London's AIM - U.S. Company Performance - Share Price and Liquidity - 2012

For the sixth year in a row, the 56 U.S. companies listed on the London Stock Exchange's AIM have outperformed the FTSE AIM All-Share Index, with eight posting triple digit returns.

The eight triple digit gainers returned between 101% and 473%.  Four are biotechnology companies listed on London's AIM (personalized medicine, gene silencing, aquaculture and agtech), two are oil and gas shale plays listed on the London Stock Exchange's AIM, one is an oil and gas services technology company listed on London's AIM and one is an industrial technology company listed on London's AIM.  One of these eight companies listed on London's AIM completed its U.S. IPO during 2011 on NYSE MKT, the small cap tier of NYSE Euronext.  This is the natural, 3 - 5 year evolution for U.S. companies that complete their initial IPOs on the London Stock Exchange's AIM, using it as a platform for the achievement of commercial success and a dual listing on the U.S. public markets.

Highlights

• U.S. domiciled companies* listed on the London Stock Exchange's AIM achieve a weighted return of 7%
• Foreign domiciled U.S. operating companies** listed on London's AIM achieve a weighted return of 15%
• FTSE AIM All-Share Index only gained 2%
• Significant liquidity difference between U.S. and foreign domiciled U.S. companies listed on London's AIM

There were 23 U.S. domiciled and 33 foreign domiciled U.S. operating companies listed on the London Stock Exchange's AIM as of the beginning and end of 2012.  During 2012, three companies delisted from London's AIM, two joined by completing London AIM IPOs and one joined London's AIM via Admission.  Of the three U.S. companies that left London's AIM; one was acquired by its largest shareholder (30%) at the market price as a result of the company’s exposure to MF Global as a large customer and, more importantly, a significant creditor and the other two simply never developed their businesses to sufficient scale and, as a result, suffered from a low market cap and lack of trading liquidity on London's AIM in their shares.  The U.S. company that joined the London Stock Exchange's AIM via Admission was, and still is, listed on the Australian Securities Exchange and raised capital in on London's AIM the month after having its shares admitted to trading on London's AIM.

The three U.S. companies that left the London Stock Exchange's AIM and the three U.S. companies that joined London's AIM during 2012 are not included in the chart and analysis below because the effect on the share price return analysis would be immaterial.  The bifurcation of the share price returns on London's AIM during 2012, with 24 of the 53 companies listed on London's AIM losing 25% or more of their value and eight posting triple digit returns, is reminiscent of 2010.

 

*    U.S. operating companies listed on London's AIM directly through a U.S. entity.

**  U.S. operating companies listed on the London Stock Exchange's AIM through a U.K. or tax efficient jurisdiction with central operations and/or decision making in the U.S.

The weighted returns for the U.S. companies listed on London's AIM in the table below were calculated using the average market capitalizations of the U.S. companies listed on the London Stock Exchange's AIM during the year, similar to how an index fund would calculate returns.

Index	Unweighted	Weighted
U.S. Domiciled Companies	4%	7%
Foreign Domiciled Companies	27%	15%
FTSE AIM All-Share Index	N/A	2%

The weighted return contributions for the U.S. domiciled companies listed on the London Stock Exchange's AIM were tightly packed between +3% and -4%, with three exceptions, where 5%, 5% and 17% weighted gains were achieved (absolute gains of 220%, 429% and 188%).  Two of the gainers simply achieved commercial success coming out of the Global Financial Crisis and the other is a biotech company that completed its U.S. IPO on NYSE MKT, the small cap tier of NYSE Euronext (the old NYSE AMEX) during 2011 and achieved some clinical trial and related regulatory success. 

The weighted return contributions for the foreign domiciled U.S. operating companies listed on London's AIM were also tightly packed between +1% and -3%, with three exceptions, where 2%, 6% and 9% weighted gains were achieved (absolute gains of 473%, 365% and 29%).  One of the gainers is an oil and gas shale play listed on the London Stock Exchange's AIM that gained commercial traction, the other modified its business model and launched some new technology in the oil and gas services space and the final gainer is simply one of the largest companies on London's AIM.  It is noteworthy that the unweighted return of 27% for the foreign domiciled U.S. operating companies listed on London's AIM exceeded the weighted return of 15%, which is indicative of London AIM investors identifying the other three triple digit gainers from the smaller end of the high-quality U.S. companies listed on the London Stock Exchange's AIM.

In terms of average monthly liquidity on London's AIM (see the table below), the foreign domiciled U.S. operating companies listed on London's AIM outperformed the U.S. domiciled companies listed on the London Stock Exchange's AIM on both measures and the London's AIM as a whole on one of two measures.  In more normal times, all of the weighted results exceed all of the unweighted results, reflecting the positive relationship between a company’s liquidity on the London Stock Exchange's AIM and its market capitalization.  The unweighted results represent the level of monthly liquidity on London's AIM that the average company can expect to achieve.

The reversal of this relationship for both categories of U.S. companies listed on London's AIM indicates that relative trading volumes were larger for companies listed on London's AIM with smaller market capitalizations.  For the U.S. domiciled companies listed on London's AIM, the reversed relationship is the result of London AIM investors exiting smaller companies listed on the London Stock Exchange's AIM in which they are no longer comfortable with the risk/reward relationship, as evidenced by the  unweighted share price return on London's AIM of 4% being less than the weighted share price return on London's AIM of 7%.  For the foreign domiciled U.S. operating companies listed on London's AIM, the reversed relationship indicates a strong bias towards investment in smaller companies listed on the London Stock Exchange's AIM that are viewed positively and/or as undervalued, as evidenced by the unweighted share price return on London's AIM of 27% exceeding the weighted share price return on London's AIM of 15%.

Average Monthly Liquidity on London's AIM	Foreign Domiciled U.S. Operating Companies Listed on London's AIM	U.S. Domiciled Companies Listed on London AIM	Entire London's AIM
Weighted	1.56%	1.37%	4.96%
Unweighted	4.15%	1.43%	3.08%

The chart below provides the monthly detail of the unweighted liquidity on London's AIM for each of the three categories in the table above.  Liquidity was strong during the first three months of 2012; however, an escalation of the Eurozone crisis, the Queen’s Diamond Jubilee and the Olympics caused a pullback in liquidity on London's AIM through the summer, with a rebound in autumn.

From a U.S. perspective, the key takeaway from the chart above is that there is a liquidity advantage on London's AIM for U.S. companies that list on the London Stock Exchange's AIM via a U.K. holding company.  The four main reasons being:

1. Once the Reg. S period expires, the London AIM IPO shares can trade directly within CREST
2. Pre-IPO shares not subject to Reg. S can immediately trade directly within CREST
3. Articles of incorporation fully conform to U.K. law, providing comfort to U.K. investors
4. London AIM institutional investors only allocate a portion of their investments to non-U.K. companies

Nevertheless, irrespective of where a company is domiciled, liquidity on London's AIM can be improved.  The reasons for a lack of liquidity on London's AIM are often company specific and not obvious.  As a consequence, thoughtful and thorough investigation is needed in order to formulate actionable solutions.  Several strategic decisions can be taken during the planning of the London AIM IPO to minimize the risk of lack of liquidity on the London Stock Exchange's AIM becoming a problem in the first instance; including, selection of the most appropriate London AIM Nominated Adviser (Nomad), London AIM Nominated Broker, financial PR/IR firm and Independent Equity Research firm.

London's AIM - Digital Globe Services Raises $20.5 Million in Lonodn AIM IPO - $8.0 Million for the Company and $12.5 Million for the Selling Shareholder

With 2012 revenue, EBITDA and net income of $20.0 million, $3.0 million and $1.8 million, respectively, all growing at 100+% from the previous year, the Company was able to command an opening valuation of $73.9 million in its London AIM IPO.

Founder & CEO Jeff Cox said, "There is clearly a growing momentum of U.S. technology company IPOs on London's AIM.  We believe the London Stock Exchange's AIM will provide a credible home for our business, raise our profile internationally and support our launch into Latin and South America, Europe and Asia.  We have been delighted by the support DGS has received from U.K. London AIM investors and look forward to creating shareholder value as a London AIM-listed company.  As a profitable, cash generative business, we believe London's AIM provides DGS with an excellent platform for the next stage of the Company's development, supporting our entry into new geographical markets and industry verticals as we seek to establish DGS as the global leader in outsourced online customer acquisition."

Overview of Listing on the London Stock Exchange's AIM

Denver, Colorado-based Digital Globe Services (DGS) raised $20.5 million ($8.0 million for the Company and $12.5 million for the Strategic Investor) in its recent IPO on the London Stock Exchange’s AIM.

DGS provides outsourced online customer acquisition solutions to large, consumer-facing organizations.  The Company procures paid search advertising, develops and manages branded web sales portals and establishes and maintains sales contact centers.  DGS’s competitive advantages include its proprietary databases and algorithms for cost-effective procurement of online advertising and the driving of customer action, expertise in optimizing websites and contact centers for maximum sales conversion and a fee-per-sale business model to closely align the economic interests of DGS with their clients.  The Company’s evaluation of data provided by its largest clients indicates that DGS delivers customers with a higher customer lifetime value and a higher number of products/service purchased relative to both its client’s internal efforts and DGS’s primary competitors.

The Company was founded in 2008, became profitable within 10 months and has generated positive EBITDA every quarter since 2009.  DGS has 427 employees; 410 in Pakistan, 14 in Castle Rock, Colorado, a suburb of Denver, two in the U.K. and one in Canada.  The Pakistani employees are based in Lahore and Karachi and provide contact center, engineering, software development and web design services.  Castle Rock, Colorado is the global headquarters from which the senior leadership team manages the overall business and, in particular, client relationships.  DGS’s CFO is based in the U.K.

DGS has historically focused on providing online customer acquisition solutions to U.S. cable companies, with Comcast Corporation, Charter Communications and Time Warner Cable accounting for 90% of revenue.  Providing additional services to existing customers, expansion into new geographical markets, such as Latin and South America, Europe and Asia, and expansion into new industry verticals, such as energy, finance, insurance and healthcare, are key objectives for DGS.

Key Financial Metrics

(in USD millions)	Y/E 6/30/10	Y/E 6/30/11	Y/E 6/30/12	Δ ’10 - ‘11	Δ ’11 - ‘12
Revenue	$6.2	$9.3	$20.0	+50%	+115%
Cost of Goods Sold	3.7	5.6	12.9	+51%	+130%
Operating Expenses	1.1	2.2	4.0	+100%	+82%
Interest Expense	0.1	0.1	0.2	+0%	+100%
Tax Expense	0.5	0.5	1.1	+0%	+120%
Net Income	0.8	0.9	1.8	+13%	+100%
EBITDA	1.3	1.5	3.0	+15%	+100%
Total Assets	2.2	2.7	3.5	+23%	+30%
Cash	0.2	0.2	0.5	+0%	+150%

The Company’s revenues were entirely generated from the United States and were highly concentrated with two or three customers in each of the last three fiscal years.  Since the Digital Globe Services' London AIM IPO completed within nine months of the latest audited financial statements, audited, comparative stub period financials were not required, however, the Company chose to provide unaudited, comparative management accounts for the six months ended December 31, 2012 and 2011.  Revenue, gross profit and EBITDA for the six months ended December 31, 2012 amounted to $11.1 million, $4.0 million and $1.4 million, respectively.

Key London AIM Listing Metrics

• $20.5m gross was raised from listing on the London Stock Exchange's AIM, $8.0m for the Company and $12.5m for the Selling Shareholder

• $6.1m, net of offering costs, was raised from listing on London's AIM for the Company intended to be used for: 
• $3.2m – Working capital 
• Provided new services to existing U.S. clients 
• Expand into new markets; Latin and South America, Europe and Asia 
• Expand into new verticals; energy, finance, insurance and healthcare 

• $2.9m – Repayment of factoring advance

• Aggregate transaction costs from listing on the London Stock Exchange's AIM amounted to 11.7% for the Company and Selling Shareholder

• Offering costs from listing on London's AIM amounted to 23.8% of the gross capital raised for the Company 
• London AIM IPO was undertaken on a ‘best efforts’ basis, as opposed to being underwritten 
• London AIM Nominated Broker commission of 4.0% 
• Undisclosed corporate finance fee 
• Discretionary commission of up to 1.0% of the opening market cap ($0.7m) 
• Five-year warrant over 0.5% of the enlarged share capital listed on London's AIM
• Exercisable subject to certain performance criteria
• Struck at a 6.3% premium to the London AIM IPO price

• Selling Shareholder bore their own costs, which only amounted to the 4.0% broking commission 

• Opening market capitalization upon listing on London's AIM of $73.9m
•  Dilution to existing shareholders of 10.8%
• Free float on the London Stock Exchange's AIM of 27.7%

• Trailing pre-money revenue multiple on London's AIM of 3.3
• Trailing pre-money EBITDA multiple on London's AIM of 22.0
• Trailing pre-money P/E ratio on London's AIM of 36.6

Shareholder Base
The Company had 26.5 million shares outstanding prior to the London AIM IPO and issued 3.2 million new shares for cash in the London Stock Exchange AIM IPO, leaving the Company with 29.7m shares outstanding.  The table below details those who held 3% or more of the Company prior to and/or after the London AIM IPO, along with the collective ownership of the Other New U.K. Investors.

Shareholder	Pre-IPO %	Post-IPO %
Strategic Investor	68.12	43.83[1],[2]
Founder & CEO	21.88	19.511
Executives, Directors, Employees and Consultants	10.00	8.92
London Institution (Pension and Insurance Funds)	-	7.95
London Institution (Various Funds) and Private Client Broker	-	3.07
Other New U.K. Investors	-	16.72
Totals	100.00	100.00

The CEO founded DGS in 2008 and the Strategic Investor provided some seed funding as well as logistical and operational support.

Beyond the obvious benefit of creating $12.5 million of immediate liquidity for the Strategic Investor, the Company now has an adequate amount of growth capital from its London Stock Exchange AIM listing for expansion of services to existing clients and expansion into new geographical markets and industry verticals.  With a solid base of blue-chip London AIM Institutional and Other U.K. Investors, the Company can create additional post-IPO liquidity and raise additional capital on London's AIM, if necessary.  In addition, the Company believes that its IPO and public market status on the London Stock Exchange's AIM will raise its profile in the sector, particularly internationally, and provide transparent incentives for existing and future employees via the Company’s Share Option Plan.

London AIM Board of Directors and Corporate Governance

The Board of Directors consists of two Executive Directors (the Founder & CEO and the CFO) and four Non-Executive Directors (a non-independent Chairman by virtue of his firm’s shareholding as the Strategic Investor and three independent NEDs, although one is the half-brother of the Chairman); all with solid resumes and a good blend of complementary experiences and skill sets.  The Board will meet at least four times per year.

Companies listed on London's AIM are not required to comply with the U.K. Corporate Governance Code, which is mandatory for companies listed on the Main Market of the London Stock Exchange; however, as is typical, the Company intends to follow, to the extent appropriate for its size and nature, the Corporate Governance Guidelines for Smaller Quoted Companies, which are published by the Quoted Companies Alliance.  The overarching principle of such guidance is to ensure that a company is managed in an efficient, effective and entrepreneurial manner for the benefit of all shareholders over the long term.

The Company has established an Audit Committee and a Remuneration Committee.  Both committees are chaired by an independent NED with the other two independent NEDs serving as members.  The Audit Committee will meet formally at least four times a year and the Remuneration Committee will meet when required, however, not less than two times a year.  The Nomination Committee will be an ad hoc committee constituted by the Board as and when required and, when constituted, will be chaired by an independent NED.

Accounting Considerations

The Company is domiciled in Bermuda, which allows for the use of any internationally recognized GAAP.  Since the Company’s operating subsidiaries are incorporated in Delaware and all of the Company’s historic revenues have been generated from the United States, the Company has chosen to report using U.S. GAAP.  Since all of the Company’s revenues are earned in U.S. Dollars, the U.S. Dollar is the functional currency and was also chosen as the reporting currency.

The U.K. Member Firm of an international accountancy network acted as Auditor and as Reporting Accountant.  Since the London Stock Exchange AIM IPO completed within nine months of the latest audited financial statements, audited, comparative stub period financials were not required, however, the Company chose to provide unaudited, comparative management accounts for the six months ended December 31, 2012 and 2011.

An unaudited pro forma statement of net assets is never required in connection with a London AIM IPO and was not provided in this instance since the effect of the net proceeds from the London Stock Exchange AIM IPO on the net assets of the Company is obvious.

Legal Considerations

Since the Company is not incorporated in the U.K. or one of its Crown Dependencies, the Channel Islands and the Isle of Man, but rather in Bermuda, and its ‘place of central management and control’ is also outside these jurisdictions, the three most important elements of English corporate law do not automatically apply.  As is customary, the Company amended its constitutional documents for these three main differences as outlined below.

1. Pre-emption rights (i.e. anti-dilution) – Shareholders may participate in, or the Company has to obtain approval from at least 75% of them for, the issuance of shares for cash on London's AIM of more than 20% of the then outstanding shares during any 12-month period.[3]
2. Notifiable Interests – Shareholders are required to notify the Company of, and the Company is required to publicly announce, holdings at or above the 3% level and whenever a full percentage point is breached in either direction.
3. Takeovers (i.e. mandatory offer) – If any party, or parties acting in concert, accumulates a holding of 30% or more, they must make a cash offer to the other London AIM shareholders at the highest price they paid for the Company’s shares during the last 12 months. 

The London Stock Exchange AIM IPO was not subject to Regulation S of the U.S. Securities Act of 1933.  Since the Company is domiciled outside the U.K., the Channel Islands or the Isle of Man, it was necessary to appoint a Depository and create Depository Interests (DIs), which represent an entitlement to shares.  The DIs are eligible for dematerialization and trading within CREST, the most common electronic system for the holding and transfer of securities in the U.K.

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[1]  Subject to a 12-month lock-in and customary orderly market provisions on London's AIM for a further 12 months.

[2]  In addition to the dilutive effect of the new shares issued for cash by the Company in connection with the London AIM IPO, the Strategic Investor raised $12.5 million as the Selling Shareholder.

[3]  Since the Company raised a relatively small amount of capital for itself at the time of the London AIM IPO, this is higher than the typical 10% level at which London AIM-listed companies seek an annual standing authorization from their shareholders for the issuance of additional shares for cash on London's AIM.  This flexibility increases the certainty and speed of small capital raises during the year and reduces transaction costs, since further communications with, and approvals from, shareholders are not required.