Annual Report and Accounts 2018 Gaming Realms is a developer, publisher and licensor of mobile games, building an international portfolio of highly popular gaming content and brands. Our vertically integrated approach, as well as investment in our proprietary mobile platform and successful brand partnerships, gives us complete control to offer highly popular games to a very broad audience. Contents Strategic Report 1 Highlights 2 4 Chairman’s Statement 5 Chief Executive’s Review 6 8 At a Glance Financial Review Principal Risks and Uncertainties Corporate Governance 10 Board of Directors and Executive Management 12 Directors’ Report 13 Statement of Directors’ Responsibilities 14 Corporate Governance Financial Statements 18 Independent Auditor’s report 21 Consolidated Statement of Comprehensive Income 22 Consolidated Statement of Financial Position 23 Consolidated Statement of Cash Flows 24 Consolidated Statement of Changes in Equity 25 Notes to the Consolidated Financial Statements 57 Parent Company Statement of Financial Position 58 Parent Company Statement of Changes in Equity 59 Notes to the Parent Company Financial Statements 62 Company Information www.gamingrealms.com Strategic Report Corporate Governance Financial Statements 1 Highlights 2018 Financial Highlights: Total profit of Net cash inflow £0.9m (2017: £8.2m loss) £0.2m (2017: £1.3m outflow) Total adjusted EBITDA loss £0.5m (2017: £0.8m profit) » Continuing Adjusted EBITDA loss £0.1m (2017: £2.8m loss) Licensing £1.0m Adjusted EBITDA profit (2017: £0.2m loss) including intra group revenue » Continuing revenue down by 19% to £6.2m (2017: £7.6m) Licensing revenue increased 167% to £2.2m (2017: £0.8m) Social Publishing £1.6m Adjusted EBITDA profit (2017: £0.1m loss) Social Publishing revenue decreased by 43% to £3.9m (2017: £6.9m), with 63% reduction in costs 2018 Operational Highlights: Games licensing and publishing Platform and Real Money Gaming (“RMG”) Own game content and IP generated 41% (2017: 38%) of RMG and Social Publishing revenue » Affiliate Marketing business sale completed in March 2018 for proceeds of £2.4m Launched with 13 new partners for Slingo Originals content Licensed a further 19 games to our partners » Sale of part of the B2C RMG business to River iGaming plc (“River”) completed in August 2018 for minimum proceeds of £8.4m » Proposed sale of » Game library growth to 30 proprietary games on our Grizzly platform (2017: 19), of which 28 are licensed to operators via our remote game server (“RGS”) » Total game library growth to 812 games on our Grizzly platform (2017: 683) remaining B2C RMG business to River in 2019 » Launch of Casonic as first overseas platform deal 2 At a Glance Innovation Gaming Realms develops, publishes and licenses mobile gaming content. As the creator of a variety of Slingo™, bingo, slots and other casual games, we use our proprietary content to create a ‘Slingo’ genre of games for our partners internationally. Gaming Realms has partnered with some of the most successful and popular global platforms and operators. Integrated game development, licensing and publishing Game development Brand licensing 2 Mobile games studios: Victoria, Canada London/ Colchester UK Rationale for sale of B2C RMG business » The Company has previously set out its strategy to focus its resources on content development and the international licensing of the Slingo brand and intellectual property » 2018 has seen high growth for licensing with consolidation in the New Jersey market as well as growth with tier 1 operators in the UK and Europe » The Group has been unable to invest fully into all its activities in 2018 with RMG requiring platform investment in new Gambling Regulations, increase in Point of Consumption as well as increasing cost per acquisition of new players IP licensor » North American Lottery Printed Scratch Games – Scientific Games » Global Electronic Gaming Machines – Scientific Games » Global Lottery Mobile Instant Games – IWG » Social Slot Games – Zynga Inc. Game licensing Content licensor » Social Puzzle Games – Electronic Arts Inc. » Bingo – Pala Interactive » iGaming Library – US and EU • US – Caesars Interactive, Resorts Inc, Pala Interactive, Rush Street, Golden Nugget, Ocean Resorts, Bwin, Betfair and Hard Rock • Europe – GVC, LadbrokesCoral, 888, JackpotJoy, Bet Victor, SkillOnNet, BeGame, Rank and William Hill Brand partnerships » Endemol – Deal or No Deal » Fremantle – Britain’s Got Talent, the X Factor, Take Me Out, The Price Is Right » ITV – Love Island, Dancing On Ice, The Only Way is Essex, Hell’s Kitchen » Sony – Who Wants to Be a Millionaire » Scientific Games – Monopoly, Rainbow Riches Gaming Realms plc Annual Report and Accounts 2018 3 Addressable online market worth $21bn gives opportunity » $21bn Global market for online casinos, lottery, bingo » 10% growth per annum » Mobile share increasing to 51% of interactive by 2023 » Offline market for gaming machines worth $104bn » 3% growth rate Globally » GMR currently has 3.5% New Jersey & 1% UK Online slot market worth £1.7bn* » iLottery & Landbased are also markets which suit Slingo * Gambling compliance Online Global Market Breakdown 8% 5% 4% 6% 27% 50% Betting Casino Poker Bingo Skill / Other gaming / Lotteries Resales Sale Lotteries Offline Global Market Breakdown 15% 28% 33% 28% 2% Betting Casino Gaming Machines Bingo / Other gaming Lotteries According to iGaming tracker we are No.8 Casino supplier in UK Strategy to repeat UK success in new markets Our key focus areas Original game content and IP development We build original content from our Colchester and Victoria game studios incorporating social meta games and real money mechanics with well-known brands. Data and algorithmic optimisation ‘It’s all about the data’ – we put the customer first, developing engaging content and using data to enhance marketing and player retention. Advanced mobile gaming platform We have invested significantly in our RGS in order to increase the distribution of our games. Responsible gambling Despite the fact we have executed an agreement to dispose of our online casino operations, Gaming Realms has been committed, in the year and subsequently, to providing an environment for customers to play responsibly and securely. Since commencing operations, we have had measures in place to encourage responsible play – to keep it fun – and have provided tools to help keep customers’ gaming and spending within their control. Gaming Realms has worked closely with other operators to help develop and shape a responsible approach to customers across the industry. Internally, we regularly conduct training for all our employees to raise awareness of problem gambling. Our marketing and advertising strategies comply with the Committee of Advertising Practice (‘CAP’), the Broadcast Committee of Advertising Practice (‘BCAP’) and the Industry Group for Responsible Gambling (‘IGRG’) advertising codes. Gaming Realms has also implemented new policies in response to the published guidelines from the UK Gambling Strategic partners and licensing Partners include Fremantle, Zynga, IWG, Pala Interactive and Scientific Games Not only do we leverage our own IP across multiple brands, but we also license Slingo into markets adjacent to the Group’s core mobile gaming business. Commission and the Competition and Markets Authority to ensure our terms are clear and fair. In addition, we fund research, education and treatment of problem gambling through donations to GambleAware. In 2018 we made several improvements to our processes to improve risk profiling and alerts for customers who may exhibit signs of problem gambling. We also established a dedicated team to focus on identifying concerns around problem gambling, source of funds and affordability. All our customers have access to tools to help manage their gameplay, including: » Session reminders – alerting customers when they’ve been playing for a set period » Deposit Limits – customers can set daily, weekly or monthly deposit limits » Cool down – customers may configure a period of time in days or weeks during which play on any of our sites will be stopped » Self-exclusion – customers may exclude themselves permanently or for a set period from all our sites » In addition to self-exclusion we were an early adopter of GAMSTOP, UK’s national self-exclusion scheme, where players can exclude themselves from all UK registered operators. Financial StatementsStrategic ReportCorporate Governance 4 Gaming Realms plc Annual Report and Accounts 2018 Chairman’s Statement Delivering growth Michael Buckley Chairman The operating plan for 2019 adopted by the Board, is to continue the development and licence of mobile focused games using our unique Slingo brand, with increased income from our game portfolio through international distribution. During 2016 and 2017 it became increasingly difficult to operate profitably within the UK online gaming market. This was due initially to competition from the plethora of operators, coupled with pressure on margins from the introduction of Point of Consumption Tax. Continued increases in costs to be borne by operators has only increased with the passage of time; » Point of Consumption Tax has increased by 40% in April 2019 » Changes in European data laws » Provisions to combat money laundering » Regulations relating to responsible gaming and gambling All of these items encompassing new legislation and regulations, have increased costs to the point where a smaller B2C gaming company finds it difficult to operate at a profit in the UK, let alone grow the business for the future. Given the adverse changes in the B2C marketplace, your Board decided towards the end of 2017 that the best course of action was to sell the larger part of our B2C sites and concentrate on game development and distribution to a worldwide audience. This resulted in a deal with River which closed in August 2018, and was followed by an announcement on 22 February 2019 of a further sale to River of all the remaining assets involved in operating B2C sites in the UK online market, subject to a number of conditions, for an aggregate consideration of £11.5m. We expect to complete this disposal very shortly. This introduction is intended to give shareholders an outline and some background to the difficulties your Company has faced, and which have led to the reorganisation which is nearing completion. Your Board is also considering its options to sell or rationalise the Social Publishing division. This process, coupled with the imminent sale of the B2C RMG assets, will lead to a dramatic reduction in overall Company costs, with a decrease in employees of over 60%. The Group will then concentrate on game development and international licensing using primarily its Slingo brand, and this division which is experiencing healthy growth will become its main focus. An increasing number of gaming companies are signing up to distribute our content on their sites, both in the UK and overseas. We are licensed as a game supplier in New Jersey, USA, where our games account for approximately 3.5% of sales from slot products. The Company is engaged in applying for a license in Pennsylvania and will continue to pursue direct opportunities outside the UK to distribute its games. The Group delivered an Adjusted EBITDA loss for 2018 of £0.5m (2017 £0.8m profit). These results mask the excellent progress made by our Licensing division, where revenue increased by 167% to £2.2m (2017: £0.8m) with an EBITDA surplus of £1.0m (2017: £0.2m loss) before allocation of central costs. The Licensing division went live with 17 new partners during the year, and our library of proprietary games increased to 28 games from 9 games at the start of the year under review. A number of new deals with game distributors have been announced during 2019, which will further increase worldwide exposure and income from our games once the necessary integrations have been completed. Further details on the 2018 results are contained in the Statements from the Chief Executive and Finance Director which follow. Outlook for 2019 The operating plan for 2019 adopted by the Board, is to continue the development and licence of mobile focused games using our unique Slingo brand, with increased income from our game portfolio through international distribution. Capitalising on our success in New Jersey, we intend to enter any new states in America which regulate online gaming. With regard to the future, I am pleased to welcome Chris Ash to the Board of Directors. Chris has a long and successful history in online game development and distribution, and I am sure will make a valuable contribution to this ongoing Company activity. Once the sale of the remaining B2C RMG business is completed and we conclude on the Social Publishing strategy, your Board believes shareholders can look forward to a period of increasing stability. This will show growth in Licensing income and a very significant reduction in Group costs, and a trend towards group profitability. In our 2019 Interim Results, we will report on the cash availability post transaction, forecast working capital needs, and the Board’s intentions with regard to any surplus. Michael Buckley Chairman 27 June 2019 5 Chief Executive’s Review A focused strategy Patrick Southon Chief Executive Officer We continue to build proprietary ‘Slingo Originals’ content and increase its distribution with new partnerships. Overview In 2018, the Group’s strategy continued to build its proprietary ‘Slingo Originals’ content and increase its distribution with new partnerships. The Group also disposed of non-core assets as it moved away from being a RMG operator in order to focus on content licensing. The Group’s decision to dispose of its B2C RMG operations has been driven by further regulatory headwinds and the recent increase in Point of Consumption Tax effective from 1 April 2019. The first phase of this asset disposal was completed in August 2018, with the sale of four B2C brands to River. We also streamlined our Social publishing business further, resulting in positive EBITDA of £1.6m (2017: £0.1m loss). However, after capitalisation the net cash inflow was £0.3m (2017: £1.3m outflow). We have invested resources into new proprietary games and introduced a further 19 games to the market, bringing the total number of licensed games at the end of 2018 to 28 (2017: 9). At the same time, we increased our content distribution and were live with 17 partners at the end of 2018 (2017: 4). Partners we have gone live with during the year include GVC, 888, Rank as well as Golden Nugget and Hard Rock Casino. This increase in taking our Slingo Originals games to market, as well as launching with new partners, has resulted in revenue growing 167% to £2.2m (2017: £0.8m). Our Licensing business also became profitable in the year, generating an Adjusted EBITDA of £1.0m (2017: £0.2m loss) before the allocation of central costs. In 2019, to date, we have grown revenues in the online casino market in New Jersey and now account for c.3.5% of the growing market. We have also signed deals with several ‘tier 1 operators’ in Europe and are now live with William Hill and Gaming Innovation Group. We are aiming to finalise our integration with NYX, which will vastly increase our international footprint, by Q3 2019. Relax Gaming will also give us reach into new markets, in particular with the large tier 1 Scandinavian operators. Our games are also now certified for the newly regulated Swedish market, as well as with the Maltese regulator, and we are planning to obtain licences in other regulated jurisdictions in 2019. We are excited to announce that we are due to release our Monopoly Slingo game to the international market in Q3 2019. We expect this to deliver increased revenue and also greater exposure on our partner sites. We are already creating a ‘Slingo’ genre of games and this very much complements our portfolio of unique IP and a well-known gaming brand. Market overview The games market is a very crowded environment, in which most operators have 700 plus games available on their sites. We are seeing that Slingo can cut through this with its unique brand and format. As such we are seeing enhanced placements on our partner sites. With the increase in Point of Consumption Tax, together with increased regulation in the UK, it is becoming more important to grow our revenues outside the UK market. We have a good footprint in the New Jersey market and have also gone live with Gaming Innovation Group, as well as currently integrating into Relax Gaming and NYX – both of whom allow access to a much larger market for Slingo. Key goals for 2019 1. To complete the sale of the B2C RMG operations 2. Conclude on options to sell or rationalise the Social Publishing division 3. Continue the strategic investment in Slingo Originals content, with a view to branded partnerships with other brand owners 4. Increase new licensees for Slingo Original content 5. Further expansion of strategic brand licensing in adjacent markets This strategic report was approved on behalf of the Board on 27 June 2019. Patrick Southon Chief Executive Officer 27 June 2019 Financial StatementsStrategic ReportCorporate Governance 6 Financial Review A strong performance Mark Segal Chief Financial Officer Overview Following the global high margin opportunities in game content licensing and the 2019 sale of the majority of the RMG CGU the Directors believe the Group is in a strong position and expects to continue to be cash generative for 2019. Overview The operations of the Group have changed significantly in 2018 and into 2019 as the Group has continued with its strategy of disposing of non-core assets and focusing its resources on Licensing. Gaming Realms delivered a profit after tax of £0.9m (2017: £8.2m loss) due to the sale of B2C RMG and Affiliate Marketing assets in year. We have treated the B2C RMG and Affiliate Marketing segments as discontinued operations in the current year and the comparative period. Adjusted EBITDA totalled £0.5m loss (2017: £0.8m profit) as a result of declining revenues off the back of reduced marketing spend. Profit on disposal initially totalled £12.5m in RMG for the disposal of four of our B2C brands in August 2018. Regulatory pressures adversely impacted the performance of these brands post sale, therefore at the year-end we impaired the investment in associate by £2.8m and recognised a fair value loss on contingent earn-out consideration of £1.9m. This has resulted in a net realised profit for the transaction of £7.8m. Continuing operations Continuing operations generated Adjusted EBITDA loss of £0.1m (2017: £2.8m loss). EBITDA from continuing operations was a £0.6m loss (2017: £3.7m loss) including restructuring costs of £0.2m. Year-on-year revenue declined 19% to £6.2m (2017: £7.6m) due to the declining performance in Social Publishing, partially offset by the growth in Licensing. Marketing for the year totalled £0.7m (2017: £2.3m) as the Group restricted spend for the Social Publishing business. Administrative expenses reduced to £4.9m (2017: £7.5m) as a result of restructuring the Social Publishing business in 2017 including the closure of our Seattle office. Licensing Licensing revenue increased 167% to £2.2m (2017: £0.8m) due to the continued success of distributing our proprietary games via our RGS to key operators in Europe and New Jersey. During 2018 we went live with an additional 13 partners in Europe and New Jersey bringing the total to 17 (2017: 4). Social Publishing Social publishing achieved profitability in 2018, delivering Adjusted EBITDA profit of £1.6m (2017: Adjusted EBITDA loss £0.1m) as a result of reducing marketing spend by 81% and administrative expenses by 71%. Despite the significant reduction in marketing investment, Social publishing revenue decreased at a lower rate of 43% to £3.9m (2017: £6.9m). During 2017, Gaming Realms closed its Seattle operations resulting in significant cost savings for 2018 of £2.5m. Impairment of Social Publishing goodwill of £1.7m was recognised in the year as a result of revised forecasts based on the reduced performance of this segment. Discontinued operations Discontinued operations relate to B2C RMG and Affiliate Marketing. Profit after tax from discontinued operations was £6.6m (2017: £0.2m) including profit on disposal of £12.5m, write down of contingent consideration of £1.9m, impairment of associate of £2.8m, and loss for the year of £1.0m. Discontinued operations have been discussed in more detail in note 20. Real money gaming Revenue fell by 28% to £16.4m (2017: £22.7m) due to ongoing reductions in marketing of 46% to £4.4m as a result of regulatory pressures (2017: £8.0m). In August 2018 four of the Group’s B2C RMG brands were sold to River generating an initial profit on disposal of £12.5m. The Group continues to operate these brands via a white label agreement until River obtains their own operating licence, recognising revenue and costs with net profit passed back to River after retaining a platform fee. As a result, additional operational costs of £1.4m were incurred, being the profit share payable to River. Gaming Realms plc Annual Report and Accounts 2018Page title 7 £2.2m licensing revenue (2017: £0.8m) 13 new partnerships £1.6m social publishing Adjusted EBITDA profit (2017: Adjusted EBITDA loss £0.1m) Post year end the Group has entered into an agreement for the sale of the remaining B2C RMG business to River for £11.5m, which includes settlement of the remaining proceeds from the 2018 disposal and the Group’s associate interest in River UK Casino. This sale is subject to regulatory approvals. As a result, this segment has been disclosed as a discontinued operation. Operating expenses include point of consumption tax, third party royalties and transaction costs which have reduced due to declining revenues. Operating costs in total have increased 3% to £9.2m (2017: £8.9m) as a result of the additional £1.4m profit share payable to River. This segment became EBITDA loss making in 2018 due to declining revenues, the new profit share to River coupled with fixed administrative costs increasing 5% on prior year. Affiliate Marketing The Affiliate Marketing business was sold in March 2018 for £2.4m after generating revenues of £0.2m in 2018 (2017: £1.3m). The loss on disposal was £0.1m. expects to continue to be cash generative for 2019. As a result, the Directors consider that the Group has adequate resources to continue its normal course of operations for the foreseeable future. Cashflow, Balance Sheet and Going Concern Net cash (note 19) increased by £0.2m in 2018 (2017: decreased by £1.3m). The current year cash position was boosted by the sale of the Affiliate Marketing business for £2.4m plus the sale of certain B2C RMG assets to River for £4.2m cash in 2018. The post year end sale agreement with River will, subject to completion, generate an additional £11.5m, of which £1.5m is deferred to 2020. Net assets totalled £17.7m (2017: £16.4m). Dividend During the year, Gaming Realms did not pay an interim or final dividend. The Board of Directors are not proposing a final dividend for the current year. Corporation and deferred taxation The Group received £0.1m (2017: £0.4m) in research and development credits in Canada and has recognised an unwind of deferred tax of £0.3m (2017: £0.2m) which arose on prior year business combinations. Following the global high margin opportunities in game content licensing and the 2019 sale of the remaining B2C RMG segment the Directors believe the Group is in a strong position and Mark Segal Chief Financial Officer 27 June 2019 The table below sets out the split of revenue and Adjusted EBITDA on a continuing and discontinued basis: Discontinued Continuing 2018 Revenue Marketing expense Operating expense Administrative expense Share-based payments Adjusted EBITDA Real money gaming £’000 Affiliate Marketing £’000 Total discontinued 2018 £’000 Licensing £’000 Social Publishing £’000 16,365 (4,319) (9,170) (3,324) – (448) 168 (15) (16) (116) – 21 16,533 (4,334) (9,186) (3,440) – (427) 2,248 – (200) (1,055) – 993 3,921 (414) (1,092) (861) – 1,554 Discontinued Continuing Real money gaming £’000 22,718 (8,022) (8,868) (3,155) – 2,673 Affiliate Marketing £’000 1,323 (128) (76) (226) – 893 Total discontinued 2017 £’000 24,041 (8,150) (8,944) (3,381) – 3,566 Licensing £’000 840 – (25) (1,036) – (221) Social Publishing £’000 6,879 (2,171) (1,755) (3,010) – (57) 2017 Revenue Marketing expense Operating expense Administrative expense Share-based payments Adjusted EBITDA Head office £’000 394 (251) – (2,738) (68) (2,663) Head office £’000 179 (110) – (2,721) 150 (2,502) Total continuing 2018 £’000 6,563* (665) (1,292) (4,654) (68) (116) Total continuing 2017 £’000 7,898* (2,281) (1,780) (6,767) 150 (2,780) Total 2018 £’000 23,096 (4,999) (10,478) (8,094) (68) (543) Total 2017 £’000 31,939 (10,431) (10,724) (10,148) 150 786 * Licensing revenue includes £389,464 (2017: £291,506) of inter-segment revenue. This is shown as an Operating Expense under the real money gaming segment and eliminates on consolidation. EBITDA and Adjusted EBITDA are non-GAAP measures and exclude exceptional items, interest, depreciation, tax and amortisation. Exceptional items are items the Group considers to be non-recurring or material in nature that may distort an understanding of financial performance or impair comparability. See note 5. Financial StatementsStrategic ReportCorporate Governance 8 Principal Risks and Uncertainties The Board constantly monitors and assesses risks and uncertainties within the Group’s trading activities. There will always be a level of risk that needs to be evaluated against the Group’s potential returns in any activity. RISK HOW THIS RISK IS MANAGED The Group has a compliance team to ensure that all regulatory guidelines are met in its gambling operations. The Group also maintains close legal counsel to advise on any changes to the regulatory framework, as well as updates on territories currently outside the Group’s activities. Regulatory and legislation Online gambling and gaming is subject to a dynamic and complex regulatory regime. The Group now holds licenses from the Alderney Gambling Control Commission, the UK Gambling Commission and a transactional waiver for New Jersey Division for Gaming Enforcement whilst it seeks a full New Jersey license. It is key to the Group to maintain compliance with all licenses and any new ones that are required. These are critical to the continuing operation of the Group’s gambling activities and also the production and supply of its unique content into both its operations and other third parties. Failing to complete River transaction Risk of failing to complete the transaction to sell real money gaming platform and Bear Group subsidiary. The Group is reliant on the £11.5m proceeds of the transaction in order to fulfil its future strategy. The Company has worked to produce complete applications to the Gambling Regulators in order to gain the required regulatory consents and is working closely with River on the integration process. If the transaction fails to complete, then the Group will receive the £4.2m deferred consideration from the transaction completed with River in August 2018. Taxation risk From the end of 2014, the gaming industry has been subject to point of consumption tax in relation to gambling activities within the UK. The rate has increased to 21% in April 2019. Residency The Group has legal entities in several jurisdictions, including US, Canada and Alderney. Its real money gaming operations are based in Alderney where there is a zero rate for corporation tax and is outside the scope of VAT. If there was a change to the rate of corporate tax or VAT in Alderney, it would have an adverse effect on the amount of tax payable within the Group. The Group has entered into an agreement to sell the B2C RMG business in 2019 which will remove the Group’s direct exposure to point of consumption tax. The remaining B2B business operates in multiple jurisdictions reducing the impact of UK specific tax. The tax liability is bourne by the operator. The Group has undertaken a detailed transfer pricing exercise to ensure that revenue and profits are attributed correctly between the operating locations and continues to monitor taxation policies in all jurisdictions. Competition The online and free to play gaming markets are highly competitive in North America and the UK. Failure to be able to hold a competitive advantage would result in attracting less players and have lower engagement on our apps and sites. In following the Group’s strategy of developing new unique IP and content, the Group feels well placed to be able to compete in the markets it operates in. It invests significant resource to be able to improve its development and operations. Diverse products and geographies also help to diversify the risk. Gaming Realms plc Annual Report and Accounts 2018 9 RISK HOW THIS RISK IS MANAGED The Group will continue to closely monitor the situation and respond as the timing and terms of the UK’s exit from the EU become clearer. Brexit On 23 June 2016 the UK voted to leave the EU. This may reduce the Group’s ability to operate on an unfettered basis in certain EU markets. The Group, along with other EU based online gaming operators, have previously relied on the ability to challenge such protectionist measures through the EU Court of Justice (‘CJEU’). In the event that the UK was to leave the EU, unless the Group was to re-domicile certain of its subsidiaries within the EU, it would no longer be able to rely on such protection. Such a re-domiciliation could give rise to higher taxes payable. Time to market The Group invests highly in technology and bringing new products and games to market. A delay in time to market will result in a loss of competitive advantage, a loss in potential revenue and also increasing cost of development. The Group has invested highly in having a dual product track to allow its products and games to be ready for both licensing and publishing exploitation in the same release. Extensive work is undergone on the planning stage to ensure that timeframes can be met, and products go live at the highest standard. Dependence on technology As a provider of online gambling services, the Group’s business is reliant on technology and advanced information systems. If the Group does not invest in the maintenance and further development of its technology systems, there is a risk that these systems may not cope with the needs of the business and may fail. The Group is reliant on the Internet and is vulnerable to activities such as distributed denial of service attacks, other forms of cyber-crime and a wide range of malicious viruses. Dependence on third-party service providers The Group engages with a number of providers of non-proprietary third-party games and payment processing services, as well as other important service providers. In the event that there is any interruption to the products or services provided by third parties, problems in supplying the products, one or more ceased to be provided or are provided on onerous terms to the Group, this may have an adverse effect on the Group’s business and performance. The team The ability to carry out the Groups strategy is dependent on the engagement of its senior management team, its technology, marketing and operations teams. The Group operates with a small team across three main locations. If key employees leave, there is a risk of loss of knowledge. The Group continues to invest in its proprietary platform to ensure the necessary features and functionality meet partner needs. In addition, it has adopted industry standard protections to detect intrusions or other security breaches and implements preventative measures to protect against sabotage, hackers, viruses and other cyber-crime. The Group also holds relevant insurance to cover against this. The Group uses reliable industry suppliers and ensures that contractual agreements with key partners offer adequate protection. The Group continues to invest in its employees to ensure that it can attract, recruit and maintain a high-quality team. The 2018 Strategic Report on pages 1 to 9, has been approved by the Board of Directors. On behalf of the Board Michael Buckley Chairman Patrick Southon Chief Executive Officer 27 June 2019 27 June 2019 Financial StatementsStrategic ReportCorporate Governance 10 Board of Directors and Executive Management An accomplished team Board of Directors MB Michael Buckley Non-Executive Chairman PS Patrick Southon Chief Executive Officer MS Mark Segal Chief Financial Officer Michael Buckley was Chairman of Cashcade, which he founded with Patrick Southon and Simon Collins in 2000. Cashcade became a leading UK-based online gaming company prior to its sale to PartyGaming plc in 2009 for an aggregate sale consideration of £96m for shareholders. Michael has invested in and been Chairman of a number of public companies. These include SelecTV plc, a producer of comedy and comedy drama series for television such as Lovejoy, Birds of a Feather and The New Statesman. SelecTV invested in a consortium which in 1991 won the franchise to create Meridian Television of which Michael was a founding Director. He was also Chairman of Pacific Media plc, which invested in a number of internet backbone companies in Asia during the 1990s as well as creating a chain of movie theatres in South East Asia in partnership with United Artists Theatre Circuit Inc. Michael has held other public and private company directorships, having obtained a professional qualification as a chartered accountant in the UK. SC Simon Collins Non-Executive Director Simon Collins was the co-founder and Commercial Director of Cashcade. He formed a range of profitable B2B and affiliate relationships for Cashcade and was an early adopter of both search engine and social network marketing in the monetised digital gaming space. In 2008 and 2009, Cashcade featured in The Sunday Times Top 20 fastest growing technology companies and the business won numerous other industry awards. Following the sale of Cashcade, Simon remained at bwin.party until April 2011, where he focused on innovation, research and development as well as the ongoing development of Cashcade’s brand in the social networking space. Since leaving bwin.party, Simon joined Patrick Southon in founding NewGame, an investment fund focusing on innovation within the gambling sector. Patrick Southon has been working within the online gambling sector for the last 18 years. He is particularly focused on marketing, brand building and media buying. Patrick was Managing Director of Cashcade and Managing Partner of NewGame an investment fund focusing on innovation within the gambling sector. His marketing expertise allowed Cashcade to build a distinctive and prominent brand identity around, among others, its flagship ‘Foxy Bingo’ brand and turned the company into one of the most effective advertisers on British television. Based on research by TNS, Marketing Magazine cited Foxy Bingo as having the best value television advertising between 2008 and 2010. Mark Segal joined Gaming Realms in May 2013 having left bwin.party as Finance Director for the bingo vertical. Previous to that Mark was Finance Director of Cashcade until it was acquired by PartyGaming plc in July 2009. Mark was responsible for the full finance function, including commercial negotiations, business intelligence and operational support in the business, and was involved in the sale to PartyGaming plc and acquisition by Cashcade of Independent Technology Ventures in July 2007. Prior to joining Cashcade, in May 2005, Mark spent five years at the accountancy firm Martin Greene Ravden, where he qualified as a chartered accountant in 2003. MW Mark Wilson Non-Executive Director Mark Wilson is a strategic adviser and investor in media, gaming and real estate. Mark has held multiple senior leadership positions, serving as CEO of Television Games Network, Executive Chairman of Music Choice International, President of Hubbard Enterprises, Managing Member of New Mexico Gaming LLC, and General Counsel and Corporate Secretary of Churchill Downs. He received a Juris Doctorate from the University of Louisville. JR Jim Ryan Non-Executive Director Jim Ryan is the CEO of Pala Interactive, LLC a real money gambling operator focused on the US regulated online gaming market. Prior to Pala Interactive, Jim was the Co-CEO of bwin.party digital entertainment plc. He has spent the last 14 years of his career in leadership roles within the online gaming sector. Jim has led a number of the industry’s largest merger and acquisition transactions which include the merger of PartyGaming plc and bwin, the acquisitions of Cashcade (Foxy Bingo) and the World Poker Tour and the sale of St Minver Limited to GTECH. Jim held senior posts at four publicly listed companies. In addition to his role of CEO of PartyGaming plc and Co-CEO of bwin.party digital entertainment plc he was President and Chief Executive Officer of Excapsa Software Inc. and as Chief Financial Officer of CryptoLogic Inc. and Chief Financial Officer of SXC Health Solutions Corp and was CEO of St. Minver Limited. Jim also held senior management posts at Procuron Inc., Metcan Information Technologies Inc. and Epson Canada Limited. Educated at Brock University (Goodman School of Business) in Ontario, Canada, where he obtained a business degree with first class honours, Jim obtained professional qualifications as a chartered accountant and certified public accountant from the Canadian Institute of Chartered Accountants. Gaming Realms plc Annual Report and Accounts 2018 Financial Statements 11 Executive Management SD Stephen Downer Chief Operating Officer JB Jonny Bennet Chief Product Officer Stephen Downer has more than fifteen years of experience in online gaming. As Director of Gaming at Sky Bet for ten years, he launched and ran Sky Vegas, Sky Poker and Sky Bingo until 2012. A year later, Stephen led Betfair’s online casino launch in New Jersey, and more recently managed Betfair’s regulated sports betting and gaming businesses in Spain, Denmark and Bulgaria. PT Philip Tuck Business Intelligence Director Philip Tuck is a specialist in algorithmic development, machine learning, predictive modelling, database management/ construction and behavioural science within the real money gambling and social gaming space. He brings a consistent track record of delivering algorithmic CRM systems, managing analytics platforms and utilising ROI focused BI across a wide range of gaming products and companies, including Betfair, Ladbrokes and Gaming Realms, and is a regular speaker on the gaming and data conference circuit. Jonny creates and leads, high performing, agile, cross functional teams. He has over 10 years experience working in the online gambling sector, across marketing, operations and product delivery. He began his career at Ladbrokes, before moving to be part of the founding team at marketing agency, Quickthink Media. Following the acquisition of Quickthink Media by Gaming Realms in 2014, he led Gaming Realms B2C/ B2B UK casino team before becoming CPO where he now leads the product strategy and tech delivery across its global real money gaming and content distribution platforms and Slingo Originals games studio. TD Tom Dyson Operational Director of Bear Group Limited Tom has 10 years’ experience in the gaming industry. Having led sales teams at Gambling Compliance and ProgressPlay, he took on the role of Commercial Director at Nektan gaining significant operational experience for a B2B/B2C operator. More recently Tom held the role of Commercial Director for Optibid, a gambling focused digital marketing agency where he managed Account Management and Sales Teams servicing multiple UK facing casino, bingo and sportsbook brands before replacing Paul Munro as Managing Director for Bear Group in Alderney leading the marketing and operational strategy for the RMG business within Gaming Realms. Strategic ReportCorporate Governance 12 Directors’ Report for the year ended 31 December 2018 The Directors present their Annual Report together with the audited financial statements for the year ended 31 December 2018. The Group is dependent on the receipt of deferred consideration due following the August 2018 disposal of brands to River, or the completion of the proposed sale of the remaining B2C RMG business. Principal activities The Group’s principal activities during the year continued to be that of an online casino operator, platform and content developer, licensor and the provision and marketing of interactive casino services to customers in the UK and Social Publishing on mobile to customers in the US and Europe. These financial statements present the results of the Group for the year ended 31 December 2018. Names of Directors and dates of any changes The Directors who served during the year and to the date of this report were: » Michael Buckley » Jim Ryan » Patrick Southon » Mark Wilson » Mark Segal » Atul Bali (resigned June 2018) » Simon Collins » Chris Bell (resigned June 2018) » Chris Ash (appointed 6 June 2019) Results and dividends The results for the year are set out on page 21. The Company will not be paying a dividend this year. Post balance sheet events On 21 February 2019 Gaming Realms Plc entered into an agreement (‘Transaction’) with River to sell the remaining B2C RMG operations via the sale of its subsidiary Bear Group Ltd, subject to regulatory approvals. The Board appointed Chris Ash as a Non-Executive Director on 6 June 2019. Going concern Under company law, the Company’s Directors are required to consider whether it is appropriate to prepare financial statements on the basis that the Group and Company are a going concern. The Group meets its day-to-day working capital requirements from the cash flows generated by its trading activities and its available cash resources. These are supplemented when required by the Group’s bank overdraft facility, which is available until August 2019. Whilst there are a number of risks to the Group’s trading performance, as summarised on page 8, the Group is confident of its ability to continue to access sources of funding in the medium term. The Group’s strategic forecasts, based on reasonable assumptions, indicate that the Group should be able to operate within the level of its currently available facilities. After making enquiries and after consideration of the Group’s existing operations, cash flow forecasts and assessment of business, regulatory and financing risks, the potential risks and impacts of Brexit, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. As of the date of approval of these financial statements, the proposed sale of the remaining B2C RMG business to River is yet to complete. If this sale does not go through as planned, £4.2m is still receivable under the original 2018 sale and is due in August 2019. The Group’s facility with its banker expires in August 2019. As such, if there is a material delay in either the completion of the sale of the remaining B2C RMG business or the receipt of the £4.2m deferred consideration, alternative funding arrangements would be required in the interim which are not yet in place. This therefore represents a material uncertainty which may cast significant doubt over the Group’s ability to continue as a going concern. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. Disclosures to auditors The Directors who held office at the date of approval of this Directors’ Report confirm that, so far as they are aware, there is no relevant audit information of which the Company’s auditor is unaware; and each Director has taken steps that ought to have been taken as a Director to make themselves aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. BDO LLP, have expressed their willingness to continue in office and a resolution to reappoint them will be proposed for the Annual General Meeting in accordance with Section 489 of the Companies Act 2006. Financial instruments Details of the Group’s financial risk management objectives and policies are included in note 24 to the financial statements. Research and development The Group maintains its level of investment in software development activities. In the opinion of the directors, continued investment in this area is essential to strengthen the Group’s market position and for future growth During the year the Group claimed Research and Development relief as per note 12. Future developments Future developments are discussed in the Chairman’s Statement on page 4 and in the Chief Executive’s Review on page 5. This directors report was approved on behalf of the Board on 27 June 2019 and signed on its behalf by Patrick Southon Chief Executive Officer 27 June 2019 Gaming Realms plc Annual Report and Accounts 2018 13 Website publication The Directors are responsible for ensuring the Annual Report and the financial statements are made available on a website. Financial statements are published on the Company’s website in accordance with legislation in the UK governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company’s website is the responsibility of the Directors. The Directors’ responsibility also extends to the ongoing integrity of the financial statements contained therein. Statement of Directors’ Responsibilities The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the Group financial statements in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union and the company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group for that period. The Directors are also required to prepare financial statements in accordance with the rules of the London Stock Exchange for companies trading securities on the Alternative Investment Market (‘AIM’). In preparing these financial statements, the Directors are required to: » select suitable accounting policies and then apply them consistently; » make judgements and accounting estimates that are reasonable and prudent; » state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements; and » prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Financial StatementsStrategic ReportCorporate Governance 14 Corporate Governance Chairman’s Introduction The Directors recognise the importance of good corporate governance and have chosen to apply the Quoted Companies Alliance Corporate Governance Code (the ‘QCA Code’), which it did so during the last financial year. The QCA Code was developed by the QCA in consultation with a number of significant institutional small company investors, as an alternative corporate governance code applicable to AIM companies. The underlying principle of the QCA Code is that ‘the purpose of good corporate governance is to ensure that the company is managed in an efficient, effective and entrepreneurial manner for the benefit of all shareholders over the longer term’. The Group is not in compliance with all aspects of the Code due to the size and relative stage of development of the business, but remains committed to developing its compliance position over time as the business grows and matures. The Group is not yet in compliance with the Code principle 7. This will be addressed at the next review of the Code in Q4 2019, given the Group’s size and plans for the future, it will also endeavour to have regard to the provisions of the UK Corporate Governance Code as best practice guidance to the extent appropriate for a company of its size and nature. To see how the Company addresses the key governance principles defined in the QCA Code please refer to the Company’s website and the below table. (The Company has not prepared an official Chairman’s corporate governance statement). The principles of the Quoted Company Alliance (QCA) Code QCA Code Principle What we do and why 1. Establish a strategy and business model which promote long-term value for shareholders The Company develops, publishes and licenses mobile real money and social games. Through its market leading mobile platform and unique IP and brands, Gaming Realms is bringing together media, entertainment and gaming assets in new game formats. Our goal is to try to beat the market by investing in unique content and relationships with partners. We do that through: » Investing in unique mobile content and features on our gaming platform; » Investing with discipline, because we are able to test new opportunities before we roll them out; » Using data and technology to continuously improve. We are able to AB test all developments in games and platform and able to deploy only the best; and » We generate revenue by licensing our unique gaming content and Slingo brand to online real money gaming operators, social publishing operators and landbased gambling games manufacturers. Key challenges in implementing the strategy: » Regulatory framework is continually changing for Gambling which requires constant updates and development work per territory » Continuing to create best in class Games to licence to operators » Having technical resource to integrate the games onto Client sites 2. Seek to understand and meet shareholder needs and expectations Please refer to our website for further details on how we comply with this requirement of the QCA code: http://www.gamingrealms.com/wp-content/uploads/GMR_Changes_to_corporate_governance_ regime_092018.pdf 3. Take into account wider stakeholder and social responsibilities and their implications for long-term success 4. Embed effective risk management, considering both opportunities and threats, throughout the organisation Please refer to our website for further details on how we comply with this requirement of the QCA code: http://www.gamingrealms.com/wp-content/uploads/GMR_Changes_to_corporate_governance_ regime_092018.pdf The Board recognises that maintaining sound controls and discipline is critical to managing the downside risks to our plan. To continue the improvement in this area we are adding to our existing controls department, expanding the compliance teams to ensure we remain compliant with regulations in all territories we will be working in and continued tight control on investment as we continue to develop the platform and the games content. Both the Board and senior managers are responsible for reviewing and evaluating risk and the Executive Directors meet at least monthly to review ongoing trading performance, discuss budgets and forecasts and new risks associated with ongoing trading. Gaming Realms plc Annual Report and Accounts 2018 15 QCA Code Principle What we do and why 5. Maintain the Board as a well-functioning, balanced team led by the chair The Board comprises the Non-Executive Chairman, two Executive Directors and three Non-Executive Directors. Michael Buckley, the Non-Executive Chairman, is responsible for the running of the Board and Patrick Southon, the Chief Executive Officer, has executive responsibility for running the Group’s business and implementing Group strategy. The Directors considered to be independent are Michael Buckley, Jim Ryan and Mark Wilson. Simon Collins was considered to be independent post the sale of the B2C real money gaming brands to River in August 2018. He has become a full-time employee of River and is now not an executive of the Group. Key Board activities this year included: » Input into the accelerating growth plan; » Considered our financial and non-financial policies; » Discussed strategic priorities, including disposal during the year; and » Discussed the Group’s capital structure and financial strategy – Reviewed the Group risk register, including Compliance – Reviewed feedback from shareholders post full and half year results. The Board is supported by the Audit, Remuneration and Nominations Committees. The Committees’ roles and members are available on the Company’s website. During the year there were 13 Board meetings. Attendance records were: Board member Michael Buckley Patrick Southon Mark Segal Jim Ryan Mark Wilson Simon Collins Atul Bali* Chris Bell* Meetings attended 12 12 12 9 9 10 5 5 * Both Atul Bali and Chris Bell resigned during the year and were not eligible to attend all 13 meetings 6. Ensure that between them the Directors have the necessary up-to-date experience, skills and capabilities The Board is satisfied that, between the Directors, it has an effective and appropriate balance of skills and experience, including in the areas of international online gambling, international licensing, finance, innovation, and marketing. All Directors receive regular and timely information on the Group’s operational and financial performance. Relevant information is circulated to the Directors in advance of meetings. The business reports monthly on its headline performance against its agreed budget, and the Board reviews the monthly update on performance and any significant variances are reviewed at each meeting. The Board makes decisions regarding the appointment and removal of Directors, and there is a formal, rigorous and transparent procedure for appointments. Full details of the Board members and their experience and skills can be found on page 10 of the 2018 Annual Report or via the Investor link on Gaming Realms plc’s website. The Board has not sought external advice on any significant matter, apart from advice sought in the normal course of business from our auditors, lawyers and tax compliance advice. No external advisors have been engaged by the Board of Directors, except as noted above. Financial StatementsStrategic ReportCorporate Governance 16 Corporate Governance continued QCA Code Principle What we do and why 7. Evaluate Board performance based on clear and relevant objectives, seeking continuous improvement To date, the Board has not had a formal effectiveness review, but intends to carry one out once the roles which are currently being recruited are filled. The Chairman will be undertaking a rolling assessment of the individual contributions of each of the members of the team to ensure that: » their contribution is relevant and effective; » that they are committed; and » where relevant, they have maintained their independence – That there is succession planning for Board members. Going forward, appraisals will be carried out each year with all Executive Directors. 8. Promote a culture that is based on ethical values and behaviours Gaming Realms takes its ethical values very seriously and, in particular, being in the gaming sector the areas of promoting responsible gaming and preventing underage gaming. Staff undergo regular training and processes are in place to ensure correct practice. The culture of the Group is to put the customer, supplier, shareholder and people first. We believe in long-term partnerships in all these areas and work to maintain strong relationships. There is a requirement to include in the Chairman’s corporate governance statement what the Board does to monitor and promote a healthy corporate culture. We have not provided a chairman’s corporate governance statement but will look to publish such a statement in the future. Please refer to our website for further details on how we comply with this requirement of the QCA code: http://www.gamingrealms.com/wp-content/uploads/ GMR_Changes_to_corpotate_governance_ regime_092018.pdf The Company communicates with shareholders through the Annual Report and Accounts, full-year and half- year announcements, the Annual General Meeting (‘AGM’) and one-to-one meetings with large existing or potential new shareholders. The Board receives regular updates on the views of shareholders through briefings and reports from the Chief Executive Officer, Chief Financial Officer and the Company’s brokers. The Company communicates with institutional investors through briefings with management. In addition, analysts’ notes and brokers’ briefings are reviewed to achieve a wide understanding of investors’ views. The Company completes regular employee surveys to maintain an open dialogue with employees. There is a requirement to prepare both an Audit Committee report and a Remuneration report. These have not been done in this report but we will look to publish such reports in the future. 9. Maintain governance structures and processes that are fit for purpose and support good decision- making by the Board 10. Communicate how the Company is governed and is performing by maintaining a dialogue with shareholders and other relevant stakeholders Gaming Realms plc Annual Report and Accounts 2018 17 Board committees The Board is supported by the Audit and Remuneration committees. Each committee has access to such resources, information and advice as it deems necessary, at the cost of the Company, to enable the committee to discharge its duties. The Audit Committee have the primary responsibility of monitoring the quality of internal controls and ensuring that the financial performance of the Group is properly measured and reported on. It will receive and review reports from the Group’s management and external auditors relating to the interim and annual accounts and the accounting and internal control systems in use throughout the Group. The Audit Committee will meet not less than twice in each financial year and will have unrestricted access to the Group’s external auditors. The Audit Committee is chaired by Jim Ryan and also comprises Simon Collins and Michael Buckley. The Remuneration Committee review the performance of the executive directors and make recommendations to the Board on matters relating to their remuneration and terms of service. The Remuneration Committee also make recommendations to the Board on proposals for the granting of share options and other equity incentives pursuant to any employee share option scheme or equity incentive plans in operation from time to time. The Remuneration Committee meet as and when necessary. In exercising this role, the directors shall have regard to the recommendations put forward in the QCA Guidelines and, where appropriate, the Combined Code guidelines. The Remuneration Committee is chaired by Mark Wilson and comprises Jim Ryan and Michael Buckley. The Company will continue review the corporate governance framework as the business grows. Roles of the Board, Chairman and Chief Executive Officer The Board is responsible for the long-term success of the Company. There is a formal schedule of matters reserved to the Board. It is responsible for overall Group strategy; approval of major investments (whether Capex or Opex); approval of the annual and interim results; annual budgets; dividend policy; and Board structure. It monitors the exposure to key business risks and reviews the strategic direction of all trading subsidiaries, their annual budgets and their performance in relation to those budgets. There is a clear division of responsibility at the head of the Company. The Chairman is responsible for running the business of the Board and for ensuring appropriate strategic focus and direction. The Chief Executive Officer is responsible for proposing the strategic focus to the Board, implementing it once it has been approved and overseeing the management of the Company through the Executive Team. All Directors receive regular and timely information on the Group’s operational and financial performance. Relevant information is circulated to the Directors in advance of meetings. The business reports monthly on its headline performance against its agreed budget, and the Board reviews the monthly update on performance and any significant variances are reviewed at each meeting. Senior executives below Board level maybe invited to attend Board meetings where appropriate to present business updates. Board meetings throughout the year are held at the Company’s Head Office in London. Executive Team The Executive Team consists of Patrick Southon and Mark Segal with input from the vertical directors and teams. They are responsible for formulation of the proposed strategic focus for submission to the Board, the day-to-day management of the Group’s businesses and its overall trading, operational and financial performance in fulfilment of that strategy, as well as plans and budgets approved by the Board of Directors. It also manages and oversees key risks, management development and corporate responsibility programmes. The Chief Executive Officer reports to the plc Board on issues, progress and recommendations for change. The controls applied by the Executive Team to financial and non-financial matters are set out earlier in this document, and the effectiveness of these controls is regularly reported to the Audit Committee and the Board. Financial StatementsStrategic ReportCorporate Governance 18 Independent Auditors’ Report to the Members of Gaming Realms plc Opinion We have audited the financial statements of Gaming Realms plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) for the year ended 31 December 2018 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated and Company Statement of Financial Position, the Consolidated and Company Statement of Changes in Equity, the Consolidated Statement of Cash Flows and notes to the financial statements, including a summary of significant accounting policies. The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting Standard 101 Reduced Disclosure Framework (United Kingdom Generally Accepted Accounting Practice). In our opinion: » the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2018 and of the Group’s profit for the year then ended; » the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; » the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and » the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs’ (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Material uncertainty in relation to going concern We draw attention to note 1 in the financial statements which explains that the business is dependent on the receipt of the deferred consideration due following the disposal of brands to River, or the completion of the proposed sale of the remainder of the Group’s real money gaming business to the same purchaser to enable it to continue as a going concern. The matters referred to in note 1 indicate that a material uncertainty exists that may cast significant doubt on the Group and Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Revenue recognition (with reference to note 1) Key audit matter The group has a number of revenue streams, as summarised in note 1 to the financial statements. The details of the accounting policies applied during the period are given in note 1 to the financial statements. During the year the Group adopted IFRS 15 (Revenue from Contracts with Customers). Management make certain judgements around revenue recognition and the treatment of contractual arrangements for revenue streams entered into, including consideration of where the Group is acting as agent or principal with end users. Licencing revenues include a number of significant revenues where agreements are multi-year and involve IP or content licencing and/ or minimum guarantees or uncertain future events, which will impact the timing and extent of revenue recognition. Our response We assessed whether the revenue recognition policies adopted by the group comply with IFRS and Industry standards. As part of this we obtained and challenged management’s paper on the impact of IFRS 15 on the revenue recognition and policies adopted. We reviewed a sample of key contracts entered into during the year to assess whether the revenue had been recognised in accordance with the group’s accounting policy, to assess the critical estimates and judgements, and whether any other terms within the contract had any material accounting or disclosure implications. We challenged the significant judgements relating to revenue in the licencing segment, where recognition was based on uncertain future events, and considered the disclosure of these milestones and judgements in the financial statements. Based on the work performed we consider that revenue has been recognised appropriately and in accordance with the group’s revenue recognition accounting policy. Impairment of intangible assets (with reference to note 14) Key audit matter In accordance with accounting standards, the group monitors the carrying value of goodwill and other intangible assets for indications of impairment. Recoverable amount is the higher or value in use and fair value less cost to sell. The group performs annual impairment reviews for each CGU. Following certain disposals in the year, management reviewed the allocation of some shared assets between CGUs, including Slingo IP and historic goodwill. Impairment reviews require significant judgement from management and are based on assumptions in respect of future profitability. The identification of each CGU and allocation of assets and liabilities between CGUs require significant judgement from management. Gaming Realms plc Annual Report and Accounts 2018 19 Our response We considered whether there were any indications of impairment in respect of intangible assets. Recoverable amount was based on value in use. The audit team challenged the appropriateness of the key assumptions used in the discounted cash flow models prepared by management and applied sensitivities to assess the potential impairment of goodwill and those assets where indications of impairment were present. Our work was based on our assessment of the historical accuracy of the group’s estimates in previous periods, our understanding of the commercial prospects of the assets, discussions with managements surrounding the future plans for the operation, identification and analysis of changes in assumptions from prior periods and an assessment of the consistency of assumptions across the impairment reviews. We reviewed the methodology of the reallocation of goodwill and intangibles to CGUs following disposals in the year and challenged management on its appropriateness. We considered the appropriateness of the related disclosures provided in the group financial statements in light of the requirements of the accounting standards. Based on the procedures performed, we concur with management’s assessment of recoverable amounts and consider the disclosures to be appropriate. Capitalisation of development costs (with reference to note 14) Key audit matter The group has material expenditure on the internal development of intangible software assets. Such expenditure should only be capitalised when it qualifies under the criteria of the accounting standards and as such this is an area of judgement. Our response We assessed the design and implementation of the controls over the group’s capitalisation cycles. Our response We obtained management’s calculations of the profit on disposal of certain elements of the real money gaming segment. We agreed that the accounting was in line with the disposal agreements. Where proceeds were based on future results of the operation we obtained management forecasts and challenged the assumptions supporting the forecast, including growth rates and marketing assumptions. We obtained management’s consideration of the carrying value of the investment in River UK Casino and the contingent consideration as at the year end and audited the underlying trading forecasts used to determine the values. We obtained management’s assessment of the goodwill allocation, following the partial disposal of the B2C RMG CGU and challenged the fair value estimates applied to each element and inputs to these calculations, which were either based on value in use or fair value less cost to sell approaches. We challenged the basis that the remaining B2C RMG operations were held for sale by the year end and obtained supporting evidence including agreed heads of terms with the potential purchaser which were signed pre-year end. Based on our work, we noted no significant issues in this area. Our application of materiality We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole. We assessed whether the capitalisation policies adopted by the group comply with IFRS and the identified useful lives were in line with our expectations and comparable entities. We agreed a sample of costs capitalised in the year to source documentation to check that they met the criteria of the accounting standards. We consider Revenue to be the most appropriate performance measure for the basis of materiality in respect of the audit of the group, given the stage of development of the Groups’ operations and the loss in the year. Using this benchmark, we set materiality at £270k (2017: £324k) being 1.2% (2017: 1%) of Revenue. This also included challenging the project analysis provided by management to check that the projects capitalised met the criteria of the standards. Based on the work performed we consider that costs have been capitalised in accordance with the group’s accounting policy. Materiality in respect of the audit of the Parent Company has been set at £256k (2017: £308k) using a benchmark of 2% total assets, limited to 95% of group materiality (2017: 2% total assets, limited to 95% of group materiality). We consider total assets to be the most appropriate measure for the basis of materiality as the Parent Company is a holding company. Disposal of B2C Real Money Gaming operations (with reference to note 20) Key audit matter The Group has disposed of certain elements of its real money gaming segment during the year. Further to this, management have judged that the remainder of the real money gaming segment had either met the definition of held for sale as at the year end or where retained the element relating to goodwill has been reclassified to the Licensing CGU. As a result of the above, management have made a number of judgements and estimates in respect of the amounts recorded in the income statement and balance sheet and the allocation between continuing and discontinuing operations. Performance materiality was set at 75% of materiality for both the group and parent company audits. In setting the level of performance materiality we considered a number of factors including the expected total value of known and likely misstatements (based on past experience and other factors) and management’s attitude towards proposed adjustments. Component materiality We set materiality for each component of the group, other than the parent company, in a range of 10-75% of materiality. We agreed with the Audit Committee that we would report to the Committee all audit differences individually in excess of £13k (2017: £16k). We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative grounds. Financial StatementsStrategic ReportCorporate Governance 20 Independent Auditors’ Report to the Members of Gaming Realms plc continued An overview of the scope of our audit Our group audit was scoped by obtaining an understanding of the group and its environment, including the group’s system of internal control, and assessing the risks of material misstatement in the financial statements at the group level. In determining the scope of our audit we considered the level of work to be performed at each component in order to ensure sufficient assurance was gained to allow us to express an opinion on the financial statements of the group as a whole. We tailored the extent of the work to be performed on each component, which was performed by the group audit team, based on our assessment of the risk of material misstatement at each component. The Group consists of the parent company and 7 subsidiaries. Four of the subsidiaries were considered to be significant components and along with the parent company were subject to a full scope audit by the group audit team. These procedures covered 100% of revenue, 100% of profit before tax and 97% of total assets. Other components not considered significant were subject to desktop review by the group audit team. Other information The Directors are responsible for the other information. The other information comprises the information included in the Annual Report and Accounts other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Opinions on other matters prescribed by the Companies Act 2006 In our opinion, based on the work undertaken in the course of the audit: » the information given in the strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and » the strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements. Matters on which we are required to report by exception In the light of the knowledge and understanding of the Group and the Parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the Directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: » adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or » the Parent Company financial statements are not in agreement with the accounting records and returns; or » certain disclosures of Directors’ remuneration specified by law are not made; or » we have not received all the information and explanations we require for our audit. Responsibilities of Directors As explained more fully in the Directors’ responsibilities statement set out on page 13, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website : www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report. Use of our report This report is made solely to the Parent Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Parent Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Dominic Stammers (senior statutory auditor) For and on behalf of BDO LLP, statutory auditor London, UK 27 June 2019 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). Gaming Realms plc Annual Report and Accounts 2018 Consolidated Statement of Comprehensive Income For the year ended 31 December 2018 Continuing Revenue Marketing expenses Operating expenses Administrative expenses Impairment of financial asset Share-based payments Adjusted EBITDA1 total Adjusted EBITDA – discontinued Adjusted EBITDA – continuing Impairment of financial asset Restructuring costs EBITDA* continuing Amortisation of intangible assets Depreciation of property, plant and equipment Impairment of goodwill Finance expense Finance income Loss before tax Tax credit Loss for the financial year – continuing Profit/(Loss) for the financial year – discontinued Profit/(Loss) for the financial year – total Other comprehensive income Items that will or may be reclassified to profit or loss: Fair value gain on available for sale assets (pre 31 Dec 2017) Exchange gain/(loss) arising on translation of foreign operations Total other comprehensive income Total comprehensive income Profit/(loss) attributable to: Owners of the parent Non-controlling interest Total comprehensive income attributable to: Owners of the parent Non-controlling interest (Loss)/gain per share Basic and diluted – continuing Basic and diluted – discontinued Basic and diluted – total 21 Note 2018 £ 2017 £ 3 6,173,196 7,606,110 (665,363) (2,280,855) (901,807) (1,487,905) (4,870,226) (7,502,371) (228,451) (67,824) – 4,810 (542,911) 786,402 427,242 (3,566,356) (115,669) (2,779,954) (228,451) (216,355) – (880,257) (560,475) (3,660,211) (3,535,972) (4,292,283) (145,269) (173,638) (1,650,000) – (576,107) (752,600) 419,894 239,603 (6,047,929) (8,639,129) 412,987 612,903 (5,634,942) (8,026,226) 29 28 5 20 29 5 14 16 14 11 11 12 20 6,564,246 (201,441) 929,304 (8,227,667) 15 – 207,222 491,611 491,611 (1,022,056) (814,834) 1,420,915 (9,042,501) 946,804 (8,225,956) (17,500) (1,711) 929,304 (8,227,667) 1,443,741 (9,007,324) (22,826) (35,177) 1,420,915 (9,042,501) Pence (1.98) 2.31 0.33 Pence (2.89) (0.07) (2.96) 13 1 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. See Note 5. The notes on pages 25 to 56 form part of these financial statements. Financial StatementsStrategic ReportCorporate Governance 22 Consolidated Statement of Financial Position as at 31 December 2018 Non-current assets Intangible assets Other investments Property, plant and equipment Other assets Current assets Trade and other receivables Deferred consideration Cash and cash equivalents Assets classified as held for sale Total assets Current liabilities Trade and other payables Liabilities classified as held for sale Non-current liabilities Deferred tax liability Other Creditors Derivative liabilities Total liabilities Net assets Equity Share capital Share premium Merger reserve Available for sale reserve Foreign exchange reserve Shares to be issued Retained earnings Total equity attributable to owners of the parent Non-controlling interest Total equity The notes on pages 25 to 56 form part of these financial statements. Note 14 15 16 17 18 20A 19 31 December 2018 £ 31 December 2017 £ 12,848,623 20,464,170 535,130 127,556 132,577 747,222 263,069 163,865 13,643,886 21,638,326 2,681,500 3,759,434 665,690 467,033 3,814,223 – 2,283,302 6,042,736 2,292,881 21 11,392,013 22 21 12 23 23 25 26 26 26 26 26 26 28,850,122 29,973,943 2,484,592 9,269,732 4,830,076 7,314,668 – 9,269,732 607,943 881,512 3,004,602 2,843,529 200,000 600,000 3,812,545 4,325,041 11,127,213 13,594,773 17,722,909 16,379,170 28,442,874 28,442,874 87,198,410 87,198,410 (67,673,657) (67,673,657) – 207,222 1,911,453 1,419,842 – 145,000 (32,308,495) (33,530,345) 17,570,585 16,209,346 152,324 169,824 17,722,909 16,379,170 The financial statements were approved and authorised for issue by the Board of Directors on 27 June 2019 and were signed on its behalf by: Patrick Southon Chief Executive Officer Gaming Realms plc Annual Report and Accounts 2018 Consolidated Statement of Cash Flows for the year ended 31 December 2018 Cash flows from operating activities Profit/(loss) for the period Adjustments for: Depreciation of property, plant and equipment Amortisation of intangible fixed assets Impairment Share of loss of associate Finance income Finance expense Income tax credit Unrealised currency translation gains Loss on disposal of property, plant and equipment Profit on disposal of assets Fair value movement on contingent consideration Cash settlement of director share-based payment Share-based payments (release)/expense Increase in trade and other receivables (Decrease)/increase in trade and other payables Net cash flows from operating activities before taxation Research and Development tax receipts in the year Net cash flows from operating activities Investing activities Acquisition of associate Purchases of property, plant and equipment Purchase of intangibles Proceeds from disposal of property, plant and equipment Proceeds from disposal of assets, net of disposal costs Interest received Net cash used in investing activities Financing activities Proceeds of Ordinary Share issue Proceeds from issue of convertible debt Cost relating to issue of convertible debt Interest paid Net cash from financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of period Exchange (gain)/losses on cash and cash equivalents Cash and cash equivalents at end of period Significant non-cash transactions are disclosed in note 23 and 20. The notes on pages 25 to 56 form part of these financial statements. 23 Note 2018 £ 2017 £ 929,304 (8,227,667) 16 14 145,269 173,638 4,319,920 4,932,699 14, 21 4,479,026 3,127,381 21 11 11 12 16 172,360 (679,160) 576,107 (412,987) (11,076) 41,646 20A, 20B (12,421,621) 21 7 7, 28 1,900,065 (145,000) 67,824 – (239,603) 792,891 (612,903) (57,957) 11,670 – – – (4,810) (310,396) (411,839) (951,414) 1,166,029 (2,300,133) 133,130 649,529 389,286 (2,167,003) 1,038,815 (3,000) (34,712) – (91,447) (3,017,674) (3,197,971) – 5,725,593 120 382 – 1,294 2,670,327 (3,287,742) – – (24,846) (232,241) (257,087) 1,132,499 122,966 (96,763) (173,192) 985,510 246,237 (1,263,417) 1,319,098 2,597,465 (15,194) (14,950) 21 16 14 16 20 11 25 23 23 11 19 1,550,141 1,319,098 Financial StatementsStrategic ReportCorporate Governance 24 Consolidated Statement of Changes in Equity for the year ended 31 December 2018 Share capital £ Share premium £ Merger reserve £ Available for sale reserve £ Foreign exchange reserve £ Shares to be issued £ Retained earnings £ Total to equity holders of parents £ Non- controlling interest £ Total equity £ 1 January 2017 27,413,329 87,095,455 (67,673,657) – 2,408,432 – (25,154,580) 24,088,979 205,001 24,293,980 Loss for the year Other comprehensive income Total comprehensive income for the year Contributions by and distributions to owners Shares issued as part of the capital raising Share-based payment to Director (Note 8) Share-based payment on share options (Note 28) – – – – – – 1,029,545 102,955 – – – – – – – – – – – – 207,222 (988,590) – – (8,225,956) (8,225,956) (1,711) (8,227,667) – (781,368) (33,466) (814,834) 207,222 (988,590) – (8,225,956) (9,007,324) (35,177) (9,042,501) – – – – – – – 145,000 – – 1,132,500 145,000 – (149,810) (149,810) – – – 1,132,500 145,000 (149,810) 31 December 2017 28,442,874 87,198,410 (67,673,657) 207,222 1,419,842 145,000 (33,530,345) 16,209,345 169,824 16,379,169 Impact of adoption of IFRS 9 – – – (207,222) – – 207,222 – – – 1 January 2018 28,442,874 87,198,410 (67,673,657) Loss for the year Other comprehensive income Total comprehensive income/(loss) for the year Contributions by and distributions to owners Share-based payment to Director settled via cash (Note 8) Share-based payment on share options (Note 28) – – – – – – – – – – – – – – – 31 December 2018 28,442,874 87,198,410 (67,673,657) – – – – – – – The notes on pages 25 to 56 form part of these financial statements. 1,419,842 145,000 (33,323,123) 16,209,346 169,824 16,379,170 – 491,611 491,611 – – – – – 946,804 946,804 (17,500) 929,304 – 491,611 – 491,611 946,804 1,438,415 (17,500) 1,420,915 (145,000) – (145,000) – 67,824 67,824 – – (145,000) 67,824 1,911,453 – (32,308,495) 17,570,585 152,324 17,722,909 Gaming Realms plc Annual Report and Accounts 2018 25 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 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, SE1 8QH. The consolidated financial statements are presented in pounds sterling. Basis of preparation The Group financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board (‘IASB’) and endorsed by the European Union. The Group financial statements have been prepared on the historical cost basis, except where certain assets or liabilities are held at amortised cost or at fair value as described in our accounting policies. Basis of consolidation The Group financial statements incorporate the financial statements of the Company and entities controlled by the Company (subsidiaries). Control is achieved when the Company is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The results of subsidiaries acquired or disposed of during the period are included in the Consolidated Statement of Comprehensive Income from the effective date of acquisition up to the effective date of disposal. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used in line with those used by the Group. All intra-Group transactions, balances, income and expenses are eliminated on consolidation. Business combinations On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired, including separately identifiable intangible assets, is recognised as goodwill. Any discount on acquisition, i.e. where the cost of acquisition is below the fair value of the identifiable net assets acquired, is credited to the Statement of Comprehensive Income in the period of acquisition. Interests in associates Where the Group has the power to participate in (but not control) the financial and operating policy decisions of another entity, it is classified as an associate. Associates are initially recognised in the consolidated statement of financial position at cost. Where the interest in the associate arises as a result of the disposal of a subsidiary, the amount recognised as cost is the fair value of the interest retained in the associate. Subsequently associates are accounted for using the equity method, where the Group’s share of post-acquisition profits and losses and other comprehensive income is recognised in the consolidated statement of profit and loss and other comprehensive income (except for losses in excess of the Group’s investment in the associate unless there is an obligation to make good those losses). Profits and losses arising on transactions between the Group and its associates are recognised only to the extent of unrelated investors’ interests in the associate. The investor’s share in the associate’s profits and losses resulting from these transactions is eliminated against the carrying value of the associate. Any premium paid for an associate above the fair value of the Group’s share of the identifiable assets, liabilities and contingent liabilities acquired is capitalised and included in the carrying amount of the associate. Where there is an indicator that the investment in an associate may have been impaired the carrying amount of the investment is tested for impairment in the same way as other non-financial assets. Adjusted EBITDA The Group presents adjusted results, as described in note 5, which differ from statutory results due to the exclusion of exceptional items and adjustments. 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 which the directors consider to be one-off or material in nature that should be brought to the reader’s attention in understanding the Group’s 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, acquisition costs, and sales proceeds on business asset disposals. Financial StatementsStrategic ReportCorporate Governance 26 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued 1. Accounting policies (continued) Going concern The Group meets its day-to-day working capital requirements from the cash flows generated by its trading activities and its available cash resources. These are supplemented when required by the Group’s bank overdraft facility, which is available until August 2019. Whilst there are a number of risks to the Group’s trading performance, as summarised on page 8, the Group is confident of its ability to continue to access sources of funding in the medium term. The Group’s strategic forecasts, based on reasonable assumptions, indicate that the Group should be able to operate within the level of its currently available facilities. After making enquiries and after consideration of the Group’s existing operations, cash flow forecasts and assessment of business, regulatory and financing risks, the potential risks and impacts of Brexit, the directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. The Group is dependent on the receipt of deferred consideration due following the August 2018 disposal of brands to River, or the completion of the proposed sale of the remaining B2C RMG business. As of the date of approval of these financial statements, the proposed sale of the remaining B2C RMG business to River is yet to complete. If this sale does not go through as planned, £4.2m is still receivable under the original 2018 sale and is due in August 2019. The Group’s facility with its banker expires in August 2019. As such, if there is a material delay in either the completion of the sale of the remaining B2C RMG business or the receipt of the £4.2m deferred consideration, alternative funding arrangements would be required in the interim which are not yet in place. This therefore represents a material uncertainty which may cast significant doubt over the Group’s ability to continue as a going concern. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and Accounts. Revenue Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. The Group recognises revenue when it transfers control over a product or service to a customer. Performance obligations and timing of revenue recognition Revenue comprises net gaming revenue derived from real money gaming, licensing of content and IP, and Social Publishing. The following is a description of the principal activities – separated by reportable segments – from which the Group generates its revenue. For more detailed information about reportable segments see note 10. Net gaming revenue derived from real money gaming Net gaming revenue derived from online gambling operations is defined as the difference between the amounts of bets placed by the players less amounts won by players. It is stated after deduction of bonuses, jackpots and prizes granted to players. Revenue is recognised at a point in time when the player activity is concluded. The Group accounts for revenue as principal where it is the licenced entity in the provision of gaming services to end users and controls the service provision. Where the Group is considered to be acting as agent in the service provision, revenues are recognised net. Affiliate revenue Affiliate revenue is derived from marketing services provided in relation to online bingo and casino products. The commission revenue is calculated either as a percentage of net gaming revenue from the operators or in line with contracts, typically based on fixed price per player. Revenue is recognised at a point in time when the marketing services are provided. Social publishing revenue Social publishing revenue derives from the purchase of credits and awards on social gaming sites. In addition, revenue is generated from in app advertisements. Revenue is recognised at a point in time when the user credit has been purchased as there is no further service to be delivered and credits are non-refundable. In app advertising revenue is recognised at a point in time when the advertisement is displayed, or offer has been completed by the customer and confirmed by third-party reports. Gaming Realms plc Annual Report and Accounts 2018 27 Licensing revenue Licensing revenue derives from contractual relationships for the right to use of intellectual property and the amount of consideration receivable is dependent upon the value of sales the customer makes using the IP. For content licensing, revenue is recognised in the period that the customers sales occur under the royalty exception. Any minimum guarantees are recognised at a point in time when the control of the licence is passed to the customer. For brand licensing, revenue is recognised at a point in time when there are no further monetary or financial obligations to be fulfilled by the licensor. However, where the Group has ongoing obligations, licensing fees are further analysed for the contractual service provision and recognised either at point in time or over time, applying the royalty exception as applicable. Determining the transaction price Most of the Group’s revenue is derived from fixed price contracts and therefore the amount of revenue to be earned from each contract is determined by reference to those fixed prices and rates. Contracts where the transaction price is not fixed are royalties which are accounted for in accordance with the usage-based royalty exception in IFRS 15. Allocating amounts to performance obligations For most contracts, there is a fixed amount for each wager or credit purchased and only one performance obligation, being the honouring of the outcome of the wager/purchase. Therefore, there is no judgement involved in allocating the contract price. Licensing contracts work on a sales-based royalty. Therefore, there is no judgement involved in allocating the contract price. Goodwill Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identifiable assets and liabilities, including separately identifiable intangible assets, of a subsidiary, associate or jointly controlled entity at the date of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less accumulated impairment. On disposal of a subsidiary, associate or jointly controlled entity, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Cost comprises the fair value of assets given, liabilities assumed and equity instruments issued, plus the amount of any non-controlling interests in the acquiree plus, if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree. Contingent consideration is initially recognised at acquisition date fair value and remeasured subsequently through profit or loss. Goodwill is capitalised as an intangible asset with any impairment in carrying value being charged to the consolidated statement of comprehensive income. Where the fair value of identifiable assets, liabilities and contingent liabilities exceed the fair value of consideration paid, the excess is credited in full to the consolidated statement of comprehensive income on the acquisition date. Impairment of non-financial assets Impairment tests on goodwill and other intangible assets with indefinite useful economic lives are undertaken annually. Other non-financial assets are subject to impairment tests whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use and fair value less costs to sell), the asset is written down accordingly. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is carried out on the smallest group of assets to which it belongs for which there are separately identifiable cash flows; its cash generating units (‘CGUs’). Goodwill is allocated on initial recognition to each of the Group’s CGUs that are expected to benefit from a business combination that gives rise to the goodwill. Impairment charges are included in the income statement, except to the extent they reverse gains previously recognised in other comprehensive income. An impairment loss recognised for goodwill is not reversed. Discontinued operations The results of operations disposed of or classified as held for sale during the year are included in the consolidated statement of comprehensive income up to the date of disposal. A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale, that has been disposed of, has been abandoned or that meets the criteria to be classified as held for sale. Discontinued operations are presented in the consolidated statement of comprehensive income as a single line which comprises the post-tax profit or loss of the discontinued operation along with the post-tax gain or loss recognised on the re-measurement to fair value less costs to sell or on disposal of the assets or disposal groups constituting discontinued operations. Financial StatementsStrategic ReportCorporate Governance 28 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued 1. Accounting policies (continued) Foreign currency Transactions entered into by Group entities in a currency other than the currency of the primary economic environment in which they operate (their ‘functional currency’) are recorded at the rates ruling when the transactions occur. Foreign currency monetary assets and liabilities are translated at the rates ruling at the reporting date. Exchange differences arising on the retranslation of unsettled monetary assets and liabilities are recognised immediately in the statement of comprehensive income. Foreign exchange differences arising from financing transactions are recognised in finance income/loss, differences arising from trading balances are recognised in administration costs. On consolidation, the results of overseas operations are translated into sterling at rates approximating to those ruling when the transactions took place. All assets and liabilities of overseas operations, including goodwill arising on the acquisition of those operations, are translated at the rate ruling at the reporting date. Exchange differences arising on translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised in other comprehensive income and accumulated in the foreign exchange reserve. Exchange differences recognised as profit or loss in Group entities’ separate financial statements on the translation of long-term monetary items forming part of the Parent company’s net investment in the overseas operation concerned are reclassified to other comprehensive income and accumulated in the foreign exchange reserve on consolidation. On disposal of a foreign operation, the cumulative exchange differences recognised in the foreign exchange reserve relating to that operation up to the date of disposal are transferred to the consolidated statement of comprehensive income as part of the profit or loss on disposal. Adoption of new and revised standards In preparing the Group financial statements for the current period, the Group has adopted a number of new IFRSs, amendments to IFRSs and IFRS Interpretations Committee (‘IFRIC’) interpretations, none of which has had a significant effect on the results or net assets of the Group. IFRS 9 ‘Financial Instruments’ IFRS 9 ‘Financial Instruments’ was issued in July 2014 and replaces IAS 39 ‘Financial Instruments: Recognition and Measurement’. Classification and measurement IFRS 9 classification and measurement criteria requires financial instruments to be classified into one of the three categories being amortised cost, fair value through other comprehensive income or fair value through profit or loss. Financial assets held by the Group consist of cash and cash equivalents, trade receivables, loans receivable, deferred consideration, contingent consideration and other investments. The Group measures all financial assets at amortised cost except for derivative financial instruments, contingent consideration and other investments, which are measured at fair value through profit or loss. The adoption of IFRS 9 has resulted in the Group’s available-for-sale investments measured at fair value through other comprehensive income now being measured at fair value through profit or loss with the brought forward available-for-sale reserve reallocated to retained earnings as at 1 January 2018. Financial liabilities held by the Group consist of customer funds, trade payables, long-term borrowings, other short-term monetary liabilities, and derivative liabilities. The Group measures all financial liabilities at amortised cost except for derivative liabilities which are measured at fair value through profit and loss. There was no impact on financial liabilities of adopting IFRS 9. Embedded derivatives are separated and fair-valued through the statement of comprehensive income when they are not closely related to their host contracts and meet the definition of a derivative, or where the host contract is not carried at fair value. Impairment IFRS 9 requires the Group to use an expected credit loss model for its financial assets measured at amortised cost, either on a 12-month or a lifetime basis. The Group financial assets at amortised cost consist of cash and cash equivalents, trade receivables and loans receivable. None of these financial assets have a significant financing component and the Group has applied the simplified approach and record lifetime expected losses on all trade receivables measured at amortised cost. Other financial assets are measured using the normal credit loss model. Gaming Realms plc Annual Report and Accounts 2018 29 IFRS 15 ‘revenue from contracts with customers’ IFRS 15 ‘Revenue from contracts with customers’ establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Under IFRS 15, an entity recognises revenue when a performance obligation is satisfied, i.e. when ‘control’ of the goods or services underlying the particular performance obligation is transferred to the customer. There were no transition adjustments required. For licensing, revenue is recognised at a point in time when there are no further monetary or financial obligations to be fulfilled by the licensor. However, where there are ongoing obligations to the Group, licensing fees are further analysed for the contractual service provision and recognised either at point in time or over time, applying the royalty exception as applicable. The ongoing obligations of certain brand licensing arrangements are satisfied over time and the method previously used to measure the progress towards complete satisfaction of these performance obligations continues to be appropriate under IFRS 15. Standards in issue but not yet effective IFRS 16 ‘Leases’ IFRS 16 ‘Leases’ will replace IAS 17 in its entirety and is effective for accounting periods beginning on or after 1 January 2019. This will be adopted by the Group for the year ending 31 December 2019. The distinction between operating leases and finance leases for lessees is removed and will result in most leases being recognised in the Statement of Financial Position as a right-of-use asset and a lease liability. For leases previously classified as operating leases, the lease cost will change from an in-period operating lease expense to recognition of depreciation of the right-of-use asset and interest expense on the lease liability. The Group’s currently classified operating leases include rent payable by the Group for office properties and amounts payable for the use of certain computer equipment. The Group will apply IFRS 16 using the modified retrospective approach. A lease liability will be recognised equal to the present value of the remaining lease payments discounted using an incremental borrowing rate. A right-of-use asset will be recognised equal to the lease liability adjusted for prepaid and accrual lease payments. At the transition date on 1 January 2019, the Group’s main office lease in London is within 12 months of term end and as such is excluded from the transition to IFRS 16. The Group has no other material leases in excess of 12 months except for the office in Seattle, which is sublet to a third party. As a result the Group do not expect a material change in the results or net position of the consolidated results, however the review is ongoing. Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less and – for the purpose of the statement of cash flows – bank overdrafts. Bank overdrafts are shown within trade and other payables in current liabilities on the consolidated statement of financial position. Assets held for sale Non-current assets and disposal groups are classified as held for sale if the carrying amount will be recovered through a sale transaction rather than through continuing use. This condition is regarded as being met only when the sale is highly probable, management is committed to a sale plan, the asset is available for immediate sale in its present condition and the sale is expected to be completed within one year from the date of classification. These assets are measured at the lower of carrying value and fair value less associated costs of sale except where the assets were previously classified as available for sale, in which case they are carried at fair value. Following their classification as held for sale, non-current assets (including those in a disposal group) are not depreciated. Share capital Financial instruments issued by the Group are classified as equity only to the extent that they do not meet the definition of a financial liability or financial asset. The Group’s ordinary shares are classified as equity instruments. Non-controlling interests Non-controlling interest is initially recognised at the present ownership instruments’ proportionate share in the recognised amounts of the acquiree’s identifiable net assets. The total comprehensive income of non-wholly owned subsidiaries is attributed to owners of the parent and to the non-controlling interests in proportion to their relative ownership interests. Financial StatementsStrategic ReportCorporate Governance 30 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued 1. Accounting policies (continued) Share-based payments Where equity-settled share options are awarded to employees, the fair value of the options at the date of grant is charged to the consolidated statement of comprehensive income over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each reporting date so that, ultimately, the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Non-vesting conditions and market vesting conditions are factored into the fair value of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisfied. Where equity instruments are granted to persons other than employees, the consolidated statement of comprehensive income is charged with the fair value of goods and services received. The fair value of share options issued without market-based vesting conditions is measured by the application of the Black-Scholes option pricing model by reference to the grant date of the options. The fair value of share options issued with market-based vesting conditions is measured by use of the Monte Carlo method. Externally acquired intangible assets Externally acquired intangible assets are initially recognised at cost and subsequently amortised on a straight-line basis over their useful economic lives. Intangible assets are recognised on business combinations if they are separable from the acquired entity or arise from other contractual/ legal rights. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques (see section related to critical estimates and judgements below). Internally generated intangible assets (development costs) Expenditure on internally developed products is capitalised if it can be demonstrated that: » it is technically feasible to develop the product for it to be sold; » adequate resources are available to complete the development; » there is an intention to complete and sell the product; » the Group is able to sell the product; » sale of the product will generate future economic benefits; and » expenditure on the project can be measured reliably. Capitalised development costs are amortised over the periods the Group expects to benefit from selling the products developed. Development expenditure not satisfying the above criteria and expenditure on the research phase of internal projects are recognised in the consolidated statement of comprehensive income as incurred. The significant intangibles recognised by the Group, their useful economic lives and the methods used to determine the cost of intangibles acquired in a business combination are as follows: Intangible asset Customer databases Development costs Intellectual property Domain names Software Useful economic life 1-2 years 3-5 years 8 years 2-3 years 3-5 years During the year the Directors re-evaluated the useful economic life of game development costs, included within Development costs, as 5 years (2017: 3 years). This resulted in a reduction in amortisation expense of £0.3m. Research and development tax Research and development taxation relief is recognised once management considers it probable that any amount claimable will be received. Gaming Realms plc Annual Report and Accounts 2018 31 Deferred taxation Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the consolidated statement of financial position differs from its tax base, except for differences arising on: » the initial recognition of goodwill; » the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting nor taxable profit; and » investments in subsidiaries and jointly controlled entities where the Group is able to control the timing of the reversal of the difference and it is probable that the difference will not reverse in the foreseeable future. Recognition of deferred tax assets is restricted to those instances where it is probable that taxable profit will be available against which the difference can be utilised. The amount of the asset or liability is determined using tax rates that have been enacted or substantively enacted by the reporting date and are expected to apply when the deferred tax liabilities/(assets) are settled/(recovered). Property, plant and equipment Items of property, plant and equipment are initially recognised at cost. As well as the purchase price, cost includes directly attributable costs and the estimated present value of any future unavoidable costs of dismantling and removing items. The corresponding liability is recognised within provisions. Depreciation is provided on all property, plant and equipment at rates calculated to write off the cost less estimated residual value, of each asset evenly over its expected useful life as follows: Office, furniture and equipment 20% per annum straight-line Computer equipment 33% per annum straight-line Leasehold improvements Over the life of the lease Player liabilities Liabilities to players comprise the amounts that are credited to customers’ accounts including provision for bonuses granted by the Group. These amounts are repayable in accordance with the applicable terms and conditions. 2. Critical accounting estimates and judgements The Group makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Estimates (a) Impairment of goodwill and other intangible assets Goodwill and other intangible assets are reviewed for impairment and their values are written-down on the basis of the Group’s expectations of future economic benefits expected to be received. Any process which attempts to estimate future outcomes to determine the recoverable amount is subject to uncertainty. The recoverable amount is determined based on the lower of value in use calculations, which require the estimate of future cash flows and the choice of discount rate to calculate the present value of the cash flows, and fair value less costs to sell. Calculations are based on management’s forecasts for the period, and past experience of the same or similar assets. Where it is believed that the estimation uncertainty can give rise to material differences in asset carrying values, this will be stated in the relevant notes to the financial statements. See note 14. (b) Amortisation of development costs Capitalised development costs are subject to amortisation over the estimated useful life and reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The estimated useful life of these assets is based on management’s estimates of the period over which the assets are expected to generate revenue and are periodically reviewed to confirm they are still appropriate. As a result of this review, the useful economic life of game development costs has been re-assessed from 3 to 5 years. Financial StatementsStrategic ReportCorporate Governance 32 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued 2. Critical accounting estimates and judgements (continued) (c) Fair value measurement A number of assets and liabilities included in the Group’s financial statements require measurement at, and/or disclosure of, fair value. The fair value measurement of the Group’s financial and non-financial assets and liabilities utilises market observable inputs and data as far as possible. Inputs used in determining fair value measurements are categorised into different levels based on how observable the inputs used in the valuation technique utilised are (the ‘fair value hierarchy’): » Level 1: Quoted prices in active markets for identical items (unadjusted); » Level 2: Observable direct or indirect inputs other than Level 1 inputs; and » Level 3: Unobservable inputs (i.e. not derived from market data). The classification of an item into the above levels is based on the lowest level of the inputs used that has a significant effect on the fair value measurement of the item. Transfers of items between levels are recognised in the period they occur. The Group measures a number of items at fair value: » Financial instruments (note 23); » Assets and liabilities classified as held for sale (note 21); » Contingent consideration (note 21); and » Investment in associate (note 21) – Initial recognition of interests in associates are recognised at the fair value of interest retained. For more detailed information in relation to the fair value measurement and sensitivities of the items above, please refer to the applicable notes. (d) Arrangement with JackpotJoy group The arrangements entered into with JackpotJoy Group in 2017 are complex. The initial recognition involves estimating the fair value of the derivative liability, and estimating the initial carrying value of the loan liability using a suitable discount rate. The values computed reflected the directors’ expectations of the timing and quantum of expected cash outflows on the loan and the probability of the conversion option being exercised. If these estimates change this will have an impact on the carrying amounts of the conversion option and the loan. The ‘free services’ revenue element of the agreement is designated as the residual value on initial recognition. See note 23 for further detail. Judgements (a) Revenue recognition The treatment of group revenues as agent or principal in the service delivery can be a complex judgement dependent on the terms of the agreement with the partner. The Group accounts for revenue as principal where it is the licenced entity in the provision of gaming services to end users and controls the service provision. Where the Group is considered to be acting as agent in the service provision, revenues are recognised net. (b) Capitalisation of development costs The identification of development costs that meet the criteria for capitalisation is dependent on management’s judgement and knowledge of the work done. Development costs of gaming software platforms are separately identified. Key judgements relate to the separately identified projects, the expected future benefits and the useful economic life and are based on the information available at each period end. Economic success of any development is assessed on a reasonable basis but remains uncertain at the time of recognition. Development costs capitalised total £3.0m (2017: £3.2m). See note 14. (c) Deferred tax Deferred tax assets and liabilities are recognised for temporary differences and for tax loss carry-forwards. The assessment of temporary differences and tax loss carry-forwards is based on management’s estimates of future taxable profits against which the temporary differences and loss carry-forwards may be utilised. The Group has not recognised a deferred tax asset in respect of their losses as there is no track record of taxable profits at this time. Deferred tax assets will be recognised when the Group has established a track record of expected future taxable profit. The total unrecognised deferred tax asset was £5.6m (2017: £5.1m). See note 12. (d) Allocation of Goodwill Goodwill is allocated on initial recognition to each of the Group’s CGUs that are expected to benefit from a business combination that gives rise to the goodwill. On disposal of part of a CGU, management exercise significant judgement in the treatment of goodwill. Goodwill is allocated to the disposed operations on a relative fair value of the disposed and retained operations within the CGU. See note 20 for further details. Gaming Realms plc Annual Report and Accounts 2018 33 (e) Discontinued operations The Directors have assessed the B2C RMG CGU to be held for sale as at 31 December 2018. Judgement is involved to determine if ‘held for sale’ conditions are met. (f) Arrangement with JackpotJoy group The agreement with JackpotJoy group allows for early settlement of the loan if a change of control occurs. The Directors’ have used their judgement in order to determine that the probability of a change in control is low. Had this judgement been different, the Group may be liable, if the option is exercised, to make an additional cash payment to JackpotJoy group earlier than the end of the term. See note 23 for more detail. 3. Revenue from contracts with customers Disaggregation of 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 in note 10. Revenue from discontinued RMG operations in the period all arise from the UK, including Channel Islands and was direct to consumers (B2C) recognised at a point in time. There were no remaining performance obligations unsatisfied at the year end. 2018 continuing revenue Primary geographic markets UK, including Channel Islands US Rest of the World Contract counterparties Direct to consumers (B2C) B2B Timing of transfer of goods and services Point in time Over time Licensing £ 443,204 977,461 827,338 Social publishing £ – 3,920,619 – 2,248,003 3,920,619 Other £ 14,088 135,409 244,541 394,038 Intra- group £ Total £ (389,464) 67,828 – – 5,033,489 1,071,879 (389,464) 6,173,196 – 3,920,619 2,248,003 – 2,248,003 3,920,619 – 394,038 394,038 – 3,920,619 (389,464) 2,252,577 (389,464) 6,173,196 1,893,399 3,920,619 394,038 (389,464) 5,818,592 354,604 – – – 354,604 2,248,003 3,920,619 394,038 (389,464) 6,173,196 Financial StatementsStrategic ReportCorporate Governance 34 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued 3. Revenue from contracts with customers (continued) 2017 continuing revenue Primary geographic markets UK, including Channel Islands US Rest of the World Contract counterparties Direct to consumers (B2C) B2B Timing of transfer of goods and services Point in time Over time Licensing £ 309,505 522,922 7,114 Social publishing £ – 6,878,760 – Other £ 60,577 44,731 74,007 Intra- group £ Total £ (291,506) 78,576 – – 7,446,413 81,121 839,541 6,878,760 179,315 (291,506) 7,606,110 – 6,878,760 839,541 839,541 – 6,878,760 – 179,315 179,315 – 6,878,760 (291,506) 727,350 (291,506) 7,606,110 525,102 314,439 6,878,760 179,315 (291,506) 7,291,671 – – – 314,439 839,541 6,878,760 179,315 (291,506) 7,606,110 Remaining performance obligations The vast majority of the Group’s contracts are for services that will be provided within the next 12 months. Certain licence contracts have been entered into for which both: » the original contractual period was greater than 12 months; and » the Group’s right to consideration does not correspond directly with the performance. The amount of revenue that will be recognised in future periods on these contracts when those remaining performance obligations will be satisfied is: Next 12 months 12-24 months 24+ months 4. Expenses by nature Loss before interest and tax has been arrived at after charging/(crediting): Employee benefit expenses (see note 9) Share-based payments Operating lease payments Depreciation of property, plant and equipment Amortisation of intangible assets Foreign exchange (gain)/loss 2018 £ 793,466 52,256 104,513 950,235 2017 £ 397,204 783,810 127,800 1,308,814 2018 £ 2017 £ 5,307,869 7,018,634 67,824 237,984 145,269 (149,810) 281,871 173,638 4,319,920 4,932,699 (8,091) 35,771 Gaming Realms plc Annual Report and Accounts 2018 35 5. 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 costs – share-based payment Impairment of financial asset Restructuring costs Adjusting items 2018 £ 2017 £ – (145,000) (228,451) (216,355) (444,806) – (735,257) (880,257) Disposal of RMG assets to River On 16th August 2018 the Group entered into an Asset Purchase Agreement with River for the sale of 4 of the Group’s real money brands including customer lists, domain names and contractual agreements. The resulting initial profit on disposal of £12.5m has been classified as exceptional due to its one-off nature. Further details of the disposal are provided in note 20. Disposal of Affiliate Marketing business On 22 March 2018, the Group sold its Affiliate Marketing business to First Leads Ltd. The resulting loss on disposal of £0.1m has been classified as exceptional due to its one-off nature. Further details of the disposal are provided in note 20. Impairment of financial asset The balance owed by Gamerail Entertainment LLC as at 31 December 2017 was $253,454 which was fully provided for in 2018. See note 29. Restructuring costs During 2018 restructuring costs of £0.2m were incurred relating to redundancy and consulting costs. During 2017 the Group closed the Seattle office. Restructuring costs in the prior year related to the closure costs associated with this including employee severance payments. 6. Auditor’s remuneration During the year the Group obtained the following services from the Company’s auditor: Fees payable to the Company’s auditor for the audit of the Group’s annual accounts Fees payable to the Company’s auditor for the audit of the subsidiary’s financial statements Fees payable to the Company’s auditor for the review of Interim statement Fees payable to the Company’s auditor for other services: – Corporate finance – Other – Tax compliance services – Tax advisory services 2018 £ 25,000 80,000 3,178 13,830 13,600 40,000 10,000 185,608 2017 £ 25,000 71,900 3,100 46,224 – 40,000 3,490 189,714 7. Key management personnel remuneration During the year the Group paid the following remuneration to the key management personnel (which include Directors) of the consolidated entity: Short-term benefits of key management personnel Post-employment benefits of key management personnel Share-based benefits of key management personnel 2018 £ 2017 £ 1,517,689 2,500,272 46,375 121,774 47,251 46,238 1,685,838 2,593,762 Financial StatementsStrategic ReportCorporate Governance 36 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued 8. Directors’ remuneration The following table presents the Directors’ remuneration of the Company for the year ended 31 December 2018. Michael Buckley Patrick Southon Simon Collins Mark Segal Jim Ryan Mark Wilson Atul Bali Chris Bell Salary and fees £ 210,000 250,000 125,000 200,000 40,000 40,000 50,000 20,000 Benefits £ – 13,077 10,118 713 – – – – 2018 Total £ 210,000 263,077 135,118 200,713 40,000 40,000 50,000 20,000 2017 Total £ 360,000 263,595 158,595 172,056 40,000 40,000 853,727 10,000 935,000 23,908 958,908 1,897,972 The remuneration for Michael Buckley includes consulting fees of £120,000 paid to Dawnglen Finance Limited, as well as repayment of expenses incurred wholly for the benefit of Gaming Realms plc of £30,000, giving a total of £150,000 paid to Dawnglen (2017: £300,000), a company controlled by Michael Buckley. During 2018 Atul Bali received $375,000 (£285,844) in severance payments for loss of office as an executive director under his contract, the cost of which was recognised in 2017 results. As part of the separation agreement 5 million of share options granted were retained and allowed to vest over the remaining vesting period. In 2017 he was granted a one-time equity grant of shares to be issued with an estimated value at 31 December 2017 of £145,000. During 2018 the parties agreed to settle the equity grant by way of cash payment of £145,000. Atul resigned as a Non-Executive Director in June 2018. He received £50,000 for Non-Executive Director services in 2018. The Directors’ ordinary shares in the Company, were as follows: £0.10 ordinary shares Michael Buckley Patrick Southon Simon Collins Mark Segal Jim Ryan Mark Wilson Atul Bali 2018 Number of shares 2017 Number of shares 23,000,000 23,000,000 12,417,319 12,417,319 10,806,742 10,806,742 740,761 740,761 1,384,615 1,384,615 384,615 384,615 1,825,000 1,825,000 50,559,052 50,559,052 Gaming Realms plc Annual Report and Accounts 2018 Directors’ interests in long-term incentive plans The Directors’ interests in share options, over ordinary shares in the Company, were as follows: Michael Buckley1 Patrick Southon1 Simon Collins1 Mark Segal1 Jim Ryan2 Mark Wilson2 Atul Bali 3,4 Option at 1 Jan 2018 5,769,230 5,769,230 4,615,384 3,076,923 769,230 769,230 5,750,000 Option granted Options lapsed Option at 31 Dec 2018 Exercise price – – – – – – – – – – – – – 5,769,230 5,769,230 4,615,384 3,076,923 769,230 769,230 (750,000) 5,000,000 £0.01 £0.01 £0.01 £0.01 £0.13 £0.13 £0.23 37 Hurdle price £0.20 £0.20 £0.20 £0.20 – – – Date of grant 01-Aug-13 01-Aug-13 01-Aug-13 01-Aug-13 01-Aug-13 01-Aug-13 17-Jun-14, 10-Oct-15 1 On the 1 August 2013 the Company granted options to B Shares under the Gaming Realms 2013 EMI plan. The B Share value will be 20 pence less than the prevailing price of the ordinary shares and will therefore have no value unless the value of the new ordinary shares exceeds 20 pence. EMI options can only be granted to employees who meet the statutory working time requirement, and cannot normally be exercised before 15 July 2015. All options granted under the New Share Option Scheme on Admission will be exercisable over B Shares at their nominal value of £0.01 and will be capable of exercise, subject to certain exceptions, after two years of the date of grant. 2 On the 1 August 2013, the Company granted Unapproved Options which have the same rights as the options granted over the B Shares under Gaming Realms 2013 EMI plan, save that the exercise price will be 13 pence per ordinary share. 3 On the 17 June 2014, the Company granted Unapproved Options which have the same rights as the options granted over the B Shares under Gaming Realms 2013 EMI plan, save that the exercise price will be 23 pence per ordinary share. 4 On the 10 October 2015, the Company granted Unapproved Options which have the same rights as the options granted over the B Shares under Gaming Realms 2013 EMI plan, save that the exercise price will be 23 pence per ordinary share. 9. Employee benefit expenses Employee benefit expenses (including directors) comprise: Wages and salaries Share-based payment expense (Note 8 & 28) Social security contributions and similar taxes Pension contributions Staff costs capitalised in respect of internally generated intangible assets 2018 £ 2017 £ 6,418,110 9,061,213 67,824 687,288 209,146 (4,810) 593,759 144,228 7,382,369 9,794,390 (2,006,675) (2,780,566) 5,375,693 7,013,824 The Group makes contributions to defined contribution plans and has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expense when they are due. The assets of the individual schemes are held separately from those of the Group in independently administered funds. The average number of employees was 115 (2017: 132). Financial StatementsStrategic ReportCorporate Governance 38 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued 10. 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 2 continuing reportable operating segments: » Licensing – brand and content licensing to partners in the US and Europe; and » Social Publishing – provides freemium games to the US and Europe. There were no customers who generated more than 10% of total revenue. The results of the discontinued segments are included in note 20. Management do not report segmental assets and liabilities internally and as such an analysis is not reported. 2018 Revenue Marketing expense Operating expense Administrative expense Share-based payments Adjusted EBITDA Restructuring costs EBITDA – continuing Amortisation of Intangible assets Depreciation of property, plant and equipment Impairment Finance expense Finance income Loss before tax – continuing 2017 Revenue Marketing expense Operating expense Administrative expense Share-based payments Adjusted EBITDA Restructuring costs Restructuring costs – share-based payment EBITDA – continuing Amortisation of Intangible assets Depreciation of property, plant and equipment Finance expense Finance income Loss before tax – continuing Licensing £ Social publishing £ Head office £ Total £ 2,248,003 3,920,619 394,038 6,562,660 * – (414,064) (251,298) (665,362) (199,412) (1,091,460) (400) (1,291,272) (1,054,712) (861,253) (2,737,906) (4,653,871) – – (67,824) 993,879 1,553,842 (2,663,390) (67,824) (115,669) (216,355) (332,024) (3,535,972) (145,269) (1,878,451) (576,107) 419,894 (6,047,929) Licensing £ Social publishing £ Head office £ Total £ 839,541 6,878,760 179,315 7,897,616 * – (2,171,341) (109,514) (2,280,855) (24,961) (1,754,450) – (1,779,411) (1,036,352) (3,010,164) (2,720,598) (6,767,114) – – 149,810 149,810 (221,772) (57,195) (2,500,987) (2,779,954) (735,257) (145,000) (3,660,211) (4,292,283) (173,638) (752,600) 239,603 (8,639,129) * Segmental revenue includes £389,464 (2017: £291,506) of inter-segment Licensing revenue. This is shown as an Operating Expense under the real money gaming discontinued operations and eliminates on consolidation. Gaming Realms plc Annual Report and Accounts 2018 11. Finance income and expense Finance income Interest received Unwind of interest on deferred consideration receivable Fair value gain on derivative liability Foreign exchange movement on deferred consideration Total finance income Finance expense Bank & loan interest paid Unwind of interest on deferred consideration payable Fair value loss on other investments Total finance expense 39 2018 £ 2017 £ 120 1,295 19,774 400,000 – 419,894 364,014 – 212,093 576,107 – – 238,309 239,604 272,613 479,987 – 752,600 20A 23 15 The deferred consideration in relation to the acquisition from RealNetworks Inc. was denominated in USD and the final payment of $4.5m was settled on 15 December 2017 (see Note 23). The retranslation of this balance resulted in a £238,309 gain in the prior year. 12. Tax credit Current tax Adjustment for current tax of prior periods R&D tax credit for the period Total current tax credit Deferred tax (Decrease)/increase in deferred tax liabilities Total deferred tax credit Total tax credit 2018 £ 2017 £ (11,078) 144,208 133,130 279,857 279,857 412,987 (67) 389,354 389,286 223,617 223,617 612,903 The reasons for the difference between the actual tax credit for the period and the standard rate of corporation tax in the UK applied to profits for the year are as follows: Loss for the period – continuing Profit/(loss) for the period – discontinued Profit/(loss) for the period Expected tax at effective rate of corporation tax in the UK of 19% (2017: 19.3%) Expenses not deductible for tax purposes Income not chargeable for tax purposed Effects of overseas taxation Adjustment for over provision in prior periods Research and Development tax credit Timing difference not recognised Tax losses for which no deferred tax assets have been recognised Total tax credit 2018 £ 2017 £ (6,047,930) (8,639,129) 6,564,247 (201,441) 516,317 (8,840,570) 98,100 (1,701,507) 920,066 (1,999,096) 290,594 11,078 7,840 – 179,516 67 (144,208) (389,354) 115,285 295,194 – 1,290,535 (412,987) (612,902) Financial StatementsStrategic ReportCorporate Governance 40 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued 12. Tax credit (continued) Changes in tax rates and factors affecting the future tax charge At Summer Budget 2015, the government announced legislation setting the Corporation Tax rate at 19% for the years starting 1 April 2017, 2018 and 2019 and at 18% for the year starting 1 April 2020. At Budget 2016, the government announced a further reduction to the Corporation Tax rate for the year starting 1 April 2020, setting the rate at 17%. Accordingly, deferred tax balances as at 31 December 2018 have been recognised at 17% (2017: 17%). There are unused UK tax losses carried forward as at the balance sheet date of £32.7m (2017: £30.1m) equating to an unrecognised deferred tax asset of £5.6m (2017: £5.1m). No deferred tax asset has been recognised in respect of these losses, as the recoverability of any asset is dependent upon sufficient profits being achieved in future years to utilise this asset. The timings of such profits are uncertain. Deferred tax liability At 1 January 2018 Unwind of deferred tax recognised on business acquisitions FX movement At 31 December 2018 2018 £ 2017 £ 881,511 1,202,889 (279,857) (223,617) 6,289 607,943 (97,761) 881,511 13. Profit/(loss) per share Basic profit/(loss) per share is calculated by dividing the result attributable to ordinary shareholders by the weighted average number of shares in issue during the year. For fully diluted loss per share, the weighted average number of ordinary shares in issue 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 (see note 28) are currently dilutive. Loss after tax – continuing Profit/(loss) after tax – discontinued Profit/(loss) after tax – total Weighted average number of ordinary shares used in calculating basic loss per share Weighted average number of ordinary shares used in calculating dilutive loss per share Basic and diluted loss per share – continuing Basic and diluted profit/(loss) per share – discontinued Basic and diluted profit/(loss) per share – total 2018 £ 2017 £ (5,634,942) (8,026,226) 6,564,246 (201,441) 929,304 (8,227,667) Number Number 284,428,746 278,166,853 284,428,746 278,166,853 Pence (1.98) 2.31 0.33 Pence (2.89) (0.07) (2.96) Gaming Realms plc Annual Report and Accounts 2018 41 14. Intangible assets Cost Goodwill £ Customer database £ Software £ Development costs £ Domain names £ Intellectual property £ Total £ Balance at 1 January 2017 16,545,864 4,111,971 1,538,500 6,858,335 429,618 6,401,430 35,885,718 Additions – – Reclassified as held for sale (5,420,262) (2,343,632) – – 3,197,971 – – – – – 3,197,971 (7,763,894) FX Movement (480,045) (141,830) (134,559) (9,198) (35,287) (558,338) (1,359,257) At 31 December 2017 10,645,557 1,626,509 1,403,941 10,047,108 394,331 5,843,092 29,960,538 Additions Disposals – – (2,191,809) (133,550) Reclassified as held for sale (1,699,000) – – – – 3,017,674 – – (364,986) (3,374,902) FX Movement 302,020 89,231 84,659 18,257 – – – 3,017,674 (2,690,345) (5,073,902) 351,280 845,520 – 73 At 31 December 2018 7,056,768 1,582,190 1,488,600 9,708,137 29,418 6,194,372 26,059,485 Amortisation Balance at 1 January 2017 Amortisation charge Reclassified as held for sale FX Movement At 31 December 2017 Amortisation charge Disposals Impairment Reclassified as held for sale FX Movement – – – – – – – 1,650,000 – – 2,841,672 916,459 (2,343,632) 642,988 490,691 – 2,438,105 2,627,075 – 198,932 135,287 – 1,102,184 7,223,881 763,187 4,932,699 – (2,343,632) (86,841) (76,019) (3,918) (21,606) (128,196) (316,580) 1,327,658 1,057,660 5,061,262 300,949 (133,550) – – 277,088 2,946,864 – – – – – (2,108,114) 312,613 52,470 (336,262) – – 1,737,175 9,496,368 742,549 4,319,920 – – – (469,812) 1,650,000 (2,108,114) 87,133 72,507 23,777 597 138,486 322,500 At 31 December 2018 1,650,000 1,582,190 1,407,255 5,923,789 29,418 2,618,210 13,210,862 Net book value At 1 January 2017 16,545,864 1,270,299 At 31 December 2017 10,645,557 298,851 895,512 346,281 4,420,230 4,985,846 230,686 5,299,246 28,661,837 81,718 4,105,917 20,464,170 At 31 December 2018 5,406,768 – 81,345 3,784,348 – 3,576,162 12,848,623 The Group has no contractual commitments for development costs (2017: nil). Financial StatementsStrategic ReportCorporate Governance 42 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued 14. Intangible assets (continued) Goodwill The Group has 2 continuing CGUs (2017: 3) for which the carrying amount of goodwill is allocated as follows: Real money gaming Licensing Social Publishing 2018 £ 2017 £ – 5,609,878 5,163,223 3,146,558 243,545 1,889,123 5,406,768 10,645,559 In 2017 the Group split the RMG and Affiliate Marketing CGU’s in preparation for sale. The Affiliate Marketing CGU was subsequently sold in March 2018 (see note 20). In August 2018, four of the B2C RMG brands were sold (see note 20), with the remaining B2C RMG business classified as held for sale as at 31 December 2018 (see note 21). Goodwill was allocated to the 2018 disposal based on relative fair values of the disposed operations, and £2.2m of goodwill included in the disposal (see note 20). Goodwill was allocated to the business classified as held for sale at the year-end based on the relative fair value of the business to be disposed, as a result goodwill of £1.7m was classified as held for sale at the year end. The remaining B2B RMG CGU was subsequently combined into the Licencing CGU as part of the reorganisation. Impairment of goodwill The Group is required to test, on an annual basis, whether goodwill has suffered any impairment. A detailed impairment test was undertaken at 31 December 2018 to assess whether the carrying value of assets was supported by its recoverable amount. The recoverable amount is the higher of fair value less costs of disposal, and value in use. The use of this method requires the estimation of future cash flows and the determination of a discount rate in order to calculate the present value of the cash flows. The recoverable amount of the real money gaming CGU reclassified as held for sale in the year was assessed based on the signed Heads of Terms for the proposed sale to River in 2019 (note 31). No indicators of impairment arose as a result of this review. The remaining B2B real money CGU was subsequently combined into the Licensing CGU as part of the reorganisation. The recoverable amounts of both continuing CGUs have been determined from value in use calculations based on cash flow projections from formally approved budgets. Cash flow projections have been prepared for a four-year period to 31 December 2022. Other major assumptions are as follows: 2018 Licensing Social Publishing 2017 Licensing Social Publishing Discount rate Long-term growth rate1 14.5% 16.5% 18.0% 20.0% 5% 0% 5% 5% 1 The growth rate assumptions apply only to the period beyond the formal budgeted period with the value in use calculation based on an extrapolation of the budgeted cashflows for year 4. The discount rates used in discounting the projected cash flows are based on the Group’s Weighted Average Cost of Capital, after considering the specific risks of the different CGU’s. The discount rates used have been considered based on the risks involved in each of the underlying business units and terminal growth rates and reflect the expected growth in underlying EBITDA expected from these units. These CGUs have been considered for impairment and sensitivities have been calculated around the terminal growth rates and discount factors used together with specific scenarios including the loss of revenue where those revenues might be considered to be at risk. As a result of declining revenue in the Social Publishing CGU, the recoverable amount of £2.7m was less than the carrying value. The total carrying value of this CGU was £4.4m, of which £1.9m was goodwill. As a result, the directors have impaired goodwill by £1.7m. Social Publishing is a reportable segment and business operation. No indicators of impairment have arisen on the licensing CGU as a result as the impact of all sensitivities were judged to be within tolerable levels. Gaming Realms plc Annual Report and Accounts 2018 15. Other investments At 1 January 2017 Change in Fair Value At 31 December 2017 Change in Fair Value At 31 December 2018 43 Other investment £ 540,000 207,222 747,222 (212,092) 535,130 The available-for-sale investment comprises a 6.6% interest in Ayima Group AB (‘Ayima’). The shares of Ayima are quoted on AktieTorget, a Nordic stock exchange (www.aktietorget.se). The investment is remeasured each reporting period to fair value based on the quoted share price. As at 31 December 2018 the quoted share price was SEK 17.50 (£1.54). This is a level 1 valuation as defined by IFRS 13. Under IFRS 9, movements in fair value are taken to profit and loss. 16. Property, plant and equipment Cost Balance at 1 January 2017 Additions Disposals FX Movement At 31 December 2017 Additions Disposals Reclassified as held for sale FX Movement At 31 December 2018 Accumulated deprecation Balance at 1 January 2017 Depreciation charge Disposals FX Movement At 31 December 2017 Depreciation charge Disposals Reclassified as held for sale FX Movement At 31 December 2018 Net book value At 1 January 2017 At 31 December 2017 At 31 December 2018 Leasehold improvements £ Computers and related equipment £ Office furniture and equipment £ 293,975 3,373 – (2,770) 294,578 6,403 (102,841) – (560) 162,095 73,324 (4,872) (917) 118,246 2,885 (12,483) (2,771) 229,630 105,877 22,829 (19,523) (51,534) (503) 197,580 180,899 78,074 93,426 – (1,047) 170,453 75,038 (95,629) – (894) 85,644 53,550 (2,442) (561) 136,191 49,131 (15,758) (42,474) (459) 148,968 126,631 215,901 124,125 48,612 76,451 93,439 54,268 Total £ 574,316 79,582 (17,355) (6,458) 630,085 34,712 (131,232) (62,047) (564) 470,954 201,009 173,638 (5,303) (2,328) 367,016 145,269 (118,310) (49,259) (1,318) 343,398 373,307 263,069 127,556 5,480 (8,868) (10,513) 499 92,475 37,291 26,662 (2,861) (720) 60,372 21,100 (6,923) (6,785) 35 67,799 80,955 45,505 24,676 Financial StatementsStrategic ReportCorporate Governance 44 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued 17. Other assets Other assets Other assets represent the rental deposit on operating leases and deposits held with third-party suppliers. 18. Trade and other receivables Trade and other receivables Prepayments and accrued income 2018 £ 2017 £ 132,577 163,865 2018 £ 2017 £ 1,541,665 1,139,835 2,311,610 1,447,824 2,681,500 3,759,434 The carrying value of trade and other receivables classified at amortised cost approximates fair value. All amounts shown fall due for payment within 1 year. The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables. To measure expected credit losses on a collective basis, trade receivables are grouped based on similar credit risk and aging. The expected loss rates are based on the Group’s historical credit losses experienced over the three-year period prior to the period end. The historical loss rates are then adjusted for current and forward-looking information on macroeconomic factors affecting the Group’s customers. At 31 December 2018 the lifetime expected loss provision for trade receivables is as follows: Expected loss rate Gross carrying amount Loss provision 19. Cash and cash equivalents Cash and cash equivalents Cash – held for sale (note 21) Restricted cash Overdraft Cash and cash equivalents for Statement of Cash Flows Current £ 1% 1,461,274 14,613 More than 30 days past due £ 3% 47,889 1,437 More than 60 days past due £ 10% 27,986 2,799 More than 120 days past due £ 50% 4,516 2,258 Total £ 1,541,665 21,106 2018 £ 2017 £ 467,033 2,283,302 1,101,489 (18,382) – – (18,702) (945,501) 1,550,141 1,319,098 The Group has restricted cash of £18,382 (2017: £18,702) relating to funds held in Swiss subsidiaries which are currently in liquidation. The funds are restricted and are not included in the consolidated statement of cash flows. Gaming Realms plc Annual Report and Accounts 2018 45 20. Discontinued operations During the year, the Group sold its Affiliate Marketing CGU, disposed of certain elements of the real money gaming CGU and was sufficiently progressed with active discussions concerning the remainder of the B2C RMG CGU that this element has been classified as held for sale as at 31 December 2018. Analysis of profit for the financial year – discontinued operations: B2C RMG 2018 Disposal Profit on disposal (Loss)/profit for the financial year B2C RMG business reclassified as held for sale Share of loss of associate Impairment in associate Fair value movement on contingent consideration Affiliate Marketing 2018 Disposal Loss on disposal (Loss)/profit for the financial year Affiliate Marketing business reclassified as held for sale Impairment Profit/(loss) for the financial year – discontinued A C 21 21 21 B C 2018 £ 12,492,369 2017 £ – (977,362) 2,033,894 (172,360) (2,829,026) (1,900,065) – – 6,613,556 2,033,894 (70,748) 21,438 – 892,046 – (3,127,381) (49,310) (2,235,335) 6,564,246 (201,441) B2C RMG Disposal in 2018 On 16 August 2018 the Group entered into an Asset Purchase Agreement with River for the sale of 4 of the Group’s B2C RMG brands. The disposed brands and associated activities were contributed to a newly incorporated company in Malta, River UK Casino. As part of the sale agreement, the Group received a 30% equity interest in this company. In addition, a put and call option was entered into giving River the right to purchase, and the Group the right to sell to River, Gaming Realms’ 30% share of River UK Casino at the end of the earn-out period based on an Enterprise value of 5.5 times River UK Casino’s EBIT. The minimum consideration receivable of £8.4m is structured as follows; £4.2m received on completion plus a further £4.2m payable 31 August 2019. Further consideration is achievable on an earn-out basis, payable no later than 30 September 2019 based on 5.5 times River UK Casino’s EBIT for the 12 months to 30 June 2019 to a maximum of £14.7m. Further to this, River UK Casino has entered into a five-year B2B platform and content agreement with the Group. Transfer to held for sale The remaining B2C RMG CGU has been classified as held for sale as at 31 December 2018. Management were actively seeking a sale for the remainder of this business prior to the year end and heads of terms had been signed with River. The sale is expected to complete very shortly, following regulatory approvals (see note 21 for further details on the held for sale assets and liabilities). Financial StatementsStrategic ReportCorporate Governance 46 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued 20. Discontinued operations (continued) A – B2C RMG profit on disposal Cash consideration Deferred consideration Contingent consideration Fair value of put/call option Investment in River UK Casino Less: Disposal costs Net proceeds Less: Assets disposed Intangible assets Profit on disposal of discontinued operation i ii iii iv £ 4,200,000 3,629,074 1,900,065 – 5,266,579 (311,540) 14,684,178 (2,191,809) 12,492,369 i A discount rate of 14.5% was used to calculate the present value of £4.2m due 31 August 2019 at inception based on the Group’s Weighted Average Cost of Capital. The deferred consideration is recognised in the respective subsidiaries involved in the disposal. As a result of the proposed disposal of Bear Group Limited and the transfer of the company to held for sale, £3.6m of deferred consideration is included in the disposal group, and interest unwind of £0.3m included in discontinued operations. The remaining deferred consideration of £0.3m is included in continuing operations. ii At inception the Group was expecting to achieve an additional £2.2m earn-out. A discount rate of 14.5% was used to calculate the fair value at inception based on the Group’s incremental borrowing rate. iii The put/call option was considered to have nil value at inception and as at 31 December 2018 on the basis the 5.5x multiple is considered a market rate. iv The initial carrying value of the Group’s investment in River UK Casino has been calculated as the expected proceeds receivable upon exercise of the option to dispose of the interest (see iii) in 2020. Based on management’s forecast at the date of the transaction, a further £7.1m was expected to be received in August 2020. A discount rate of 14.5% was used to calculate the present value at inception based on the Group’s Weighted Average Cost of Capital. Deferred consideration for B2C RMG Deferred consideration for Affiliate Marketing Unwind of discount 20A 20B 11 Continuing Held for sale Total 260,916 385,000 19,774 3,368,159 3,629,074 – 255,266 385,000 275,040 665,690 3,623,425 4,289,115 Affiliate Marketing On 22 March 2018 the Group sold its Affiliate Marketing CGU for total consideration of £2.4m to First Leads Ltd. First Leads paid £2.0m on closing, and a further £0.4m was received in January 2019 based on the achievement of performance targets. B – Loss on disposal of the Affiliate Marketing CGU Cash consideration Deferred consideration Less: Disposal costs Net proceeds Less: Assets disposed Intangible assets Loss on disposal of discontinued operation i £ 2,000,000 385,000 (162,867) 2,222,133 (2,292,881) (70,748) i The amount of deferred consideration was capped at £400,000 and reduced based on performance targets. The amount receivable of £385,000 was confirmed with First Lead Ltd as at 31 December 2018 and was received in January 2019. Gaming Realms plc Annual Report and Accounts 2018 C – Results of discontinued operations: B2C RMG Revenue Marketing expenses Operating expenses Administrative expenses EBITDA Amortisation of intangible assets Finance income Affiliate Marketing Revenue Marketing expenses Operating expenses Administrative expenses Adjusted EBITDA – discontinued 47 2018 £ 2017 £ 16,364,816 22,717,729 (4,318,842) (8,022,410) (9,169,594) (8,867,787) (3,325,060) (3,153,222) (448,680) 2,674,310 (783,948) (640,416) 255,266 – (977,362) 2,033,894 168,018 1,322,713 (14,833) (15,809) (115,938) 21,438 (128,316) (76,316) (226,035) 892,046 (427,242) 3,566,356 The results of the discontinued real money gaming operations include the results generated by the brands disposed to River UK Casino and operated under the B2B platform and content agreement. 21. Assets and liabilities classified as held for sale On 22 March 2018 the Group sold its Affiliate Marketing CGU, which was classified as held for sale in the comparative balance sheet, for total consideration of £2.4m to First Leads Ltd. See note 20.During H2 2018 the Board concluded to pursue the sale of the remaining B2C RMG business and to accelerate the conclusion of the put/call option over the Group’s 30% interest in River UK Casino. Advisors were appointed and offers invited, which were actively being discussed during late 2018. The Group has therefore reclassified this business and the Group’s interest in River UK Casino as held for sale as at 31 December 2018. No impairment has been recognised based on the recoverable amount of goodwill attributable to this segment. Recoverable amount has been calculated as fair value less the costs of disposal. Fair value is measured at £11.5m based on active offers received during late 2018. Analysis of assets and liabilities classified as held for sale in the year The following major classes of assets and liabilities relating to these operations have been classified as held for sale in the consolidated statement of financial position on 31 December 2018: Non-current assets Intangible assets – goodwill Intangible assets – platform development costs Investment in associate Property, plant and equipment Other assets Current assets Trade and other receivables Deferred consideration Cash and cash equivalents Assets held for sale Current liabilities Trade and other payables Liabilities held for sale Note 31 December 2018 £ 31 December 2017 £ 1,699,000 2,292,881 1,266,788 2,268,192 12,789 32,000 – – – – 5,278,769 2,292,881 1,388,330 20A 3,623,425 1,101,489 – – – 11,392,013 2,292,881 4,830,076 4,830,076 – – Financial StatementsStrategic ReportCorporate Governance 48 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued 21. Assets and liabilities classified as held for sale (continued) Associate investment in River UK Casino The Group uses the equity method of accounting for associates. The following table shows the aggregate movement in the Group’s interests in associates: At 1 January 2018 Initial recognition of associate (note 20) Share of associate’s loss Impairment At 31 December 2018 2018 £ – 5,269,578 (172,360) (2,829,026) 2,268,192 On 16 August Gaming Realms Plc acquired an investment of 30% of the ordinary share capital of River UK Casino Limited, a newly incorporated company in Malta, for consideration of £3,000. The Group is able to exert significant influence over River UK Casino by way of its 30% holding and its seat on the Board of directors. The following financial information relates to River UK Casino as at the period ended 31 December 2018: Total assets Total liabilities Total revenue Total loss after tax 2018 £ 22,814,767 (9,696,364) 1,384,822 (574,538) River UK Casino owns a number of real money gaming sites targeting the UK market. The statutory financial statements of River UK Casino are prepared to 31 December 2018. Impairment of the associate and contingent consideration movement Post-sale, the performance of the 4 brands sold to River UK Casino has declined. As a result, the forecasts have been revised and expected proceeds reduced accordingly. As a result, an impairment of the associate of £2.8m and fair value decrease of contingent consideration of £1.9m have been recognised in discontinued operations. Put/call option As part of the sale agreement, the Group received a 30% equity interest in the above associate, River UK Casino. In addition, a put and call option was entered into giving River the right to purchase, and the Group the right to sell to River, Gaming Realms’ 30% share of River UK Casino at the end of the earn-out period based on an Enterprise value of 5.5 times River UK Casino’s EBIT. This is considered to have an immaterial value at inception and as at 31 December 2018. 22. Trade and other payables Trade and other payables Bank overdraft Accruals Player liabilities 2018 £ 2017 £ 1,896,184 5,655,863 – 945,501 588,408 2,270,675 – 397,693 2,484,592 9,269,732 The carrying value of trade and other payables classified as financial liabilities measured at amortised cost approximates fair value. The Group’s bank overdraft is repayable on demand and is secured over the Group’s assets. The agreed facility at the reporting date was £1m expiring on 31 August 2019. Gaming Realms plc Annual Report and Accounts 2018 49 23. Arrangement with Jackpotjoy Group In December 2017 the group entered into a complex transaction with Jackpotjoy plc and group companies (together ‘Jackpotjoy Group’). The transaction includes a £3.5m secured convertible loan agreement alongside a 10-year framework services agreement for the supply of various real money services. The convertible loan principle of £3.5m was paid directly by Jackpotjoy Group to RealNetworks to settle the outstanding $4.5m (£3.4m) deferred consideration obligation, with the excess cash of £0.1m transferred to the Group. Under the framework services agreement the first £3.5m of services are provided free-of-charge within the first 5 years. The convertible loan has a duration of 5 years and carries interest at 3-month LIBOR plus 5.5%. It is secured over the Group’s Slingo assets and business. At any time after the first year, Jackpotjoy Group may elect to convert all or part of the principal amount into ordinary shares of Gaming Realms Plc at a discount of 20% to the share price prevailing at the time of conversion. To the extent that the price per share at conversion is lower than 10p (nominal value), then the shares can be converted at nominal value with a cash payment equal to the aggregate value of the convertible loan outstanding multiplied by the shortfall on nominal value payable to Jackpotjoy Group. Under this arrangement, the maximum dilution to Gaming Realms shareholders will be approximately 11%, assuming the convertible loan is converted in full. The option violates the fixed-for-fixed criteria for equity classification as the number of shares is variable and as a result is classified as a liability. The fair value of the conversion feature is determined at 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 31 December 2018 was £0.2m (2017: £0.6m) 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 cashflows was 14.1%, being the Group’s incremental borrowing rate. This 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 cashflows are based on 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 to provide free services. At 1 January 2018 Change in fair value Cost relating to issue of convertible debt Utilisation of free services Effective interest (14.4%) Interest paid At 31 December 2018 Fair value of debt host £ 2,630,469 – (24,846) Obligation to provide free services Fair value of derivative liability £ Total £ 213,000 600,000 3,443,469 – (4,000) 360,475 (170,495) – – (400,000) (400,000) – – – – (24,846) (4,000) 360,475 (170,495) 2,795,603 209,000 200,000 3,204,603 Financial StatementsStrategic ReportCorporate Governance 50 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued 24. Financial instruments and risk management – Group The Group is exposed through its operations to risks that arise from use of its financial instruments. The Group’s financial assets and liabilities are shown on the face of the consolidated statement of financial position and in the table below and they can be classified wholly as either loans and receivables, other assets or other liabilities. The Group has separately analysed the 2018 held for sale category. No instruments in held for sale were classified as held at fair value. Financial assets Cash and cash equivalents Trade and other receivables Deferred consideration Other assets Other investments Financial liabilities Trade and other payables Accruals Player liabilities Other creditors Derivative liability Amortised cost Fair value 2018 continuing £ 2018 held for sale £ 2017 £ 2018 £ 2017 £ 467,033 1,101,489 2,283,302 1,541,665 1,388,330 2,311,610 665,690 3,623,425 – 132,577 32,000 163,865 – – – – – – – – – – 535,130 747,222 1,896,184 2,631,917 5,655,863 588,408 1,894,730 2,270,675 – 303,429 397,693 3,004,602 – – – 2,843,529 – – – – – – – – – 200,000 600,000 Financial assets and financial liabilities are recognised on the balance sheet when the Group becomes a party to the contractual provisions of the instrument. The Group classifies its financial instruments in the following categories: » Loans and receivables at amortised cost; » Other financial liabilities at amortised cost; and » Financial assets and liabilities at fair value through profit or loss. The classification depends on the purpose for which the financial assets and liabilities were acquired. Management determines the classification of its financial instruments at initial recognition or in certain circumstances on modification. Financial assets of the Group classified as loans and receivables or available for sale. Financial liabilities are held at amortised cost or fair value. In the Directors’ opinion, there is no material difference between the book value and the fair value of any of the financial instruments. The Group has some exposure to credit risk and liquidity risk. There has been no material change to the financial instruments used within the business during the year except for contingent consideration and therefore no material changes to the risk management policies put in place by the Board which are now discussed below. The Board has overall responsibility for the determination of the Group’s risk management objectives and policies. Whilst acknowledging this responsibility, it has delegated the authority and day to day responsibility for designing and operating systems and controls which meet these risk management objectives to the finance and administration function. The Board regularly reviews the effectiveness of these processes in meeting its objectives and considers any necessary changes in response to changes within the business or the environment in which it operates. Currency risk The Group is exposed to currency risk on translation and on sales and purchases that are denominated in a currency other than Pounds Sterling (‘GBP’). The currency in which these transactions are primarily denominated is US Dollars (‘USD’). The Group’s policy is, where possible to allow group entities to settle liabilities denominated in their functional currency with the cash generated from their own operations in that currency. Where group entities have liabilities denominated in a currency other than their functional currency cash already denominated in that currency will, where possible, be transferred from elsewhere in the Group. All financial instruments included in held for sale are denominated in GBP. Gaming Realms plc Annual Report and Accounts 2018 51 As of 31 December 2018 the Group’s net exposure to foreign exchange risk was as follows: Net foreign currency financial assets/ (liabilities) Sterling US Dollar Other Sterling 2018 – 234,737 18,201 252,937 Sterling 2017 – 543,998 37,837 581,835 US Dollar 2018 US Dollar 2017 Other 2018 Other 2017 – – – – – – – – – – – – – – – – The effect of a 20% strengthening of the US Dollar against Sterling at the reporting date on the US Dollar denominated receivables carried at that date would, all other variables held constant, have resulted in a decrease in losses and an increase in net assets of £50,587 (2017: decrease in losses and increase of net assets of £116,367). A 20% weakening in the exchange rate would, on same basis increase loss after tax and decrease net assets by £50,587. (2017: increase loss after tax and decrease net assets by £116,367). Liquidity risk Liquidity risk arises from the Group’s management of working capital and the finance charges and principal repayments on its debt instruments. It is the risk that the Group will encounter difficulty in meeting its financial obligations as they fall due. The Group’s policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due. Customer funds are kept in dedicated client accounts, separately from the Group’s operational bank accounts. All financial liabilities included in held for sale are due within 1 year. The Group operates an overdraft facility of £1m with its principal bankers, Barclays plc. The Group expects to complete the sale of the remaining B2C RMG business imminently which will generate cash proceeds on completion totalling £10m. The following table sets out the undiscounted contractual cash flows: At 31 December 2018 Trade and other payables Accruals Player liabilities Other creditors Total At 31 December 2017 Trade and other payables Accruals Player liabilities Other creditors Total Within 1 year £ 1,896,184 588,408 – 1-2 years £ – – – Over 2 years £ – – – 279,921 263,219 4,018,938 2,764,513 263,219 4,018,938 Within 1 year £ 5,655,862 2,270,675 397,693 225,578 8,549,808 1-2 years £ – – – Over 2 years £ – – – 227,500 227,500 4,282,158 4,282,158 Credit risk The Group’s trading is mainly exposed to credit risk through credit sales in the Licencing and Social Publishing segments. Generally, receivables are due and collected within 30 days of invoice or contract. See note 18 for further detail on receivables exposure and expected credit loss analysis. Management considered the credit risk on other financial assets including deferred consideration and the counterparty debt risk and concluded no provision was required. In the opinion of management, the credit risk to cash and lease deposits is immaterial. See further disclosure on results of expected credit losses in notes 18 and 29. Financial StatementsStrategic ReportCorporate Governance 52 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued 24. Financial instruments and risk management – Group (continued) Financial liabilities measured at fair value The fair value hierarchy of financial liabilities measured at fair value is provided. The fair value of derivative liabilities totalling £0.2m (2017: £0.6m) was based on a probability assessment of conversion and future share price. This is a level 3 valuation as defined by IFRS 13. Included in the held for sale group at year end is contingent consideration and a put/call option over the group’s associate interest arising from the sale disclosed in note 20. The value of contingent consideration and the put/call option is based on future EBITDA multiples. This is a level 3 valuation as defined by IFRS 13. The fair value measurement hierarchy is based on the inputs to valuation techniques used to measure fair value. The inputs are categorised into three levels, with the highest level (level 1) given to inputs for which there are unadjusted quoted prices in active markets for identical assets or liabilities and the lowest level (level 3) given to unobservable inputs. Level 2 inputs are directly or indirectly observable inputs other than quoted prices. Capital management The Group is funded through shareholders’ funds, a £3.5m facility with JackpotJoy Group (note 23) and a £1m overdraft facility with Barclays (note 22). The Group monitors its capital structure, which comprises all components of equity (i.e. share capital, share premium, non-controlling interest and retained earnings) and monitors external debt. The Group is not subject to any externally imposed capital requirements. Changes in liabilities IAS 7 requires an entity to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both cash and non-cash changes. The Group’s liabilities arising from financing activities consist of JPJ Arrangement (note 23), Derivative liability (note 23) and an obligation to provide free services. There are no financing liabilities included in the held for sale asset group. A reconciliation between the opening and closing balances of these items is provided below. 2018 Opening balance Cash Transaction costs Non-cash transaction Unwind of discount Change in fair value Carried forward 2017 Opening balance Cash Transaction costs Non-cash transaction Unwind of discount Foreign exchange movement Carried forward Fair value of debt host 2,630,469 (170,495) (24,846) Obligation to provide free services Fair value of derivative liability 213,000 600,000 – (4,000) 360,475 – – – 2,795,603 209,000 – – – – – – (400,000) 200,000 Fair value of debt host – 122,966 (96,763) Obligation to provide free services Fair value of derivative liability – – – – – – 2,564,034 213,000 600,000 40,232 – – – – – 2,630,469 213,000 600,000 The 2017 non-cash transaction relates to JPJ settling the deferred consideration owed by the Group directly with Real Networks with excess cash of £123k transferred to Gaming Realms. Gaming Realms plc Annual Report and Accounts 2018 53 25. Share capital Ordinary shares Ordinary shares of 10 pence each 284,428,747 28,442,874 284,428,747 28,442,874 2018 Number 2018 £ 2017 Number 2017 £ On 11 August 2017 10,295,455 shares were issued at £0.11 per share for a total consideration of £1,132,500. Movements in share capital At 1 January 2017 Ordinary shares issued for cash consideration At 31 December 2017 At 31 December 2018 Number £ 274,133,292 27,413,329 10,295,455 1,029,545 284,428,747 28,442,874 284,428,747 28,442,874 26. Reserves The following describes the nature and purpose of each reserve within equity: Reserve Share premium Merger reserve Retained earnings Description and purpose Amount subscribed for share capital in excess of nominal value. Adjustments arising on the reverse transaction and the excess of the fair value over nominal value for shares issued in business combinations qualifying for merger relief under the Companies Act 2006. All other net gains and losses and transactions with owners not recognised elsewhere. Foreign exchange reserve Gains/losses arising on retranslating the net assets of overseas operations into sterling. Available for sale reserve – until 31 Dec 2017 Gains/losses arising on recognising changes in fair value of available for sale assets. 27. Leases The Group has future lease payments under non-cancellable operating leases on land and buildings and other leases. The total future value of minimum lease payments is due as follows: Not later than one year Later than one year and not later than five years Later than five years 2018 £ 162,307 218,593 – 2017 £ 211,454 804,938 – 380,900 1,016,393 Financial StatementsStrategic ReportCorporate Governance 54 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued 28. Share-based payments Gaming Realms 2013 EMI Plan On 1 August 2013 the Company adopted the Gaming Realms 2013 EMI Plan to allow, at the discretion of the Board, eligible employees to be granted EMI or non-EMI options at an exercise price to be determined by the Board not less than the nominal value of a share. Options will vest subject to such time based and share price performance-based conditions as the Board may determine. Options to acquire ordinary shares under the EMI plan may be granted up to a maximum of £3m (based on the market value of the shares placed under option at the date of the grant). No consideration is payable for the grant of the option and the options are not transferable or assignable. Cash consideration is paid to the Company by the employee at the point that the share options are exercised. In 2013, the Company granted options for B Shares under the Gaming Realms 2013 EMI plan. The B Share value will be 20 pence less than the prevailing price of the ordinary shares and will therefore have no value unless the value of the new ordinary shares exceeds 20 pence. EMI options can only be granted to employees who meet the statutory working time requirement and cannot normally be exercised before 15 July 2015. All options granted under the New Share Option Scheme on Admission will be exercisable over B Shares at their nominal value of £0.01 and will be capable of exercise, subject to certain exceptions, after two years of the date of grant. Options are not exercisable later than midnight on the day before the tenth anniversary of the date of grant. Options were fair valued using the Black-Scholes option pricing model, or where there are market-based performance conditions, a Monte Carlo simulation pricing model. Expected volatility was determined by calculating the historical volatility of the Company’s competitors in the sector. The inputs into the Black Scholes model for issues in previous years can be found in the respective annual reports. IFRS 2 (Share-based payments) requires that the fair value of such equity-settled transactions is calculated and systematically charged to the statement of comprehensive income over the vesting period. The total fair value that was charged to the income statement in relation to the equity-settled share-based payments was £67,824 (2017: credit £149,810). Outstanding at 1 January 2017 Forfeited during the year Number of options outstanding at 31 December 2017 Forfeited during the year Number of options outstanding at 31 December 2018 Exercisable at 31 December 2018 Weighted average exercise price (pence) 10.71 25.30 9.48 22.70 15.45 15.50 Number 48,120,043 (3,735,156) 44,384,887 (4,879,562) 39,505,325 38,370,699 Options to subscribe under various schemes, including those noted in Directors’ interests in note 8, are shown in the table below: Approved Date granted 1 August 2013 Exercise price (pence) Exercisable between 2018 Number of shares 2017 Number of shares 0.01 31 July 2015 to 31 July 2023 26,153,837 26,153,837 Unapproved 1 August 2013 13.00 31 July 2015 to 31 July 2023 23.00 1 April 2017 to 1 April 2024 23.00 16 June 2016 to 16 June 2024 28.88 16 June 2016 to 16 June 2024 33.00 19 February 2018 to 19 February 2025 1,538,460 2,780,663 – 326,087 284,141 1,538,460 4,208,315 750,000 467,391 422,475 25.13 15 October 2018 to 15 October 2025 5,810,000 5,970,000 10 November 2015 25.00 10 November 2018 to10 November 2025 1,410,711 28 July 2016 28 July 2016 20.00 28 July 2018 to 28 July 2026 20.00 28 July 2018 to 28 July 2026 1,069,251 132,175 2,340,713 2,326,196 207,500 39,505,325 44,384,887 2 April 2014 17 June 2014 17 June 2014 19 February 2015 15 October 2015 Approved Unapproved Approved Approved Approved Approved Approved Unapproved Modification During the year certain share options were terminated and replaced with new options with lower exercise price or quantity. This has been accounted for as a modification under IFRS 2. The fair value of the reissued options is less than the fair value of the original grant. Gaming Realms plc Annual Report and Accounts 2018 55 29. Related party transactions Atul Bali is an advisor of Gamerail Entertainment LLC, a social lottery gaming company. Blastworks, Inc., a group company, provided platform development, operational and marketing services to Gamerail Entertainment LLC in the prior year to the value of $47,365. No services were provided in 2018. The balance owed by Gamerail Entertainment LLC as at 31 December 2017 was $253,454 which was fully provided for in 2018. Atul Bali is an advisor to Instant Win Gaming. In April 2016, Instant Win Gaming entered into an agreement with Bear Group Limited to supply Instant Win Games on its online gaming websites. During the year, the total revenue share payable by Bear Group Limited for the supply of game content totalled £44,708 (2017: £93,995) with £2,768 owed at 31 December 2018 (2017: £4,925). In addition, Instant Win Gaming has entered into a licensing agreement with Blastworks Limited for the Slingo Brand. Instant Win Game licensed the Slingo Brand to create and distribute Slingo Branded Instant Win Games. During the year, the total licence fees earned were £51,377 (2017: £17,998) with £7,310 due at 31 December 2018 (2017: £2,220). Atul resigned on 30 June 2018 and therefore the above entities ceased to be a related party as of this date. Jim Ryan is a Non-Executive Director of the Company and the CEO of Pala Interactive. On 22 March 2016, Pala Interactive launched a real- money online bingo site in New Jersey. The Bingo software is provided by AlchemyBet Limited on a revenue share basis. During the year, the total licence fees earned were $13,709 (2017: $44,000) with $1,102 due at 31 December 2018 (2017: $5,431). Jim Ryan is a Non-Executive Director of JackpotJoy Group. In December 2017 the group entered into a 10-year framework services agreement and a 5-year convertible loan agreement for £3.5m with the JackpotJoy Group (see note 23). Gaming Realms has also entered into an agreement to provide JackpotJoy Group a white label site, JackpotHappy.com. During the prior year Bear Group Limited billed £75,000 to JackpotJoy Group in respect of site design and build works which was outstanding as at 31 December 2017. During the year £180,000 (2017: £300,000) of consulting fees were paid to Dawnglen Finance Limited, a company controlled by Michael Buckley. No amounts were owed at year end. Simon Collins is a Non-Executive Director of the Company and holds a 6% shareholding in Stannp Limited. During 2018 we spent £2,593 on customer mailings with Stannp Limited. This amount was fully paid as at 31 December 2018. The details of key management compensation are set out in note 7. 30. Subsidiaries The subsidiaries of the Company, all of which have been included in these consolidated financial statements, are as follows: Name Registered office Country of incorporation Principal activity Proportion held by Parent Company Proportion held by Group Quickthink Digital Limited (formerly Bingo Realms Limited) 2 Valentine Place, London, SE1 8QH Blastworks Limited 2 Valentine Place, London, SE1 8QH AlchemyBet Limited 2 Valentine Place, London, SE1 8QH UK UK UK Bear Group Limited Inchalla,Le Val, Alderney, GY9 3UL Alderney Marketing services 100% IP owner Software developer 90.66% 88.85% Real money gaming operator 100% Blueburra Holdings Limited Digital Blue Limited Blastworks Inc Backstage Technologies Inc Hullabu Inc Blastmedia LLC 49 Victoria Street, Douglas, Isle of Man, IM1 2LD 49 Victoria Street, Douglas, Isle of Man, IM1 2LD Isle of Man Marketing services 100% Isle of Man Marketing services 0% 300 Deschutes Way SW, Tumwater, WA 98501 USA Social publishing operator 808 Douglas Street, Victoria BC, V8W 2B6 848 N Rainbow Blvd, Las Vegas, NV, 89101 Prospekt Masherova 6a, Brest, Belarus, 224000 Canada USA Belarus Software developer IP owner Software developer 100% 100% 0% 0% 100% 100% 100% 100% 100% 100% 100% 100% 62.5% 62.5% Financial StatementsStrategic ReportCorporate Governance 56 Notes to the Consolidated Financial Statements for the year ended 31 December 2018 continued 30. Subsidiaries (continued) The Group held 100% interest in the following subsidiaries that were in the process of liquidation at the balance sheet date: Name PDX Businessgroup AG 8200 Schaffhausen PDX Technologies AG PDX Management AG PDX Public Health and Safety AG BFX Solutions AG DDX Solutions AG Registered office Country of incorporation Principal activity Proportion held by Parent Company Proportion held by Group Vordergasse 53 Switzerland In liquidation 100% 100% Switzerland Switzerland Switzerland Switzerland Switzerland In liquidation In liquidation In liquidation In liquidation In liquidation 0% 0% 0% 0% 0% 100% 100% 100% 100% 100% 31. Post balance sheet events On 21 February 2019 Gaming Realms Plc entered into an agreement (‘Transaction’) with River to sell the remaining B2C real money operations via the sale of Bear Group Ltd, a Company incorporated in Alderney for total consideration of £11.5m, which includes settlement of the deferred consideration (see note 20), disposal of the associate and settlement of the put/call option (see note 20). The Company also has gaming licences issued by the UK Gambling Commission and the Alderney Gambling Commission. The Transaction also provides for the transfer of the 30% shareholding Gaming Realms has in River UK Casino and the acquisition of a sole perpetual licence for the use, development and distribution of a gaming platform. River have now received UK GC approval and expect to complete very shortly. Gaming Realms plc Annual Report and Accounts 2018 Parent Company Statement of Financial Position as at 31 December 2018 Assets Non-current assets Investment in subsidiary undertakings Other investments Property, plant and equipment Intangible assets Other assets Current assets Trade and other receivables Cash and cash equivalents Assets classified as held for sale Total assets Liabilities Current liabilities Trade and other payables Non-current liabilities Other Creditors Derivative liabilities Total liabilities Net assets Equity Share capital Share premium Merger reserve Available for sale reserve Shares to be issued Retained earnings Total equity 57 Note 31 December 2018 £ 31 December 2017 £ 2 2 10,897,262 13,297,262 535,130 48,596 – 120,000 747,222 131,717 1,708 120,000 11,600,988 14,297,909 3 16,598,253 23,804,493 59,561 71,319 16,657,814 23,875,812 3,000 – 28,261,802 38,173,721 4 5 5 6,386,838 6,386,838 6,537,936 6,537,936 3,008,603 2,843,529 200,000 600,000 3,208,603 3,443,529 9,595,441 9,981,465 18,666,361 28,192,256 6 28,442,874 28,442,874 87,918,410 87,918,410 2,683,702 2,683,702 – – 207,222 145,000 (100,378,625) (91,204,952) 18,666,361 28,192,256 As permitted by section 408 of the Companies Act 2006, a separate profit and loss account of the Company is not presented. The Company’s loss for the financial year was £9,448,719 (2017: £10,329,552). The financial statements were approved and authorised for issue by the Board of Directors on 27 June 2019 and were signed on its behalf by: Patrick Southon Chief Executive Officer Financial StatementsStrategic ReportCorporate Governance 58 Parent Company Statement of Changes in Equity for the year ended 31 December 2018 Share capital £ Share premium £ Merger reserve £ Available for sale reserve £ Shares to be issued £ Retained earnings £ Total equity £ 1 January 2017 Loss for the year Other comprehensive income Shares issued as part of the capital raising Share-based payment to Director (Note 8) Share-based payment on share options 27,413,329 87,815,455 2,683,702 – – – – 1,029,545 102,955 – – – – – – – – – – – 207,222 – – – 31 December 2017 28,442,874 87,918,410 2,683,702 Impact of adoption of IFRS 9 – – – 207,222 (207,222) 1 January 2018 Loss for the year Share-based payment to Director (Note 8) Share-based payment on share options 28,442,874 87,918,410 2,683,702 – – – – – – – – – 31 December 2018 28,442,874 87,918,410 2,683,702 The notes on pages 59 to 61 form part of these financial statements. – – – – – – – – – 145,000 (80,725,590) 37,186,896 (10,329,552) (10,329,552) – – – 207,222 1,132,500 145,000 – (149,810) (149,810) 145,000 (91,204,952) 28,192,256 – 207,222 – 145,000 (90,997,730) 28,192,256 – (9,677,170) (9,677,170) (145,000) – (145,000) – – 67,824 67,824 (100,607,076) 18,437,910 Gaming Realms plc Annual Report and Accounts 2018 59 Notes to the Parent Company Financial Statements for the year ended 31 December 2018 1. Principal accounting policies These financial statements present the results of Gaming Realms plc for the year ended 31 December 2018. These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (‘FRS 101). The financial statements are prepared under the historical cost convention. No profit and loss account is presented by the Company as permitted by Section 408 of the Companies Act 2006. The financial statements are prepared in Sterling. Basis of preparation The accounting policies which follow set out those policies which apply in preparing the financial statements for the year ended 31 December 2018. The Company has taken advantage of the following disclosure exemptions under FRS 101: a) IFRS 2 Share-based Payment disclosure, the share-based payment arrangement concerns its own equity instruments and its separate financial statements are presented alongside the consolidated financial statements of the Group. b) IFRS 7 Financial Instruments disclosures, given that equivalent disclosures are included in the consolidated financial statements of the Group in which the entity is consolidated. c) IFRS 13 Fair Value Measurement disclosures. d) Certain disclosures required by IAS 1 Presentation of Financial Statements, including certain comparative information in respect of share capital movements. e) IAS 7 Statement of Cash Flows and related notes. f) IAS 24 Related Party Disclosures relating to key management personnel compensation. g) IAS 24 Disclosure of related party transactions entered into between two or more members of a group, given that any subsidiary which is party to the transaction is wholly owned by such a member. Investments Investments in subsidiaries and associates are stated at cost less provision for impairment in value, except for investments acquired before 1 October 2013 where shares issued to effect business combinations and the conditions of the Companies Act 2006 are met, merger relief was applied and the resulting investment is recorded at the nominal value of the shares issued. Taxation Current tax, including UK corporation tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet. Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date, where transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the balance sheet date. A net deferred tax asset is recognised as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as more likely than not that there will be suitable taxable profits against which to recover carried forward tax losses and from which the future reversal of underlying timing differences can be deducted. Deferred tax is measured at the average tax rates that are expected to apply in the period in which the timing differences are expected to reverse, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Foreign currencies Transactions denominated in foreign currencies are recorded at exchange rates as of the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are reported at the rates of exchange prevailing at that date. Financial liabilities Financial liabilities held by the Company consist of trade payables, deferred consideration, long-term borrowings and other short-term monetary liabilities, which are held at amortised cost, and derivative liabilities which are held at fair value through profit and loss. Financial StatementsStrategic ReportCorporate Governance 60 Notes to the Parent Company Financial Statements for the year ended 31 December 2018 continued 2. Investments At 1 January 2017 Change in fair value Impairment At 31 December 2017 Change in fair value Additions Impairment At 31 December 2018 Investment in subsidiary undertakings £ 20,737,592 – (7,440,330) 13,297,262 – – (2,400,000) 10,897,262 Investment in associate £ Other investments £ – – – – – 3,000 – 540,000 207,222 – 747,222 (212,092) – – 3,000 535,130 The investment in Blueburra Holdings Limited was impaired as a result of the 2018 Affiliate Marketing business sale. Details of the Company’s investments can be found in note 30 of the consolidated financial statements. 3. Trade and other receivables Amounts due from Group companies Other debtors Prepayments and accrued income Expected credit losses on Amounts due from Group companies was calculated as £6.5m. 4. Trade and other payables Creditors: amounts falling due within one year Amounts due to Group companies Trade creditors Overdraft Other creditors Accruals and deferred income 5. Other creditors & derivative liability See note 23 of the consolidated accounts for further information. 2018 £ 2017 £ 16,407,738 23,590,212 73,743 116,773 66,176 148,104 16,598,253 23,804,492 2018 £ 2017 £ 6,056,090 4,924,851 75,390 – – 325,710 945,501 – 255,357 341,874 6,386,838 6,537,936 Gaming Realms plc Annual Report and Accounts 2018 61 6. Called up share capital Allotted, called up and fully paid Ordinary shares of 10 pence each 284,428,747 28,442,874 284,428,747 28,442,874 2018 Number 2018 £ 2017 Number 2017 £ Allotted and fully paid As at 31 December 2018 and 31 December 2017 £ 28,442,875 On 11 August 2017 10,295,455 shares were issued at £0.11 per share for a total consideration of £1,132,500. 7. Employee information The Company had a monthly average of 10 (2017: 11) employees during the year. The employee costs for the Company were £1,103,599 (2017: £1,090,741). Details of Directors’ remuneration can be found in note 8 of the Consolidated Financial Statements. 8. Leases The Company has future lease payments under non-cancellable operating leases on land and buildings and other leases. The total future value of minimum lease payments is due as follows: Not later than one year Later than one year and not later than five years Later than five years 2018 £ 88,356 – – 2017 £ 125,000 35,959 – 88,356 160,959 9. Related party transactions During the year £180,000 (2017: £300,000) of consulting fees were paid to Dawnglen Finance Limited, a company controlled by Michael Buckley. The details of key management compensation are set out in note 7 of the Consolidated Financial Statements. Financial StatementsStrategic ReportCorporate Governance 62 Company Information Directors Michael Buckley, Non-Executive Chairman Patrick Southon, Chief Executive Officer Mark Segal, Chief Financial Officer Simon Collins, Non-Executive Director Jim Ryan, Non-Executive Director Mark Wilson, Non-Executive Director Atul Bali, Non-Executive Director (resigned 30 June 2018) Chris Bell, Non-Executive Director (resigned 30 June 2018) Chris Ash, Non-Executive Director (appointed 6 June 2019) Company Secretary Mark Segal Auditors BDO LLP, 55 Baker Street, London, W1U 7EU Bankers Barclays Bank plc, 1 Churchill Place, London, E14 5HP Nominated advisors Peel Hunt, 120 London Wall, London, EC2Y 5ET Solicitors Memery Crystal LLP, 44 Southampton Buildings, London WC2A 1AP Registrars Computershare Investor Services PLC, The Pavilions, Bridgwater Road, Bristol, BS13 8AE Registered office Two Valentine Place, London, SE1 8QH Registered number 04175777 Gaming Realms plc Annual Report and Accounts 2018 Designed and produced by Instinctif Partners creative.instinctif.com Gaming Realms plc Two Valentine Place London SE1 8QH www.gamingrealms.com