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Nektan Plc

Nektan plc All KPIs up including revenue growth of 52%

Nektan plc (LON: NKTN), a leading international gaming solutions and services provider, announced today its audited final results for the year ended 30 June 2018, and announces separately today that it has received in principle support to raise £3.5m in cash through the sale of 57.5% of its US subsidiary Respin for £2.0m and to raise £1.5m through an equity placing and subscriptions for new ordinary shares at a price of 15p per share.

Nektan PLC – Financial highlights

Year ended 30 June 2018

Year ended 30 June 2017

Total revenue (£000)

20,069

13,250

Adjusted EBITDA loss* (£000)

(2,355)

(3,419)

Operating loss (£000)

(5,475)

(4,624)

Loss before taxation (£000)

(7,182)

(6,219)

Basic and diluted loss per share (pence)

(16.6)

(21.8)

Financial, operational and strategic highlights

·      Revenue growth of 52% to £20.1m (2017: £13.3m)

·      All KPIs showed a marked improvement during the year:

o  Net Gaming Revenue (NGR) up by 48% to £19.4m (2017: £13.1m)

o  New First Time Depositing Players (FTDs) up by 20% to 156,703 (2017: 130,105)

o  Total cash wagering up by 43% to £560m (2017: £390m)

·      Adjusted EBITDA loss* reduced to £2.4m (2017: £3.4m), and an operating loss for the year of £5.5m (2017: £4.6m).  These numbers include 12 months of the Group’s US division compared to 6 months in the prior year.  Excluding the US, adjusted EBITDA loss* reduced to £1.4m (2017: £2.7m) which saw an operating loss of £0.5m in H2 versus £0.9m in H1

·      Significant product improvements, including further multi-language and currency functionality, helping to increase the number of new casino partners and new geographies

·      Major enhancements to games portfolio from some of the leading global studios taking the total number of games to over 750, helping to strengthen Nektan’s attraction to B2C and B2B partners

·      In December 2017, the Company announced that it had raised £1,759,535 through a placing of 5,095,243 new ordinary shares and subscriptions for 3,283,495 new ordinary shares both at a price of 21p per share

·      In July 2017, the Company secured commitments to raise £2,500,000 through an unsecured loan facility, with two of its Directors, Gary Shaw and Sandeep Reddy, of which £1,985,000 was drawn down with the balance having now expired

·      The Company has entered into negotiations with HMRC in order to agree a payment schedule for £2.9m of owed UK point of consumption tax 

B2C

·      Launched 38 new casinos on its network taking the total at year end to 113 casinos from 55 partners

B2B

·      Evolve Lite, Nektan’s B2B content aggregation platform, went live in November 2017, opening up new more profitable revenue streams

·      Signed first global platform deal for Evolve Lite with Malta based gaming company, Tyche Digital Malta Limited (“Tyche”)

Post year-end highlights

·      Lucy Buckley joined as Chief Executive Officer on 3 December 2018

·      BetVictor went live with Nektan’s B2B global casino aggregation platform which sees BetVictor take the Evolve Lite casino platform’s content and distribute it across three of its casino brands

·      On 27 December 2018, the Company announced that it had received in principle support to raise £3.5m in cash through the sale of 57.5% of its US subsidiary Respin for £2.0m and to raise £1.5m through an equity placing and subscriptions for new ordinary shares at a price of 15p per share (the “Placing Price”)

·      In addition, the Company has reached agreement with holders of approximately £4.3m of the outstanding balance of the £8.1m Series A convertible loan notes and loan noteholders who own £1.2m of the outstanding convertible loan note interest to convert into new ordinary shares at the Placing Price resulting in the issue of, in aggregate, approximately 36.6m new ordinary shares

·      Following the conversions, reduction of the coupon on the Series A convertible loan notes to 2.5%

·      Furthermore, Gary Shaw, Executive Director of the Company, has agreed to convert £650k of his shareholder loan and the accrued interest on the full loan of £148k at the Placing Price resulting in the issue of 5,321,680 new ordinary shares

*The Group defines adjusted EBITDA as the operating result before depreciation, amortisation, income or expenditure relating to exceptional items and non-cash charges relating to share based payments and impairments.  Exceptional items are considered to be one-off, non-trading items. 

Gary Shaw, Founder and Executive Director’s Review

I am delighted to present Nektan’s results for the year ended 30 June 2018, for what was a transformational year for the business that saw substantial operational enhancements which have led to a significant increase in commercial opportunities for the Group. During the year, Nektan continued to develop its mobile casino product offering, expanded into new geographic markets, launched new product offerings and grew significantly in each quarter achieving growth at 8.6% quarter on quarter on average with an annual NGR growth figure at 48.1%.

We believe that our proprietary technology is unique in the market place and we are now attracting major global partners who wish to use the feature rich gaming content we have worked so hard to populate our platforms with. By working closely with the best developers of casino games, we can provide our partners with engaging, socially responsible and compliant content. The growth we have seen during this financial year reflects the progress we have made in adding more content and providing this to a growing list of partners. This is a growth trajectory that we continue to see not just domestically, but globally in emerging markets such as Asia.

Our core B2C white label casino business is expanding across Europe and we continue to see additional market opportunities developing. During the year, the number of Nektan managed sites increased from 75 to 113 and we are now operating 152 casinos for 66 partners with first time depositors increasing from 130,105 to 156,703. Our commitment to supplying the best casino content and experience to players saw us integrate further game providers, launch new products including NetEnt’s live dealer offering, and add new payment methods including PayPal. The Evolve platform now has over 750 games from 27 game providers. In addition to ramping up our CPD accredited multi-jurisdictional compliance and regulatory training content, we have added new payment methods including Paypal during the year, created a new CRM and affiliates function and, as a result, all player and acquisition marketing is now managed in-house.

Product innovation has been a key driver of B2C revenue, particularly our newly developed business intelligence tools, which have significantly improved our data insight and operational capabilities from acquisition and player loyalty to game positioning. This data is also being used to track player trends for new product development and for player protection. Nektan takes its responsibility of preventing problem gambling very seriously and we were one of the first online casino technology providers to fully integrate with GamStop. The integration ensures that the Evolve platform detects all players who have signed up to GamStop and prevents them from registering and playing on Nektan managed sites, reflecting the emphasis on duty of player care.

Our emerging B2B software supply and content distribution division is now supporting sites across a number of countries in 16 languages. Due to Nektan’s speed of integration, it is now attracting global operators, such as BetVictor, and there are further contracts with top tier operators on track to be launched in the coming months. Our proven capabilities in B2C white label casino allows us to leverage our technology and business intelligence expertise into the B2B industry to drive increased revenues for our partners. Our bonus tools, in particular, allow operators to offer marketing campaigns across all partner games and are driving improved player loyalty.

In addition to B2B software supply and content distribution, Nektan is working with global independent game studios to provide technology, expertise and distribution for small and medium developers. A number of these studios are exclusive to Nektan, thereby increasing our unique competitive position in the market of providing the best gaming content in the industry.

In the US, we have developed and certified a mobile casino gaming solution that allows players to download an app and play Class II and Class III games for real money anywhere in the property. It is due to go live with a number of casino partners in the first few months of 2019. In US states that have or are in the process of legalising iGaming, such as New Jersey and Pennsylvania, the Nektan platform and games can be accessed seamlessly by players within the casino property, on the go or at home. We see ourselves as a first mover in the US market which is gradually opening up.

Performance

For the year-ended 30 June 2018, the Group’s European Managed Solutions business has seen significant growth in all KPIs – Net Gaming Revenue (NGR) in the year ended 30 June 2018 was £19.4m (2017: £13.1m), First Time Depositors (FTDs) were 156,703 (2017: 130,105) and cash wagering was £559.8m (2017: £390.3m). At the year end, the casino network included 113 white label casinos (2017: 75 casinos).

FY18

FY17

Change

Net Gaming Revenue

£19.4m

£13.1m

48.1%

First Time Depositors

156,703

130,105

20.4%

Cash wagering

£559.8m

£390.3m

43.4%

 

For the year ended 30 June 2018, the operating loss was £5.5m (2017: £4.6m) and adjusted EBITDA loss* was £2.4m (2017: £3.4m). The adjusted EBITDA loss* included £0.9m loss from Respin for the year ended 30 June 2018 (2017: £0.8m loss for 6 months following acquisition).

*The Group defines adjusted EBITDA as the operating result before depreciation, amortisation, income or expenditure relating to exceptional items and non-cash charges relating to share based payments and impairments. Exceptional items are considered to be one-off non-trading items.

Operations

Europe

We continue to make significant improvements across all aspects of casino management, including maximising player entertainment and engagement, through the enhancement of our Evolve platform and associated services across CRM, payments, customer service and player marketing.

The continuing improvement of our Evolve platform’s back office during the year positions the casino network well for further growth and geographic expansion, which we are seeing reflected in a strong pipeline of prospective new partners and regular roll out of new casinos. Controlling our product roadmap offers flexibility and the opportunity to differentiate our casino offering from other casinos in a competitive market, which benefits our white label partners.

We continue to add high quality partners and, at the year-end, had 113 live casinos from 55 partners. We expect to continue to see strong growth in our Managed Solutions business as we improve further our CRM, in particular through data intelligence, and operational capabilities as well as place further emphasis on overseas markets.

The B2B business is becoming a significant part of Nektan’s future global strategy which is being achieved by leveraging the Evolve platform into new, significantly higher margin business lines as the Company moves towards EBITDA break-even in Europe, which is expected during FY19.

Nektan generated revenue during the year from the B2B business for the first time and the business stream is now growing strongly and currently has 14 contracts live globally. The first global platform deal with Tyche now has four partners live and a significant pipeline of further integrations expected over the coming months, where we are benefiting from our speed of integration and breadth of content offering.

Nektan has made its proprietary remote gaming server (“RGS”) available to third party games studios who can integrate their content directly onto it. This strategic move has created an opportunity to work with leading industry partners to produce premium content with higher margins and we recently announced that we are now partnering with Japanese games company Rising Entertainment to distribute 12 of their games on an exclusive basis across our B2B and B2C networks.

The Group is in discussions with a number of industry partners to integrate E-Lite on a platform to platform basis giving access to Nektan’s content and other functionality in the next two quarters which would be an additional global revenue stream for the Group and is part of the higher margin B2B division.

North America

Respin LLC (Respin), our US operating subsidiary, now rebranded as Rapid Games, is focused on mobile on-premise digital gaming, primarily for the Class II tribal gaming market, offering players and casinos the opportunity to play bingo and slot games on mobile devices when in the casino.

In the year, the Rapid Games team has developed and released several software updates to their platform. These include enhancements that have secured independent test lab certifications for several strategic standards, including GLI 11 Standards for gaming devices in casinos, GLI 16 cashless systems in casinos, GLI 21 client-server systems and GLI 26 Mobile Gaming. The additional certifications along with Rapid Games NIGC 547 certifications position them as the only current interactive platform in the US with both Class II and III on-premise certifications that can operate within casino boundaries or outside the casino on tribal lands.

The team has maintained its live deployment in northern California and is positioned to launch at several tier 1 tribal casinos in southern California. We are in the process of securing contracts at further tier 1 casinos.

Respin made an adjusted EBITDA loss in the period of £911k (2017: £752k).

Compliance & Social Responsibility

Licensed and regulated by the Gibraltar Licensing Authority, the Gambling Commission for Great Britain, and ICO (Information Commissioners Office), Nektan upholds an ISO 27001:13 certification.

As a socially responsible licence holder, Nektan has always operated with a detailed level of data management options. It has incorporated a comprehensive list of built-in functions on its white label platform to give players the ability to manage and be fully in control of their gaming experience.

Anti-money laundering and player security has been at the heart of Nektan’s core strategy and aims to ensure that its gaming environments remain safe, secure and compliant. It has invested heavily in technological developments to its software so that it delivers on this promise.

Providing players with a responsible gambling environment that does not impact on the quality of play is made easier by Nektan’s enhanced, industry leading age verification procedures that have been built into its proprietary platforms. These checks are done via automated systems and manual procedures.

Nektan’s staff undergo rigorous compliance and social responsibility awareness training to ensure the care of vulnerable players.

As well as introducing Gamcare and Gamstop safety measures, which allow players to initiate self-exclusion and visit limits, Nektan broadcasts responsible gaming messages across its casino sites and offers a full-range of expert advice via its internal training schedule. CRM messaging is responsible and purposefully written, with all communications compliant under ASA and CAP guidelines.

Financial review

Revenue

Net gaming revenue in the year ended 30 June 2018 was £19,414k (2017: £13,092k), an increase of 48%. This is due to the increase in new partners signed up during the year, an increase in the number of casinos offered by those partners and also improved operational efficiencies across the network. Total revenue for the year was £20,069k (2017: £13,250k), an increase of 51%, the difference between Net Gaming Revenue and total revenue of £655k (2017: £221k) consists of B2B revenue and site set-up and management fees.

Expenses

The B2C business operates largely under the revenue share model and, as such, the marketing, partner and affiliate costs increase with revenues and during the year were £9,494k (2017: £7,203k). However, as a percentage of total revenues, costs decreasing from 54% to 47% demonstrating efficiencies in spend as the Company grows.

Administrative expenses, excluding exceptional items, depreciation, amortisation and share based payment charges, increased during the year to £5,414k (2017: £4,703k), which includes 12 months of the US division which was only fully consolidated for 6 months during the prior year. The Europe administrative expenses increased during the year to £4,404k (2017: £3,938k) due to the significant growth experienced in Managed Solutions as well as the small headcount required for the new B2B business unit. As a percentage of revenue, Europe decreased from 30% to 22% reflecting the considerable operational gearing that exists within the Company.

The administrative expenses are broken down further below:

Year ended

 30 June 2018

Year ended

 30 June 2017

£’000

£’000

Europe adjusted administrative expenses

(4,404)

(3,938)

US adjusted administrative expenses (6 months in FY17)

(1,010)

(765)

Adjusted administrative expenses

(5,414)

(4,703)

Exceptional items

(404)

1,463

Depreciation

(170)

(126)

Impairment of fixed assets

(152)

Amortisation

(2,184)

(1,976)

Share based payment charge

(210)

(566)

Total administrative expenses

(8,534)

(5,908)

 

Exceptional costs moved from a gain of £1,463k to a charge of £404k. The previous year’s gain was primarily due to the profit on the disposal of brands after legal costs of £1,897k; excluding this, the charge was £434k which related to fund-raising costs, a provision for an onerous contract and restructuring costs.

Adjusted EBITDA

The operating loss for the year was £5,475k (2017: £4,624k). Adjusted EBITDA loss* was £2,355k (2017: £3,419k). This figure includes 12 months of Respin, Nektan’s US subsidiary, being fully consolidated, versus 6 months in the prior year, the impact being a loss of £911k (2017: £752k).

*The Group defines adjusted EBITDA as the operating result before depreciation, amortisation, income or expenditure relating to exceptional items and non-cash charges relating to share based payments and impairments. Exceptional items are considered to be one-off, non-trading, items.

Cash flow

The Group’s cash balance at 30 June 2018 was £1,402k (30 June 2017: £638k). Net proceeds of £1,692k (2017: £2,191k) were raised in the year from issuing new shares and a new debt facility (net of transaction costs) of £1,985k (2017: £nil). During the year £1,358k (2017: £813k) was spent on capitalised development costs. In addition, the Group raised £1,950k in the previous year from the sale of 3 casino brands to Buckingham HMB LLP.

Convertible Loan Note (CLN)

During the year, the Company received conversion notices from Series A CLN holders to the value of £780,000 (2017: £1,094,500). These were converted at the prevailing conversion price of 26.25p (2017: 34.375p) resulting in the issue of 2,971,428 new shares (2017: 3,184,000 new shares). The CLN Series A currently has £8.1m outstanding and the Series B has £1.1m outstanding.

Nektan Marketing Services

During the prior year, the Group reached an agreement to buy out its joint venture partners in Nektan Marketing Services Limited (“NMS”) and terminate the put option held by it for consideration of £500,000 payable in cash. An initial payment of £250,000 was made in August 2017 and a further £150,000 was paid in February 2018 and £100,000 in August 2018. This liability was reduced by certain credit notes received from NMS prior to acquisition resulting in a net settlement of £105k with the remaining investment of £97k being impaired.

Point of consumption tax (POCT)

The Company has entered into negotiations with HMRC in order to agree a payment schedule for £2.9m of owed UK point of consumption tax.

Post balance sheet events

On 27 December 2018, the Company announced that it had received in principle support to raise £3.5m in cash through the sale of 57.5% of its US subsidiary Respin for £2.0m and to raise £1.5m through an equity placing and subscriptions for new ordinary shares at the Placing Price.

In addition, the Company has reached agreement with holders of approximately £4.3m of the outstanding balance of the £8.1m Series A convertible loan notes and loan noteholders who own £1.2m of the outstanding convertible loan note interest to convert into new ordinary shares at the Placing Price resulting in the issue of, in aggregate, approximately 36.6m new ordinary shares. Following the conversions, the coupon on the Series A convertible loan notes will be reduced from 10% to 2.5%.

Furthermore, Gary Shaw, Executive Director of the Company, has agreed to convert £650k of his shareholder loan and the accrued interest on the full loan of £148k at the Placing Price resulting in the issue of 5,321,680 new ordinary shares.

Outlook from Lucy Buckley, Chief Executive Officer

I am delighted to have joined Nektan at this pivotal point in the Company’s evolution. The global gaming market, in particular on mobile, is still growing rapidly and I believe Nektan is well positioned to increase its market share and capture new value from emerging markets.

Our next-generation mobile casino platform, Evolve, is new technology that has been built mobile-first; a key competitive advantage as we see mobile play outstrip desktop and tablet globally. Nektan’s extensive experience in managing over 150 casino brands in competitive and highly regulated markets, ensures that new platform features are data driven and experience-led. As we enter new regulated markets, such as Sweden, I am confident we have the unique business intelligence and CRM tools needed to attract and retain players.

Beyond regulated markets in Europe, the US is one of the most exciting opportunities in the industry. While internet gambling may be subject to further regulation globally, it is likely to gather momentum over several years and the sheer scale of the potential opportunity is undeniable. In the immediate term, Nektan’s in-casino mobile platform provides a legal mobile gaming solution to Class II and Class III operators in states without iGaming legislation. Engaging with mobile-first, millennial consumers is a key challenge for traditional casino properties; Nektan’s app, platform and content provides the solution.

Finally, we are pleased to have received in principle support to raise £3.5m in cash through the sale of 57.5% of the Company’s US subsidiary Respin for £2.0m and to raise £1.5m through an equity placing and subscriptions for new ordinary shares at the Placing Price from a combination of existing and new shareholders as well as certain members of senior management and the Board in order to continue to invest in the platform and exploit further growth opportunities.

On behalf of the Board, I would like to thank all of Nektan’s employees for their efforts in the last year and our business partners, loan noteholders and shareholders for their continued commitment, all helping to support the continued growth of our business.

Gary Shaw

Director