Escape Hunt plc (LON:ESC) has announcd its unaudited preliminary results for the year ended 31 December 2019.
FINANCIAL HIGHLIGHTS
| · | Group revenue up 128% to £4.9m (2018: £2.2m) |
| · | Revenue from owner-operated sites up 275% to £3.8m (2018: £1.0m) |
| · | Site level Adjusted EBITDA from owner-operated sites rose to £0.6m[1] (2018: loss £0.5m) |
| · | Franchise EBITDA increased to £0.3m (2018: £14k) |
| · | Group Adjusted EBITDA loss £1.7m (2018: loss £3.1m) |
| · | Group operating loss of £5.9m (2018: loss of £10.0m) |
| · | Cash at year end £2.2m (2018: £2.7m) and £1.2m on 30 April 2020 |
OPERATIONAL HIGHLIGHTS
| · | Nine ‘Escape Hunt’ branded sites open in the UK at year end (2018: eight sites) |
| · | Number of active UK games rooms increased to 49 (2018: 38 rooms) |
| · | Like-for-like revenue growth in Q4 2019 of 34% from three most mature owner-operated sites |
| · | Strong Christmas trading in both owner-operated and franchise estates continued into the new year, pre-impact of COVID-19 |
| · | Encouraging pipeline of new sites in ongoing negotiations with more favourable property market conditions |
| · | New, strategically important franchise Area Representative Agreement signed with PCH to cover US and Canada |
| · | Rationalisation of underperforming franchisee sites supporting improved profitability for franchise business during the year |
| · | Raised £3.7m (net of expenses) through an equity placing in June 2019 |
POST YEAR END & COVID-19 UPDATE
| · | Trading in the period 1 January 2020 to 29 February 2020 was strong with revenue and owner-operated site performance comfortably ahead of Board’s expectations |
| · | First US site under PCH Area Representative Agreement opened in March 2020 in Houston, Texas |
| · | Virtual reality being trialed in two rooms at the newest site, Birmingham Resorts World |
| · | New Doctor Who game launched in March 2020 under licence with BBC Studios. BBC Studios announced in April 2020 that the new story ‘Time Lord Victorious’ will be released later this year on multiple platforms |
| · | Proactive, early measures taken to mitigate the impact of COVID-19, including: |
| o Significant cost reductions implemented to put core business into ‘hibernation’ | |
| o Deferral of costs where possible | |
| o Grant and other support from UK Government | |
| o Launch of play at home games enhancing brand exposure | |
| o All UK owner-operated sites were closed on 20 March 2020 until further notice | |
| o Lockdowns are in place in other countries which impact the majority of the Company’s international franchise network | |
| · | Planned openings of two new owner-operated sites deferred to post-lockdown |
| · | Pipeline for new sites remains attractive |
The Board is actively exploring options to access further capital and to finance its strategic objectives for 2020 and beyond and to provide additional working capital in the short and medium term.
Richard Harpham, Chief Executive of Escape Hunt, commented: “The strong performance at a site level in Q4 2019 which ran into Q1 2020 demonstrates the very attractive return on capital metrics and the potential for strong growth in the business. This has given us greater confidence in our plans to grow both our owner-operated estate in the UK and our franchise network internationally. Whilst the business has been severely impacted in the short term by COVID-19, the support and understanding we have received from our employees and many of our suppliers has been amazing and, as such, we remain confident in the medium and long term prospects for the business.”
CHAIRMAN’S STATEMENT
I am pleased to report that 2019 has, in many ways, been a defining year in proving the commercial proposition of our model and one during which we made further progress in executing our strategy. Trading during the year ended 31 December 2019 showed continued, strong growth with a particularly busy Christmas period.
The strong performance over Christmas continued into the new year, with revenues and site performance in the UK comfortably ahead of management’s expectations and franchise activity in line for the period to 29 February 2020.
Since the end of February 2020, however, the impact of COVID-19 on the UK leisure and hospitality sector has been dramatic. Trading held up well in early March, but as the pandemic became more widely spread and advice on social distancing was implemented, we began to feel the impact, culminating on 20 March when the UK Government mandated closure of all restaurants, bars, clubs, gyms and leisure facilities. The vast majority of our franchise network has also been affected by similar mandatory closures in other parts of the world. Anticipating the closures, we took early action to cut costs significantly and preserve cash. The UK Government’s measures to assist businesses such as ours have also provided help. We were greatly relieved to be able to retain our staff as a result of the Coronavirus Job Protection Scheme. We are very fortunate to have a very loyal and dedicated workforce. As I write, 125 (87%) of our staff are on furlough leave and will receive up to 80% of their normal pay through the Government scheme, subject to the applicable rules. All other staff have accepted temporary pay reductions, with senior management accepting a 25% pay reduction and the Non-Executive Directors waiving all fees whilst the lockdown conditions persist. Our teams are the Group’s most valuable asset and their universal understanding of the situation and willingness to support our efforts to ensure we are able to bounce back from this crisis have been humbling.
The UK Government’s decision to offer a rates holiday for 2020/2021 to eligible retail, hospitality and leisure businesses was welcomed and will make a material difference to our property costs over the next 12 months. We have also benefitted from the £25,000 grants being made available at a number of our UK sites. A number of our landlords have been incredibly supportive giving consent to defer rent. For that we thank them. However, there are exceptions and certain landlords have chosen to take an aggressive stance which has been both frustrating and disappointing in the circumstances.
We have put on hold all capital expenditure and the majority of our third-party expenditure leading to delays in our planned new site openings in Norwich and Basingstoke. Many of these suppliers have been important supporters of Escape Hunt and it is therefore difficult to see them being impacted through our decisions where we have had little choice. Through these initiatives, we have been able to enact a very significant reduction in our monthly cash costs, some of which is deferred rather than a permanent reduction, but nevertheless these actions provide adequate headroom for us to survive an anticipated 3 – 6 month period of closure.
More detail on our performance during 2019 is provided in our Strategic Report and Financial Review below. A few highlights are worth mentioning (all figures below are unaudited):
· Group revenue rose 128% to £4.9m (2018: £2.2m)
· Site level Adjusted EBITDA from our UK owner-operated estate rose to £0.6m1 (2018: loss £0.5m)
· Franchise EBITDA rose to £0.3m (2018: £14k)
· Group Adjusted EBITDA loss improved to £1.7m (2018: loss of £3.1m)
· Cash at 31 December 2019 of £2.2m (2018: £2.7m) and £1.2m on 4 May 2020
[1] Pre-IFRS 16
A key metric for our UK owned and operated sites is cashflow return on capital, which we measure as site level EBITDA divided by total cash invested, including start-up losses. With eight of these sites having been open for more than 12 months, we are beginning to obtain reliable indicators of this metric and believe that we can target very attractive returns on future site openings. This is explained in more detail below.
In June 2019, the Company raised £3.7m (net of expenses) in a placing and open offer of new shares. At 31 December 2019, we had deployed approximately half of these funds which were raised to support the roll-out of further sites in the UK. Further details on our progress and plans to expand our estate are set out below.
Notwithstanding our growth ambitions, we took a more cautious approach to our roll-out strategy during 2019, as we were keen to ensure that our business model could be repeated in a premium and industry-leading manner such as we have been targeting. As a result, we have not as yet fully achieved all the milestones we set ourselves at the time of our fundraising. However, the benefit of this is that we have set the business up well to catch up on our expansion objectives and, most importantly, have now clearly demonstrated the potential for our business through our site metrics and return on capital profile. Before the onset of COVID-19, we had expected to catch up our site roll-out objectives by the end of May 2020, but have since had to delay those plans. Nevertheless, we look forward to executing our growth plans with confidence, enthusiasm and vigour.
In September 2019, after a lengthy period of discussion and negotiation, we were delighted to complete our master franchise agreement for the USA and Canada with our new partners, Proprietors Capital Holdings (“PCH”). North America represents a very substantial opportunity for the Group and we are focused on delivering on this opportunity.
Alistair Rae stepped down from the Board and as Chief Financial Officer at the end of July 2019, and we were delighted to appoint Graham Bird who joined the Board as CFO in January 2020. Graham has extensive City experience and brings a wide range of skills having worked in investment, advisory, financial and commercial roles.
Adrian Jones, who was one of the original management team which established Escape Hunt prior to its acquisition by Dorcaster and Admission to AIM, will step down from his position on the Board as a Non-Executive Director at the end of May 2020. Adrian is based in Malaysia and his knowledge and experience of operating in the Far East has been invaluable, particularly whilst Escape Hunt had a significant presence in the region. However, since Admission, the focus of our business has moved to the UK and, in due course, we will appoint a UK based replacement. I would like to thank Adrian for his contribution over the years.
We are acutely aware that shareholders have suffered a significant fall in the value of their holdings in Escape Hunt over the last twelve months and since our Admission in May 2017. Whilst we cannot account for every movement in the share price, a significant impact was undoubtedly when one of our largest shareholders, Arrowgrass, went into Administration in Autumn 2019 and the sale of their shares subsequently triggered a precipitous fall in the share price. The impact of Brexit uncertainty did not help the performance of micro-cap shares either and, more recently we have had to endure the impact of COVID-19. We are also aware that it has taken longer for us to prove the attractions of the business than we had originally expected. Nevertheless, as a Board, we take comfort in the increasingly attractive return on capital metrics at site level and remain confident in the long-term opportunity to build substantial shareholder value.
We are enormously encouraged by the performance of our business prior to the pandemic and by the fact that at that time, all our UK sites had five star ratings and were ranked in the top four on TripAdvisor™ in their respective cities under fun and games. We are also encouraged by the energy and enthusiasm of our US partners and many of our franchise operators. We continue to see the opportunity afforded by rapid growth in experiential entertainment as an attractive one where we will be able to build and sustain a premium brand in escape rooms. We are confident that we will emerge from the COVID-19 pandemic intact and ready to build on the base that we have successfully established so far.
Richard Rose
Non-Executive Chairman
12 May 2020
STRATEGIC REPORT
The Group ended 2019 with a strong performance, providing us with a high level of confidence in the future potential for our business as we continue to grow our network. 2019 was critical in validating our business model and content strategy, and we are delighted with progress that can now be firmly demonstrated.
Group turnover rose by 128% to £4.9m (2018: £2.2m) and Group Adjusted EBITDA loss fell from £3.1m to £2.1m on a pre-IFRS16 basis, and to £1.7m post-IFRS16.
Importantly, we now have solid evidence of the potential for our business. In aggregate, the unit economics at a site level are proving very attractive, both at an EBITDA margin level and based on return on capital metrics. This gives us confidence to accelerate the pace of our roll-out now that we have reduced the build cost and optimised the returns for new sites. Adjusted Group and site level EBITDA are key metrics which we use to measure performance of the business as the measures provide a good proxy for cash contribution from each component part of the Group.
Owner-Operated sites
The owner-operated sites accounted for 78% of Group sales in the year ended 31 December 2019 and delivered unaudited revenue of £3.8m (2018: £1.0m), a material increase over the prior year. The increase was helped by the full year impact of sites opened during 2018, but a substantial proportion of the growth was organic. Escape Hunt’s three most mature owner-operated sites (Birmingham, Bristol and Leeds), each 21 months old at year end, delivered a combined like-for-like sales increase of 34% in the final quarter of 2019. Across all eight established owner-operated sites, like-for-like sales increased by 70% in December. Five of these sites were opened in the final quarter of 2018 and hence benefitted from entering the final month of 2019 with a more mature market position.
We have seen continued growth across all our Escape Hunt branded UK sites. We have also gained a greater understanding of the impact of school holidays and seasonal variations as well as the maturity profile of sites after opening. All our Escape Hunt branded sites have continued to experience growth, notwithstanding their period of maturity.
Table 1: Like-for-Like Growth
| Year-on-Year Growth | ||||
| (Rolling average period) | ||||
| Data as at 7 March 2020 | 4 weeks | 12 weeks | 24 weeks | |
| First 3 sites | 21% | 25% | 32% | |
| Next 5 sites | 91% | 110% | na | |
| All 8 mature sites | 54% | 63% | na |
Site level adjusted EBITDA from the owner-managed portfolio for the full year was £0.6m[2] (2018: loss £0.5m) which exceeded management’s expectations, and included the start-up site losses incurred in the opening months of trading for the immature sites.
Pleasingly, the significant and continued focus on the customer experience has again driven exceptional TripAdvisor scores, with all sites five star rated and in the top four “fun and games” activities in their respective territories.
In June 2019, we raised £3.7m (net of expenses) by way of a placing and open offer of new shares to fund the opening of new UK sites. In December, we opened a new site at Birmingham Resorts World and sites at Basingstoke and Norwich were well advanced and due to open towards the end of Q1 2020. We are also in advanced negotiations on several other sites, including a number where we have agreed heads of terms. All these have had to be put on hold as a result of COVID-19. Notwithstanding the slower pace of roll-out of new sites, the number of the Group’s active UK games rooms increased from 38 to 49 during 2019.
Our newest site in Birmingham Resorts World has made a strong start and, until the COVID-19 pandemic impacted business, was trading well ahead of management’s expectations. The new site also includes two virtual reality escape rooms, which are being tested ahead of a potential further roll-out at other sites. In part, the early success of our Resorts World site can be attributed to the support we have received from our landlord, both by way of capital contribution in building the site, and in ongoing marketing. The model is one we believe can be repeated and ‘leisure destination’ sites, such as Resorts World, are likely to form a growing part of our ongoing strategy.
Market challenges faced by retail landlords continued to protract the time taken to complete commercial negotiations throughout the year. However, there were signs in late 2019 and early 2020 that this market pressure was easing and Escape Hunt has been increasingly able to find sites on financially attractive terms. COVID-19 will undoubtedly have an impact on many smaller retailers and restauranteurs and we therefore expect the environment for us to find suitable sites on attractive terms to improve further. Together with the strong unit economics that we have been able to demonstrate, this gives us confidence in our ability to deliver on our strategy for the UK.
Franchise network
The most significant development in our franchise strategy in 2019 was the agreement we signed with our new Area Representative, PCH, covering the USA and Canada. Proprietors Capital Holdings (“PCH”) is a US-based investment capital company with a wealth of experience in supporting and growing brands as both a franchisee and franchisor. PCH has successfully grown brands including Papa Murphy’s, CPR -Cell Phone Repair, PROSE, Miracle Method, online Trading Academy, and Pedal Pub. This is the most substantial franchise agreement we have signed since Admission and sets a standard for future, similar deals. Importantly, the new agreement creates much stronger alignment in content strategy with our franchise partners which will enable us to serve our partners more effectively, efficiently and profitably. PCH successfully converted an existing franchise location in Houston, Texas to our new format and branding and installed one of our catalogue games, Alice in Puzzleland. The site opened in early March 2020 to extremely positive reviews before being temporarily closed due to COVID-19. We continue to work closely with our US partners and supporting their growth ambitions is a key strategic objective for 2020. Although the PCH agreement was signed in 2019, there was no financial contribution from the partnership in the year to 31 December 2019.
Our existing franchise network performed in line with the Board’s expectations, delivering revenue of £1.1m (2018: £1.1m) and EBITDA of £0.3m (2018: £14k). We have terminated a number of under-performing smaller direct franchise agreements. At year end, the active network comprised 40 locations in 17 countries. Since year end, we have terminated a further three agreements as we seek to rationalise the network and focus on regions where we can build a meaningful presence.
Content strategy
Our content strategy sets out a clear path to monetise opportunities from a broad customer segment. To date, the business has been focused on retail consumers. In late 2019, we aimed to diversify our customer mix and began to market directly to corporates, generating positive results. Looking forward, we have identified a number of opportunities and have a strategy to address each of these incrementally. The content strategy supports both the UK owned and operated business and our franchise network.
Table 2: Content strategy
| EH Retail | EH for Business | EH for Education | EH for Brands | |
| Content | · Social entertainment experiences | · Experiences as learning and development, training and recruitment | · Experiential, gamified learning and assessment | · Experiential gamified marketing activations for consumer products, services and attractions |
| Audience | · Families, friends, colleagues, social event organisers, children, students, retired | · Learning and development; recruitment and assessment; reward and recognition; conferences, away days | · Teachers and pupils· Schools and colleges· Community groups· Admissions teams | · Tourist attractions· Theme parks· Hotels· Museums· Parks |
| Channel | · In venue games and meeting rooms· Surrounds of venue (outdoor)· Virtual Reality· Downloads / home games | · In venue games and meeting rooms· Surrounds of venues· Downloads / home games | · In venue games and meeting rooms· Surrounds of venues· Downloads / home games· Virtual Reality | · Bespoke trails· Outdoor roaming· Indoor· Virtual Reality· Themes downloads / home games |
Operational capability
Our success in delivering value for our customers, shareholders and other stakeholders alike, depends on our ability to produce high quality content efficiently and effectively. Since Admission, our experience in developing new games and turning them to reality has created a substantial bank of intellectual property. We have been working with key suppliers to reduce the cost of installing new games and have developed ways to produce games in a more modular fashion so that they can be more easily replicated, installed and, in future, moved between venues. We are also working closely with our franchise partners, notably in the US, to further improve the manufacturing and installation costs of games as we believe this will provide a clear competitive advantage in future.
As a small business, we work closely with certain suppliers, providing opportunities for continued improvement whilst seeking to develop and build the know-how internally to ensure the value of all these initiatives is retained.
Whilst efforts to date have been able to substantially reduce the cost per game / room compared to our earliest sites, further work is being done to continue progress in this regard.
Strategic objectives for 2020
Our strategic objectives for 2020 and beyond fall into five categories:
1. Roll-out of our owner-managed network through direct investment
2. Sustain and support growth in performance from our existing franchise network
3. Deliver the US franchise opportunity in partnership with PCH
4. Enhance returns and margins through broadening our product set and target audience
5. Investment in infrastructure and operations to improve efficiency and scalability
The pace and order in which we are able to achieve these objectives depends partly on our ability to access further capital, and the Board is therefore actively exploring options to do so and to provide additional working capital in the short and medium term. The recent performance of our business gives us confidence in the unit economics and the financial attractions of the business model and the Board therefore continues to explore any options which will support growth whilst seeking to grow shareholder value.
Conditional on accessing sufficient capital to do so, our short-term target is to grow the UK estate to at least 15 Escape Hunt branded sites within 9 months and then to 20 within 18 – 24 months of reopening after COVID-19. We believe there is a market opportunity to grow the UK estate to approximately 50 sites in the longer term. Supported by anticipated growth in our franchise business, both in the US and elsewhere, we believe this strategy will deliver a sustainably cash generative, highly profitable business.
Our key performance indicators by which we monitor progress and performance are set out in the Financial Review below.
Outlook
Without a clear view on when our sites might be able to re-open and how consumers will behave thereafter, it is difficult to know how quickly our business will rebound. We are enormously encouraged by the Group’s performance as we entered the pandemic and by the consumer response to our offering, evidenced by the fantastic TripAdvisor™ ratings we have received and excellent financial returns. We are also encouraged by the energy and enthusiasm of our US partners and our franchise network. Consequently, we continue to see the opportunity afforded by rapid growth in experiential entertainment as an attractive one where we will be able to build and sustain a premium brand in escape rooms. We are therefore as confident as we can be that we will emerge from the COVID-19 pandemic intact and ready to build on the base that we have successfully established so far.
Richard Harpham
Chief Executive Officer
[1] Pre-IFRS 16
[2] Pre-IFRS 16
[3] £370k is the rental charge relating to sites only which is reversed out under IFRS16. The group total rental charge reversed out under IFRS16 is £454k, £84k relating to head office.
[4] 2018 has not been restated for IFRS16
