New AIM company Digitalbox’s two digital publications, Entertainment Daily and The Daily Mash satirical website, have profitable track records and provide a solid base for the reversal into AIM shell Polemos. The key to the prosperity of the business is securing additional acquisitions and building up a much larger, cash generative group.

It appears that the profit of The Daily Mash, whose purchase will be completed next week, has declined in the past three years and is important that Digitalbox shows that it can make the mobile-focused model that has been honed on Entertainment Daily work for other online titles.

Digitalbox will undoubtedly have to come back to the market to raise cash and/or issue shares to vendors when it makes more acquisitions. There should be plenty of opportunities to acquire non-core assets from major media companies, as well as individual, privately-owned sites. Digitalbox is already enhancing its team so that it should have the resources to manage around four more acquisitions.

The valuation is a full one for the business as it is, but investors would be buying a management team with enormous experience of the media and publishing world, particularly at EMAP, and the potential to create a much larger business.

This is one to keep an eye on for the time being, especially as there can be selling by shareholders in the original shell after a reversal.

New admission/ reversal details 

Digitalbox (LON:DBOX)

www.digitalbox.com

Reversal/placing

Reversal date: 28 February 2019

Issue price: 14p

Amount raised: £1.02m

Reversal expenses: £750,000

Market capitalisation: £12.6m

Nominated adviser: WH Ireland                     

Brokers: Leander Capital Partners / Peterhouse

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What was it?

Polemos was a shell that originally floated as Ofex Holdings, the original name of smaller company-focused stockmarket NEX Exchange, in April 2003. The market operations were sold in 2012 and the investing policy was changed to focus on natural resources. The name was changed to Polemos in November 2012.

A number of resources investments were made in subsequent years and in September 2017 there was a proposed acquisition of US-based cyber security firm SecurLinx Corporation for £17.8m in shares – at 0.035p a share. This reversal was terminated in March 2018. There was a 100-for-one share consolidation in May 2018.

In September 2018, the proposed acquisition of Digitalbox Publishing, which was demerged from M Capital Ventures at the end of 2017, was announced at a valuation of £10m. This was satisfied by the issue of shares at 13.75p a share.

There was a 2,500-for-one share consolidation followed by a subdivision of each consolidated share into 125 shares. That is effectively a 20-for-one consolidation, and this has been undertaken to ensure the par value is below the placing price and to get rid of the small shareholders with a few hundred shares. There were 372 out of a total of 465 Polemos shareholders than owned less than 2,500 shares and they accounted for less than 0.1% of shares in issue.

What will it be?

Digitalbox is a digital media business and it began operations in December 2015 with a focus on mobile. The initial online operation was Entertainment Daily, where the demographic is 25-54 year old women. Entertainment news is a competitive market but Entertainment Daily appears to have secured a profitable niche.

Just after the reversal, the company will buy satirical website the Daily Mash for £1.2m in cash and shares issued at 14p each – £100,000 of cash is deferred. The Daily Mash was started in 2007 and co-developed TV programme The Mash Report with the BBC.

More acquisitions are planned in order to build up a mobile-focused publishing group. Targets have been identified. Staff have been taken on to provide a resource that has enough capacity for four more acquisitions of websites. These acquisitions will have broad appeal that can be used to generate increased revenues.

The model for improving the performance of acquisitions includes maximising mobile-related behaviour, assessing the effectiveness of content and removing activities that do not help to make money.

Advertisers bid for advertising slots on the site thereby maximising revenues. Investment in technology enables the website to be faster and more efficient.

Financials

In November 2018, Polemos issued convertible loan notes to raise £220,000, which were converted at 10.5p a share – a 25% discount to the 14p placing price. The £1.02m raised in the placing/subscription, which is less than the £3m originally envisaged, will cover expenses of £750,000, although £120,000 of this will be paid in shares, and contribute to the £900,000 initial cash cost of the Daily Mash.

Pro forma net assets are £11.2m, including £10.3m of goodwill, and £183,000 is in the bank, after the repayment of £200,000 of the £400,000 owed by Digitalbox Publishing to M Capital Ventures.

In 2017, Digitalbox reported a pre-tax profit of £508,000 on revenues of £2.32m. However, there was cash outflow from operations of £437,000, after a £1m working capital increase.

In the six months to June 2018, pre-tax profit was £138,000 on revenues of £1.01m. That was boosted by a £229,000 exceptional credit, which relates to a change in the recognition of prepaid costs from 12 months to 36 months, because viewers are thought to have a longer engagement life than previously. There was £263,000 in cash generated from operations following a small working capital reduction.

Revenues are generated internationally with the US the biggest contributor. However, direct trading in the US was suspended in April 2018 because of the high level of cash required to make the business successful.

Daily Mash owner Mashed Productions has reported annual revenues of around £400,000 for the past three years. In the year to March 2018, revenues were £396,000 and pre-tax profit was £135,000 – the lowest level for the past three years, but it was the only year it generated cash from operations. The latest seven month figures show an operating profit of £49,000 on revenues of £199,000.

Neil Rafferty and Paul Stokes were the owners and directors of the company. Total dividends of £253,000 have been paid in the past 43 months, but directors remuneration and pension contributions have been more modest at £207,000 over the same period. Neil Rafferty is staying with the business so some of the dividend payments will be reflected in a higher salary.

Daily Mash revenues are more focused on the UK than Entertainment Daily and this has become more pronounced in the past couple of years. Advertising contributes the majority of revenues, but these have declined. There was a boost to last year’s figures from television revenues.

There will be additional costs for staff and resources taken on in order to run and improve further acquisitions. There will also be additional quoted company costs.

Directors

James Carter is chief executive and he has previously been publishing director at EMAP and new product development director at Dennis Publishing.

Annual salary £120,000

Jim Douglas is chief operating officer and a former EMAP journalist. He was also editorial director of Future Publishing and he is head of editorial at Digitalbox.

Annual salary £120,000

David Joseph is finance director and he is employed for five days each month. He is another former EMAP employee.

Annual salary £40,000

Former EMAP boss Sir Robin Miller is non-executive chairman and he is also a director of AIM-quoted Brave Bison and M Capital Ventures, which demerged Digitalbox.

Annual fee £30,000

Along with Sir Robin Miller, non-executive director Martin Higginson is a director of M Capital Ventures. Higginson has built up other AIM-quoted companies, including mobile services provider Monstermob and online gaming operator NetPlayTV, and is currently boss of virtual reality company Immotion.

Annual fee £12,000

Nigel Burton is the only Polemos director to stay on as a non-executive after the reversal. He is chairman of Remote Monitored Systems, formerly Strat Aero, and a former director of Nu-Oil and Gas.

Annual fee £20,000.

Shareholders

The directors own 25.7% of the company with Carter and Douglas each owning 12.1%. (They also each owe £85,000 to the company for cash used to buy shares in the acquired business.) Sir Robin Miller owns 0.86% and along with Martin Higginson, who does not own any shares directly, is interested in the 3.81% stake owned by M Capital Ventures. Nigel Burton is the other director who owns shares and he holds 0.66%.

Sam Higginson owns 10.8%, Leonie Dobbie 8.4% and Napier Brown Holdings holds 3.7%. These are all part of a concert party related to M Capital Ventures, which owns 36.4% in total.