Additional comments on TextMagic AS Feb 2023 payout
TextMagic AS wishes to refute the rumours, which have been circulating the last few days in the press and in various investment forums, to the effect that TextMagic AS has used the monies collected as part of its IPO to make payments to its majority shareholders. TextMagic AS has done nothing of the kind.
As a result of the IPO conducted at the end of 2021 TextMagic AS received 2.5 million euros worth of investments. The IPO had three main objectives:
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to raise additional capital to be used for business development,
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to increase the liquidity of shares, making thereby more attractive employees’ share option programme and
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strengthen the TextMagic brand.
The company description stated as much.
Although the business of TextMagic was and continues to be profitable, it was disclosed at the time of the IPO that TextMagic AS had no plans of distributing dividends. Such a conservative approach was occasioned by accounting rules. Large non-tangible assets meant that their depreciation was likewise large. Essentially the depreciation “ate up” all the profit. According to the company description published prior to the IPO the depreciation for 2022 should have amounted to approximately 5 million euros.
In 2022, having consulted with its auditors, TextMagic AS changed its depreciation policy. As a result, the depreciation for the first six months of 2022 amounted to approximately 800 thousand euros, and the depreciation for the entire 2022 should amount to approximately 1.6 million euros.
The revenue and net assets of TextMagic AS have been very strong in 2022. The revenue actually earning largely coincides with that forecast in the company description (no cash flow forecast was made in the company description). Taking all that into account, the management of TextMagic AS deemed it justified to give the shareholders the chance to vote on distribution of “shareholder income”. All shareholders had the chance to vote for or against that.
Since in view of a large depreciation the financial statements for 2021 nevertheless showed the financial result to be a loss, there was no possibility of distributing dividends. Instead, the management of TextMagic AS, having taken advice, proposed to conduct a bonus issue followed by a reduction of share capital. That is well-know avenue for distributing shareholder-income. It comprises the following steps:
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a share premium which has been contributed by the shareholders is converted into share capital,
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after that the share capital is reduced and
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after that distributions are made to shareholders on account of that reduction (no such distributions have yet been made; they may be made only in the beginning of 2023).
It needs to be separately pointed out that the share premium which was converted into share capital and was used for increasing the value of shares of every shareholder had actually been contributed Monday Media OÜ, the majority shareholder of TextMagic AS. Thus, the holding of every shareholder was essentially increased on account of assets which had been contributed to TextMagic AS by Monday Media OÜ.
It has been suggested that the timing of the bonus issue was ill-advised. While TextMagic AS would have preferred to conduct it after the publication of the 6-months’ interim report for 2022, then in view of statutory requirements the management decided not to wait for that publication. According to those requirements an audited set of financial statements must be used for a bonus issue. Furthermore, the balance sheet date of financial statements used for a bonus issue cannot be older than eight months at the time when an application for registering the bonus issue is made to the Commercial Register (i.e., the application to register the bonus issue must be submitted to the Commercial Register at the end of August at the latest). Since the interim financial statements of TextMagic AS is not audited, it cannot be used for the purposes of the bonus issue; the annual financial statements must be used instead.
TextMagic AS published its 6-months’ financial statements on 15th August. Bearing in mind that August is a holiday period, the management of TextMagic AS was of the opinion that there existed a significant risk that if the voting on the bonus issue (as well as all related activities) had been left for the second half of August, the application for registering the bonus issue would not have been submitted to the Commercial Register on time, viz., by the end of August (while it was certainly not impossible that the application would be submitted in time, the management did not wish to take the risk).
While the total size of the distributions to be made to the shareholders is admittedly similar to the amount of capital received by TextMagic AS as part of the IPO, there are five aspects which need to be pointed out in this respect.
First, the monies received as part of the IPO have been largely expended. The cash flows from investing activities for the first six months of 2022 alone amounted to approximately 1.3 million euros. In addition, TextMagic AS has had to bear various costs pertaining to development which are not shown among cash flows from investing activities in the cash-flow statement.
Second, the distribution of shareholder income is (and was from the beginning of the bonus issue) planned for early 2023. By that time the cash flows from investing activities alone will exceed 2.5 million euros.
Third, in the company description the depreciation forecasted for 2022 amounted to approximately 5 million euros. After the change in accounting policies, it should in fact amount to approximately 1.6 million euros. Thus, the proposed distribution to shareholders – totalling some 2.55 million euros – is actually smaller than the amount “saved in depreciation”.
Fourth, a distribution will be made to every shareholder. Every shareholder will receive 0.3 euros per share.
Fifth, on 30th September 2021, i.e., before the IPO, TextMagic AS had on its accounts approximately 3.2 million euros of cash. Thus, if Monday Media OÜ, the majority shareholder of TextMagic AS, had wanted to distribute to itself shareholder income, it could have done so. There was no need to collect monies for making such a distribution through an IPO; sufficient cash was already available.
Priit Vaikmaa
TextMagic AS CEO
investor@textmagic.biz
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