21 Oct 2011 15:28
21 October 2011
Phorm Inc
("Phorm" or the "Company")
£30m Equity Placing, Intention to repay Convertible Loan Notes and Operational Update.
Highlights:
·; £30m equity placing by Mirabaud Securities LLP ("Mirabaud") as bookrunner
·; Intended repayment of £16.075m convertible loan notes
·; Strong operational progress
o ramp up in Brazil and achievement of key business model assumptions
o deployment and full ramp up in Romania after just 4 weeks
o signed contracts in two major markets including the People's Republic of China with expected deployment in the first half of next year
·; Revised management incentive scheme
·; Potential share buyback
Details of the placing and repayment of convertible loan notes
Phorm (AIM: PHRM and PHRX), the internet personalization technology company, is pleased to announce that it has arranged an equity placing of approximately £30m with institutional and other investors including Phorm's Non-Executive Board Director Mark Schneider (the "Placing"). Mirabaud acted as bookrunner for the Company. The proceeds from the Placing will be used to retire the convertible loan notes ("CLNs") issued on or about 21 March 2011 (together with the Placing, the "Transaction") and to provide sufficient working capital to get to positive operational cash flow and develop the opportunities described below, amongst others.
The CLNs can be retired at any point at the Company's option, subject to paying the principal of £16,075,000 and 15% per annum coupon in cash and achieving a minimum threshold return of 1.1 times principal within the first year. The minimum threshold return will be satisfied in the first instance by the issue of 3,778,000 redemption shares in the capital of the Company with any additional return requirement to be satisfied either through payment in cash or the issuance of additional Phorm equity. The price of the additional equity will be the average of the lowest five daily closing prices over the 20 day trading period immediately prior to the redemption notice being given. Accordingly, the total number of shares required to repay the notes will be determined when the redemption notice to retire the notes is issued. If the redemption notice is issued such that average price is £1.50, and the redemption premium is repaid entirely in shares, the additional equity will comprise approximately 8 million shares on top of the 3,778,000 mentioned above. If the average price is in excess of £4.69, no additional shares will need to be issued.
Commitments have been received from a number of institutional and other investors pursuant to a placing agreement between the Company and Mirabaud, and by additional subscribing investors. Mr. Schneider, a Board Director of Phorm Inc. has agreed to invest £1.6m for 1.6% of the Enlarged Share Capital as described below. All of the commitments are conditional on a call notice being issued by the Company to trigger the redemption of the CLNs and on customary other conditions, including the admission of a minimum number of placing shares by 8 December 2011 and that there be no material adverse change in the financial position or prospects of the Company.
Placing shares will be issued at a price (the "Placing Price") which equates to £1 million for each 1% of the fully diluted enlarged share capital of the Company after the Transaction (equating to a market value of £100 million on a fully diluted basis). The current market capitalisation of the Company was ca. £28.2 million as at close of business on 20 October 2011. The Company intends to issue the call notice for the redemption of the CLNs by no later than 1 December 2011. The fully diluted market value takes into account the existing issued shares, the Placing shares, the shares issuable upon redemption of the CLNs, the shares issuable pursuant to the Company's CEO's options described below and a further pool for management options described below (the "Enlarged Share Capital").
In conjunction with the Placing, the Company has undertaken to the major placees (for so long as they individually own 3% or more of the issued share capital), for a period of three years from today not to take certain actions unless it has been approved either by a majority of those placees or by a majority of shareholders. In summary, the relevant actions comprise (subject to certain exceptions): entering into a transaction with a related party (as defined in the AIM Rules for Companies ("AIM Rules")) otherwise than on arm's length terms; issuing shares or rights to them which would increase the Enlarged Share Capital by more than 10%, or at a discount of over 30% to the prevailing market price of the Company, or of a class other than Common Shares; and disposing of 50% or more of the shares or value of any subsidiary or of any material intellectual property. In addition, the Company has agreed to allow the placees to participate in any future share issuance in proportion to their percentage holdings of Common Shares at the time of any such issuance.
Commercial Update
In the last three years the Company has made a great deal of progress, learning some very tough lessons from its experience in the UK and significantly changing both its approach and its proposition.
We have led the way on privacy and regulatory issues by introducing an industry leading Opt In strategy for our Discover personalised content and OIX personalised advertising proposition.
We have demonstrated the appeal of our product by launching successfully in Brazil in 2010 with Oi and Telefonica and Romania four weeks ago with Romtelecom. We have proven, at small but statistically significant scale, the three key assumptions of our business model.
·; Advertiser pricing, which directly drives revenues, has been significantly higher than forecast.
·; Publisher costs have been in line with or lower than forecast
·; Opt in rates have been in line with or higher than forecast
The key risk to our business model has always been the uncertain timelines of our internet service provider ("ISP") partners in reaching full deployment. In Romania, we have now completed the roll out for Romtelecom which we initiated only four weeks ago. Progress has been much faster than that which we have experienced in Brazil and it is expected that future rollouts will follow similar time scales to that achieved in Romania.
Following the UK experience, we decided as a company to simultaneously approach leading telecom partners in many of the world's major markets. In many cases, we have been in discussions with them for over three years. As we have been delivering results in Brazil and refining our proposition, we have found that the timeline involved in going from introduction to launch has shortened considerably. As a result, we anticipate entering a number of additional markets within the first half of next year.
Revenues in our model grow as a non-linear function of our user base. Although currently still low, revenues are expected to grow rapidly based on the recent increase in users from Brazil. Based upon the results which have been achieved so far and the expected further scaling of the user base, our discounted cash flow model for Brazil suggests, for illustrative purposes only to demonstrate the potential scale of the business, that the net present value ("NPV") of the Brazilian business could be £703m, utilizing a 20% discount rate. Using the same model and for illustrative purposes only, the Company believes that the NPV of Romania could be £78m.
Other markets
We have also made considerable progress in a number of other markets:
- We have signed our first agreement in the People's Republic of China and expect to conclude a number of further agreements over the coming months. Deployment is expected by the second quarter of next year.
- We have also signed an agreement with an ISP in an important Southern European market. Deployment is expected in the first quarter of next year. The NPV of this market, calculated on the same basis as above and for illustrative purposes only, could be £483m.
- We have agreed terms and are currently in the documentation phase in an important Southeast Asian market. Deployment is expected in the first quarter of next year. The NPV of this market, calculated on the same basis as above and for illustrative purposes only, could be £82m.
- In addition to the above markets, there are a number of other relationships, some of them dating back several years, which are progressing well. We will update the market in due course as they develop.
Management incentives
In light of the Transaction, the board, in consultation with certain major shareholders, has decided to realign management incentives with the capital structure post the Transaction. As a result, management will be awarded such additional options to their existing options so that they represent 12% in total of the fully diluted share capital of the Company post the Transaction.
In addition, the board has put into place a new incentive option package for the founder and CEO of the Company, Kent Ertugrul as follows :
·; Options representing 15% of the fully diluted share capital following the Transaction. The strike price of the options will be set at the Placing Price. 50% of the options vest on the first anniversary of the grant and the other 50% on the second anniversary of the grant.
·; Up to four additional tranches, each representing 2% of the fully diluted share capital following the Transaction with a strike price equal to the Placing Price, subject to achieving incremental market capitalisation (without the issue of additional equity). One tranche will vest for each £100m added to the market capital of the Company after the Transaction.
·; In consideration of the grant of these new options Mr. Ertugrul has agreed to the cancellation of his existing options representing 12.9% of the current issued share capital of the Company.
Mr Schneider, a non-executive member of the board, will become a consultant to the Company, providing general strategic advice and working with the CEO in supporting global business development. He will receive grants of share options amounting to 1% of the fully diluted share capital following the Transaction, rising to 1.5% upon the commercial launch of the above mentioned Southern European market, which he has been instrumental in implementing.
Share buyback
In the light of the commercial developments announced in this and recent announcements, the Company's strong progress across product development, business development, user growth prospects and Key Performance Indicators supporting our forecasts, the Company's board of directors intends to monitor the Company's share price and if it believes that the Company's shares are significantly undervalued, the Company may buy shares in the market as appropriate moving forward.
The market will be notified of such share buybacks as they occur. Whilst the Company expects to make significant financial progress in the near term, any buyback will be limited so as to allow the Company to have at least 12 months' working capital from the closing of the Placing at a cash burn rate of £1.1 million a month. The Company expects that any shares it buys back will be purchased at the prevailing market price.
Related party transactions
Blackrock Investment Management (UK) Limited ("Blackrock") is investing £7.0m in cash in the Placing on a fully independent basis and on the same terms and conditions as the other investors. Solely by virtue of its existing shareholding in the Company of 13.2%, Blackrock's investment constitutes a related party transaction for the purposes of Rule 13 of the AIM Rules. In light of the above, the directors of Phorm consider, having consulted with Canaccord Genuity Limited (the Company's nominated advisor), that the terms of Blackrock's participation in the Placing are fair and reasonable insofar as the Company's shareholders are concerned.
Kent Ertugrul, CEO of the Company is receiving the incentive package set out above. This constitutes a related party transaction for the purposes of Rule 13 of the AIM Rules and the directors of Phorm, other than Kent Ertugrul, consider, having consulted with Canaccord Genuity Limited (the Company's nominated advisor), that the terms of Kent's incentive package are fair and reasonable insofar as the Company's shareholders are concerned.
In addition, Mark Schneider, a non-executive director of the Company is investing £1.6m in cash in the Placing on the same terms and conditions as the other investors, he is also receiving the incentive package set out above. Together, these constitute a related party transaction for the purposes of Rule 13 of the AIM Rules and the directors of Phorm, other than Mark Schneider, consider, having consulted with Canaccord Genuity Limited (the Company's nominated advisor), that the terms of these transactions are fair and reasonable insofar as the Company's shareholders are concerned.
About Phorm:
Phorm is a global personalisation technology company that makes content and advertising more relevant to the consumer. Phorm's innovative platform preserves user privacy and delivers a more interesting online experience.
Phorm's partners include leading Internet Service Providers (ISPs), Publishers, Ad Networks and Advertisers.
Phorm is a Delaware, US incorporated company, with offices in Bucharest, Seoul, Sao Paolo and London.
The Company was admitted to the AIM market of the London Stock Exchange in 2004 and has over 140 employees and contractors.
For more information, please visit: www.phorm.com
Enquiries:
Phorm, Inc
Andy Croxson (analysts & investors) +44 20 7297 2326
Alex Laity (media) +44 20 7297 2710
Brokers
Canaccord Genuity Limited +44 20 7050 6500
(Nominated Adviser)
Andrew Chubb
Mirabaud Securities LLP +44 20 7878 3362
(Joint Broker)
Peter Krens
Evolution Securities Limited +44 20 7071 4300
(Joint Broker)
Stuart Andrews