Notes forming part of the consolidated financial statements

For the 6 months ended 30 June 2019

1. Accounting policies

General Information

Gaming Realms plc ("the Company") and its subsidiaries (together "the Group").

The Company is admitted to trading on AIM of the London Stock Exchange. It is incorporated and domiciled in the UK. The address of its registered office is Two Valentine Place, London, SE18QH.

The results for the six months ended 30 June 2019 and 30 June 2018 are unaudited.

Basis of preparation

The financial information for the year ended 31 December 2018 included in these financial statements does not constitute the full statutory accounts for that year. The Annual Report and Financial Statements for 2018 have been filed with the Registrar of Companies. The Independent Auditors' Report on the Annual Report and Financial Statement for 2018 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

This interim report, which has neither been audited nor reviewed by independent auditors, was approved by the board of directors on 25 September 2019. The financial information in this interim report has been prepared in accordance with the recognition and measurement requirements of International Financial Reporting Standards as adopted for use in the EU (IFRSs). The accounting policies applied by the Group in this financial information are the same as those applied by the Group in its financial statements for the year ended 31 December 2018 and which will form the basis of the 2019 financial statements.

The consolidated financial statements are presented in Sterling.

Going concern

The Group meets its day-to-day working capital requirements from the cash flows generated by its trading activities and its available cash resources.  These are supplemented when required by the Group's bank overdraft facility, which is available until April 2020.

After the period end on 17 July 2019, the Group concluded the sale of the remaining B2C RMG business to River.  On completion of the transaction, the Group received initial consideration of £7.35m, with a further £1.5m receivable on or before 31 December 2020.  Further, the transaction resulted in River assuming the £2.65m net liability position of Bear Group Limited at the point of disposal.

The Group's strategic forecasts, based on reasonable assumptions, together with the above RMG disposal, indicate that the Group will be able to operate within the level of its currently available resources.

The directors therefore have a reasonable expectation that the Group has adequate resources to continue in existence for the foreseeable future.  Accordingly, these financial statements have been prepared on a going concern basis.

Changes in significant accounting policies

Except as described below, the accounting policies applied in these interim financial statements are the same as those applied in the latest annual financial statements.

The changes in accounting policies are also expected to be reflected in the Group's consolidated financial statements as at and for the year ended 31 December 2019.

The Group has adopted IFRS 16: Leases from 1 January 2019.  Several other amendments and interpretations apply for the first time in 2019, but do not have an impact on the interim consolidated financial statements of the Group.  The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

IFRS 16: Leases

IFRS 16 'Leases' has replaced IAS 17 in its entirety.  The distinction between operating leases and finance leases for lessees is removed and it results in most leases being recognised on the Statement of Financial Position as a right-of-use asset and a lease liability.  For leases previously classified as operating leases, the lease cost has changed from an in-period operating lease expense to recognition of depreciation of the right-of-use (ROU) asset and interest expense on the lease liability. 

The Group has applied IFRS 16 using the modified retrospective approach.  A lease liability has been recognised equal to the present value of the remaining lease payments discounted using an incremental borrowing rate.  A ROU asset has been recognised equal to the lease liability adjusted for prepaid and accrued lease payments. 

The Group has applied the below practical expedients permitted under the modified retrospective approach;

·      Exclude leases for measurement and recognition for leases where the term ends within 12 months from the date of initial application and account for these leases as short-term leases;

·      Applied portfolio level accounting for leases with similar characteristics;

·      Excluded initial direct costs from measuring the right of use asset at the date of initial application; and

·      Used hindsight when determining the lease term if the contract contains options to extend or terminate the lease.

The table below presents the cumulative effects of the items affected by the initial application on the statement of financial position as at 1 January 2019:

In measurement of the lease liability, the Group discounted future lease payments using the nominal incremental borrowing rate at 1 January 2019, being 14.5%.

As a result of initially applying IFRS 16, the right-of-use asset and lease liability recognised as at 30 June 2019 are £889,270 and £906,075 respectively.  Under IFRS 16, the Group has recognised amortisation and interest costs, as opposed to an operating lease expense.  During the six months ended 30 June 2019, the Group recognised £85,187 of additional depreciation charges and £43,829 of additional interest costs from leases.

The impact on EBITDA as a result of the implementation of IFRS 16 is an increase of £102,432 during the six months ended 30 June 2019, and a decrease of £26,913 in the Group's net profit.

Set out below, are the carrying amount of the Group's right-of-use asset and lease liability and the movement during the period:

The lease liability at 1 January 2019 can be reconciled to the operating lease commitments as of 31 December 2018 as follows:

As a lessor

The Group has one leased property which is also sublet.  The accounting policies applicable to the Group as a lessor are not different from those under IAS 17.

Adjusted EBITDA

EBITDA is a non-GAAP company specific measure defined as loss before tax adjusted for finance income and expense, depreciation and amortisation.

Adjusted EBITDA excludes non-recurring material items which are outside the normal scope of the Group's ordinary activities. Adjusted EBITDA is considered to be a key performance measure by the Directors as it serves as an indicator of financial performance. The adjusting items are separately disclosed in order to enhance the reader's understanding of the Group's profitability and cash flow generation. Adjusting items include EBITDA from discontinued operations and costs arising from a fundamental restructuring of the Group's operations.

2. Segment information

The Board is the Group's chief operating decision-maker. Management has determined the operating segments based on the information reviewed by the Board for the purposes of allocating resources and assessing performance.

The Group has two continuing reportable segments.

·      Licensing - B2B brand and content licensing to partners in the US and Europe; and

·      Social publishing - provides B2C freemium games to the US and Europe.

The results of the discontinued segments are included in note 10.  Management do not report segmental assets and liabilities internally and as such an analysis is not reported.

Revenue by product

Geographical information

The Group considers that its primary geographic regions are the UK, including Channel Islands, USA and the rest of the world. No revenue is derived from real money gaming in the US. With the exception of the ROU assets recognised on adoption of IFRS 16 (see note 1), all of the Group's non-current assets are based in the UK.

Adjusted EBITDA

3. Finance income and expense

4. Loss per share

Basic profit / (loss) per share is calculated by dividing the result attributable to ordinary shareholders by the weighted average number of shares in issue during the period.  For fully diluted loss per share, the weighted average number of ordinary shares is adjusted to assume conversion of dilutive potential ordinary shares.  The Group's potentially dilutive securities consist of share options, performance shares and a convertible bond.  As the continuing operations of the Group are loss making, none of the potentially dilutive securities are currently dilutive.

5. Property, plant and equipment

6. Intangible assets

7. Trade and other receivables

All amounts shown fall due for payment within one year.

8. Cash and cash equivalents

Restricted cash relates to funds held in Swiss subsidiaries which are currently undergoing liquidation. The funds are restricted and are not included in the consolidated statement of cash flows.

In July 2019, the bank overdraft was repaid in full on receipt of the proceeds received on the RMG B2C disposal (see note 15).

9. Trade and other payables

The carrying value of trade and other payables classified as financial liabilities measured at amortised cost approximates fair value.

10. Discontinued operations

At the period end, the Group was sufficiently progressed with active discussions concerning the remainder of the B2C real money gaming brands and real money gaming platform, that these elements have been classified as held for sale as at 30 June 2019.  The sale of the real money gaming assets completed in July 2019 (see note 15).

During the prior period, on 22 March 2018 the Group sold its Affiliate Marketing CGU.

The results of both the real money gaming and affiliate marketing segments are therefore presented as discontinued operations in these financial statements.

Results of discontinued operations:

11. Assets and liabilities classified as held for sale

The following major classes of assets and liabilities have been classified as held for sale in the consolidated statement of financial position at 30 June 2019 and 31 December 2018.  These assets and liabilities were disposed of on completion of the real money gaming assets disposal in July 2019 (see note 15).

12. Share capital

Ordinary Shares

13. Arrangement with JackpotJoy

In December 2017 the Group entered into a complex transaction with Jackpotjoy plc and Group companies (together 'Jackpotjoy Group').  The transaction includes a £3.5m secured convertible loan agreement alongside a 10-year framework services agreement for the supply of various real money services.

 The convertible loan principal of £3.5m was paid directly by Jackpotjoy Group to RealNetworks to settle the outstanding $4.5m (£3.4m) deferred consideration obligation, with the excess cash of £0.1m transferred to the Group.  Under the framework services agreement the first £3.5m of services are provided free of charge within the first 5 years.

The convertible loan has a duration of 5 years and carried interest at 3-month LIBOR plus 5.5%.  It is secured over the Group's Slingo assets and business.  At any time after the first year, Jackpotjoy Group may elect to convert all or part of the principal amount into ordinary shares of Gaming Realms plc at a discount of 20% to the share price prevailing at the time of conversion.  To the extent that the price per share at conversion is lower than 10p (nominal value), then the shares can be converted at nominal value with a cash payment equal to the aggregate value of the convertible loan outstanding multiplied by the shortfall on nominal value payable to Jackpotjoy Group.  Under this arrangement the maximum dilution to Gaming Realms shareholders will be approximately 11% assuming the convertible loan is converted in full.

The option violates the fixed-for-fixed criteria for equity classification as the number of shares is variable and as a result is classified as a liability.

The fair value of the conversion feature is determined each reporting date with changes recognised in profit or loss.  The initial fair value was £0.6m based on a probability assessment of conversion and future share price.  This is a level 3 valuation as defined by IFRS 13.  The fair value as at 30 June 2019 was £0.2m (31 December 2018: £0.2m) based on revised probabilities of when and if the option will be exercised.  The key inputs into the valuation model included timing of exercise by the counterparty (based on a probability assessment) and the share price.

The initial fair value of the host debt was calculated as £2.7m, being the present value of expected future cash outflows.  The rate used to discount future cash flows was 14.1%, being the Group's incremental borrowing rate.  The rate was calculated by reference to the Group's cost of equity in the absence of reliable alternative evidence of the Group's cost of borrowing given it is predominantly equity funded.  Expected cash flows are based on the directors' judgement that a change in control event would not occur.  Subsequently the loan is carried at amortised cost.

The residual £0.2m of proceeds were allocated to the obligation of provide free services.

14. Related party transactions

Jim Ryan is a non-executive Director of the Group and the CEO of Pala Interactive. On 22 March 2016, Pala Interactive launched a real-money online bingo site in New Jersey. The Bingo software is provided by AlchemyBet Limited on a revenue share basis.  During the period, the total licence fees earned were $6,507 (H1 2018: $8,146) with $1,390 due at 30 June 2019 (30 June 2018: $nil).

Jim Ryan is a non-executive Director of JackpotJoy Plc. In December 2017 Gaming Realms entered into a 10-year framework services agreement and a 5-year convertible loan agreement for £3.5m with the Jackpotjoy Group (see note 13).

During the period £75,000 (H1 2018: £75,000) of consulting fees were paid to Dawnglen Finance Limited, a company controlled by Michael Buckley. No amounts were owed at the period end (H1 2018: £nil).

Atul Bali is an advisor of Gamerail Entertainment LLC, a social lottery gaming company.  During H1 2018, a balance of $253,454 receivable in Blastworks, Inc. which arose from historical transactions was fully provided for.  No services were provided in 2018.

Atul Bali is an advisor to Instant Win Gaming.  In April 2016, Instant Win Gaming entered into an agreement with Bear Group Limited to supply Instant Win Games on its online gaming websites.  During the period ended 30 June 2018, the total revenue share payable by Bear Group Limited for the supply of game content totalled £22,033 with £5,280 owed at 30 June 2018.

In addition, Instant Win Gaming has entered into a licensing agreement with Blastworks Limited for the Slingo Brand.  Instant Win Game licensed the Slingo Brand to create and distribute Slingo Branded Instant Win Games.  During the period to 30 June 2018, total license fees earned were £18,781, with £2,227 due at 30 June 2018.

Atul resigned on 30 June 2018 and therefore the above entities ceased to be a related party on this date.

15. Events after reporting date

On 17 July 2019, the Group completed the proposed transaction to (i) sell the entire issued share capital of Bear Group Limited, (ii) license the Company's real money gaming platform, and (iii) sell the Company's residual interest in River UK Casino Limited, to River iGaming plc.

The cash consideration of the transaction is £11.5m on a cash-free, debt-free basis.  The transaction terminated the £4.2m deferred consideration due on 31 August 2019 and the put/call option over the Group's 30% shareholding of River UK Casino.  The Company has received an initial cash sum of £7.35m, with a deferred consideration of £1.5m due on or before 31 December 2020.  As part of the transaction, River has assumed £2.65m, being the net liabilities of Bear Group Limited.

Included within the £0.3m loss on disposal expenses incurred during the period, are £0.2m of expenses associated with the above B2C RMG disposal.  These expenses associated with the B2C RMG disposal will be included in the profit on disposal of the segment presentation which will be included in the 2019 full year financial statements.