Notes forming part of the consolidated financial statements

For the 6 months ended 30 June 2020

1. Accounting policies

General Information

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

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

The results for the six months ended 30 June 2020 and 30 June 2019 are unaudited.

Basis of preparation

The financial information for the year ended 31 December 2019 included in these financial statements does not constitute the full statutory accounts for that year. The Annual Report and Financial Statements for 2019 have been filed with the Registrar of Companies. The Independent Auditors' Report on the Annual Report and Financial Statement for 2019 was unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

This interim report, which has neither been audited nor reviewed by independent auditors, was approved by the board of directors on 7 September 2020. The financial information in this interim report has been prepared in accordance with the recognition and measurement requirements of International Financial Reporting Standards as adopted for use in the EU (IFRSs). The accounting policies applied by the Group in this financial information are the same as those applied by the Group in its financial statements for the year ended 31 December 2019 and which will form the basis of the 2020 financial statements.

The consolidated financial statements are presented in Sterling.

Going concern

The Group meets its day-to-day working capital requirements from the cash flows generated by its trading activities and its available cash resources. 

The Group prepares cash flow forecasts and re-forecasts regularly as part of the business planning process.  A re-forecasting process has been completed for H2 2020 to 2022 in light of current business performance and economic situation given the uncertainty arising from the COVID-19 pandemic.  These forecasts show that the Group will continue to have sufficient cash resources available to meet its liabilities as they fall due. 

Accordingly, these financial statements have been prepared on the basis of accounting principles applicable to a going concern, which assumes that the Group will realise its assets and discharge its liabilities in the normal course of business.

Changes in significant accounting policies

In preparing the Group financial statements for the current period, the Group has adopted the following amendments to IFRSs:

·      IAS 8 (amended):                 Accounting Policies, Changes in Accounting Estimates and Errors

·      IFRS 3 (amended):              Business Combinations

·      IFRS 7 (amended):              Financial Instruments: Disclosures

·      IFRS 16 (amended):           Leases

All adopted new and revised standards have not had a significant impact on the results or net assets of the Group.

Adjusted EBITDA

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

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

Restatement of comparatives

The comparative results for the period ending 30 June 2019 have been restated following an update in accounting for a property lease that the Group sub-leases.  Previously a right-of-use (ROU) asset was recognised, however in line with IFRS 16 this has been reversed and a finance lease asset recognised with sub-lease receipts reducing the asset and interest income earned on the unwind over the lease term.  The impact of this restatement on the previous period income statement is a reduction in revenue of £65,612, a reduction in EBITDA of £95,816 and an increase in loss before tax of £13,237.  The restatement increased net assets at 30 June 2019 by £69,591 to £14,636,760 as shown in the statement of changes in equity, from the previously reported £14,567,169.  This item was correctly accounted for in the financial statements for the year ended 31 December 2019 so there will be no restatement required in the 2020 financial statements.

2. Segment information

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

The Group has two continuing reportable segments.

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

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

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

Revenue

The Group has disaggregated revenue into various categories in the following table which is intended to:

·   Depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic date; and

·   Enable users to understand the relationship with revenue segment information provided below.

Adjusted EBITDA

3. Finance income and expense

4. Adjusted EBITDA

EBITDA and Adjusted EBITDA are non-GAAP measures and exclude exceptional items, depreciation, and amortisation. Exceptional items are those items the Group considers to be non-recurring or material in nature that may distort an understanding of financial performance or impair comparability.

Adjusted EBITDA is stated before exceptional items as follows:

Restructuring expenses

Restructuring costs of £0.3m (H1 2019: £0.1m) were incurred relating to redundancy, consulting and relocation costs.

Loss on disposal

£0.3m of expenses were incurred in the prior period associated with the B2C RMG disposal completed in July 2019.  These expenses associated with the B2C RMG disposal were subsequently included in the profit on disposal of the segment that was disclosed in the 2019 full year financial statements.  No such expenses occurred in H1 2020.

5. Loss per share

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

6. Property, plant and equipment

7. Intangible assets

8. Trade and other receivables

All amounts shown fall due for payment within one year.

9. Cash and cash equivalents

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

10. Trade and other payables

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

11. Discontinued operations

At the previous period end, the Group was sufficiently progressed with active discussions concerning the remainder of the B2C real money gaming brands and real money gaming platform, that these elements were classified as held for sale as at 30 June 2019.  The sale of the real money gaming assets completed in July 2019 and details of the transaction were fully disclosed in the 2019 financial statements.

Results of discontinued operations:

12. Share capital

13. Share based payments

On 1 May 2020, certain employees of the Group were granted a total of 6,650,000 share options, which vest in three equal tranches on 3 February 2021, 3 February 2022 and 3 February 2023.  The options have an exercise price of 10 pence per share.

On 2 June 2020, the two Executive Directors of the Group were each granted 3,000,000 share options, which vest in three equal tranches on 3 February 2021, 3 February 2022 and 3 February 2023.  The vesting of each tranche is subject to delivery of adjusted EBITDA targets for the financial years ending 31 December 2020, 2021 and 2022.  The options have an exercise price of 10 pence per share.

For both grants, the fair value of each tranche is being charged to the income statement over the vesting period.  This resulted in a share-based payment charge for the period of £40,075 (H1 2019: £nil).

On 1 May 2020, a consultant of the Group was granted 750,000 replacement share options in lieu of waiving the rights over 5,750,000 options that had previously been granted (whilst an employee of the Group) but not exercised.  The replacement options have an exercise price of 10 pence per share and are immediately fully vested.  The fair value of the replacement options was calculated to be lower than the share options being waived, and as such no share based payment charge has been recognised in the income statement.

14. Arrangement with Gamesys Group plc (previously Jackpotjoy Group)

In December 2017 the Group entered into a complex transaction with Gamesys Group plc (previously Jackpotjoy plc) and Group companies (together 'Jackpotjoy Group').  The transaction includes a £3.5m secured convertible loan agreement alongside a 10-year framework services agreement for the supply of various real money services.  Under the framework services agreement the first £3.5m of services are provided free of charge within the first 5 years.

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

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

The fair value of the conversion feature is determined each reporting date with changes recognised in profit or loss.  The initial fair value was £0.6m based on a probability assessment of conversion and future share price.  This is a level 3 valuation as defined by IFRS 13.  The fair value as at 30 June 2020 was £0.3m (31 December 2019: £0.3m) based on revised probabilities of when and if the option will be exercised.  The key inputs into the valuation model included timing of exercise by the counterparty (based on a probability assessment) and the share price.

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

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

15. Related party transactions

Jim Ryan is a Non-Executive Director of the Company and the CEO of Pala Interactive, which has a real-money online bingo site in New Jersey. During the period, total license fees earned by the Group were $22,592 (H1 2019: $6,507) with $7,599 due at 30 June 2020 (30 June 2019: $1,390).

Jim Ryan is a Non-Executive Director of Gamesys Group plc. In December 2017 the Group entered into a 10-year framework services agreement and a 5-year convertible loan agreement for £3.5m with Gamesys Group plc (previously Jackpotjoy Group) (see Note 13).

During the period £48,333 (H1 2019: £75,000) of consulting fees were paid to Dawnglen Finance Limited, a company controlled by Michael Buckley. No amounts were owed at 30 June 2020 (30 June 2019: £nil).

16. Events after reporting date

On 28 July 2020, the Group's two executive Directors were granted a total of 8,846,153 share options in replacement of their existing options for B shares, which were due to lapse on 31 July 2020.  The replacement options vest in two equal tranches on 1 August 2021 and 1 August 2022, with all options having an exercise price of 20 pence per share.