Immotion Group, the UK-based immersive virtual reality (“VR”) out-of-home entertainment group, announces, following the success of its recent VR installations into a range of high quality partners (“Partners”), that it has decided to focus its strategy predominantly on the roll out of its Partnership Model into high footfall locations. The visibility of higher margins and recurring revenues delivered from this model is, the Directors believe, the best strategy for the Group and its shareholders. To support this strategy, the Company is carrying out a fundraising to raise approximately £2.0 million, before expenses, via the issue of an aggregate of approximately 29.6 million new Ordinary Shares (“Placing Shares”) at a price of 6.75 pence per share (“the Placing Price”) (the “Placing”).
WH Ireland Limited and Alvarium Capital Partners are acting as joint brokers in relation to the Placing (the “Brokers”) and furthermore, the Company has authorised the Brokers to raise up to a further £0.5 million through a broker option (the “Broker Option”), (together with the Placing, the “Fundraising”) in order to allow existing and other investors to participate in the Fundraising. Ordinary Shares issued under the Broker Option will also be issued at the Placing Price and will therefore be limited to approximately 7.4 million new Ordinary Shares (the “Broker Option Shares”), expected to close by 5.00 p.m. on 30 July 2019. It is intended that the net proceeds of the Fundraising will be used to accelerate the Company’s growth plans under the revised strategy. A placing agreement has been entered into today between the Company and the Brokers in connection with the Fundraising (the “Placing Agreement”).
The Placing is being conducted, subject to the satisfaction of certain conditions set out in the Appendix to this Announcement, through an accelerated book-build process (the “Bookbuild”), which will be launched immediately following this Announcement.
Operational and Trading Highlights
· Currently the Group has a total installed base of 237 headsets;
· 34 new headset installs agreed across Madame Tussauds, Washington DC; two Legoland Discovery Centres; and two Al Hokair sites in the Middle East;
· A further 118 headsets installs agreed subject to contract, expected to be installed through the remainder of 2019;
· Based on current headset yields, the Directors expect overall monthly EBITDA breakeven at c.410 installed headsets (expected Q1 2020);
· Strong revenue per headset performance in the Partner venues being driven by sector focus;
· Launch of ‘Underwater Explorer’, ‘Thrill Coasters’ and ‘Raw Data’ themed VR stands;
· Strong demand and enquiries from both existing and new high footfall leisure destination Partners;
· Roll-out of the Company’s VR Cinematic Platforms with Merlin Entertainments plc (“Merlin”), now encompassing the Legoland Discovery Centre, LEGOLAND®, Sea Life, and Madame Tussauds locations with 70 headsets now installed; and
· ImmotionVR, the Company’s own VR operations, now also includes a partnership-based model focusing on high footfall leisure destinations, such as The O2, Soar Centre in Glasgow, and Star City in Birmingham.
· Proposed Fundraising of up to approximately £2.5 million before expenses at a price of 6.75 pence per share by way of a Placing and Broker Option.
· Placing being conducted through an accelerated book-build process which will open with immediate effect following this Announcement.
· The Placing Shares and Broker Option Shares (“New Ordinary Shares”), assuming full take-up of the Placing and Broker Option, will represent approximately 13 per cent. of the Company’s enlarged issued share capital.
· The final number of Placing Shares will be agreed by the Brokers and the Company at the close of the Bookbuild, and the result will be announced as soon as practicable thereafter.
· The timing for the close of the Bookbuild and allocation of the Placing Shares shall be at the discretion of the Brokers, in consultation with the Company. The Fundraising is not underwritten.
· The Broker Option is expected to close by 5.00 p.m. on 30 July 2019.
· The Appendix to this Announcement (which forms part of this Announcement) contains the detailed terms and conditions of the Fundraising.
Background and Current Strategy
Immotion Group was established to exploit the ‘Out-of-Home’ VR immersive entertainment market. Since inception, it has developed an extensive range of both CGI and live-action experiences, all of which operate on the Company’s proprietary Content Management and Reporting System. Immotion’s core offering provides virtual reality experiences to be enjoyed on sophisticated motion platforms delivering a truly engaging and immersive experience.
In addition to the Company’s own consumer-facing VR operation, ImmotionVR, the Company has thus far offered its solutions to third parties via both a straight sales model, as well as a revenue share model with Partners (“Partnership Solution” or “Partnership Model”). In addition, the Company has also used its CGI studio to offer the development of VR experiences for major brands, as well as licensing its own experiences into countries where it doesn’t operate.
Over the past year the Company has experienced positive feedback from its existing Partners as well as new potential Partners. Its innovative Partnership Model has been well received in what is a fast growing, but still nascent market.
The Partnership Model developed by the Company allows high footfall leisure destinations to embrace VR, adding both consumer value as well as ancillary revenue to these locations. The decision process for the Partner moves from a prolonged capital investment decision to a simple operating decision, thus speeding up the decision process considerably.
Feedback from Partners in regard to the Partnership Model has been very positive, with demand demonstrating a strong appeal of this model as opposed to the straight sales model. Consequently, the Company has taken the decision to focus on its Partnership Solution.
The Directors believe the Partnership Model, in terms of both experiences and hardware, allow Partners to enter the early stage VR market with confidence. This underpinned with the Company’s proprietary Content Management and Reporting System allows Partners, big and small, the ability to upload remotely new experiences, as well as see ‘real-time’ data on usage and revenues and to receive remote support from Immotion Group.
The Company has seen very encouraging results in the Partner sites generally with the aquaria sites outperforming all others. This has led the Company to conclude that it should develop solutions for a number of high footfall “edutainment” destinations such as aquaria, zoos, science centres and museums. Initial efforts have focused on aquaria and this has now begun to gain significant traction with experiences now in 7 major aquaria locations and many further discussions ongoing. The year to date average total gross revenue per headset per month of c.£2,100 in the aquaria sector is performing 1.6x that of the historic headset averages across the Partner estate and delivers an annual margin per headset of £12,000.
The average annual gross revenue and average annual blended contribution margin to Immotion Group, including the ImmotionVR estate is per headset, across the continuing estate, running currently at c.£16,300 (or £1,356 per month) and c.£7,000 per annum (or £583 per month) respectively. On a Partner only basis, excluding the ImmotionVR own retail sites, based on year to date performance, this gross average revenue per headset increases to circa £18,200 per annum (£1,517 per month). At the current level of fixed operating costs (net of commercial contract work) of £240,000 per month this implies a monthly breakeven level of c.410 headsets assuming the margin contribution of £583 per month.
The Directors believe that there is scope for the overall average revenue per headset to grow significantly, driven by a number of factors. The mix of sites is expected to grow in favour of Partner sites and stronger performing vertical channels within that (such as aquaria) as noted above. Furthermore, the Company is developing new marketing and selling tools to support Partners in growing revenue. Additionally, H2 19 should yield better performance as there are a greater number of school and other holidays in H2 in USA and Europe.
The Directors believe the focus on the Company’s growing Partnership Model will deliver greater shareholder value as it builds these recurring revenue streams. The number of quality Partners such as The O2, Al Hokair, Merlin Entertainments, Shedd Aquarium and Santa Barbara Zoo to name but a few, all of whom are already enjoying the benefits of this model, continues to grow rapidly. With over 34 new headsets contracted, and due to be installed in the coming weeks, along with a further 118 agreed, subject to contract, this gives the Company visibility to c.389 installed headsets.
As noted in the final results announcement on 3 April 2019, whilst there is demand for direct hardware sales in the VR market and the Directors recognise the positive impact in the financial year in which these sales are recognised, and that they do aide cashflow, this does not in the Directors’ view outweigh the benefits of building Partner relationships with longevity and recurring revenue.
On balance, the Company believes due to the “one-off” transaction revenue nature of direct sales, the competitive landscape in a nascent market, the lead-times to gain decisions from prospective customers as well as the margins achievable of c.£2,500 per headset for a direct sale of hardware, makes the Partnership Solution considerably more appealing for the Group and its shareholders as a whole in the long-term.
The innovative Partnership Model provides a collaborative business relationship for both the Partner and the Group. The decision process for the partner is much easier, and with on-going segmental focus the Directors believe the Company can continue to drive revenue per headset up delivering added benefits for both parties.
The revenue share Partner Model drives recurring revenues for both parties and with a contribution to the Group of c.£21,000 over the 3-year expected life of a VR Cinematic Platforms, the Directors believe it is a better route for the Company and its shareholders. Furthermore, the potential to grow these margins with better utilisation will further improve margins for the Company, as well as delivering a greater revenue share for Partners.
The Group currently has an installed base of 237 headsets, 118 of these headsets are operated by the Company’s own staff, with the balance operated by our Partners’ staff. The Group’s contracted and subject to contract pipeline is currently for a further 34 and 118 headsets respectively, which are expected to be installed throughout the remainder of 2019. The Directors are targeting an installed base of 1,000 headsets by the end of 2020.
Based on current contribution per headset and the current costs of operation, the Directors believe the Group will reach EBITDA breakeven when approximately 410 headsets are installed, and the Directors expect this to be achieved in Q1 2020.
The move to a Partnership Model will help the Company build a recurring revenue stream which the Directors believe will benefit the Group in future years as well as drive the Group to EBITDA breakeven. The short-term impact of the focus on the Partnership Model will be lower expected revenue for the 2019 financial year, as the forecast “one-off” revenue from direct sales are exchanged for recurring revenues with Partners. As the number of Partners increases, and the volume of recurring revenues increases, the revenue and profit potential for future years will not only increase substantially but will also be much more predictable.
As a direct result in the decision to focus on the ‘Partnership Model’ strategy the Directors have reviewed its forecasts for the year and the timing of pipeline of orders that support those forecasts. The immediate consequence of this strategy is the reduction in both top-line revenue and profit from the sale of machines, this combined with an increased overhead cost as the Company focuses its efforts on engaging quality Partners will result in lower revenue and EBITDA for 2019. As a result of this the Directors now expect the Group’s EBITDA loss (excluding one off and exceptional items) for the current financial year to remain broadly in line with the year ended 31 December 2018.
Once the breakeven level of installations has been achieved, the contribution from each new installation flows predominantly to the bottom line. The Directors believe, assuming continued interest from partners, this model will be highly profitable in the medium to long term and is very scalable.
The Company has invested heavily in building a range of experiences, along with its proprietary Content Management and Reporting System and a range of themed motion platform VR offerings. This combination, along with its unique business model has enabled it to secure a range of quality leisure partners operating in high footfall locations. As the business continues its roll-out and approaches the ‘tipping point’, the Directors believe the impact in the medium to long term will be beneficial to shareholders and that the Group is well placed to take advantage of the opportunities ahead, to become a leading out-of-home immersive VR operator.
Martin Higginson, CEO of Immotion Group, said:
“Since inception we have invested heavily in building a range of VR experiences, the quality of which has not been seen before at affordable price points in the ‘out-of-home’ VR market. This fact, combined with our proprietary reporting software, themed stands and on-going investment in VR motion platforms has positioned us well in this nascent market.”
“However, it has been our determination to create a new and exciting business model that has and will define us. Creating a Partnership Solution where we work together with high footfall leisure locations to provide them with not only a new and interesting attraction, but also a valuable ancillary revenue stream has transformed our business. Demand from high quality aquaria partners is very strong and we are beginning to see demand from other verticals.”
“Our continued focus in creating not only the right environment as well as VR experience for our partner, is starting to show encouraging signs with revenues in our Partner estate growing strongly. The performance of our aquaria partners is particularly strong and the Directors see this as a highly scalable, potentially global opportunity.”
“As we move closer to EBITDA breakeven, this tipping-point business is poised for substantial growth. Our offering is unique, our experiences are the best in class, and our list of quality partners just gets better every day. With an offering that benefits our partners as much as us, we believe this model will allow us to lead this new and exciting market.”