London's AIM - U.S. Company Performance - Share Price and Liquidity - 2014

The 52 U.S. companies listed on London's AIM stock exchange lost 32% during 2014, versus a loss of 17% for the FTSE AIM All-Share Index, as junior mining and oil and gas companies were adversely impacted by global macroeconomic forces, such as central bank policies, slowing growth in emerging markets and the collapse of the oil price during the second half of the year.  The 82 AIM IPOs during 2014, however, achieved average and median share price gains of 9% and 5%, respectively, from the median IPO date of June 30, 2014.

Four of the U.S. companies that left AIM during 2014 did so in order to concentrate their public listings in the U.S.  Three completed their initial IPOs on AIM during 2005, 2006 and 2006 and their U.S. IPOs on NASDAQ in 2007, 2012 and 2013, respectively, and one completed its initial IPO on AIM in 2007 and its U.S. IPO on the NYSE MKT in 2011.  This is the natural evolution for U.S. companies that complete their initial IPOs on AIM; using it as a platform for raising capital, the achievement of commercial success and a dual listing on the U.S. public markets.

With the unweighed liquidity level on AIM at 3.34% during 2014, it is now clear that a step-change up occurred during 2013 to 3.32% from 3.08% in 2012 for a number of reasons.  From August 2013, AIM shares can be held in UK Individual Savings Accounts (ISAs), the U.S. equivalent of IRAs, which provided a liquidity boost from retail investors into some of the larger, more well-known companies listed on AIM.  In addition, at the start of the new tax year in early April 2014, the annual ISA allowance was raised from £11,520 to £15,000.  Finally, the 0.5% stamp duty (tax) on the purchase of AIM shares was abolished at the end of April 2014.

AIM shares can be one of the most tax-advantaged investments; avoiding capital gains tax, income tax, inheritance tax and now stamp duty.  The benefits for companies considering an AIM IPO, and for those already listed on AIM, should be a further reduction in the cost-of-capital and an increase in aftermarket liquidity; both positively impacting valuations.

Highlights

• U.S. domiciled companies register a weighted loss of 23%
• Foreign domiciled U.S. operating companies register a weighted loss of 37%
• FTSE AIM All-Share Index lost 17%
• Significant liquidity difference between U.S. and foreign domiciled U.S. companies

There were 20 U.S. domiciled and 35 foreign domiciled U.S. operating companies listed on AIM at the beginning of 2014.  During 2014, eight companies delisted and five joined; three by way of IPO, one as a result of a reverse takeover and one migrated to AIM from the Main Market.  Of the eight companies that left AIM; three completed their U.S. IPOs on NASDAQ in 2007, 2012 and 2013 and one on the NYSE MKT in 2011, simply deciding to concentrate their public listings in the U.S., two never developed their businesses to sufficient scale, one was a large oil and gas E&P company that was acquired at a 15% premium and the final one was an investment fund that wanted to issue a class of shares that weren’t eligible for AIM, therefore, they used the LSE’s Specialist Fund Market (SFM) for that purpose and then migrated from AIM to the SFM.

The eight leavers during 2014 are not included in the chart and analysis below because they either left during the early part of the year or their market caps were relatively small, however, the joiner by way of reverse takeover is included since that occurred in January.  The majority of the underperformers during 2014 are junior mining and oil and gas E&P companies which were adversely impacted by global macroeconomic forces, such as central bank policies, slowing growth in emerging markets and the collapse of the oil price during the second half of the year.

The weighted returns in the table below were calculated using the average market capitalizations of the companies during the year, similar to how an index fund would calculate returns.

Index	Unweighted	Weighted
U.S. Domiciled Companies	(16%)	(23%)
Foreign Domiciled Companies	(31%)	(37%)
FTSE AIM All-Share Index	N/A	(17%)

The weighted return contributions for the U.S. domiciled companies were tightly packed at +/-3%, with two exceptions, where weighted losses of 6% and 9% were recorded (absolute losses of 66% and 64%).  The company that lost 66% is an aquaculture biotech company that gained 168% during 2013 after receiving regulatory clearance for commercial production in Canada, however, continuing delays with the U.S. FDA caused a retracement of the share price to early 2013 levels.  The company that lost 64% is a clean water technology and engineering company, primarily focused on the oil and gas industry, that encountered what appear to be temporary delays with some large contracts, therefore, the company may need to raise additional capital.

The weighted return contributions for the foreign domiciled U.S. operating companies were also tightly packed at +/-4%, with three exceptions, one where a weighted gain of 5% was recorded (absolute gain of 125%) and two where weighted losses of 20% and 5% were recorded (absolute losses of 87% and 52%).  The company that gained 125% is an agtech company that has developed naturally derived products for plants and soil that underwent a management change and entered into a significant European development and distribution agreement with an Italian-based agtech company.  The company that lost 87% fell victim to a blog posted by a consultant who was paid by unnamed parties in which the company’s business model and practices were questioned.  The company strongly refuted the assertions made, completed a thorough internal and external review and published a detailed response.  During 2013, this company gained 215% after integrating several acquisitions and achieving exceptional financial results, all of which was wiped out, likely temporarily, by an apparently malicious act.  The company that lost 52% is an oil and gas E&P company with significant assets in South America that got caught by slowing growth in emerging markets and the collapse of the oil price during the second half of 2014.

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

For the foreign domiciled U.S. operating companies and AIM as a whole, the relative trading volumes were larger for the larger companies as investors exited those in which they were no longer comfortable with the risk/reward relationship, as evidenced by the underperformance of the weighted share price returns compared to the unweighted share price returns.

Average Monthly Liquidity	Foreign Domiciled U.S. Operating Companies	U.S. Domiciled Companies	Entire AIM Market
Weighted	5.35%	1.65%	4.72%
Unweighted	4.89%	1.69%	3.34%

The chart below provides the monthly detail of the unweighted liquidity for each of the three categories in the table on the previous page.  The liquidity pattern is relatively stable, barring some anomalies with respect to the foreign domiciled U.S. operating companies during the first two months, and the typical summer and December holiday season pullbacks.  With the unweighted liquidity level on AIM as a whole at 3.34% during 2014, it is now clear that a step-change up occurred during 2013 to 3.32% from 3.08% in 2012 for the reasons outlined below.

From August 5, 2013, AIM shares can be held in UK Individual Savings Accounts (ISAs), the U.S. equivalent of IRAs, which provided a liquidity boost from retail investors into some of the larger, more well-known companies listed on AIM.  In addition, at the start of the new tax year on April 6, 2014, the annual ISA allowance was raised from £11,520 to £15,000.  Finally, the 0.5% stamp duty (tax) on the purchase of AIM shares was abolished from April 28, 2014.

AIM shares can be one of the most tax-advantaged investments; avoiding capital gains tax, income tax, inheritance tax and now stamp duty.  The benefit for companies considering an AIM IPO, and for those already listed on AIM, should be a further reduction in the cost-of-capital and an increase in aftermarket liquidity; both positively impacting valuations.

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

1. Once the Reg. S period expires, the 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 UK law, providing comfort to UK investors
4. Institutional investors only allocate a portion of their investments to non-UK companies

Nevertheless, irrespective of where a company is domiciled, liquidity can be improved.  The reasons for a lack of liquidity 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 IPO to minimize the risk of lack of liquidity becoming a problem in the first instance; including, selection of the most appropriate AIM Nomad, AIM Broker(s), Financial PR/IR firm and Independent Equity Research firm.

London's AIM - Constellation Healthcare Technologies Raises $15 Million in AIM IPO

With 2013 revenue and EBITDA of $52 million and $7 million, respectively, the Company was able to command an opening valuation of $118 million.  Compared to 2012, revenue was flat but EBITDA grew by 169%.  The trailing pre-money revenue and EBITDA multiples were 2.0 and 14.7, respectively.

Chairman John Johnston said, “We are delighted that London-based, blue-chip investors have enthusiastically supported our AIM IPO, recognizing the significant opportunity available to Constellation in consolidating a large and highly fragmented market.  AIM provides the ideal platform for M&A and access to additional capital, along with greatly enhancing our commercial profile and standing.  We look forward to using the many benefits of AIM to help us drive aggressive growth in the business.”

Overview of Listing on London's AIM

Houston, Texas-based Constellation Healthcare Technologies, Inc. raised $15.1 million in its recent IPO on the London Stock Exchange’s AIM.

Constellation is a healthcare services organization providing outsourced revenue cycle management (RCM), practice management (PM) and group purchasing service to hospital-based physicians and physician groups across 18 U.S. states.  The Company was formed in June 2013 through acquisitions.

The core strategy has been to move back office functions to India.  The staff of a typical medical billing company comprises many low skilled workers performing predominately linear tasks, such as explanation of benefits, coding and customer payment processing.  In the U.S., such businesses typically employ lowly qualified workers and experience high levels of turnover, resulting in an annual cost of employment of $50,000.  In India, the Company is able to employ college graduates who are more motivated and stay in their jobs longer, resulting in an annual cost of employment of $15,000.  This differential has allowed the Company to significantly decrease operating expenses and increase EBITDA by 169% during 2013.

RCM services accounted for 63% of the Company’s revenue in 2013 at a relatively high margin.  These services are provided to hospital-based physicians and physicians who are part of a larger group practice; including, pathologists, anesthesiologists and radiologists.  Physicians utilizing the Company’s RCM services avoid the infrastructure investment and costs associated with maintaining their own back office operations, thereby reducing administrative costs and increasing the amount and velocity of cash flow.

The Company has developed a proprietary business intelligence platform, Pegasus, which provides the Company and its RCM clients with transparency relating to payment and operational performance.  It consists of web-based dashboards, interactive reports and data visualization tools for effective financial and operational decision making.  Pegasus captures data from across the revenue cycle continuum and transforms that data into actionable information.  The Company has access to a team of 35 technology specialists based in the U.S. and India who developed, maintain and are extending Pegasus, providing the Company with a significant point-of-differentiation versus the wide range of outsourced RCM vendors.

PM services accounted for 34% of the Company’s revenue in 2013 at a relatively low margin.  These are comprehensive business and practice management services provided to primary care practices.  The Company also offers a group purchasing service that helps physicians lower vaccine costs through volume pricing with pharmaceutical suppliers such as Sanofi Pasteur and Merck.  This service accounted for 3% of the Company’s revenue in 2013 at a relatively high margin given its pass-through nature.

The Company retains all 387 front office jobs in the U.S.; including, management, customer service and client relationship management.  Since the Company was formed in June 2013 through acquisitions, 340 back office jobs have been moved to two third-party Indian BPO providers, one of whom is exclusive.

The Company plans to act as a consolidator of the U.S. third-party medical billing market, which consists of over 2,000 companies, many of whom have revenues below $20m and low profitability.  Targets will typically have at least 75 employees, the majority of whom are based in the U.S, $5m - $15m of revenue, EBITDA margins of 5% - 25%, positive cash flow, an organizational structure based on skill sets with well-documented jobs and procedures and owners willing to accept a significant proportion of deferred consideration contingent upon achieving performance targets for at least two years post-acquisition.

Key Financial Metrics

(in USD millions)	Y/E 12/31/11	Y/E 12/31/12	Y/E 12/31/13	Δ ’11 - ‘12	Δ ’12 - ‘13
Revenue	$55.2	$51.7	$52.0	-6%	+1%
Operating Expenses	56.5	54.1	48.9	-4%	-10%
Interest Expense	5.1	7.2	4.2	+41%	-42%
Other Income	-	-	1.6	N/A	N/A
Income Tax Expense	0.3	-	1.3	-100%	N/A
Net Loss	6.7	9.6	0.8	+43%	-92%
EBITDA	4.5	2.6	7.0	-42%	+169%
Total Assets	42.7	40.0	56.7	-6%	+42%
Cash	0.2	0.8	4.0	+300%	+400%

The Company’s revenue was entirely generated from the U.S.  The largest customer only accounted for 6% of revenue in 2013 and the top ten only accounted for 29%.  Since the 2013 financials were more than nine months old, unaudited, comparative, six-month stub period financials were required.  The aggressive drive for operational efficiency continued into 2014 with the generation of $7.2 million of EBITDA during the six months ended June 30, 2014, a 320% increase over the same period during 2013.

Key Listing Metrics

·         $15.1m gross was raised, $12.9m net of offering costs, intended to be used for:

o    Acquisitions and their integration

o    Organic growth

§  Investment in sales and client relationship management strategies

§  Further development of Pegasus business intelligence / analytical tools platform

o    Working capital

·         Offering costs amounted to 14.6% of the gross capital raised

o    The offering was undertaken on a ‘best efforts’ basis, as opposed to being underwritten

§  Corporate finance fee of £200k ($314k)

§  Broker and sub-placing agent commission of £304k ($477k)

o    £251k ($394k) of which was settled in shares

·         U.S. placement agent fee of $400k

·         Opening market capitalization of $117.9m

·         Dilution to existing shareholders of 12.8%

·         Free float of 13.1%

·         Trailing pre-money revenue multiple of 2.0

·         Trailing pre-money EBITDA multiple of 14.7

·         Trailing pre-money P/E ratio N/A

Shareholder Base
The Company had 47.3 million shares outstanding prior to the AIM IPO, issued 7.1 million new shares for cash in the IPO, issued 1.0 million shares to an investment entity controlled by the Founder & CEO (see footnote 2 below) and issued 0.2 million shares to the AIM Broker and Sub-Placing Agent, leaving the Company with 55.6 million shares outstanding.  The table below details those who held 3% or more of the Company prior to and after the IPO, along with other holdings that are of interest.

Shareholder	Pre-IPO %	Post-IPO %
Founder & CEO	80.00	68.08[1]
Third-Party Investment Entity	20.00	17.021
Global Institution (Various Funds)	-	5.33
Investment Entity Controlled by the Founder & CEO	-	1.701,[2]
AIM Broker and Sub-Placing Agent	-	0.33[3]
Directors	-	0.081
Other New U.K. and U.S. Investors	-	7.46
Totals	100.00	100.00

As a result of the AIM IPO, and considering the fact that $17 million remains undrawn on the Company’s $40 million Credit Facility, the Company now has an adequate amount of capital to execute on its strategic acquisition and integration campaign.  The broadening of the shareholder base as a result of the IPO, should allow the Company to access further capital, if required, to support additional acquisitions and their integration over the medium-to-longer-term.  In addition, the Company believes that its IPO and public market status on AIM will enhance its commercial profile and standing and generally assist with the growth of the business.  Finally, the Company intends to adopt a Share Option plan so as to enhance its ability to attract, recruit and retain management, employees and consultants with equity-based incentives.

Accounting Considerations

Since the Company is incorporated in Delaware, and did not re-domicile into a European Economic Area country, which includes the U.K., they chose 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 Reporting Accountant and the U.S. Member Firms of another international accountancy network audited the 2011 - 2013 financials.  Since the 2013 financials were more than nine months old, unaudited, comparative, six-month stub period financials were required.

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

Board of Directors and Corporate Governance

The Board of Directors consists of two Executive Directors (the Founder & CEO and the CFO), an independent Non-Executive Chairman (NEC) and two independent Non-Executive Directors (NEDs); all with solid resumes and a good blend of complementary experiences and skill sets.

Companies listed on AIM are not required to comply with the U.K. Corporate Governance Code published by the Financial Reporting Council, which is mandatory for companies listed on the Main Market of the London Stock Exchange.  AIM listed companies typically comply with, and the Company intends, in so far as is practicable given its size, nature and stage-of-development, the main provisions of the Quoted Companies Alliance Guidelines.  The Company also intends to comply with the Policy and Voting Guidelines for AIM Companies issued by the National Association of Pension Funds.  The overarching principle of corporate governance on AIM is to ensure that companies are managed in an efficient, effective and entrepreneurial manner for the benefit of all shareholders over the long term.

Since the Company’s Founder & CEO remains a substantial shareholder, he entered into a Relationship Agreement with the Company.  The Relationship Agreement regulates certain aspects of the continuing relationship between the parties so as to enable the Company to conduct its business affairs independently from the Founder & CEO and at arm’s-length and on normal commercial terms.  In addition, and more specifically, the Relationship Agreement prevents the Founder & CEO from taking any action that would cause non-compliance with the AIM Rules, proposing or procuring the proposal of a shareholder resolution intended to circumvent the pre-emption rights of shareholders (see the Legal Considerations section on the next page) or voting in favor of the cancellation of the Company’s shares to admission and trading on AIM.  There is also a requirement that independent Directors constitute at least 50% of the Board and any dealings or disputes between the Founder & CEO and the Company be handled on behalf of the Company by a committee comprising only the independent Directors.  Finally, the Relationship Agreement includes standard non-compete clauses that extend for one year following termination of the Relationship Agreement.  The Relationship Agreement terminates if the Founder & CEO’s shareholding drops below 15%, another party holds 30% or more of the Company or the Company’s shares are no longer listed on AIM or the Main Market.

The Company has established an Audit Committee and a Compensation Committee with the Board retaining responsibility for nominations to the Board at this early stage of the Company’s development.  The Audit Committee is chaired by one of the NEDs with the other NED and the NEC serving as the other members and will meet at least two times a year.  The CFO will, where appropriate, be invited to attend meetings and the Company’s auditors will be regularly invited to attend meetings, including at the planning and reporting stages of the audit.  The Compensation Committee is chaired by the NEC with both NEDs serving as the other members and will meet as and when required.

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 Delaware, 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 of more than 10% of the then outstanding shares during any 12-month period.[4]

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 shareholders at the highest price they paid for the Company’s shares during the last 12 months.

The Company relied on the safe harbor afforded by Regulation S of the U.S. Securities Act of 1933 so as to not have to file a registration statement with the U.S. SEC.  Shares subject to Reg. S (generally, those issued in the IPO for a period of one year, issued within one year prior to the AIM IPO and/or held by affiliates) are not currently eligible for dematerialization and, as such, are held and traded in certificated form.

Since the Company did not re-domicile into the U.K. or one of its Crown Dependencies, the Channel Islands and the Isle of Man, its shares that are not subject to Reg. S are not eligible for direct trading within CREST; the most common electronic system for the holding and transfer of shares in the U.K., however, a Depository could be appointed and Depository Interests (DIs), which represent an entitlement to shares, could be created, allowing for the immediate trading of these non-Reg. S DIs within CREST.

Article 3(2) of the EU Regulation on Central Securities Depositories, which was published in August 2014, will require that all AIM listed shares be dematerialized and eligible for electronic trading and settlement.  The London Stock Exchange is working with the companies who own and manage CREST on the technology solution necessary to accommodate ‘restricted securities’, implementation of which is scheduled for June 2015.  At or around that time, the Company will apply for all of its common shares to be evidenced in CREST, and therefore eligible for electronic trading and settlement, in the form of DIs.

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

[2]  This shareholding arose from 1) the conversion of $1.2 million owed by the Company to an investment entity controlled by the

   Founder & CEO who made a prepayment under the Company’s $40 million Credit Facility which was triggered by the actual

   and expected costs of the AIM IPO and 2) a $0.8 million Subscription.

[3]  Subject to orderly market provisions for 12 months.

[4]  This is the typical level at which AIM-listed companies seek an annual standing authorization from their shareholders for the issuance of additional shares for cash.  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.