Gamesys Group Results for the Year Ended 31 Dec 19

Gamesys Group PLC

Mar 17 2020 07:00 BSTSource: RNS

RNS Number : 3729G

Gamesys Group PLC

17 March 2020

Gamesys Group plc

Results for the Year Ended 31 December 2019

Strong financial performance including pro-forma revenue up 15%

Positive start to 2020 with good momentum across the business

LONDON, 17 March 2020 - Gamesys Group plc (LSE: GYS) (the 'Group', 'Gamesys') (formerly JPJ Group plc), a leading international online gaming operator, announces its financial results for the year ended 31 December 2019.

Financial summary[1]^,[2]

	Year ended 31 December 2019 (£m)	Year end 31 December 2018 (£m)	Reported change (%)
Gaming revenue	415.1	308.2	35
Net income from continuing operations (as reported under IFRS)	9.1	19.3	(53)
Adjusted EBITDA[3]	118.2	108.4	9
Adjusted net income³	84.4	85.9	(2)
Diluted net income per share from continuing operations[4]	0.11	0.26	(58)
Diluted adjusted net income per share from continuing operations³^,⁴	1.01	1.15	(12)

Pro-forma financial summary[5]

Year ended

31 December 2019 (£m)

Year end

31 December 2018 (£m)

Reported

change

(%)

Gaming revenue

565.3

492.8

Adjusted EBITDA³

158.9

165.7

(4)

Financial highlights

· Strong reported and pro-forma⁵ financial performance

o Reported gaming revenue rose 35% year-on-year driven by high organic growth[6], particularly in UK and Asia, and the inclusion of the acquired Gamesys brands; on a pro-forma⁵ basis, gaming revenue increased 15% year-on-year

o Adjusted EBITDA³ increased 9% year-on-year; on a pro-forma⁵ basis, adjusted EBITDA³ decreased 4% year-on-year further reflecting the impact of higher UK gaming taxes

o Adjusted net income³ decreased 2% year-on-year, partly due to the interest costs associated with funding the acquisition of Gamesys (Holdings) Limited

· Continued strong cashflow generation and healthy balance sheet

o Cash balances of £100.3m at 31 December 2019

o Adjusted net debt[7] of £450.3 million, adjusted net leverage ratio[8] of 2.83x increased from 2.68x at 31 December 2018

o Post year-end, the Group has made the first paydown of £40.0 million towards its debt balances

· Following a good start to the current financial year, the Group is trading in line with expectations. With respect to the fast-changing situation concerning COVID-19, our priority is the health and wellbeing of our employees and ensuring the necessary structures are in place to maintain business continuity. We will continue to monitor the situation carefully and provide a further update on Q1 trading in May.

Operational highlights

· Successful completion of the Gamesys Acquisition on 26 September 2019 creating a leading UK and international operator and offering players an even greater choice of major brands and different games

· Post-acquisition, the Group has benefited from an aligned marketing strategy and the ability to share best-practice across our two proprietary technology platforms

· Return to revenue growth in the UK, up 5% year-on-year on a pro-forma⁵ basis, as the impact of enhanced responsible gambling measures annualised

· Successful launch of Rainbow Riches Casino in the UK; a new site dedicated to one of the UK's most popular slots

· Strong growth in Asia with revenue growth of 137% year-on-year driven by our well-established momentum in Japan and our burgeoning B2B business

· Within ROW, the US is the largest territory and delivered good growth with revenues up 20%. Brazil also enjoyed double-digit growth and we launched in Canada

· Spain was the standout performer in Europe with robust revenue growth while Sweden was impacted by the new regulatory environment

· Within core KPIs[9]^,[10] , Average Real Money Gaming Revenue per Month⁹^,¹⁰ increased 13% year-on-year:

o Average Active Players per Month⁹^,¹⁰ grew to 587,399 in the twelve months to 31 December 2019, an increase of 18% year-on-year

o Average Real Money Gaming Revenue per Month⁹^,¹⁰ grew to £45.4 million, an increase of 13% year-on-year

o Monthly Real Money Gaming Revenue per Average Active Player⁹^,¹⁰ of £77, a decrease of 4% year-on-year

· Unwavering commitment to the maintenance and development of a culture of responsible gambling

Outlook

After a transformative year the Group can look to the future with confidence. Our ability to use enhanced scale, greater operational control and a renowned portfolio of brands will provide a strong platform for growth and at this early stage of the current financial year we are trading in line with our expectations. Finally, as ever, we aim to continue to provide an entertaining, fun and responsible environment for all our players to enjoy.

Neil Goulden, Executive Chair, Gamesys Group plc commented:

"This has been a transformative year for Gamesys Group and we reached an important corporate milestone after the year-end with the announcement of our forthcoming inclusion in the FTSE 250 index. The acquisition of Gamesys (Holdings) Limited was completed in September 2019 and has created a leading international operator, offering players an even greater choice of major brands and games.

Our impressive financial performance has enabled us to continue to deliver strong cashflow and a high cash conversion from EBITDA, and the Board expects this to continue going forward. Our long-term strategy remains to reduce leverage to our target range of 1x to 2x adjusted EBITDA³ and to commence dividend payments, with the retained ability to launch a sustained share buyback programme if our share price continues to be significantly undervalued. However, the Board is very well aware that we are now in uncharted waters given the global health crisis and related economic upheaval. Given the underlying uncertainty, we will remain flexible and agile in the implementation of our corporate strategy in relation to the balance between cash conservation, debt paydown and returning cash to shareholders."

Lee Fenton, Chief Executive Officer, Gamesys Group plc, commented:

"I am delighted with Gamesys Group's strong financial performance in 2019, particularly given the significant work undertaken around the acquisition and integration of the legacy Gamesys business. Pro-forma⁵ revenues grew 15% delivered by growth the UK, Asia and North America, slightly offset by a decline in Europe, mainly due to regulatory developments in Sweden. It was particularly pleasing to see the UK return to moderate growth in 2019 as we annualised the introduction of enhanced responsible gambling measures and we expect to see similar trends in 2020. We are confident that our approach of multiple trusted brands, player centricity and a focus on the quality, rather than quantity, of content will leave us well-positioned to make market share gains.

We remain active contributors to the debate around responsible gambling and in particular how the industry can best deliver the player protections needed whilst maintaining an exciting, trusted entertainment proposition. We want players to be in control of their gaming and we facilitate this with a wide variety of different tools for self-care and rigorous processes for the limited occasions that we need to intervene. It is not only the right thing to do, but it is our route to building healthy, long-term player relationships that result in sustainable revenue streams."

Conference call

A conference call for analysts and investors will be held today at 1.00pm GMT / 8.00am ET. To participate, interested parties are asked to dial +44 (0) 20 3003 2666 (UK shareholders); +1 866 378- 3566 (Canada); or +1 866 966-5335 (US), 10 minutes prior to the scheduled start of the call using the reference "Gamesys"'. A replay of the conference call will be available for 30 days by dialling +44 (0) 20 8196 1998 or + 1 866 595 5357 and using reference 2081546#. A transcript will also be made available on Gamesys Group plc's website at www.gamesysgroup.com/investors

Enquiries

Gamesys Group plc Jason Holden Director of Investor Relations	jason.holden@gamesysgroup.com +44 (0) 207 478 8150 +44 (0) 7812 142118


Finsbury	gamesysgroup-LON@finsbury.com +44 (0) 207 251 3801
James Leviton, Andy Parnis	gamesysgroup-LON@finsbury.com +44 (0) 207 251 3801

Chair's statement

"A culture of responsible gambling is as important to our employees as it is to our players"

Overview and summary of results

Five years after its inception in 2014, 2019 was a transformational year for the Group. The completion of the acquisition of Gamesys for c.£490 million has created a leading international operator offering players an even greater choice of major brands and games. JPJ Group plc was renamed Gamesys Group plc and the new organisation has cemented what was already a symbiotic relationship between the two companies. Following the year-end, it was pleasing to also receive news of our inclusion in the FTSE 250 index, which represents another milestone in our corporate development.

Our operational focus since the completion of the acquisition in September 2019 has been the integration of the two businesses which, given the complementary nature of our activities, has progressed smoothly and according to plan. The rationale for the combination was centred around the strategic alignment of two high-growth companies and the Group has not had to endure the upheaval more typically associated with achieving significant cost synergies following major transactions. To cement the unification, and reinforce our commitment to being a responsible business, I'm pleased to share that we have launched a new company purpose, 'Crafting entertainment with care'. This is supported by a set of company values which represent the core of our Gamesys DNA. The planning and execution of the acquisition has not distracted the Group from continuing to deliver an impressive operational performance. On a pro-forma⁵ basis, revenues grew by 15% in 2019, reflecting high growth in key overseas markets, notably Asia, and also good progress in Spain and across our UK brands. As expected, adjusted EBITDA³ on a pro-forma⁵ basis fell, principally due to the impact of higher UK gaming taxes, although this headwind will annualise out in 2020 from Q2 onwards.

Strong underlying cash flows have been a consistent feature of our results and prior to the acquisition of Gamesys, the adjusted leverage ratio⁸ had reduced to below 2.5x and down from over 3.5x at the beginning of 2018. Deleverage is expected to progress rapidly as we move through 2020 and the opportunities this will create are discussed below.

Board developments

Katie Vanneck-Smith joined the Group's Board of Directors as a Non-Executive Director with effect from 1 October 2019. Katie is currently the co-founder and publisher of Tortoise Media, the slow-news start up, launched in January 2019. She previously spent over 20 years in various senior executive roles at News Corp, where she gained significant digital and marketing experience while working for some of the largest UK and US national publications, including The Times and The Wall Street Journal. She was most recently President of Dow Jones, publisher of The Wall Street Journal.

Paul Pathak and David Danziger did not seek re-election at the AGM in June 2019, having joined the Board when the Intertain Group was admitted to the Toronto Stock Exchange in 2014. They made a huge contribution to the development of the Group and on behalf of shareholders I would like to thank them for their contribution and wish them well for the future.

Governance update

To reinforce and drive our commitment to being a responsible business, we set up an Environmental, Social and Governance ('ESG') Committee, of which I am a member. The Committee has already made a significant impact, most notably by establishing The Gamesys Foundation and has also overseen the production of our first Section 172(1) statement and non-financial information statement, both produced in line with recent legislation.

Capital structure

Strong cash flow and a high cash conversion from adjusted EBITDA³ has been a major positive feature of the Group and the Board expects this to continue going forward. From an adjusted leverage ratio⁸of 2.83x at the end of 2019 we therefore anticipate further deleveraging during 2020 and to this extent the Board has agreed the following long-term strategy on capital structure and capital allocation.

Our long term strategy remains to reduce leverage to our target range of 1x to 2x adjusted EBITDA³ and to commence dividend payments, with the retained ability to launch a sustained share buyback programme if our share price continues to be significantly undervalued. However, the Board is very well aware that we are now in uncharted waters given the global health crisis and related economic upheaval. Given the underlying uncertainty, we will remain flexible and agile in the implementation of our corporate strategy in relation to the balance between cash conservation, debt paydown and returning cash to shareholders.

Responsible gambling: focusing on a safe and entertaining environment for all players

Our commitment to the maintenance and development of a culture of responsible gambling is continuous and unwavering. We want to ensure that our players can enjoy a recreational and entertaining gaming experience without exposure to the risks of problem gambling. The enhanced due diligence we undertook in 2018 led to the closure of accounts where players could not provide us with the necessary evidence of their source of funds and affordability, to continue to gamble at current levels, and we will remain highly vigilant in these and all other respects.

We have developed a variety of tools which educate and protect our players. We use these to actively intervene during player sessions if activity levels suggest there are potential problems and some of these tools also provide self-help mechanisms to players. We will continue to implement, develop and refine responsible gambling measures to protect all our players, especially those at risk from potential harm. The foundation of our business is a loyal and sustainable player base and this is underpinned by the Group's strong track record in responsible gambling.

Our people

A culture of responsible gambling is as important to our employees as it is to our players and we will continue to strive to promote a positive environment in this respect, underpinned by our new Gamesys Group DNA and company purpose, 'Crafting entertainment with care'. To attract and retain the best talent, our organisation relies on its ability to demonstrate that we remain an employer which focuses on player safety and staff engagement as well as enjoyment for both employees and players.

The hard work of all our talented employees has delivered a performance in 2019 of which they should all be proud. Despite the inevitable distraction of a major acquisition, the focus and commitment of our workforce has delivered a record set of results and created a solid foundation for the Group to thrive in 2020 and beyond.

Outlook

After a transformative year the Group can look to the future with much confidence. Our ability to use enhanced scale, greater operational control and a renowned portfolio of brands will provide a strong platform for growth. The global gaming market continues to evolve and we believe we are well placed to deliver revenue growth and value for shareholders against this backdrop. Finally, as ever, we aim to continue to provide an entertaining, fun and responsible environment for all our players to enjoy.

Neil Goulden

Chair

Chief executive's statement

"The acquisition of the Gamesys business in September of 2019 has transformed our Group way beyond a change of name."

Twelve months ago the Gamesys Group was unrecognisable from the organisation it is today. We started 2019 as JPJ Group, a company with several hundred staff running one proprietary platform but heavily reliant on a single partner in Gamesys that delivered much of the technology, know-how and operations that powered a significant proportion of our revenue streams. The acquisition of the Gamesys business in September 2019 has transformed our Group way beyond a change of name. We now have over 1,400 staff, total ownership of the vast majority of technology deployed and complete control of our operations. Our talent base has been strengthened across the Group and the Executive Team has been enhanced by experienced individuals with a strong track record of driving growth in the sector.

Despite the distractions of a major corporate transaction, the results delivered in FY19 demonstrate the underlying strength of the Group and have confirmed our belief that the transaction would be relatively simple from an integration perspective due to the established working relationships. Pro-forma⁵ net revenue moved up 15% compared to 2018, delivered by growth in the UK, Asia and North America, slightly offset by a decline in Europe, mainly due to regulatory developments in Sweden. Adjusted EBITDA³ moved down by 4% but this was primarily as a consequence of the change in UK gaming tax.

The integration to create a combined group has progressed well and is on plan. The focus of Q4 2019 was to fully integrate our corporate activities (Finance, Compliance, Legal and HR) and our infrastructure technology functions as well as to align our budget years to deliver the 2020 combined Group budget. In addition, we have also aligned our HR systems and reward structures to serve employees across the enlarged organisation. Through 2020 we will be looking to drive best practice throughout the Group and look to further integrate - where it makes sense - in the areas of Product, Technology and Marketing. Early gains have already been made on marketing spend optimisation, retention marketing algorithms and infrastructure management.

The UK market as a whole saw growth moderate through 2019 and we expect to see similar trends in 2020. We are confident that our approach of multiple trusted brands, player centricity and a focus on the quality, rather than quantity, of content will leave us well positioned to make market share gains. In November 2019 we added Rainbow Riches Casino to our brand stable, giving the UK's most popular slot franchise a place where the Rainbow Riches fan can experience a world that has never been brought together before. The launch has outperformed any previous new brand launch and we will be looking to build on this promising start. Regulation will no doubt evolve throughout the coming years and we will continue our efforts to focus on excellence in execution of any new regulatory measures. We remain active contributors to the debate on how the industry can best deliver the player protections needed whilst maintaining an exciting, trusted entertainment proposition.

Our European operations faced challenges through 2019 as a new regulatory regime was implemented in Sweden and Germany continued to debate on how to agree an Inter-State Treaty for gambling legislation. Our Spanish business has performed solidly through 2019 but does not yet benefit from the multi-brand approach enjoyed by the UK market and we are expecting to launch an additional brand into the market in 2020 as well as move our operational base to Ceuta to take advantage of a more tax-efficient environment.

Our Asia business segment has a well-established momentum in Japan and we will continue to focus in this area by optimising our platform, improving player journeys and maintaining a focus on player protection. Our B2B business, which is mainly focused on Asia, is growing and our internal game studio, Golden Hero, is developing successful content for the region. We have invested significantly in the region for the last five years and believe we have created the platform for sustainable growth.

With the repeal of the Professional and Amateur Sports Protection Act of 1992 we have started to see the US market adopt state-by-state regulations to facilitate online sports betting and, in some instances, online casino. We expect that over time online casino regulation is likely to follow the regulation of sports, so we will continue to look for opportunities to grow our US business. Our strong partnership with Tropicana in New Jersey and the continued development of Virgin Casino in the state, means we have a strong demonstrator of our casino capability in the largest online gaming state in the market and we believe that this gives us a strong platform to access future growth as the wider market opens up.

We want players to be in control of their gaming and we facilitate this with a wide variety of different tools for self-care and many algorithms and processes for the limited occasions that we need to intervene. It is not only the right thing to do, but it is our route to building healthy, long-term player relationships that result in sustainable revenue streams. This approach to player welfare only works if it is deeply embedded in a company's culture and values, so we strive to have all our employees put the player at the heart of what they do and ensure they get the service and care they would hope to get themselves.

Our people are the beating heart of our business and make us who we are. Our commitment to continuous improvement across every area of our organisation is what sets us apart. We work hard to set a high bar on talent and to find, develop and keep the best people. We encourage an owner mentality across the Group where our staff feel responsible for both the sustainability of our business and the responsibility we have towards our players.

Lee Fenton

Chief executive

Note regarding non-IFRS financial measures

The following non-IFRS definitions are used in this release because management believes that they provide additional useful information regarding ongoing operating and financial performance. Readers are cautioned that the definitions are not recognised measures under IFRS, do not have standardised meanings prescribed by IFRS, and should not be considered in isolation or construed to be alternatives to revenues and net income/(loss) and comprehensive income/(loss) for the period determined in accordance with IFRS or as indicators of performance, liquidity or cash flows. Our method of calculating these measures may differ from the method used by other entities. Accordingly, our measures may not be comparable to similarly titled measures used by other entities or in other jurisdictions.

Adjusted EBITDA, as defined by the Group, is income from continuing operations before interest expense including accretion (net of interest income), income taxes, amortisation and depreciation, share-based compensation, one-off tax charges, severance costs, fair value adjustments on contingent consideration, transaction related costs and foreign exchange (gain)/loss. Management believes that Adjusted EBITDA is an important indicator of the issuer's ability to generate liquidity to service outstanding debt and uses this metric for such purpose. The exclusion of share-based compensation eliminates non-cash items and the exclusion of fair value adjustments on contingent consideration, one-off tax charges, severance costs, transaction related costs and foreign exchange (gain)/loss eliminates items which management believes are either non-operational and/or non-routine.

Adjusted Net Income, as defined by the Group, is net income from continuing operations plus or minus items of note that management may reasonably quantify and believes will provide the reader with a better understanding of the Group's underlying business performance. Adjusted Net Income is calculated by adjusting net income for accretion on financial liabilities, amortisation of acquisition related purchase price intangibles (including non-compete clauses), share-based compensation, one-off tax charges, severance costs, fair value adjustments on contingent consideration, transaction related costs and foreign exchange (gain)/loss. The exclusion of accretion on financial liabilities and share-based compensation eliminates the non-cash items and the exclusion of amortisation of acquisition related purchase price intangibles (including non-compete clauses), fair value adjustments on contingent consideration, one-off tax charges, severance costs, transaction related costs and foreign exchange (gain)/loss eliminates items which management believes are non-operational and/or non-routine. Adjusted Net Income is considered by some investors and analysts for the purpose of assisting in valuing a company.

Diluted Adjusted Net Income per share from continuing operations, as defined by the Group, means Adjusted Net Income divided by the diluted weighted average number of shares outstanding, calculated using the IFRS treasury method, for the applicable period. Management believes that Diluted Adjusted Net Income per share from continuing operations assists with the Group's ability to analyse Adjusted Net Income on a diluted weighted average per share basis.

Cautionary Note Regarding Forward Looking Information

This release contains certain information and statements that may constitute 'forward-looking information' (including future-oriented financial information and financial outlooks) within the meaning of applicable laws, including Canadian securities laws. Often, but not always, forward-looking information can be identified by the use of words such as 'plans', 'expects', 'estimates', 'projects', 'predicts', 'targets', 'seeks', 'intends', 'anticipates', 'believes', or 'is confident of' or the negative of such words or other variations of or synonyms for such words, or state that certain actions, events or results 'may', 'could', 'would', 'should', 'might' or 'will' be taken, occur or be achieved. Forward-looking information involves known and unknown risks, uncertainties and other factors which may cause actual results, performance, achievements or developments to be materially different from those anticipated by the Group and expressed or implied by the forward-looking statements. Forward-looking information contained in this release includes, but is not limited to, statements with respect to the Group's future financial performance, the future prospects of the Group's business and operations, the Group's growth opportunities and the execution of its growth strategies, the future performance of the online gaming segment, the possibility of the Group drawing on the RCF, and the statements made under the heading 'Outlook' of this release. Certain of these statements may constitute a financial outlook within the meaning of Canadian securities laws. These statements reflect the Group's current expectations related to future events or its future results, performance, achievements or developments, and future trends affecting the Group. All such statements, other than statements of historical fact, are forward-looking information. Such forward-looking information is based on a number of assumptions which may prove to be incorrect, including, but not limited to, the ability of the Group to secure, maintain and comply with all required licences, permits and certifications to carry out business in the jurisdictions in which it currently operates or intends to operate; governmental and regulatory actions, including the introduction of new laws or changes in laws (or the interpretation thereof) related to online gaming; general business, economic and market conditions (including market growth rates and the withdrawal of the UK from the European Union); the Group operating in foreign jurisdictions; the competitive environment; the expected growth of the online gaming market and potential new market opportunities; anticipated and unanticipated costs; the protection of the Group's intellectual property rights; the Group's ability to successfully integrate and realise the benefits of its completed acquisitions; the Group's relationship with third parties; the ability of the Group to service its debt obligations; and the ability of the Group to obtain additional financing, if, as and when required. Such statements could also be materially affected by risks relating to the lack of available and qualified personnel or management; stock market volatility; taxation policies; competition; foreign operations; the Group's limited operating history and the Group's ability to access sufficient capital from internal or external sources. However, whether actual results and developments will conform with the expectations and predictions contained in the forward-looking information is subject to a number of risks and uncertainties, many of which are beyond the Group's control, and the effects of which can be difficult to predict, including that the assumptions outlined above may not be accurate. For a description of additional risk factors, see Schedule 'A' attached to Gamesys Group plc's most recently filed annual information form. Although the Group has attempted to identify important factors that could cause actual results, performance, achievements or developments to differ materially from those described in forward-looking statements, there may be other factors that cause actual results, performance, achievements or developments not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results, performance, achievement or developments are likely to differ, and may differ materially, from those expressed in or implied by the forward-looking information contained in this release. Accordingly, readers should not place undue reliance on forward-looking information. While subsequent events and developments may cause the Group's expectations, estimates and views to change, the Group does not undertake or assume any obligation to update or revise any forward-looking information, except as required by applicable securities laws. The forward-looking information contained in this release should not be relied upon as representing the Group's expectations, estimates and views as of any date subsequent to the date of this release. The forward-looking information contained in this release is expressly qualified by this cautionary statement. Investors should not place undue reliance on forward-looking statements as the plans, intentions or expectations upon which they are based might not occur.

Any future-oriented financial information or financial outlooks in this release (including any such information or outlooks under the heading 'Outlook' on page 3 of this release) are based on certain assumptions regarding expected growth, results of operations, performance, and business prospects and opportunities. While the Group considers these assumptions to be reasonable, based on information currently available, they may prove to be incorrect. These risks, uncertainties and other factors include, but are not limited to: credit, market, currency, operational, liquidity and funding risks, including changes in economic conditions, and interest rates or tax rates.

Financial Review¹^,²

Gaming revenue

	Three month period ended 31 December 2019 (£000's)	Three month period ended 31 December 2018 (£000's)	Year ended 31 December 2019 (£000's)	Year ended 31 December 2018 (£000's)
UK	94,367	40,960	214,614	163,884
Asia	38,731	18,204	122,408	51,647
Europe	16,036	21,993	68,590	79,273
ROW	3,971	2,893	9,466	13,408
Total	153,105	84,050	415,078	308,212

The increase in total gaming revenue for the three months and year ended 31 December 2019 in comparison to the same periods in the prior year relates to organic growth⁶ of the Group's online gaming segment as well as the results of the Gamesys Acquisition.

Costs and expenses

	Three month period ended 31 December 2019 (£000's)	Three month period ended 31 December 2018 (£000's)	Year ended 31 December 2019 (£000's)	Year ended 31 December 2018 (£000's)

Distribution costs[11]	78,272	41,128	214,239	149,856
Administrative costs¹¹	63,069	28,194	147,432	104,840
Impairment of financial assets	3,879	1,000	3,879	1,000
Severance costs	-	-	-	850
Transaction related costs	569	550	15,809	1,890
	145,789	70,872	381,359	258,436

Distribution costs

	Three month period ended 31 December 2019 (£000's)	Three month period ended 31 December 2018 (£000's)	Year ended 31 December 2019 (£000's)	Year ended 31 December 2018 (£000's)

Selling and marketing	31,812	15,384	81,740	54,523
Licensing fees¹¹	12,119	10,394	45,318	38,094
Gaming taxes	24,444	9,743	59,165	38,670
Processing fees	9,897	5,607	28,016	18,569
	78,272	41,128	214,239	149,856

Selling and marketing expenses consist of payments made to affiliates and general marketing expenses related to each brand. Licensing fees consist of the fees for the online gaming segment to operate on its platforms and game suppliers' fees paid. Gaming taxes largely consist of point of consumption taxes, payable in the regulated jurisdictions that the Group operates in. Variance in gaming taxes from prior periods relates to the Gamesys Acquisition and an increase in remote gaming duty from 15% to 21%, which came into effect in the UK in Q2 2019. Processing fees consist of costs associated with using payment providers and include payment service provider transaction and handling costs, as well as deposit and withdrawal fees. With the exception of selling and marketing expenses, distribution costs tend to be variable in relation to revenue.

The increase in distribution costs for the three months and year ended 31 December 2019 compared to the same periods in 2018 is mainly due to increased revenue and marketing spend in the online gaming segment as well as results of the Gamesys Acquisition.

Administrative costs

	Three month period ended 31 December 2019 (£000's)	Three month period ended 31 December 2018 (£000's)	Year ended 31 December 2019 (£000's)	Year ended 31 December 2018 (£000's)

Compensation and benefits	24,226	9,010	55,635	31,582
Professional fees	1,436	1,454	5,086	4,300
General and administrative¹¹	12,844	3,754	24,558	13,631
Amortisation and depreciation	24,563	13,976	62,153	55,327
	63,069	28,194	147,432	104,840

Compensation and benefits costs consist of salaries, wages, bonuses, directors' fees, benefits and share-based compensation expense. The increase in these expenses for the three months and year ended 31 December 2019 compared to the same periods in 2018 is primarily due to the Gamesys Acquisition, additional staff hired and higher bonus accruals as the business continues to grow.

Professional fees consist mainly of legal, accounting and audit fees. The increase in professional fees for the year ended 31 December 2019 compared to the same period in 2018 can be attributed to the Gamesys Acquisition and services obtained in relation to some of the Group's operational and corporate initiatives.

General and administrative expenses consist of items, such as travel and accommodation, insurance, listing authority fees, one-off tax charges, technology and development costs, and other office overhead charges. The increase in these costs for the three months and year ended 31 December 2019 compared to the same periods in 2018 can be attributed to higher office overhead costs, a one-off tax charge of £6.0 million and the Gamesys Acquisition.

Amortisation and depreciation expenses consist of amortisation of the Group's intangible assets and depreciation of the Group's tangible assets over their useful lives. The increase in amortisation and depreciation in the three months and year ended 31 December 2019 is due to the addition of purchase price intangibles bought as part of the Gamesys Acquisition.

This increase is partially offset by the fact that amortisation expense related to purchase price intangibles recognised in prior periods decreases with each passing period of their useful lives as a result of the amortisation method used. The increase is further offset by the fact that the Group's non-compete clauses were fully amortised during the three months ended 31 March 2019.

Transaction related costs

Transaction related costs consist of legal, professional, due diligence, other direct costs/fees associated with transactions and acquisitions or disposals contemplated or completed by the Group. The increase in transaction related costs in the year ended 31 December 2019 compared to the same period in 2018 relates to the Gamesys Acquisition.

Business unit results

Online gaming (pro-forma⁵)

	Q4 2019 (£000's)	Q4 2018 (£000's)	Variance (£000's)	Variance %
Gaming revenue	153,105	132,863	20,242	15%
Distribution costs	78,272	64,137	14,135	22%
Administrative costs	27,553	22,481	5,072	23%
Impairment of financial assets	3,879	1,000	2,879	288%
Adjusted EBITDA³	43,401	45,245	(1,844)	(4%)

	YTD 2019 (£000's)	YTD 2018 (£000's)	Variance (£000's)	Variance %
Gaming revenue	565,303	492,769	72,534	15%
Distribution costs	287,848	233,158	54,690	23%
Administrative costs	101,188	81,824	19,364	24%
Impairment of financial assets	3,879	1,000	2,879	288%
Adjusted EBITDA³	172,388	176,787	(4,399)	(2%)

Online gaming revenue by geography (pro-forma⁵)

	Q4 2019 (£000's)	Q4 2018 (£000's)	Variance (£000's)	Variance %
UK	94,367	87,635	6,732	8%
Asia	38,731	18,204	20,527	113%
Europe	16,036	21,993	(5,957)	(27%)
ROW	3,971	5,031	(1,060)	(21%)
Total	153,105	132,863	20,242	15%

	YTD 2019 (£000's)	YTD 2018 (£000's)	Variance (£000's)	Variance %
UK	357,169	339,864	17,305	5%
Asia	122,408	51,647	70,761	137%
Europe	68,590	79,273	(10,683)	(13%)
ROW	17,136	21,985	(4,849)	(22%)
Total	565,303	492,769	72,534	15%

Gaming revenue for the online gaming segment for the three months and year ended 31 December 2019 was 15% higher than in the same periods in 2018. UK revenues increased by 8% and 5%, respectively, for the three months and year ended 31 December 2019 compared to the same periods in 2018 despite the continued impact of enhanced responsible gambling measures. Asia continued to perform strongly growing revenue by 113% and 137%, respectively, for the three months and year ended 31 December 2019 compared to the same periods in 2018. Europe revenues declined by 27% and 13%, respectively, for the three months and year ended 31 December 2019 compared to the same periods in 2018, largely due to the impact of regulatory measures in Sweden. ROW includes New Jersey revenues which increased by 19% and 20%, respectively, for the three months and year ended 31 December 2019 compared to the same periods in 2018.

Distribution costs increased 22% and 23%, respectively, for the three months and year ended 31 December 2019 compared to the same periods in 2018 as a result of higher marketing spend and higher revenues achieved.

The increase in administrative costs for the three months and year ended 31 December 2019 compared to the same periods in 2018 was mainly driven by increases in personnel costs and administrative overhead costs as the segment continues to grow. The increase in administrative costs for the year ended 31 December 2019 compared to the same period in 2018 was also driven by an increase in professional fees.

Unallocated corporate costs - adjusted EBITDA³(pro-forma⁵)

Adjusted EBITDA³ on unallocated corporate costs decreased from (£3.3) million to (£4.7) million in the three months ended 31 December 2019 compared to the same period in 2018. The variance mainly relates to a £0.9 million increase in compensation and a £0.7 million increase in general administrative costs offset by a £0.2 million decrease in professional fees.

Adjusted EBITDA³ on unallocated corporate costs decreased from (£11.1) million to (£13.5) million in the year ended 31 December 2019 compared to the same period in 2018. The variance relates to a £2.0 million increase in compensation, a £0.1 million increase in professional fees and a £0.4 million increase in general administrative costs.

Unallocated corporate costs - net loss

Net loss on unallocated corporate costs increased for the three months ended 31 December 2019 compared to the same period in 2018. This increase is primarily driven by higher interest expense related to the Group's Add-on Debt.

Net loss on unallocated corporate costs increased for the year ended 31 December 2019 compared to the same period in 2018. This increase is driven by higher transaction related costs incurred as a result of the Gamesys Acquisition as discussed on pages 31 through 33 of this release.

Costs included in net loss which are excluded from the adjusted EBITDA³ measure are discussed on page 9 of this release.

Key performance indicators - pro-forma⁵

Average Active Players is a key performance indicator used by management to assess real money player acquisition and real money player retention efforts of each of the Group's brands. The Group defines Average Active Player Accounts ('Average Active Players') as being real money players who have placed at least one bet in a given month. 'Average Active Players per Month' is the Average Active Players per month, averaged over a twelve-month period. While this measure is not recognised by IFRS, management believes that it is a meaningful indicator of the Group's ability to acquire and retain players.

Total Real Money Gaming Revenue and Average Real Money Gaming Revenue per Month are key performance indicators used by management to assess revenue earned from real money gaming operations of the business. The Group defines Total Real Money Gaming Revenue ('Total Real Money Gaming Revenue') as revenue less revenue earned from B2B operations. The Group defines Average Real Money Gaming Revenue per Month ('Average Real Money Gaming Revenue per Month') as Real Money Gaming Revenue per month, averaged over a twelve-month period. While these measures are not recognised by IFRS, management believes that they are meaningful indicators of the Group's real money gaming operational results.

Monthly Real Money Gaming Revenue per Average Active Player is a key performance indicator used by management to assess the Group's ability to generate Real Money Gaming Revenue on a per player basis. The Group defines Monthly Real Money Gaming Revenue per Average Active Player ('Monthly Real Money Gaming Revenue per Average Active Player') as being Average Real Money Gaming Revenue per Month divided by Average Active Players per Month. While this measure is not recognised by IFRS, management believes that it is a meaningful indicator of the Group's ability to generate Total Real Money Gaming Revenue.

	Twelve months ended 31 December 2019	Twelve months ended 31 December 2018	Variance	Variance %
Average Active Players per Month (#)	587,399	499,701	87,698	18%
Total Real Money Gaming Revenue (£000's) ⁽¹⁾	544,826	482,162	62,664	13%
Average Real Money Gaming Revenue per Month (£000's)	45,402	40,180	5,222	13%
Monthly Real Money Gaming Revenue per Average Active Player (£)	77	80	(3)	(4%)

1 Total Real Money Gaming Revenue for the twelve months ended 31 December 2019 consists of total pro-forma⁵ revenue less revenue earned from B2B activity of £20.5 million (31 December 2018 - £10.6 million)

Monthly Real Money Gaming Revenue per Average Active Player decreased by 4% year-over-year maintaining a level consistent with the Group's overall player acquisition and retention strategy.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Year ended 31 December 2019	Year ended 31 December 2018
	(£000's)	(£000's)
Gaming revenue⁶	415,078	308,212

Costs and expenses
Distribution costs^6,7	214,239	149,856
Administrative costs⁷	147,432	104,840
Impairment of financial assets^6,13	3,879	1,000
Severance costs⁶	-	850
Transaction related costs⁶	15,809	1,890
Foreign exchange (gain)/loss⁶	(1,470)	354
Total costs and expenses	379,889	258,790


Fair value adjustments on contingent consideration²³	460	7,208
Interest income⁹	(420)	(349)
Interest expense⁹	21,824	19,821
Accretion on financial liabilities⁹	1,291	2,993
Total financing expenses	23,155	29,673

Net income for the year before taxes from continuing operations	12,034	19,749

Tax expense²⁷	2,906	458

Net income for the year after taxes from continuing operations	9,128	19,291

Net loss from discontinued operations⁸	(660)	(4,814)

Net income for the year attributable to owners of the parent	8,468	14,477

Other comprehensive income/(loss): Items that will or may be reclassified to profit or loss in subsequent periods
Foreign currency translation gain on retranslation of overseas subsidiaries	1,316	394
Unrealised gain on foreign exchange forward¹⁵	2,717	-
Unrealised loss on cross currency swap¹⁵	(9,251)	-
Unrealised loss on interest rate swap¹⁵	(1,238)	(1,141)
Total comprehensive income for the year attributable to owners of the parent	2,012	13,730

Net income for the year per share
Basic¹⁰	£0.10	£0.20
Diluted¹⁰	£0.10	£0.19

Net income for the year per share - continuing operations
Basic¹⁰	£0.11	£0.26
Diluted¹⁰	£0.11	£0.26

See accompanying notes

CONSOLIDATED BALANCE SHEETS

	As at 31 December 2019	As at 31 December 2018
ASSETS	(£000's)	(£000's)

Current assets
Cash^12,23	100,299	84,383
Restricted cash^12,23	6,324	3,912
Player deposits^12,23	12,444	9,032
Trade and other receivables^13,23	33,182	19,680
Taxes receivable	13,671	7,313
Total current assets	165,920	124,320

Non-current assets
Tangible assets	9,448	2,232
Intangible assets^5,16	484,524	226,324
Goodwill^5,16	524,208	288,355
Right-of-use assets¹⁷	22,176	-
Other long-term receivables^14,23	5,216	4,675
Total non-current assets	1,045,572	521,586

Total assets	1,211,492	645,906

LIABILITIES AND EQUITY

Current liabilities
Accounts payable and accrued liabilities^18,23	77,970	20,606
Other short-term payables^11,20,23	5,617	9,612
Current portion of provisions¹⁹	3,800	-
Current portion of cross currency and interest rate swap payable^11,15,23	3,719	97
Current portion of lease liabilities^11,17	4,727	-
Interest payable^11,23	959	264
Payable to players²³	12,444	9,032
Current portion of contingent consideration^11,23	-	4,540
Provision for taxes	13,406	8,169
Total current liabilities	122,642	52,320

Non-current liabilities
Other long-term payables^11,15,23,24	16,724	1,817
Provisions¹⁹	6,000	-
Lease liabilities^11,17,23	17,907	-
Deferred tax liability⁵	53,209	1,196
Long-term debt^11,22,23	530,319	371,450
Total non-current liabilities	624,159	374,463

Total liabilities	746,801	426,783

Equity
Retained earnings	190,839	182,435
Share capital²⁵	10,867	7,434
Share premium	4,685	2,068
Other reserves	258,300	27,186
Total equity	464,691	219,123

Total liabilities and equity	1,211,492	645,906

See accompanying notes

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

	Share Capital (£000's)	Share Premium (£000's)	Merger Reserve (£000's)	Share-Based Payment Reserve (£000's)	Translation Reserve (£000's)	Hedge Reserve (£000's)	Retained Earnings (£000's)	Total (£000's)
Balance at 1 January 2018	7,407	1,342	(6,111)	9,971	23,649	-	167,799	204,057

Comprehensive income/(loss) for the year:
Net income for the year (continued and discontinued operations)	-	-	-	-	-	-	14,477	14,477
Other comprehensive income/(loss)	-	-	-	-	394	(1,141)	-	(747)
Total comprehensive income/(loss) for the year:	-	-	-	-	394	(1,141)	14,477	13,730

Contributions by and distributions to shareholders:
Conversion of debentures²⁵	6	186	-	-	-	-	-	192
Exercise of options²⁵	21	540	-	(159)	-	-	159	561
Share-based compensation²⁵	-	-	-	583	-	-	-	583
Total contributions by and distributions to shareholders:	27	726	-	424	-	-	159	1,336

Balance at 1 January 2019	7,434	2,068	(6,111)	10,395	24,043	(1,141)	182,435	219,123


Comprehensive income/(loss) for the year:
Net income for the year (continued and discontinued operations)	-	-	-	-	-	-	8,468	8,468
Other comprehensive income/(loss)¹⁵	-	-	-	-	1,316	(7,772)	-	(6,456)
Total comprehensive income/(loss) for the year:	-	-	-	-	1,316	(7,772)	8,468	2,012

Contributions by and distributions to shareholders:
Issuance of common shares, net of costs²⁵	3,365	-	240,625	-	-	-	(1,355)	242,635
Reclassification of foreign exchange forward¹⁵	-	-	-	-	-	(2,717)	-	(2,717)
Exercise of options²⁵	68	2,617	-	(821)	-	-	821	2,685
Issuance of ordinary share warrants	-	-	-	-	-	-	470	470
Share-based compensation²⁵	-	-	-	483	-	-	-	483
Total contributions by and distributions to shareholders:	3,433	2,617	240,625	(338)	-	(2,717)	(64)	243,556

Balance at 31 December 2019	10,867	4,685	234,514	10,057	25,359	(11,630)	190,839	464,691

See accompanying notes

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended 31 December 2019	Year ended 31 December 2018
	(£000's)	(£000's)
Operating activities
Net income for the year	8,468	14,477
Add (deduct) items not involving cash
Amortisation and depreciation	63,241	61,994
Share-based compensation expense²⁵	483	583
Issuance of ordinary share warrants	470	-
Tax expense²⁷	2,906	458
Interest expense, net⁹	22,695	22,465
Fair value adjustments on contingent consideration²³	460	7,208
Foreign exchange (gain)/loss⁶	(1,470)	317
Loss on sale of discontinued operation, net of tax⁸	26	4,477
	97,279	111,979

Restriction of cash balances	(1,409)	(3,651)
Increase in trade and other receivables	(6,311)	(1,299)
(Increase)/reduction in other long-term receivables	(61)	571
Increase in accounts payable and accrued liabilities	6,338	2,705
Reduction in other short-term payables	(23,727)	(2,871)
Increase in provisions	6,000	-
Cash generated from operations	78,109	107,434
Income taxes paid	(5,957)	(3,325)
Income taxes received	2,930	2,484
Total cash provided by operating activities	75,082	106,593

Financing activities
Proceeds from exercise of options	2,685	561
Proceeds from long-term debt^5,22	173,578	-
Debt issuance costs²²	(2,617)	-
Debenture settlement	-	(62)
Lease payments	(3,643)	-
Repayment of non-compete liability	(6,000)	(8,000)
Interest repayment	(20,974)	(21,007)
Payment of contingent consideration²³	-	(63,455)
Total cash provided by/(used in) financing activities	143,029	(91,963)

Investing activities
Purchase of tangible assets	(3,809)	(1,450)
Purchase of intangible assets	(12,921)	(5,250)
Proceeds from sale of intangible assets	-	1,450
Disposal of discontinued operation⁸	18,000	16,140
Business acquisitions, net of cash acquired⁵	(199,726)	-
Total cash (used in)/provided by investing activities	(198,456)	10,890

Net increase in cash during the year	19,655	25,520
Cash, beginning of year	84,383	59,033
Exchange loss on cash and cash equivalents	(3,739)	(170)
Cash, end of year	100,299	84,383

See accompanying notes

SUPPLEMENTARY NOTES FOR YEAR ENDED 31 DECEMBER 2019

1. Corporate information

Gamesys Group plc, formerly JPJ Group plc, is an online gaming holding company that was incorporated under the Companies Act 2006 (England and Wales) on 29 July 2016. On 26 September 2019, following the completion of the Gamesys Acquisition (as defined below), JPJ Group plc changed its name to Gamesys Group plc. Gamesys Group plc's registered office is located at 10 Piccadilly, London, United Kingdom. Unless the context requires otherwise, use of 'Group' in these accompanying notes means Gamesys Group plc and its subsidiaries, as applicable, and use of 'Parent Company' means Gamesys Group plc.

The Group currently offers bingo, casino and other games to its players using the Jackpotjoy, Starspins, Botemania, Virgin Games, Heart Bingo, Virgin Casino, Monopoly Casino, Rainbow Riches, Vera&John, InterCasino and Solid Gaming brands. All brands operate off proprietary software owned by the Group.

On 13 June 2019, the Group entered into a conditional agreement to acquire the business of Gamesys (Holdings) Limited, excluding sports brands and games, for a mixture of cash and new Group shares (the 'Gamesys Acquisition'). The Gamesys Acquisition was completed on 26 September 2019. The total consideration amounted to approximately £491.2 million, comprising of: (i) £237.3 million in cash (net of gains from hedging), of which £173.6 million was funded by an add-on to the Group's existing Term Facility, (ii) £9.9 million in deferred consideration (net of working capital adjustments) and (iii) 33.7 million in newly issued shares, representing approximately £244.0 million.

These Consolidated Financial Statements were authorised for issue by the Board of Directors of Gamesys Group plc on 17 March 2020.

2. Basis of preparation

Basis of presentation

These Consolidated Financial Statements have been prepared by management on a going concern basis, are presented in compliance with International Financial Reporting Standards ('IFRS') as issued by the International Accounting Standards Board ('IASB') and adopted by the European Union. The impact of the first-time adoption of IFRS 16 - Leases ('IFRS 16') is explained in note 3.

These Consolidated Financial Statements have been prepared under the historical cost convention, other than for the measurement at fair value of the Group's Interest Rate Swap, Currency Swap, FX Forward, contingent consideration, certain hedged loan instruments, and certain loans receivable.

The financial information for the period ended 31 December 2019 and the period ended 31 December 2018 does not constitute the company's UK statutory accounts for those years.

Statutory accounts for the period ended 31 December 2018 have been delivered to the UK Registrar of Companies. The statutory accounts for the period ended 31 December 2019 will be delivered to the Registrar of Companies in due course.

The auditors' reports on the accounts for the year ended 31 December 2019 and year ended 31 December 2018 were 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.

Basis of consolidation

Gamesys Group plc's Consolidated Financial Statements consolidate the Parent Company and all of its subsidiaries. The parent controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. All transactions and balances between companies within the group are eliminated on consolidation.

Subsidiaries are fully consolidated from the date of acquisition, being the date on which Gamesys Group plc obtains control, and continue to be consolidated until the date that such control ceases.

Intercompany transactions, balances, income and expenses on transactions between Gamesys Group plc's subsidiaries are eliminated. Profit and losses resulting from intercompany transactions that are recognised in assets are also eliminated.

3. Summary of significant accounting policies

Business combinations and goodwill

The acquisition method of accounting is used to account for the acquisition of subsidiaries by Gamesys Group plc, whereby the purchase consideration is allocated to the identifiable assets and liabilities on the basis of fair value at the date of acquisition. Provisional fair values allocated at a reporting date are finalised as soon as the relevant information is available, within a period not to exceed a year from the acquisition date.

Consideration transferred includes the fair values of the assets transferred, liabilities incurred, and equity interests issued by Gamesys Group plc. Consideration also includes the fair value of any contingent consideration. Subsequent to the acquisition, contingent consideration that is based on an earnings target and classified as a liability is measured at fair value with any resulting gains or losses recognised in net income. Transaction related costs are expensed as incurred.

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred over the net identifiable assets acquired and liabilities assumed. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to Gamesys Group plc's cash-generating units that are expected to benefit from the combination.

Segmental reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Makers. The Chief Operating Decision Makers, who are responsible for allocating resources and assessing the performance of the operating segments, have been identified as the management team comprising of the Chair, Chief Executive Officer and Chief Financial Officer.

In December 2019, following the Gamesys Acquisition, the Group determined that Chief Operating Decision Makers will no longer allocate resources and assess performance based on previously established operating segments. Therefore, the Group's reportable operating segments had changed such that the Jackpotjoy and Vera&John segments were aggregated into a single operating segment, being online gaming.

Revenue recognition

The Group earns its revenue from operating online bingo and casino websites ('Net Gaming Revenue'). Other revenue streams, which the Group does not consider material comprise of licencing of its proprietary platform to third parties, affiliate aggregation services, and game aggregation services (in combination, 'B2B Revenue').

Net Gaming Revenue

Revenue from online bingo and casino consists of the difference between total amounts wagered by players less all winnings payable to players, bonuses allocated and jackpot contributions. Players transact with the Group's businesses under agreed terms, which form the basis for the contractual arrangement. There are no significant judgements required in applying IFRS 15 - Revenue from Contracts with Customers to these arrangements.

Net Gaming Revenue is recognised upon satisfaction of the Group's performance obligation to the player, which is the point in time when the player completes one of the games offered by the Group and the outcome of the game is honoured with the appropriate payout being made.

There is no significant degree of uncertainty involved in quantifying the amount of Net Gaming Revenue earned, including bonuses, jackpot contributions, and loyalty points. Bonuses, jackpot contributions and loyalty points are measured at face value when credited to the player's account.

Fair value measurement

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: in the principal market for the asset or liability, or in the absence of a principal market, in the most advantageous market accessible by the Group for the asset or liability.

Gamesys Group plc uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the Consolidated Financial Statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities.

Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.

Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

The Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation at the end of each reporting period.

Foreign currency translation

Functional and presentation currency

The Group's Consolidated Financial Statements are presented in pounds sterling. Management determines the functional currency for each subsidiary within the Group based on the principal economic environment in which the subsidiary is active. Items included in the financial statements of each subsidiary are measured using that functional currency. Differences arising on the retranslation of subsidiaries whose functional currency is not pounds sterling are recorded in other comprehensive income and accumulated in translation reserve.

Foreign currency transactions and balances

Foreign currency transactions are translated into the functional currency of the respective entity of Gamesys Group plc, using the exchange rates prevailing at the dates of the transactions (spot rates). Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates as at the reporting date. Foreign exchange gains and losses resulting from the settlement or translation of monetary items are recognised in profit and loss.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of gain or loss on change in fair value of the item.

Financial instruments

Financial assets and financial liabilities are recognised when Gamesys Group plc becomes a party to the contractual provisions of the financial instrument. Financial assets are derecognised when the contractual rights to the cash flows from the financial assets expire, or when the financial asset and all substantial risks and rewards are transferred. Financial liabilities are derecognised when extinguished, discharged, cancelled, or when they expire.

The Group classifies its financial assets and liabilities under the following categories: fair value through profit or loss ('FVPL'), fair value through other comprehensive income ('FVOCI'), financial assets at amortised cost and financial liabilities at amortised cost. All financial instruments are recognised initially at fair value. Transaction costs that are directly attributable to the acquisition or issue of a financial instrument classified as other than at FVPL are added to the carrying amount of the asset or liability.

The accretion of these costs is recognised over the life of the instrument in accretion on financial liabilities under the effective interest rate method described below.

Fair value through profit or loss

The Group's contingent consideration is classified as FVPL. Any gains or losses are recorded in net income in the period in which they arise.

Financial assets at amortised cost

Financial assets at amortised cost are non-derivative financial instruments with fixed or determinable payments that are not quoted in an active market. After initial measurement, such instruments are subsequently measured at amortised cost using the effective interest rate ('EIR') method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in interest income or expense in the Consolidated Statements of Comprehensive Income. This category generally applies to cash, restricted cash, player deposits, trade and other receivables, and other long-term receivables.

The Group uses the simplified Expected Credit Loss model ('ECL') ('ECL Model') for Gamesys Group plc's trade receivables in accordance with IFRS 9 - Financial Instruments ('IFRS 9'). Other receivables have been evaluated under the standard ECL Model. Under the ECL Model, Gamesys Group's trade receivables are classified in stage 1 - financially healthy assets that are expected to perform in line with their contractual terms and which show no signs of increased credit risk.

In order to determine the amount of ECL to be recognised in the Consolidated Financial Statements on trade and other receivables, Gamesys Group plc has set up a provision matrix based on its historical credit loss experience. The matrix is adjusted for forward looking estimates and establishes that ECL should be calculated as follows:

· 0-30 days past due: 1% of carrying value (2018 - less than 1% of carrying value)

· 31-60 days past due: 15% of carrying value (2018 - 15% of carrying value)

· 61-90 days past due: 19% of carrying value (2018 - 19% of carrying value)

· More than 90 days past due: 25% of carrying value (2018 - 25% of carrying value)

Balances in transit or receivable from payment service providers are also considered trade and other receivables that fall under the scope of IFRS 9. In order to determine the amount of ECL to be recognised in the Consolidated Financial Statements on these balances, the Group has set up a risk rating system to determine credit risk of each counter party. ECL is calculated as 30% of the balances owing from all payment service providers identified as high-risk.

Financial liabilities at amortised cost

With the exception of contingent consideration and derivatives, all financial liabilities are measured at amortised cost using the effective interest rate method. This category generally applies to interest payable, accounts payable and accrued liabilities, other short-term payables, payable to players, lease liabilities, long-term debt, and other long-term payables. All interest-related charges are reported in profit or loss within interest expense.

Convertible loan receivable

The Group holds convertible loan receivable that can be converted to equity of the borrower after 12 months following the date of the loan agreement.

The convertible loan receivable is shown as a single asset and is measured at fair value through profit or loss. Fair value is established using a risk neutral simulation model.

Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount reported in the Consolidated Balance Sheets if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously.

Derivative financial instruments

Gamesys Group plc uses derivative instruments for risk management purposes. Gamesys Group plc does not use derivative instruments for speculative trading purposes. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured to fair value at each reporting period end. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. The method of recognising unrealised and realised fair value gains and losses depends on whether the derivatives are designated as hedging instruments. For derivatives not designated as hedging instruments, unrealised gains and losses are recorded in interest income/expense on the Consolidated Statements of Comprehensive Income. For derivatives designated as hedging instruments, unrealised and realised gains and losses are recognised according to the nature of the hedged item and where the hedged item is a non-financial asset, amounts recognised in the hedging reserve are reclassified and the non-financial asset is adjusted accordingly.

Hedge accounting

Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss, except for the effective portion of cash flow hedges, which are recognised in other comprehensive income and later reclassified to profit or loss when the hedged item affects profit or loss.

The Group elected to use hedge accounting for the purposes of recognising realised and unrealised gains and losses associated with its Interest Rate Swap and Currency Swap.

IFRS 9 permits hedge accounting under certain circumstances provided that the hedging relationship is:

· formally designated and documented, including the entity's risk management objective and strategy for undertaking the hedge, identification of the hedging instrument, the hedged item, the nature of the risk being hedged, and how the entity will assess the hedging instrument's effectiveness;

· expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk as designated and documented, and effectiveness can be reliably measured; and

· assessed on an ongoing basis and determined to have been highly effective.

For the purpose of hedge accounting, hedges are classified as:

· fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment;

· cash flow hedges when hedging the exposure to variability in cash flows that is either attributable to a risk associated with a recognised asset or liability or a highly probable forecast transaction; and

· hedges of a net investment in a foreign operation.

Fair value hedges

The change in the fair value of a hedging instrument is recognised in the Consolidated Statements of Comprehensive Income as a financing expense. The change in the fair value of the hedged item attributable to the risk hedged is recorded as part of the carrying value of the hedged item and is also recognised in the Consolidated Statements of Comprehensive Income as a financing expense. For fair value hedges relating to items carried at amortised cost, any adjustment to carrying value is amortised through profit or loss over the remaining term of the hedge using the effective interest rate method. EIR amortisation may begin as soon as an adjustment exists and no later than when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. If the hedged item is derecognised, the unamortised fair value is recognised immediately in profit or loss.

At 31 December 2019, the Group had no hedges designated as fair value hedges.

Cash flow hedges

The Group uses interest rate contracts as hedges of its exposure to interest rate risk in forecast transactions and firm commitments. The effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognised immediately in profit or loss. The ineffective portion relating to interest rate contracts is recognised in financing expenses. Amounts recognised in other comprehensive income are transferred to profit or loss when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast sale occurs.

If the hedging instrument or hedged item expires or is sold, terminated or exercised without replacement or rollover (as part of the hedging strategy), or when the hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss previously recognised in other comprehensive income remains separately in equity until the forecast transaction occurs or the foreign currency firm commitment is met.

At 31 December 2019, the Group designated its Interest Rate Swap and Currency Swap as a cash flow hedges.

Hedges of net investments in foreign operations

Hedges of net investments in foreign operations are accounted for in a way similar to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised in other comprehensive income, while any gains or losses relating to the ineffective portion are recognised in profit or loss. On disposal of the foreign operation, the cumulative value of any such gains or losses recorded in equity is transferred to profit or loss.

The Group uses its EUR Term Facility as a hedge of its exposure to foreign exchange risk on its investments in EUR foreign subsidiaries. Gains or losses on the retranslation of this borrowing are transferred to other comprehensive income to offset any gains or losses on translation of the net investments in the subsidiaries.

At 31 December 2019, no material ineffectiveness arising on net investment hedges was included in the Consolidated Statements of Comprehensive Income.

Income taxes

Income tax expense consists of current and deferred tax expense. Income tax expense is recognised in the Consolidated Statements of Comprehensive Income. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year-end, adjusted for amendments to tax payable with regards to previous years.

Deferred tax assets and liabilities are recognised for deferred tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred taxes are not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse in the foreseeable future. Deferred tax assets and liabilities are measured using the enacted or substantively enacted tax rates expected to apply when the asset is realised or the liability settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognised in the Consolidated Statements of Comprehensive Income in the period that substantive enactment occurs.

A deferred tax asset is recognised to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. To the extent that the Group does not consider it probable that a deferred tax asset will be recovered, the deferred tax asset is reduced.

Where there is uncertainty about the appropriate tax treatment of certain transactions or circumstances, the Group applies the guidance of IFRIC 23 - Uncertainty Over Income Tax Treatments and recognises and measures its current and deferred tax assets and liabilities in accordance with its evaluation of the likelihood that a taxation authority will accept the uncertain tax treatment. Where it is considered probable that a taxation authority will accept the Group's uncertain tax treatment, the Group determines its taxable profit consistently with the tax treatment used or planned to be used in its income tax filings. Where it is considered unlikely that a taxation authority will accept the Group's uncertain tax treatment, the Group reflects the effect of uncertainty in determining its taxable profit following the method it expects to better predict the resolution of the uncertainty.

Cash and cash equivalents

Cash and cash equivalents include cash in hand and deposits held at call with banks, as well as balances with payment processors which are subject to an insignificant risk of change in value.

Cash and cash equivalents exclude restricted cash. Restricted cash is made up of cash held on deposit for the purpose of applying for business and gaming licences, as well as reserves held with payment service providers.

The effect on the Consolidated Statements of Cash Flows of restrictions either taking effect on, or being lifted from, cash balances are reported with regard to the linkage principle, under which changes in cash are classified based on the purpose for which the restricted cash is used. Under this principle, changes (such as cash, which is restricted for the purposes of applying for a business licence and payment service provider reserves) are treated as an operating cash outflow.

Tangible assets

Tangible assets are recorded at cost less accumulated depreciation. These assets are depreciated over their estimated useful lives as follows:

Computer hardware 33% - 50% per annum

Office furniture 20% - 50% per annum

Freehold property Over 50 years

Leasehold improvements Over the term of the lease

Depreciation is recorded under administrative costs in the Consolidated Statements of Comprehensive Income.

Intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortised over their useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. Amortisation expense is reflected in the Consolidated Statements of Comprehensive Income. Amortisation for the material categories of finite life intangible assets is recorded under administrative costs and is calculated at the following rates:

Brand	5% per annum
Gaming licences	5% per annum
Platform and software	7% - 33% per annum
Player relationships and partnership agreements	8% - 20% per annum (variable, according to the expected pattern of consumption)

Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually, either individually or at the cash-generating unit ('CGU') level. If any indication of impairment exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows independently of other assets, the Group estimates the recoverable amount of the CGU to which the asset belongs.

Recoverable amount is the higher of fair value less costs to sell (measured according to level 3 in the fair value hierarchy) and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (or CGU) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.

The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.

In instances when a part of a particular CGU is disposed of, the value of goodwill associated with the disposal is measured on the basis of the relative value of the operation disposed of as a portion of the unit retained. The relative value is derived by analysing various methods available for the asset being disposed of and concluding on the method that is most appropriate for each individual disposal.

Share-based compensation and long-term incentive plan

Compensation expense for equity-settled stock options awarded under the share option plan is measured at the fair value at the grant date using the Black-Scholes valuation model and is recognised using the graded vesting method over the vesting period of the options granted. Compensation expense for equity-settled stock options awarded under the LTIP, LTIP2 and LTIP3 (as defined in note 25) is measured at the fair value at the grant date using the Black-Scholes valuation model for the EPS and EPS CAGR Tranches (as defined in note 25) and the Monte Carlo model for the TSR Tranches (as defined in note 25).

Compensation expense recognised is adjusted to reflect the number of options that has been estimated by management for which conditions attached to service will be fulfilled as of the grant date until the vesting date so that the ultimately recognised expense corresponds to the options that have actually vested. The compensation expense credit is attributed to share-based payment reserve when the expense is recognised in the Consolidated Statements of Comprehensive Income.

Earnings per share

Basic earnings per share is calculated by dividing the net income or loss for the period attributed to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated using the same method as for basic earnings per share and adjusting the weighted average of common shares outstanding during the period to reflect the dilutive impact, if any, of options and warrants assuming they were exercised for that number of common shares calculated by applying the treasury stock method. The treasury stock method assumes that all proceeds received by Gamesys Group plc when options and warrants are exercised will be used to purchase common shares at the average market price during the reporting period. Convertible debt is considered in the calculation of diluted earnings per share to the extent that it is dilutive.

Provisions

Provisions are recognised when the Group has a present obligation, legal or constructive, as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

Research and development costs

Research costs are expensed as incurred. Development expenditures on an individual project are recognised as an intangible asset when the Group can demonstrate:

· the technical feasibility of completing the intangible asset so that the asset will be available for use or sale;

· its intention to complete and its ability to use or sell the asset;

· how the asset will generate future economic benefits;

· the availability of resources to complete the asset; and

· the ability to measure reliably the expenditure during development.

Following initial recognition of the development expenditure as an asset, the asset is carried at cost less any accumulated amortisation and accumulated impairment losses. Amortisation of the asset begins the same month the asset is recognised and is amortised over the period of expected future economic benefit to the Group. During the period of development, the asset is tested for impairment annually as part of the CGU to which it relates.

Leases

Effective from 1 January 2019, the Group adopted IFRS 16, which replaces IAS 17 - Leases and related interpretations.

The Group elected to apply the modified retrospective approach which does not require restatement of comparative periods. As a result, lease liabilities were recognised in the opening consolidated balance sheet as at 1 January 2019 at an amount equal to the Group's remaining lease payments discounted using the Group's incremental borrowing rate. Additionally, the Group elected to measure right-of-use assets by reference to the measurement of the lease liabilities on the same date. As a result, net assets were not impacted. There was also no impact on the Group's equity at 1 January 2019.

On 1 January 2019, the Group recognised right-of-use assets and lease liabilities of £3.2 million related to its existing leases. Furthermore, the Group assumed that leases obtained as part of the Gamesys Acquisition were also subject to IFRS 16 starting on 1 January 2019 and recognised additional right-of-use assets and lease liabilities of £20.7 million as a result.

Under IFRS 16, the Group amortises its right-of-use assets and accretes interest on its lease liabilities. As at 31 December 2019, the carrying value of the right-of-use assets amounted to £22.2 million and the carrying value of lease liabilities amounted to £22.6 million, with £4.7 million of this balance shown in current liabilities with the remaining portion of £17.9 million reflected under non-current liabilities.

The above lease liabilities balances were calculated using an incremental borrowing rate of 5.0%.

4. Summary of significant accounting estimates and assumptions

The preparation of Gamesys Group plc's Consolidated Financial Statements requires management to make judgements, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures, and the disclosure of contingent liabilities. Estimates and judgements are continuously evaluated and are based on management's experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods.

The effect of a change in an accounting estimate is recognised prospectively by including it in the Consolidated Statements of Comprehensive Income in the period of the change, if the change affects that period only; or in the period of the change and future periods if the change affects both.

The estimates and judgements that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Business combinations and contingent consideration

Business combinations require management to exercise judgement in measuring the fair value of the assets acquired, equity instruments issued, liabilities, and contingent consideration incurred or assumed. In particular, a high degree of judgement is applied in determining which assets and liabilities are included in a business combination, the fair value of the separable intangible assets acquired and their useful economic lives.

Goodwill and intangible assets

Goodwill and intangible assets are reviewed for impairment annually, or more frequently when there are indicators that impairment may have occurred, by comparing the carrying value to its recoverable amount. Management uses judgement in estimating the recoverable values of the Group's CGUs and uses internally developed valuation models that consider various factors and assumptions including forecasted cash earnings, growth rates and discount rates. The use of different assumptions and estimates could influence the determination of the existence of impairment and the valuation of goodwill.

Taxes

Group companies may be subject to indirect taxation on transactions, which have been treated as exempt supplies of gambling, or on supplies which have been zero rated where legislation provides that the services are received or used and enjoyed in the country where the service provider is located. Revenue earned from players located in any particular jurisdiction may give rise to further taxes in that jurisdiction. If such taxes are levied, either on the basis of current law or the current practice of any tax authority, or by reason of a change in the law or practice, then this may have a material adverse effect on the amount of tax payable by the Group, its financial position or its reported results. Where it is considered probable that a previously identified contingent liability will give rise to an actual outflow of funds, then a provision is made in respect of the relevant jurisdiction and period impacted. Where the likelihood of a liability arising is considered remote, or the possible contingency is not material to the financial position of the Group, the contingency is not recognised as a liability at the balance sheet date.

The Group is also exposed to a range of different corporation and other tax regimes. Any given tax jurisdiction may have complex legislation operating both domestically and potentially beyond the borders of the country in question. This requires the Group to make judgments on the basis of detailed tax analysis and recognise payables or provisions and disclose contingent liabilities as appropriate in the circumstances. Should the Group's judgement change as it is revisited over time, or the associated estimates be updated as more information comes to light, tax expense recorded in the income statement in future reporting periods will be affected. Further information on recognised provisions is included in note 19.

5. Business combinations

On 26 September 2019, the Group completed the Gamesys Acquisition, which includes the Virgin Games, Heart Bingo, Virgin Casino and Monopoly Casino brands and related assets. The purchase was completed for £237.3 million in cash (net of gains from hedging), of which £173.6 million was funded by an add-on to the Group's existing Term Facility, £9.9 million in deferred consideration (net of working capital adjustments) and 33,653,846 newly issued ordinary shares of the Parent Company, which at the prevailing share price of £7.25 on 26 September 2019 amounted to £244.0 million. The deferred consideration is payable in March 2022 and is subject to an annual interest rate of 5.0% plus LIBOR. The Gamesys Acquisition has been accounted for as a business combination.

The purchase price allocation set forth below represents the allocation of the purchase price to the provisional fair value of assets acquired. and liabilities assumed. No indemnification assets have been recognised at this stage due to the uncertainty of any such amounts being agreed.

Effect of acquisition on the financial position of the Group

	26 September 2019 (£000's)
Assets acquired
Cash	40,274
Restricted cash	1,165
Player deposits	8,960
Trade and other receivables	14,010
Other non-current assets	5,943
Right-of-use assets	18,786
Intangible assets (note 16)	309,000
Goodwill (note 16)	252,718
	650,856

Liabilities assumed
Accounts payable and accrued liabilities	75,452
Player liabilities	8,960
Deferred tax liabilities (note 27)	52,403
Provisions (note 19)	3,800
Lease liabilities	19,067
	159,682

Net assets acquired	491,174

Consideration
Cash	240,000
Realised gain on FX Forward (note 15)	(2,717)
Deferred consideration	10,000
Estimated working capital adjustment	(99)
Shares issued	243,990
	491,174

The excess purchase consideration over the net fair value of financial and other tangible and intangible assets and liabilities acquired was allocated to goodwill. The goodwill recognised is primarily attributed to the expected synergies and other benefits from combining the assets and activities of Gamesys (Holdings) Limited with those of the Group.

None of the goodwill is expected to be deductible for income tax purposes.

The Gamesys Acquisition is expected to enhance the Group's scale and will allow it to benefit from a diversified brand portfolio, greater operational control and complementary executive and operational team. Costs relating to this transaction amounted to a total of £15.8 million, with £14.4 million reflected in transaction related costs and £1.4 million reflected as costs of issuance of common shares.

Since the date of acquisition, this business combination has contributed £60.3 million in revenue and £9.9 million in net income to the Group. The results of this business combination are included in the Group's online gaming segment. The Group has used a significant amount of judgement and simplifying assumptions in estimating the net income and operating profits before income taxes had the business combination occurred at the beginning of the year. Had the business combination occurred at the beginning of the year, it would have contributed £210.5 million in revenue and £49.7 million in operating profit before income taxes, making consolidated revenue for the year be £565.3 million and operating profit before income taxes for the year be £51.8 million. Operating profit before income taxes take into account income earned from the software licence fee and other income earned by the acquired business from the reporting entity during the period before the Gamesys Acquisition. As a result of the judgement and simplifying assumptions used to generate these estimates, the amounts should not be used as an indicator of past or future performance of the Group or its acquired subsidiaries.

6. Segment information

Under IFRS 8 - Operating Segments ('IFRS 8') segments are reported in a manner consistent with internal reporting provided to the Chief Operating Decision Makers (as defined in note 3).

In December 2019, following the Gamesys Acquisition, the Group determined that its reportable operating segments had changed such that the Jackpotjoy and Vera&John segments were aggregated into a single operating segment, being online gaming. The online gaming segment consists of online real money and casino operating results of the Jackpotjoy, Starspins, Virgin Games, Heart Bingo, Botemania, Rainbow Riches, Virgin Casino, Monopoly Casino, Vera&John, InterCasino and Solid Gaming brands.

Management believes that this segmentation is most appropriate because online gaming is the Group's primary business that is being managed on a combined basis without central business costs or operating expenses being allocated to any particular geography or product. The new segmentation came into effect on 1 December 2019.

Additionally, as discussed in note 8, the Group sold its Mandalay business in the period ended 31 March 2019 and it sold its social gaming business in the period ended 30 September 2018. All current year and 2018 comparative figures have been restated accordingly.

The following tables present selected financial results for online gaming and the unallocated corporate costs:

Year ended 31 December 2019:

	Online gaming¹ (£000's)	Unallocated corporate costs (£000's)	Total (£000's)
Gaming revenue	415,078	-	415,078

Distribution costs	214,214	25	214,239
Amortisation and depreciation	61,190	963	62,153
Compensation, professional, and general and administrative expenses	71,307	13,972	85,279
Impairment of financial assets	3,879	-	3,879
Transaction related costs	224	15,585	15,809
Foreign exchange loss/(gain)	1,319	(2,789)	(1,470)
Financing, net	483	22,672	23,155
Income/(loss) for the year before taxes from continuing operations	62,462	(50,428)	12,034
Tax expense	2,554	352	2,906
Net income/(loss) for the year after taxes from continuing operations	59,908	(50,780)	9,128

Net income/(loss) for the year after taxes from continuing operations	59,908	(50,780)	9,128
Interest expense, net	483	20,921	21,404
Accretion on financial liabilities	-	1,291	1,291
Tax expense	2,554	352	2,906
Amortisation and depreciation	61,190	963	62,153
EBITDA	124,135	(27,253)	96,882
Share-based compensation	-	483	483
One-off tax charges	6,000	-	6,000
Fair value adjustments on contingent consideration	-	460	460
Transaction related costs	224	15,585	15,809
Foreign exchange loss/(gain)	1,319	(2,789)	(1,470)
Adjusted EBITDA	131,678	(13,514)	118,164

Net income/(loss) for the year after taxes from continuing operations	59,908	(50,780)	9,128
Share-based compensation	-	483	483
One-off tax charges	6,000	-	6,000
Fair value adjustments on contingent consideration	-	460	460
Transaction related costs	224	15,585	15,809
Foreign exchange loss/(gain)	1,319	(2,789)	(1,470)
Amortisation of acquisition related purchase price intangibles	52,701	-	52,701
Accretion on financial liabilities	-	1,291	1,291
Adjusted net income/(loss)	120,152	(35,750)	84,402

¹Includes Gamesys Acquisition results from 27 September 2019 to 31 December 2019.

Year ended 31 December 2018:

	Online gaming (£000's)	Unallocated corporate costs (£000's)	Total (£000's)
Gaming revenue	308,212	-	308,212

Distribution costs	149,793	63	149,856
Amortisation and depreciation	54,937	390	55,327
Compensation, professional, and general and administrative expenses	37,881	11,632	49,513
Impairment of financial assets	1,000	-	1,000
Severance costs	850	-	850
Transaction related costs	139	1,751	1,890
Foreign exchange loss/(gain)	438	(84)	354
Financing, net	(115)	29,788	29,673
Income/(loss) for the year before taxes from continuing operations	63,289	(43,540)	19,749
Tax expense	122	336	458
Net income/(loss) for the year after taxes from continuing operations	63,167	(43,876)	19,291

Net income/(loss) for the year after taxes from continuing operations	63,167	(43,876)	19,291
Interest expense, net	(115)	19,587	19,472
Accretion on financial liabilities	-	2,993	2,993
Tax expense	122	336	458
Amortisation and depreciation	54,937	390	55,327
EBITDA	118,111	(20,570)	97,541
Share-based compensation	-	583	583
Severance costs	850	-	850
Fair value adjustments on contingent consideration	-	7,208	7,208
Transaction related costs	139	1,751	1,890
Foreign exchange loss/(gain)	438	(84)	354
Adjusted EBITDA	119,538	(11,112)	108,426

Net income/(loss) for the year after taxes from continuing operations	63,167	(43,876)	19,291
Share-based compensation	-	583	583
Severance costs	850	-	850
Fair value adjustments on contingent consideration	-	7,208	7,208
Transaction related costs	139	1,751	1,890
Foreign exchange loss/(gain)	438	(84)	354
Amortisation of acquisition related purchase price intangibles	52,752	-	52,752
Accretion on financial liabilities	-	2,993	2,993
Adjusted net income/(loss)	117,346	(31,425)	85,921

During the year ended 31 December 2019, revenue was earned from players situated in the following locations: United Kingdom - 52% (year ended 31 December 2018 - 53%), Japan - 26% (year ended 31 December 2018 - 14%), Spain - 8% (year ended 31 December 2018 - 10%), Sweden - 3% (year ended 31 December 2018 - 8%), rest of Europe - 6% (year ended 31 December 2018 - 7%), rest of world - 5% (year ended 31 December September 2018 - 8%).

During the year ended 31 December 2019, the Group's B2B Revenue comprised 4% (year ended 31 December 2018 - 3%) of total Group revenues, with the remaining portion being revenues earned from Net Gaming Revenue operations.

Non-current assets by geographical location as at 31 December 2019 were as follows: Europe £85.3 million (31 December 2018 - £85.2 million), Americas £383.9 million (31 December 2018 - £436.8 million) and United Kingdom £576.4 million (31 December 2018 - £nil).

7. Costs and expenses

As discussed in note 8, the Group sold its Mandalay business in the period ended 31 March 2019 and its social gaming business in the period ended 30 September 2018. All current year and 2018 comparative figures have been restated accordingly. The results of the Gamesys Acquisition for the period from 27 September 2019 to 31 December 2019 are included in the tables below.

	Year ended 31 December 2019 (£000's)	Year ended 31 December 2018 (£000's)
Distribution costs:
Selling and marketing	81,740	54,523
Licensing fees¹	45,318	38,094
Gaming taxes	59,165	38,670
Processing fees	28,016	18,569
	214,239	149,856

Administrative costs:
Compensation and benefits	55,635	31,582
Professional fees	5,086	4,300
General and administrative¹	24,558	13,631
Tangible asset depreciation	4,361	538
Intangible asset amortisation	57,792	54,789
	147,432	104,840

¹Certain changes were reallocated from licensing fees to general and administrative to match presentation following the Gamesys Acquisition.

8. Discontinued operations

On 12 March 2019, the Group completed the sale of its Mandalay business for a cash consideration of £18.0 million. The Mandalay business was not previously classified as held-for-sale. As discussed in note 7 of the Group's 2018 Consolidated Financial Statements, the Group disposed of its social gaming business in the period ended 30 September 2018. The comparative consolidated statements of comprehensive income are presented below to show the Mandalay and social gaming business discontinued operations separately from continuing operations. The results of the Mandalay and social gaming businesses have been excluded from notes 6 and 7 above.

Results of discontinued operations

	Year ended 31 December 2019 (£000's)	Year ended 31 December 2018 (£000's)
Gaming revenue	1,595	11,376
Social gaming revenue	-	7,495
Expenses	2,229	19,208
Results from operating activities	(634)	(337)
Income tax	-	-
Loss for the year	(634)	(337)
Loss on disposal of discontinued operations	(26)	(4,477)
Income tax on loss on disposal of discontinued operations	-	-
Loss from discontinued operations, net of tax	(660)	(4,814)

Basic loss per share from discontinued operations	£(0.01)	£(0.06)
Diluted loss per share from discontinued operations	£(0.01)	£(0.06)

Cash flows from discontinued operations

	Year ended 31 December 2019 (£000's)	Year ended 31 December 2018 (£000's)
Net cash provided by operating activities	525	6,090
Net cash provided by investing activities	18,000	16,140
Net cash from financing activities	-	-
Net cash flows for the period	18,525	22,230

Effect of disposal on the financial position of the Group

	31 December 2019 (£000's)	31 December 2018 (£000's)
Trade and other receivables	-	184
Non-current assets	3,753	10,365
Goodwill	14,273	9,638
Net assets	18,026	20,187

Working capital adjustments payable	-	(1,203)
Costs of disposal	-	(1,118)
Consideration received, satisfied in cash	18,000	18,031
Loss on disposal of discontinued operations	(26)	(4,477)

Goodwill disposed of was allocated to the Mandalay business on the basis of earnings before interest, taxes, depreciation and amortisation, relative to that of the overall segment.

9. Interest income/expense

	Year ended 31 December 2019 (£000's)	Year ended 31 December 2018 (£000's)
Total interest income	420	349

Interest accrued and paid on long-term debt	21,435	19,815
Fair value adjustment on secured convertible loan	(248)	-
Interest accrued and paid on lease liabilities	637	-
Interest accrued and paid on convertible debentures	-	6
Total interest expense	21,824	19,821

Accretion of discount recognised on contingent consideration	-	1,204
Interest accretion recognised on convertible debentures	-	8
Debt issue costs and accretion recognised on long-term debt	723	576
Interest accretion recognised on other long-term liabilities	568	1,205
Total accretion on financial liabilities	1,291	2,993

10. Earnings per share

The following table presents the calculation of basic and diluted earnings per share:

	Year ended 31 December 2019 (£000's)	Year ended 31 December 2018 (£000's)
Numerator:
Net income attributable to owners of the parent - basic	8,468	14,477
Net income attributable to owners of the parent - diluted	8,468	14,477

Numerator:
Net income from continuing operations - basic	9,128	19,291
Net income from continuing operations - diluted	9,128	19,291

Numerator:
Net loss from discontinued operations - basic	(660)	(4,814)
Net loss from discontinued operations - diluted¹	(660)	(4,814)

Denominator:
Weighted average number of shares outstanding - basic	83,326	74,241
Weighted average effect of dilutive share options	266	592
Weighted average number of shares outstanding - diluted	83,592	74,833

Net income per share^2,3
Basic	£0.10	£0.20
Diluted	£0.10	£0.19

Net income per share^2,3- continuing operations
Basic	£0.11	£0.26
Diluted	£0.11	£0.26

Net loss per share^1,2,3 - discontinued operations
Basic	£(0.01)	£(0.06)
Diluted	£(0.01)	£(0.06)

¹ In case of a net loss, the effect of share options potentially exercisable on diluted loss per share will be anti-dilutive; therefore, basic and diluted net loss per share will be the same.

²Basic income per share is calculated by dividing the net income by the weighted average number of shares outstanding during the year.

³ Diluted income per share is calculated by dividing the net income by the weighted average number of shares outstanding during the year and adjusted for the number of potentially dilutive share options and contingently issuable instruments.

11. Liabilities arising from financing activities

The following is a reconciliation of liabilities arising from financing activities:

	Long-term debt (£000's)	Interest payable (£000's)	Non- compete clauses (£000's)	Interest rate swap liability (£000's)	Currency swap liability (£000's)	Contingent consideration (£000's)	Lease liabilities (£000's)	Total (£000's)
Balance, 1 January 2018	369,487	924	16,912	-	-	59,583	-	446,906
Cash flows	-	(20,351)	(8,000)	(656)	-	(63,455)	-	(92,462)
Non-cash flows:
Fair value adjustments	-	-	-	1,141	-	7,208	-	8,349
Interest expense	-	19,815	-	-	-	-	-	19,815
Accretion	576	-	1,184	-	-	1,204	-	2,964
Foreign exchange translation	1,387	(124)	-	-	-	-	-	1,263
Balance, 31 December 2018	371,450	264	10,096	485	-	4,540	-	386,835
Cash flows	170,961	(20,391)	(6,000)	(583)	-	-	(3,643)	140,344
Non-cash flows:
Fair value adjustments	-	-	-	1,238	9,251	460	-	10,949
Interest expense	-	21,435	-	-	-	-	637	22,072
Lease liabilities	-	-	-	-	-	-	25,643	25,643
Accretion	723	-	568	-	-	-	-	1,291
Set-off against acquired assets	-	-	-	-	-	(5,000)	-	(5,000)
Foreign exchange translation	(12,815)	(349)	-	-	-	-	(3)	(13,167)
Balance, 31 December 2019	530,319	959	4,664	1,140	9,251	-	22,634	568,967

12. Cash, restricted cash and player deposits

	31 December 2019 (£000's)	31 December 2018 (£000's)
Cash	100,299	84,383
Restricted cash¹	6,324	3,912
	106,623	88,295

Player deposits - restricted cash²	12,444	3,853
Player deposits - other³	-	5,179
	12,444	9,032

1 The Group has elected to present £2.2 million of its 31 December 2018 balance related to reserves held with payment service providers as trade and other receivables (note 13).

2 Player deposits - restricted cash consists of cash held by the Group in relation to amounts payable to players where the Group acts as operator. In this regard, the Group has elected to split player deposits into sub-categories and present £3.9 million of its 31 December 2018 balance as player deposits - restricted cash, rather than player deposits, to improve comparability with the balances at the current reporting date.

3 Player deposits - other includes balances held by third party operators on behalf of the Group in relation to amounts payable to players.

13. Trade and other receivables

Trade and other receivables consist of the following items:

	31 December 2019 (£000's)	31 December 2018 (£000's)
Due from the Gamesys group	-	8,764
Due from the 888 group	-	1,665
Due from payment service providers¹	12,218	2,249
ECL on payment service providers (note 3)	(3,579)	-
B2B Revenue receivable	5,453	2,722
ECL on B2B Revenue receivable	(107)	(334)
Sales tax refund receivable	4,806	1,461
ECL on sales tax refund receivable	(521)	(266)
Prepaid expenses	10,443	2,925
Other receivables	4,791	533
ECL on other receivables	(322)	(39)
	33,182	19,680

1 The Group has elected to present £2.2 million of its 31 December 2018 balance related to reserves held with payment service providers as trade and other receivables (note 12).

The following table summarises the Group's expected credit loss on its trade receivables and other long-term receivables at 31 December 2019:

	0-30 days (£000's)	31-60 days (£000's)	61-90 days (£000's)	90 days + (£000's)	Total (£000's)
Trade and other receivables	116	12	30	792	950
Other long-term receivables	-	-	-	350	350
	116	12	30	1,142	1,300

The following table summarises the Group's expected credit loss on its trade receivables and other long-term receivables at 31 December 2018:

	0-30 days (£000's)	31-60 days (£000's)	61-90 days (£000's)	90 days + (£000's)	Total (£000's)
Trade and other receivables	-	91	131	417	639
Other long-term receivables	-	-	-	361	361
	-	91	131	778	1,000

14. Other long-term receivables

In connection with the Gaming Realms Transaction, the Group recognised a long-term receivable of £3.8 million (31 December 2018 - £3.6 million) for the secured convertible loan, in accordance with IFRS 9, based on the calculation of fair value at 30 September 2019, as explained in note 23.

As at 31 December 2019, the remaining balance of £1.4 million (31 December 2018 - £1.1 million), net of an ECL provision discussed in note 13, relates to a long-term loan receivable by the Group.

15. Interest rate swap, currency swap and foreign exchange forward

Foreign exchange forward

On 26 June 2019, Gamesys Group plc entered into a foreign exchange forward agreement (the 'FX Forward') in order to minimise the Group's exposure to foreign exchange rate fluctuations between GBP and EUR as the Group added €196.0 million to its EUR Term Facility in relation to the Gamesys Acquisition. Under the FX Forward, the Group was able to convert €193.0 million to £173.7 million at an exchange rate of 0.89970 on 26 September 2019, giving rise to a £2.7 million realised gain on settlement of the foreign exchange forward.

Prior to being utilised, the FX Forward was designated as a cash flow hedge. As a result, upon utilising the FX Forward, the entire gain in the amount of £0.3 million previously shown in other comprehensive income was reclassified, in accordance with IFRS 9, and formed part of the realised gain on foreign exchange forward discussed above.

Currency swap

On 1 August 2019, the Group entered into a cross currency swap agreement (the 'Currency Swap') in order to minimise the Group's increased exposure to exchange rate fluctuations between GBP and EUR impacting the Group's EUR Term Facilities. The Currency Swap had an effective date of 30 September 2019 and a maturity date of 30 September 2022.

As at 31 December 2019, the fair value of the Currency Swap was a £9.3 million payable (31 December 2018 - £nil). The Group has included £3.4 million of this amount in current liabilities with the remaining balance included in other long-term payables, as discussed in note 24. An unrealised loss of £9.3 million for the year ended 31 December 2019 related to the Currency Swap was recognised in other comprehensive income (year ended 31 December 2018 - £nil).

Interest rate swap

On 5 August 2019, Gamesys Group plc amended the terms of its existing Interest Rate Swap to further minimise its exposure to interest rate fluctuations. Under the new terms, the Group will pay a fixed 6.08% rate of interest in place of floating GBP interest payments of GBP LIBOR plus 5.00%. On 15 August 2019, the starting Notional Amount went back to being 60% of the GBP Term Facility (£150.0 million) and will decrease to £69.0 million by 15 June 2021.

As at 31 December 2019, the fair value of the Interest Rate Swap was a £1.1 million payable (31 December 2018 - £0.5 million). The Group has included £0.4 million of this payable in current liabilities (31 December 2018 - £0.1 million), with the value of the remaining balance included in other long-term payables, as discussed in note 24. For the year ended 31 December 2019, the Group recognised an unrealised loss of £1.2 million in other comprehensive income (year ended 31 December 2018 - £1.1 million).

16. Intangible assets and goodwill

As at 31 December 2019

	Gaming licences	Player relationships	Software	Brand	Partnership agreements	Non-compete clauses	Goodwill	Total
	(£000's)	(£000's)	(£000's)	(£000's)	(£000's)	(£000's)	(£000's)	(£000's)
Cost
Balance, 1 January 2019	91	320,060	30,955	70,326	12,900	20,434	309,121	763,887
Additions (note 5)	-	223,300	93,974	-	4,600	-	252,718	574,592
Disposals (note 8)	-	(27,200)	(350)	(1,610)	-	-	(14,273)	(43,433)
Translation	(2)	(1,209)	(1,614)	(536)	(43)	-	(3,149)	(6,553)
Balance, 31 December 2019	89	514,951	122,965	68,180	17,457	20,434	544,417	1,288,493

Accumulated amortisation/impairment
Balance, 1 January 2019	56	172,574	18,280	13,577	6,080	17,875	20,766	249,208
Amortisation	47	41,571	8,650	3,442	2,609	2,559	-	58,878
Disposals (note 8)	-	(24,700)	(329)	(378)	-	-	-	(25,407)
Translation	(14)	(1,133)	(1,043)	(129)	(42)	-	(557)	(2,918)
Balance, 31 December 2019	89	188,312	25,558	16,512	8,647	20,434	20,209	279,761

Carrying value
Balance, 31 December 2019	-	326,639	97,407	51,668	8,810	-	524,208	1,008,732

As at 31 December 2018

	Gaming licences	Player relationships	Software	Brand	Partnership agreements	Non-compete clauses	Goodwill	Total
	(£000's)	(£000's)	(£000's)	(£000's)	(£000's)	(£000's)	(£000's)	(£000's)
Cost
Balance, 1 January 2018	93	337,655	25,211	70,019	12,900	20,434	316,386	782,698
Additions	-	-	5,318	-	-	-	-	5,318
Disposals (note 8)	-	(18,000)	-	-	-	-	(9,638)	(27,638)
Translation	(2)	405	426	307	-	-	2,373	3,509
Balance, 31 December 2018	91	320,060	30,955	70,326	12,900	20,434	309,121	763,887

Accumulated amortisation/impairment
Balance, 1 January 2018	81	139,333	12,551	10,005	4,458	7,661	19,605	193,694
Amortisation	44	40,496	5,518	3,502	1,622	10,214	-	61,396
Disposals (note 8)	-	(7,635)	-	-	-	-	-	(7,635)
Translation	(69)	380	211	70	-	-	1,161	1,753
Balance, 31 December 2018	56	172,574	18,280	13,577	6,080	17,875	20,766	249,208

Carrying value
Balance, 31 December 2018	35	147,486	12,675	56,749	6,820	2,559	288,355	514,679

Goodwill impairment testing

For the purpose of the annual impairment test, goodwill has been allocated to each CGU of the business. The recoverable amount of the Jackpotjoy CGU has been determined based on a fair value less selling costs calculation using cash flow projections from financial forecasts approved by senior management covering a five-year period. The pre-tax discount rate applied to cash flow projections is 14.0% (2018 - 14.0%) and cash flows beyond the five-year period are extrapolated using a 2.0% (2018 - 2.5%) growth rate. At 31 December 2019, the carrying amount of goodwill related to the Jackpotjoy CGU is £469.8 million (2018 - £231.3 million).

The recoverable amount of the Vera&John CGU has been determined based on a fair value less selling costs calculation using cash flow projections from financial forecasts approved by senior management covering a five-year period. The pre-tax discount rate applied to cash flow projections is 19.0% (2018 - 18.0%) and cash flows beyond the five-year period are extrapolated using a 2.0% (2018 - 2.5%) growth rate. At 31 December 2019, the carrying amount of goodwill related to the Vera&John CGU is £54.4 million (2018 - £57.0 million).

The fair value less selling costs calculations are based on level 3 in the fair value hierarchy. As at 31 December 2019, there was no indication of impairment of goodwill, nor does senior management expect any reasonably possible change in a key assumption that may give rise to an impairment.

17. Leases

As discussed in note 3, on 1 January 2019, the Group adopted IFRS 16. The tables below provide a reconciliation between operating lease commitments disclosed at 31 December 2018 and balances presented in the Group's Consolidated Financial Statements:

Right-of-use assets

	31 December 2019
	(£000's)
Balance, 1 January 2019	3,189
Additions	5,254
Additions arising on business combination	18,691
Depreciation	(2,614)
Effect of modification of lease terms	(2,346)
Foreign exchange movements	2
Balance, 31 December 2019	22,176

Lease liabilities

	31 December 2019
	(£000's)
Balance, 1 January 2019	3,189
Additions	5,254
Additions arising on business combination	18,825
Interest expense	637
Effect of modification of lease terms	(1,625)
Lease payments	(3,643)
Foreign exchange movements	(3)
Balance, 31 December 2019	22,634

The following table reconciles the minimum lease commitments disclosed in the Group's 31 December 2018 Consolidated Financial Statements to the lease liabilities recognised on 1 January 2019:

	1 January 2019
	(£000's)
Lease commitments at 31 December 2018	1,623
Short-term leases not recognised under IFRS 16	(93)
Effects of extension options reasonably certain to be exercised	2,005
Undiscounted lease payments	3,535
Effect of discounting	(346)
Lease liabilities at 1 January 2019	3,189

18. Accounts payable and accrued liabilities

Accounts payable and accrued liabilities consist of the following items:

	31 December 2019 (£000's)	31 December 2018 (£000's)
Affiliate/marketing expenses payable	11,148	7,038
Payable to game suppliers	10,414	3,181
Compensation payable	21,833	5,773
Professional fees	2,137	1,231
Gaming tax payable	24,434	1,174
Other	8,004	2,209
	77,970	20,606

19. Provisions

Provisions consist of:

	31 December 2019 (£000's)
Balance, 1 January 2019	-
Arising on business combination (note 5)	3,800
Provision in the year	6,000
Balance, 31 December 2019	9,800

The Group has taken external legal advice in respect of the impact of new legislation introduced in the UK relating to tax on income derived from the UK players. Management has determined that there is a reasonable argument that the Group does not fall under the new legislation; however, it is noted that this is not certain due to ambiguity in the legislation and its practical operation. Management considers that the liability based on payments made in the period would result in a provision of approximately £6.0 million.

Provisions arising on business combination include a probability based estimate of the fair value of potential UK tax liabilities of £3.8 million which have been disclosed under HMRC's Profit Diversion Compliance Facility.

The Group has included £3.8 million of these provisions in current liabilities (31 December 2018 - £nil million), with the value of the remaining balance included in non-current liabilities.

20. Other short-term payables

Other short-term payables consist of:

	31 December 2019 (£000's)	31 December 2018 (£000's)
Transaction related payables	953	516
Current portion on non-compete clauses payable	4,664	8,667
Working capital adjustment payable	-	429
	5,617	9,612

21. Financial risk management

Credit risk

Credit risk is the risk of loss associated with the counterparty's inability to fulfill its payment obligations. As at 31 December 2019, the Group is largely exposed to credit risk through its relationship with its service providers as well as its cash balances. Credit risk also arises from payment services providers ('PSPs'). Prior to accepting new PSPs, credit checks are performed using a reputable external source, where available. Management monitors PSP balances on a weekly basis and promptly takes corrective action if pre-agreed limits are exceeded. As at 31 December 2019 the Group recognised a £4.9 million provision for potentially uncollectable trade and other receivables and other long-term receivables, as explained in Note 3. With the exception of the balances discussed in note 13, no other receivables are considered past due or impaired. Quantitative analysis of the Group's exposure to credit risk arising from its receivables is included in note 13 and analysis of the Group's exposure to its credit risk arising from cash is presented below.

A significant amount of cash is held with the following institutions:

Financial Institution Rating	31 December 2019 (£000's)	31 December 2018 (£000's)
AA-	3,693	17,786
A	61,099	43,946
A-	5,305	31
BBB+	-	1,969
BBB	1,948	5,975
BBB-	2,245	-
BB	2,410	4,002

The Group monitors the credit ratings of counterparties regularly and at the reporting date does not expect any losses from non-performance by the counterparties. The Group's policy is to transfer significant concentrations of cash held at lower-rated financial institutions to higher rated financial institutions as swiftly as possible.

Interest rate risk

Interest rate risk relates to the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Gamesys Group plc is exposed to cash flow interest rate risk on its credit facilities, described in note 22, which bear interest at variable rates. A one percentage point increase (decrease) in interest rates would have decreased (increased) net earnings before income taxes by approximately £4.2 million for the year ended 31 December 2019 (31 December 2018 - £3.7 million), with all other variables held constant.

Management monitors movements in interest rates by reviewing the LIBOR on a frequent basis.

On 16 February 2018, Gamesys Group plc entered into an Interest Rate Swap to mitigate its exposure to interest rate volatility. On 5 August 2019, the Group amended the terms of its existing Interest Rate Swap to further minimise its exposure to interest rate fluctuations. A one percentage point increase (decrease) in interest rates would have increased (decreased) the fair value of the Interest Rate Swap by approximately £2.7 million for the year ended 31 December 2019 (31 December 2018 - £2.9 million), with all other variables held constant.

Foreign exchange risk

Foreign exchange risk arises when individual group entities enter into transactions denominated in a currency other than their functional currency. Gamesys Group plc's policy is, where possible, to allow the Group's entities to settle liabilities denominated in their functional currency with the cash generated from their own operations in that currency. Where Gamesys Group plc's entities have liabilities denominated in a currency other than their functional currency (and have insufficient reserves of that currency to settle them), cash already denominated in that currency will, where possible, be transferred from elsewhere within Gamesys Group plc.

Apart from these particular cash flows, the Group aims to fund expenses and investments in their respective currencies and to manage foreign exchange risk at a local level by matching the currency in which revenue is generated and expenses are incurred, as well as by matching the currency of its debt structure with the currency cash is generated in.

The following table summarises the Group's discounted net financial assets/liabilities by currency and the approximate effects on total comprehensive income, and therefore total equity as a result of a 10% change in the value of the foreign currencies against pounds sterling where the Group has significant exposure. The analysis assumes that all other variables remain constant.

At 31 December 2019

	Net foreign currency financial assets/(liabilities)	Effect of 10% strengthening in foreign exchange rates on comprehensive income	Effect of 10% weakening in foreign exchange rates on comprehensive income
	(£000's)	(£000's)	(£000's)
Canadian dollar	(92)	(9)	9
EURO	(245,476)	(24,548)	24,548
United States dollar	5,122	512	(512)

At 31 December 2018

	Net foreign currency financial assets/(liabilities)	Effect of 10% strengthening in foreign exchange rates on comprehensive income	Effect of 10% weakening in foreign exchange rates on comprehensive income
	(£000's)	(£000's)	(£000's)
Canadian dollar	(237)	(24)	24
EURO	(99,546)	(9,955)	9,955
United States dollar	1,471	147	(147)

Liquidity risk

The Group requires capital and liquidity to fund existing and future operations and future cash payments. The Group's policy is to maintain sufficient capital levels to fund its financial position and meet future commitments and obligations in a cost-effective manner.

Liquidity risk arises from the Group's ability to meet its financial obligations as they become due. The following tables summarise the Group's undiscounted financial and other liabilities as at 31 December 2019 and 31 December 2018:

At 31 December 2019	On demand	Less than 1 year	2-3 years	4-5 years	After 5 years
	(£000's)	(£000's)	(£000's)	(£000's)	(£000's)
Accounts payable and accrued liabilities	77,970	-	-	-	-
Other payables	953	8,383	16,724	-	-
Lease liabilities	-	4,727	8,866	7,995	5,795
Payable to players	12,444	-	-	-	-
Long-term debt	-	-	-	536,306	-
Interest payable on long-term debt	-	25,844	51,547	52,578	-
	91,367	38,954	77,137	596,879	5,795

At 31 December 2018	On demand	Less than 1 year	2-3 years	4-5 years	After 5 years
	(£000's)	(£000's)	(£000's)	(£000's)	(£000's)
Accounts payable and accrued liabilities	20,606	-	-	-	-
Other payables	1,612	8,097	2,388	-	-
Payable to players	9,032	-	-	-	-
Contingent consideration	-	4,670	-	-	-
Long-term debt	-	-	-	-	375,692
Interest payable on long-term debt	-	19,763	39,580	39,526	20,081
	31,250	32,530	41,968	39,526	395,773

The Group manages liquidity risk by monitoring actual and forecasted cash flows in comparison with the maturity profiles of financial assets and liabilities. The Group does not anticipate fluctuations in its financial obligations as they largely stem from interest payments related to the EUR Term Facility (as defined below) and the GBP Term Facility (as defined below). Management believes that the cash generated from the Group's business activities is sufficient to fund the working capital and capital expenditure needs in the short and long term, assuming there are no significant adverse changes in the markets in which the Group operates. The Group is actively managing its capital resources to ensure sufficient resources will be in place when Term Facilities (as defined below) repayments and interest payments become due.

Subject to meeting certain financial covenants, the Group may have the ability to draw on the £13.5 million RCF (as defined below) as a further capital resource.

22. Credit facilities

	EUR Term Facility (£000's)	GBP Term Facility (£000's)	Total (£000's)

Balance, 1 January 2018	122,903	246,584	369,487
Accretion¹	172	404	576
Foreign exchange translation	1,387	-	1,387
Balance, 31 December 2018	124,462	246,988	371,450
Add-on Debt	173,578	-	173,578
Debt financing costs	(2,617)	-	(2,617)
Accretion¹	293	430	723
Foreign exchange translation	(12,815)	-	(12,815)
Balance, 31 December 2019	282,901	247,418	530,319

Current portion	-	-	-
Non-current portion	282,901	247,418	530,319

¹Effective interest rates are as follows: EUR Term Facility - 4.26% (2018 - 4.44%), GBP Term Facility - 5.97% (2018 - 6.01%).

On 6 December 2017, Gamesys Group plc entered into a senior facilities agreement ('Senior Facilities Agreement') pursuant to which debt facilities were made available to Gamesys Group plc and certain of its subsidiaries in an aggregate sterling equivalent amount of approximately £388.5 million, comprised of (i) a €140.0 million term facility (the 'EUR Term Facility', (ii) a £250.0 million term facility (the 'GBP Term Facility and, together with the EUR Term Facility', the 'Term Facilities') and (iii) a £13.5 million revolving credit facility (the 'RCF' and, together with the Term Facilities, the 'Facilities'). Proceeds from the Term Facilities were used in part to repay the Group's existing First and Second Lien Facilities on 14 December 2017, at which point, the accretion of the remaining debt issue costs on the First and Second Lien facilities was accelerated. Proceeds from the RCF can be applied to, among other things, working capital and general corporate purposes and financing or refinancing capital expenditure.

On 1 July 2019, the Group completed the syndication of a €196.0 million additional term loan facility (the 'Add-on Debt') to fund the Gamesys Acquisition. The Group's new incremental term loan facility is fungible with the Group's existing EUR Term Facility and the syndication came into effect on 26 September 2019.

The Term Facilities are non-amortising and mature in December 2024. The RCF matures in December 2023 and remains undrawn as at 31 December 2019.

The EUR Term Facility has an interest rate of EURIBOR (with a 0% floor) plus an opening margin of 4.25% per annum, subject to a margin ratchet with step downs of 0.25% to 3.50% based on reductions in the senior secured net leverage ratio ('SSLR') and meeting certain ratings requirements. The GBP Term Facility has an interest rate of LIBOR (with a 0% floor) plus an opening margin of 5.25% per annum, subject to a margin ratchet with step downs of 0.25% to 4.50% based on reductions in the SSLR and meeting certain ratings requirements. The RCF has an interest rate of EURIBOR (for Euro loans, with a 0% floor) or LIBOR (for GBP loans, with a 0% floor) plus, in each case, an opening margin of 4.25% per annum, subject to a margin ratchet with step downs of 0.50% to 3.25% based on reductions in the SSLR.

The Senior Facilities Agreement contains certain restrictions on, amongst other things, asset disposals, debt incurrence, loans and guarantees, joint ventures and acquisitions, subject in each case to various permissions. The Senior Facilities Agreement also contains a senior secured leverage ratio maintenance covenant and an interest cover maintenance covenant.

Gamesys Group plc was in compliance with the terms of the Senior Facilities Agreement as at 31 December 2019.

23. Financial instruments

The principal financial instruments used by the Group are summarised below:

Financial assets

	Financial assets as subsequently measured at amortised cost
	31 December 2019 (£000's)	31 December 2018 (£000's)
Cash and restricted cash	106,623	88,295
Trade and other receivables	33,182	19,680
Other long-term receivables	1,391	1,101
Player deposits	12,444	9,032
	153,640	118,108

Financial liabilities

	Financial liabilities as subsequently measured at amortised cost
	31 December 2019 (£000's)	31 December 2018 (£000's)
Accounts payable and accrued liabilities	77,970	20,606
Other short-term payables	5,617	9,612
Other long-term payables	10,052	1,429
Interest payable	959	264
Payable to players	12,444	9,032
Lease liabilities	22,634	-
Long-term debt	530,319	371,450
	659,995	412,393

The carrying values of the financial instruments noted above approximate their fair values.

Other financial instruments

	Financial instruments at fair value through profit or loss - assets/(liabilities)
	31 December 2019 (£000's)	31 December 2018 (£000's)
Interest Rate Swap	(1,140)	(485)
Currency Swap	(9,251)	-
Contingent consideration	-	(4,540)
Other long-term receivables	3,825	3,574
	(6,566)	(1,451)

Fair value hierarchy

The hierarchy of the Group's financial instruments carried at fair value is as follows:

	Level 2		Level 3
	31 December 2019 (£000's)	31 December 2018 (£000's)	31 December 2019 (£000's)	31 December 2018 (£000's)
Interest Rate Swap	(1,140)	(485)	-	-
Currency Swap	(9,251)	-	-	-
Other long-term receivables	3,825	3,574	-	-
Contingent consideration	-	-	-	(4,540)

The Interest Rate Swap and Currency Swap balances represent the fair values of expected cash flows under the Interest Rate Swap and Currency Swap agreements.

Other long-term receivables represent the fair value of the loan receivable from Gaming Realms. The key inputs into the fair value estimation of this balance include the share price of Gaming Realms on the date of cash transfer, a 3.2-year risk-free interest rate of 0.6019%, and an estimated share price return volatility rate of Gaming Realms of 47.8%.

Following completion of the Gamesys Acquisition, the Group was able to set off the remaining milestone payment for the Jackpotjoy acquisition. As a result, at 31 December 2019 the remaining milestone payment is considered settled.

The movement in Level 3 financial instruments is detailed below:

	(£000's)

Contingent consideration, 1 January 2018	59,583
Fair value adjustments	7,208
Payments	(63,455)
Accretion of discount	1,204
Contingent consideration, 31 December 2018	4,540
Fair value adjustments	460
Set-off against acquired assets	(5,000)
Contingent consideration, 31 December 2019	-

24. Other long-term payables

Other long-term payables consist of:

	31 December 2019 (£000's)	31 December 2018 (£000's)
Deferred consideration payable (note 5)	10,052	-
Interest Rate Swap (note 15)	784	388
Currency Swap (note 15)	5,888	-
Non-compete clauses payable	-	1,429
	16,724	1,817

25. Share capital

As at 31 December 2019, Gamesys Group plc's issued share capital consisted of 108,665,248 ordinary shares, each with a nominal value of £0.10.

	Ordinary shares of £0.10
	(£000's)	#

Balance, 1 January 2018	7,407	74,064,931
Conversion of convertible debentures, net of costs	6	56,499
Exercise of options	21	207,500
Balance, 31 December 2018	7,434	74,328,930
Issuance, net of costs	3,365	33,653,846
Exercise of options	68	682,472
Balance, 31 December 2019	10,867	108,665,248

Ordinary shares

During the year ended 31 December 2019, Gamesys Group plc issued 33,653,846 additional ordinary shares as part of the consideration paid for the Gamesys Acquisition.

Share options

The share option plan (the 'Share Option Plan') was approved by the Board of Directors on 5 September 2016. Upon completion of the plan of arrangement, all options over common shares of Intertain under Intertain's stock option plan were automatically exchanged for options of equivalent value over ordinary shares of Gamesys Group plc on equivalent terms and subject to the same vesting conditions under Intertain's share option plan. The strike price of each grant was converted from Canadian dollars to pound sterling at the foreign exchange rate of 0.606, being the exchange rate at the date of the plan of arrangement. Following the grant of the replacement options, no further options were, or will be, granted under the Share Option Plan.

The changes in the number of share options outstanding during the year ended 31 December 2019 were as follows:

	Number of options	Weighted average exercise price
	#	(£)
Outstanding, 1 January 2018	3,027,990	6.79
Forfeited	(425,000)	9.51
Exercised	(207,500)	2.70
Outstanding, 31 December 2018	2,395,490	6.66
Forfeited	(121,166)	7.53
Exercised	(682,472)	3.93
Outstanding, 31 December 2019	1,591,852	7.76

Long-term incentive plan

On 30 September 2019, Gamesys Group plc granted additional equity-settled awards over ordinary shares of Gamesys Group plc under the Group's long-term incentive plan ('LTIP3') for key management personnel. The awards will (i) vest on the date on which the remuneration committee determines the extent to which the performance conditions (as described below) have been met and (ii) are subject to a holding period of two years beginning on the vesting date. At 31 December 2019, the number of ordinary shares that may be allotted under the Group's 2019 LTIP3 awards is 778,100.

The performance condition as it applies to 25% of each LTIP3 award is based on the Group's total shareholder return compared with the total shareholder return of the companies constituting the Financial Times Stock Exchange 250 index (excluding investment trusts and financial services companies) over three years commencing on 1 January 2019. The performance condition as it applies to another 25% of the award is based on the Group's total shareholder return compared with the total shareholder return of certain companies in a peer group over three years commencing on 1 January 2019. The performance condition as it applies to the remaining 50% of the award is based on the compound annual growth rate ('CAGR') of the Group's earnings per share over a three year period commencing on 1 January 2019 ('EPS CAGR Tranche') and vests as to 25% if the EPS CAGR equals 5.0%, between 25% and 100% (on a straight-line basis) if final year EPS CAGR is more than 5.0% but less than 14.0%, and 100% if final year EPS CAGR is 14.0% or more.

During the year ended 31 December 2019, the Group recorded £0.5 million (year ended 31 December 2018 - £0.3 million) in share-based compensation expense relating to its long-term incentive plans with a corresponding increase in share-based payment reserve.

Reserves

The following describes the nature and purpose of each reserve within the Group's Consolidated Statements of Changes in Equity.

Share capital

The purpose of this reserve is to show Gamesys Group plc's issued share capital at its nominal value of £0.10 per share.

Share premium

The purpose of this reserve is to show amount subscribed for Gamesys Group plc's issued share capital in excess of nominal value.

Merger reserve

The purpose of this reserve is to present the Consolidated Statements of Changes in Equity under the merger method of accounting, as if Gamesys Group plc has always been the Parent Company and owned all of the subsidiaries.

Share-based payment reserve

The purpose of this reserve is to show cumulative share-based compensation expense relating to the Group's Share Option Plan, LTIP, LTIP2 and LTIP3.

Translation reserve

The purpose of this reserve is to show gains and losses arising on retranslating the financial information of the Group companies with functional currencies other than GBP.

Hedge reserve

The purpose of this reserve is to show unrealised gains and losses arising from the changes in the fair value of the Group's Interest Rate Swap and Currency Swap.

Retained earnings

The purpose of this reserve is to show cumulative net gains and losses recognised in the Consolidated Statements of Comprehensive Income.

26. Capital management

Gamesys Group plc defines the capital that it manages as its aggregate shareholders' equity. Its principal source of cash is operating activities and, in earlier periods, the issuance of common shares, and long-term debt. Gamesys Group plc's capital management objectives are to safeguard its ability to continue as a going concern and to have sufficient capital to meet its financial obligations as they become due. To maintain or adjust the capital structure, Gamesys Group plc may attempt to issue new shares, issue new debt, or acquire or dispose of assets.

The Group monitors its SSLR, which is calculated in accordance with the Senior Facilities Agreement, on a frequent basis as this ratio impacts, among other things, the amount of excess cash flow required to be applied in prepayment of the Term Facilities. Commencing on 31 December 2018, if the Group's SSLR is greater than 2.5, 50% of the Group's excess cash flow is required to be applied in prepayment of the Term Facilities. If the Group's SSLR falls between 2.0 and 2.5, 25% of the Group's excess cash flow is required to be applied in prepayment of the Term Facilities. If the Group's SSLR falls below 2.0, 0% of the Group's excess cash flow is required to be applied in prepayment of the Term Facilities. At 31 December 2019 the Group's SSLR is greater than 2.5.

Excess cash flow is calculated in accordance with the Senior Facilities Agreement and is based on consolidated EBITDA (also calculated in accordance with the Senior Facilities Agreement) to which certain adjustments are made (such as the deduction of certain items such as debt prepayments). Gamesys Group plc is not subject to any externally imposed capital requirements. Gamesys Group plc manages the Group's capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the Group's underlying assets.

There have been no changes to Gamesys Group plc's approach to capital management or in the items the Group manages as capital during the year ended 31 December 2019.

27. Taxes and deferred taxes

	Year ended 31 December 2019	Year ended 31 December 2018
	(£000's)	(£000's)
Current tax expense
Total current tax on profits for the year	10,285	853

Deferred tax
Origination and reversal of temporary differences related to business combinations	(7,379)	(395)
Total tax expense	2,906	458

The reasons for the difference between the actual tax charge for the year and the standard rate of corporation tax in the United Kingdom applied to profits for the year are as follows:

	Year ended	Year ended
	31 December 2019	31 December 2018
	(£000's)	(£000's)
Profit for the year before taxes	11,374	14,935
Tax using Gamesys Group plc's domestic tax rate of 19% (2018 - 19%)	2,160	2,838
Effect of different tax rates applied in overseas jurisdictions	(915)	(3,754)
Non-capital loss for which no tax benefit has been recorded	1,661	1,374
Total tax expense	2,906	458

As at 31 December 2019, taxes payable and receivable balances consist primarily of taxes related to the 2018 and 2019 fiscal years.

The Group generated unused UK tax losses of approximately £8.7 million (2018 - £7.1 million) that are available indefinitely for offsetting against future taxable profits. There is no certainty over the use or timing of use of tax losses and as a result, no deferred tax assets have been recognised.

Deferred tax liabilities relate exclusively to balances arising on business combination.

28. Contingent liabilities

Indirect taxation

Gamesys Group plc subsidiaries may be subject to indirect taxation on transactions that have been treated as exempt supplies of gambling, or on supplies that have been zero rated where legislation provides that the services are received or used and enjoyed in the country where the service provider is located. Revenue earned from players located in any particular jurisdiction may give rise to further taxes in that jurisdiction. If such taxes are levied, either on the basis of current law or the current practice of any tax authority, or by reason of a change in the law or practice, then this may have a material adverse effect on the amount of tax payable by the Group or on its financial position.

Where it is considered probable that a previously identified contingent liability will give rise to an actual outflow of funds, then a provision is made in respect of the relevant jurisdiction and period impacted. Where the likelihood of a liability arising is considered remote, or the possible contingency is not material to the financial position of the Group, the contingency is not recognised as a liability at the balance sheet date. As at 31 December 2019, the Group had recognised £nil (31 December 2018 - £nil) potential contingent indirect taxation liabilities.

29. Related party transactions

Compensation of key management

Key management is comprised of the Board of Directors, officers, and members of management of the Group. The number of individuals included in key management increased as a result of the Gamesys Acquisition. Key management personnel compensation for services rendered is as follows:

	Year ended	Year ended
	31 December 2019	31 December 2018
	(£000's)	(£000's)
Salaries, bonuses and benefits	8,994	4,619
Share-based compensation	412	404
	9,406	5,023

30. Employees

	31 December 2019	31 December 2018
	(£000's)	(£000's)
Wages and salaries¹	37,303	16,071
Pensions	916	545
Social security	3,747	1,846
Benefits	513	300
	42,479	18,762

¹Wages and salaries figures include severance costs.

The average headcount of employees on a full-time and part-time basis during the year was as follows:

	31 December 2019	31 December 2018
	(#)	(#)
Group	600	293

31. Auditors' remuneration

BDO LLP's remuneration for the auditing of these Consolidated Financial Statements and for other services provided is as follows:

	Year ended	Year ended
	31 December 2019	31 December 2018
	(£000's)	(£000's)
Audit fees	698	335
Audit related assurance services	167	100
Services relating to corporate finance transactions	1,528	239
	2,393	674

32. Subsequent events

On 6 February 2020, the Group completed the repricing of its Facilities to lower the overall cost of the Group's debt by 50 bps while maintaining the interest rate step downs based on future leverage ratios.

On 2 March 2020, the Group voluntarily made the first paydown of £40.0 million towards its GBP Term Facility.

[1] All figures in the financial summary, except operating cash flows, exclude Mandalay results. For more information on the sale of the Mandalay assets, please refer to Note 8 - 'Discontinued operations' of the consolidated financial statements on pages 36 and 37 of this release.

[2] All figures in the financial summary and financial review sections of this release include results of the Gamesys Acquisition for the period from 27 September 2019 to 31 December 2019. For more information on the Gamesys Acquisition, please refer to Note 5 - 'Business combinations' of the consolidated financial statements on pages 31 through 33 of this release.

[3] This release contains non-IFRS financial measures, which are noted where used. For additional details, including with respect to the reconciliations from these non-IFRS financial measures, please refer to the information under the heading 'Note regarding non-IFRS measures' on page 9 of this release and Note 6 - 'Segment information' of the consolidated financial statements on pages 33 through 36 of this release.

[4] Per share figures are calculated on a diluted weighted average basis using the IFRS treasury method.

[5] All figures in the pro-forma financial summary and related discussions present Group results as though the acquired Gamesys brands have been a part of the Group for the entire current year and comparative period.

[6] Organic growth is growth achieved without accounting for acquisitions or disposals.

[7] Adjusted net debt consists of existing term loans, deferred consideration, fair value of interest rate swap and cross currency swap, less non-restricted cash.

[8] Adjusted net leverage ratio consists of existing term loans, deferred consideration, fair value of interest rate swap and cross currency swap, less non-restricted cash divided by LTM to 31 December 2019 pro-forma adjusted EBITDA of £158.9 million.

[9] For additional details, please refer to the information under the heading 'Key performance indicators' on page 16 of this release.

[10] Figures exclude results from the Group's Mandalay and social gaming businesses, where applicable.

[11] Certain changes were reallocated from licensing fees to general and administrative to match presentation following the Gamesys Acquisition.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

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Company Announcements

Gamesys Group Results for the Year Ended 31 Dec 19