilities, if any, which may be imposed on Arden by the Financial Services and Markets Act 2000 or the regulatory regime established thereunder, Arden does not accept any responsibility whatsoever for the contents of this announcement, and makes no representation or warranty, express or implied, for the contents of this announcement, including its accuracy, completeness or verification, or for any other statement made or purported to be made by it, or on its behalf, in connection with the Company or the New Ordinary Shares or the Proposals, and nothing in this announcement is or shall be relied upon as, a promise or representation in this respect whether as to the past or future. Arden accordingly disclaims to the fullest extent permitted by law all and any liability whether arising in tort, contract or otherwise (save as referred to above) which it might otherwise have in respect of this announcement or any such statement.

No statement in this announcement is intended to be a profit forecast or profit estimate for any period and no statement in this announcement should be interpreted to mean that earnings or earnings per share of the Company for the current or future financial years would necessarily match or exceed the historical published earnings or earnings per share of the Company.

This announcement may include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "projects", "anticipates", "expects", "intends", "may", "will", or "should" or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include matters that are not historical facts. They appear in a number of places throughout this announcement and include statements regarding the Directors' current intentions, beliefs or expectations concerning, among other things, the Company's results of operations, financial condition, liquidity, prospects, growth, strategies and the Company's markets. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Actual results and developments could differ materially from those expressed or implied by the forward-looking statements. Forward-looking statements may and often do differ materially from actual results. Any forward-looking statements in this announcement are based on certain factors and assumptions, including the Directors' current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Company's operations, results of operations, growth strategy and liquidity. Whilst the Directors consider these assumptions to be reasonable based upon information currently available, they may prove to be incorrect. Save as required by applicable law or by the AIM Rules for Companies, the Company undertakes no obligation to release publicly the results of any revisions to any forward-looking statements in this announcement that may occur due to any change in the Directors' expectations or to reflect events or circumstances after the date of this announcement.

Neither the content of the Company's website nor any website accessible by hyperlinks to the Company's website is incorporated in, or forms part of, this announcement.

All references to time in this announcement are to London time, unless otherwise stated.