Minds + Machines to acquire ICM Registry (.xxx, .adult, .porn, .sex)

Minds + Machines Group Limited (AIM: MMX), announced today that it has entered into a conditional agreement to acquire the entire membership interests of ICM Registry LLC (“ICM”), a US company, for a cash payment of $10.0 million, funded from the Company’s existing cash reserves, and a total of 225,000,000 new Ordinary Shares with an equivalent value of approximately $31.0 million*. The Acquisition is conditional on receiving approval from the Internet Corporation for Assigned Names and Numbers (“ICANN”).

ICM, a Florida based company, is the owner of four high value, niche TLD’s that are regulated by ICANN. In its tax filings for the 12 months ended 31 December 2017, ICM reported net sales of $7.27 million and net income of $3.5 million, from approximately 100,000 registrations. In 2017, approximately 78% of revenue was renewal based and approximately 14% was generated from premium sales.

Toby Hall, CEO of MMX, commented:

“We are delighted to have entered this agreement. We expect the Acquisition to be earnings enhancing in the current year and believe it will deliver scale, strong recurring revenues and positive working capital to the Company in 2018 and future years. Further, it will strengthen the quality of our revenues, both accelerating MMX’s already fast-growing renewal base and improving the geographic make-up of our sales, given ICM’s revenues are primarily derived from the US and Europe. We see this transaction as a major step forward in our ambition to introduce a progressive dividend policy over the next 18 months.”

Separately, the Company has entered into a Facility Agreement with a vehicle associated with its substantial shareholder, managed by London and Capital Asset Management Ltd**, which is beneficially interested in approximately 16.03 per cent of the current issued share capital of the Group. The $3.0 million working capital facility, for draw-down at the Company’s calling post completion of the Acquisition, is available to support future innovation and acquisition orientated activity.

The above transactions formally mark the end of the strategic review process begun in May 2017.

Acquisition highlights

• ICM is a Florida based TLD owner of four niche, high value, ICANN regulated TLD’s
• In its filed accounts for the year ending 31 December 2017, ICM generated net sales of $7.27 million and net  income of $3.5 million, from approximately 100,000 registrations
• In 2017, approximately 78% of ICM’s revenue was renewal based and approximately 14% was generated from premium sales
• The consideration comprises:
  – $10.0 million in cash, funded from the Company’s existing cash resources;
  – 96,699,235 new Ordinary Shares to be issued on Completion, 75,000,000 of which are subject to a   four month lock-in and 21,699,235 of which are subject to a 12 month lock-in; and
  – 128,300,765 new Ordinary Shares to be issued to the Vendors on 1 January 2019, to be locked-in until the 12 month anniversary of Completion
• The Acquisition is expected to be earnings enhancing in the current year with further earnings enhancement to be targeted from cost synergies and scale efficiencies post integration of the Acquisition
• ICM has historically generated high levels of recurring cash flow which will support the Enlarged Group’s strategy to introduce a progressive dividend policy over the next 18 months
• The Acquisition is conditional upon regulatory approval by ICANN, which is expected to be received by 30 June 2018 (“Completion”). A further announcement will be made at this time.

Further details on the Acquisition and Facility are set out below. The Company currently has 699,857,562 Ordinary Shares in issue.

* Based on the closing share price of an MMX ordinary share of 10.10 pence on 3 May 2018, being the last practicable day prior to the announcement and an exchange rate of GBP1.00 = USD1.362.

** Underlying shareholder being BNP Nominees Re: Carey Pension 3253.

Minds + Machines Group Limited (LSE: MMX) is the owner and operator of a world class portfolio of top-level domain assets (gTLDs). As a sales and marketing-led registry business, we are focused on commercializing our portfolio in partnership with our expanding global network of distribution partners.

The MMX portfolio is currently focused around geographic domains (e.g. .london, .boston, .miami, .bayern), professional occupations (e.g. .law, .abogado, and .dds), consumer interests (e.g. .fashion, .wedding, .vip), lifestyle (e.g. .fit, .surf, .yoga), outdoor activities (e.g..fishing, .garden, .horse) and generic names such as .work and .casa. As a business, we work through our expanding international network of registrars and distribution partners to bring the benefits of affinity based domain addresses to B2B and consumer audiences. For more information on MMX, please visit www.mmx.co

Background on ICM

ICM Registry LLC and subsidiaries, ICM Registry AD LLC, ICM Registry PN LLC and ICM Registry SX LLC (together “ICM”) is the owner and operator of four niche ICANN regulated TLDs aimed at affording greater protection to consumers on the Internet: dot-xxx, dot-adult, dot-porn and dot-sex. ICM’s TLDs are available through many domain name resellers (registrars) around the world, including GoDaddy, Enom, and Domain.com.

ICM’s most valuable TLD is dot-xxx, which was originally awarded to ICM in 2004 by ICANN but which did not go live until Spring 2011 following competitive challenges following the original award. The policies by which dot-xxx operates are set by an independent body, the International Foundation for Online Responsibility (“IFFOR”), which was established to promote user choice, parental control, and the development and adoption of responsible business practices designed to combat online child abuse images. ICM partners with a range of content monitoring organisations, most notably the Internet Watch Foundation, to ensure its policies are maintained by underlying website operators within the TLD. In 2012, ICM successfully applied for and subsequently won the rights for dot-adult, dot-porn and dot-sex under ICANN’s new gTLD program. The premise for each of the TLDs is to provide clear labelling to Internet users through the domain ending as to the likely content of a website, in much the same way film bodies and leading streaming media companies provide guidance as to the content of a film before it begins or is played.

As at 31 December 2017, ICM had five full-time employees and three part-time employees. Employees are located in Florida and Utah.

Background to and strategic rationale for the Acquisition

As a registry business, MMX’s strategy is to a build a strong, annuity based business of scale founded on recurring revenues. In 2017, MMX saw 100% growth in its renewal revenues with renewal revenues of $4.8 million accounting for approximately 34% of total 2017 revenues. One-off premium sales accounted for approximately 49%, with approximately 53% of the Company’s revenue being generated from China. By contrast, ICM’s revenues are predominately derived from the US and Europe with renewal revenue accounting for approximately 78% of their 2017 revenues and premium sales for approximately 14%. The MMX Board expects that the Acquisition will be earnings enhancing in the current year, with the scope for further earnings enhancement through cost synergies post integration of the Acquisition, increased operational leverage and scale efficiencies. The MMX Board believes that the Acquisition will position MMX as one of the leading gTLD operators in terms of revenue and EBITDA.

ICM summary financials

In its filed accounts contained in the federal tax returns for the year ending 31 December 2017, ICM generated net sales of $7.27 million and net income of $3.5 million, with total assets as at 31 December 2017 of $2.9million. Approximately, 78% of its revenues in 2017 were renewals with 14% being generated from premium sales. The remainder was generated from standard new sales.

Summary of the Acquisition Agreement

Under the terms of a sale and purchase agreement dated 3 May 2018 (the “Acquisition Agreement”) the Company has agreed, subject to ICANN approval of a change of control of the dot-.XXX, . dot-porn, . dot-sex and . dot-adult TLDs (together the “ICM TLDs”), to acquire 100% of the issued membership units of ICM.  ICM comprise the following vendors: Stuart Lawley, Afilias USA Inc., Hawthorn Corporation, Teresa Perea, Lynda Bradshaw and John Katona (together the “Vendors”).

Under the terms of the Acquisition Agreement, subject to Completion, the Company will immediately pay to the Vendors (pro rata to their interest in ICM) $10.0 million (the “Cash Consideration”) and issue 96,699,235 new Ordinary Shares at a deemed price of $0.1376 per Ordinary Share (the “Consideration Shares”) based on the 10.10 pence mid-price of the Company’s shares listed on the London Stock Exchange at the close of 3 May 2018 (at an exchange rate of GBP1.00 = USD1.362). In addition to the Cash Consideration and the Consideration Shares, on 4 January 2019 the Company will issue to the Vendors (and/or their appointed nominees), in aggregate 128,300,765 new Ordinary Shares at a deemed price of $0.1376 per Ordinary Share (the “Deferred Consideration Shares”) based on the 10.10 pence mid-price of the Company’s shares listed on the London Stock Exchange at the close of 3 May 2018 (at an exchange rate of GBP1.00 = USD1.362).

As a condition of Completion, both the Consideration Shares and the Deferred Consideration Shares will be subject to lock-in and orderly market conditions as set out below:

·   75,000,000 Consideration Shares shall be subject to a four month lock-in period from Completion during which time Vendors shall be prohibited from selling their respective holding of Consideration Shares (other than in certain specific circumstances including a general offer for the Company or in the event of death or an intervening Court Order), after which period the Vendors shall be subject to orderly market obligations in relation to proposed sales for a period of 12 months;

·     21,699,235 Consideration Shares shall be subject to a 12 month lock-in period from Completion during which time Vendors shall be prohibited from selling their respective holding of Consideration Shares (other than in certain specific circumstances including a general offer for the Company or in the event of death or an intervening Court Order), after which period the Vendors shall be subject to orderly market obligations in relation to proposed sales for a period ending 31 December 2019; and

·   128,300,765 Deferred Consideration Shares shall be subject to a lock-in period expiring on the 12 month anniversary of Completion during which time Vendors shall be prohibited from selling their respective holding of Consideration Shares (other than in certain specific circumstances including a general offer for the Company or in the event of death or an intervening Court Order), after which period the Vendors shall be subject to orderly market obligations in relation to proposed sales for a period ending 31 December 2019.

The Company and the Vendors provided customary warranties to each other in relation to the Acquisition, including in particular a tax indemnity from the Vendors in relation to the tax liabilities of ICM prior to Completion.

New Facility 

Separately, the Company has entered into a Facility Agreement with a vehicle associated with its substantial shareholder, managed by London and Capital Asset Management Ltd, which is beneficially interested in approximately 16.03 per cent of the current issued share capital of the Group.

The Facility Agreement provides a $3.0million working capital facility, for draw-down at the Company’s calling post completion of the Acquisition, to support future innovation and acquisition orientated activity by the Company. The term of the Facility is up to 12 months from Completion (the “Availability Period”). The interest payable will be 0.5% (monthly) on funds not drawn and 1% (monthly) on funds drawn. Interest will be paid by the Company during the period of the loan exercised by the Company and will not accrue and compound. Funds can be drawn down at any time during the Availability Period, in one tranche or through multiple draw-down notices The Facility Agreement contains customary events of default to protect the Lender, following which the Facility would become immediately repayable. The Directors have no current intention of drawing down the Facility but welcome the increased financial flexibility that it affords.

Related Party Transaction

The provision of the Facility is deemed to be a related party transaction pursuant to the AIM Rules for Companies as the Lender is a substantial shareholder in the Company (the “Related Party Transaction”).

The Board has considered alternative forms of funding and reviewed other options that may be available from other debt providers. Having consulted with the Company’s Nominated Adviser, finnCap Ltd, the Directors consider the terms of the Facility to be fair and reasonable insofar as the Company’s shareholders are concerned.

Admission/Issue of Equity

Completion of the Acquisition is conditional upon ICANN approval and the admission of 96,699,235 Ordinary Shares to be issued to the Vendors in connection with the Acquisition to trading on AIM (“Admission”). MMX will apply to the London Stock Exchange for the Admission of such Ordinary Shares upon receipt of ICANN approval. A separate announcement will be made in due course.