Minds + Machines Group Limited (AIM: MMX) announced Final Results for the year ended 31 December 2020.

MMX admitted the the AdultBlock revenue decreased in 2020 by $0.4m to $0.5m. So this dubious business model seems to be drying up.

MMX also discontinued several promotions historically run in the 4^th quarter, particularly for .vip, resulting in this significant reduction in unprofitable DUMs. One less spam extension.

.Vip and .work have renewal rates of 36% and 18% respectively.

“Our adult themed gTLDs, including AdultBlock, have renewal rates of approximately 90% and our geographic gTLDs have renewal rates of approximately 80%, whereas .vip and .work have renewal rates of 36% and 18% respectively, highlighting the challenge in this part of our portfolio from our historic reliance on one-off brokered sales and low margin bulk transactions. Brokered revenue decreased by $368k (58%) in 2020 and is now just $270k of Group revenue.

Revenue from .vip, .work and .bayern increased 14%, 19% and 18% respectively from 2019. Revenue from our adult themed gTLDs and .law and .luxe decreased by 2%, 17% and 56% respectively.

After the initial success of the AdultBlock launch at the end of 2019, when it generated $0.9m in new revenue, we did not continue to capitalize on this momentum in 2020. AdultBlock revenue in 2020 decreased by $0.4m to $0.5m. However, 2021 was always seen as the start of the real opportunity for AdultBlock as we hit the 10-year anniversary of Sunrise B in the last quarter of the year. We remain optimistic in the potential for AdultBlock to drive significant new recurring revenues as we have refocused on this product with our Registrars.

Domains Under Management (“DUMs”) decreased by 19% to 1.99 million. Upon their arrival, the new Executive focused on the net contribution each gTLD was making to the business and reviewed pricing and promotions to ensure the Group pursued only accretive and profitable transactions. This resulted in the discontinuance of several promotions historically run in the 4^th quarter, particularly for .vip, resulting in this significant reduction in unprofitable DUMs.”

2020 Financial Highlights

Financial Review

		FY 2020 $ 000’s			FY 2019 $ 000’s
Domains under management		1.99m				2.46m
Revenue		16,829				17,227
Revenue less partner payments		14,571				14,345
Cost of sales		(3,131)				(3,337)
General administrative expenses		(6,288)				(7,217)
Profit on contested gTLD applications		–				588
Profit on disposal of join.law		–				383
Share of results of joint ventures		5				48
Operating EBITDA		5,157				4,810
Other non-operating expense		(1,000)				–
EBITDA		4,157				4,810
Depreciation, amortisation and finance costs		(1,167)				(1,827)
Profit before taxation		2,990				2,983
Income taxes		(7)				(140)
Profit for the year		2,983				2,843
Earnings per share		$0.33				$0.31

Cash generated from operating activities increased to $6.4m from $481k in 2019. Cash balances at the end of 2020 were $8.9m, an increase of $2.3m from $6.6m at the end of 2019, even after buying back 43 million of our shares in the year at a cost of $2.8m.

Commenting on Current Trading and Outlook, Tony Farrow said:

“Our results for 2020 continue to demonstrate the quality of our portfolio and the cash generative nature of the Company. Q4 was a transitional period for the Company as in addition to immediate actions such as reducing staffing and terminating non-accretive supplier contracts, we considered structural and operational changes that we believe sustainably improve the business going forward.

“Revenues for the first quarter of 2021 are 4% below those for Q1 2020. While it is early in the AdultBlock Sunrise B renewal period, we are encouraged by Registrar interest and some early sales of this product. We are also seeing an increase in cash generation despite the decrease in revenues as the staffing changes and other cost reduction initiatives put in place at the end of 2020 resulted in EBITDA of $1.6m for the quarter, a 98% increase over the $801k generated in Q1 2020.

“We continue to work closely with GoDaddy Registry to complete the conditions precedent to the completion of the sale transaction whilst continuing to drive the business forward to maximise near term cash flows.”

Executive Summary

Before reviewing 2020, perhaps the most important matter is the proposed Asset Sale to GoDaddy Registry.

On 7 April 2021, the Company announced that it had conditionally agreed to sell the majority of its assets and business to Registry Services, LLC (“GoDaddy Registry”), an affiliate of GoDaddy Inc., for US$120m in cash. The sale was approved by the Company’s shareholders at a General Meeting of Shareholders held on 23 April 2021.

Completion of the sale is conditional upon the satisfaction of the following conditions:

·    Approval for the transfer of the TLDs to GoDaddy Registry by the Internet Corporation for Assigned Names and Numbers (“ICANN”);

·    Approval of Chinese authorities for the change of control of MMX China (including change of control in respect of       relevant licenses held by MMX China permitting it to distribute gTLDs in China);

·     Approval, as well as the waiver of certain rights of first refusal, by commercial partners for the transfer of certain gTLDs;   and

·     No material adverse change in the ownership and/or performance of the business in the period prior to completion. 

The long-stop date for satisfaction of these conditions is 7 August 2021.

Reasons for sale

Following the Company’s leadership changes in October 2020, the new Executive conducted a thorough review of the underlying profitability of the business and the contribution of each gTLD asset. The conclusions from this review reinforced the view of the Board that our business has strong recurring cash flows but afforded limited opportunity for material organic growth beyond the Company’s AdultBlock services without fundamental changes and significant further investment. Consequently, the Company would need to consider a multi-year transformation, including further inorganic growth and/or pursuing additional revenue opportunities outside the core business, in order to effectively leverage our relatively high fixed costs. Alternatively, the Board concluded, the Company could seek a merger or sale of the business.

Originating from discussions to move our registry back-end service, the Board entered into discussions with GoDaddy Registry for the sale of the Company’s business. Negotiations culminated in the sale transaction discussed above, which was overwhelmingly approved by shareholders. The sale affords the shareholders an attractive valuation of the Company compared to its pre-announcement trading history. The Board estimates that the offer value per share, after taking into consideration transaction costs, including taxes, represents a premium of:

–      92% to the market capitalization of the Company based on the closing share price of Ordinary Shares on AIM on 6 April 2021 (the last day prior to the announcement of the sale);

–      87% to the 20-day volume weighted average price (VWAP) of an Ordinary Share up to and including 6 April 2021; and

–      78% to the 60-day VWAP of an Ordinary Share up to and including 6 April 2021.

Use of Proceeds

Following completion of the sale the Board will consider the best way to maximise shareholder value, which is likely to include returning a portion of the cash to shareholders together with considering alternative acquisitions as provided under the Aim Rules. As set out below, the Company is obliged to provide certain services for the duration of the transition services period as well as retaining US$12 million in an escrow account until 31 March 2022. Once the transition services period has completed the Company will no longer have any material operating business and the Company will be regarded as a cash shell under AIM Rule 15.

The timing and method of any distribution or other return of capital remains to be confirmed. The quantum of any distribution or return of capital will take into account the investment and/or acquisition opportunities identified by the Company during the period as an AIM Rule 15 cash shell, and the wishes of shareholders following a consultation process which the Company will commence following completion of the sale and which will include one-to-one discussions with larger shareholders, and use of the ‘Investor Meet Company’ digital platform for an investor call or presentation providing an opportunity for all shareholders to provide their feedback to the Company.

Transition Services

For the period from completion of the sale until no later than 31 January 2022 the Company will provide certain transition services to GoDaddy Registry. These transition services will be provided to facilitate a smooth transition of the assets and certain employees to GoDaddy Registry. The Company will be paid fixed fees by GoDaddy Registry to cover the costs incurred by the Company in providing these services, including the costs of relevant employees. The transition services consist of maintenance of technology infrastructure and registry platforms, customer support to Registrars, back-office support services (including billing, cash-collection and accounting), legal support, and channel sales and marketing support. The transition services period may be terminated or extended by written agreement between the Company and GoDaddy Registry.

The Company expects that during the transition services period it will seek to dispose of or otherwise discontinue operating the retained assets of the Group and wind-up dormant subsidiaries.

2020 Review

Executive Change

On 29 October 2020, by mutual agreement, Toby Hall and Michael Salazar, Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) respectively, resigned as Executive Officers of the Group and from the Board of Directors.

Concurrently, the Board appointed Tony Farrow as interim CEO. The Board appointed Mr. Farrow to the Board of Directors of the Company in January 2021 and made him permanent CEO at that time. Mr. Farrow had previously been Chief Operating Officer of the Group, with responsibility for overall operations, Registrar channel support, and integration with registry service provider backends. Prior to its acquisition by MMX in May 2018, Mr. Farrow was the Chief Operating Officer of ICM Registry. 

Bryan Disher, independent Non-Executive Director, also agreed to oversee the finance function of the Group and assumed the role of interim CFO on 30 October 2020. Mr. Disher is a Chartered Professional Accountant, Chartered Accountant (Canada) who spent 37 years at PwC.

Accounting Investigation

In October 2020, the Board carried out a formal investigation to determine whether certain revenues had been correctly accounted for in the year ended 31 December 2019 and the six months to 30 June 2020. The Board concluded that as a result of management’s override of the Group’s internal controls, accounting errors had been made and on 30 October issued a Regulatory News Service (“RNS”) detailing changes required to the previously issued financial statements. All amounts reported in this Annual Report reflect these restatements.

Financial Review

			2020  $ 000’s			2019 (Restated) $ 000’s
Domains under management			1.99m				2.46m
Revenue			16,829				17,227
Revenue less partner payments			14,571				14,345
Cost of sales			(3,131)				(3,337)
General administrative expenses			(6,288)				(7,217)
Profit on contested gTLD applications			–				588
Profit on disposal of join.law			–				383
Share of results of joint ventures			5				48
Operating EBITDA			5,157				4,810
Other non-operating expense			(1,000)				–
EBITDA			4,157				4,810
Depreciation, amortisation and finance costs			(1,167)				(1,827)
Profit before taxation			2,990				2,983
Income taxes			(7)				(140)
Profit for the year			2,983				2,843
Earnings per share			$0.33				$0.31

Revenue 

Revenue for 2020 was $16.8m, down 2% from $17.2m in 2019.

Whilst we did not achieve revenue growth in 2020, we were successful in improving the quality of the Group’s revenue by continuing to replace one-off brokered sales and low margin bulk transactions with automated renewal revenue and revenue from standard new sales made through the Registrar channel. While renewal revenue remained constant in 2020 at $11.7m, it increased as a percentage of total revenue and now represents 69% of Group revenue. Coupled with new standard and premium sales, Registrar channel sales now account for 98% of revenues, ending the Group’s historic reliance on one-off brokered and low margin bulk transactions. We believe this establishes a much more predictable revenue base for the Group.

The table below charts the significant change in revenue composition over the last three years.

	2020 %	2019 (Restated) %	2018 %
Renewal revenue	69%	67%	62%
Standard revenue	23%	21%	16%
Premium revenue	6%	8%	4%
Brokered (non-channel) revenue	2%	4%	18%
	100%	100%	100%

 

Our adult themed gTLDs, including AdultBlock, have renewal rates of approximately 90% and our geographic gTLDs have renewal rates of approximately 80%, whereas .vip and .work have renewal rates of 36% and 18% respectively, highlighting the challenge in this part of our portfolio from our historic reliance on one-off brokered sales and low margin bulk transactions. Brokered revenue decreased by $368k (58%) in 2020 and is now just $270k of Group revenue.

Revenue from .vip, .work and .bayern increased 14%, 19% and 18% respectively from 2019. Revenue from our adult themed gTLDs and .law and .luxe decreased by 2%, 17% and 56% respectively.

After the initial success of the AdultBlock launch at the end of 2019, when it generated $0.9m in new revenue, we did not continue to capitalize on this momentum in 2020. AdultBlock revenue in 2020 decreased by $0.4m to $0.5m. However, 2021 was always seen as the start of the real opportunity for AdultBlock as we hit the 10-year anniversary of Sunrise B in the last quarter of the year. We remain optimistic in the potential for AdultBlock to drive significant new recurring revenues as we have refocused on this product with our Registrars.

Domains Under Management (“DUMs”) decreased by 19% to 1.99 million. Upon their arrival, the new Executive focused on the net contribution each gTLD was making to the business and reviewed pricing and promotions to ensure the Group pursued only accretive and profitable transactions. This resulted in the discontinuance of several promotions historically run in the 4^th quarter, particularly for .vip, resulting in this significant reduction in unprofitable DUMs.

Expenditures

Cost of Sales

Cost of sales, which are comprised of ICANN fees, direct marketing expenses, back-end registry costs, and validation and domain abuse and protection costs, were $3.1m in 2020 (19% of gross revenue), a decrease of $0.2m from $3.3m in 2019 (19% of gross revenue). This reduction reflects a $188k decrease in direct marketing costs to $1.1m in 2020 from $1.3m in 2019, principally because .vip renewal promotions the Group used in 2018 and 2019 were discontinued in 2020.

General administrative expenses

General administrative expenses are comprised as follows:

	2020 $ 000’s	2019 $ 000’s (Restated)
Salaries and contractors	3,924	4,122
Share-based compensation	(143)	1,272
IT and software	402	305
Administrative expense	1,311	1,550
Bad debt expense	52	1,933
Employee and other termination costs	707	63
Foreign exchange loss (gain)	(148)	(378)
Gain on settlement of onerous contract	–	(1,351)
Gain on settlement of lease	–	(299)
Investigation costs	183	–
General administrative expenses	6,288	7,217

Salary and contractor costs were $3.9m in 2020, a decrease of $198k from 2019. The Group’s staffing was reduced from 23 at the end of 2019 to 16 at the end of 2020, however much of this reduction occurred in the 2^nd half of the year so most of the cost savings, estimated to be approximately $950k annually, will not be realised until 2021. The Group incurred $457k of employee termination costs in 2020, including legal fees. No termination costs were paid to the former CEO and CFO. The former CEO and CFO also forfeited an aggregate of 46m share options and RSUs, resulting in a recovery of previously expensed share-based compensation. In 2019 the Company’s share-based payment expense was $1.3m. During 2020, the Company repurchased vested share options and RSUs from employees, No options or RSUs were repurchased from the former CEO or CFO.

IT and software costs are comprised of outsourced IT support services and the annual software fees for the various business software used by the Group. IT support costs increased in the year as the Group undertook some development projects to improve client interfaces and improve internal management reporting and support.

Administration expense, which is comprised of professional fees, insurance, PLC costs, rent and office expenses and corporate travel and marketing, were $1.3m in 2020 compared to $1.6m in 2019. The decrease of $239k results principally from a $204k reduction in travel costs as corporate travel was curtailed due to the COVID-19 pandemic.

Bad debt expense in 2020 was $52k, a decrease of $1.9m from 2019. In 2018 and 2019 the Group experienced significant bad debt write-offs in respect of initiatives in China. As the Group ended its dependency on brokered sales and bulk transaction, bad debts declined to what management believes are more normal levels. Sales through the Registrar channel have historically resulted in very few bad debts.

Employee and other termination costs of $707k consist of severance and related costs to former employees and the cost of settling a contractor claim.

At the end of 2019 the Company settled an onerous contract that had obligated the Group to minimum revenue guarantees and marketing costs. This settlement resulted in a gain in the year of $1.4m as the settlement costs were ultimately less than amounts previously provided for. The Group had no similar amounts in 2020.

Investigation costs are legal fees arising from the Board’s accounting investigation in October 2020.

EBITDA and Operating EBITDA

Operating Earnings Before Interest, Taxes, Depreciation, and Amortisation (“Operating EBITDA”) was $5.2m in 2020 compared to $4.8m in 2019. 2019 Operating EDITDA included gains from contested gTLD applications and the sale of join.law of $588k and $383k respectively. EBITDA in 2020 was $4.2m compared to $4.8m in 2019, reflecting a $1.0m settlement with the former shareholders of ICM Registry.

Depreciation and amortisation expense decreased $481k in 2020 to $706k, a result of the Company terminating two registry leases in 2019. Finance costs of $461k are the imputed interest charge in the Group’s registry service leases. The decrease of $188k in finance costs from 2019 is principally the result of the Group settled its $3m working capital facility in June 2019.

Profit/(loss)

Profit for the year is $2.9m compared to a profit of $2.8m in 2019. The profit for the year is after the $1.0m settlement with the former shareholders of ICM and $707k of employee and other termination costs. The 2019 profit included a gain of $1.4m on the settlement of the Group’s onerous contract offset by the $1.9m bad debt write off. Basic and fully diluted earnings per share were $0.33 in 2020 compared to $0.31 and $0.29 respectively in 2019. The increase in 2020 reflects the higher earnings in 2020 and significant reduction in outstanding shares, share options and restricted share units in 2020.

Capital returns

During 2020 we continued and expanded our share buy-back programme. We acquired 42.99 million shares at a total cost of $2.8 million (6.6c/5.1p per share) and also repurchased 6.8m vested employee share purchase options and restricted share units (“RSUs”) for $305k (4.4c/3.4p per share). These buy-backs, together with the options and RSUs forfeited by the former Executive Officers, reduced our fully diluted ordinary shares outstanding by 10% in 2020. In 2019 we repurchased 5.84 million shares for $440k (7.5c/5.9p per share).

Balance sheet

Cash

Cash generated from operating activities increased to $6.4m from $481k in 2019. This does not include the $1.0m ICM settlement as this was paid in 2021.

Cash balances at the end of 2020 were $8.9m, an increase of $2.3m from $6.6m at the end of 2019. The cash increase principally reflects the $6.4m generated from operations less $2.8m used in the share buy-back programme and a further $233k used to repurchase vested employee options and RSUs.

The other key changes to the balance sheet in 2020 are:

·   $1.8m reduction in trade receivables to $1.4m in 2020 from $3.2m at the end of 2019. The 2019 balance includes significant AdultBlock billings near the end of the year. Bad debt expense in 2020 was $52k, down from $1.9m in 2019. At the end of 2020 the Group had $487k of receivables greater than 30 days old, compared to $1.1m at the end of 2019;

·   $1.4m reduction in prepayments and other receivables. The 2019 balance included $1.0m of VAT receivable related to the onerous contract settlement. This VAT was recovered in the first half of 2020; and

·   $857k reduction in trade and other payables to $6.1m (2019: $6.9m). The 2020 payables balance includes the $1.0m ICM shareholder settlement.

Current Trading & Outlook

With the arrival of the Group’s new Executive at the end of October, Q4 of 2020 was a transitional period for the Company. In addition to immediate actions such as reducing staffing and terminating non-accretive supplier contracts, we considered structural and operational changes that could sustainably improve the business going forward. These changes, guided by a detailed review of the net contribution provided by each of our gTLDs, include:

·   Promotions: Promotions must be accretive and lead to profitable renewal revenues. We discontinued several promotions that did not drive profitable renewal billings, resulting in a reduction of DUMs in .vip in Q4 and continuing into Q1 2021. Other promotion contracts were also not renewed and further reductions in DUMs is likely for .work as existing promotions complete their existing business cycle;

·   Inventory Control: an extensive review and EstiBot valuation was performed on all domains that were either priced as premium or held as reserved for potential direct sale. This resulted in the release of or price reductions on over 800,000 domain names. The Registrar channel was notified of the pending release of these domains (“The Great Release”) and these entered the market on 23 April 2021. To date The Great Release has generated over $170k in new billings;

·   Recurring revenue: The long-term value of our portfolio is recurring revenues.  Consequently, all pricing is now determined with a view to maximizing renewal revenues, moving us away from a number of historic pricing structures that had high first year prices and very low renewal pricing;

·   AdultBlock: We are continuing to improve and innovate the AdultBlock product so that it now allows for “common law trademark” extensions to the blocking service thereby significantly increasing its potential market beyond the current Trademark Clearing House (TMCH) and Sunrise B customer base.

·   Staffing: Our sales staff was restructured to focus more effectively on our Registrar partners, promoting our entire portfolio to the Registrars.    

Revenues for the first quarter of 2021 are 4% below those for Q1 2020. While it is early in the AdultBlock Sunrise B renewal period, we are encouraged by Registrar interest and some early sales of this product. We are also seeing an increase in cash generation despite the decrease in revenues as the staffing changes and other cost reduction initiatives put in place at the end of 2020 resulted in EBITDA of $1.6m for the quarter, a 98% increase over the $801k generated in Q1 2020.

We continue to work closely with GoDaddy Registry to complete the conditions precedent to the completion of the sale transaction whilst continuing to drive the business forward to maximise near term cash flows.