SPO.L Regulatory News (SPO)

SPORTECH PLC

('Sportech', the 'Group' or the 'Company')

Final Results

Sportech, an international betting & technology business, is pleased to announce its final results for the year ended 31 December 2022.

1. Adjusted EBITDA excludes expenditure that management believe should be added back (separately disclosed items) and other income. See note 1 of this announcement.

2. Includes separately disclosed items

3. Adjusted cash excludes customer balances at 31 December 2022. Adjusted Cash at 31 March 2023 was £ 8.5 million

Financial Overview

Continuing operations:

· Strong operational performance.

· Stable revenue growth +2% to £26.0 million.

· Gross profit +11% to £14.2 million.

· Adjusted EBITDA returned to positive £1.6 million (2021: £1.8 million loss).

Group:

· Year end 2022 cash net of customer balances was £7.4 million (2021: £21.9 million).

· £7 million dividend paid during 2022 (7p per share).

Post Year end:

· Successful receipt of CN $2 million earn-out related to a 2021 disposal.

· Following the sale of lottery contracts late in 2021, the remaining Lot.to systems operating assets were sold to Inspired Entertainment in February 2023 for £500,000 (plus a £500,000 contingent performance earnout).

· Adjusted cash at 31 March 2023 was £8.5 million.

· 2023 Q1 Retail Sports Betting Hold +39% vs. Q1 2022

Group Developments

· Stable revenue growth + 2% to £26.0 million.

· Strong operational performance, adjusted EBITDA returning to positive territory of £1.6 million (2021: a loss of £1.8 million).

· Disposals: Post year end the Group sold further non-core assets as noted above and received an additional £1m, net of fees and incentives relating to the 2021 Bump 50:50 sale.

· Corporate: During 2022 the Company continued to return capital to investors, via a £7 million (7p per share) dividend. The 2023 dividend will be announced before the Annual General Meeting, scheduled for 30 May 2023. All Corporate costs continue to be reviewed to improve Group efficiency and capital retention.

· Venues: The Group's core business line delivered a strong performance, with traditional Pari-Mutuel handle declining only 4.7% on a like-for-like basis despite the introduction of additional competing betting products such as iLottery, iCasino, and Sports Betting. Throughout the year, the Group focused on investing in building a solid foundation to expand opportunities for delivering Sports Betting to retail customers.

· Sports Betting: In August 2021, Sportech agreed to become a distributor for the Connecticut Lottery Corporation's (CLC) sports betting product at the majority of venues across the state. Through Sportech Venues, the gross retail sports betting handle during the year was an impressive $98.7 million, from which Sportech received a percentage of the net hold.

· Digital: In recent years the Company has advanced two online pool betting sites in the US, both of which delivered revenue growth in the year. Additional opportunities for these sites are under review.

· Plc Board: The Board was reshaped following various departures during the year to better align with the Company's evolved strategy.

· Strategy: The Board are focused on delivering further corporate opportunities; materially reducing the corporate cost base; delivering further capital returns to shareholders, while evaluating significant growth opportunities that build on the core skills withing the Group.

Richard McGuire, Executive Chairman of Sportech, said:

"2022 was a year of consolidation and progress and the team are excited about the potential in 2023. Our investment in the growth of US sports betting has started to deliver results. 2022 Operational leverage was impressive, as modest revenue gains translated to impressive gross profit gains and a return to positive EBITDA during the year. We are reviewing various strategic options for the current business lines while evaluating online betting opportunities that leverage our brand, people and expertise. Cash position is strong and we will update the market regarding potential further shareholder capital returns ahead of the May AGM."

Shareholder briefing:

The summary presentation will be available on the Company website https://www.sportechplc.com/investors/results/.

Management is available as required for analyst and investor meetings; requests should be made via Peel Hunt.

Contacts:

Forward-looking statements This announcement contains certain statements that are forward-looking statements. They appear in a number of places throughout this announcement and include statements regarding our intentions, beliefs or current expectations and those of our officers, directors and employees concerning, amongst other things, results of our operations, financial condition, liquidity, prospects, growth, strategies and the business we operate. These forward-looking statements include all matters that are not historical facts. By their nature, these statements involve risks and uncertainties since future events and circumstances can cause results and developments to differ materially from those anticipated. Any such forward-looking statements reflect knowledge and information available at the date of preparation of this announcement. Other than in accordance with its legal or regulatory obligations (including under the Market Abuse Regulation (596/2014), as it applies in the UK), the Company undertakes no obligation to update or revise any such forward-looking statements. Nothing in this announcement should be construed as a profit forecast. The Company and its directors accept no liability to third parties in respect of this announcement save as would arise under English law.

Notes to Editors:

About Sportech

Sportech operates in the gaming market and has two main businesses. Firstly, it runs Sports Bars and other betting venues in Connecticut, USA, where it has an exclusive license to offer pari-mutuel wagering, it also has a distribution agreement with the Connecticut Lottery Corporation to provide retail sports betting. Secondly, Sportech provides online gaming through two separate lines of business. Mywinners.com operates under an exclusive license to offer pari-mutuel betting online in Connecticut, while 123bet.com offers pari-mutuel betting online across the wider USA.

Operating Review

2022 was year of consolidation and progress

After selling several business lines and moving to the Alternative Investment Market (AIM), the Group achieved operational stability and growth in 2022.

The introduction of the Sports Betting product suite in late 2021 required significant capital investment, but the Venues business, now including sports betting, is experiencing a period of positive change with busier operations and a new crowd of patrons to service. Despite the Omicron surge affecting early 2022, the food and beverage revenues performed well, and the retail division's focus on delivering sports betting was the major difference in the company's operations.

The company's business relationship with the Connecticut Lottery Corporation (CLC) continues to strengthen, with a more robust agreement progressed to build on the early success of sports betting across the state. One non-performing location was closed, and certain leases were extended to meet demand and secure the profitable estate.

The UK-based digital technology team executed and delivered a contracted digital solution to a major client, and post year-end, the team was transferred to Inspired Entertainment with additional Lot.to Systems assets.

A focus on efficient use of cash and accurately measuring returns on capital deployed remain core metrics. The introduction of the Sports Betting product suite in late 2021, required obvious capital investment to secure our position with the master wagering licensee, the Connecticut Lottery Corporation (CLC). Moreover, the United States as a whole remains a land of new opportunity in the gambling sector as sports betting continues to enter the pantheon of entertainment State by State. Sportech, as a participant with a significant USP in its Venues business, has the ability both to seize the immediate opportunities in Connecticut and demonstrate its skills in doing so to position itself for other opportunities which may arise across the rest of the US. Accordingly, there will be extra focus on operational efficiency and service to ensure that the value of this USP is maximised.

The introduction of Sports Betting to the Connecticut Venues business and the successful rollout across locations demanded a significant amount of management focus and planning and given the opportunity will continue to be a core part of business planning in 2023 and beyond. Adding this additional betting product to our existing pari-mutuel product range has clearly increased consumer traffic driving a higher F&B revenue and proportionally reduced the Pari-Mutuel cost base as costs are allocated proportionally between F&B, pari mutuel and sports betting.

Food and beverage revenues in 2022 performed well despite the Omicron surge negatively affecting the early months: +46% at £3.44m (2021: £2.37m). Sports betting handle comparisons are not a useful measure as 2022 was the initial year for sports betting. However worth noting early progress in 2023 with Q1 handle +18% and Q1 hold +39%, vs. Q1 2022.

Delivering Sports Betting across our retail division was the major difference to the operational focus during the year. Retail Sports Betting handle was an impressive $98.7 million in this initial year, across our eight approved locations. The core 'hold' metric was a solid 9.4% during the year, significantly better than forecast (hold being the gross profit from wager), primarily driven by 40% of gross handle being accumulator wagers with respective higher risk and therefore higher potential margin.

Major League Baseball topped the handle charts, however the importance of American Football, both NFL and NCAAF remains evident for both sports betting and F&B demand. Soccer, is not a major sport yet in the US however, we noted increasing volume in major European leagues. Our retail clients beat our book in the World Cup as they supported an Argentina victory and France to be top European team resulting in modest loss for the book. That said, the attendance when USA played, across our sports bars was very strong, delivering impressive F&B surges.

Our business relationship with the CLC, continues to strengthen and we have progressed a new agreement with CLC, providing further commitment to build on the early success of Sports Betting across the State. 

During 2022, one non-performing location was closed and certain leases extended to meet demand and secure the profitable estate. Whilst the significant New Haven, lease was extended to February 2024, it is expected that the business will move out of this property to a new venue in the vicinity, to maintain betting handle growth. Additionally two new locations are being evaluated that would provide pari-mutuel and sports betting product suite to more Connecticut retail consumers and in doing so will create the blueprint for a future Venue model for the business.

The UK based digital technology team executed and delivered a contracted digital solution to the customer as part of the lottery contract concluded in late 2021. Post year end the team were transferred to Inspired Entertainment with additional assets, for £500,000. This transfer will reduce costs and ultimately enhance Group cashflow during 2023.

During the year the Group concluded and exited various legacy litigation claims in California and have now successfully exited that historic endeavour. The tax position in relation to the treatment of the £4.6m gain included in the 2016 financial statements for the Spot the Ball VAT refund remains uncertain. The Company has made payment of the amount at issue, in order to freeze the accumulation of interest, although the directors continue to dispute that this amount is ultimately payable. The directors await HMRC's final assessments whereupon they will consider if any further actions are appropriate.

The 2022 dividend reduced the cash position of the Group to a comfortable level to enable the business to explore further organic investment opportunities in broader initiatives within the gaming sector. 

As the Group transitions through 2023, revenues and profitability will return to the fore as key metrics. The tail of legacy issues that affected the business are concluded and we have a simpler business with clear strategy aligned to stakeholders' interests. For the first time in many years, we can provide with some accuracy a future outlook for 2023, having emerged from the depths of COVID, and having experience of a full year of Sports Betting in Connecticut.

Management are confident that trade is recovering, Q1 2023 has delivered early encouraging performance and a good rate of handle and growth is being experienced in the new sports product.

DIVISIONAL SPORTECH VENUES

Sportech Venues, ('Venues') operates across the State of Connecticut offering legal betting through two distinct types of operations.

Firstly, Venues offer pari-mutuel betting on horseracing, greyhound racing and jai alai through both online and venue-based operations under an exclusive and perpetual licence. Secondly, they offer sports betting under a distributorship type arrangement with the Connecticut Lottery Corporation.

Their venues operations are of two types: Sports Bar/Restaurants and Off-Track Betting (OTB) shops. The Sports Bar/Restaurants offer a main-stream leisure-based experience where betting is an exciting additional customer attraction. The Off-Track Betting (OTB) shops are dedicated primarily to retail gambling operations, although they do offer some light refreshments and other products.

1. Adjusted amounts excludes expenditure that management believe should be added back (separately disclosed items) and other income. See note 1&2 of this announcement

Developments during the year

Connecticut has three licensed sports books in operation: Mohegan casino engaged Fan Duel, the Mashantucket Pequot casino engaged Draft Kings, and CLC engaged Rush Street Interactive to provide their Play Sugarhouse sports book, which is delivered across most of the retail outlets.

CLC is the only licensee authorized to provide retail sports betting across the state. The two casinos are limited to within casino property. All three are authorized to provide online sports betting (1 online skin each), and the casinos are also authorized and provide iCasino.

Sports betting was the major feature and focus of 2022, and Sportech Venues increased staffing to manage the additional regulatory, planning, and execution requirements. This was the first full year of sports betting in Connecticut and a learning curve for all state participants.

Sportech Venues provides a sports betting product range across eight venues under a commercial agreement with the CLC, and they also receive a modest share of online sports betting net hold.

Sports betting handle grew during the year to an impressive $98.7 million from the Group's eight sports betting locations, with an equally impressive 9.42% hold. US Sports dominate the 'action' with Baseball, American Football, and Basketball leading the turnover. Post-year-end, the Company continues to note significant increases in sports betting handle with January and February 2023 +33% and +18% respectively vs 2022.

Pari-mutuel handle remained stable in the face of increased competition for discretionary gambling dollars, dropping only 4.7% on a like-for-like basis. The non-retail component (online and tele-betting) represented 25.4% of the total handle in 2022, which is higher than the pre-Covid level of 18.9% in FY 2019.

Sports betting provides a strong vertical that attracts new patronage to the venues. Therefore, it leverages both pre-existing products with new sales and existing cost base with new revenues, enhancing the entire operation.

Looking forward 

Plans for 2023 include the delivery of an improved pari-mutuel website, providing additional marketing opportunities and closer management of online clientele. In addition the Group is working with Sports Betting partners to progress a retail client relationship management rewards initiative.

Sport and capturing the wagering revenues of its followers is clearly the opportunity for the Venues business and we continue to reshape the business accordingly.

Management have developed a retail brand and experience format optimising the mix of formats and locations of venues to further enhance and better capture the sports betting market without detraction from the mainstay earnings of pari-mutuel betting.

We see the most promising signs of improvement in bar and restaurant formats, which cater to sports patrons and offer a close-to-live game experience for customers.

To capitalize on the sports betting market without compromising on our main source of earnings from pari-mutuel betting, the management team have developed a retail brand and experience format. This approach optimizes the mix of formats and locations of venues, enhancing our ability to capture the sports betting market opportunity.

SPORTECH DIGITAL

Sportech Digital is comprised of two small, digitally focused businesses.

The first is a US-facing B2C trading operation called 123Bet.com, which was previously a white-label customer of the now-discontinued Racing and Digital business. In 2019, it was brought in-house, and since then, it has operated with experienced management and a tight marketing budget derived from its own profits. Despite its small size, 123Bet.com has achieved success and continues to grow. We believe that it is ready for a refreshed offer and the next stage of growth.

The second business in 2022, was a B2B operation based in Chester, UK, that served markets with a proprietary platform for lottery management.

1. Adjusted amounts excludes expenditure that management believe should be added back (separately disclosed items) and other income. See note 1&2 of this announcement

The team at Lot.to Systems, based in Chester, provided invaluable research and development support to several Sportech businesses, including the Global Tote and the Lotteries division. Their contributions enhanced the capabilities and profile of these business lines, resulting in improved client deliverables, numerous contract extensions, and ultimately, sales of certain business lines in 2021.

In 2022, the team delivered the online lottery product as contracted to do within the late 2021 sale of the LEIDSA lottery contract. Their successful delivery of this product demonstrates their expertise and commitment to providing high-quality solutions that meet client needs.

Developments post year end

After selling significant operational businesses in 2021 and successfully delivering the online platform, Sportech decided to sell certain assets of Lot.to Systems Ltd, and transfer the team to Inspired Entertainment. The sale was for £0.5 million (a further £0.5m being an unrecognised, contingent performance earnout). This decision was made early in 2023. 

Sportech remains optimistic about the future of 123Bet.com. We believe that this business line has a strong future and going forward we will be reporting the results within our retail Venues business.

GROUP OUTLOOK

There is little doubt that the pandemic tested our organisation in recent years, however Sportech employees are professionals who work with incredible passion and purpose and the Board continues to be inspired by their dedication to improve in every area.

2022 marked a year of consolidation and redefining growth opportunities within the Group. Within the Venues business, the attraction of Sports Betting boosted F&B revenue while the team catered to a new clientele eager to find that live game experience.

The emphasis on accountability and an ownership culture that commenced in 2020 thrives as the entire team promote an entrepreneurial attitude to client service and growth opportunities.

A summary of our strategic objectives for 2023 includes:

1. Evaluate and execute further corporate opportunities.

2. Materially reduce the corporate cost base.

3. Evaluate and execute growth opportunities across the gaming sector.

4. Deliver further capital returns to shareholders.

The Board and management remain fully engaged and focused on enhancing shareholder value and effectively managing opportunities.

Richard McGuire

Executive Chairman

18 April 2023

FINANCIAL REVIEW

Income Statement - Detailed View

1. Adjusted loss before tax for the year from continuing operations is the aggregate of adjusted EBITDA, share option charges, depreciation, amortisation (excluding amortisation of acquired intangibles), and certain finance charges (see note 1 for reconciliation).

2. Adjusted operating expenses exclude depreciation, amortisation, impairments, share option charges, other income and separately disclosed items.

Revenue - continuing operations

Revenue from continuing operations increased by 2% on a constant currency basis. The growth in F&B and Sports betting helping to offset the wagering revenue decline. A further location was closed during 2022, resulting in the Venues business operating nine current locations. The Digital revenue was principally supported by improved performance from the online pari-mutuel operations.

Adjusted EBITDA - continuing operations

The significant Adjusted EBITDA improvement from a loss of £(1,783)k, which included a £260,000 sports betting investment, representing lobbying costs, in 2021. Returning to a profit of £1,599k from continuing operations, was delivered through improvements across all divisions. The Venues business more than offset the decline in pari-mutuel revenue through its strong results in its first full year of sports betting commission in addition to the recovery of the F&B product after COVID. The digital division reduced its losses, with growth through CRM in the 123.bet online business. Central costs were also reduced significantly in the year.

Discontinued operations

Further consideration was received from the Bump 50:50 businesses of £1,229k, (£1,013k net of fees) as well as retrospective receipt of other income of £170k in respect of the CARES Act in relation to the Global Tote business.

Separately disclosed items

1. The redundancy and restructuring costs relate to settlements made to former Directors in lieu of notice.

2. Settlement of a contract relates to the Group exiting a royalty arrangement in the period relating to branding at its Connecticut venues. This required a termination fee to be paid and will financially benefit the Group in the long term.

The Group's lease issues in California were finally resolved during the year, avoiding further litigation and bringing those matters to a close, below the previous provisions.

Cash flow

The Group's cash flow for the year is as follows (including discontinued operations):

* There is a modest rounding adjustment of £1,000, within the aggregate table above to match Closing cash. 

Net cash outflow (excluding movement in customer balances) in the year was £14,491k.

The significant outflow items related to distributions to shareholders with a £7,000k dividend paid during the year and the agreement to place in Escrow an amount related to a potential tax liability, in order to stop interest accruing with no settlement yet reached with HMRC.

The business generated EBITDA on its continuing operations, improving on this measure year-on year.

Following the disposals of major businesses in 2021, the capitalized software and PPE investment were reduced for the continuing 2022 business. The Venues business introduced a significant new product line late 2021 and expanded upon that during 2022, requiring additional working capital during the period.

Consolidated Income Statement

for the year ended 31 December 2022

See note 1 for a reconciliation of the above statutory income statement to the adjusted performance measures used by the Board of Directors to assess divisional performance.

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2022

Consolidated Balance Sheet

As at 31 December 2022

Consolidated Statement of Changes in Equity

for the year ended 31 December 2022

for the year ended 31 December 2021

Consolidated Statement of cash flows

for the year ended 31 December 2022

The financial statements were approved and authorised for issue by the Board of Directors on 17April 2023 and were signed on its behalf by:

Richard McGuire

Director

Company Registration Number: SC069140

Notes to the financial statements

for the year ended 31 December 2022

All accounting policies applied in this Preliminary Statement are consistent with those in the full financial statements which have yet to be published. The preliminary results for the year ended 31 December 2022 were approved by the Board of Directors on 17 April 2023. The financial information set out in this announcement does not constitute statutory financial statements for the years ended 31 December 2022 and 2021 within the meaning of Section 435 of the Companies Act 2006, but is extracted from those financial statements. The auditors have reported on those financial statements and have given an unqualified report which does not contain a statement under Section 498 of the Companies Act 2006.

General information

Sportech PLC (the "Company") is a company domiciled in the UK and listed on the London Stock Exchange's Alternative Investment Market ("AIM"). The Company's registered office is Collins House, Rutland Square, Edinburgh, Midlothian, Scotland EH1 2AA. The consolidated financial statements of the Company as at and for the period ended 31 December 2022 comprise the Company, its subsidiaries, joint ventures and associates (together referred to as the "Group"). The principal activities of the Group were the provision of pari-mutuel betting (B2C) and the supply of wagering technology solutions (B2B) up until the disposal of the Group's Global Tote business on 17 June 2021, the disposal of the Group's 50:50 Lottery business (Bump 50:50) on 2 June 2021 and the disposal of the Group's supply contract with LEIDSA in the Dominican Republic on 31 December 2022. Following the disposals the Group continued to provide pari-mutuel betting (B2C) and lottery technology (B2B).

Going concern

The Directors have concluded that it is reasonable to adopt a going concern basis in preparing the financial statements. This is based on a reasonable expectation that the Group has adequate resources to continue in operational existence for at least twelve months from the date of signing of these accounts. At the 31st December 2022 the Group had unrestricted cash of £7.4 million, with no debt in the business.

The Directors have prepared forecasts covering the period to December 2024, built from the detailed Board-approved budget for 2023.

The forecasts used in the analysis of the Group's ability to continue in operational existence for the foreseeable future include both the base plan and downside scenarios. The downside case makes far more pessimistic commercial assumptions, for instance that online handle remains flat rather than continue on growth trajectory, and a significant reduction in the contribution from sports betting. It also considers the impact of a weakening dollar.

Both the base plan and downside scenario forecasts led the Directors to have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future.

For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Basis of accounting

All accounting policies applied in this Preliminary Statement are consistent with those in the full financial statements which have yet to be published. The preliminary results for the year ended 31 December 2022 were approved by the Board of Directors on 17 April 2023. The financial information set out in this announcement does not constitute statutory financial statements for the years ended 31 December 2022 and 2021 within the meaning of Section 435 of the Companies Act 2006, but is extracted from those financial statements. The auditors have reported on those financial statements and have given an unqualified report which does not contain a statement under Section 498 of the Companies Act 2006.

1. Adjusted Performance Measures

The Board of Directors assesses the performance of the operating segments based on a measure of adjusted EBITDA which excludes the effects of expenditure that management believe should be added back (separately disclosed items) and other income. The share option expense is also excluded given it is not directly linked to operating performance of the divisions. Interest is not allocated to segments as the Group's cash position is controlled by the central finance team. This measure provides the most reliable indicator of underlying performance of each of the trading divisions as it is the closest approximation to cash generated by underlying trade, excluding the impact of separately disclosed items and working capital movements.

Adjusted EBITDA is not an IFRS measure, nevertheless although it may not be comparable to adjusted figures used elsewhere, it is widely used by both the analyst community to compare with other gaming companies and by management to assess underlying performance.

A reconciliation of the adjusted operating expenses used for statutory reporting and the adjusted performance measures is shown below:

Adjusted EBITDA is calculated as below:

The 2021 Adjusted EBITDA reported in 2021, included an amount of £260,000 Sports betting investment and therefore a total 2021 Adjusted EBITDA of £(1,783). This has been adjusted to provide clarity and consistency and 'like for like' reporting.

Adjusted profit/(loss) is also an adjusted performance measure used by the Group. This uses adjusted EBITDA, as defined above as management's view of the closest proxy to cash generation for underlying divisional performance, and deducting share option charges, depreciation, amortisation of intangible assets (other than those which arise in the acquisition of businesses) and certain finance charges. This provides an adjusted profit before tax measure, which is then taxed by applying an estimated adjusted tax measure. The adjusted tax charge excludes the tax impact of income statement items not included in adjusted profit before tax.

2. Segmental reporting

2b Information by geographical area

3. Expenses by nature